AMRS 2012 Q3 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
OR
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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)
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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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuance to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
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Large accelerated filer | x | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. |
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Class | Outstanding at October 26, 2012 |
Common Stock, $0.0001 par value per share | 59,430,122 shares |
AMYRIS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2012
INDEX
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| PART I - FINANCIAL INFORMATION | |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| PART II - OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Amyris, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
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| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 44,373 |
| | $ | 95,703 |
|
Short-term investments | 56 |
| | 7,889 |
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Accounts receivable, net of allowance of $481 and $245, respectively | 3,807 |
| | 6,936 |
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Inventories, net | 8,311 |
| | 9,070 |
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Prepaid expenses and other current assets | 9,995 |
| | 19,873 |
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Total current assets | 66,542 |
| | 139,471 |
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Property and equipment, net | 164,703 |
| | 128,101 |
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Restricted cash | 954 |
| | — |
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Other assets | 20,133 |
| | 43,001 |
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Goodwill and intangible assets | 9,248 |
| | 9,538 |
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Total assets | $ | 261,580 |
| | $ | 320,111 |
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Liabilities and Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 18,374 |
| | $ | 26,379 |
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Deferred revenue | 1,532 |
| | 3,139 |
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Accrued and other current liabilities | 24,061 |
| | 30,982 |
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Capital lease obligation, current portion | 1,871 |
| | 3,717 |
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Debt, current portion | 2,121 |
| | 28,049 |
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Total current liabilities | 47,959 |
| | 92,266 |
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Capital lease obligation, net of current portion | 1,495 |
| | 2,619 |
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Long-term debt, net of current portion | 103,289 |
| | 13,275 |
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Deferred rent, net of current portion | 8,886 |
| | 9,957 |
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Deferred revenue, net of current portion | 4,396 |
| | 4,097 |
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Other liabilities | 18,893 |
| | 37,085 |
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Total liabilities | 184,918 |
| | 159,299 |
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Commitments and contingencies (Note 5) |
| |
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Stockholders’ equity: | | | |
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding | — |
| | — |
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Common stock - $0.0001 par value, 100,000,000 shares authorized as of September 30, 2012 and December 31, 2011; 59,430,122 and 45,933,138 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively | 6 |
| | 5 |
|
Additional paid-in capital | 632,773 |
| | 548,159 |
|
Accumulated other comprehensive loss | (12,479 | ) | | (5,924 | ) |
Accumulated deficit | (542,835 | ) | | (381,188 | ) |
Total Amyris, Inc. stockholders’ equity | 77,465 |
| | 161,052 |
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Noncontrolling interest | (803 | ) | | (240 | ) |
Total stockholders' equity | 76,662 |
| | 160,812 |
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Total liabilities and stockholders' equity | $ | 261,580 |
| | $ | 320,111 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
Amyris, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues | | | | | | | |
Product sales | $ | 4,728 |
| | $ | 31,162 |
| | $ | 46,615 |
| | $ | 92,998 |
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Grants and collaborations revenue | 14,380 |
| | 5,114 |
| | 21,225 |
| | 12,454 |
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Total revenues | 19,108 |
| | 36,276 |
| | 67,840 |
| | 105,452 |
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Costs and operating expenses | | | | | | | |
Cost of products sold | 4,444 |
| | 35,729 |
| | 71,891 |
| | 99,247 |
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Loss on purchase commitments and write off of production assets | 1,438 |
| | — |
| | 38,090 |
| | — |
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Research and development | 15,736 |
| | 23,441 |
| | 55,580 |
| | 66,622 |
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Sales, general and administrative | 17,355 |
| | 21,174 |
| | 61,301 |
| | 59,401 |
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Total costs and operating expenses | 38,973 |
| | 80,344 |
| | 226,862 |
| | 225,270 |
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Loss from operations | (19,865 | ) | | (44,068 | ) | | (159,022 | ) | | (119,818 | ) |
Other income (expense): | | | | | | | |
Interest income | 297 |
| | 609 |
| | 1,406 |
| | 1,250 |
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Interest expense | (1,224 | ) | | (291 | ) | | (3,538 | ) | | (1,172 | ) |
Other income (expense), net | 664 |
| | 310 |
| | (512 | ) | | 160 |
|
Total other income (expense) | (263 | ) | | 628 |
| | (2,644 | ) | | 238 |
|
Loss before income taxes | (20,128 | ) | | (43,440 | ) | | (161,666 | ) | | (119,580 | ) |
Provision for income taxes | (260 | ) | | (474 | ) | | (753 | ) | | (299 | ) |
Net loss | $ | (20,388 | ) | | $ | (43,914 | ) | | $ | (162,419 | ) | | $ | (119,879 | ) |
Net loss attributable to noncontrolling interest | 95 |
| | 224 |
| | 772 |
| | 437 |
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Net loss attributable to Amyris, Inc. common stockholders | $ | (20,293 | ) |
| $ | (43,690 | ) | | $ | (161,647 | ) | | $ | (119,442 | ) |
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.34 | ) | | $ | (0.97 | ) | | $ | (2.91 | ) | | $ | (2.68 | ) |
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, basic and diluted | 58,964,226 |
| | 45,031,613 |
| | 55,552,949 |
| | 44,507,686 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
Amyris, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In Thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Comprehensive loss: | | | | | | | |
Net loss | $ | (20,388 | ) | | $ | (43,914 | ) | | $ | (162,419 | ) | | $ | (119,879 | ) |
Change in unrealized loss on investments | — |
| | — |
| | — |
| | (5 | ) |
Foreign currency translation adjustment, net of tax | (410 | ) | | (10,642 | ) | | (6,346 | ) | | (8,318 | ) |
Total comprehensive loss | (20,798 | ) | | (54,556 | ) | | (168,765 | ) | | (128,202 | ) |
Loss attributable to noncontrolling interest | 95 |
| | 224 |
| | 772 |
| | 437 |
|
Foreign currency translation adjustment attributable to noncontrolling interest | (41 | ) | | — |
| | (209 | ) | | — |
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Comprehensive loss attributable to Amyris, Inc. | $ | (20,744 | ) | | $ | (54,332 | ) | | $ | (168,202 | ) | | $ | (127,765 | ) |
See the accompanying notes to the unaudited condensed consolidated financial statements.
Amyris, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interest | | Total Equity |
(In Thousands, Except Share and Per Share Amounts) | Shares | | Amount | |
December 31, 2011 | | 45,933,138 |
| | $ | 5 |
| | $ | 548,159 |
| | $ | (381,188 | ) | | $ | (5,924 | ) | | $ | (240 | ) | | $ | 160,812 |
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Issuance of common stock related to employee stock purchase plan and exercise of stock options | | 1,306,430 |
| | — |
| | 1,313 |
| | — |
| | — |
| | — |
| | 1,313 |
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Issuance of common stock in a private placement, net of issuance cost of $334 | | 11,896,425 |
| | 1 |
| | 62,489 |
| | — |
| | — |
| | — |
| | 62,490 |
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Restricted stock units settlement, net of tax withholdings | | 299,584 |
| | — |
| | (588 | ) | | — |
| | — |
| | — |
| | (588 | ) |
Repurchase of common stock | | (53 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Recovery of shares from Draths escrow | | (5,402 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Stock-based compensation | | — |
| | — |
| | 21,400 |
| | — |
| | — |
| | — |
| | 21,400 |
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Foreign currency translation adjustment, net of tax | | — |
| | — |
| | — |
| | — |
| | (6,555 | ) | | 209 |
| | (6,346 | ) |
Net loss | | — |
| | — |
| | — |
| | (161,647 | ) | | — |
| | (772 | ) | | (162,419 | ) |
September 30, 2012 | | 59,430,122 |
| | $ | 6 |
| | $ | 632,773 |
| | $ | (542,835 | ) | | $ | (12,479 | ) | | $ | (803 | ) | | $ | 76,662 |
|
See the accompanying notes to the unaudited condensed consolidated financial statements.
Amyris, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Operating activities | | | |
Net loss | $ | (162,419 | ) | | $ | (119,879 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 10,686 |
| | 7,728 |
|
Loss on disposal of property and equipment | 208 |
| | — |
|
Stock-based compensation | 21,400 |
| | 18,836 |
|
Amortization of premium on investments | — |
| | 630 |
|
Amortization of debt discount | 316 |
| | — |
|
Provision for doubtful accounts | 236 |
| | — |
|
Loss on purchase commitments and write off of production assets | 38,090 |
| | — |
|
Change in fair value of derivative instruments | 364 |
| | — |
|
Other noncash expenses | 108 |
| | (79 | ) |
Changes in assets and liabilities: | | | |
Accounts receivable | 2,864 |
| | 234 |
|
Inventories, net | 612 |
| | (4,623 | ) |
Prepaid expenses and other assets | 10,655 |
| | (1,134 | ) |
Accounts payable | (11,200 | ) | | 10,993 |
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Accrued and other liabilities | (29,362 | ) | | 17,700 |
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Deferred revenue | (1,308 | ) | | 4,587 |
|
Deferred rent | (943 | ) | | (761 | ) |
Net cash used in operating activities | (119,693 | ) | | (65,768 | ) |
Investing activities | | | |
Purchase of short-term investments | (8,240 | ) | | (55,286 | ) |
Maturities of short-term investments | — |
| | 105,000 |
|
Sales of short-term investments | 16,449 |
| | 44,826 |
|
Change in restricted cash | (954 | ) | | — |
|
Acquisition of cash in noncontrolling interest | — |
| | 344 |
|
Purchase of property and equipment, net of disposals | (50,344 | ) | | (54,416 | ) |
Deposits on property and equipment | (562 | ) | | (16,832 | ) |
Net cash provided by (used in) investing activities | (43,651 | ) | | 23,636 |
|
Financing activities | | | |
Proceeds from issuance of common stock, net of repurchases | 696 |
| | 4,987 |
|
Proceeds from issuance of common stock in private placements, net of issuance cost | 62,490 |
| | — |
|
Principal payments on capital leases | (2,970 | ) | | (2,109 | ) |
Proceeds from debt issued | 105,624 |
| | 7,622 |
|
Principal payments on debt | (52,052 | ) | | (3,962 | ) |
Initial public offering costs | — |
| | (497 | ) |
Net cash provided by financing activities | 113,788 |
| | 6,041 |
|
Effect of exchange rate changes on cash and cash equivalents | (1,774 | ) | | (827 | ) |
Net decrease in cash and cash equivalents | (51,330 | ) | | (36,918 | ) |
Cash and cash equivalents at beginning of period | 95,703 |
| | 143,060 |
|
Cash and cash equivalents at end of period | $ | 44,373 |
| | $ | 106,142 |
|
Amyris, Inc.
Condensed Consolidated Statements of Cash Flows—(Continued)
(In Thousands)
(Unaudited)
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| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 2,831 |
| | $ | 1,131 |
|
Supplemental disclosures of noncash investing and financing activities: | | | |
Acquisitions of assets under accounts payable and accrued liabilities | $ | 5,672 |
| | $ | 7,166 |
|
Capitalization of manufacturing equipment under ASC840 | $ | — |
| | $ | 7,272 |
|
Change in unrealized gain (loss) on foreign currency | $ | (5,887 | ) | | $ | (7,265 | ) |
Issuance of common stock upon exercise of warrants | $ | — |
| | $ | 3,554 |
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Unpaid investment in joint venture | $ | — |
| | $ | 108 |
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Long term deposits used for purchase of property and equipment | $ | 12,286 |
| | $ | — |
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Conversion of other liability to notes payable | $ | (23,300 | ) | | $ | — |
|
Transfer of fixed assets to current assets | $ | — |
| | $ | 886 |
|
Acquisition of net assets in noncontrolling interest | $ | — |
| | $ | 25 |
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See the accompanying notes to the unaudited condensed consolidated financial statements.
Amyris, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. The Company
Amyris, Inc. (the “Company”) was incorporated in California on July 17, 2003 and reincorporated in Delaware on June 10, 2010 for the purpose of leveraging breakthroughs in synthetic biology to develop and provide renewable compounds for a variety of markets. The Company is currently building and applying its industrial synthetic biology platform to provide alternatives to select petroleum-sourced products used in specialty chemical and transportation fuel markets worldwide. 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 varying from specialty chemical applications to transportation fuels, such as diesel. While the Company’s platform is able to use a wide variety of feedstocks, the Company focused initially on Brazilian sugarcane. The Company has secured access to this and other feedstock to expand its production capacity working with existing sugar and ethanol mill owners to build new, adjacent bolt-on facilities at their existing mills. In addition, the Company has entered into various contract manufacturing agreements to support commercial production. The Company has established two principal operating subsidiaries, Amyris Brasil Ltda. (formerly Amyris Brasil S.A., “Amyris Brasil”) for production in Brazil, and Amyris Fuels, LLC ("Amyris Fuels"). Through the third quarter of 2012, the Company conducted an ethanol and reformulated ethanol-blended gasoline business through Amyris Fuels, but has, as of September 30, 2012 transitioned out of that business.
On September 30, 2010, the Company closed its initial public offering (“IPO”) of 5,300,000 shares of common stock. Upon the closing of the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into 31,550,277 shares of common stock, the outstanding convertible preferred stock warrants were automatically converted into common stock warrants to purchase a total of 195,604 shares of common stock, and shares of Amyris Brasil held by third party investors were automatically converted into 861,155 shares of the Company’s common stock.
The Company has incurred significant losses since its inception. As of September 30, 2012, the Company had an accumulated deficit of $542.8 million and management believes that it will continue to incur losses and net cash outflows for the foreseeable future.
The Company's strategy is to focus on direct commercialization of higher-value, lower-volume markets while moving lower-margin, higher-volume commodity products into joint venture arrangements with established 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. The Company is building its experience producing renewable products at commercial scale. The Company's prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this stage of development. These risks include, but are not limited to, the Company's ability to finance its operations, its ability to achieve substantially higher production efficiencies than it has to date, timely completion of the construction and the commencement of operations at its production facilities, and its ability to secure additional collaborations and establish joint ventures on acceptable terms.
The Company expects to fund its operations for the foreseeable future with cash and investments currently on hand, with cash inflows from collaboration and grant funding, cash contributions from product sales, and with new debt and equity financing . In February 2012, the Company completed a private placement of 10.2 million shares of common stock for total proceeds of $58.7 million and raised $25.0 million through convertible promissory notes. In May 2012, the Company completed a private placement of 1.7 million shares of common stock for aggregate proceeds of $4.1 million. In July 2012, the Company completed a sale of a convertible promissory note for cash proceeds of $15.0 million and in September 2012, the Company completed a sale of an additional convertible promissory note for additional cash proceeds of $15.0 million. These notes issued in the third quarter of 2012 used the same conversion price and included the same covenants that were used in the notes issued in February 2012.
The Company's anticipated working capital needs and its planned operating and capital expenditures for the remainder of 2012 and for 2013 will require significant inflows of cash from collaboration partners, as well as funding from equity or debt offerings, credit facilities or loans, or combinations of these sources. Specifically, the Company will need to raise cash in the fourth quarter in order to fund its operations beyond the fourth quarter of 2012. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in ownership dilution to existing stockholders and the Company may be subject to restrictive covenants that limit the Company's ability to conduct its business.
Beginning in March 2012, the Company initiated a plan to shift a portion of its production capacity from contract manufacturing facilities to a Company-owned plant that is currently under construction. As a result, the Company evaluated its contract manufacturing agreements and recorded a loss of $31.2 million related to the write-off of $10.0 million in facility
modification costs and recognition of $21.2 million of fixed purchase commitments in the three months ended March 31, 2012. The Company recognized an additional charge of $1.4 million associated with loss on fixed purchase commitments in the three months ended September 30, 2012. The Company computed the loss on facility modification costs and fixed purchase commitments using the same lower of cost or market approach that is used to value inventory. The computation of the loss on firm purchase commitments is subject to several estimates, including the cost to complete and the ultimate selling price of any Company products manufactured at the relevant production facilities, and is therefore inherently uncertain. The Company also recorded losses on write off of production assets of $5.5 million related to Amyris-owned equipment at contract manufacturing facilities in the three months ended March 31, 2012.
Nearly all of the Company's revenues to date have come from the sale of ethanol and reformulated ethanol-blended gasoline with substantially all of the remaining revenues coming from collaborations and government grants. Effective in the third quarter of 2012, the Company transitioned out of the ethanol and reformulated ethanol-blended gasoline business, which will result in the loss of all future revenue from that business. The Company does not expect to be able to replace much of the revenue lost in the near term as a result of this transition, particularly in 2012 and 2013 while it continues its efforts to establish a renewable products business.
Meeting the Company's anticipated working capital needs and funding its strategic plans for the remainder of 2012 and for 2013 will depend on its ability to identify and secure substantial additional sources of funding beyond those that it has currently identified. Furthermore, some of its anticipated financing sources are subject to risk that it may not meet milestones, or are not yet subject to definitive agreements or funding commitments. Failure to secure such funding in a timely manner, either in the short or long term, the Company may be forced to curtail its operations, which could include reductions or delays of its planned capital expenditures or scaling back its operations. If it is forced to curtail its operations, it may be unable to proceed with construction of certain planned production facilities, including its planned large-scale production plants at Usina São Martinho and Paraíso Bioenergia, enter into definitive agreements for supply of feedstock and associated production arrangements that are currently subject to letters of intent, commercialize its products within the timeline it expects, or otherwise continue its business as currently contemplated.
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 (“GAAP”) and with the instructions for Form 10-Q and Regulations S-X statements. 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 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2012. 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.
Principles of Consolidations
The Company has interests in joint venture entities that are variable interest entities (“VIEs”). Determining whether to consolidate a variable interest entity may require 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.
The unaudited condensed consolidated financial statements of the Company include the accounts of Amyris, Inc., its subsidiaries and two consolidated 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 8.
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information
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 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. 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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash equivalents and investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents and short-term investments.
The Company performs ongoing credit evaluation of its customers, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary.
Customers representing 10% or greater of accounts receivable were as follows:
|
| | | | | |
Customers | September 30, 2012 | | December 31, 2011 |
Customer A | * |
| | 20 | % |
Customer B | 38 | % | | ** |
|
Customer C | 13 | % | | ** |
|
Customer D | 11 | % | | ** |
|
Customer E | ** |
| | 10 | % |
Customer F | 26 | % | | ** |
|
* No outstanding balance
** Less than 10%
Customers representing 10% or greater of revenues were as follows:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Customers | 2012 | | 2011 | | 2012 | | 2011 |
Customer A | * |
| | 17 | % | | 14 | % | | ** |
|
Customer C | 14 | % | | ** |
| | ** |
| | ** |
|
Customer G | ** |
| | ** |
| | ** |
| | 17 | % |
Customer H | 51 | % | | * |
| | 14 | % | | ** |
|
Customer I | * |
| | 12 | % | | ** |
| | ** |
|
* Not a current customer
** Less than 10%
Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is based on or derived from observable market
prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
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. The fair values of the notes payable, loan payable, convertible notes and credit facility are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company.
The Company estimates the fair value of its embedded derivative related to Total convertible notes using a Black-Scholes valuation model that 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 convertible. The Company will continue to mark the bifurcated compound derivative to market due to the conversion price not being indexed to the Company's own stock because of the feature requiring the Company to redeem foregone interest upon conversion by the holder. The change in the fair value of the bifurcated compound derivative is primarily related to the change in price of the underlying common stock and is reflected in the Company's consolidated statements of operations as “other income (expense)”.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity date of 90 days or less at the date of purchase are considered to be cash equivalents. Cash and cash equivalents consist of money market funds, certificates of deposit, commercial paper, U.S. Government agency securities and various deposit accounts.
Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable for estimated losses resulting from the inability of its customers to make required payments. The Company determines this allowance based on specific doubtful account identification and management judgment on estimated exposure. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable.
Investments
Investments with original maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as short-term investments. The Company classifies investments as short-term or long-term based upon whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal cycle of business. The Company invests its excess cash balances primarily in certificates of deposit, short-term investment grade commercial paper and corporate bonds, and U.S. Government agency securities and notes. Certificates of deposits that have maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as short term investments. The Company classifies all of its investments as available-for-sale and records such assets at estimated fair value in the consolidated balance sheets, with unrealized gains and losses, if any, reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Debt securities are adjusted for amortization of premiums and accretion of discounts and such amortization and accretion are reported as a component of interest income. Realized gains and losses and declines in value that are considered to be other than temporary are recognized in the statements of operations. The cost of securities sold is determined on the specific identification method. There were no significant realized gains or losses from sales of debt securities during the nine months ended September 30, 2012 and 2011. As of September 30, 2012 and December 31, 2011, the Company did not have any other-than-temporary declines in the fair value of its debt securities.
Restricted Cash
Cash accounts that are restricted to withdrawal or usage are presented as restricted cash. As of September 30, 2012 and December 31, 2011, the Company had $954,000 and zero, respectively, of restricted cash held by a bank in a certificate of deposit as collateral under a facility lease.
Inventories
Inventories, which consist of farnesene-derived products, as well as ethanol and reformulated ethanol-blended gasoline, are stated at the lower of cost or market and categorized as finished goods, work-in-process or raw material inventories. In the quarter ended September 30, 2012 the Company sold its remaining inventory of ethanol and reformulated ethanol-blended gasoline as it
transitioned out of this business. The Company evaluates the recoverability of its inventories based on assumptions about expected demand and net realizable value. If the Company determines that the cost of inventories exceeds its estimated net realizable value, the Company records a write-down equal to the difference between the cost of inventories and the estimated net realizable value. If actual net realizable values are less favorable than those projected by management, additional inventory write-downs may be required that could negatively impact the Company's operating results. If actual net realizable values are more favorable, the Company may have favorable operating results when products that have been previously written down are sold in the normal course of business. The Company also evaluates the terms of its agreements with its suppliers and establishes accruals for estimated losses on adverse purchase commitments as necessary, applying the same lower of cost or market approach that is used to value inventory. Cost is computed on a first-in, first-out basis. Inventory costs include transportation costs incurred in bringing the inventory to its existing location.
Derivative Instruments
The Company makes limited use of derivative instruments, which includes currency interest rate swap agreements to manage the Company's exposure to foreign currency exchange rate fluctuations and interest rate fluctuations related to the Company's Banco Pine S.A. loan (discussed below under Note 6). Through the third quarter of 2012, the Company held futures positions on the New York Mercantile Exchange and the CME/Chicago Board of Trade to mitigate the risks related to the price volatility of ethanol and reformulated ethanol-blended gasoline but as of September 30, 2012 the Company has transitioned out of that business and no longer held such derivative instruments. The Company does not engage in speculative derivative activities, and the purpose of its activity in derivative commodity instruments is to manage the financial risk posed by physical transactions and inventory. Changes in the fair value of the derivative contracts are recognized currently in the condensed consolidated statements of operations.
Asset Retirement Obligations
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. In addition, asset retirement cost is added to the carrying amount of the associated asset and this additional carrying amount is amortized over the life of the asset. The Company’s asset retirement obligations are associated with its commitment to return property subject to an operating lease in Brazil to its original condition upon lease termination.
As of September 30, 2012 and December 31, 2011, the Company had asset retirement obligations of $1.1 million and $1.1 million, respectively. The related leasehold improvements are being amortized to depreciation expense over the term of the lease or the useful life of the assets, whichever is shorter. Related amortization expense was $59,000 and $4,000 for the three months ended September 30, 2012 and 2011, respectively, and $188,000 and $136,000 for nine months ended September 30, 2012 and 2011, respectively.
The change in the asset retirement obligation is summarized below (in thousands):
|
| | | |
Balance at December 31, 2011 | $ | 1,129 |
|
Additions | — |
|
Foreign currency impacts and other adjustments | (91 | ) |
Accretion expenses recorded during the period | 91 |
|
Balance at September 30, 2012 | $ | 1,129 |
|
Property and Equipment, net
Property and equipment, net is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.
Depreciation and amortization periods for the Company’s property and equipment are as follows:
|
| |
Machinery and equipment | 7-15 years |
Computers and software | 3-5 years |
Furniture and office equipment | 5 years |
Vehicles | 5 years |
Leasehold improvements are amortized on a straight-line basis over the terms of the lease, or the useful life of the assets, whichever is shorter.
Computers and software includes internal-use software that is acquired, internally developed or modified to meet the Company’s internal needs. Amortization commences when the software is ready for its intended use and the amortization period is the estimated useful life of the software, generally three to five years. Capitalized costs primarily include contract labor and payroll costs of the individuals dedicated to the development of internal-use software. Capitalized software additions totaled approximately $521,000 and $1.2 million for the nine months ended September 30, 2012 and 2011, respectively, related to software development costs pertaining to the installation of a new financial reporting system. For the nine months ended September 30, 2012 and 2011, $449,000 and $308,000, respectively, of amortization expense was recorded and as of September 30, 2012 and December 31, 2011, the total unamortized cost of capitalized software was $2.9 million and $2.8 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or the estimated useful life is no longer appropriate. If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the asset, an impairment loss is recorded to write the assets down to their estimated fair values. Fair value is estimated based on discounted future cash flows. The Company recorded losses on write off of production assets of $5.5 million and zero during the nine months ended September 30, 2012 and 2011, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost over the fair value of net assets acquired from our business combinations. Intangible assets are comprised primarily of in-process research and development ("IPR&D"). The Company makes significant judgments in relation to the valuation of goodwill and intangible assets resulting from business combinations.
There are several methods that can be used to determine the estimated fair value of the IPR&D acquired in a business combination. The Company utilized the "income method," which applies a probability weighting that considers the risk of development and commercialization, to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets will be amortized over the remaining useful life or written off, as appropriate.
Goodwill and intangible assets with indefinite lives are assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such a review. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment.
The Company evaluates its intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets consist of purchased licenses and permits and are amortized on a straight-line basis over their estimated useful lives. Factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, the Company makes an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the technology over the remaining amortization period, the Company will reduce the net carrying value of the related intangible asset to fair value and may adjust the remaining amortization period. Any such impairment charge could be significant and could have a material adverse effect on the Company's reported financial results. The Company has not recognized any impairment charges on intangible assets through September 30, 2012.
In-Process Research and Development
During 2011, the Company recorded IPR&D of $8.6 million related to the acquisition of Draths Corporation ("Draths"). Amounts recorded as IPR&D will begin being amortized upon first sales of the product over the estimated useful life of the technology. In accordance with authoritative accounting guidance, since the technology has not yet been proven, the amortization of the acquired IPR&D has not begun. The Company estimates that it could take up to three years before it will have viable products resulting from the acquired technology.
Noncontrolling Interest
Changes in noncontrolling interest ownership that do not result in a change of control and where there is a difference between fair value and carrying value are accounted for as equity transactions.
On April 14, 2010, the Company entered into a joint venture with Usina São Martinho. The carrying value of the noncontrolling interest from this joint venture is recorded in the equity section of the consolidated balance sheets (see Note 8).
On January 3, 2011, the Company entered into a production service agreement with Glycotech, Inc. ("Glycotech"). The Company has determined that the arrangement with Glycotech qualifies as a VIE. The Company determined that it is the primary beneficiary. The carrying value of the noncontrolling interest from this VIE is recorded in the equity section of the consolidated balance sheets (see Note 8).
Revenue Recognition
The Company recognizes revenue from the sale of farnesene-derived products, delivery of research and development services, and from governmental grants. Through the third quarter of 2012, the Company also sold ethanol and reformulated ethanol-blended gasoline under short-term agreements at prevailing market prices but as of September 30, 2012 the Company has transitioned out of that business. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectibility is reasonably assured.
If sales arrangements contain multiple elements, the Company evaluates whether the components of each arrangement represent separate units of accounting. To date the Company has determined that all revenue arrangements should be accounted for as a single unit of accounting.
Product Sales
Beginning in the second quarter of 2011, the Company began to sell farnesene-derived products, which were produced by contracted third parties. Through the third quarter of 2012, the Company also sold ethanol and reformulated ethanol-blended gasoline under short-term agreements at prevailing market prices but as of September 30, 2012 the Company has transitioned out of that business. Ethanol and reformulated ethanol-blended gasoline sales consisted of sales to customers through purchases from third-party suppliers in which the Company took physical control of the ethanol and reformulated ethanol-blended gasoline and accepted risk of loss. The Company's renewable product sales do not include rights of return. Returns are only accepted if the product does not meet product specifications and such nonconformity is communicated to the Company within a set number of days of delivery. Commencing April 1, 2012, the Company began offering a two year standard warranty provision for squalane products sold after March 31, 2012 if the products do not meet Company-established criteria as set forth in the Company's trade terms. The Company based its return reserve on a combination of historical rate of return for the Company's squalane products and historical returns for companies in the cosmetics industry since the Company did not have a full two years of historical return data. Revenues are recognized, net of discounts and allowances, once passage of title and risk of loss has occurred and contractually specified acceptance criteria have been met, provided all other revenue recognition criteria have also been met.
Grants and Collaborative Revenue
Revenue from collaborative research services is recognized as the services are performed consistent with the performance requirements of the contract. In cases where the planned levels of research services fluctuate over the research term, the Company recognizes revenue using the proportionate performance method based upon actual efforts to date relative to the amount of expected effort to be incurred by the Company. When up-front payments are received and the planned levels of research services do not fluctuate over the research term, revenue is recorded on a ratable basis over the arrangement term, up to the amount of cash received. When up-front payments are received and the planned levels of research services fluctuate over the research term, revenue is recorded using the proportionate performance method, up to the amount of cash received. Where arrangements include milestones
that are determined to be substantive and at risk at the inception of the arrangement, revenue is recognized upon achievement of the milestone and is limited to those amounts whereby collectibility is reasonably assured.
Government grants are agreements that generally provide cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues from government grants are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants were provided have been met and only perfunctory obligations are outstanding. Under the Defense Advanced Research Projects Agency (DARPA) contract signed in June 2012, the Company will receive funding based on achievement of program milestones. Accordingly the Company will recognize revenue using the proportionate performance method based upon actual efforts to date relative to the amount of expected effort to be incurred, up to the amount of verified payable milestones.
Cost of Products Sold
Cost of products sold consists primarily of cost of purchased ethanol and reformulated ethanol-blended gasoline, terminal fees paid for storage and handling, transportation costs between terminals and changes in the fair value of derivative commodity instruments. Starting in the second quarter of 2011, cost of products sold also includes production costs of farnesene-derived products, which include cost of raw materials, amounts paid to contract manufacturers and period costs including inventory write-downs resulting from applying lower-of-cost-or-market inventory rules. Cost of farnesene-derived products sold also includes certain costs related to the scale-up in production of such products.
Shipping and handling costs charged to customers are recorded as revenues. Shipping costs are included in cost of products sold. Such charges were not significant in any of the periods presented.
Costs of Start-Up Activities
Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, commencing some new operation or activities related to organizing a new entity. All the costs associated with start-up activities related to a potential facility are expensed and recorded within selling, general and administrative expenses until the facility is considered viable by management, at which time costs would be considered for capitalization based on authoritative accounting literature.
Research and Development
Research and development costs are expensed as incurred and include costs associated with research performed pursuant to collaborative agreements and government grants. Research and development costs consist of direct and indirect internal costs related to specific projects as well as fees paid to others that conduct certain research activities on the Company’s behalf.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of the Company’s assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses and research and development credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
The Company recognizes and measures uncertain tax positions in accordance with Income Taxes subtopic 05-6 of ASC 740, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken in a tax return, in the consolidated financial statements. Additionally, the guidance also prescribes treatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained.
Currency Translation
The Brazilian real is the functional currency of the Company’s wholly-owned subsidiary in Brazil and also of the Company’s joint venture with Usina São Martinho. Accordingly, asset and liability accounts of those operations are translated into United States dollars using the current exchange rate in effect at the balance sheet date and equity accounts are translated into United
States dollars using historical rates. The revenues and expenses are translated using the exchange rates in effect when the transactions occur. Gains and losses from foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in the consolidated balance sheets.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees using a fair value method which requires the recognition of compensation expense for costs related to all stock-based payments including stock options. The fair value method requires the Company to estimate the fair value of stock-based payment awards on the date of grant using an option pricing model. The Company uses the Black-Scholes pricing model to estimate the fair value of options granted, which is expensed on a straight-line basis over the vesting period. The Company accounts for restricted stock unit awards issued to employees based on the fair market value of the Company’s common stock.
The Company accounts for stock options issued to nonemployees based on the estimated fair value of the awards using the Black-Scholes option pricing model. The Company accounts for restricted stock units issued to nonemployees based on the fair market value of the Company’s common stock. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in the Company’s consolidated statements of operations during the period the related services are rendered.
Comprehensive Income (Loss)
Comprehensive income (loss) represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments represent the components of comprehensive income (loss) excluded from the Company’s net loss and have been disclosed in the condensed consolidated statements of comprehensive loss for all periods presented.
The components of accumulated other comprehensive loss are as follows (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Foreign currency translation adjustment, net of tax | $ | (12,479 | ) | | $ | (5,924 | ) |
Total accumulated other comprehensive loss | $ | (12,479 | ) | | $ | (5,924 | ) |
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, using the treasury stock method or the as converted method, as applicable. For all periods presented, 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 are the same for each period presented.
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 September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Numerator: | | | | | | | |
Net loss attributable to Amyris, Inc. common stockholders | $ | (20,293 | ) | | $ | (43,690 | ) | | $ | (161,647 | ) | | $ | (119,442 | ) |
Denominator: | | | | | | | |
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, basic and diluted | 58,964,226 |
| | 45,031,613 |
| | 55,552,949 |
| | 44,507,686 |
|
Net loss per share attributable to common stockholders, basic and diluted | $ | (0.34 | ) | | $ | (0.97 | ) | | $ | (2.91 | ) | | $ | (2.68 | ) |
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:
|
| | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Period-end stock options to purchase common stock | 8,345,400 |
| | 8,353,279 |
|
Convertible promissory notes | 11,077,785 |
| | — |
|
Period-end common stock subject to repurchase | 301 |
| | 10,335 |
|
Period-end common stock warrants | 21,087 |
| | 5,136 |
|
Period-end restricted stock units | 1,712,899 |
| | 375,189 |
|
Total | 21,157,472 |
| | 8,743,939 |
|
Recent Accounting Pronouncements
In May 2011, the FASB issued an amendment to an accounting standard related to fair value measurement. This amendment is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this amended guidance required expanded disclosure in the Company's consolidated financial statements but did not impact financial results.
In June 2011, the FASB issued an amendment to an accounting standard related to the presentation of the Statement of Comprehensive Income. This amendment requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance is effective for interim and annual periods beginning after December 15, 2011 with full retrospective application required. Early adoption is permitted. The Company chose early adoption of this guidance effective its year ended December 31, 2011 through a separate presentation of its Consolidated Statement of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009. The adoption of this amended guidance changed the financial statement presentation and required expanded disclosures in the Company's consolidated financial statements, but did not impact financial results.
In September 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this amended guidance did not have any impact on the Company's financial results.
In December 2011, the International Accounting Standards Board ("IASB") and the FASB issued common disclosure requirements that are intended to enhance comparability between financial statements prepared on the basis of U.S. GAAP and those prepared in accordance with IFRS. This new guidance affects all entities with financial instruments or derivatives that are either presented on a net basis on the balance sheet or subject to an enforceable master netting arrangement or similar arrangement. While this guidance does not change existing offsetting criteria in U.S. GAAP or the permitted balance sheet presentation for items meeting the criteria, it requires an entity to disclose both net and gross information about assets and liabilities that have been offset and the related arrangements. Required disclosures under this new guidance should be provided retrospectively for all comparative periods presented. This new guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years, which would be the Company's first quarter of fiscal 2013. The Company does not expect that the adoption of this new guidance will have an impact on its financial position, results of operations or cash flows as it is disclosure only in nature.
In July 2012, the FASB issued an amended accounting standard update to simplify how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. The amended guidance permits an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely
than not that the fair value is more than its carrying value, then the amended guidance eliminates the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The amended guidance is effective for fiscal years beginning after September 15, 2012; however, early adoption is permitted. The Company does not expect this amended guidance to have an impact on the Company's financial results.
3. Fair Value Measurements
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.
As of September 30, 2012, 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 September 30, 2012 |
Financial Assets | | | | | | | |
Money market funds | $ | 20,718 |
| | $ | — |
| | $ | — |
| | $ | 20,718 |
|
Certificates of deposit | 5,823 |
| | — |
| | — |
| | 5,823 |
|
Derivative asset | — |
| | — |
| | — |
| | — |
|
Total financial assets | $ | 26,541 |
| | $ | — |
| | $ | — |
| | $ | 26,541 |
|
Financial Liabilities | | | | | | | |
Notes payable | $ | — |
| | $ | 1,762 |
| | $ | — |
| | $ | 1,762 |
|
Loans payable | — |
| | 21,133 |
| | — |
| | 21,133 |
|
Credit facilities | — |
| | 9,777 |
| | — |
| | 9,777 |
|
Convertible notes | — |
| | — |
| | 63,278 |
| | 63,278 |
|
Compound embedded derivative liability | — |
| | — |
| | 10,263 |
| | 10,263 |
|
Currency interest rate swap derivative liability | — |
| | 1,126 |
| | — |
| | 1,126 |
|
Total financial liabilities | $ | — |
| | $ | 33,798 |
| | $ | 73,541 |
| | $ | 107,339 |
|
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 are based on fair values of identical assets. The fair values of the notes payable, loan payable, convertible notes, credit facility 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. Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative liability measured at fair value using significant unobservable inputs (Level 3) (in thousands):
|
| | | |
| Compound Embedded Derivative Liability |
Balance at December 31, 2011 | $ | — |
|
Transfers in to Level 3 | 11,025 |
|
Total (gain) losses included in other income (expense), net | (762 | ) |
Balance at September 30, 2012 | $ | 10,263 |
|
The compound embedded derivative liability, which is included in other liabilities, represents the value of the equity conversion option and a "make-whole" provision of outstanding convertible notes issued to Total Gas & Power USA SAS (see Note 6). There is no current observable market for this type of derivative and, as such, the Company determined the value of the embedded derivative using a Black-Scholes valuation model that 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 convertible. The Company will mark the embedded derivative to market due to the conversion price not being indexed to the Company's own stock. Except for the "make-whole interest" provision included in the conversion option, which is only required to be settled in cash upon a change of control, at the noteholder's option, the embedded derivative will be settled in either cash or shares. As of September 30, 2012, the Company has enough common shares to settle the conversion option in shares.
The Company’s financial assets and financial liabilities as of December 31, 2011 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, 2011 |
Financial Assets | | | | | | | |
Money market funds | $ | 57,127 |
| | $ | — |
| | $ | — |
| | $ | 57,127 |
|
Certificates of Deposit | 27,384 |
| | — |
| | — |
| | 27,384 |
|
Total financial assets | $ | 84,511 |
| | $ | — |
| | $ | — |
| | $ | 84,511 |
|
Financial Liabilities |
| |
| |
| |
|
Derivative liabilities | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
Total financial liabilities | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
Derivative Instruments
The Company’s derivative instruments included Chicago Board of Trade (CBOT) ethanol futures and Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline futures. All derivative commodity instruments were recorded at fair value on the consolidated balance sheets. None of the Company’s derivative instruments were designated as a hedging instrument. Changes in the fair value of these non-designated hedging instruments were recognized in cost of products sold in the condensed consolidated statements of operations.
In June 2012, the Company entered into a loan agreement with Banco Pine S.A. under which the bank provided the Company with a short term loan of R$52.0 million (approximately US$25.6 million based on the exchange rate as of September 30, 2012) (the “Bridge Loan”). At the time of the 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$10.8 million based on the exchange rate of as of September 30, 2012). The swap arrangement exchanges the principal and interest payments under the 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 other income (expense) in the condensed consolidated statements of operations.
Derivative instruments measured at fair value as of September 30, 2012 and December 31, 2011, and their classification on the consolidated balance sheets and consolidated statements of operations, are presented in the following tables (in thousands except contract amounts)
|
| | | | | | | | | | | |
| Asset/Liability as of |
| September 30, 2012 | | December 31, 2011 |
Type of Derivative Contract | Quantity of Short Contracts | | Fair Value | | Quantity of Short Contracts | | Fair Value |
Regulated fixed price futures contracts, included as liability in accounts payable | — | | $ | — |
| | 22 | | $ | 18 |
|
Currency interest rate swap, included as net liability in other long term liability | 1 | | $ | — |
| | — | | $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
Type of Derivative Contract | | Income Statement Classification | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| 2012 | | 2011 | | 2012 | | 2011 |
| | Gain (Loss) Recognized | | Gain (Loss) Recognized |
Regulated fixed price futures contracts | | Cost of products sold | | $ | (31 | ) | | $ | 625 |
| | $ | (288 | ) | | $ | (2,103 | ) |
Currency interest rate swap | | Other income (expense), net | | $ | 82 |
| | $ | — |
| | $ | (1,133 | ) | | $ | — |
|
4. Balance Sheet Components
Investments
The following table summarizes the Company’s investments as of September 30, 2012 (in thousands):
|
| | | | | | | | | | | |
| September 30, 2012 |
| Amortized Cost | | Unrealized Gain (Loss) | | Fair Value |
Short-Term Investments | | | | | |
Certificates of Deposit | $ | 56 |
| | $ | — |
| | $ | 56 |
|
Total short-term investments | $ | 56 |
| | $ | — |
| | $ | 56 |
|
The following table summarizes the Company’s investments as of December 31, 2011 (in thousands):
|
| | | | | | | | | | | |
| December 31, 2011 |
| Amortized Cost | | Unrealized Gain (Loss) | | Fair Value |
Short-Term Investments | | | | | |
Certificates of Deposit | $ | 7,889 |
| | $ | — |
| | $ | 7,889 |
|
Total short-term investments | $ | 7,889 |
| | $ | — |
| | $ | 7,889 |
|
Inventories, net
Inventories, net, is comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Raw materials | $ | 1,805 |
| | $ | 2,191 |
|
Work-in-process | 5,105 |
| | 1,237 |
|
Finished goods | 1,401 |
| | 5,642 |
|
Inventories, net | $ | 8,311 |
| | $ | 9,070 |
|
Prepaid and Other Current Assets
Prepaid and other current assets is comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Advances to contract manufacturers(1) | $ | 820 |
| | $ | 10,748 |
|
Manufacturing catalysts | 2,644 |
| | 3,929 |
|
Recoverable VAT and other taxes | 4,468 |
| | 2,193 |
|
Other | 2,063 |
| | 3,003 |
|
Prepaid and other current assets | $ | 9,995 |
| | $ | 19,873 |
|
| |
(1) | At September 30, 2012 and December 31, 2011, this amount includes $785,000 and $748,000, respectively, of the current |
unamortized portion of equipment costs funded by the Company to a contract manufacturer. The related amortization is being offset against purchases of inventory.
Property and Equipment, net
Property and equipment, net is comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Leasehold improvements | $ | 39,839 |
| | $ | 40,011 |
|
Machinery and equipment | 61,238 |
| | 59,657 |
|
Computers and software | 7,548 |
| | 6,491 |
|
Furniture and office equipment | 2,365 |
| | 2,223 |
|
Vehicles | 511 |
| | 596 |
|
Construction in progress | 93,825 |
| | 45,318 |
|
| $ | 205,326 |
| | $ | 154,296 |
|
Less: accumulated depreciation and amortization | (40,623 | ) | | (26,195 | ) |
Property and equipment, net | $ | 164,703 |
| | $ | 128,101 |
|
Property and equipment includes $10.2 million and $13.7 million of machinery and equipment and furniture and office equipment under capital leases as of September 30, 2012 and December 31, 2011, respectively. Accumulated amortization of assets under capital leases totaled $4.4 million and $4.7 million as of September 30, 2012 and December 31, 2011, respectively.
Depreciation and amortization expense, including amortization of assets under capital leases, was $3.1 million and $3.0 million for the three months ended September 30, 2012 and 2011, respectively and was $10.4 million and $7.5 million for the nine months ended September 30, 2012 and 2011, respectively.
The Company capitalizes interest cost incurred to construct plant and equipment. The capitalized interest is recorded as part of the depreciable cost of the asset to which it relates to and this amount is amortized over the asset's estimated useful life. Interest cost capitalized as of September 30, 2012 and December 31, 2011was $309,000 and zero, respectively.
Other Assets
Other assets are comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Deferred charge asset(1) | $ | — |
| | $ | 18,792 |
|
Deposits on property and equipment, including taxes | 2,907 |
| | 17,455 |
|
Advances to contract manufacturers, net of current portion (2) | 2,419 |
| | 2,866 |
|
Recoverable taxes on purchased property and equipment and inventories(3) | 12,686 |
| | 2,075 |
|
Other | 2,121 |
| | 1,813 |
|
Total other assets | $ | 20,133 |
| | $ | 43,001 |
|
______________
| |
(1) | The deferred charge asset relates to the collaboration agreement between the Company and Total (see Note 9). |
| |
(2) | At September 30, 2012 and December 31, 2011, the amount of $2.4 million and $2.9 million, respectively, relates to the non-current unamortized portion of equipment costs funded by the Company to a contract manufacturer. The related amortization is being offset against purchases of inventory. |
| |
(3) | At September 30, 2012 and December 31, 2011, $12.7 million and $2.1 million, respectively, are recoverable taxes from the Brazilian government. |
Accrued and Other Current Liabilities
Accrued and other current liabilities are comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Professional services | $ | 1,908 |
| | $ | 4,384 |
|
Accrued vacation | 2,442 |
| | 2,761 |
|
Payroll and related expenses | 6,058 |
| | 6,343 |
|
Construction in progress | 1,069 |
| | 4,992 |
|
Tax-related liabilities | 620 |
| | 2,180 |
|
Deferred rent, current portion | 1,403 |
| | 1,274 |
|
Contractual obligations to contract manufacturers | 8,435 |
| | — |
|
Customer advances | 970 |
| | 3,667 |
|
Refundable exercise price on early exercise of stock options | 1 |
| | 30 |
|
Other | 1,155 |
| | 5,351 |
|
Total accrued and other current liabilities | $ | 24,061 |
| | $ | 30,982 |
|
Other Liabilities
Other liabilities are comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Contingently repayable advance from related party collaborator(1) | $ | — |
| | $ | 31,922 |
|
Bonus payable to contract manufacturer, non-current | — |
| | 2,500 |
|
Contractual obligations to contract manufacturers, non-current | 4,000 |
| | — |
|
Fair market value of swap obligations | 1,126 |
| | — |
|
Asset retirement obligations | 1,129 |
| | 1,129 |
|
Fair value of compound embedded derivative liability(2) | 10,263 |
| | — |
|
Other | 2,375 |
| | 1,534 |
|
Total other liabilities | $ | 18,893 |
| | $ | 37,085 |
|
______________
| |
(1) | The contingently repayable advance from related party collaborator relates to the collaboration agreement between the Company and Total which was settled in the third quarter of 2012. |
| |
(2) | The compound embedded derivative liability represents the fair value of the equity conversion feature and a "make-whole" feature of the outstanding promissory notes issued to Total. |
In November 2011, the Company and Total entered into an amendment of their Technology License, Development, Research and Collaboration Agreement (the "Amendment”). The Amendment provided for an exclusive strategic collaboration for the development of renewable diesel products and contemplated that the parties would establish a joint venture (the “JV”) for the production and commercialization of such renewable diesel products on an exclusive, worldwide basis. In addition, the Amendment contemplated providing the JV with the right to produce and commercialize certain other chemical products on a non-exclusive basis. The amendment further provided that definitive agreements to form the JV had to be in place by March 31, 2012 or such other date as agreed to by the parties or the renewable diesel program, including any further collaboration payments by Total related to the renewable diesel program, would terminate. In the second quarter of 2012, the parties extended the deadline to June 30, 2012, and, through June 30, 2012 the parties were engaged in discussions regarding the structure of future payments related to the program, until the amendment was superseded by a further amendment in July 2012 (as discussed in Note 9).
Pursuant to the Amendment, Total agreed to fund the following amounts: (i) the first $30.0 million in research and development costs related to the renewable diesel program which have been incurred since August 1, 2011, which amount would be in addition to the $50.0 million in research and development funding contemplated by the Collaboration Agreement, and (ii) for any research and development costs incurred following the JV formation date that were not covered by the initial $30.0 million, an additional $10.0 million in 2012 and up to an additional $10.0 million in 2013, which amounts would be considered part of the $50.0 million contemplated by the Collaboration Agreement. In addition to these payments, Total further agreed to fund 50% of all remaining research and development costs for the renewable diesel program under the Amendment.
Under the Amendment,Total had an option for a period of 90 days, following the completion of the renewable diesel program on December 31, 2013 (or any other date as determined by the management committee to achieve the end-project milestone), to notify the Company that it did not wish to pursue production or commercialization of renewable diesel under the Amendment. If
Total exercised this right, all of Total's intellectual property rights that were developed during the renewable diesel program would terminate and would be assigned to the Company, and the Company would be obligated to pay Total specified royalties based on the Company's net income in consideration of the benefits the Company derived from the technology and intellectual property developed during the renewable diesel development project. Such royalty payments would commence on the royalty notification date and end on the date when the Company had paid Total an aggregate amount equal to $150.0 million. Such royalty payments would be equal to (20%) of Company and Company-affiliate (i) net income on a yearly basis derived from licenses or sales of intellectual property developed under the collaboration other than to the extent such licenses or sales relate to the use of such intellectual property for the non-exclusive JV products, and (ii) net income of the Company on a consolidated basis other than that derived from the jet fuel development program with Total or from the non-exclusive JV products.
In addition, under the Amendment, if the Company sold all or substantially all of its renewable diesel business prior to the time the aggregate royalty amount has been paid, the Company would be required to pay Total fifty percent (50%) of the net proceeds from such sale up to the then-remaining unpaid amount of the aggregate royalty amount. Net income was to be calculated in accordance with generally accepted accounting principles consistently applied by the Company and in the event that the foregoing net income was negative for a given fiscal quarter, the Company would not be required to pay any royalty for such fiscal quarter). Beginning on the sixth year from the royalty notification date, the aforementioned royalty would be additionally derived from the non-exclusive JV products.
The Company concluded that there was a significant amount of risk associated with the development of these products and therefore the arrangement is within the scope of ASC 730-20 Research and Development. The Company also determined that until Total exercised its royalty option under the Amendment, it would be uncertain that financial risk involved with research and development was transferred from the Company to Total. Accordingly, the funds received from Total for the diesel product research and development activities were recorded as a contingently repayable advance from the collaborator as part of other liabilities. Depending on the resolution of Total's royalty option contingency, the Company will record this arrangement as a contract to perform research and development services or as an obligation to repay the funds.
In July 2012, the Company entered into a further amendment of the collaboration agreement with Total that expanded Total's investment in the biofene collaboration, incorporated the development of certain joint venture products for use in diesel and jet fuel into the scope of the collaboration, and changed the structure of the funding from Total to include a convertible debt mechanism (see Note 9). As a part of the July 2012 amendments, Total's royalty option contingency related to diesel was removed and jet fuel collaboration was combined with the expanded biofene collaboration. As a result, $23.3 million of payments received from Total that had been recorded as an advance from the collaborator were no longer contingently repayable and were recorded as a contract to perform research and development services, by reducing the capitalized deferred charge asset of $14.4 million and recording revenue of $8.9 million.
5. Commitments and Contingencies
Capital Leases
In March 2008, the Company executed an equipment financing agreement intended to cover certain qualifying research and laboratory hardware and software. In January 2009, the agreement was amended to increase the financing amount. During the years ended December 31, 2011, 2010, and 2009, the Company financed certain purchases of hardware equipment and software of approximately zero, $1.4 million and $4.8 million, respectively. Pursuant to the equipment financing agreement, the Company financed the equipment with the transactions representing capital leases. Accordingly, fixed assets and capital lease liabilities were recorded at the present values of the future lease payments of $0.9 million and $3.1 million at September 30, 2012 and December 31, 2011, respectively. The incremental borrowing rates used to determine the present values of the future lease payments was 9.5%. The capital lease obligations expire at various dates, with the latest maturity in March 2013. In connection with the agreement entered into in 2008, the Company issued a warrant to purchase shares of the Company's convertible preferred stock (see Note 11).
In December 2011, the Company executed an equipment financing agreement intended to cover certain qualifying research and laboratory hardware. During the year ended December 31, 2011, the Company financed certain purchases of hardware equipment of $3.0 million. Pursuant to the equipment financing agreement, the Company financed the equipment with transactions representing capital leases. This sale/leaseback transaction resulted in a $1.3 million unrealized loss which is being amortized over the life of the assets under lease. Accordingly, the Company recorded a capital lease liability at the present value of the future lease payments of $2.5 million at September 30, 2012 and $3.4 million at December 31, 2011 The incremental borrowing rate used to determine the present values of the future lease payments was 6.5%. The lease obligations expire on January 1, 2015. In connection with the equipment financing transaction, the Company issued a warrant to purchase shares of the Company's common
stock (see Note 11). Future minimum payments under this sales/leaseback agreement as of September 30, 2012 are as follows (in thousands):
|
| | | |
Years ending December 31: | Sale/Leaseback |
2012 (Three Months) | $ | 274 |
|
2013 | 1,098 |
|
2014 | 1,007 |
|
2015 | 289 |
|
2016 | — |
|
Thereafter | — |
|
Total future minimum lease payments | 2,668 |
|
Less: amount representing interest | (207 | ) |
Present value of minimum lease payments | 2,461 |
|
Less: current portion | (966 | ) |
Long-term portion | $ | 1,495 |
|
The Company recorded interest expense in connection with its capital leases of $81,000 and $126,000 for the three months ended September 30, 2012 and 2011, respectively, and $321,000 and $437,000 for the nine months ended September 30, 2012 and 2011, respectively. Future minimum payments under capital leases, including the sale/leaseback equipment financing agreement, as of September 30, 2012 are as follows (in thousands):
|
| | | |
Years ending December 31: | Capital Leases |
2012 (Three Months) | $ | 816 |
|
2013 | 1,489 |
|
2014 | 1,007 |
|
2015 | 289 |
|
2016 | — |
|
Thereafter | — |
|
Total future minimum lease payments | 3,601 |
|
Less: amount representing interest | (235 | ) |
Present value of minimum lease payments | 3,366 |
|
Less: current portion | (1,871 | ) |
Long-term portion | $ | 1,495 |
|
Operating Leases
The Company has noncancelable operating lease agreements for office, research and development and manufacturing space in the United States that expire at various dates, with the latest expiration in May 2018 with an estimated annual rent payment of approximately $6.0 million. In addition, the Company leases facilities in Brazil pursuant to noncancelable operating leases that expire at various dates, with the latest expiration in November 2016 and with an estimated annual rent payment of approximately $0.6 million.
In 2007, the Company entered into an operating lease for its headquarters in Emeryville, California, with a term of ten years commencing in May 2008. As part of the operating lease agreement, the Company received a tenant improvements allowance of $11.4 million. The Company recorded the allowance as deferred rent and associated expenditures as leasehold improvements that are being amortized over the shorter of their useful life or the term of the lease. In connection with the operating lease, the Company elected to defer a portion of the monthly base rent due under the lease and entered into notes payable agreements with the lessor for the purchase of certain tenant improvements. In October 2010, the Company amended its lease agreement with the lessor of its headquarters, to lease up to approximately 22,000 square feet of research and development and office space. In return for the removal of the early termination clause in its amended lease agreement, the Company received approximately $1.0 million from the lessor in December 2010.
The Company recognizes rent expense on a straight-line basis over the noncancelable lease term and records the difference between cash 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 in the determination of straight-line rent expense over the lease term. Rent expense was $1.2 million and $1.2 million for the three months ended September 30, 2012 and 2011, respectively, and $3.7 million and $3.5 million for the nine months ended September 30, 2012 and 2011, respectively.
In January 2011, the Company entered into a right of first refusal agreement with respect to a facility and site in Leland, North Carolina leased by Glycotech covering a two year period commencing in January 2011. Under the right of first refusal agreement, the lessor agrees not to sell the facility and site leased by Glycotech during the term of the production service agreement. If the lessor is presented with an offer to sell, or decides to sell, an adjacent parcel, the Company has a right of first refusal to acquire the adjacent parcel or leased property.
In February 2011, the Company commenced payment of rent related to an operating lease on real property owned by Usina São Martinho in Brazil. In conjunction with a joint venture agreement (see Note 7) with the same entity, the real property will be used by the joint venture entity, SMA Indústria Química S.A. (“SMA”), for the construction of a production facility. This lease has a term of 20 years commencing in February 2011 with an estimated annual rent payment of approximately $47,000.
In February 2011, the Company entered into an operating lease for certain equipment owned by GEA Engenharia de Processos e Sistemas Industriais Ltda (“GEA”) in Brazil. The equipment under this lease was used by the Company in its production activities in Brazil. This lease had a term of one year commencing in March 2011 and was terminated in June 2012 and the equipment was returned to GEA.
In March 2011, the Company entered into an operating lease on real property owned by Paraíso Bioenergia S.A. (“Paraíso Bioenergia”) in Brazil. In conjunction with a supply agreement (see Note 9) with the same entity, the real property is being used by the Company for the construction of an industrial facility. This lease has a term of 15 years commencing in March 2011 with an estimated annual rent payment of approximately $118,000.
In August 2011, the Company notified the lessor of its leased office facilities in Brazil of the Company's termination of its existing lease effective November 30, 2011. At the same time, the Company entered into an operating lease for new office facilities in Campinas, Brazil. The new lease has a term of 5 years commencing in November 2011 with an estimated annual rent payment of approximately $375,000.
Future minimum payments under operating leases as of September 30, 2012, are as follows (in thousands):
|
| | | | | | | | | | | |
Years ending December 31: | Operating Leases - Facilities | | Operating Leases - Land | | Total Operating Leases |
2012 (Three Months) | $ | 1,658 |
| | $ | 32 |
| | $ | 1,690 |
|
2013 | 6,385 |
| | 166 |
| | 6,551 |
|
2014 | 6,516 |
| | 165 |
| | 6,681 |
|
2015 | 6,644 |
| | 165 |
| | 6,809 |
|
2016 | 6,630 |
| | 165 |
| | 6,795 |
|
Thereafter | 9,233 |
| | 1,758 |
| | 10,991 |
|
Total future minimum lease payments | $ | 37,066 |
| | $ | 2,451 |
| | $ | 39,517 |
|
Guarantor Arrangements
The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer 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 amounts paid. 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 September 30, 2012 and December 31, 2011.
The Company has a facility (“FINEP Credit Facility”) with a financial institution to finance a research and development project on sugarcane-based biodiesel (see Note 6). The FINEP Credit Facility provides for loans of up to an aggregate principal amount of R$6.4 million (approximately US$3.2 million based on the exchange rate as of September 30, 2012) which 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$3.0 million based on the exchange rate as of September 30, 2012). Subject to compliance with certain terms and conditions under the FINEP Credit Facility, four disbursements of the loan will become available to the Company for withdrawal, as described in more detail in Note 6. After the release of the first disbursement, prior to any subsequent drawdown from the FINEP Credit Facility, the Company also needs to provide bank letters of guarantee of up to R$3.3 million (approximately US$1.6 million based on the exchange rate as of September 30, 2012).
The Company has a credit facility (“BNDES Credit Facility”) with a financial institution to finance a production site in Brazil. This 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 US$12.3 million based on the exchange rate at September 30, 2012). 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 a bank guarantee under the BNDES Credit Facility.
The Company has signed loan agreements and a security agreement where the Company pledged certain farnesene production system as collateral (the fiduciary conveyance of movable goods) with each of Nossa Caixa and Banco Pine. Under the loan agreements, Banco Pine, agreed to lend R$22.0 million and Nossa Caixa agreed to lend R$30.0 million as financing for capital expenditures relating to the Company's manufacturing facility at Paraíso Bioenergia in Brazil. The Company's total acquisition cost for the farnesene production system pledged as collateral under these agreements is approximately R$68.0 million (approximately US$33.5 million based on the exchange rate as of September 30, 2012). The Company is a also a parent guarantor for the payment of the outstanding balance under these loan agreements.
Under an operating lease agreement for its office facilities in Brazil, which commenced on November 15, 2011, the Company is required to maintain restricted cash or letters of credit equal to three months of rent of approximately R$191,000 (approximately US$94,000 based on the exchange rate as of September 30, 2012) in the aggregate as a guarantee that the Company will meet its performance obligations under such operating lease agreement.
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 which will only be resolved 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 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 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. For example, one of our contract manufacturers recently sent us a notice of termination and demanded payment of certain ongoing costs and removal of our equipment in connection with our decision to halt production at that plant. Another of our contract manufacturers similarly made claims that we had breached an agreement by suspending production at that plant. The Company has accrued for losses it deems to be probable arising from these claims. However, such matters are subject to many uncertainties and outcomes are not predictable with assurance. Therefore, if one or more of these legal matters were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for the relevant reporting period could be materially adversely affected.
6. Debt
Debt is comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Credit facilities | $ | 10,238 |
| | $ | 18,852 |
|
Notes payable | 1,689 |
| | 3,113 |
|
Convertible notes | 67,591 |
| | — |
|
Loans payable | 25,892 |
| | 19,359 |
|
Total debt | 105,410 |
| | 41,324 |
|
Less: current portion | (2,121 | ) | | (28,049 | ) |
Long-term debt | $ | 103,289 |
| | $ | 13,275 |
|
Credit Facility
In November 2010, the Company entered into a credit facility with Financiadora de Estudos e Projetos (“FINEP”), a state-owned company subordinated to the Brazilian Ministry of Science and Technology. This FINEP Credit Facility was extended to partially fund expenses related to the Company’s research and development project on sugarcane-based biodiesel (“FINEP Project”) and provides for loans of up to an aggregate principal amount of R$6.4 million (approximately US$3.2 million based on the exchange rate as of September 30, 2012) which is secured by a chattel mortgage on certain equipment of the Company as well as by bank letters of guarantee. Subject to compliance with certain terms and conditions under the FINEP Credit Facility, four disbursements of the loan will become available to the Company for withdrawal. The first disbursement received in February 2011 was approximately R$1.8 million (approximately US$0.9 million based on the exchange rate as of September 30, 2012) and the next three disbursements will each be approximately R$1.6 million (approximately US$0.8 million based on exchange rate as of September 30, 2012). As of September 30, 2012 and December 31, 2011 there was R$1.8 million (approximately US$0.9 million based on the exchange rate at September 30, 2012) outstanding under this FINEP Credit Facility.
Interest on loans drawn under this 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 (“TJLP”). If the TJLP at the time of default is greater than 6.0%, 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% shall apply to the amount of any obligation in default. Interest on late balances will be 1.0% interest 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. Commencing in March 2011, interest on loans drawn and other charges have been paid on a monthly basis.
The FINEP Credit Facility contains the following significant terms and conditions
| |
• | The Company will share with FINEP the costs associated with the FINEP Project. At a minimum, the Company will contribute from its own funds approximately R$14.5 million (approximately US$7.1 million based on the exchange rate as of September 30, 2012) of which the Company expects R$11.1 million to be contributed prior to the release of the second disbursement, which is expected to occur in 2013; |
| |
• | After the release of the first disbursement, prior to any subsequent drawdown from the FINEP Credit Facility, the Company is required to provide bank letters of guarantee of up to R$3.3 million in aggregate (approximately US$1.6 million based on the exchange rate as of September 30, 2012); |
| |
• | Amounts released from the FINEP Credit Facility must be completely used by the Company towards the FINEP Project within 30 months after the contract execution. |
Notes Payable
During the period between May 2008 and October 2008, the Company entered into notes payable agreements with the lessor of its headquarters under which it borrowed a total of $3.3 million for the purchase of tenant improvements, bearing an interest rate of 9.5% per annum and to be repaid over a period of 55 to 120 months. As of September 30, 2012 and December 31, 2011, a principal amount of $1.6 million and $2.0 million, respectively, was outstanding under these notes payable.
In connection with the operating lease for its headquarters (see Note 5) in Emeryville, California, the Company elected
to defer a portion of monthly base rent due under the lease. In June 2011, a deferred rent obligation of $1.5 million resulting from this election became due and payable in 24 equal monthly installments of approximately $63,000. As such, the Company reclassified this obligation from Other Liabilities to Notes Payable. In June 2012, the Company paid off the outstanding notes payable balance. As of September 30, 2012 and December 31, 2011, a principal amount of zero and $1.1 million, respectively, was outstanding under this note payable.
Convertible Notes
In February 2012, the Company completed the sale of unsecured senior 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 Fidelity Investments Institutional Services Company, Inc. The offering consisted of the sale of 3% senior unsecured convertible promissory notes with a March 1, 2017 maturity date and a conversion price equal to $7.0682 per share of common stock, subject to adjustment for proportional adjustments to outstanding common stock and anti-dilution provisions in case of dividends and distributions. As of September 30, 2012, the notes were convertible into an aggregate of up to 3,536,968 shares of common stock. The note holders have a right to require repayment of 101% of the principal amount of the notes in an acquisition of the Company, and the notes provide for payment of unpaid interest on conversion following such an acquisition if the note holders do not require such repayment. The securities purchase agreement and notes include covenants regarding payment of interest, maintaining the Company's listing status, limitations on debt, maintenance of corporate existence, and filing of SEC reports. The notes include standard events of default resulting in acceleration of indebtedness, including failure to pay, bankruptcy and insolvency, cross-defaults, material adverse effect clauses and breaches of the covenants in the securities purchase agreement and notes, with default interest rates and associated cure periods applicable to the covenant regarding SEC reporting.
In July 2012, the Company entered into a further amendment of the collaboration agreement with Total that expanded Total's investment in the biofene collaboration, incorporated the development of certain joint venture products for use in diesel and jet fuel into the scope of the collaboration, and changed the structure of the funding from Total to include a convertible debt mechanism (see Note 9).
The purchase agreement for the notes related to the funding from Total provides for the sale of an aggregate of $105.0 million in notes as follows:
| |
• | As part of an initial closing under the purchase agreement (which initial closing was completed in two installments), (i) on July 30, 2012, the Company sold a 1.5% Senior Unsecured Convertible Note Due 2017 to Total in the face amount of $38.3 million, including $15.0 million in new funds and repayment by the Company of $23.3 million in previously-provided diesel research and development funding by Total, and (ii) on September 14, 2012, the Company sold another note (in the same form) for $15.0 million in new funds from Total. |
| |
• | The purchase agreement provides that additional notes may be sold in subsequent closings in July 2013 (for cash proceeds to the Company of $30.0 million) and July 2014 (for cash proceeds to the Company of $21.7 million, which would be settled in an initial installment of $10.85 million payable at such closing and a second installment of $10.85 million payable in January 2015). |
The notes each have a March 1, 2017 maturity date and a conversion price equal to $7.0682 per share of Company common stock. The notes bear interest of 1.5% per year (with a default rate of 2.5%), accruing from date of funding 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. Accrued interest is canceled if the notes are canceled based on a “Go” decision.
The notes become convertible into Company common stock (i) within 10 trading days prior to maturity (if they are not canceled as described above prior to their maturity date), (ii) on a change of control of the Company, (iii) if Total is no longer the largest stockholder of the Company following a “No-Go” decision (subject to a six-month lock-up with respect to any shares of common stock issued upon conversion), and (iv) on a default by the Company. If Total makes a final “Go” decision, then the notes will be exchanged by Total for equity interests in the Fuels JV, after which the notes will not be convertible and any obligation to pay principal or interest on the notes will be extinguished. If Total makes a “No-Go” decision, outstanding notes will remain outstanding and become payable at maturity.
The conversion price of the notes is 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 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 Total does not require such repayment. The purchase agreement and 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 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 purchase agreement and notes, with added default interest rates and associated cure periods applicable to the covenant regarding SEC reporting.
Loans Payable
In December 2009, the Company entered into a loans payable agreement with the lessor of its Emeryville pilot plant under which it borrowed a total of $250,000, bearing an interest rate of 10.0% per annum and to be repaid over a period of 96 months. As of September 30, 2012 and December 31, 2011, a principal amount of $184,000 and $204,000, respectively, was outstanding under the loan.
In December 2011, the Company entered into a loan agreement with Banco Pine under which Banco Pine provided the Company with a short term loan of R$35.0 million (approximately US$17.2 million based on the exchange rate as of September 30, 2012). Such loan was an advance on anticipated July 2012 financing from Nossa Caixa Desenvolvimento, ("Nossa Caixa"), the Sao Paulo State development bank, and Banco Pine, under which Banco Pine and Nossa Caxia would provide the Company with loans of up to approximately R$52.0 million (approximately US$25.6 million based on the exchange rate as of September 30, 2012) as financing for capital expenditures relating to the Company's manufacturing facility at Paraíso Bioenergia. The interest rate for the loan was 119.2% of the Brazilian interbank lending rate (approximately 12.3% on an annualized basis). The principal and interest of loans under the loan agreement, as amended, matured and were required to be repaid on August 15, 2012.
In June 2012, the Company entered into a separate loan agreement with Banco Pine under which Banco Pine provided the Company with a short-term bridge loan of R$52.0 million (approximately US$25.6 million based on the exchange rate as of September 30, 2012). The bridge loan was an additional advance on the anticipated Banco Pine and Nossa Caixa financing described above. The interest rate for the bridge loan was 0.4472% monthly (approximately 5.5% on an annualized basis). The principal and interest under the bridge loan matured and were required to be repaid on September 19, 2012, subject to extension by Banco Pine. The bridge loan was in addition to the R$35.0 million short term loan to the Company described above. At the time of this bridge loan, the Company entered into a currency interest rate swap arrangement with the lender for R$22.0 million (approximately US$10.8 million based on the exchange rate as of September 30, 2012). The swap arrangement exchanged the principal and interest payments under the bridge loan for alternative principal and interest payments that were subject to adjustment based on fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real. The swap had a fixed interest rate of 3.94%.
In July 2012, the Company entered into a Note of Bank Credit and a Fiduciary Conveyance of Movable Goods agreements with each of Nossa Caixa and Banco Pine. Under these agreements, the Company's total acquisition cost for the farnesene production system pledged as collateral is approximately R$68.0 million (approximately US$33.5 million based on the exchange rate as of September 30, 2012). The Company is a also a parent guarantor for the payment of the outstanding balance under these loan agreements.
Under such instruments, the Company could borrow an aggregate of R$52.0 million (approximately US$25.6 million based on the exchange rate as of September 30, 2012) as financing for capital expenditures relating to the Company's manufacturing facility at Paraíso Bioenergia in 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 funds for the loans are provided by Banco Nacional de Desenvolvimento Econômico e Social ("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. For the first two years that the loans are outstanding, the Company is required to pay interest only on a quarterly basis. After August 15, 2014, the Company is required to pay equal monthly installments of both principal and interest for the remainder of the term of the loans. In July 2012, the Company repaid the outstanding bridge loans of R$52.0 million and R$35.0 million from Banco Pine.
Letters of Credit
In November 2008, the Company entered into the Credit Agreement with a financial institution to finance the purchase and sale of fuel and for working capital requirements, as needed. In October 2009, the agreement was amended to decrease the maximum amount that the Company may borrow under such facility. The Credit Agreement, as amended, provided, as of March 31, 2012, for an aggregate maximum availability up to the lower of $20.0 million and the borrowing base as defined
in the agreement, and was subject to a sub-limit of $5.7 million for the issuance of letters of credit and a sub-limit of $20.0 million for short-term cash advances for product purchases. The Credit Agreement was collateralized by a first priority security interest in certain of the Company’s present and future assets. Amyris was a parent guarantor for the payment of the outstanding balance under the Credit Agreement. Outstanding advances bore an interest rate at the Company’s option of the bank’s prime rate plus 1.0% or the bank’s cost of funds plus 3.5%. In April 2012, the Company, entered into an Amendment to the credit agreement, effective as of April 14, 2012 to extend the maturity date pending the Company's transition out of its ethanol and reformulated ethanol-blended gasoline business, and its plan to repay all amounts remaining outstanding under the Credit Agreement, and terminate the Credit Agreement as of the new maturity date. As of September 30, 2012, the Credit Agreement was terminated. As of September 30, 2012 and December 31, 2011, the Company had no outstanding advances and had zero and $5.0 million, respectively, in outstanding letters of credit under the Credit Agreement.
In June 2012, the Company entered into a letter of credit agreement for $953,000, under which it provided a letter of credit to the landlord for its headquarters in Emeryville, California in order to cover the security deposit on the lease. The letter of credit is secured by a certificate of deposit. Accordingly, the Company recorded $954,000 as restricted cash as of September 30, 2012.
Revolving Credit Facility
In December 2010, the Company established a revolving credit facility with a financial institution that provided for loans and standby letters of credit of up to an aggregate principal amount of $10.0 million with a sublimit of $5.0 million on standby letters of credit. Interest on loans drawn under this revolving credit facility was equal to (i) the Eurodollar Rate plus 3.0%; or (ii) the Prime Rate plus 0.5%. In case of default or non-compliance with the terms of the agreement, the interest on loans was Prime Rate plus 2.0%. The credit facility was collateralized by a first priority security interest in certain of the Company's present and future assets. In April 2012, the Company paid $7.7 million of its outstanding loans under the Credit Facility. In May 2012, the Company entered into a letter agreement with the bank amending the credit facility agreement to reduce the committed amount under the credit facility from $10.0 million to approximately $2.3 million, and the letters of credit sublimit from $5.0 million to approximately $2.3 million. The amendment also modified the current ratio covenant to require a ratio of current assets to current liabilities of at least 1.3:1 (as compared to 2:1 in the Credit Facility), and required the Company to maintain unrestricted cash of at least $15.0 million in its account with the Bank. In June 2012, the credit facility was terminated and, as of September 30, 2012, no loans or letters of credit were outstanding.
BNDES Credit Facility
In December 2011, the Company entered into a credit facility (the "BNDES Credit Facility") in the amount of R$22.4 million (approximately US$11.0 million based on the exchange rate as of September 30, 2012) with BNDES, a government owned bank headquartered in Brazil. This BNDES facility was extended as project financing for a production site in Brazil. 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. The credit line is available for 12 months from the date of the Credit Agreement, subject to extension by the lender.
The principal of the 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 is due initially on a quarterly basis and the first installment was paid in March 2012. From and after January 2013, payments of principal and interest will be due on a monthly basis. The loaned amounts carry interest of 7% per year. Additionally, 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 denominated in Brazilian reais. The 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 US$12.3 million based on the exchange rate as of September 30, 2012). 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 a bank guarantee equal to 10% of the total approved amount (R$22.4 million in total debt) available under this 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, the Lender may terminate its commitments and declare immediately due all borrowings under the facility. As of September 30, 2012 the Company had R$19.1 million (approximately US$9.4 million based on the exchange rate as of September 30, 2012) in
outstanding advances under the BNDES Credit Facility.
Future minimum payments under the debt agreements as of September 30, 2012 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
Years ending December 31: | Notes Payable | | Convertible Notes | | Loans Payable | | Credit Facility |
2012 (Three Months) | $ | 156 |
| | $ | 192 |
| | $ | 670 |
| | $ | 370 |
|
2013 | 445 |
| | 760 |
| | 1,534 |
| | 2,632 |
|
2014 | 355 |
| | 760 |
| | 2,495 |
| | 2,497 |
|
2015 | 355 |
| | 765 |
| | 3,914 |
| | 2,361 |
|
2016 | 355 |
| | 761 |
| | 3,823 |
| | 2,226 |
|
Thereafter | 479 |
| | 81,958 |
| | 19,400 |
| | 2,255 |
|
Total future minimum payments | 2,145 |
| | 85,196 |
| | 31,836 |
| | 12,341 |
|
Less: amount representing interest | (456 | ) | | (17,605 | ) | | (5,944 | ) | | (2,103 | ) |
Present value of minimum debt payments | 1,689 |
| | 67,591 |
| | 25,892 |
| | 10,238 |
|
Less: current portion | (371 | ) | | — |
| | (127 | ) | | (1,623 | ) |
Noncurrent portion of debt | $ | 1,318 |
| | $ | 67,591 |
| | $ | 25,765 |
| | $ | 8,615 |
|
7. Joint Ventures
SMA Indústria Química S.A.
On April 14, 2010, the Company established SMA, a joint venture with Usina São Martinho, to build a manufacturing facility. SMA is located at the Usina São Martinho mill in Pradópolis, São Paulo state, Brazil. SMA has a 20 year initial term.
SMA is managed by a three member executive committee, of which the Company appoints 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 is governed by a four member board of directors, of which the Company and Usina São Martinho each appoint two members. The board of directors has 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 require the Company to fund the construction costs of the new facility and Usina São Martinho would reimburse the Company up to R$61.8 million (approximately US$30.4 million based on the exchange rate as of September 30, 2012) of the construction costs after SMA commences production. Post commercialization, the Company would market and distribute Amyris renewable products and Usina São Martinho 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 Usina São Martinho 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 Usina São Martinho’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 becomes controlled, directly or indirectly, by a competitor of Usina São Martinho, then Usina São Martinho has the right to acquire the Company’s interest in SMA. If Usina São Martinho becomes controlled, directly or indirectly, by a competitor of the Company, then the Company has the right to sell its interest in SMA to Usina São Martinho. In either case, the purchase price is 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.
Amyris has a 50% ownership interest in SMA. The Company has identified SMA as a VIE. The Company is the primary beneficiary and consequently consolidates SMA’s operations in its financial statements.
Joint Venture with Cosan
In June 2011, the Company entered into joint venture agreements with Cosan Combustíveis e Lubrificantes S.A. and Cosan S.A. Industria e Comércio (such Cosan entities, collectively or individually, “Cosan”), related to the formation of a joint venture (the “Novvi JV”), to focus on the worldwide development, production and commercialization of base oils made from Biofene
produced by the Novvi JV or purchased from the Company or a contract manufacturer. The Company and Cosan are establishing entities related to the joint venture in both Brazil and the United States.
Under the joint venture agreements, the Novvi JV would undertake, on a worldwide basis, the development, production and commercialization of certain classes of base oils produced from Biofene for use in lubricants products in the automotive, commercial and industrial markets. The agreements provide that (i) the Company will perform research and development activities on behalf of the Novvi JV under a research services arrangement and will grant a royalty-free license to the Novvi JV to use the Company's technology to develop, produce, market and distribute renewable base oils for use in lubricant products sold worldwide, and (ii) Cosan will provide technical expertise and use commercially reasonable efforts to contribute a base oils offtake agreement with a third party to the Novvi JV.
Subject to certain exceptions for the Company, the joint venture agreements provide that the Novvi JV will be the exclusive means through which the Company and Cosan will engage in the worldwide development and commercialization of specified classes of renewable base oils that are derived from Biofene or, under certain circumstances, from other intermediate molecules or technologies. The JV has certain rights of first refusal with respect to alternative base oil technologies that may be acquired by the Company or Cosan during the term of the Novvi JV.
Under the joint venture agreements, the Company and Cosan each own 50% of the Novvi JV and each party will share equally in any costs and any profits ultimately realized by the JV. The joint venture agreement has an initial term of 20 years from the date of the agreement, subject to earlier termination by mutual written consent or by a non-defaulting party in the event of specified defaults by the other party (including breach by a party of any material obligations under the joint venture agreements). The Shareholders' Agreement has an initial term of 10 years from the date of the agreement, subject to earlier termination if either the Company or Cosan ceases to own at least 10% of the voting stock of the Novvi JV.
The Company has identified Novvi S.A., the initial Brazilian JV entity formed, as a VIE. The power to direct activities, which most significantly impact the economic success of the joint venture, is equally shared between the Company and Cosan, who are not related parties. Accordingly, the Company is not the primary beneficiary and therefore will account for its investment in the JV entity using the equity method. The Company will periodically review its consolidation analysis on an ongoing basis. As of September 30, 2012, the carrying amounts of the unconsolidated JV entity's assets and liabilities were not material to the Company's consolidated financial statements.
In September 2011, the U.S. JV entity, Novvi LLC was formed. The Company and Cosan are still finalizing operating agreements for this new entity. As of September 30, 2012, there had been no activity in this joint venture.
8. Noncontrolling Interest
Redeemable Noncontrolling Interest
In December 2009, Amyris Brasil sold 1,111,111 of its shares representing a 4.8% interest in Amyris Brasil for R$10.0 million. This redeemable noncontrolling interest was reported in the mezzanine equity section of the consolidated balance sheet because the Company was then subject to a contingent put option under which it could have been required to repurchase an interest in Amyris Brasil from the noncontrolling interest holder.
In March 2010, Amyris Brasil sold an additional 853,333 shares of its stock, an incremental 3.4% interest, for R$3.0 million. In May 2010, Amyris Brasil sold an additional 1,111,111 shares of its stock, an incremental 4.07% interest, for R$10.0 million.
Under the terms of the agreements with these Amyris Brasil investors, the Company had the right to require the investors to convert their shares of Amyris Brasil into shares of common stock at a 1:0.28 conversion ratio. On September 30, 2010, in connection with the Company’s IPO, shares of Amyris Brasil held by these investors were converted into 861,155 shares of the Company’s common stock. The remaining noncontrolling interest as of September 30, 2010 was converted to common stock and additional paid-in capital.
At the closing of the IPO, the Company recorded a one-time beneficial conversion feature charge of $2.7 million associated with the conversion of the shares of Amyris Brasil held by investors into shares of Amyris, Inc. common stock, which impacted earnings per share for the year ended December 31, 2010.
The following table provides a roll forward of the redeemable noncontrolling interest (in thousands):
|
| | | |
Balance as of December 31, 2009 | $ | 5,506 |
|
Proceeds from redeemable noncontrolling interest | 7,041 |
|
Conversion of shares of Amyris Brasil S.A. subsidiary held by third parties into common stock | (11,870 | ) |
Foreign currency translation adjustment | 217 |
|
Net loss | (894 | ) |
Balance as of December 31, 2010 | $ | — |
|
Noncontrolling Interest
SMA Indústria Química
The joint venture, SMA (see Note 7), is a VIE pursuant to the accounting guidance for consolidating VIEs because the amount of total equity investment at risk is not sufficient to permit SMA to finance its activities without additional subordinated financial support, as well as the related commercialization agreement provides a substantive minimum price guarantee. Under the terms of the joint venture agreement, the Company directs the design and construction activities, as well as production and distribution. In addition, the Company has the obligation to fund the design and construction activities until commercialization is achieved. Subsequent to the construction phase, both parties equally 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. Accordingly, the financial results of SMA are included in the Company’s consolidated financial statements and amounts pertaining to Usina São Martinho’s interest in SMA are reported as noncontrolling interests in subsidiaries.
Glycotech
In January 2011, the Company entered into a production service agreement with Glycotech, whereby Glycotech is to provide process development and production services for the manufacturing of various Company products at its leased facility in Leland, North Carolina. The Company products to be manufactured by Glycotech will be owned and distributed by the Company. Pursuant to the terms of the 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 agreement is for a two year period commencing on February 1, 2011 and will renew automatically for successive one-year terms, unless terminated by the Company. On the same date as the production service agreement, the Company also entered into a right of first refusal agreement with the lessor of the facility and site leased by Glycotech covering a two year period commencing in January 2011. Per the terms of the right of first refusal agreement the lessor agreed not to sell the facility and site leased by Glycotech during the term of the production service agreement. In the event that the lessor is presented with an offer to sell or decides to sell an adjacent parcel, the Company has the right of first refusal to acquire it.
The Company has determined that the arrangement with Glycotech qualifies as a VIE. The Company determined that it is the primary beneficiary of this arrangement since it has the power through the management committee over which it has majority control to direct the activities that most significantly impact the arrangement's economic performance. In addition, the Company is required to fund 100% of Glycotech's actual operating costs for providing services each month while the facility is in operation under the production service agreement. Accordingly, the Company consolidates the financial results of Glycotech. As of September 30, 2012, the carrying amounts of the consolidated VIE's assets and liabilities were not material to the Company's consolidated financial statements.
The table below reflects the carrying amount of the assets and liabilities of the two consolidated VIEs for which the Company is the primary beneficiary. The assets include $24.9 million in property and equipment and $4.8 million in other assets, and $0.3 million in current assets. The liabilities include $0.8 million in accounts payable and accrued current liabilities and $0.1 million in loan obligations by Glycotech to a financial institution that are non-recourse to the Company. The creditors of each consolidated VIE have recourse only to the assets of that VIE.
|
| | | | | | | |
(In thousands) | September 30, 2012 | | December 31, 2011 |
Assets | $ | 29,964 |
| | $ | 22,094 |
|
Liabilities | $ | 921 |
| | $ | 2,873 |
|
The change in noncontrolling interest for the nine months ended September 30, 2012 and 2011 is summarized below (in
thousands):
|
| | | | | | | |
| 2012 | | 2011 |
Balance at January 1 | $ | (240 | ) | | $ | 2 |
|
Addition to noncontrolling interest | — |
| | 369 |
|
Foreign currency translation adjustment | 209 |
| | — |
|
Loss attributable to noncontrolling interest | (772 | ) | | (437 | ) |
Balance at September 30 | $ | (803 | ) | | $ | (66 | ) |
9. Significant Agreements
Research and Development Activities
Total Collaboration Agreement
In June 2010, the Company entered into a technology license, development, research and collaboration agreement (“collaboration agreement”) with Total Gas & Power USA Biotech, Inc., an affiliate of Total S.A. (Total S.A. and its relevant affiliates, collectively, “Total”). The collaboration agreement sets forth the terms for the research, development, production and commercialization of certain to be determined chemical and/or fuel products made through the use of the Company’s synthetic biology platform. The collaboration agreement establishes a multi-phased process through which projects are identified, screened, studied for feasibility, and ultimately selected as a project for development of an identified lead compound using an identified microbial strain. Under the terms of the collaboration agreement, Total will fund up to the first $50.0 million in research and development costs for the selected projects; thereafter the parties will share such costs equally. Amyris has agreed to dedicate the laboratory resources needed for collaboration projects. Total also plans to second employees at Amyris to work on the projects. Once a development project has commenced, the parties are obligated to work together exclusively to develop the lead compound during the project development phase. After a development project is completed, the Company and Total expect to form one or more joint ventures to commercialize any products that are developed, with costs and profits to be shared on an equal basis, provided that if Total has not achieved profits from sales of a joint venture product equal to the amount of funding it provided for development plus an agreed upon rate of return within three years of commencing sales, then Total will be entitled to receive all profits from sales until this rate of return has been achieved. Each party has certain rights to independently produce commercial quantities of these products under certain circumstances, subject to paying royalties to the other party. Total has the right of first negotiation with respect to exclusive commercialization arrangements that the Company would propose to enter into with certain third parties, as well as the right to purchase any of the Company’s products on terms no less favorable than those offered to or received by the Company from third parties in any market where Total or its affiliates have a significant market position.
The collaboration agreement has an initial term of 12 years and is renewable by mutual agreement by the parties for additional three year periods. Neither the Company nor Total has the right to terminate the agreement voluntarily. The Company and Total each have the right to terminate the agreement in the event the other party commits a material breach, is the subject of certain bankruptcy proceedings or challenges a patent licensed to it under the collaboration agreement. Total also has the right to terminate the collaboration agreement in the event the Company undergoes a sale or change of control to certain entities. If the Company terminates the collaboration agreement due to a breach, bankruptcy or patent challenge by Total, all licenses the Company has granted to Total terminate except licenses related to products for which Total has made a material investment and licenses related to products with respect to which binding commercialization arrangements have been approved, which will survive subject, in most cases, to the payment of certain royalties by Total to the Company. Similarly, if Total terminates the collaboration agreement due to a breach, bankruptcy or patent challenge by the Company, all licenses Total has granted to the Company terminate except licenses related to products for which the Company has made a material investment, certain grant-back licenses and licenses related to products with respect to which binding commercialization arrangements have been approved, which will survive subject, in most cases, to the payment of certain royalties to Total by the Company. On expiration of the collaboration agreement, or in the event the collaboration agreement is terminated for a reason other than a breach, bankruptcy or patent challenge by one party, licenses applicable to activities outside the collaboration generally continue with respect to intellectual property existing at the time of expiration or termination subject, in most cases, to royalty payments. There are circumstances under which certain of the licenses granted to Total will survive on a perpetual, royalty-free basis after expiration or termination of the collaboration agreement. Generally these involve licenses to use the Company’s synthetic biology technology and core metabolic pathway for purposes of either independently developing further improvements to marketed collaboration technologies or products or the processes for producing them within a specified scope agreed to by the Company and Total prior to the time of expiration or termination, or independently developing early stage commercializing products developed from collaboration compounds that met certain performance criteria prior to the time the agreement expired or was terminated and commercializing products related to such
compounds. After the collaboration agreement expires, the Company may be obligated to provide Total with ongoing access to Amyris laboratory facilities to enable Total to complete research and development activities that commenced prior to termination.
In June 2010, concurrent with the collaboration agreement, the Company issued 7,101,548 shares of Series D preferred stock to Total for aggregate proceeds of approximately $133.0 million at a per share price of $18.75, which was lower than the per share fair value of common stock as determined by management and the Board of Directors. Due to the fact the collaboration agreement and the issuance of shares to Total occurred concurrently, the terms of both the collaboration agreement and the issuance of preferred stock were evaluated to determine whether their separately stated pricing was equal to the fair value of services and preferred stock. The Company determined that the fair value of Series D preferred stock was $22.68 at the time of issuance and, therefore, the Company measured the preferred stock initially at its fair value with a corresponding reduction in the consideration for the services under the collaboration agreement. As revenue from collaboration agreement will be generated over a period of time based on the performance requirements, the Company recorded the difference between the fair value and consideration received for Series D preferred stock of $27.9 million as a deferred charge asset within other assets at the time of issuance which will be recognized as a reduction to revenue in proportion to the total estimated revenue under the collaboration agreement. As of September 30, 2012 and December 31, 2011, the Company had recognized a cumulative reduction of $27.9 million and $9.1 million, respectively, against the deferred charge asset.
As a result of recording Series D preferred stock at its fair value, the effective conversion price was greater than the fair value of common stock as determined by management and the Board of Directors. Therefore, no beneficial conversion feature was recorded at the time of issuance. The Company further determined that the conversion option with a contingent reduction in the conversion price upon a qualified IPO was a potential contingent beneficial feature and, as a result, the Company calculated the intrinsic value of such conversion option upon occurrence of the qualified IPO. The Company determined that a contingent beneficial conversion feature existed and the Company recorded a charge within the equity section of its balance sheet, which impacted earnings per share for the year ended December 31, 2010, based upon the price at which shares were offered to the public in the IPO in relation to the adjustment provisions provided for the Series D preferred stock. Based on the IPO price of $16.00 per share, the charge to net loss attributable to Amyris’ common stockholders was $39.3 million.
In connection with Total’s equity investment, the Company agreed to appoint a person designated by Total to serve as a member of the Company’s Board of Directors in the class subject to the latest reelection date, and to use reasonable efforts, consistent with the Board of Directors’ fiduciary duties, to cause the director designated by Total to be re-nominated by the Board of Directors in the future. These membership rights terminate upon the earlier of Total holding less than half of the shares of common stock originally issuable upon conversion of the Series D preferred stock or a sale of the Company.
The Company also agreed with Total that, so long as Total holds at least 10% of the Company’s voting securities, the Company will notify Total if the Company’s Board of Directors seeks to cause the sale of the Company or if the Company receives an offer to be acquired. In the event of such decision or offer, the Company must provide Total with all information given to an offering party and certain other information, and Total will have an exclusive negotiating period of 15 business days in the event the Board of Directors authorizes the Company to solicit offers to buy the Company, or five business days in the event that the Company receives an unsolicited offer to be acquired. This exclusive negotiation period will be followed by an additional restricted negotiation period of 10 business days, during which the Company will be obligated to negotiate with Total and will be prohibited from entering into an agreement with any other potential acquirer. Total has also entered into a standstill agreement pursuant to which it agreed for a period of three years not to acquire in excess of the greater of 20% or the number of shares of Series D preferred stock purchased by Total (during the initial two years) or 30% (during the third year) of the Company’s common stock without the prior consent of the Company's Board of Directors, except that, among other things, if another person acquires more than Total’s then current holdings of the Company’s common stock, then Total may acquire up to that amount plus one share.
In November 2011, the Company and Total entered into an amendment of the collaboration agreement as described above in Note 4 under "Other Liabilities".
In July 2012, the Company entered into an amendment of its collaboration agreement with Total and related agreements. Under such July agreements, the scope of the collaboration initially contemplated by the parties under the November 2011 amendment described in Note 4, was expanded to encompass certain joint venture products for use in diesel and jet fuel on a worldwide basis and to provide a new structure for the research and development program and formation of the joint venture (the “Fuels JV”) to commercialize the products encompassed by the diesel and jet fuel research and development program (the “Program”).
Under the new agreements, the Company controls operations and execution of the Program subject to strategic and ultimate decision-making authority by a management committee composed of Company and Total representatives, and Total participates
in the ultimate Fuels JV, or receives rights to recover its investment if, at a series of decision points, it decides not to proceed with the project. The agreements contemplate that the parties would grant exclusive manufacturing and commercial licenses to the Fuels JV for the Fuels JV products when the Fuels JV is formed (subject to requirements for the Company to grant the license to Total in the event the Fuels JV is not formed because of a deadlock, followed by an election by the Company to sell to Total the assets it otherwise would have contributed to the Fuels JV, or earlier under certain circumstances), and that the Company would retain the right to make and sell products other than the Fuels JV products. Under the agreements, the Fuels JV licenses would be consistent with the principle that development, production and commercialization of the Fuels JV products in Brazil will remain with the Company unless Total elects, after formation of the Fuels JV, to have such business contributed to the Fuels JV. The agreements also provide that certain Fuels JV non-exclusive products that were contemplated by the November 2011 amendment to the collaboration agreement are no longer to be included in the Fuels JV, but that the parties will explore potential development and commercialization of such products at a later date.
The agreements contemplate that the research and development efforts under the Program may extend through 2016, with a series of “Go/No Go” decisions by Total through such date tied to funding by Total. Each funding tranche involves the issuance of senior unsecured convertible promissory notes by the Company to Total (see Note 6). The agreements provided for funding by Total of $15.0 million in July 2012 and an additional $15.0 million in September 2012. (Such funding occurred in July and September as contemplated by the agreements.) Further, Total will, if it chooses to proceed with the Program, fund an additional $30.0 million in July 2013, $10.85 million in July 2014 and $10.85 million in January 2015. Thirty days following the earlier of the completion of the research and development program or December 31, 2016, Total has a final opportunity to decide whether or not to proceed with the Program.
At either of the decision points tied to the funding described above (in July 2013 or July 2014), if Total decides not to continue to fund the Program (or, at any funding date does not provide funding based on (i) the Company's failure to satisfy a closing condition under the purchase agreement for the notes, or (ii) Total's breach of the purchase agreement), the notes previously issued under the purchase agreement would remain outstanding and become payable by the Company at the maturity date in March 2017, the Program and associated agreements would terminate, all Company rights granted for use in farnesene-based diesel and farnesene-based jet fuel would revert to the Company, and no Fuels JV would be formed to commercialize the Fuels JV products.
In the final “Go/No Go” decision described above, Total may elect to (i) go forward with the full Program (diesel and jet fuel) (a “Go” decision), (ii) not continue its participation in the full Program, or (iii) go forward only with the jet fuel component of the Program, with the following outcomes:
| |
• | For a “Go” decision by Total with respect to the whole Program, the parties would form the Fuels JV and the notes would be canceled. |
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• | For a “No-Go” decision by Total with respect to the whole Program, the consequences would be as described in the paragraph above regarding a decision by Total not to continue to fund the Program. |
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• | For a decision by Total to proceed with the jet fuel component of the Program and not the diesel component of the Program, 70% of the principal amount outstanding under the notes would remain outstanding and become payable by the Company and 30% of the outstanding principal of such notes would be canceled, the diesel product would no longer be included in the collaboration, the Fuels JV would not receive rights to products for use in diesel fuels, and the Fuels JV would be formed by the parties to commercialize products for use in jet fuels. |
The agreements contemplate that the parties will finalize the structure for the Fuels JV in the future as set forth in the agreements and that the Fuels JV, if and when it is formed, would, subject to the conditions described below and absent other agreement, be owned equally (50%/50%) by the Company and Total. Under the agreements, the parties will, prior to the projected completion date, enter into a shareholders' agreement governing the Fuels JV, agree on the budget and business plan for the Fuels JV, and form the Fuels JV. In addition, following a final “Go” decision, the parties would enter into the Fuels JV license agreements, contribution agreements and other agreements required to establish the Fuels JV and enable it to operate.
Within 30 days prior to the final “Go” decision, Total may declare a “deadlock” if the parties fail to come to agreement on various matters relating to the formation of the Fuels JV, at which point Total may (i) elect to declare a “No-Go” decision, which has the consequences described above, or (ii) initiate a process whereby the fair value of the proposed Fuels JV would be determined and the Company would then have the option to: (x) elect to sell to Total the assets that the Company would have been required to contribute to the Fuels JV for an amount equal to 50% of such fair value; (y) proceed with the formation of the Fuels JV (accepting Total's position with respect to the funding requirement of the Fuels JV) and becoming a 50% owner of the Fuels JV; or (z) proceed with the formation of the Fuels JV (accepting Total's position with respect to the funding requirements of the Fuels JV), and then sell all or a portion of its 50% interest in the Fuels JV to Total for a price equal to the fair value multiplied by the
percentage ownership of the Fuels JV sold to Total.
The agreements provide that the Company would initially retain its ability to develop its diesel and jet fuel business in Brazil, and that Total has an option to require the Company to contribute its Brazil diesel and jet fuel business to the Fuels JV at a price determined pursuant to the agreements. Such option terminates if the Fuels JV is not formed or if Total subsequently buys out the Company's Fuels JV contribution. Furthermore, the option is limited to the jet fuel business if Total opts out of the diesel component of the Program as described above.
Under the agreements, Total has a right to participate in future equity or convertible debt financings of the Company through December 31, 2013 to preserve its pro rata ownership of the Company and thereafter in limited circumstances. The purchase price for the first $30.0 million of purchases under this pro rata right would be paid by cancellation of outstanding notes held by Total.
In connection with the purchase agreement and sale of the Notes, the Company entered into a registration rights agreement. Under such agreement, the Company is obligated to file a registration statement on Form S-3 with the SEC registering the resale of all of the shares of Company common stock issuable upon conversion of the notes within 20 days prior to the maturity date of the notes or within 30 days following optional conversion. In addition, the Company is obligated to have the registration statement declared effective within 70-100 days following the filing depending on whether the Company receives comments from the SEC. If the registration statement filing is delayed or the registration statement is not declared effective within the foregoing time frames, the Company is required to make certain monthly payments to the Total.
As a result of the July 2012 amendments, $23.3 million of payments received from Total that had been recorded as an advance from the collaborator were no longer contingently repayable and were recorded as a contract to perform research and development services, by reducing the capitalized deferred charge asset of $14.4 million and recording revenue of $8.9 million.
M&G Finanziaria Collaboration Agreement
In June 2010, the Company entered into a collaboration agreement with M&G Finanziaria S.R.L. (“M&G”) to incorporate Biofene as an ingredient in M&G's polyethylene terephthalate, or PET, resins to be incorporated into containers for food, beverages and other products. In April 2011, Amyris and M&G entered into an amended and restated collaboration agreement to amend certain portions of the original agreement entered into in June 2010 and adding Chemtex Italia S.R.L. and Chemtex International Inc. (both wholly owned subsidiaries of M&G) to the collaboration agreement. Under the terms of the amended agreement, the Company and Chemtex International Inc. will share the costs incurred associated with the PET collaboration on a 50/50 basis. In addition, the amended agreement expanded the collaboration arrangement between the Company and M&G to include a cellulosic feasibility study with each party bearing its own costs associated with such feasibility study. The collaboration agreement also establishes the terms under which M&G may purchase Biofene from the Company upon successful completion of product integration.
Firmenich Collaboration and Joint Development Agreements
In November 2010, the Company entered into collaboration and joint development agreements with Firmenich SA (“Firmenich”), a flavors and fragrances company based in Geneva, Switzerland. Under the agreement, Firmenich will fund technical development at the Company to produce an ingredient for the flavors and fragrances market. The Company will manufacture the ingredient and Firmenich will market it, and the parties will share in any resulting economic value. The agreement also grants worldwide exclusive flavors and fragrances commercialization rights to Firmenich for the ingredient. In addition, Firmenich has an option to collaborate with the Company to develop a second ingredient. In July 2011, the Company and Firmenich expanded their collaboration agreement to include a third ingredient. The collaboration and joint development agreements will continue in effect until the later of the expiration or termination of the development agreements or the supply agreements. The Company is also eligible to receive additional payments of up to $6.0 million upon the achievement of certain performance milestones towards which the Company will be required to make a contributory performance. These milestones are accounted for under the guidance in the FASB accounting standard update related to revenue recognition under the milestone method. The Company concluded that these milestones are substantive. For the nine months ended September 30, 2012 and 2011, the Company recorded $4.3 million and $4.6 million, respectively, of revenue from the collaboration agreement with Firmenich. During the third quarter of 2012, the second milestone was reached and as a result $2.0 million was recognized as revenue in the period.
Michelin Collaboration Agreement
In September 2011, the Company entered into a collaboration agreement with Manufacture Francaise des Pneumatiques Michelin (“Michelin”). Under the terms of the collaboration agreement the Company and Michelin will collaborate on the development, production and worldwide commercialization of isoprene or isoprenol, generally for tire applications, using the
Company's technology. Under the agreement, Michelin has agreed to pay an upfront payment to the Company of $5.0 million, subject to a reimbursement provision under which the Company would have to repay $1.0 million if it fails to achieve specified future technical milestones. The agreement provides that, subject to achievement of technical milestones, Michelin can notify the Company of its desired date for initial delivery, and the parties will either collaborate to establish a production facility or use an existing Company facility for production. The agreement also includes a term sheet for a supply agreement that would be negotiated at the time the decision regarding production facilities is made. The agreement has an initial term that will expire upon the earlier of 42 months from the effective date and the completion of a development work plan. As of September 30, 2012, the Company had recorded the upfront payment of $5.0 million from Michelin as deferred revenue.
Manufacturing Agreements
In 2010 and 2011, the Company entered into contract manufacturing agreements with Biomin do Brasil Nutricão Animal Ltda. (“Biomin”), Tate & Lyle Ingredients Americas, Inc. (“Tate & Lyle”), Antibióticos, S.A. (“Antibióticos”), Albemarle Corporation ("Albemarle"), and Glycotech (see Note 8) to utilize their manufacturing facilities to produce Amyris products.
Under the terms of these contract manufacturing agreements, the Company provided necessary equipment for the manufacturing of its products, over which the Company retained ownership. The Company also reimbursed the contract manufacturers for an aggregate of $13.8 million in expenditures related to the modification of their facilities. The Company recorded facility modification costs as other assets and amortized them as an offset against purchases of inventory. Certain of these contract manufacturing agreements also impose fixed purchase commitments on the Company, regardless of the production volumes.
Beginning in March 2012, the Company initiated a plan to shift a portion of its production capacity from the contract manufacturing facilities to a Company-owned plant that is currently under construction. As a result, the Company evaluated its contract manufacturing agreements and recorded a loss of $31.2 million related to the write-off of $10.0 million in facility modification costs and the recognition of $21.2 million of fixed purchase commitments in the three months ended March 31, 2012. The Company recognized an additional charge of $1.4 million associated with loss on fixed purchase commitments in the three months ended September 30, 2012. The Company computed the loss on facility modification costs and fixed purchase commitments using the same lower of cost or market approach that is used to value inventory. The computation of the loss on firm purchase commitments is subject to several estimates, including cost to complete and the ultimate selling price of any Company products manufactured at the relevant production facilities, and is therefore inherently uncertain. The Company also recorded a loss on write off of production assets of $5.5 million related to Amyris-owned production equipment at contract manufacturing facilities in the quarter ended March 31, 2012. The Company will continue to evaluate the potential for losses in future periods based on updated production and sales price assumptions.
Paraíso Bioenergia
In March 2011, the Company entered into a supply agreement with Paraíso Bioenergia. Under the agreement, the Company will construct fermentation and separation capacity to produce its products and Paraíso Bioenergia will supply sugar cane juice and other utilities. The Company will retain the full economic benefits enabled by the sale of Amyris farnesene-derived products over the lower of sugar or ethanol alternatives. In conjunction with the supply agreement, the Company also entered into an operating lease on real property owned by Paraíso Bioenergia. The real property is being used by the Company for the construction of an industrial facility (see Note 5).
Per the terms of the supply agreement, in the event that Paraíso is presented with an offer to sell or decides to sell the real property, the Company has the right of first refusal to acquire it. If the Company fails to exercise its right of first refusal the purchaser of the real property will need to comply with the specific obligations of Paraíso Bioenergia to the Company under the lease agreement.
Albemarle
In July 2011, the Company entered into a contract manufacturing agreement with Albemarle Corporation ("Albemarle"), which will provide toll manufacturing services at its facility in Orangeburg, South Carolina. Under this agreement, Albemarle will manufacture lubricant base oils from Biofene, which will be owned and distributed by the Company or a Company commercial partner. The initial term of this agreement is from July 31, 2011 through December 31, 2012. Albemarle is required to modify its facility, including installation and qualification of equipment and instruments necessary to perform the toll manufacturing services under the agreement. The Company reimbursed Albemarle $10.0 million for all capital expenditures related to the facility modification, which was accounted for as a prepaid asset. All equipment or facility modifications acquired or made by Albemarle will be owned by Albemarle, subject to Albemarle's obligation to transfer title to and ownership of certain assets to the Company
within 30 days after termination of the agreement, at the Company's discretion and sole expense. In March 2012 the Company recorded a loss of $10.0 million related to the write off of the facility modification costs, described above.
In addition, the Company was required to pay a one-time, non-refundable performance bonus of $5.0 million if Albemarle delivered to the Company a certain quantity of the lubricant base stock by December 31, 2011 or $2.0 million if Albemarle delivered the same quantity by January 31, 2012. Based on Albemarle's performance as of December 31, 2011, the Company concluded that Albemarle had earned the bonus and recorded a liability of $5.0 million as of September 30, 2012. The bonus is payable in two payments: one payment of $2.5 million on September 30, 2012 and one payment of $2.5 million on March 31, 2013.
In February 2012, the Company entered into an amended and restated agreement with Albemarle, which superseded the original contract manufacturing agreement with Albemarle. The term of the new agreement continues through December 31, 2019. The agreement includes certain obligations for the Company to pay fixed costs totaling $7.5 million, of which $3.5 million and $4.0 million are payable in 2012 and 2014, respectively. In the three months ended March 31, 2012, the Company recorded a corresponding loss related to these fixed purchase commitments, as described above. In addition, fixed costs of $2.0 million per quarter are payable in 2013 if the Company exercises its option to have product manufactured in the facility in 2013. The agreement also includes variable pricing during the contract term.
Supply Agreements
The Company has also entered into agreements to sell Biofene and its derivatives directly to various potential customers, including with Procter & Gamble Company ("P&G") for use in cleaning products, with M&G for use in plastics, with Kuraray Co., Ltd. ("Kuraray") for use in production of polymers, with Firmenich and Givaudan SA. ("Givaudan") for ingredients for the flavors and fragrances market, with Method Products, Inc. ("Method") for use in home and personal care products, and with Wilmar International Limited ("Wilmar") for use as a surfactant.
Soliance Agreements
In June 2010, the Company entered into an agreement with Soliance for the development and commercialization of Biofene-based squalane for use as an ingredient in cosmetics products. In December 2011, the Company and Soliance entered into an agreement and release to terminate the collaboration agreement and any other obligations with respect to the proposed joint venture. As part of the termination agreement the parties agreed that for a period commencing October 1, 2011 and ending on December 31, 2013, Soliance will be paid a commission of 10% of amounts received by the Company from Nikko Chemicals Co., Ltd. (“Nikko") on quantities of squalane sold by the Company to Nikko with respect to Nikko's committed minimum purchase obligation pursuant to a distribution agreement with Nikko. Concurrently with the execution of such termination agreement, the parties executed a distribution agreement, pursuant to which the Company appointed Soliance as its exclusive distributor to distribute the Company's squalane in the cosmetic market in the approved territory.
Nikko Chemicals
In August 2011, the Company entered into an agreement with Nikko, a private limited company in Japan, for the sales of renewable squalane to Nikko (commencing in September 2011 and continuing for two years through the end of December 2013).
10. Draths Corporation Acquisition
On October 6, 2011 (the Closing Date), the Company completed an acquisition of assets of Draths related to production of renewable chemicals. The acquisition was accounted for as a business combination. In connection with the acquisition, the Company issued 362,319 shares of common stock, of which 41,408 shares were held in escrow and paid $2.9 million in cash. In the quarter ended June 30, 2012, the Company recovered 5,402 shares of common stock from the escrow in connection with certain Draths indemnification obligations under the purchase agreement.
The components of the purchase price allocation for Draths are as follows:
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| | | | |
Purchase Consideration: | | |
(in thousands) | | |
Fair value of common stock issued to Draths | | $ | 7,000 |
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Cash paid to Draths | | 2,934 |
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Total purchase consideration | | $ | 9,934 |
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| | | | |
Allocation of Purchase Price: | | |
(in thousands) | | |
Property and Equipment | | $ | 713 |
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Other | | 101 |
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In-process research and development | | 8,560 |
|
Goodwill | | 560 |
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Total purchase consideration | | $ | 9,934 |
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The Company allocated $8.6 million of the purchase price of Draths to acquired IPR&D. This amount represents management's valuation of the fair value of assets acquired at the date of the acquisition. Management used the income approach to determine the estimated fair values of acquired IPR&D, applying a risk adjusted discount rate of 30% to the development project's cash flows. The discounted cash flow model applies probability weighting factors, based on estimates of successful product development and commercialization, to estimated future net cash flows resulting from projected revenues and related costs. These success rates take into account the stages of completion and the risks surrounding successful development and commercialization of the underlying products such as estimates of revenues and operating profits related to the IPR&D considering its stage of development; the time and resources needed to complete the development; the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a product.
Goodwill totaling $0.6 million represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and is due primarily to synergies expected from combining the new genetic pathway with the Company's existing platform to accelerate development to get the technology to market sooner leading to increased market penetration from future products and customers.
The Draths business acquisition was a taxable transaction. For federal and state tax purposes, the above in-process research and development and goodwill is amortized over a 15-year period. The Company has determined that there are no significant differences in the tax basis of assets and the basis for financial reporting purposes. In addition, the business combination did not have any impact on the Company's deferred tax balance, net of the full valuation allowance, or to uncertain tax positions, at the acquisition date.
The Company applies the applicable accounting principles set forth in the U.S. Financial Accounting Standards Board's Accounting Standards Codification to its intangible assets (including goodwill), which prohibits the amortization of intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. There are several methods that can be used to determine the estimated fair value of the IPR&D acquired in a business combination. The Company has used the "income method," which applies a probability weighting that considers the risk of development and commercialization, to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets will be amortized over the remaining useful life or written off, as appropriate. If the carrying amount of the assets is greater than the measures of fair value, impairment is considered to have occurred and a write-down of the asset is recorded. Any finding that the value of its intangible assets has been impaired would require the Company to write-down the impaired portion, which could reduce the value of its assets and reduce its net income for the year in which the related impairment charges occur.
11. Stockholders’ Equity
Private Placement
In May 2012, the Company completed a private placement of its common stock of 1,736,100 shares of common stock at a
price of $2.36 for aggregate proceeds of $4.1 million.
In February 2012, the Company completed a private placement of its common stock of 10,160,325 shares of common stock at a price of $5.78 for aggregate proceeds of $58.7 million. In connection with this private placement, the Company entered into an agreement with an investor to purchase additional shares of Common Stock for an additional $15.0 million upon satisfaction by the Company of criteria associated with the commissioning of the Company's Paraíso Bioenergia production plant in Brazil by March 2013. Additionally, such agreement granted certain investors Board designation rights and certain rights of first investment with respect to future issuances of the Company's securities.
Common Stock
Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 100,000,000 shares of common stock. Holders of the Company’s common stock are entitled to dividends as and when declared by the Board of Directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holder of each share of common stock is entitled to one vote.
Preferred Stock
Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 5,000,000 shares of preferred stock. The Board of Directors has the authority, without action by its stockholders, to designate and issue shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. Prior to the closing of the Company’s IPO, the Company had four series of convertible preferred stock outstanding, including Series D preferred stock issued to Total (see Note 9). As of September 30, 2012 and December 31, 2011, the Company had zero shares of convertible preferred stock outstanding.
Common Stock Warrants
During the period from January 1, 2008 to September 30, 2010, the Company issued 182,405 warrants in connection with placement agent fees associated with its preferred stock issuance, capital and operating lease agreements and consulting services. Upon the closing of the Company’s IPO on September 30, 2010, these outstanding convertible preferred stock warrants were automatically converted into common stock warrants to purchase 195,604 shares of common stock. In addition, the fair value of the convertible preferred stock warrants as of September 30, 2010, estimated to be $2.3 million using the Black-Scholes option pricing model, was reclassified to additional paid in capital.
In December 2011, in connection with a capital lease agreement, the Company issued a warrant to purchase 21,087 shares of the Company's common stock at an exercise price of $10.67 a share. The Company estimated the fair value of these warrants as of the issuance date to be $193,000 and was recorded as other assets and amortized subsequently over the term of the lease. The fair value was based on the contractual term of the warrants of 10 years, risk free interest rate of 2.0%, expected volatility of 86% and zero expected dividend yield. This warrant remains unexercised and outstanding as of September 30, 2012.
Each of these warrants included a cashless exercise provision which permitted the holder of the warrant to elect to exercise the warrant without paying the cash exercise price, and receive a number of shares determined by multiplying (i) the number of shares for which the warrant is being exercised by (ii) the difference between the fair market value of the stock on the date of exercise and the warrant exercise price, and dividing such by (iii) the fair market value of the stock on the date of exercise. During the nine months ended September 30, 2012 and 2011, warrants were exercised with respect to zero and 190,468 shares, respectively through the cashless exercise provision and 77,087 shares of common stock were issued after deducting the shares to cover the cashless exercises. There were no warrants exercised during the three months ended September 30, 2012 and 2011.
As of September 30, 2012 and December 31, 2011, the Company had the following unexercised common stock warrants outstanding: