Amyris
AMYRIS, INC. (Form: 10-Q, Received: 11/09/2015 18:47:35)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the Transition Period from              to

Commission File Number: 001-34885

 

AMYRIS, INC.

(Exact name of registrant as specified in its charter)

Delaware 55-0856151

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Amyris, Inc.

5885 Hollis Street, Suite 100

Emeryville, CA 94608

(510) 450-0761

(Address and telephone number of principal executive offices)

 

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

 

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

Large accelerated filer Accelerated filer
Non-accelerated filer 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  ☒

 

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

Class Outstanding at October 31, 2015
Common Stock, $0.0001 par value per share

192,174,168

 

 
 

AMYRIS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2015

 

INDEX

 

    Page
  PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 54
Item 3. Quantitative and Qualitative Disclosures About Market Risk 73
Item 4. Controls and Procedures 74
   
  PART II - OTHER INFORMATION
Item 1. Legal Proceedings 75
Item 1A. Risk Factors 75
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 106
Item 3. Defaults Upon Senior Securities 106
Item 4. Mine Safety Disclosures 106
Item 5. Other Information 106
Item 6. Exhibits 106
  Signatures
  Exhibit Index

 

 

 
 

PART I

ITEM 1. FINANCIAL STATEMENTS

Amyris, Inc.

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

   

September 30, 2015

 

December 31, 2014

Assets                
Current assets:                
Cash and cash equivalents   $ 10,903     $ 42,047  
Restricted cash     215        
Short-term investments     995       1,375  
Accounts receivable, net of allowance of $479 and $479, respectively     3,806       8,687  
Related party accounts receivable     575       455  
Inventories, net     11,102       14,506  
Prepaid expenses and other current assets     7,034       6,534  
Total current assets     34,630       73,604  
Property, plant and equipment, net     81,941       118,980  
Restricted cash     957       1,619  
Equity and loans in affiliates     1,815       2,260  
Other assets     9,591       13,635  
Goodwill and intangible assets     6,085       6,085  
Total assets   $ 135,019     $ 216,183  
Liabilities and Deficit                
Current liabilities:                
Accounts payable   $ 11,275     $ 3,489  
Deferred revenue     9,204       5,303  
Accrued and other current liabilities     16,832       13,565  
Capital lease obligation, current portion     555       541  
Debt, current portion     20,902       17,100  
Total current liabilities     58,768       39,998  
Capital lease obligation, net of current portion     280       275  
Long-term debt, net of current portion     90,532       100,122  
Related party debt     42,401       115,239  
Deferred rent, net of current portion     9,845       10,250  
Deferred revenue, net of current portion     4,462       6,539  
Derivative liabilities     62,966       59,736  
Other liabilities     7,230       9,087  
Total liabilities     276,484       341,246  
Commitments and contingencies (Note 6)                
Stockholders’ deficit:                
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding            
Common stock - $0.0001 par value, 400,000,000 and 300,000,000 shares authorized as of September 30, 2015 and December 31, 2014, respectively; 158,610,725 and 79,221,883 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively     16       8  
Additional paid-in capital     902,933       724,669  
Accumulated other comprehensive loss     (48,932 )     (29,977 )
Accumulated deficit     (995,186 )     (819,152 )
Total Amyris, Inc. stockholders’ deficit     (141,169 )     (124,452 )
Noncontrolling interest     (296 )     (611 )
Total stockholders' deficit     (141,465 )     (125,063 )
Total liabilities and stockholders' deficit   $ 135,019     $ 216,183  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

3
 

Amyris, Inc.

Condensed Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

  Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2014   2015   2014
Revenues                                
Renewable product sales   $ 4,226     $ 11,112     $ 9,661     $ 18,333  
Related party renewable product sales     2       368       2       402  
Total product sales     4,228       11,480       9,663       18,735  
Grants and collaborations revenue     4,363       4,861       14,643       12,954  
Total grants and collaborations revenue     4,363       4,861       14,643       12,954  
Total revenues     8,591       16,341       24,306       31,689  
Cost and operating expenses                                
Cost of products sold     8,455       10,146       26,057       23,893  
Loss on purchase commitments and impairment of property, plant and equipment     7,259       952       7,259       1,111  
Research and development     10,343       12,181       33,521       37,342  
Sales, general and administrative     14,103       14,356       42,859       41,726  
Total cost and operating expenses     40,160       37,635       109,696       104,072  
Loss from operations     (31,569 )     (21,294 )     (85,390 )     (72,383 )
Other income (expense):                                
Interest income     61       100       205       304  
Interest expense     (16,559 )     (8,620 )     (71,027 )     (20,172 )
Gain (loss) from change in fair value of derivative instruments     (21,690 )     (6,000 )     (10,268 )     48,148  
Loss from extinguishment of debt     (5,984 )           (5,984 )     (10,512 )
Other income (expense), net     (168 )     54       (1,204 )     147  
Total other income (expense)     (44,340 )     (14,466 )     (88,278 )     17,915  
Loss before income taxes and loss from investments in affiliates     (75,909 )     (35,760 )     (173,668 )     (54,468 )
Provision for income taxes     (119 )     (134 )     (355 )     (370 )
Net loss before loss from investments in affiliates     (76,028 )     (35,894 )     (174,023 )     (54,838 )
Loss from investments in affiliates     (660 )     (778 )     (2,089 )     (988 )
Net loss     (76,688 )     (36,672 )     (176,112 )     (55,826 )
Net loss attributable to noncontrolling interest     24       31       78       91  
Net loss attributable to Amyris, Inc. common stockholders   $ (76,664 )   $ (36,641 )   $ (176,034 )   $ (55,735 )
Net loss per share attributable to common stockholders:                                
Basic   $ (0.55 )   $ (0.46 )   $ (1.76 )   $ (0.71 )
Diluted   $ (0.55 )   $ (0.46 )   $ (1.76 )   $ (0.94 )
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock:                                
Basic     140,374,297       78,980,402       100,103,007       78,146,365  
Diluted     140,374,297       78,980,402       100,103,007       111,114,801  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

4
 

Amyris, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

 

   

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

    2015   2014   2015   2014
Comprehensive income (loss):                                
Net loss   $ (76,688 )   $ (36,672 )   $ (176,112 )   $ (55,826 )
Foreign currency translation adjustment, net of tax     (10,459 )     (8,164 )     (18,562 )     (3,753 )
Total comprehensive loss     (87,147 )     (44,836 )     (194,674 )     (59,579 )
Loss attributable to noncontrolling interest     24       31       78       91  
Foreign currency translation adjustment attributable to noncontrolling interest     (145 )     (79 )     (393 )     (37 )
Comprehensive loss attributable to Amyris, Inc.   $ (87,268 )   $ (44,884 )   $ (194,989 )   $ (59,525 )

 

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

5
 

Amyris, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(In Thousands, Except Share Amounts)

(Unaudited)

 

    Common Stock                    
    Shares   Amount   Additional Paid-in Capital   Accumulated Deficit   Accumulated Other Comprehensive Loss   Noncontrolling Interest   Total Deficit
December 31, 2014     79,221,883     $ 8     $ 724,669     $ (819,152 )   $ (29,977 )   $ (611 )   $ (125,063 )
Issuance of common stock upon exercise of stock options, net of restricted stock     10,750             15                         15  
Issuance of common stock upon conversion of debt     61,295,416       6       94,831                         94,837  
Issuance of warrants on conversion of debt                 51,705                         51,705  
Shares issued from restricted stock settlement     801,167             (313 )                       (313 )
Shares issued upon ESPP purchase     255,867             428                         428  
Issuance of common stock in a private placement, net of issuance costs     16,025,642       2       24,624                         24,626  
Stock-based compensation                 6,964                         6,964  
Issuance of common stock upon exercise of warrants     1,000,000             10                         10  
Foreign currency translation adjustment                             (18,955 )     393       (18,562 )
Net loss                       (176,034 )           (78 )     (176,112 )
September 30, 2015     158,610,725     $ 16     $ 902,933     $ (995,186 )   $ (48,932 )   $ (296 )   $ (141,465 )

See the accompanying notes to the unaudited condensed consolidated financial statements.
 

6
 

Amyris, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

    Nine Months Ended September 30,
    2015   2014
Operating activities                
Net loss   $ (176,112 )   $ (55,826 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     9,931       11,334  
Loss on disposal of property, plant and equipment     121       152  
Stock-based compensation     6,964       10,769  
Amortization of debt discount     54,633       6,794  
Loss from extinguishment of debt     5,984       10,512  
Loss on purchase commitments and impairment of property, plant and equipment     7,259       1,111  
Change in fair value of derivative instruments     10,268       (48,148 )
Loss from investments in affiliates     2,089       988  
Other non-cash expenses     414       (113 )
Changes in assets and liabilities:                
Accounts receivable     5,161       (3,088 )
Related party accounts receivable     (10 )     (79 )
Inventories, net     3,306       (6,148 )
Prepaid expenses and other assets     (3,218 )     (2,334 )
Accounts payable     7,302       (903 )
Accrued and other liabilities     11,430       4,748  
Deferred revenue     2,666       6,078  
Deferred rent     (405 )     46  
Net cash used in operating activities     (52,217 )     (64,107 )
Investing activities                
Purchase of short-term investments     (1,989 )     (946 )
Maturities of short-term investments     2,023       979  
Change in restricted cash     238        
Investment in joint venture           (2,075 )
Loans to affiliate     (1,231 )     (1,214 )
Purchases of property, plant and equipment, net of disposals     (2,345 )     (3,616 )
Net cash used in investing activities     (3,304 )     (6,872 )
Financing activities                
Proceeds from issuance of common stock, net of repurchases     453       2,159  
Employees’ taxes paid upon vesting of restricted stock units     (313 )     (1,797
Proceeds from issuance of common stock in private placements, net of issuance costs     25,000       4,000  
Principal payments on capital leases     (594 )     (827 )
Proceeds from debt issued     1,607       83,171  
Proceeds from debt issued to related party     10,850       49,862  
Principal payments on debt     (11,249 )     (4,627 )
Net cash provided by financing activities     25,754       131,947  
Effect of exchange rate changes on cash and cash equivalents     (1,377 )     (619 )
Net (decrease)/increase in cash and cash equivalents     (31,144 )     60,349  
Cash and cash equivalents at beginning of period     42,047       6,868  
Cash and cash equivalents at end of period   $ 10,903     $ 67,217  

 

7
 

Amyris, Inc.

Condensed Consolidated Statements of Cash Flows—(Continued)

(In Thousands)

 

  Nine Months Ended September 30,
    2015   2014
Supplemental disclosures of cash flow information:        
Cash paid for interest   $ 5,859     $ 3,504  
Supplemental disclosures of non-cash investing and financing activities:                
Acquisitions of property, plant and equipment under accounts payable, accrued liabilities and notes payable   $ (692 )   $ (95 )
Financing of equipment   $ 613     $  
Financing of insurance premium under notes payable   $ (236 )   $ (361 )
Interest capitalized to debt   $ 6,354     $ 2,812  
Purchase of property, plant and equipment via deposit   $ (392 )   $  
Receivable of proceeds for options exercised   $     $ (355 )
Non-cash investment in joint venture   $     $ (237 )
Private placement issuance costs   $ (374 )   $  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

8
 

Amyris, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. The Company

 

Amyris, Inc. (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 industrial bioscience technology to develop and provide renewable compounds for a variety of markets. The Company is currently applying its industrial bioscience technology platform to provide alternatives to select petroleum-sourced products used in consumer care, 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 including emollients, fragrance oils and diesel fuel. While the Company's platform is able to use a wide variety of feedstocks, the Company is initially focused on Brazilian sugarcane. In addition, the Company is a party to various contract manufacturing agreements to support its commercial production needs. The Company has established two principal operating subsidiaries, Amyris Brasil Ltda. (formerly Amyris Brasil S.A., or "Amyris Brasil") for production in Brazil, and Amyris Fuels, LLC (or "Amyris Fuels").

 

The Company's renewable products business strategy is to focus on direct commercialization of specialty products while moving established commodity products into joint venture arrangements with leading industry partners. To commercialize its products, the Company must be successful in using its technology to manufacture products at commercial scale and on an economically viable basis (i.e., low per unit production costs) and developing sufficient sales volume for those products to support its operations. The Company's prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this stage of development.

 

The Company expects to fund its operations for the foreseeable future with cash and investments currently on hand, with new debt and equity financings, and with cash inflows from collaborations and grants, and cash contributions from product sales. The Company's planned 2015 and 2016 working capital needs and its planned operating and capital expenditures are dependent on significant inflows of cash from new and existing collaboration partners and from cash generated from renewable product sales, and may also require additional funding from debt or equity financings.

 

Liquidity

 

The Company has incurred significant losses since its inception and believes that it will continue to incur losses and negative cash flow from operations through at least 2016. As of September 30, 2015, the Company had an accumulated deficit of $995.2 million and had cash, cash equivalents and short term investments of $11.9 million. In October 2015, the Company completed a convertible notes offering with net proceeds after offering expenses of $54.4 million. $27.1 million of the proceeds were used to repay existing convertible notes. Refer to Note 18, “Subsequent Events” for further details. The Company has significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments.

 

As of September 30, 2015, the Company's debt, net of discount of $17.3 million, totaled $153.8 million, of which $20.9 million matures within the next twelve months. In addition to upcoming debt maturities, the Company's debt service obligations over the next twelve months are significant, including $9.2 million of anticipated cash interest payments. The Company's debt agreements contain various covenants, including certain restrictions on the Company's business that could cause the Company to be at risk of defaults, such as the requirement to maintain unrestricted, unencumbered cash in U.S.bank accounts an amount equal to at least 50% of the principal amount outstanding under its loan facility with Hercules Technology Growth Capital, Inc (Hercules). Please refer to Note 5, “Debt” and Note 6, “Commitments and Contingencies” for further details regarding the Company's debt service obligations and commitments. In addition, refer to Note 18, “Subsequent Events” for further details regarding the Company’s compliance with covenants in its loan facility with Hercules.

 

The Company’s operating plan for 2015 contemplates significant reduction in the Company’s net cash outflows, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs compared to prior periods as a result of manufacturing and technical developments in 2014, (iii) increased cash inflows from collaborations compared to 2014 (iv) maintaining operating expenses at levels comparable to 2014, and (v) access to various financing commitments.

 

9
 

If the Company is unable to raise additional financing, or if other expected sources of funding are delayed or not received, the Company would take the following actions as early as the fourth quarter of 2015 to support its liquidity needs through the remainder of 2015 and into 2016:

 

Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities.

 

Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts.

 

Reduce production activity at the Company’s Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers.

 

Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors.

 

Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects.

 

Closely monitor the Company’s working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities.

 

Implementing this plan could have a negative impact on the Company's ability to continue its business as currently contemplated, including, without limitation, delays or failures in its ability to:

 

Achieve planned production levels;

 

Develop and commercialize products within planned timelines or at planned scales; and

 

Continue other core activities.

 

Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on the Company's ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.

 

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 Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the fiscal year ended December 31, 2014 as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2015. 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.

 

10
 

The Company uses the equity method to account for investments in companies, if its investments provide it with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income or loss includes the Company’s proportionate share of the net income or loss of these companies. Judgments made by the Company regarding the level of influence over each equity method investment include considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.

 

Principles of Consolidation

 

The condensed consolidated financial statements of the Company include the accounts of Amyris, Inc., its subsidiaries and two consolidated variable interest entities (or “VIEs”), with respect to which the Company is considered the primary beneficiary, after elimination of intercompany accounts and transactions. Disclosure regarding the Company’s participation in the VIEs is included in Note 7, "Joint Ventures and Noncontrolling Interest."

 

Variable Interest Entities

 

The Company has interests in joint venture entities that are VIEs. Determining whether to consolidate a VIE requires judgment in assessing (i) whether an entity is a VIE and (ii) if the Company is the entity’s primary beneficiary and thus required to consolidate the entity. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates whether it has (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company’s evaluation includes identification of significant activities and an assessment of its ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding and financing and other applicable agreements and circumstances. The Company’s assessment of whether it is the primary beneficiary of its VIEs requires significant assumptions and judgment.

 

Use of Estimates

 

In preparing the unaudited condensed consolidated financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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 year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (or “FASB”) issued new guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition update guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Therefore, the new standard will be effective commencing with our quarter ending March 31, 2018.

 

11
 

In August 2014, FASB issued new guidance related to the disclosure around going concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure if substantial doubt exists. The new standard is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

 

In January 2015, the FASB issued an update related to the presentation of extraordinary and unusual items. The update eliminates the concept of extraordinary items found in Subtopic 225-20, which required that an entity separately classify, present and disclose extraordinary events and transactions when the event or activity met both criteria of being unusual in nature and infrequent in occurrence. Although the concept of extraordinary items will be eliminated, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The standard is effective for annual and interim periods within those annual years beginning after December 15, 2015. The Company expects that the adoption of the update will not materially affect its financial statements.

 

In February 2015, FASB issued an amendment to ASC 810 Consolidation . The amendments affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments are effective for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of adopting this new accounting standard on its financial statements.

 

In April 2015, the FASB issued Accounting Standards Update 2015-3, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This will represent a change from the Company’s current treatment of debt issuance costs, which are reported in other assets.

 

In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory , which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. The new standard is being issued as part of the simplification initiative. Prior to the issuance of the standard, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). The new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Prospective application is required and early adoption is permitted. The Company is currently assessing the impact of adopting this new accounting standard on its financial statements.

 

3. Fair Value of Financial Instruments

 

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

12
 

As of September 30, 2015, 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, 2015
Financial Assets                                
Money market funds   $ 136     $     $     $ 136  
Certificates of deposit     995                   995  
Loans to affiliate (1)                 1,747       1,747  
Total financial assets   $ 1,131     $     $ 1,747     $ 2,878  
Financial Liabilities                                
Loans payable (1)   $     $ 9,421     $     $ 9,421  
Credit facilities  (1)           32,029             32,029  
Convertible notes (1)                 99,393       99,393  
Compound embedded derivative liabilities                 32,699       32,699  
Temasek Funding Warrant derivative liability           25,342           $ 25,342  
Currency interest rate swap derivative liability           4,925             4,925  
Total financial liabilities   $     $ 71,717     $ 132,092     $ 203,809  

 ________

(1) These liabilities are carried on the condensed consolidated balance sheet on a historical cost basis (noting that the Remaining Notes subject to the Maturity Treatment Agreement were revalued to fair value on July 29, 2015, see Note 5 “Debt” for details).

 

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The fair values of money market funds and certificates of deposit are based on fair values of identical assets. The fair values of the loans payable, convertible notes, credit facilities and currency interest rate swaps are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company. The method of determining the fair value of the compound embedded derivative liabilities is described below. Market risk associated with the fixed and variable rate long-term loans payable, credit facilities and convertible notes relates to the potential reduction in fair value and negative impact to future earnings, from an increase in interest rates. The fair value of loans to affiliates is based on the present value of expected future cash flows and assumptions about interest rates and the creditworthiness of the affiliate. Market risk associated with the compound embedded derivative liabilities relates to the potential reduction in fair value and negative impact to future earnings from a decrease in interest rates.

 

The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities and low market interest rates, if applicable.

 

13
 

As of December 31, 2014, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):

    Level 1   Level 2   Level 3   Balance as of December 31, 2014
Financial Assets                                
Money market funds   $ 20,160     $     $     $ 20,160  
Certificates of deposit     1,375                   1,375  
Loans to affiliate (1)                 1,745       1,745  
Total financial assets   $ 21,535     $     $ 1,745     $ 23,280  
Financial Liabilities                                
Loans payable (1)   $     $ 16,720     $     $ 16,720  
Credit facilities (1)           39,332             39,332  
Convertible notes (1)                 222,031       222,031  
Compound embedded derivative liabilities                 56,026       56,026  
Currency interest rate swap derivative liability           3,710             3,710  
Total financial liabilities   $     $ 59,762     $ 278,057     $ 337,819  

________

(1) These liabilities are carried on the condensed consolidated balance sheet on a historical cost basis.

 

The following table provides a reconciliation of the beginning and ending balances for the convertible notes measured at fair value using significant unobservable inputs (Level 3) (in thousands):

    September 30, 2015
Balance at January 1   $ 222,031  
Derecognition on debt conversion     (124,175 )
Change in fair value of convertible notes     1,537  
Balance at September 30   $ 99,393  

 

Derivative Instruments

 

The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):

    September 30, 2015
Balance at January 1   $ 56,026  
Additions to Level 3     229  
Derecognition on debt conversion     (24,598 )
Loss from change in fair value of derivative liabilities     1,042  
Balance at September 30   $ 32,699  

 

14
 

The compound embedded derivative liabilities, represent the fair value of the equity conversion options and "make-whole" provisions or down round conversion price adjustments to provisions of outstanding convertible promissory notes issued to Total Energies Nouvelles Activités USA (formerly known as Total Gas & Power USA, SAS, or “Total” and such convertible promissory notes, the “Total Notes”), as well as Tranche I Notes (as defined below), Tranche II Notes (as defined below) and notes issued under the Rule 144A convertible notes offering (or the “Rule 144A Notes”) (see Note 5, "Debt"). There is no current observable market for these types of derivatives and, as a result, the Company determined the fair value of the embedded derivatives using a Monte Carlo simulation valuation model for the Total Notes and the binomial lattice model for the Tranche I Notes, Tranche II Notes and the Rule 144A Notes (or together the “Convertible Notes”). A Monte Carlo simulation valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of the Company's common stock into which the notes are or may be convertible. A binomial lattice model generates two probable outcomes - one up and another down - arising at each point in time, starting from the date of valuation until the maturity date. A lattice model was used to determine if the convertible notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the Convertible Notes will be converted early if the conversion value is greater than the holding value and (ii) the Convertible Notes will be called if the holding value is greater than both (a) redemption price and (b) the conversion value at the time. If the Convertible Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the Convertible Notes. Using this lattice method, the Company valued the embedded derivatives using the "with-and-without method", where the fair value of the Convertible Notes including the embedded derivative is defined as the "with", and the fair value of the Convertible Notes excluding the embedded derivatives is defined as the "without". This method estimates the fair value of the embedded derivatives by looking at the difference in the values between the Convertible Notes with the embedded derivatives and the fair value of the Convertible Notes without the embedded derivatives. The lattice model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. The Company marks the compound embedded derivatives to market due to the conversion price not being indexed to the Company's own stock. 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 compound embedded derivative will be settled in either cash or shares. As of September 30, 2015, the Company has sufficient common stock available to settle the conversion option in shares. On July 29, 2015, the Company closed the "Exchange" pursuant to that certain Exchange Agreement dated as of July 26, 2015 (the "Exchange Agreement"), among the Company, Temasek and Total, under which these stockholders exchanged an aggregate of $138 million of Convertible Notes for common stock of the Company at a price of $2.30 per share (representing a change from the originally agreed conversion price for the relevant Convertible Notes, see Note 5 "Debt" for further details), with an additional $37 million of outstanding Convertible Notes held by Total and Temasek being restructured to eliminate the Company's repayment obligation at maturity and provide for mandatory conversion to the Company's common stock at maturity. As of September 30, 2015 and December 31, 2014, included in "Derivative Liabilities" on the consolidated balance sheet are the Company's compound embedded derivative liabilities of $32.7 million and $56.0 million, respectively, which represents the fair value of the equity conversion options and a "make-whole" provision relating to the outstanding Total Notes, Tranche I Notes, Tranche II Notes and 144A.

 

The market-based assumptions and estimates used in valuing the compound embedded derivative liabilities include amounts in the following ranges/amounts:

  September 30, 2015   September 30, 2014
Risk-free interest rate   0.93% - 1.07%   0.79% - 1.67%
Risk-adjusted yields   24.40% - 39.90%   15.10% - 24.40%
Stock-price volatility     45%     45%
Probability of change in control     5%     5%
Stock price   $2.01     $3.79  
Credit spread   28.81% - 38.83%   13.54% - 22.73%
Estimated conversion dates   2015 - 2019   2017 - 2019

 

Changes in valuation assumptions can have a significant impact on the valuation of the embedded derivative liabilities. For example, all other things being equal, a decrease/increase in the Company’s stock price, probability of change of control, credit spread, term to maturity/conversion or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk adjusted yields or risk-free interest rates increases/decreases the valuation of the liabilities. The conversion price of certain of the convertible notes also include conversion price adjustment features and for, example, issuances of common stock by the Company at prices lower than the conversion price result in a reset of the conversion price of such notes, which increases the value of the embedded derivative liabilities. See Note 5, "Debt" for further details of conversion price adjustment features.

 

15
 

In June 2012, the Company entered into a loan agreement with Banco Pine S.A. (or Banco Pine) under which Banco Pine provided the Company with a loan (or the Banco Pine Bridge Loan) (see Note 5, "Debt"). At the time of the Banco Pine Bridge Loan, the Company also entered into a currency interest rate swap arrangement with Banco Pine with respect to the repayment of R$22.0 million (approximately US$5.5 million based on the exchange rate as of September 30, 2015) of the Banco Pine Bridge Loan. The swap arrangement exchanges the principal and interest payments under the Banco Pine Bridge Loan for alternative principal and interest payments that are subject to adjustment based on fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real. The swap has a fixed interest rate of 3.94%. Changes in the fair value of the swap are recognized in “Gain (loss) from change in fair value of derivative instruments" in the condensed consolidated statements of operations are as follows (in thousands):

 

    Income
Statement Classification
 

Three Months Ended

September 30,

 

Nine Months

Ended September 30,

Type of Derivative Contract       2015   2014   2015   2014
        Loss Recognized   Loss Recognized
Currency interest rate swap   Gain (loss) from change in fair value of derivative instruments   $ (1,796 )   $ (1,139 )   $ (3,201 )   $ (83 )

 

The Company granted a warrant to Temasek to purchase the Company’s common stock, (the “Temasek Funding Warrant”), as part of the Exchange transaction completed on July 29, 2015. The terms of the Temasek Funding Warrant provide for an adjustment to the number of shares issuable in the future based on the number of any additional shares for which certain other outstanding convertible promissory notes may become exercisable as a result of a reduction to the conversion price of such notes, including down-round provisions. As a result of the future adjustment feature (for reduction to the conversion price of outstanding convertible notes), the Company determined the Temasek Funding Warrant would not meet the conditions in ASC 815-40-15 to be considered indexed to the Company’s own equity. Consequently the Temasek Funding Warrant is a derivative and will be marked to market each reporting period. The Temasek Funding Warrant is valued using a Black-Scholes valuation model with the following assumptions (in addition to the Company’s share price):

 

    Initial recognition (July 29, 2015)   September 30, 2015
Expected dividend yield     0       0  
Risk-free interest rate     2 %     2 %
Expected term (in years)     10.00       10.00  
Expected volatility     74 %     74 %

 

The Company recognized a derivative liability for the Temasek Funding Warrant of $19.4 million on July 29, 2015 and revalued the derivative liability to $25.3 million at September 30, 2015. The increase in the liability was principally due to the decrease in the Company’s share price between July 29, 2015 and September 30, 2015. 12.7 million shares were potentially issuable (for an exercise price of $0.01 per share) under the Temasek Funding Warrant on September 30, 2015.

 

Derivative instruments measured at fair value as of September 30, 2015 and December 31, 2014, and their classification on the condensed consolidated balance sheets are as follows (in thousands):

 

    September 30, 2015   December 31, 2014
Fair market value of swap obligation   $ 4,925     $ 3,710  
Fair value of compound embedded derivative liabilities     32,699       56,026  
Temasek Funding Warrant derivative liability     25,342        
Total derivative liabilities   $ 62,966     $ 59,736  

 

16
 

4. Balance Sheet Components

 

Inventories, net

 

Inventories are stated at the lower of cost or market and consist of the following (in thousands):

 

    September 30, 2015   December 31, 2014
Raw materials   $ 1,928     $ 2,665  
Work-in-process     6,470       5,269  
Finished goods     2,704       6,572  
Inventories, net   $ 11,102     $ 14,506  

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets are comprised of the following (in thousands):

 

    September 30, 2015   December 31, 2014
Maintenance   $ 200     $ 399  
Prepaid insurance     167       701  
Manufacturing catalysts     2,928       1,166  
Recoverable VAT and other taxes     2,085       2,411  
Debt issuance costs     441        
Other     1,213       1,857  
Prepaid expenses and other current assets   $ 7,034     $ 6,534  

 

Property, Plant and Equipment, net

 

Property, plant and equipment, net is comprised of the following (in thousands):

   

September 30, 2015

 

December 31, 2014

Leasehold improvements   $ 38,505     $ 39,132  
Machinery and equipment     72,433       90,657  
Computers and software     8,947       8,946  
Furniture and office equipment     2,231       2,445  
Buildings     3,855       6,321  
Vehicles     196       353  
Construction in progress     33,082       38,815  
      159,249       186,669  
Less: accumulated depreciation, amortization and impairment     (77,308 )     (67,689 )
Property, plant and equipment, net   $ 81,941     $ 118,980  

 

17
 

The Company's first, purpose-built, large-scale Biofene production plant in southeastern Brazil commenced operations in December 2012. This plant is located at Brotas in the state of São Paulo, Brazil and is adjacent to an existing sugar and ethanol mill, Tonon Bioenergia S.A. (or “Tonon”) (formerly Paraíso Bioenergia) with which the Company has an agreement to purchase a certain number of tons of sugarcane per year, along with specified water and vapor volumes.

 

In July 2015, the Company announced that it was in discussions with SMSA regarding the continuation of the joint venture.  Specifically, the Company and SMSA agreed to continue the joint venture pending discussions through August 31, 2015 in order to evaluate the best investment options available to optimize returns and provide balanced economics for both parties. In September 2015, the Company entered into negotiations with SMSA to agree to terms for the termination of the joint venture and the Company has determined that there is no realistic prospect of the joint venture continuing. Consequently, an impairment assessment of the assets was performed by management during the third quarter of 2015. The Company expects to be required to remove the existing assets of the joint venture, which are currently situated on land owned by SMSA (the “SMSA site”). The Company plans to construct the production facility at an alternative location.

 

The Company recorded an impairment charge of $7.3 million (included in ‘Loss on purchase commitments and impairment of property, plant and equipment’) for the quarter ended September 30, 2015 for the immovable assets at the SMSA site, which are to be abandoned with no expected salvage value, including $0.6 million of irrecoverable Brazilian VAT related to the assets. Moveable assets are to be relocated to an alternative location and used in construction of a comparable facility to that planned with SMSA, utilizing the joint venture assets that will be transferred from the SMSA site. If our plans or estimate of the value of the remaining assets change, additional impairment charges may arise in future periods.

 

Property, plant and equipment, net includes $1.3 million and $4.1 million of machinery and equipment under capital leases as of September 30, 2015 and December 31, 2014, respectively. Accumulated amortization of assets under capital leases totaled $0.3 million and $2.3 million as of September 30, 2015 and December 31, 2014, respectively.

 

Depreciation and amortization expense, including amortization of assets under capital leases was $3.1 million and $3.8 million for the three months ended September 30, 2015 and 2014, respectively, and was $9.9 million and $11.3 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Other Assets (non-current)

 

Other assets are comprised of the following (in thousands):

 

   

September 30, 2015

 

December 31, 2014

Deposits on property and equipment, including taxes   $ 827     $ 1,738  
Recoverable taxes from Brazilian government entities     6,814       9,747  
Debt issuance costs     697       851  
Other     1,253       1,299  
Total other assets   $ 9,591     $ 13,635  

 

18
 

Accrued and Other Current Liabilities

 

Accrued and other current liabilities are comprised of the following (in thousands):

 

   

September 30, 2015

 

December 31, 2014

Professional services   $ 3,876     $ 2,015  
Accrued vacation     1,920       2,213  
Payroll and related expenses     3,785       5,393  
Tax-related liabilities     1,282       277  
Deferred rent, current portion     1,110       1,111  
Accrued interest     2,606       1,308  
Contractual obligations to contract manufacturers     541       310  
Commitment loan fee     750        
Other     962       938  
Total accrued and other current liabilities   $ 16,832     $ 13,565  

 

5. Debt

 

Debt is comprised of the following (in thousands):

   

September 30, 2015

 

December 31, 2014

FINEP credit facility   $ 889     $ 1,614  
BNDES credit facility     2,163       4,314  
Hercules loan facility     23,503       29,779  
Total credit facilities     26,555       35,707  
Convertible notes     71,971       60,418  
Related party convertible notes     42,401       115,239  
Loans payable     12,908       21,097  
Total debt     153,835       232,461  
Less: current portion     (20,902 )     (17,100 )
Long-term debt   $ 132,933     $ 215,361  

 

FINEP Credit Facility

 

In November 2010, the Company entered into a credit facility with Financiadora de Estudos e Projetos (or the “FINEP Credit Facility”). The FINEP Credit Facility was extended to partially fund expenses related to the Company’s research and development project on sugarcane-based biodiesel (or the “FINEP Project”) and provided for loans of up to an aggregate principal amount of R$6.4 million (approximately US$1.6 million based on the exchange rate as of September 30, 2015), which is secured by a chattel mortgage on certain equipment of Amyris Brasil as well as by bank letters of guarantee. All available credit under this facility is fully drawn.

 

Interest on loans drawn under the FINEP Credit Facility is fixed at 5% per annum. In case of default under or non-compliance with the terms of the agreement, the interest on loans will be dependent on the long-term interest rate as published by the Central Bank of Brazil (such rate, the “TJLP”). If the TJLP at the time of default is greater than 6%, then the interest will be 5% plus a TJLP adjustment factor, otherwise the interest will be 11% per annum. In addition, a fine of up to 10% shall apply to the amount of any obligation in default. Interest on late balances will be 1% per month, levied on the overdue amount. Payment of the outstanding loan balance is being made in 81 monthly installments, which commenced in July 2012 and extends through March 2019. Interest on loans drawn and other charges are paid on a monthly basis and commenced in March 2011. As of September 30, 2015 and December 31, 2014, the total outstanding loan balance under the FINEP Credit Facility was R$3.5 million (approximately US$0.9 million based on the exchange rate as of September 30, 2015) and R$4.3 million (approximately US$1.6 million based on exchange rate as of December 31, 2014), respectively.

 

19
 

The FINEP Credit Facility contains the following significant terms and conditions:

The Company was required to share with FINEP the costs associated with the FINEP Project. At a minimum, the Company was required to contribute from its own funds approximately R$14.5 million (approximately US$3.6 million based on the exchange rate as of September 30, 2015) of which R$11.1 million was contributed prior to the release of the second disbursement. All four disbursements were completed and the Company has fulfilled all of its cost sharing obligations;
After the release of the first disbursement, prior to any subsequent drawdown from the FINEP Credit Facility, the Company was required to provide bank letters of guarantee of up to R$3.3 million in aggregate (approximately US$0.8 million based on the exchange rate as of September 30, 2015). On December 17, 2012 and prior to release of the second disbursement on December 26, 2012, the Company obtained the required bank letter of guarantees from Banco ABC Brasil S.A. (or "ABC"); and
Amounts disbursed under the FINEP Credit Facility were required to be used towards the FINEP Project within 30 months after the contract execution.

 

BNDES Credit Facility

 

In December 2011, the Company entered into a credit facility with the Brazilian Development Bank (or “BNDES” and such credit facility is the “BNDES Credit Facility”) in the amount of R$22.4 million (approximately US$5.6 million based on the exchange rate as of September 30, 2015). This BNDES Credit Facility was extended as project financing for a production site in Brazil. The credit line was divided into an initial tranche of up to approximately R$19.1 million and an additional tranche of approximately R$3.3 million that would become available upon delivery of additional guarantees. The credit line was cancelled in 2013.

 

The principal of the loans under the BNDES Credit Facility is required to be repaid in 60 monthly installments, with the first installment paid in January 2013 and the last due in December 2017. Interest was due initially on a quarterly basis with the first installment due in March 2012. From and after January 2013, interest payments are due on a monthly basis together with principal payments. The loaned amounts carry interest of 7% per annum. Additionally, there is a credit reserve charge of 0.1% on the unused balance from each credit installment from the day immediately after it is made available through its date of use, when it is paid.

 

The BNDES Credit Facility is collateralized by a first priority security interest in certain of the Company's equipment and other tangible assets totaling R$24.9 million (approximately $6.3 million based on the exchange rate as of September 30, 2015). The Company is a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, the Company was required to provide a bank guarantee equal to 10% of the total approved amount (R$22.4 million in total debt) available under the BNDES Credit Facility. For advances of the second tranche (above R$19.1 million), the Company is required to provide additional bank guarantees equal to 90% of each such advance, plus additional Company guarantees equal to at least 130% of such advance. The BNDES Credit Facility contains customary events of default, including payment failures, failure to satisfy other obligations under this credit facility or related documents, defaults in respect of other indebtedness, bankruptcy, insolvency and inability to pay debts when due, material judgments, and changes in control of Amyris Brasil. If any event of default occurs, BNDES may terminate its commitments and declare immediately due all borrowings under the facility. As of September 30, 2015 and December 31, 2014, the Company had R$8.6 million (approximately US$2.2 million based on the exchange rate as of September 30, 2015) and R$11.5 million (approximately US$4.3 million based on the exchange rate as of December 31, 2014), respectively, in outstanding advances under the BNDES Credit Facility.

 

20
 

Hercules Loan Facility

 

In March 2014, the Company entered into a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (or “Hercules”) to make available to Amyris a loan in the aggregate principal amount of up to $25.0 million (or the "Hercules Loan Facility"). The original Hercules Loan Facility accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 6.25% or 9.50%. The Company may repay the loaned amounts before the maturity date (generally February 1, 2017) if it pays an additional fee of 3% of the outstanding loans (1% if after the initial twelve-month period of the loan). The Company was also required to pay a 1% facility charge at the closing of the transaction, and is required to pay a 10% end of term charge. In connection with the original Hercules Loan Facility, Amyris agreed to certain customary representations and warranties and covenants, as well as certain covenants that were subsequently amended (as described below). The total available credit of $25.0 million under this facility was fully drawn down by the Company.

 

In June 2014, the Company and Hercules entered into a first amendment (or the “First Hercules Amendment”) of Hercules Loan Facility. Pursuant to the First Hercules Amendment, the parties agreed to adjust the term loan maturity date from May 31, 2015 to February 1, 2017 and remove (i) a requirement for the Company to pay a forbearance fee of $10.0 million in the event certain covenants were not satisfied, (ii) a covenant that the Company maintain positive cash flow commencing with the fiscal quarter beginning October 1, 2014, (iii) a covenant that, beginning with the fiscal quarter beginning July 1, 2014, the Company and its subsidiaries achieve certain projected cash product revenues and projected cash product gross profits, and (iv) an obligation for the Company to file a registration statement on Form S-3 with the SEC by no later than June 30, 2014 and complete an equity financing of more than $50.0 million by no later than September 30, 2014. The Company further agreed to include a new covenant requiring the Company to maintain unrestricted, unencumbered cash in U.S. bank accounts an amount equal to at least 50% of the principal amount then outstanding under the Hercules Loan Facility and borrow an additional $5.0 million. The additional $5.0 million borrowing was completed in June 2014, and accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 5.25% or 8.5%. The Hercules Loan Facility is secured by liens on the Company's assets, including on certain Company intellectual property. The Hercules Loan Facility includes customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgments, and insolvency. If an event of default occurs, Hercules may require immediate repayment of all amounts due.

 

In March 2015, the Company and Hercules entered into a second amendment (or the “Second Hercules Amendment”) of the Hercules Loan Facility. Pursuant to the Second Hercules Amendment, the parties agreed to, among other things, establish an additional credit facility in the principal amount of up to $15.0 million, which would be available to be drawn by the Company at its sole election (in increments of $5.0 million) through the earlier of March 31, 2016 or such time as the Company raises an aggregate of at least $20.0 million through the sale of new equity securities, subject to certain conditions, including the receipt of third party consents and a requirement to first make certain draw-downs under an equity line of credit that the Company previously secured (to the extent the Company is permitted to do so under the terms thereof). Commencing with the quarter in which the Company borrows any amounts under this additional facility, the Company becomes subject to a covenant to achieve certain amounts of product revenues. Under the terms of the Second Hercules Amendment, the Company agreed to pay Hercules a 3.0% facility availability fee on April 1, 2015. If the facility was not canceled, and any outstanding borrowings were not repaid, before June 30, 2015, an additional 5.0% facility fee became payable on June 30, 2015. The Company did not pay the additional facility fee and thereafter received a waiver from Hercules with respect thereto. The Company had the ability to cancel the additional facility at any time prior to June 30, 2015 at its own option, and the additional facility would terminate upon the Company securing a new equity financing of at least $20.0 million. The additional facility was cancelled undrawn upon the completion of the Company’s Private Offering in July 2015.

 

As of September 30, 2015, $23.5 million was outstanding under the Hercules Loan Facility, net of discount of $0.2 million. The Company’s loan facility with Hercules requires the Company to maintain unrestricted, unencumbered cash in U.S. bank accounts in an amount equal to at least 50% of the principal amount outstanding under such facility. The Company received a waiver from Hercules with respect to non-compliance with such covenants. As of the date of issuance of this report, the Company is in compliance with all of its Hercules debt agreements.

 

21
 

Convertible Notes

 

Fidelity

 

In February 2012, the Company completed the sale of senior unsecured convertible promissory notes in an aggregate principal amount of $25.0 million pursuant to a securities purchase agreement, between the Company and certain investment funds affiliated with FMR LLC (or the "Fidelity Securities Purchase Agreement"). The offering consisted of the sale of 3% senior unsecured convertible promissory notes with a March 1, 2017 maturity date and an initial conversion price equal to $7.0682 per share of the Company's common stock, subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends and distributions (or the "Fidelity Notes"). As of September 30, 2015, the Fidelity Notes were convertible into an aggregate of up to 3,536,968 shares of the Company's common stock. Such note holders have a right to require repayment of 101% of the principal amount of the Fidelity 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 Fidelity Securities Purchase Agreement and Fidelity Notes include covenants regarding payment of interest, maintaining the Company's listing status, limitations on debt, maintenance of corporate existence, and timely filing of SEC reports. The Fidelity Notes include standard events of default resulting in acceleration of indebtedness, including failure to pay, bankruptcy and insolvency, cross-defaults, material adverse effect clauses and breaches of the covenants in the Fidelity Securities Purchase Agreement and Fidelity Notes, with default interest rates and associated cure periods applicable to the covenant regarding SEC reporting. Furthermore, the Fidelity Notes include restrictions on the amount of debt the Company is permitted to incur. With exceptions for certain existing debt, refinancing of such debt and certain other exclusions and waivers, the Fidelity Notes provide that the Company's total outstanding debt at any time cannot exceed the greater of $200.0 million or 50% of its consolidated total assets and its secured debt cannot exceed the greater of $125.0 million or 30% of its consolidated total assets. In connection with the Company’s closing of a short-term bridge loan for $35.0 million in October 2013, holders of the Fidelity Notes waived compliance with the debt limitations outlined above as to the $35.0 million bridge loan (or the “Temasek Bridge Note”) and the August 2013 Financing (defined below). In consideration for such waiver, the Company granted to holders of the Fidelity Notes or their affiliates, the right to purchase up to an aggregate of $7.6 million worth of convertible promissory notes in the first tranche of the August 2013 Financing.

 

Pursuant to a Securities Purchase Agreement among the Company, Maxwell (Mauritius) Pte Ltd (or “Temasek”) and Total, dated as of August 8, 2013 (or the “August 2013 SPA”), as amended in October 2013 to include certain entities affiliated with FMR LLC (or the “Fidelity Entities”), the Company sold and issued certain senior convertible promissory notes (or the "Tranche I Notes") pursuant to a financing (or the “August 2013 Financing”) exempt from registration under the Securities Act of 1933, as amended, (the "Securities Act"), with an aggregate principal amount of $7.6 million of Tranche I Notes sold to the Fidelity Entities. See "Related Party Convertible Notes" in Note 5, "Debt."

 

Rule 144A Convertible Note Offering

 

In May 2014, the Company entered into a Purchase Agreement with Morgan Stanley & Co. LLC, as the initial purchaser (or the “Initial Purchaser”), relating to the sale of $75.0 million aggregate in principal amount of its 6.50% Convertible Senior Notes due 2019 (or the "144A Notes") to the Initial Purchaser in a private placement, and for initial resale by the Initial Purchaser to certain qualified institutional buyers (or the "Rule 144A Convertible Note Offering"). In addition, the Company granted the Initial Purchaser an option to purchase up to an additional $15.0 million aggregate principal amount of 144A Notes, which option expired according to its terms. Under the terms of the purchase agreement for the 144A Notes, the Company agreed to customary indemnification of the Initial Purchaser against certain liabilities. The Notes were issued pursuant to an Indenture, dated as of May 29, 2014 (or the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee. The net proceeds from the offering of the 144A Notes were approximately $72.0 million after payment of the Initial Purchaser’s discounts and offering expenses. In addition, in connection with obtaining a waiver from Total of its preexisting contractual right to exchange certain senior secured convertible notes previously issued by the Company for new notes issued in the offering, the Company used approximately $9.7 million of the net proceeds to repay previously issued notes (representing the amount of 144A Notes purchased by Total from the Initial Purchaser). Certain of the Company's affiliated entities purchased $24.7 million in aggregate principal amount of 144A Notes from the Initial Purchaser (described further below under "Related Party Convertible Notes"). The 144A Notes bear interest at a rate of 6.50% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning November 15, 2014. The 144A Notes mature on May 15, 2019, unless earlier converted or repurchased. The 144A Notes are convertible into shares of the Company's common stock at any time prior to the close of business day on May 15, 2019. The 144A Notes have an initial conversion rate of 267.037 shares of Common Stock per $1,000 principal amount of 144A Notes (subject to adjustment in certain circumstances). This represents an initial effective conversion price of approximately $3.74 per share of common stock. For any conversion on or after May 15, 2015, in the event that the last reported sale price of the Company’s common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date the Company receives a notice of conversion exceeds the conversion price of $3.74 per share on each such trading day, the holders, in addition to the shares deliverable upon conversion, will be entitled to receive a cash payment equal to the present value of the remaining scheduled payments of interest that would have been made on the 144A Notes being converted from the conversion date to the earlier of the date that is three years after the date the Company receives such notice of conversion and maturity (May 15, 2019). In the event of a fundamental change, as defined in the Indenture, holders of the 144A Notes may require the Company to purchase all or a portion of the 144A Notes at a price equal to 100% of the principal amount of the 144A Notes, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Holders of the 144A Notes who convert their 144A Notes in connection with a make-whole fundamental change will receive additional shares representing the present value of the remaining interest payments which will be computed using a discount rate of 0.75%. If a holder of 144A Notes elects to convert its 144A Notes prior to the effective date of any make-whole fundamental change, such holder will not be entitled to an increased conversion rate in connection with such conversion. Refer to the “Exchange” and “Maturity Treatment Agreement” sections of this Note 5, "Debt", for details of the impact of the Maturity Treatment and Exchange agreements on the 144A Notes.

 

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Related Party Convertible Notes

 

Total R&D Convertible Notes

 

In July 2012, the Company entered into an agreement with Total that expanded Total's investment in its Biofene collaboration with the Company, provided new structure for a joint venture (or the "Fuels JV") to commercialize the products encompassed by the diesel and jet fuel research and development program (or the "Program"), and established a convertible debt structure for the collaboration funding from Total (or the "July 2012 Agreements").

 

The purchase agreement for the notes related to the funding from Total (or the “Total Purchase Agreement”) provided for the sale of the Total Notes consisting of an aggregate of $105.0 million in 1.5% Senior Unsecured Convertible Note due March 2017 as follows:

 

As part of an initial closing under the Total Purchase Agreement (which was completed in two installments), (i) on July 30, 2012, the Company sold a Total Note with a principal amount of $38.3 million, including $15.0 million in new funds and $23.3 million in previously-provided diesel research and development funding by Total, and (ii) on September 14, 2012, the Company sold another Total Note for $15.0 million in new funds from Total.
At a second closing under the Total Purchase Agreement (also completed in two installments) the Company sold additional Total Notes for an aggregate of $30.0 million in new funds from Total ($10.0 million in June 2013 and $20.0 million in July 2013).
At a third closing under the Total Purchase Agreement (also completed in two installments) the Company sold additional Total Notes for an aggregate of $21.7 million in new funds from Total ($10.85 million in July 2014 and $10.85 million in January 2015) (or the “Third Closing Notes”).

 

The Total Notes have a maturity date of March 1, 2017, an initial conversion price equal to $7.0682 per share for the Total Notes issued under the initial closing, an initial conversion price equal to $3.08 per share for the Total Notes issued under the second closing and an initial conversion price equal to $4.11 per share for the Third Closing Notes. The Total Notes bear interest of 1.5% per annum (with a default rate of 2.5%), accruing from the 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 partially or fully cancelled if the Total Notes are cancelled based on a final decision by Total to go forward with the fuels collaboration (either partially with respect to jet fuel or fully with respect to jet fuel and diesel (a “Go” decision) (see Note 8, "Significant Agreements"). The agreements contemplate that the research and development efforts under the Program may extend through 2016, with a series of “Go/No Go” decisions (see Note 8, "Significant Agreements") by Total through such date tied to funding by Total.

 

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The Total Notes become convertible into the Company's common stock (i) within 10 trading days prior to maturity (if they are not cancelled 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 with respect to the full fuels collaboration, then the Total Notes will be exchanged by Total for equity interests in the Fuels JV, after which the Total Notes will not be convertible and any obligation to pay principal or interest on the Total Notes will be extinguished. In case of a “Go” decision only with respect to jet fuel, the parties would form an operational joint venture only for jet fuel (and the rights associated with diesel would terminate), 70% of the outstanding Total Notes would remain outstanding and become payable by the Company, and 30% of the outstanding Total Notes would be cancelled. If Total makes a “No-Go” decision, outstanding Total Notes will remain outstanding and become payable at maturity.

 

In connection with the December 2012 private placement of the Company’s common stock involving certain existing stockholders of the Company (see Note 10, "Stockholders' Equity"), Total elected to participate in the private placement by exchanging approximately $5.0 million of its $53.3 million in Total Notes issued in the initial closing into 1,677,852 of the Company's common stock at a price of $2.98 per share. As such, $5.0 million of Total's outstanding $53.3 million in Total Notes issued in the initial closing was cancelled. The cancellation of the debt was treated as an extinguishment of debt in accordance with the guidance outlined in ASC 470-50. As a result of the exchange and cancellation of the $5.0 million debt, the Company recorded a loss from extinguishment of debt of $0.9 million in the year ended December 31, 2012.

 

In March 2013, the Company entered into a letter agreement with Total (or the “March 2013 Letter Agreement”) under which Total agreed to waive its right to cease its participation in the parties' fuels collaboration at the July 2013 decision point and committed to proceed with the second closing under the Total Purchase Agreement (subject to the Company's satisfaction of the relevant closing conditions for such funding in the Total Purchase Agreement). As consideration for this waiver and commitment, the Company agreed to:

 

reduce the conversion price for the $30.0 million in principal amount of Total Notes to be issued in connection with the second closing of the Total Notes (as described above) from $7.0682 per share to a price per share equal to the greater of (i) the consolidated closing bid price of the Company's common stock on the date of the March 2013 Letter Agreement, plus $0.01, and (ii) $3.08 per share, provided that the conversion price would not be reduced by more than the maximum possible amount permitted under the rules of The NASDAQ Stock Market (or “NASDAQ”) such that the new conversion price would require the Company to obtain stockholder consent; and
grant Total a senior security interest in the Company's intellectual property, subject to certain exclusions and subject to release by Total when the Company and Total enter into final documentation regarding the establishment of the Fuels JV.

 

In addition to the waiver by Total described above, Total also agreed that, at the Company's request and contingent upon the Company meeting its obligations described above, it would pay advance installments of the amounts otherwise payable at the second closing.

 

In June 2013, the Company sold and issued $10.0 million in principal amount of Total Notes to Total pursuant to the second closing of the Total Notes as discussed above. In accordance with the March 2013 Letter Agreement, this Total Note has an initial conversion price equal to $3.08 per share of the Company's common stock.

 

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In July 2013, the Company sold and issued $20.0 million in principal amount of Total Notes to Total pursuant to the second closing of the Total Notes as discussed above. This purchase and sale completed Total's commitment to purchase $30.0 million of the Total Notes in the second closing by July 2013. In accordance with the March 2013 Letter Agreement, this Total Note has an initial conversion price equal to $3.08 per share of the Company's common stock.

 

The conversion prices of the Total Notes were subject to adjustment for proportional adjustments to outstanding common stock and under anti-dilution provisions in case of certain dividends and distributions. Total had a right to require repayment of 101% of the principal amount of the Total Notes in the event of a change of control of the Company and the Total Notes provided for payment of unpaid interest on conversion following such a change of control if Total did not require such repayment. The Total Purchase Agreement and Total Notes included 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 Total Notes include standard events of default resulting in acceleration of indebtedness, including failure to pay, bankruptcy and insolvency, cross-defaults, and breaches of the covenants in the Total Purchase Agreement and Total Notes, with added default interest rates and associated cure periods applicable to the covenant regarding SEC reporting. Furthermore, the Total Notes included restrictions on the amount of debt the Company is permitted to incur. With exceptions for certain existing debt, refinancing of such debt and certain other exclusions and waivers, the Total Notes provided that the Company's total outstanding debt at any time could not exceed the greater of $200.0 million or 50% of its consolidated total assets and its secured debt could not exceed the greater of $125.0 million or 30% of its consolidated total assets. In connection with the Company’s closing of the Temasek Bridge Note for $35.0 million and the August 2013 Financing and in connection with the Rule 144A Convertible Note Offering in May 2014, Total waived compliance with the debt limitations outlined above as to the Temasek Bridge Note, the August 2013 Financing and the Rule 144A Convertible Note Offering.

 

In December 2013, in connection with the Company's entry into a Shareholders Agreement dated December 2, 2013 and License Agreement dated December 2, 2013 (or, collectively, the “JV Documents”) with Total and Total Amyris BioSolutions B.V. (or “JVCO”) relating to the establishment of JVCO (see Note 7, "Joint Ventures and Noncontrolling Interest"), the Company (i) exchanged the $69.0 million of the then-outstanding Total Notes issued pursuant to the Total Purchase Agreement for replacement 1.5% senior secured convertible notes, in principal amounts equal to the principal amount of each cancelled note (or the “Replacement Notes”) or, when referencing Replacement Notes outstanding as of June 30, 2015 sometimes referred to the Total Notes), ii) granted to Total a security interest in and lien on all Amyris’ rights, title and interest in and to Company’s shares in the capital of JVCO and (iii) agreed that any securities to be purchased and sold at the third closing under the Total Purchase Agreement by Total would be Replacement Notes instead of Total Notes. As a consequence of executing the JV Documents and forming JVCO, the security interest in all of the Company's intellectual property, granted by the Company in favor of Total, Temasek, and certain Fidelity Entities pursuant to the Restated Intellectual Property Security Agreement dated as of October 16, 2013, were automatically terminated effective as of December 2, 2013 upon Total’s and the Company’s joint written notice to Temasek and the Fidelity Entities.

 

In April 2014, the Company and Total entered into a letter agreement dated as of March 29, 2014 (or the “March 2014 Total Letter Agreement”) to amend the Amended and Restated Master Framework Agreement entered into as of December 2, 2013 (included as part of JV Documents) and the Total Purchase Agreement. Under the March 2014 Total Letter Agreement, the Company agreed to, (i) amend the conversion price of the Replacement Notes to be issued in the third closing under the Total Purchase Agreement from $7.0682 per share to $4.11 per share subject to stockholder approval at the Company's 2014 annual meeting (which was obtained in May 2014), (ii) extend the period during which Total may exchange for other Company securities Replacement Notes issued under the July 2012 Agreements from June 30, 2014 to the later of December 31, 2014 and the date on which the Company shall have raised $75.0 million of equity and/or convertible debt financing (excluding any convertible promissory notes issued pursuant to the Total Purchase Agreement), (iii) eliminate the Company’s ability to qualify, in a disclosure letter to Total, certain of the representations and warranties that the Company must make at the closing of any third closing sale, and (iv) beginning on March 31, 2014, provide Total with monthly reporting on the Company’s cash, cash equivalents and short-term investments. In consideration of these agreements, Total agreed to waive its right not to consummate the closing of the issuance of the Third Closing Notes if it had decided not to proceed with the collaboration and had made a "No-Go" decision with respect thereto.

 

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In July 2014, the Company sold and issued a Replacement Note to Total with a principal amount of $10.85 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement. This purchase and sale constituted the initial installment of the $21.7 million third closing described above. In accordance with the March 2014 Total Letter Agreement, this convertible note has an initial conversion price equal to $4.11 per share of the Company's common stock.

 

In January 2015, the Company sold and issued a Replacement Note to Total with a principal amount of $10.85 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement. This purchase and sale constituted the final installment of the $21.7 million third closing described above. In accordance with the March 2014 Total Letter Agreement, this convertible note has an initial conversion price equal to $4.11 per share of the Company's common stock. Refer to the “Exchange” section of this Note 5, "Debt", for details of the impact of the Exchange Agreement on the Replacement Notes.

 

As of September 30, 2015 and December 31, 2014, $5.0 million and $51.0 million, respectively, of Replacement Notes were outstanding, net of debt discount of $0.0 million and $13.1 million, respectively.

 

August 2013 Financing Convertible Notes and 2013 Bridge Note

 

In connection with the August 2013 Financing, the Company entered into the August 2013 SPA with Total and Temasek to sell up to $73.0 million in convertible promissory notes in private placements, with such notes to be sold and issued over a period of up to 24 months from the date of signing. The August 2013 SPA provided for the August 2013 Financing to be divided into two tranches (the first tranche for $42.6 million and the second tranche for $30.4 million), each with differing closing conditions. Of the total possible purchase price in the financing, $60.0 million was paid in the form of cash by Temasek ($35.0 million in the first tranche and up to $25.0 million in the second tranche) and $13.0 million was paid by the exchange and cancellation of outstanding convertible promissory notes held by Total in connection with its exercise of pro rata rights ($7.6 million in the first tranche and $5.4 million in the second tranche). The August 2013 SPA included requirements that the Company meet certain production milestones before the second tranche would become available, obtain stockholder approval prior to completing any closing of the transaction, and issue a warrant to Temasek to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.01 per share, exercisable only if Total converts notes previously issued to Total in the second closing under the Total Purchase Agreement. In September 2013, prior to the initial closing of the August 2013 Financing, the Company's stockholders approved the issuance in the private placement of up to $110.0 million aggregate principal amount of senior convertible promissory notes, the issuance of a warrant to purchase 1,000,000 shares of the Company's common stock and the issuance of the common stock issuable upon conversion or exercise of such notes and warrant, which approval included the transactions contemplated by the August 2013 Financing.

 

In October 2013, the Company sold and issued the Temasek Bridge Note in exchange for a bridge loan of $35.0 million. The Temasek Bridge Note was due on February 2, 2014 and accrued interest at a rate of 5.5% quarterly from the October 4, 2013 date of issuance. The Temasek Bridge Note was cancelled on October 16, 2013 as payment for Temasek’s purchase of Tranche I Notes in the first tranche of the August 2013 Financing, as further described below.

 

In October 2013, the Company amended the August 2013 SPA to include certain Fidelity Entities in the first tranche of the August 2013 Financing with an investment amount of $7.6 million, and to proportionally increase the amount acquired by exchange and cancellation of outstanding Total Notes in connection with its exercise of pro rata rights up to $14.6 million ($9.2 million in the first tranche and up to $5.4 million in the second tranche). Also in October 2013, the Company completed the closing of the first tranche of the August 2013 Financing, issuing a total of $51.8 million in Tranche I Notes for cash proceeds of $7.6 million and cancellation of outstanding convertible promissory notes of $44.2 million, of which $35.0 million resulted from cancellation of the Temasek Bridge Note and the remaining $9.2 million from the exchange and cancellation of an outstanding Total Note. As a result of the exchange and cancellation of the $35.0 million Temasek Bridge Note and the $9.2 million Total Note for the Tranche I Notes, the Company recorded a loss from extinguishment of debt of $19.9 million. The Tranche I Notes are due sixty months from the date of issuance and are convertible into the Company’s common stock at a conversion price equal to $2.44, which represents a 15% discount to a trailing 60-day weighted-average closing price of the common stock on NASDAQ through August 7, 2013, subject to adjustment as described below. The Tranche I Notes are convertible at the option of the holder: (i) at any time after 18 months from the date of the August 2013 SPA, (ii) on a change of control of the Company or (iii) upon the occurrence of an event of default. The conversion price of the Tranche I Notes will be reduced to $2.15 if (a) (i) a specified Company manufacturing plant failed to achieve a total production of 1.0 million liters within a run period of 45 days prior to June 30, 2014, or (ii) the Company fails to achieve gross margins from product sales of at least 5% prior to June 30, 2014, or (b) the Company reduces the conversion price of certain existing promissory notes held by Total prior to the repayment or conversion of the Tranche I Notes. In 2013, the Company achieved a total production of 1.0 million liters within a run period of 45 days in satisfaction of clause (a) (i) of the preceding sentence and the Company achieved clause (a)(ii) by achieving greater than 8% gross margins from product sales prior to June 30, 2014. Each Tranche I Note accrues interest from the date of issuance until the earlier of the date that such Tranche I Note is converted into the Company’s common stock or is repaid in full. Interest accrues at a rate of 5% per six months, compounded semiannually (with graduated interest rates of 6.5% applicable to the first 180 days and 8% applicable, thereafter as the sole remedy should the Company fail to maintain NASDAQ listing status or at 6.5% for all other defaults). Interest for the first 30 months is payable in kind and added to the principal every six-months and thereafter, the Company may continue to pay interest in kind by adding to the principal every six-months or may elect to pay interest in cash. The Tranche I Notes may be prepaid by the Company after 30 months from the issuance date and initial interest payment; thereafter, the Company has the option to prepay the Tranche I Notes every six months at the date of payment of the semi-annual coupon.

 

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In January 2014, the Company sold and issued, for face value, approximately $34.0 million of convertible promissory notes in the second tranche of the August 2013 Financing (or the “Tranche II Notes”). At the closing, Temasek purchased $25.0 million of the Tranche II Notes and Wolverine Asset Management, LLC (or “Wolverine”) purchased $3.0 million of the Tranche II Notes, each for cash. Total purchased approximately $6.0 million of the Tranche II Notes through cancellation of the same amount of principal of previously outstanding Replacement Notes held by Total. As a result of the exchange and cancellation of the $6.0 million Total Note for the Tranche II Notes, the Company recorded a loss from extinguishment of debt of $9.4 million. The Tranche II Notes are be due sixty months from the date of issuance and are convertible into shares of common stock at a conversion price equal to $2.87 per share, which represents a trailing 60-day weighted-average closing price of the common stock on NASDAQ through August 7, 2013, subject to adjustment as described below. Specifically, the Tranche II Notes are convertible at the option of the holder (i) at any time 12 months after issuance, (ii) on a change of control of the Company, or (iii) upon the occurrence of an event of default. Each Tranche II Note accrues interest from the date of issuance until the earlier of the date that such Tranche II Note is converted into common stock or repaid in full. Interest accrues at a rate per annum equal to 10%, compounded annually (with graduated interest rates of 13% applicable to the first 180 days and 16% applicable thereafter as the sole remedy should the Company fail to maintain NASDAQ listing status or at 12% for all other defaults). Interest for the first 36 months is payable in kind and added to principal every year following the issue date and thereafter, the Company may continue to pay interest in kind by adding to principal on every year anniversary of the issue date or may elect to pay interest in cash.

 

In addition to the conversion price adjustments set forth above, the conversion prices of the Tranche I Notes and Tranche II Notes are subject to further adjustment (i) according to proportional adjustments to outstanding common stock of the Company in case of certain dividends and distributions, (ii) according to anti-dilution provisions, and (iii) with respect to notes held by any purchaser other than Total, in the event that Total exchanges existing convertible notes for new securities of the Company in connection with future financing transactions in excess of its pro rata amount. Notwithstanding the foregoing, holders of a majority of the principal amount of the notes outstanding at the time of conversion may waive any anti-dilution adjustments to the conversion price. The purchasers have a right to require repayment of 101% of the principal amount of the notes in the event of a change of control of the Company and the notes provide for payment of unpaid interest on conversion following such a change of control if the purchasers do not require such repayment. The August 2013 SPA, Tranche I Notes and Tranche II Notes include covenants regarding payment of interest, maintenance of the Company’s listing status, limitations on debt and on certain liens, maintenance of corporate existence, and filing of SEC reports. The 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 August 2013 SPA, Tranche I Notes and Tranche II Notes, with default interest rates and associated cure periods applicable to the covenant.

 

The conversion price of the Tranche I Notes and Tranche II Notes was reset to $1.42 per share upon the completion of the Private Offering in July 2015.

 

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As of September 30, 2015 and December 31, 2014, the related party convertible notes outstanding under the Tranche I Notes and Tranche II Notes were $22.7 million and $49.2 million, respectively, net of debt discount of $0.0 million and $30.7 million, respectively. The debt discount is the result of the bifurcation of the conversion options that contain "make-whole" provisions or down round conversion price adjustment provisions associated with the outstanding debt. Refer to the “Exchange” and “Maturity Treatment Agreement” sections of this Note 5, "Debt", for details of the impact of the Maturity Treatment and Exchange agreements on the Tranche I and II Notes.

 

Rule 144A Convertible Notes Sold to Related Parties

 

As discussed above under “Rule 144A Convertible Note Offering”, the Company sold and issued $75.0 million aggregate principal amount of 144A Notes pursuant to Rule 144A of the Securities Act. In connection with obtaining a waiver from one of its existing investors, Total, of its preexisting contractual right to exchange certain senior secured convertible notes previously issued by Amyris pursuant to the Total Purchase Agreement for 144A Notes issued in the transaction, Amyris used approximately $9.7 million of the net proceeds to repay such amount of previously issued Replacement Notes held by Total, which represented the amount of 144A Notes purchased by Total from the Initial Purchaser under the Rule 144A Convertible Note Offering. As a result of the settlement of the $9.7 million of Replacement Notes, the Company recorded a loss from extinguishment of $1.1 million in the year ended December 31, 2014.

 

Additionally, Foris Ventures, LLC and Temasek each participated in the Rule 144A Convertible Note Offering and purchased $5.0 million and $10.0 million, respectively, of the convertible promissory notes sold thereunder.

 

As of September 30, 2015, there was $5.0 million in outstanding principal under Total Notes with a conversion price of $3.74 per share, with such Total Notes all having a maturity date of March 1, 2017, subject to the conversion and cancellation provisions set forth in the Notes.

 

As of September 30, 2015, the related party convertible notes outstanding under the Rule 144A Convertible Note Offering were $14.6 million, net of discount of $1.7 million.

 

As of September 30, 2015 and December 31, 2014, the total related party convertible notes outstanding were $42.4 million and $115.2 million, respectively, net of discount of $1.7 million and $53.8 million, respectively. The Company recorded a loss from extinguishment of debt from the exchange and cancellation of related party convertible notes of $5.9 million and zero for the three months ended September 30, 2015 and 2014, respectively, and $5.9 million and $10.5 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Loans Payable

 

In July 2012, the Company entered into a Note of Bank Credit and a Fiduciary Conveyance of Movable Goods Agreement (together, the "July 2012 Bank Agreements") with each of Nossa Caixa Desenvolvimento (or “Nossa Caixa”) and Banco Pine S.A. (or “Banco Pine”). Under the July 2012 Bank Agreements, the Company pledged certain farnesene production assets as collateral for the loans of R$52.0 million. The Company's total acquisition cost for such pledged assets was approximately R$68.0 million (approximately US$17.1 million based on the exchange rate as of September 30, 2015). The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements. Under the July 2012 Bank Agreements, the Company could borrow an aggregate of R$52.0 million (approximately US$13.1 million based on the exchange rate as of September 30, 2015) as financing for capital expenditures relating to the Company's manufacturing facility located in Brotas, Brazil. Specifically, Banco Pine, agreed to lend R$22.0 million and Nossa Caixa agreed to lend R$30.0 million. The funds for the loans are provided by BNDES, but are guaranteed by the lenders. The loans have a final maturity date of July 15, 2022 and bear a fixed interest rate of 5.5% per year. The loans are also subject to early maturity and delinquency charges upon occurrence of certain events including interruption of manufacturing activities at the Company's manufacturing facility in Brotas, Brazil for more than 30 days, except during the sugarcane off-season. For the first two years that the loans are outstanding, the Company is required to pay interest only on a quarterly basis. Since August 15, 2014, the Company has been required to pay equal monthly installments of both principal and interest for the remainder of the term of the loans. As of September 30, 2015 and December 31, 2014, a principal amount of $11.2 million and $18.6 million, respectively, was outstanding under these loan agreements.

 

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In March 2013, the Company entered into an export financing agreement with Banco ABC Brasil S.A. (or “ABC”) for approximately $2.5 million to fund exports through March 2014. This loan was collateralized by future exports from the Company's subsidiary in Brazil. In March 2014, the Company entered into an additional export financing agreement with ABC for approximately $2.2 million to fund exports through March 2015. This loan is collateralized by future exports from the Company's subsidiary in Brazil. In April, 2015, we entered into an additional export financing agreement with ABC for approximately $1.6 million to fund exports through March 2016. This loan is collateralized by future exports from the Company's subsidiary in Brazil. As of September 30, 2015, the principal amount outstanding under this agreement was $1.6 million. The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements.

 

In October 2013, the Company entered into a financing arrangement with a third party for the monthly payments of its insurance premiums of $0.6 million payable in nine monthly installments of principal and interest. Interest accrues at a rate of 3.24% per annum. The installment payments were concluded in 2014. In October 2014, the Company agreed to a new installment plan amounting to $0.6 million to pay for the current insurance premiums under the same terms. As of September 30, 2015 and December 31, 2014, the outstanding unpaid installment payments were zero and $0.3 million, respectively.

 

Exchange (debt conversion)

 

On July 29, 2015, the Company closed the Exchange pursuant to that certain Exchange Agreement, dated as of July 26, 2015 (the “ Exchange Agreement ”), among the Company, Temasek and Total.

 

Under the Exchange Agreement, at the closing, Temasek exchanged approximately $71.0 million of outstanding convertible promissory notes (including paid-in-kind and accrued interest through July 29, 2015) and Total exchanged $70.0 million in principal amount of outstanding convertible promissory notes for shares of the Company’s common stock. The exchange price was $2.30 per share (the “Exchange Price”) and was paid by the exchange and cancellation of such outstanding convertible promissory notes, and Temasek and Total received 30,860,633 and 30,434,782 shares of the Company’s common stock, respectively, in the Exchange. As a result of the Exchange, accretion of debt discount was accelerated based on the Company’s estimate of the expected conversion date, resulting in an additional interest expense of $36.6 million for the quarter ended June 30, 2015 and $2.6 million for the quarter ended September 30, 2015.

 

Under the Exchange Agreement, Total also received the following warrants, each with a five-year term, at the closing:

 

A warrant to purchase 18,860,992 shares of the Company’s Common Stock (the “Total Funding Warrant”).

 

A warrant to purchase 2,000,000 shares of the Company’s common stock that will only be exercisable if the Company fails, as of March 1, 2017, to achieve a target cost per liter to manufacture farnesene (the “Total R&D Warrant”). The Total Funding Warrant and the Total R&D Warrant are collectively referred to as the “Total Warrants.”

 

Additionally, under the Exchange Agreement, Temasek received the following warrants:

 

A warrant to purchase 14,677,861 shares of the Company’s common stock. (the “Temasek Exchange Warrant”)

 

A warrant exercisable for that number of shares of the Company’s common stock equal to (1) (A) the number of shares for which Total exercises the Total Funding Warrant plus (B) the number of additional shares for which the certain convertible notes remaining outstanding following the completion of the Exchange may become exercisable as a result of a reduction in the conversion price of such remaining notes as of a result of and/or subsequent to the date of the Exchange plus (C) that number of additional shares in excess of 2,000,000, if any, for which the Total R&D Warrant becomes exercisable multiplied by a fraction equal to 30.6% divided by 69.4% plus (2) (A) the number of any additional shares for which certain other outstanding convertible promissory notes may become exercisable as a result of a reduction to the conversion price of such notes multiplied by (B) a fraction equal to 13.3% divided by 86.7%.

 

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A warrant exercisable for that number of shares of the Company’s common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000. If Total is entitled to, and does, exercise the Total R&D Warrant in full, this warrant would be exercisable for 880,339 shares.

 

The above-referenced warrants issued to Temasek have ten-year terms and are referred to herein as the “Temasek Warrants” and, the Temasek Warrants and Total Warrants are hereinafter collectively referred to as the “Exchange Warrants”. All of the Exchange Warrants have an exercise price of $0.01 per share.

 

In addition to the grant of the Exchange Warrants, a warrant issued by the Company to Temasek in October 2013 in conjunction with a prior convertible debt financing (the “2013 Warrant”) became exercisable in full upon the completion of the Exchange. There are 1,000,000 shares underlying the 2013 Warrant, which were exercised at an exercise price of $0.01 per share during the quarter ended September 30, 2015.

 

The exercisability of all of the Exchange Warrants is subject to stockholder approval. The Company intends to solicit such approval promptly and, as further described below, has entered into Voting Agreements (defined below) with certain of the Company’s stockholders and investors pursuant to which such stockholders and investors have agreed to vote in favor of the exercisability of the Exchange Warrants and the exercisability of certain of other warrants to be issued under the transactions contemplated by the Private Offering (as described below, the “ Private Offering Warrants ”), which was obtained on September 17, 2015.

 

Maturity Treatment Agreement

 

At the closing of the Exchange, the Company, Total and Temasek also entered into a Maturity Treatment Agreement, dated as of July 29, 2015, pursuant to which Total and Temasek agreed to convert any of the Company’s convertible promissory notes held by them that were not cancelled in the Exchange (the “Remaining Notes”) into shares of the Company’s common stock in accordance with the terms of such Remaining Notes upon maturity, provided that certain events of default have not occurred with respect to the applicable Remaining Notes prior to such maturity. As of immediately following the closing of the Exchange, Temasek held $10.0 million in aggregate principal amount of Remaining Notes (being Rule 144A Convertible Notes) and Total held approximately $25.0 million in aggregate principal amount of Remaining Notes (being $9.7 million of Rule 144A Convertible Notes and $15.3 million of Tranche I and II Notes).

 

Including the Remaining Notes, following the closing of the July 2015 Private Offering and the Exchange, the Company had outstanding $130.9 million in aggregate principal amount of convertible promissory notes, including $25.0 million with a conversion price of $7.0682 per share, $5.0 million with a conversion price of $3.08 per share (with such $5.0 million to be canceled upon final execution of agreements relating to restructuring of a fuels joint venture with Total), $75.0 million with a conversion price of $3.74 per share, and $25.9 million (the “Tranche Notes ”) with a conversion price of approximately $1.42 per share (with Tranche Notes’ conversion price reduced from conversion prices ranging from $2.44 to $2.87, based on existing anti-dilution adjustments in the Tranche Notes as a result of the Private Offering price).

 

In conjunction with the closing of the Exchange and Maturity Treatment Agreements on July 29, 2015, $178.1 million of convertible debt was extinguished and a $6.0 million loss on extinguishment was recognized in the quarter ended September 30, 2015. The Remaining Notes were recorded at fair value.

 

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Letters of Credit

 

In June 2012, the Company entered into a letter of credit agreement for $1.0 million under which it provided a letter of credit to the landlord of its headquarters in Emeryville, California, in order to cover the security deposit on the lease. This letter of credit is secured by a certificate of deposit. Accordingly, the Company has $1.0 million as restricted cash under this arrangement as of September 30, 2015 and December 31, 2014.

 

Future minimum payments under the debt agreements as of September 30, 2015 are as follows (in thousands):

Years ending December 31:   Related Party Convertible Debt   Convertible Debt   Loans
Payable
  Credit Facility   Total
2015 (remaining three months)   $ 807     $ 2,019     $ 704     $ 4,816     $ 8,346  
2016     1,606       4,020       3,813       19,216       28,655  
2017     6,798       29,090       2,091       6,821       44,800  
2018     16,780       15,685       2,002       262       34,729  
2019     35,298       56,798       1,914       70       94,080  
Thereafter                 4,533             4,533  
Total future minimum payments     61,289       107,612       15,057       31,185       215,143  
Less: amount representing interest (1)     (24,414 )     (35,640 )     (2,149 )     (4,631 )     (66,834 )
Present value of minimum debt payments     36,875       71,972       12,908       26,554       148,309  
Less: current portion                 (3,364 )     (17,538 )     (20,902 )
Add: FV change due to conversion on 7/29/2015     5,526     $                   5,526  
Noncurrent portion of debt   $ 42,401     $ 71,972     $ 9,544     $ 9,016     $ 132,933  

______________

(1) Including debt discount of $17.1 million related to the embedded derivatives associated with the related party and non-related party convertible debt which will be accreted to interest expense under the effective interest method over the term of the convertible debt.

 

6. Commitments and Contingencies

 

Lease Obligations

 

The Company leases certain facilities and finances certain equipment under operating and capital leases, respectively. Operating leases include leased facilities and capital leases include leased equipment (see Note 4, "Balance Sheet Components"). The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records the difference between rent payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them as a straight-line rent expense over the lease term. The Company has non-cancellable operating lease agreements for office, research and development, and manufacturing space that expire at various dates, with the latest expiration in February 2031. Rent expense under operating leases was $1.4 million and $1.3 million for the three months ended September 30, 2015 and 2014, respectively, and was $3.9 million and $4.0 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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Future minimum payments under the Company's lease obligations as of September 30, 2015, are as follows (in thousands):

 

Years ending December 31:   Capital
Leases
  Operating
Leases
  Total Lease Obligations
2015 (remaining three months)   $ 187     $ 1,696     $ 1,883  
2016     530       6,755       7,285  
2017     187       6,642       6,829  
2018           6,700       6,700  
2019           6,748       6,748  
Thereafter           25,026       25,026  
Total future minimum lease payments     904     $ 53,567     $ 54,471  
Less: amount representing interest     (70 )                
Present value of minimum lease payments     834                  
Less: current portion     (555 )                
Long-term portion   $ 279                  

 

Guarantor Arrangements

 

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or directors are serving in their official capacities. The indemnification period remains enforceable for the officer's or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future payments. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of September 30, 2015 and December 31, 2014.

 

The Company entered into the FINEP Credit Facility to finance a research and development project on sugarcane-based biodiesel (see Note 5, "Debt"). The FINEP Credit Facility is guaranteed by a chattel mortgage on certain equipment of the Company. The Company's total acquisition cost for the equipment under this guarantee is approximately R$6.0 million (approximately US$1.5 million based on the exchange rate as of September 30, 2015).

 

The Company entered into the BNDES Credit Facility to finance a production site in Brazil (see Note 5, "Debt").The BNDES Credit Facility is collateralized by a first priority security interest in certain of the Company's equipment and other tangible assets with a total acquisition cost of R$24.9 million (approximately US$6.3 million based on the exchange rate as of September 30, 2015). The Company is a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, the Company is required to provide certain bank guarantees under the BNDES Credit Facility. Accordingly, the Company has $0.2 million and $0.6 million as restricted cash as of September 30, 2015 and December 31, 2014, respectively.

 

The Company entered into loan agreements and security agreements whereby the Company pledged certain farnesene production assets as collateral (the fiduciary conveyance of movable goods) with each of Nossa Caixa and Banco Pine (see Note 5, "Debt"). The Company's total acquisition cost for the farnesene production assets pledged as collateral under these agreements is approximately R$68.0 million (approximately US$17.1 million based on the exchange rate as of September 30, 2015). The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements. 

 

The Company had an export financing agreement with ABC for approximately $2.5 million for a one year term to fund exports through March 2014. As of September 30, 2015, the loan was fully repaid. On April 8, 2015, the Company entered into another export financing agreement with the same bank for approximately $1.6 million for a one year term to fund exports through March 2016. This loan is collateralized by future exports from Amyris Brasil. The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements. 

 

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In October 2013, the Company entered into a letter agreement with Total relating to the Temasek Bridge Note and to the closing of the August 2013 Financing (or the "Amendment Agreement") (see Note 5, "Debt"). In the August 2013 Financing, the Company was required to provide the purchasers under the August 2013 SPA with a security interest in the Company’s intellectual property if Total still held such security interest as of the initial closing of the August 2013 Financing. Under the terms of a previous Intellectual Property Security Agreement by and between the Company and Total (or the "Security Agreement"), the Company had previously granted a security interest in favor of Total to secure the obligations of the Company under the Total Notes issued and issuable to Total under the Total Purchase Agreement. The Security Agreement provided that such security interest would terminate if Total and the Company entered into certain agreements relating to the formation of the Fuels JV. In connection with Total’s agreement to (i) permit the Company to grant the security interest under the Temasek Bridge Note and the August 2013 Financing and (ii) waive a secured debt limitation contained in the outstanding Total Notes issued pursuant to the Total Purchase Agreement and held by Total, the Company entered into the Amendment Agreement. Under the Amendment Agreement, the Company agreed to reduce, effective December 2, 2013, the conversion price for the Total Notes issued in 2012 (approximately $48.3 million of which are outstanding as of the date hereof) from $7.0682 per share to $2.20, the market price per share of the Company’s common stock as of the signing of the Amendment Agreement, as determined in accordance with applicable NASDAQ rules, unless the Company and Total entered into the JV Documents on or prior to December 2, 2013. The Company and Total entered into the JV agreements on December 2, 2013 and the Amendment Agreement and all security interests thereunder were automatically terminated and the conversion price of such Total Notes remained at $7.0682 per share.

 

In December 2013, in connection with the execution of JV Documents entered into by and among Amyris, Total and JVCO relating to the establishment of the JVCO (see Note 5, "Debt" and Note 7, "Joint Venture and Noncontrolling Interests"), the Company agreed to exchange the $69.0 million outstanding Total Notes issued pursuant to the Total Purchase Agreement and issue replacement 1.5% senior secured convertible notes, in principal amounts equal to the principal amount of each Total Note and grant a security interest to Total in and lien on all the Company’s rights, title and interest in and to the Company’s shares in the capital of the JVCO. Following execution of the JV Documents, all Total Notes that have been issued became Replacement Notes. Further, the $10.85 million in principal amount of such notes issued in the initial tranche of the third closing under the Total Purchase Agreement in July 2014 and the $10.85 million in principal amount of such notes issued in the second tranche of the third closing are secured Replacement Notes instead of unsecured Total Notes. "See Note 5,"Debt" for the impact of the Exchange and Maturity Treatment Agreement on the Replacement Notes".

 

The Hercules Loan Facility (see Note 5, "Debt") is collateralized by liens on the Company's assets, including certain Company intellectual property.

 

Purchase Obligations

 

As of September 30, 2015, the Company had $2.0 million in purchase obligations which included $1.1 million in non-cancellable contractual obligations and construction commitments, of which zero have been accrued as loss on purchase commitments.

 

Other Matters

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but will only be recorded when one or more future events occur or fail to occur. The Company's management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against and by the Company or unasserted claims that may result in such proceedings, the Company's management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be 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.

 

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The Company is subject to disputes and claims that arise or have arisen in the ordinary course of business and that have not resulted in legal proceedings or have not been fully adjudicated. Such matters that may arise in the ordinary course of business are subject to many uncertainties and outcomes are not predictable with assurance. Therefore, if one or more of these legal disputes or claims resulted in settlements or legal proceedings that were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for the relevant reporting period could be materially adversely affected.

 

7. Joint Ventures and Noncontrolling Interests

 

Novvi LLC

 

In September 2011, the Company and Cosan US, Inc. (or “Cosan U.S.”) formed Novvi LLC (or “Novvi”), a U.S. entity that is jointly owned by the Company and Cosan U.S.. In March 2013, the Company and Cosan U.S. entered into agreements to (i) expand their base oils joint venture to also include additives and lubricants and (ii) operate their joint venture exclusively through Novvi. Specifically, the parties entered into an Amended and Restated Operating Agreement for Novvi (or the “Operating Agreement”), which sets forth the governance procedures for Novvi and the parties' initial contribution. The Company also entered into an IP License Agreement with Novvi (or the "IP License Agreement") under which the Company granted Novvi (i) an exclusive (subject to certain limited exceptions for the Company), worldwide, royaty-free license to develop, produce and commercialize base oils, additives, and lubricants derived from Biofene for use in automotive and industrial lubricants markets, and (ii) a non-exclusive, royalty free license, subject to certain conditions, to manufacture Biofene solely for its own products. In addition, both the Company and Cosan U.S. granted Novvi certain rights of first refusal with respect to alternative base oil and additive technologies that may be acquired by the Company or Cosan U.S. during the term of the IP License Agreement. Under these agreements, the Company and Cosan U.S. each own 50% of Novvi and each party shares equally in any costs and any profits ultimately realized by the joint venture. Novvi is governed by a six member Board of Managers (or the “Board of Managers”), with three managers represented by each investor. The Board of Managers appoints the officers of Novvi, who are responsible for carrying out the daily operating activities of Novvi as directed by the Board of Managers. The IP License Agreement has an initial term of 20 years from the date of the agreement, subject to standard early termination provisions such as uncured material breach or a party's insolvency. Under the terms of the Operating Agreement, Cosan U.S. was obligated to fund its 50% ownership share of Novvi in cash in the amount of $10.0 million and the Company was obligated to fund its 50% ownership share of Novvi through the granting of an IP License to develop, produce and commercialize base oils, additives, and lubricants derived from Biofene for use in the automotive, commercial and industrial lubricants markets, which Cosan U.S. and Amyris agreed was valued at $10.0 million. In March 2013, the Company measured its initial contribution of intellectual property to Novvi at the Company's carrying value of the licenses granted under the IP License Agreement, which was zero. Additional funding requirements to finance the ongoing operations of Novvi are expected to happen through revolving credit or other loan facilities provided by unrelated parties (i.e., such as financial institutions); cash advances or other credit or loan facilities provided by the Company and Cosan U.S. or their affiliates; or additional capital contributions by the Company and Cosan U.S.

 

In April 2014, the Company purchased additional membership units of Novvi for an aggregate purchase price of $0.2 million. Also in April 2014, the Company contributed $2.1 million in cash in exchange for receiving additional membership units in Novvi. Each member owns 50% of Novvi's issued and outstanding membership units.

 

In September 2014, the Company and Cosan U.S. entered into a member senior loan agreement to grant Novvi a loan amounting to approximately $3.7 million. The loan is due on September 1, 2017 and bears interest at a rate of 0.36% per annum. Interest accrues daily and is due and payable in arrears on September 1, 2017. The Company and Cosan U.S. each agreed to provide 50% of the loan. The Company's share of approximately $1.8 million was disbursed in two installments. The first installment of $1.2 million was made in September 2014 and the second installment of $0.6 million was made in October 2014. In November 2014, the Company and Cosan U.S. entered into a second member senior loan agreement to grant Novvi a loan of approximately $1.9 million on the same terms as the loan issued in September 2014. The Company and Cosan U.S. each agreed to provide 50% of the loan. The Company disbursed its share of approximately $1.0 million in November 2014. In May 2015, the Company and Cosan U.S. entered into a third member senior loan agreement to grant Novvi a loan of approximately $1.1 million on the same terms as the loan issued in September 2014, except that the due date is May 14, 2018. As of September 30, 2015 and December 31, 2014, total loans to Novvi were $2.5 million and $1.7 million, net of imputation of interest of $1.5 million and $1.0 million as result of the below market interest rate on the loan to affiliate, respectively.

 

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In August, 2015, the Company and Cosan U.S. entered into a fourth member senior loan agreement to grant Novvi a loan of approximately $0.2 million on the same terms as the loan issued in September 2014, except that the due date is August 19, 2018.

 

The following table is a reconciliation of our equity and loans in Novvi:

 

    September 30,
(In thousands)   2015   2014
Balance at January 1   $ 2,192     $  
Loans to affiliate     770        
Imputation of interest     461        
Capital contribution (cash)           2,075  
Capital contribution (non – cash)           237  
Share in net loss offset to equity investment     (908 )     (988 )
Share in net loss offset to loans to affiliate     (1,181 )      
Accretion of imputed interest     413        
Balance at September 30   $ 1,747     $ 1,324  

 

The Company has identified Novvi as a VIE and determined that the power to direct activities, which most significantly impact the economic success of the joint venture (i.e., continuing research and development, marketing, sales, distribution and manufacturing of Novvi products), is equally shared between the Company and Cosan U.S. Accordingly, the Company is not the primary beneficiary and therefore accounts for its investment in Novvi under the equity method of accounting. The Company will continue to reassess its primary beneficiary analysis of Novvi if there are changes in events and circumstances impacting the power to direct activities that most significantly affect Novvi's economic success. Under the equity method, the Company's share of profits and losses are included in “Loss from investments in affiliates” in the condensed consolidated statements of operations. The Company recorded $0.7 million and $0.8 million for its share of Novvi's net loss for the three months ended September 30, 2015 and 2014, respectively, and $2.1 million and $1.0 million for the nine months ended September 30, 2015 and 2014, respectively. The carrying amount of the Company's equity investment in Novvi was $1.7 million and $1.3 million as of September 30, 2015 and 2014, respectively.

 

Total Amyris BioSolutions B.V.

 

In November 2013, the Company and Total formed JVCO. The common equity of JVCO is jointly owned (50%/50%) by the Company and Total, and the preferred equity of JVCO is 100% owned by the Company. The Parties have agreed that JVCO’s purpose is limited to executing the License Agreement and maintaining such licenses under it, unless and until either (i) Total elects to go forward with either the full (diesel and jet fuel) JVCO commercialization program or the jet fuel component of the JVCO commercialization program (or a “Go Decision”), (ii) Total elects to not continue its participation in the R&D Program and JVCO (or a “No-Go Decision”), or (iii) Total exercises any of its rights to buy out the Company’s interest in JVCO. Following a Go Decision, the articles and shareholders’ agreement of JVCO would be amended and restated to be consistent with the shareholders’ agreement contemplated by the July 2012 Agreements (see Note 5, "Debt" and Note 8, "Significant Agreements").

 

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The JVCO has an initial capitalization of €0.1 million (approximately US$0.1 million based on the exchange rate as of September 30, 2015). The Company has identified JVCO as a VIE and determined that the Company is not the primary beneficiary and therefore accounts for its investment in JVCO under the equity method of accounting. Following a "Go" decision, no later than six months prior to July 31, 2016, the Company and Total are required to amend the July 2012 Agreements to reflect the corporate structure of JVCO, amend and restate the articles of association of JVCO, finalize and agree on a five-year plan and an initial budget, maximize economic viability and value of JVCO and enter into the Total license agreement. The Company will reevaluate its assessment in 2016 based on the specific terms of the final shareholders' agreement.

 

On July 26, 2015, the Company entered into a Letter Agreement with Total (the “JVCO Letter Agreement”) regarding the restructuring of ownership and rights of Total Amyris BioSolutions B.V., the jointly-owned entity incorporated in November 2013 to house the JV (“TAB"), pursuant to which the parties agreed to enter into an Amended and Restated Shareholders' Agreement among the Company, Total and TAB, a Deed of Amendment of Articles of Association of TAB, an Amended & Restated Jet Fuel License Agreement among the Company and TAB, and a License Agreement regarding Diesel Fuel in the EU between the Company and Total, all in order to reflect certain changes to the structure of TAB and license grants and related rights pertaining to TAB (together, with the Pilot Plant Agreement Amendment described below, collectively, the "Commercial Agreements"). The Pilot Plant Agreement Amendment was entered into on July 26, 2015. The parties continue to finalize the terms of the Commercial Agreements related to TAB and expect to complete the transactions before the end of 2015.

 

Under the Commercial Agreements relating to TAB, the Company will grant exclusive (excluding its Brazil jet fuels business), world-wide, royalty-free rights to TAB for commercialization of farnesene- or farnesane-based jet fuel, and the parties agreed that, if TAB wishes to purchase farnesene- or farnesane for such business, they would negotiate a supply agreement on a "most-favored" pricing basis. TAB would also have an option until March 1, 2018 to purchase the assets of the jet portion of the Company's Brazil fuel business at a price based on the fair value of the commercial assets and the Company's investment in other related assets. If it exercises that option, TAB would no longer have any licenses or rights with regards to farnesene- or farnesane-based diesel fuel.

 

In addition, the Company will grant Total an exclusive, royalty-free license for the rights to offer for sale and sell in the European Union (" EU ") farnesene- or farnesane-based diesel fuel, and the parties agreed that, if Total wishes to purchase farnesene- or farnesane for such business, they would negotiate a supply agreement on a "most-favored" pricing basis. For a to-be-negotiated, commercially reasonable, "most-favored" basis royalty to be paid to Amyris, Total will also have the right to make farnesene- or farnesane anywhere in the world solely for Total to offer for sale and sell it for diesel fuel in the EU.

 

Further, in accordance with the Commercial Agreements and pursuant to the JVCO Letter Agreement, Total will cancel R&D Notes in an aggregate principal amount of $5 million, plus all PIK and accrued interest under all outstanding R&D Notes and a note in the principal amount of Euro 50,000, plus accrued interest, issued by Amyris to Total in connection with the existing TAB capitalization, in exchange for an additional 25% of TAB (giving Total an aggregate ownership stake of 75% of TAB and giving the Company an aggregate ownership stake of 25% of TAB).

 

Additionally, in connection with the restructuring of the terms of TAB and the other Commercial Agreements, Total and the Company entered into Amendment #1 (the "Pilot Plant Agreement Amendment") to that certain Pilot Plant Services Agreement dated as of April 4, 2014 (as amended, the " Pilot Plant Agreement ") whereby the Company and Total agreed to restructure the payment obligations of Total under the Pilot Plant Agreement. Under the original Pilot Plant Agreement, for a five year period, the Company is providing certain fermentation and downstream separations scale-up services and training to Total and receives an aggregate annual fee payable by Total for all services in the amount of up to approximately $900,000 per annum. Such annual fee is due in three equal installments payable on March 1, July 1 and November 1 each year during the term of the Pilot Plant Agreement. Under the Pilot Plant Agreement Amendment, in connection with the restructuring of TAB discussed above, Amyris agreed to waive a portion of these fees up to approximately $2.0 million, over the term of the Pilot Plant Agreement. The Pilot Plant Agreement Amendment is expected to complete before the end of 2015.

 

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SMA Indústria Química S.A.

 

In April 2010, the Company established SMA Indústria Química (or "SMA"), a joint venture with São Martinho S.A. (or "São Martinho"), to build a production facility in Brazil. SMA is located at the São Martinho mill in Pradópolis, São Paulo state. The joint venture agreements establishing SMA have 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 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 São Martinho would reimburse the Company up to R$61.8 million (approximately US$15.6 million based on the exchange rate as of September 30, 2015) of the construction costs after SMA commences production. After commercialization, the Company would market and distribute Amyris renewable products produced by SMA and 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 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 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 São Martinho, then São Martinho has the right to acquire the Company’s interest in SMA. If 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 São Martinho. In either case, the purchase price shall be determined in accordance with the joint venture agreements, and the Company would continue to have the obligation to acquire products produced by SMA for the remainder of the term of the supply agreement then in effect even though the Company would no longer be involved in SMA’s management.

 

The Company has a 50% ownership interest in SMA. The Company has identified SMA as 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 because 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 São Martinho’s interest in SMA are reported as noncontrolling interests in subsidiaries.

 

The Company completed a significant portion of the construction of the new facility in 2012. The Company suspended construction of the facility in 2013 in order to focus on completing and operating the Company's smaller production facility in Brotas, Brazil. In February 2014, the Company entered into an amendment to the joint venture agreement with São Martinho which updated and documented certain preexisting business plan requirements related to the recommencement of construction at the joint venture operated plant and sets forth, among other things, (i) the extension of the deadline for the commencement of operations at the joint venture operated plant to no later than 18 months following the construction of the plant no later than March 31, 2017, and (ii) the extension of an option held by São Martinho to build a second large-scale farnesene production facility to no later than December 31, 2018 with the commencement of operations at such second facility to occur no later than April 1, 2019. On July 1, 2015 SMSA filed a material fact document with CVM (Securities Exchange Commission of Brazil) that announced that certain contractual targets undertaken by the Company have not been achieved, which affects the feasibility of the project. Therefore, SMSA decided not to approve continuing construction of the plant for the joint venture with Amyris Inc and its Brazilian subsidiary Amyris Brasil Ltda. In July 2015, the Company announced that it was in discussions with SMSA regarding the continuation of the joint venture.  Specifically, the Company and SMSA agreed to continue the joint venture pending discussions through August 31, 2015 in order to evaluate the best investment options available to optimize returns and provide balanced economics for both parties. The Company now expects to enter into agreements in 2015 documenting a planned termination of the joint venture. Refer to Note 4 “Balance Sheet Components” for details of the impact of these developments on the quarter ended September 30, 2015.

 

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Glycotech

 

In January 2011, the Company entered into a production service agreement (or the "Glycotech Agreement") with Glycotech, Inc. (or "Glycotech"), under which Glycotech provides process development and production services for the manufacturing of various Company products at its leased facility in Leland, North Carolina. The Company products manufactured by Glycotech are owned and distributed by the Company. Pursuant to the terms of the Glycotech Agreement, the Company is required to pay the manufacturing and operating costs of the Glycotech facility, which is dedicated solely to the manufacture of Amyris products. The initial term of the Glycotech Agreement was for a two year period commencing on February 1, 2011 and the Glycotech Agreement renews automatically for successive one-year terms, unless terminated by the Company. Concurrent with the Glycotech Agreement, the Company also entered into a Right of First Refusal Agreement with the lessor of the facility and site leased by Glycotech (or the "ROFR Agreement"). Per conditions of the ROFR Agreement, the lessor agreed not to sell the facility and site leased by Glycotech during the term of the Glycotech 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 Glycotech'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 Glycotech Agreement. Accordingly, the Company consolidates the financial results of Glycotech. As of September 30, 2015, the carrying amounts of Glycotech's assets and liabilities were not material to the Company's condensed 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. As of September 30, 2015, the assets include $6.4 million in property, plant and equipment, $1.5 million in other assets and $0.4 million in current assets. The liabilities include $0.3 million in accounts payable and accrued current liabilities and $0.1 million in loan obligations by Glycotech to its shareholders 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, 2015   December 31, 2014
Assets*   $ 8,291     $ 22,812  
Liabilities   $ 444     $ 290  

 ________

*Net of impairment at September 30, 2015 of $7.3 million related to SMA assets (see Note 4 “Balance Sheet Components” for details).

 

The change in noncontrolling interest for the nine months ended September 30, 2015 and 2014, is summarized below (in thousands):

 

    September 30, 2015   September 30, 2014
Balance at January 1   $ 611     $ 584  
Foreign currency translation adjustment     (393 )     (37 )
Income attributable to noncontrolling interest     78       91  
Balance at September 30   $ 296     $ 638  

 

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8. Significant Agreements

 

Research and Development Activities

 

Total Collaboration Arrangement

 

In June 2010, the Company entered into a technology license, development, research and collaboration agreement (or the “Collaboration Agreement”) with Total Gas & Power USA Biotech, Inc., an affiliate of Total. This agreement provided for joint collaboration on the development of products through the use of the Company’s synthetic biology platform. In November 2011, the Company entered into an amendment of the Collaboration Agreement with respect to development and commercialization of Biofene for fuels. This represented an expansion of the initial collaboration with Total, and established a global, exclusive collaboration for the development of Biofene for fuels and a framework for the creation of a joint venture to manufacture and commercialize Biofene for diesel. In addition, a limited number of other potential products were subject to development by the joint venture on a non-exclusive basis.

 

In November 2011, the Company and Total entered into an amendment of the Collaboration Agreement (or 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 (or 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 further described below).

 

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 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.

 

In July 2012, the Company entered into a further amendment of the Collaboration Agreement that expanded Total’s investment in the Biofene collaboration, incorporated the development of certain JV products for use in diesel and jet fuel into the scope of the collaboration, and changed the structure of the funding from Total for the collaboration by establishing a convertible debt structure for the collaboration funding (see Note 5, “Debt”). In connection with such additional amendment Total and the Company also executed certain other related agreements. Under these agreements, (collectively referred to as the “July 2012 Agreements”), the parties would grant exclusive manufacturing and commercial licenses to the JV for the JV products (diesel and jet fuel from Biofene) when the JV was formed. The licenses to the JV were to be consistent with the principle that development, production and commercialization of the JV products in Brazil would remain with Amyris unless Total elected, after formation of the operational JV, to have such business contributed to the joint venture (see below for additional detail). Further, as part of the July 2012 Agreements, Total's royalty option contingency related to diesel was removed and the jet fuel collaboration was combined with the expanded Biofene collaboration. As a result, $46.5 million of payments previously received from Total that had been recorded as an advance from Total were no longer contingently repayable. Of this amount, $23.3 million was treated as a repayment by the Company and included as part of the senior unsecured convertible promissory note issued to Total in July 2012 and the remaining $23.2 million was recorded as a contract to perform research and development services, which was offset by the reduction of the capitalized deferred charge asset of $14.4 million resulting in the Company recording revenue from a related party of $8.9 million in 2012. See Note 5, "Debt" for details of the Exchange and Maturity Treament Agreements and Note 7," Joint Ventures and Noncontrolling Interest" for further details of the relationship with Total.

 

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F&F Collaboration Partner Joint Development and License Agreement

 

In April 2013, the Company entered into a joint development and license agreement with a collaboration partner. Under the terms of the multi-year agreement, the collaboration partner and the Company will jointly develop certain fragrance ingredients. The collaboration partner will have exclusive rights to these fragrance ingredients for applications in the flavors and fragrances field, and the Company will have exclusive rights in other fields. The collaboration partner and the Company will share in the economic value derived from these ingredients. The joint development and license agreement provided for up to $6.0 million in funding based upon the achievement of certain technical milestones, which are considered substantive by the Company, during the first phase of the collaboration.

 

In February 2014, the Company entered into an amendment to the joint development and license agreement with the collaboration partner noted in the preceding paragraph to proceed with the second phase of the collaboration and the development of a certain fragrance ingredient.

 

The Company recognized collaboration revenue for the three and nine months ended September 30, 2015, of $0.8 million and $2.3 million, respectively, under this agreement. As of September 30, 2015 and 2014, zero was recorded in deferred revenue.

 

F&F Collaboration Partner Master Collaboration and Joint Development Agreement

 

In November 2010, the Company entered into a Master Collaboration and Joint Development Agreement with a collaboration partner. Under the agreement, the collaboration partner was to fund technical development at the Company to produce an ingredient for the flavors and fragrances market. The Company agreed to manufacture the ingredient and the collaboration partner would market it, and the parties would share in any resulting economic value. The agreement also grants exclusive worldwide flavors and fragrances commercialization rights to the collaboration partner for the ingredient. Under further agreements, the collaboration partner has an option to collaborate with the Company to develop additional ingredients. These agreements 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 potential total payments of $6.0 million upon the achievement of certain performance milestones towards which the Company will be required to make a contributory performance. The Company concluded that these milestone payments are substantive. All performance milestones under this agreement were achieved in 2013.

 

In March 2013, the Company entered into a Master Collaboration Agreement (or the “March 2013 Agreement”) with the collaboration partner to establish a collaboration arrangement for the development and commercialization of multiple renewable flavors and fragrances compounds. Under this agreement, except for rights granted under preexisting collaboration relationships, the Company granted the collaboration partner exclusive access for such compounds to specified Company intellectual property for the development and commercialization of flavors and fragrances products in exchange for research and development funding and a profit sharing arrangement. The agreement superseded and expanded the prior collaboration agreement between the Company and the collaboration partner.

 

The agreement provided for annual, up-front funding to the Company by the collaboration partner of $10.0 million for each of the first three years of the collaboration. Payments of $10.0 million were received by the Company in each of March 2015, 2014 and 2013. The Company recognized collaboration revenues under the March 2013 Agreement with the collaboration partner of $2.5 million for each of the three months ended September 30, 2015 and 2014 and of $7.5 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively. The agreement contemplated additional funding by the collaboration partner of up to $5.0 million under three potential milestone payments, as well as additional funding by the collaboration partner on a discretionary basis. Through September 2015, the Company achieved the second performance milestone under the Master Collaboration Agreement and recognized collaboration revenues of $1.0 million for the nine months ended September 30, 2015.

 

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In addition, the March 2013 Agreement contemplated that the parties will mutually agree on a supply price for each compound and share product margins from sales of each compound on a 70/30 basis (70% for the collaboration partner) until the collaboration partner receives $15.0 million more than the Company in the aggregate, after which the parties will share 50/50 in the product margins on all compounds. The Company also agreed to pay a one-time success bonus of up to $2.5 million to the collaboration partner's for outperforming certain commercialization targets. The collaboration partner eligibility to receive the one-time success bonus commences upon the first sale of the collaboration partner's product. The March 2013 Agreement does not impose any specific research and development commitments on either party after year six, but if the parties mutually agree to perform development after year six, the agreement provides that the parties will fund it equally.

 

Under the March 2013 Agreement, the parties agreed to jointly select target compounds, subject to final approval of compound specifications by the collaboration partner. During the development phase, the Company would be required to provide labor, intellectual property and technology infrastructure and the collaboration partner would be required to contribute downstream polishing expertise and market access. The March 2013 Agreement provided that the Company would own research and development and strain engineering intellectual property, and the collaboration partner would own blending and, if applicable, chemical conversion intellectual property. Under certain circumstances such as the Company's insolvency, the collaboration partner would gain expanded access to the Company's intellectual property. Following development of flavors and fragrances compounds under the March 2013 Agreement, the March 2013 Agreement contemplated that the Company would manufacture the initial target molecules for the compounds and the collaboration partner will perform any required downstream polishing and distribution, sales and marketing.

 

In September 2014, the Company entered into a supply agreement with the collaboration partner to provide target compounds to make a certain finished ingredient and market and sell such finished ingredient and/or products to the flavors and fragrances market. The Company recognized $1.3 million revenues from product sales under this agreement for the three and nine months ended September 30, 2015.

 

Michelin and Braskem Collaboration Agreements

 

In September 2011, the Company entered into a collaboration agreement with Manufacture Francaise de Pnematiques Michelin (or “Michelin”). Under the terms of the September 2011 collaboration agreement, the Company and Michelin agreed to 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 made an upfront payment to the Company of $5.0 million.

 

In June 2014, the Company entered into a collaboration agreement with Braskem S.A. (or “Braskem”) and Michelin to collaborate to develop the technology to produce and possibly commercialize renewable isoprene. The term of the collaboration agreement commenced on June 30, 2014 and will continue, unless earlier terminated in accordance with the agreement, until the first to occur of (i) the date that is three years following the actual date on which a work plan is completed, which date is estimated to occur on or about December 30, 2020, or (ii) the date of the commencement of commissioning of a production plant for the production of renewable isoprene. The June 2014 collaboration agreement terminated and supersedes the September 2011 collaboration agreement with Michelin, and, as a result of the signing of the June 2014 collaboration agreement, the upfront payment by Michelin of $5.0 million is being rolled into the new collaboration agreement between Michelin, Braskem and the Company as Michelin's collaboration funding towards the research and development activities to be performed. As of December 31, 2014, the Company accrued a total contribution from Braskem to the collaboration of $4.0 million, of which $2.0 million was received in July 2014 and $2.0 million was received in January 2015.

 

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The Company recognized collaboration revenues of zero for the three months ended September 30, 2015 and $1.9 million for the nine months ended September 30, 2015 under this agreement. As of September 30, 2015, $6.3 million of deferred revenues was recorded in the condensed consolidated balance sheet related to these agreements.

 

Kuraray Collaboration Agreement and Securities Purchase Agreement

 

In March 2014, the Company entered into the Second Amended and Restated Collaboration Agreement with Kuraray Co., Ltd (or “Kuraray”) in order to extend the term of the original agreement dated July 21, 2011 for an additional two years and add additional fields and products to the scope of development. In consideration for the Company’s agreement to extend the term of the original collaboration agreement and add additional fields and products, Kuraray agreed to pay the Company $4.0 million in two equal installments of $2.0 million. The first installment was paid on April 30, 2014 and the second installment was due on April 30, 2015. In connection with the collaboration agreement, Kuraray signed a Securities Purchase Agreement in March 2014 to purchase 943,396 shares of the Company's common stock at a price per share of $4.24 per share. The Company issued 943,396 shares of its common stock at a price per share of $4.24 in April 2014 for aggregate cash proceeds of $4.0 million. In March 2015, the Company entered into the First Amendment to the Second Amended and Restated Collaboration Agreement with Kuraray Co., Ltd (or Kuraray) to extend the term of the original agreement until December 31, 2016 and accelerated payment to the Company of the second installment of $2.0 million to March 31, 2015.

 

The Company recognized collaboration revenues of $0.3 million for the three months ended September 30, 2015 and $1.2 million for the nine months ended September 30, 2015 under this agreement.

 

DARPA

 

In September 2015, the Company entered into a Technology Investment Agreement (the “Agreement”) with The Defense Advanced Research Projects Agency (“DARPA”), under which the Company, with the assistance of five specialized subcontractors, will work to create new research and development tools and technologies for strain engineering and scale-up activities. The program that is the subject of the Agreement is scheduled to commence on November 1, 2015 and will be performed and funded on a milestone basis, where DARPA, upon the Company’s successful completion of each milestone event in the Agreement, pays the Company the amount in the Agreement corresponding to such milestone event. Under the Agreement, the Company and its subcontractors could collectively receive DARPA funding of up to $35.0 million over the program’s four year term if all of the program’s milestones are achieved. In conjunction with DARPA’s funding, the Company and its subcontractors are obligated to collectively contribute approximately $15.5 million toward the program over its four year term (primarily by providing specified labor and/or purchasing certain equipment). The Company can elect to retain title to the patentable inventions it produces in the program, but DARPA receives certain data rights as well as a government purposes license to certain of such inventions. Either party may, upon written notice and subject to certain consultation obligations, terminate the Agreement upon a reasonable determination that the program will not produce beneficial results commensurate with the expenditure of resources.

 

Financing Agreements

 

Nomis Bay Ltd. Common Stock Purchase Agreement

 

In February 2015, the Company entered into a Common Stock Purchase Agreement (or the “Common Stock Purchase Agreement”) and a Registration Rights Agreement (or the “Registration Rights Agreement”) with Nomis Bay Ltd. (or “Nomis Bay”) under which the Company may from time to time sell up to $50.0 million of its common stock to Nomis Bay over a 24-month period. In connection with such Common Stock Purchase Agreement and Registration Rights Agreement, the Company also entered into a Placement Agent Letter Agreement (or the “Placement Agent Agreement”) with Financial West Group (or “FWG”, the Common Stock Purchase Agreement, the Registration Rights Agreement and the Placement Agent Agreement are collectively referred to as the “Committed Equity Facility Agreements”). The equity commitment arrangement entered into under the Committed Equity Facility Agreements is sometimes referred to as a committed equity line financing facility. Subject to customary covenants and conditions, from time to time over the 24-month term, and in the Company’s sole discretion, the Company may present Nomis Bay with up to 24 draw down notices requiring Nomis Bay to purchase a specified dollar amount of shares of the Company’s common stock, based on the volume weighted average price of our common stock over 10 consecutive trading days prior to the date the Company delivers a draw down notice (or the “10-Day VWAP”). The per share purchase price for these shares equals the daily volume weighted average price of the Company’s common stock on each date during the 10 consecutive trading days following delivery of the draw down notice (or a “Draw Down Period”) on which shares are purchased, less a discount ranging from 3.0% to 6.25%, which discount is based on the 10-Day VWAP. The maximum amount of shares that may be sold in any Draw Down Period ranges from shares having aggregate purchase prices of $325,000 to $3,250,000, based on the 10-Day VWAP. Alternatively, in the Company’s sole discretion, but subject to certain limitations, the Company may require Nomis Bay to purchase a percentage of the daily trading volume of the Company’s common stock for each trading day during the Draw Down Period. The Company will not sell under the Common Stock Purchase Agreement a number of shares of voting common stock which, when aggregated with all other shares of voting common stock then beneficially owned by Nomis Bay and its affiliates, would result in the beneficial ownership by Nomis Bay or any of its affiliates of more than 9.9% of the then issued and outstanding shares of common stock.

 

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Under the Committed Equity Facility Agreements, the Company agreed to pay up to $35,000 of Nomis Bay’s legal fees and expenses. The Company also agreed to pay Nomis Bay a commitment fee of $0.1 million which was paid at the signing of the Purchase Agreement, and $0.3 million paid in May 2015. The issuance of the shares of common stock to Nomis Bay would be exempt from registration under the Securities Act pursuant to the exemption for transactions by an issuer not involving a public offering. The Company agreed to indemnify Nomis Bay and its affiliates for losses related to a breach of the representations and warranties by the Company under the Committed Equity Facility Agreements and the other transaction documents, or any action instituted against Nomis Bay or its affiliates due to the transactions contemplated by the Committed Equity Facility Agreements or other transaction documents, subject to certain limitations.

 

Under the Registration Rights Agreement, the Company granted to Nomis Bay certain registration rights related to the shares issuable in accordance with the Common Stock Purchase Agreement and agreed to use its commercially reasonable efforts to prepare and file with the SEC one or more registration statements for the purpose of registering the resale of the maximum shares of common stock issuable pursuant to the Common Stock Purchase Agreement.

 

Under the Placement Agent Agreement, the Company agreed to pay Financial West Group ("FWG") a fee not to exceed $15,000 in the aggregate for FWG’s reasonable attorney’s fees and expenses incurred in connection with the transaction .

 

Naxyris Securities Purchase Agreement

 

In March, 2015, the Company entered into a Securities Purchase Agreement (or the “Naxyris SPA”) for the sale of up to $10.0 million in principal amount of an unsecured convertible note of the Company (or the “Naxyris Note”) to Naxyris, S.A. (or “Naxyris”), an existing holder of more than 5% of the Company’s outstanding common stock as of September 30, 2015. Naxyris is an affiliate of Carole Piwnica, a member of the Company’s Board of Directors (or the “Board”) who was designated by Naxyris to serve on the Board under a February 2012 letter agreement among the Company, Naxyris and certain other investors in the Company. The Naxyris SPA contemplated that the Naxyris Note may be issued in one closing to occur at the option of the Company at any time prior to the earlier of March 31, 2016 or the Company completing a new financing (or series of financings) of equity, debt or similar instruments in the amount of at least $10.0 million in the aggregate (excluding amounts that may be raised under existing commitments and agreements in existence as of March 30, 2015), following the satisfaction of certain closing conditions, including the receipt of certain third party consents, and required that the Company pay a commitment availability fee of $0.2 million to Naxyris on April 1, 2015. The agreement expired in July 2015 following the Company’s private placement of shares of its common stock, as described below.

 

Private Offering

 

In July 2015, the Company sold and issued 16,025,642 shares of the Company’s Common Stock, $0.0001 par value per share (the “ Common Stock ”), at a price per share of $1.56, under a Securities Purchase Agreement, dated as of July 24, 2015 (the “SPA”), by and among the Company, Foris Ventures, LLC, Wolverine Flagship Fund Trading Limited, Nomis Bay Ltd., Total, Connective Capital I Master Fund, LTD, Connective Capital Emerging Energy QP, LP and Naxyris SA (collectively, the “ Purchasers ”). Pursuant to the SPA, the Company agreed to grant to each of the Purchasers a Private Offering Warrant with a term of five years exercisable at an exercise price of $0.01 per share for the purchase of a number of shares of the Company’s common stock equal to 10% of the shares purchased by such investor. The exercisability of the Private Offering Warrants was subject to stockholder approval, which was obtained on September 17, 2015.

 

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Second Hercules Amendment

 

In March 2015, the Company and Hercules entered into the Second Hercules Amendment. Pursuant to the Second Hercules Amendment, the parties agreed to, among other things, establish an additional credit facility in the principal amount of up to $15.0 million, which would be available to be drawn by the Company at its sole election (in increments of $5.0 million) through the earlier of March 31, 2016 or such time as the Company raises an aggregate of at least $20.0 million through the sale of new equity securities, subject to certain conditions, including the receipt of third party consents and a requirement to first make certain draw-downs under an equity line of credit that the Company previously secured (to the extent the Company is permitted to do so under the terms thereof) The additional credit facility expired in July 2015 following the Company’s private placement of shares of its common stock, as described above.

 

9. Goodwill and Intangible Assets

 

The following table presents the components of the Company's intangible assets (in thousands):

 

        September 30, 2015   December 31, 2014
    Useful Life in Years   Gross Carrying Amount   Accumulated Amortization   Net Carrying Value   Gross Carrying Amount   Accumulated
Amortization/
Impairment
  Net Carrying Value
In-process research and development     Indefinite     $ 8,560     $ 3,035     $ 5,525     $ 8,560     $ (3,035 )   $ 5,525  
Acquired licenses and permits     2       772       (772 )           772       (772 )      
Goodwill     Indefinite       560             560       560             560  
            $ 9,892     $ (3,807 )   $ 6,085     $ 9,892     $ (3,807 )   $ 6,085  

 

The intangible assets acquired through the acquisition of Draths Corporation in October 2011 of in-process research and development (or “IPR&D”) of $8.6 million 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 (increase) its net income (loss) for the period in which the related impairment charges occur. During the fourth quarter of 2014, the Company updated its ongoing analysis of the technical and commercial viability of the IPR&D. The complex scientific and significant funding requirements of certain potential products, caused the Company to re-focus its research and development efforts on a narrower range of potential products. As a result of the change in strategy, the forecast discounted future cash flows of the IPR&D were updated, resulting in an impairment to the value of the IP&D assets for the year ended December 31, 2014 of $3.0 million.

 

Acquired licenses and permits are amortized using a straight-line method over their estimated useful life. Amortization expense for these intangibles was zero for the nine months ended September 30, 2015 and 2014. As of September 30, 2015, acquired licenses and permits were fully amortized.

 

The Company has a single reportable segment (see Note 15, “Reporting Segments” for further details). Consequently, all of the Company's goodwill is attributable to the single reportable segment.

 

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10. Stockholders’ Deficit

 

Common Stock Warrants

 

In December 2011, in connection with a capital lease agreement, the Company issued warrants to purchase 21,087 shares of the Company's common stock at an exercise price of $10.67 per share. The Company estimated the fair value of these warrants as of the issuance date to be $0.2 million and recorded these warrants as other assets, amortizing them 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%, expected volatility of 86% and zero expected dividend yield. These warrants remain unexercised and outstanding as of September 30, 2015.

 

In October 2013, in connection with the issuance of the Tranche I Notes (see Note 5, "Debt"), the Company issued to Temasek contingently exercisable warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.01 per share. The Company estimated the fair value of these warrants as of the issuance date at $1.3 million and recorded these warrants as debt issuance cost to be amortized over the term of the note. The fair-value was calculated using a Monte Carlo simulation valuation model based on the contractual term of the warrants of 3.4 years, risk free interest rate of 0.77%, expected volatility of 45% and zero expected dividend yield. These warrants have been exercised as of September 30, 2015 and $2.6 million for the quarter ended September 30, 2015.

 

The Temasek Exchange Warrant and Total Funding Warrant issued under the Exchange Agreement were recognized in equity at fair value on July 29, 2015. The fair value was calculated using a Black-Scholes valuation model based on the contractual term of the warrants, risk free interest rate of 2%, expected volatility of 74% and zero expected dividend yield. See Note 5, "Debt," for further details.

 

Each of these warrants includes a cashless exercise provision which permits 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, 2015 and 2014, no warrants were exercised through the cashless exercise provision.

 

As of September 30, 2015 and 2014, the Company had 50,699,368 and 1,021,087, respectively, of unexercised common stock warrants.

 

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11. Stock-Based Compensation

 

The Company’s stock option activity and related information for the nine months ended September 30, 2015 was as follows:

 

    Number
Outstanding
  Weighted-
Average
Exercise
Price
  Weighted-Average
Remaining
Contractual
Life (Years)
  Aggregate
Intrinsic
Value
                (in thousands)
Outstanding - December 31, 2014     10,539,978     $ 6.10       7.22     $ 50  
Options granted     2,582,353     $ 1.98              
Options exercised     (10,750 )   $ 1.41              
Options cancelled     (1,803,902 )   $ 5.06              
Outstanding - September 30, 2015     11,307,679     $ 5.33       7.16     $ 283  
Vested and expected to vest after September 30, 2015     10,603,529     $ 5.52       7.04     $ 245  
Exercisable at September 30, 2015     6,075,541     $ 7.53       5.77     $ 40  

 

The aggregate intrinsic value of options exercised under all option plans was $0.0 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and was $0.0 million and $0.6 million for the nine months ended September 30, 2015 and 2014, respectively, determined as of the date of option exercise.

 

The Company’s restricted stock units (or "RSUs") and restricted stock activity and related information for the nine months ended September 30, 2015 was as follows:

 

    RSUs   Weighted-Average Grant-Date Fair Value   Weighted Average Remaining Contractual Life (Years)
Outstanding - December 31, 2014     1,975,503     $ 3.59       0.93  
Awarded     2,767,355     $ 1.92        
Vested     (929,322 )   $ 3.19        
Forfeited     (255,293 )   $ 2.95        
Outstanding - September 30, 2015     3,558,243     $ 2.63       1.54  
Expected to vest after September 30, 2015     3,029,826     $ 2.63       1.42  

 

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The following table summarizes information about stock options outstanding as of September 30, 2015:

 

    Options Outstanding   Options Exercisable
Exercise Price   Number of Options   Weighted-
Average
Remaining
Contractual Life
(Years)
  Weighted-Average Exercise Price   Number of Options   Weighted-Average Exercise Price
$0.10—$1.80     687,093       8.74     $ 1.70       68,093     $ 1.43  
$1.96—$1.96     1,412,533       9.62     $ 1.96           $  
$1.98—$2.73     1,200,797       7.72     $ 2.53       478,181     $ 2.66  
$2.75—$2.87     1,299,025       7.55     $ 2.83       800,584     $ 2.83  
$2.89—$3.44     1,031,420       7.45     $ 3.11       613,405     $ 3.10  
$3.51—$3.51     2,027,865       8.28     $ 3.51       738,773     $ 3.51  
$3.55—$3.93     1,515,548       5.16     $ 3.87       1,302,162     $ 3.88  
$4.06—$16.00     1,164,094       4.34     $ 9.17       1,131,706     $ 9.27  
$16.50—$26.84     909,304       5.13     $ 23.04       882,637     $ 22.93  
$30.17—$30.17     60,000       5.45     $ 30.17       60,000     $ 30.17  
$0.10—$30.17     11,307,679       7.16     $ 5.33       6,075,541     $ 7.53  

 

Stock-Based Compensation Expense

 

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

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2014   2015   2014
Research and development   $ 530     $ 915     $ 1,776     $ 2,622  
Sales, general and administrative     1,726       2,657       5,188       8,147  
Total stock-based compensation expense   $ 2,256     $ 3,572     $ 6,964     $ 10,769  

 

As of September 30, 2015, there was unrecognized compensation expense of $7.8 million related to stock options, and the Company expects to recognize this expense over a weighted average period of 2.78 years. As of September 30, 2015, there was unrecognized compensation expense of $5.6 million related to RSUs, and the Company expects to recognize this expense over a weighted average period of 2.60 years.

 

Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant. Stock-based compensation expense for stock options and employee stock purchase plan rights is estimated at the grant date and offering date, respectively, based on the fair-value using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:

 

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    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2014   2015   2014
Expected dividend yield     %     %     %     %
Risk-free interest rate     2 %     2 %     2 %     2 %
Expected term (in years)     6.03       6.06       6.00       6.09  
Expected volatility     74 %     74 %     74 %     75 %

 

Expected Dividend Yield —The Company has never paid dividends and does not expect to pay dividends.

 

Risk-Free Interest Rate —The risk-free interest rate was based on the market yield currently available on United States Treasury securities with maturities approximately equal to the option’s expected term.

 

Expected Term —Expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company’s assumptions about the expected term have been based on that of companies that have similar industry, life cycle, revenue, and market capitalization and the historical data on employee exercises.

 

Expected Volatility —The expected volatility is based on a combination of historical volatility for the Company's stock and the historical stock volatilities of several of the Company’s publicly listed comparable companies over a period equal to the expected terms of the options, as the Company does not have a long trading history.

 

Forfeiture Rate —The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.

 

Each of the inputs discussed above is subjective and generally requires significant management and director judgment.

 

12. Employee Benefit Plan

 

The Company established a 401(k) Plan to provide tax deferred salary deductions for all eligible employees. Participants may make voluntary contributions to the 401(k) Plan up to 90% of their eligible compensation, limited by certain Internal Revenue Service (or the "IRS") restrictions. Effective January 2014, the Company implemented a discretionary employer match plan whereby the Company will match employee contributions up to the IRS limit or 90% of compensation, with a minimum one year of service required for vesting. The total matching amount for the three and nine months ended September 30, 2015 was $0.1 million and $0.4 million, respectively.

 

13. Related Party Transactions

 

Related Party Financings

 

See the Naxyris Securities Purchase Agreement of Note 8 “ Significant Agreements ” for a description of transaction with Naxyris, a related party of the Company.

 

As of September 30, 2015 and December 31, 2014, convertible notes with related parties were outstanding in aggregate principal amount of $42.4 million and $115.2 million, respectively, net of debt discount of $1.7 million and $53.8 million, respectively. The Company recorded a loss from extinguishment of debt from the settlement, exchange and cancellation of related party convertible notes of $5.9 million and zero for each of three months ended September 30, 2015 and 2014, and, $5.9 million and $10.5 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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The fair value of the derivative liability related to the related party convertible notes as of September 30, 2015 and December 31, 2014 was $35.6 million and $39.8 million, respectively. The Company recognized a loss from change in fair value of the derivative instruments of $12.4 million and $3.1 million for the three months ended September 30, 2015 and 2014, respectively, and a loss from change in fair value of the derivative instruments of $0.7 million for the nine months ended September 30, 2015 and a gain from change in fair value of the derivative instruments of $68.2 million for the nine months ended September 30, 2014, respectively, related to these derivative liabilities (see Note 3, "Fair Value of Financial Instruments").

 

In July, 2015, the Company sold and issued 16,025,642 shares of the Company’s Common Stock, $0.0001 par value per share (the “ Common Stock ”), at a price per share of $1.56, under a Securities Purchase Agreement, dated as of July 24, 2015 (the “SPA”) for a total of $25.0 million. Pursuant to the SPA, the Company agreed to grant to each of the Purchasers a Private Offering Warrant with a term of five years exercisable at an exercise price of $0.01 per share for the purchase of a number of shares of the Company’s common stock equal to 10% of the shares purchased by such investor. Among the investors of the SPA were Total Energies Nouvelles Activites, Foris Ventures, LLC, and Naxyris SA, all related parties to the Company. The related parties purchased 13,141,029 shares or $20.5 million of the SPA.

 

Refer to Note 5, "Debt", for details of the related party transactions under the Exchange and Maturity Treatment agreements.

 

See Note 18, “Subsequent Events,” for information regarding changes since September 30, 2015 to certain related party convertible notes.

 

Related Party Revenues

 

The Company recognized related party revenues from product sales to Total of $2,000 and $0.2 million for the three months ended September 30, 2015 and 2014, respectively, and $2,000 and $0.3 million for the nine months ended September 30, 2015 and 2014, respectively. Related party accounts receivable from Total as of September 30, 2015 and December 31, 2014, were both $0.3 million, which is related to a sale of jet fuel.

 

Transactions with affiliate, Novvi LLC

 

See Note 7, "Joint Ventures and Noncontrolling Interest" for details of the Company's loans to its affiliate, Novvi LLC. Related party accounts receivable from Novvi as of September 30, 2015 and December 31, 2014 was $0.3 million and $0.1 million, respectively, which was related to operating expenses and rent.

 

Joint Venture with Total

 

In November 2013, the Company and Total formed JVCO and, in July 2015, the Company entered into a letter agreement with Total regarding the restructuring of ownership and rights of Total Amyris BioSolutions B.V., the jointly owned entity formed in November 2013 to house the joint venture, both as discussed above under Note 7, "Joint Venture and Noncontrolling Interests."

 

Pilot Plant Agreements

 

In May 2014, the Company received the final consents necessary for the Pilot Plant Services Agreement (or "Pilot Plant Services Agreement") and a Sublease Agreement (or the "Sublease Agreement"), each dated as of April 4, 2014 (collectively the “Pilot Plant Agreements”), between the Company and Total. The Pilot Plant Agreements generally have a term of five years. Under the terms of the Pilot Plant Services Agreement, the Company will provide certain fermentation and downstream separations scale-up services and training to Total and will receive an aggregate annual fee payable by Total for all services in the amount of up to approximately $0.9 million. Under the Sublease Agreement, the Company will receive an annual base rent payable by Total of approximately $0.1 million. In July 2015, the Company and Total entered into an amendment to the Pilot Plan Agreement (the “Pilot Plant Amendment”) whereby the parties agreed to restructure Total’s payment obligations under the Pilot Plant Agreement. Under the Pilot Plant Amendment, in connection with the restructuring of TAB discussed above, the Company agreed to waive a portion of the annual fees up to approximately $2.0 million over the term of the Pilot Plant Agreement. The Company expects to complete the Pilot Plant Amendment before the end of 2015.

 

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As of September 30, 2015, the Company had received $1.7 million in cash under the Pilot Plant Agreements from Total. In connection with these arrangements, sublease payments and service fees of $0.3 million and $0.8 million were offset against cost and operating expenses for the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, $0.2 million of cash received under the Pilot Plant Agreements from Total was recorded as "Accrued and other current liabilities" on the condensed consolidated balance sheet.

 

14. Income Taxes

 

The Company recorded a provision for income taxes for the three months ended September 30, 2015 and 2014 of $0.1 million and $0.1 million, respectively and for the nine months ended September 30, 2015 and 2014 of $0.4 million and $0.4 million, respectively. The provision for income taxes for the nine months ended September 30, 2015 and 2014 consisted of an accrual of Brazilian withholding tax on intercompany interest liability. Other than the above mentioned provision for income tax, no additional provision for income taxes has been made, net of the valuation allowance, due to cumulative losses since the commencement of operations.

 

On December 15, 2011, the IRS completed its audit of the Company for tax year 2008 which concluded that there were no adjustments resulting from the audit. While the statutes are closed for tax year 2008, the US federal tax carryforwards (net operating losses and tax credits) may be adjusted by the IRS in the year in which the carryforward is utilized.

 

15. Reporting Segments

 

The chief operating decision maker for the Company is the chief executive officer. The chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity comprised of research and development and sales of fuels and farnesene-derived products and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable segment and operating segment structure.

 

Revenues by geography are based on the location of the customer. The following tables set forth revenue and long-lived assets by geographic area (in thousands):

 

Revenues

    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2014   2015   2014
United States   $ 6,177     $ 10,189     $ 15,550     $ 14,977  
Brazil     964       1,933       3,850       3,983  
Europe     459       2,836       2,138       9,174  
Asia     991       1,383       2,769       3,555  
Total   $ 8,591     $ 16,341     $ 24,307     $ 31,689  

 

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Long-Lived Assets (Property, Plant and Equipment)

    September 30, 2015   December 31, 2014
United States   $ 39,417     $ 44,418  
Brazil     42,206       74,197  
Europe     318       365  
Total   $ 81,941     $ 118,980  

 

16. Comprehensive Income (Loss)

 

Comprehensive income (loss) represents all changes in stockholders’ deficit except those resulting from investments or contributions by stockholders. The Company’s foreign currency translation adjustments represent the components of comprehensive 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, 2015   December 31, 2014
Foreign currency translation adjustment, net of tax   $ (48,932 )   $ (29,977 )
Total accumulated other comprehensive loss   $ (48,932 )   $ (29,977 )

 

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17. Net Loss Attributable to Common Stockholders and Net Loss per Share

 

The Company computes net loss per share in accordance with ASC 260, “Earnings per Share.” Basic net loss per share of common stock is computed by dividing the Company’s net loss attributable to Amyris, Inc. common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock is computed by giving effect to all potentially dilutive securities, including stock options, restricted stock units, common stock warrants, convertible promissory notes using the treasury stock method or the as converted method, as applicable. For the three and nine months ended September 30, 2015, basic net loss per share was the same as diluted net loss per share because the inclusion of all potentially dilutive securities outstanding was anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss was the same for those periods.

 

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,
    2015   2014   2015   2014
Numerator:                                
Net loss attributable to Amyris, Inc. common stockholders   $ (76,664 )   $ (36,641 )   $ (176,034 )   $ (55,735 )
Interest on convertible debt                       4,835  
Accretion of debt discount                       3,856  
Gain from change in fair value of derivative instruments                       (57,580 )
Net loss attributable to Amyris, Inc. common stockholders after assumed conversion   $ (76,664 )   $ (36,641 )   $ (176,034 )   $ (104,624 )
                                 
Denominator:                                
Weighted average shares of common stock outstanding for basic EPS     140,374,297       78,980,402       100,103,007       78,146,365  
Basic loss per share   $ (0.55 )   $ (0.46 )   $ (1.76 )   $ (0.71 )
                                 
Weighted average shares of common stock outstanding     140,374,297       78,980,402       100,103,007       78,146,365  
Effect of dilutive securities:                                
Convertible promissory notes     0                   32,968,436  
Weighted common stock equivalents     0                   32,968,436  
                                 
Diluted weighted-average common shares     140,374,297       78,980,402       100,103,007       111,114,801  
Diluted loss per share   $ (0.55 )   $ (0.46 )   $ (1.76 )   $ (0.94 )

 

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock because including them would have been anti-dilutive:

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2015   2014   2015   2014
Period-end stock options to purchase common stock     11,307,679       10,340,375       11,307,679       10,340,375  
Convertible promissory notes     43,451,433       72,367,114       43,451,433       39,283,005  
Period-end common stock subject to repurchase                        
Period-end common stock warrants     2,901,926       1,021,087       2,901,926       1,021,087  
Period-end restricted stock units     3,558,243       2,090,252       3,558,243       2,090,252  
Total     61,219,281       85,818,828       61,219,281       52,734,719  

 

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18. Subsequent Events

 

Convertible Senior Notes

 

On October 20, 2015, the Company sold and issued $57.6 million aggregate principal amount of the Company's 9.50% Convertible Senior Notes due 2019 in a private placement.

The notes pay interest semi-annually at a rate of 9.50% per annum and mature on April 15, 2019, unless earlier converted or repurchased. Interest is payable, at the Company's election, entirely in cash or entirely in shares of common stock. The notes have an initial conversion rate, subject to adjustment, of 443.6557 shares of the Company's common stock per $1,000 principal amount of the notes, representing a conversion price of approximately $2.25 per share of the Company's common stock.

The notes are convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the notes will be settled in shares of the Company's common stock. With respect to any conversion on or after the earlier of (i) the date that a registration statement covering the resale of common stock issuable upon conversion of the notes, in connection with an early conversion payment or as interest payments on the notes, is effective or (ii) April 15, 2016, in addition to the shares deliverable upon conversion, holders will be entitled to receive a payment equal to the present value of the remaining scheduled payments of interest that would have been made on the notes being converted from the date of conversion (or, in the case of conversion between a record date and the following interest payment date, from such interest payment date) until the earlier of the date that is three years after the date the Company receives such notice of conversion or maturity.

The net proceeds from the offering after offering expenses were $54.4 million. The Company expects to use the net proceeds from the offering of the notes for general corporate purposes, which may include the development of the Company's sales and marketing infrastructure, as well as other strategic transactions and acquisitions. In addition, the Company used approximately $18.3 million of the proceeds of the offering to repurchase $22.9 million aggregate principal amount of the Company's outstanding 6.50% Convertible Senior Notes due 2019 and approximately $8.8 million to repurchase $9.7 million aggregate principal amount of the Company's outstanding 3% Convertible Senior Notes due 2017, in each case held by purchasers of notes participating in the offering.

 

Hercules Loan Facility

 

The Company’s loan facility with Hercules requires the Company to maintain unrestricted, unencumbered cash in U.S. bank accounts an amount equal to at least 50% of the principal amount outstanding under such facility. The Company received a waiver from Hercules with respect to non-compliance with such covenants. As of the date of issuance of this report, the Company is in compliance with all its Hercules debt agreements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements include, but are not limited to, statements concerning our strategy of achieving a significant reduction in net cash outflows in 2015, future production capacity and other aspects of our future operations, ability to improve our production efficiencies, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

 

Trademarks

 

Amyris, the Amyris logo, Biofene, Biossance, Dial-A-Blend, Diesel de Cana, Evoshield, µPharm, Muck Daddy, Myralene, Neossance, Beauty is in our biology, No Compromise, and You Muck Up. We Clean Up. are trademarks, service marks, registered trademarks or registered service marks of Amyris, Inc. This report also contains trademarks and trade names of other business that are the property of their respective holders

 

Overview

 

Amyris, Inc. (referred to as the “Company,” “Amyris,” “we,” “us,” or “our”) is a renewable products company focused on providing sustainable alternatives to a broad range of petroleum-sourced products. We developed innovative microbial engineering and screening technologies that modify the way microorganisms process sugars. We are using our proprietary industrial bioscience technology to design microbes, primarily yeast, and use them as living factories in established fermentation processes to convert plant-sourced sugars into renewable hydrocarbons. We are developing, and, in some cases, already commercializing, products from these hydrocarbons in several target industry sectors, including cosmetics, lubricants, flavors and fragrances, performance materials, and transportation fuels. We call these No Compromise products because we design them to perform comparably to or better than currently available products.

 

We have been applying our industrial bioscience technology platform to provide alternatives to a broad range of petroleum-sourced products. We have focused our development efforts on the production of Biofene, our brand of renewable farnesene, a long-chain, branched liquid hydrocarbon molecule. Using Biofene as a first commercial building block molecule, we are developing a wide range of renewable products for our target markets.

 

While our platform is able to utilize a wide variety of feedstocks, we are focusing our large-scale production plans primarily on the use of Brazilian sugarcane as our feedstock because of its abundance, low cost and relative price stability. We have also been able to produce Biofene through the use of other feedstocks such as sugar beets, corn dextrose, sweet sorghum and cellulosic sugars.

 

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Our first purpose-built, large-scale Biofene production plant commenced operations in southeastern Brazil in December 2012. This plant is located in Brotas, in the state of São Paulo, Brazil, and is adjacent to an existing sugar and ethanol mill.

 

Our business strategy is focused on our commercialization efforts of specialty products while moving commodity products, including our fuels and base oil lubricants products, into joint venture arrangements with established industry leaders. We believe this approach will permit access to the capital and resources necessary to support large-scale production and global distribution for our products. Our initial renewable products efforts have been focused on cosmetics, niche fuel opportunities, fragrance oils, and performance materials sector.

 

Relationship with Total

 

In July 2012 and December 2013, we entered into a series of agreements to establish a research and development program and form a joint venture with Total Energies Nouvelles Activités USA (formerly known as Total Gas & Power USA, SAS, and referred to as “Total”) to produce and commercialize Biofene-based diesel and jet fuels, and successfully formed such joint venture in December 2013 (or the "July 2012 Agreements"). With an exception for our fuels business in Brazil, the collaboration and joint venture established the exclusive means for us to develop, produce and commercialize fuels from Biofene. We granted the joint venture exclusive licenses under certain of our intellectual property to make and sell joint venture products. We also granted the joint venture, in the event of a buy-out of our interest in the joint venture by Total (which Total is entitled to do under certain circumstances described below), a non-exclusive license to optimize or engineer yeast strains used by us to produce farnesene for the joint venture’s diesel and jet fuels. As a result of these licenses, Amyris generally no longer has an independent right to make or sell Biofene fuels outside of Brazil without the approval of Total.

 

Our agreements with Total relating to our fuels collaboration created a convertible debt financing structure for funding the research and development program. The collaboration agreements contemplated approximately $105.0 million in financing for the collaboration, which as of January 2015, had been completely funded by Total.

 

In July, 2015, we entered into a Letter Agreement with Total (the "JVCO Letter Agreement") regarding the restructuring of ownership and rights of Total Amyris BioSolutions B.V., a jointly owned entity incorporated in November, 2013 to house the JV ("TAB"), pursuant to which the parties agreed to enter into an Amended and Restated Shareholders' Agreement among us, Total and TAB, a Deed of Amendment of Articles of Association of TAB, an Amended & Restated Jet Fuel License Agreement among us and TAB, and a License Agreement regarding Diesel Fuel in the EU between us and Total, all in order to reflect certain changes to the structure of TAB and license grants and related rights pertaining to TAB (together, with the Pilot Plant Agreement Amendment, collectively, the "Commercial Agreements"). The parties continue to finalize the terms of the Commercial Agreements related to TAB and expect to complete the transaction before the end of 2015.

 

Under the Commercial Agreements relating to TAB, we will grant exclusive (excluding its Brazil jet fuels business), world-wide, royalty-free rights to TAB for commercialization of farnesene- or farnesane-based jet fuel, and the parties agreed that, if TAB wishes to purchase farnesene- or farnesane for such business, they would negotiate a supply agreement on a "most-favored" pricing basis. TAB would also have an option until March 1, 2018 to purchase the assets of the jet portion of the Company's Brazil fuel business at a price based on the fair value of the commercial assets and our investment in other related assets. TAB will no longer have any licenses or rights with regards to farnesene- or farnesane-based diesel fuel.

 

In addition, we will grant Total an exclusive, royalty-free license for the rights to offer for sale and sell in the European Union ("EU") farnesene- or farnesane-based diesel fuel, and the parties agreed that, if Total wishes to purchase farnesene- or farnesane for such business, they would negotiate a supply agreement on a "most-favored" pricing basis. For a to-be-negotiated, commercially reasonable, "most-favored" basis royalty to be paid to Amyris, Total will also have the right to make farnesene- or farnesane anywhere in the world solely for Total to offer for sale and sell it for diesel fuel in the EU.

 

Further, in accordance with the Commercial Agreements and pursuant to the JVCO Letter Agreement, Total will cancel R&D Notes in an aggregate principal amount of $5.0 million, plus all PIK and accrued interest under all outstanding R&D Notes and a note in the principal amount of Euro 50,000, plus accrued interest, issued by Amyris by Total in connection with the existing TAB capitalization, in exchange for an additional 25% of TAB, giving Total an aggregate ownership stake of 75% of TAB and giving us an aggregate ownership stake of 25% of TAB. The parties continue to finalize the terms of the Commercial Agreements related to TAB and expect to complete the transaction before the end of 2015.

 

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Sales and Revenue

 

To commercialize our initial Biofene-derived product, squalane, in the cosmetics sector for use as an emollient, we have entered into certain marketing and distribution agreements in Europe, Asia, and North America. As an initial step towards commercialization of Biofene-based diesel, we have entered into agreements with municipal fleet operators in Brazil. Our diesel fuel is supplied to a Brazilian fuel distributor which blends our product with petroleum diesel and sells to a number of bus fleet operators. Pursuant to our agreements with Total, future commercialization of our jet fuel products outside of Brazil would generally occur exclusively through certain agreements entered into by and among Amyris, Total and Total Amyris BioSolutions B.V. (or JVCO). For the industrial lubricants market, we established a joint venture with Cosan for the worldwide development, production and commercialization of renewable base oils in the lubricant sector.

 

Financing

 

In January 2014, we sold and issued, for face value, approximately $34.0 million of convertible promissory notes in Tranche II Notes as described in more detail in Note 5, "Debt".

 

In March 2014, we entered into a securities purchase agreement with Kuraray under which we agreed to sell shares of our common stock at a price equal to the greater of $2.88 per share or the average daily closing prices per share on the NASDAQ Stock Market for the three month period ending March 27, 2014, for an aggregate purchase price of $4.0 million. In April 2014, we completed the sale of common stock to Kuraray and issued 943,396 shares of our common stock at a price per share of $4.24 for aggregate proceeds of approximately $4.0 million.

 

In March 2014, we entered into an export financing agreement with Banco ABC Brasil S.A. (or ABC) for approximately $2.2 million to fund exports through March 2015. This loan was collateralized by future exports from our subsidiary in Brazil.

 

In March 2014, we entered into a Loan and Security Agreement (or, as amended, the “Hercules Loan Facility”) with Hercules Technology Growth Capital, Inc. (or “Hercules”) under which we issued to Hercules, secured debt in the aggregate amount of $25.0 million. In June 2014, we entered into a First Amendment of the Loan and Security Agreement and agreed to, among other things, issue an additional $5.0 million of secured debt to Hercules. In March 2015, we entered into a Second Amendment to the Loan and Security Agreement, under which, subject to certain terms and conditions, we have the option to draw an additional $15.0 million from Hercules in up to three installments of $5.0 million each. The Hercules Loan Facility, as amended, is described in more detail below under "Liquidity and Capital Resources."

 

In May 2014, we sold and issued $75.0 million aggregate principal amount of 6.50% Convertible Senior Notes due 2019 to Morgan Stanley & Co. LLC as the Initial Purchaser in a private placement, and for initial resale by the Initial Purchaser to qualified institutional buyers in the Rule 144A Convertible Note Offering (as described in more detail below under "Liquidity and Capital Resources").

 

In July 2014, we closed on the initial installment of the $21.7 million in convertible notes from Total under the July 2012 Agreements as described in more detail in Note 5, "Debt", in the amount of $10.85 million and in January 2015, we closed on the second installment in the amount of $10.85 million.

 

In July 2015, we entered into a securities purchase agreement (the “SPA”) with certain purchasers under which we agreed to sell 16,025,642 shares of our common stock at a price per share of $1.56, with aggregate proceeds to the Company of $25 million (the "Private Offering"). The sale of common stock under the SPA was completed on July 29, 2015. Pursuant to the SPA, the Company also granted to each of the purchasers a Private Offering Warrant exercisable at an exercise price of $0.01 per share for the purchase of a number of shares of the Company’s common stock equal to 10% of the shares purchased by such investor. The exercisability of the Private Offering Warrants was subject to stockholder approval, which was obtained on September 17, 2015. See Note 18, “Subsequent Events”, for a description of our sale and issuance in October 2015 of $57.6 million of 9.50% Senior Convertible Notes due 2019.

 

56
 

Exchange (debt conversion)

 

In July, 2015, we closed the Exchange pursuant to that certain Exchange Agreement, dated as of July 26, 2015 (the “ Exchange Agreement ”), among us, Temasek and Total.

 

Under the Exchange Agreement, at the closing, Temasek exchanged approximately $71.0 million of outstanding convertible promissory notes (including paid-in-kind and accrued interest through July 29, 2015) and Total exchanged $70.0 million in principal amount of outstanding convertible promissory notes for shares of the Company’s common stock. The exchange price was $2.30 per share (the “Exchange Price”) and was paid by the exchange and cancellation of such outstanding convertible promissory notes, and Temasek and Total received 30,860,633 and 30,434,782 shares of the Company’s common stock, respectively, in the Exchange. The first and second closings contemplated by the Exchange Agreement occurred simultaneously on July 29, 2015 as the conditions precedent for both of such closings (including the consummation of the Private Offering) had been met on July 29, 2015.

 

Under the Exchange Agreement, Total also received the following warrants, each with a five-year term, at the closing:

 

A warrant to purchase 18,860,992 shares of our Common Stock (the “Total Funding Warrant”).

 

A warrant to purchase 2,000,000 shares of our common stock that will only be exercisable if we fail, as of March 1, 2017, to achieve a target cost per liter to manufacture farnesene (the “Total R&D Warrant”). The Total Funding Warrant and the Total R&D Warrant are collectively referred to as the “Total Warrants.”

 

Additionally, under the Exchange Agreement, Temasek received the following warrants:

 

A warrant to purchase 14,677,861 shares of our common stock.

 

A warrant exercisable for that number of shares of our common stock equal to (1) (A) the number of shares for which Total exercises the Total Funding Warrant plus (B) the number of additional shares for which the certain convertible notes remaining outstanding following the completion of the Exchange may become exercisable as a result of a reduction in the conversion price of such remaining notes as of a result of and/or subsequent to the date of the Exchange plus (C) that number of additional shares in excess of 2,000,000, if any, for which the Total R&D Warrant becomes exercisable multiplied by a fraction equal to 30.6% divided by 69.4% plus (2) (A) the number of any additional shares for which certain other outstanding convertible promissory notes may become exercisable as a result of a reduction to the conversion price of such notes multiplied by (B) a fraction equal to 13.3% divided by 86.7%.

 

A warrant exercisable for that number of shares of our common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000. If Total is entitled to, and does, exercise the Total R&D Warrant in full, this warrant would be exercisable for 880,339 shares.

 

The above-referenced warrants issued to Temasek have ten-year terms and are referred to herein as the “Temasek Warrants” and, the Temasek Warrants and Total Warrants are hereinafter collectively referred to as the “Exchange Warrants”. All of the Exchange Warrants have an exercise price of $0.01 per share.

 

57
 

In addition to the grant of the Exchange Warrants, a warrant issued by the Company to Temasek in October 2013 in conjunction with a prior convertible debt financing (the “2013 Warrant”) became exercisable in full upon the completion of the Exchange. There are 1,000,000 shares underlying the 2013 Warrant, which is exercisable at an exercise price of $0.01 per share.

 

The exercisability of all of the Exchange Warrants was subject to stockholder approval, which was obtained on September 17, 2015.

 

Maturity Treatment Agreement

 

At the closing of the Exchange, we, Total and Temasek also entered into a Maturity Treatment Agreement, dated as of July 29, 2015, pursuant to which Total and Temasek agreed to convert any of our convertible promissory notes held by them that were not cancelled in the Exchange (the “Remaining Notes”) into shares of our common stock in accordance with the terms of such Remaining Notes upon maturity, provided that certain events of default have not occurred with respect to the applicable Remaining Notes prior to such maturity. As of immediately following the closing of the Exchange, Temasek held $10.0 million in aggregate principal amount of Remaining Notes and Total held approximately $25.0 million in aggregate principal amount of Remaining Notes. Including the Remaining Notes, following the closing of the Private Offering and the Exchange, we had outstanding approximately $130.9 million in aggregate principal amount of convertible promissory notes, including $25.0 million with a conversion price of $7.0682 per share, $5.0 million with a conversion price of $3.08 per share (with such $5.0 million to be canceled upon final execution of agreements relating to restructuring of a fuels joint venture with Total), $75.0 million with a conversion price of approximately $3.74 per share, and $25.9 million (the “Tranche Notes ”) with a conversion price of approximately $1.42 per share (with Tranche Notes’ conversion price reduced from conversion prices ranging from $2.44 to $2.87, based on existing anti-dilution adjustments in the Tranche Notes as a result of the Private Offering price).

 

In conjunction with the closing of the Exchange and Maturity Treatment Agreements on July 29, 2015, $178.1 million of convertible debt was extinguished and a $6.0 million loss on extinguishment was recognized in the quarter ended September 30, 2015. The Remaining Notes were recorded at fair value.

 

Liquidity

 

We have incurred significant losses since our inception and believe that we will continue to incur losses and negative cash flow from operations through at least 2016. As of September 30, 2015, we had an accumulated deficit of $995.2 million and had cash, cash equivalents and short term investments of $11.9 million. We have significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments. Refer to "Liquidity and Capital Resources" for further details.

 

58
 

Results of Operations

 

Comparison of Three Months Ended September 30, 2015 and 2014

 

Revenues

    Three Months Ended September 30,   Period-to-period
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Revenues                                
Renewable product sales   $ 4,226     $ 11,112     $ (6,886 )     (62 )%
Related party renewable product sales     2       368       (366 )     (99 )%
Total product sales     4,228       11,480       (7,252 )     (63 )%
Grants and collaborations revenue     4,363       4,861       (498 )     (10 )%
Total grants and collaborations revenue     4,363       4,861       (498 )     (10 )%
Total revenues   $ 8,591     $ 16,341     $ (7,750 )     (47 )%

 

Our total revenues decreased by $7.8 million to $8.6 million for the three months ended September 30, 2015, as compared to the same period in the prior year, primarily due to a decrease in product sales.

 

Product sales decreased by $7.3 million to $4.2 million for the three months ended September 30, 2015, as compared to the same period in the prior year, primarily due to the lower flavors and fragrances product sales resulting from lower overall volumes compared to the launch in the third quarter of fiscal year 2014 and a lower contractual average selling price. Also contributing to the decrease in product sales were unfavorable foreign currency fluctuation of $0.5 million mainly attributable to our diesel fuel sales in Brazil and a decrease in cosmetic sales due to inventory-related demand fluctuation.

 

Grants and collaborations revenue decreased by $0.5 million to $4.4 million for the three months ended September 30, 2015, as compared to the same period in the prior year primarily due to a $0.8 million decrease in government grant revenue resulting mainly from the completion of the DARPA Technology Investment Agreement with the Defense Advanced Research Projects Agency (or “DARPA”) during the first quarter of fiscal year 2015. This decrease was partly offset by an increase in collaborations revenue of $0.3 million resulting mainly from a new collaborations with a global food ingredients supplier.

 

Cost and Operating Expenses

 

    Three Months Ended September 30,   Period-to-period
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Cost of products sold   $ 8,455     $ 10,146     $ (1,691 )     (17 )%
Loss on purchase commitments and impairment of property, plant and equipment     7,259       952       6,307       (663 )%
Research and development     10,343       12,181       (1,838 )     (15 )%
Sales, general and administrative     14,103       14,356       (253 )     (2 )%
Total cost and operating expenses   $ 40,160     $ 37,635     $ 2,525 )     (7 )%

 

59
 

Our cost of products sold includes cost of raw materials, labor and overhead, amounts paid to contract manufacturers, period costs related to inventory write-downs resulting from applying lower of cost or market inventory valuations, and costs related to scale-up in production of such products. Our cost of products sold decreased by $1.7 million to $8.5 million for the three months ended September 30, 2015, as compared to the same period in the prior year, primarily driven by lower sales, and lower excess capacity charges based on timing of production. This was partly off-set by higher volume sales of fuel and higher inventory provisions related to lower average selling prices. Our farnesene cash production costs per liter, have steadily declined since the commencement of production at our manufacturing facility in Brotas, Brazil, consistent with increases in volume and production efficiency. We expect the downward trend, subject to periodic fluctuations, in cash production costs per liter to continue as we continually improve strains, operational efficiency and/or increase volumes. Cash production costs per liter, includes costs of feedstock, nutrients and other chemical ingredients, labor, utilities and other plant overhead.

 

In July 2015, we announced that we were in discussions with SMSA regarding the continuation of the joint venture.  Specifically, we and SMSA agreed to continue the joint venture pending discussions through August 31, 2015 in order to evaluate the best investment options available to optimize returns and provide balanced economics for both parties. Discussions with SMSA have continued despite the lapse of the August 31 deadline and the joint venture has not been terminated and is still in existence as of September 30, 2015. In September 2015, we entered into negotiations with SMSA to agree to terms for the termination of the joint venture, and we consider there is no realistic prospect of the joint venture continuing. Consequently, an impairment assessment of the assets was performed by management during the third quarter of 2015. We expect to be required to remove the existing assets of the joint venture, which are currently situated on land owned by SMSA (the “SMSA site”). We plan to construct the production facility at an alternative location, relocating movable assets to an alternative location.

 

We recorded an impairment charge of $7.3 million (included in ‘Loss on purchase commitments and impairment of property, plant and equipment’) for the quarter ended September 30, 2015 for non - moveable assets to be abandoned at the SMSA site and for which there is expected to be no salvageable value, including $0.6 million of irrecoverable Brazilian VAT related to the assets.

 

Research and Development Expenses

 

Our research and development expenses decreased by $1.8 million to $10.3 million for the three months ended September 30, 2015, as compared to the same period in the prior year, primarily as a result of decreases of $0.9 million in depreciation expense, $0.6 million from our overall cost reduction efforts and lower spending to manage our operating costs, $0.4 million in salaries and benefits expense, $0.4 million in stock-based compensation and $0.3 million in reductions to consulting and outside services and lab supplies and equipment and other expenses. Research and development expenses included stock-based compensation expense of $0.5 million and $0.9 million during the three months ended September 30, 2015 and 2014, respectively.

 

Sales, General and Administrative Expenses

 

Our sales, general and administrative expenses decreased by $0.3 million to $14.1 million for the three months ended September 30, 2015, as compared to the same period in the prior year, primarily due to decreases in stock-based compensation, which declined to $1.7 million from $2.7 million in the prior year period. This was offset in part by increases in consulting and outside services and personnel-related expense from the hiring of a sales and marketing force to support the Company’s product commercialization plans during the three months ended September 30, 2015 and 2014, respectively.

 

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Other Income (Expense)

 

    Three Months Ended September 30,   Period-to-period
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Other income (expense):                                
Interest income   $ 61     $ 100     $ (39 )     (39 )%
Interest expense     (16,559 )     (8,620 )     (7,939 )     92 %
Loss from change in fair value of derivative instruments     (21,690 )     (6,000 )     (15,690     262 %
Loss from extinguishment of debt     (5,984           (5,984     nm  
Other income (expense), net     (168 )     54       (222 )     (411 )%
Total other income (expense)   $ (44,340 )   $ (14,466 )   $ (29,874 )     (207 )%

 

Total other expense increased by $29.9 million to $44.3 million for the three months ended September 30, 2015, as compared to the same period in the prior year primarily due to an increase in interest expense of $7.9 million associated with the acceleration of accretion of debt discount due to the anticipated repayment of convertible debt in October 2015, loss from change in fair value of derivative instruments of $21.7 million due principally to a change in the estimated fair value of our compound embedded derivative liabilities associated with our senior secured convertible promissory notes as a result of the reset of conversion prices and an additional derivative feature as a result of the private offering completed on July 29, 2015. The loss on extinguishment of debt is due to the impact of the the Exchange and Maturity Treatment Agreements which completed on July 29, 2015.

 

Comparison of nine Months Ended September 30, 2015 and 2014

 

Revenues

    Nine Months Ended September 30,   Year-to-Year
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Revenues                                
Renewable product sales   $ 9,661     $ 18,333     $ (8,672 )     (47 )%
Related party renewable product sales     2       402       (400 )     (100 )%
Total product sales     9,663       18,735       (9,072 )     (48 )%
Grants and collaborations revenue     14,643       12,954       1,689       13 %
Total grants and collaborations revenue     14,643       12,954       1,689       13 %
Total revenues   $ 24,306     $ 31,689     $ (7,383 )     (23 )%

 

Our total revenues decreased by $7.4 million to $24.3 million for the nine months ended September 30, 2015, as compared to the same period in the prior year , primarily due to the achievement of collaboration milestones and the timing of revenue recognition related to previous collaboration payments. This decrease was partly offset by the unfavorable foreign currency fluctuation of $1.3 million, lower fragrance sales primarily due to the timing of a large fragrance molecule sale to a collaborator in the third quarter of 2014 as well as the completion of several government grant contracts.

 

Product sales decreased by $9.1 million to $9.7 million for the nine months ended September 30, 2015, as compared to the same period in the prior year primarily due to the lower flavors and fragrances product sales resulting from lower overall volumes compared to the launch in the third quarter of fiscal year 2014 and a lower contractual average selling price. Also contributing to the decrease in product sales was an unfavorable foreign currency fluctuation of $1.3 million mainly attributable to our diesel fuel sales in Brazil and a decrease in cosmetic sales due to inventory-related demand fluctuation.

 

61
 

Grants and collaborations revenue increased by $1.7 million to $14.6 million for the nine months ended September 30, 2015, as compared to the same period in the prior year. Collaborations revenue from non-related parties increased $4.6 million due to the achievement of the second performance milestone related to a flavors and fragrances product, along with collaborations revenues from existing and new collaborations. This increase was partly offset by the decrease of $2.9 million in government grant revenue mainly resulting from the completion of the DARPA Technology Investment Agreement during the first quarter of fiscal year 2015.

 

Cost and Operating Expenses

    Nine Months Ended September 30,   Year-to-Year
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Cost of products sold   $ 26,057     $ 23,893     $ 2,164       9 %
Loss on purchase commitments and write-off of production assets     7,259       1,111       6,148       553 %
Research and development     33,521       37,342       (3,821 )     (10 )%
Sales, general and administrative     42,859       41,726       1,133       3 %
Total cost and operating expenses   $ 109,696     $ 104,072     $ 5,624       5 %

 

Cost of Products Sold

 

Our cost of products sold increased by $2.2 million to $26.1 million for the nine months ended September 30, 2015, as compared to the same period in the prior year, primarily driven by higher volume sales of fuel, higher inventory provisions related to overall lower average selling prices and higher excess capacity charge based on timing of production. This was partly offset by lower sales and product mix.

 

Research and Development Expenses

 

Our research and development expenses decreased by $3.8 million to $33.5 million for the nine months ended September 30, 2015, as compared to the same period in the prior year, primarily as a result of decreases of $1.2 million from depreciation expense, $0.9 million from our overall cost reduction efforts and lower spending to manage our operating costs, $0.8 million in stock-based compensation, $0.6 million in consulting and outside services and lab supplies and equipment, $0.5 million from facilities and rent expense, $0.4 million in salaries and benefits expense and $0.2 million from other expenses. Research and development expenses included stock-based compensation expense of $1.8 million and $2.6 million during the nine months ended September 30, 2015 and 2014, respectively.

 

Sales, General and Administrative Expenses

 

Our sales, general and administrative expenses increased by $1.1 million to $42.9 million for the nine months ended September 30, 2015, as compared to the same period in the prior year, primarily due to increases in consulting and outside services and personnel-related expense from the additional hiring of a sales and marketing force to support the Company’s product commercialization plans, as well as a severance-related charge, offset in part by a decrease in stock-based compensation. Sales, general and administrative expenses included stock-based compensation expense of $5.2 million and $8.1 million during the nine months ended September 30, 2015 and 2014, respectively.

 

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Other Income (Expense)

    Nine Months Ended September 30,   Year-to-Year
Change
  Percentage
Change
    2015   2014        
    (Dollars in thousands)    
Other income (expense):                                
Interest income   $ 205     $ 304     $ (99 )     (33 )%
Interest expense     (71,027 )     (20,172 )     (50,855 )     252 %
Gain (loss) from change in fair value of derivative instruments     (10,268 )     48,148       (58,416 )     (121 )%
Income (loss) from extinguishment of debt     (5,984 )     (10,512 )     4,528       (43 )%
Other income (expense), net     (1,204 )     147       (1,351 )     (919 )%
Total other income (expense)   $ (88,278 )   $ 17,915     $ (106,193 )     (593 )%

 

Total other expense increased by $106.2 million to $88.3 million for the nine months ended September 30, 2015, as compared to the same period in the prior year primarily attributable to the losses from change in fair value of derivative instruments of $58.4 million and the increases of $50.9 million in interest expense associated with our increased borrowings, including a $36.6 million charge in the nine months ended September 30, 2015 due to acceleration of the accretion of debt discount on the Total and Temasek convertible notes converted to equity in July 2015.

 

Liquidity and Capital Resources

 

   

September 30, 2015

 

December 31, 2014

    (Dollars in thousands)
Working capital deficit, excluding cash and cash equivalents   $ (35,041 )   $ (8,441 )
Cash and cash equivalents and short-term investments   $ 11,898     $ 43,422  
Debt and capital lease obligations   $ 154,670     $ 233,277  
Accumulated deficit   $ (995,186 )   $ (819,152 )

 

    Nine Months Ended September 30,
    2015   2014
    (Dollars in thousands)
Net cash used in operating activities   $ (52,217 )   $ (64,107 )
Net cash used in investing activities   $ (3,304 )   $ (6,872 )
Net cash provided by financing activities   $ 25,754     $ 131,947  

 

Working Capital Deficit. Our working capital deficit, excluding cash and cash equivalents, was $35.0 million at September 30, 2015, which represents an increase of $26.6 million compared to a working capital deficit of $8.4 million at December 31, 2014. The increase of $26.6 million in working capital deficit during the nine months ended September 30, 2015 was primarily due to increases of $7.8 million in accounts payable, $3.9 million in deferred revenue, $3.8 million in current portion of debt resulting from loan repayments to Hercules falling due, and $3.3 million in accrued and other current liabilities, together with decreases of $4.8 million in accounts receivable, $3.4 million in inventory and $0.3 million in short-term investments, offset by increases of $0.5 million in prepaid expenses and other current assets and $0.2 million in restricted cash.

 

To support production of our products in contract manufacturing and dedicated production facilities, we have incurred, and we expect to continue to incur, capital expenditures as we invest in these facilities. We plan to continue to seek external debt and equity financing from U.S. and Brazilian sources to help fund our investment in these contract manufacturing and dedicated production facilities.

 

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We expect to fund our 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 financings. Some of our anticipated financing sources, such as research and development collaborations and convertible debt financings, are subject to the risk that we cannot meet milestones, are not yet subject to definitive agreements or mandatory funding commitments and, if needed, we may not be able to secure additional types of financing in a timely manner or on reasonable terms, if at all. Our planned 2015 and 2016 working capital needs and our planned operating and capital expenditures for 2015 and 2016 are dependent on significant inflows of cash from existing collaboration partners, as well as additional funding from new collaborations, and may also require additional funding from debt or equity financings. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, storage, distribution and other aspects of our business.

 

Liquidity . We have incurred significant losses since our inception and believe that we will continue to incur losses and negative cash flow from operations through at least 2016. As of September 30, 2015, we had an accumulated deficit of $995.2 million and had cash, cash equivalents and short term investments of $11.9 million. We have significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments.

 

As of September 30, 2015, our debt, net of discount of $17.3 million, totaled to $153.8 million, of which $20.9 million matures within the next twelve months. In addition to upcoming debt maturities, our debt service obligations over the next twelve months are significant, including $9.2 million of anticipated interest payments. Our debt agreements also contain various covenants, including restrictions on our business that could cause us to be at risk of defaults, such as the requirement to maintain unrestricted, unencumbered cash in an amount equal to at least 50% of the principal amount outstanding under the Hercules Loan Facility (as defined below). Refer to Note 5, "Debt" and Note 6, “Commitments and Contingencies” for further details of our debt arrangements.

 

Our operating plan for 2015 contemplates a significant reduction in our net cash outflows, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs compared to prior periods as a result of manufacturing and technical developments in 2014, (iii) increased cash inflows from collaborations compared to 2014, (iv) maintaining operating expenses at levels consistent with 2014, and (v) access to various financing commitments (see Note 5, “Debt” and Note 8 “Significant Agreements” for details of financing commitments, and Note 18 “Subsequent events” for details of financing transactions subsequent to September 30, 2015).

 

If we are unable to generate sufficient cash contributions from product sales, payments from existing and new collaboration partners, and draw sufficient funds from certain financing commitments due to contractual restrictions and covenants, we will need to obtain additional funding from equity or debt financings, agree to burdensome covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights, or grant licenses on terms that are not favorable.

 

If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, we would take the following actions as early as the fourth quarter of 2015 to support our liquidity needs through the remainder of 2015 and into 2016:

 

Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities.

 

Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts.

 

Reduce production activity at our Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers.

 

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Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors.

 

Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects.

 

Closely monitor the Company’s working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities.

 

Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:

 

Achieve planned production levels;

 

Develop and commercialize products within planned timelines or at planned scales; and

 

Continue other core activities.

 

Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on our ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.

 

Collaboration Funding. As of September 30, 2015, we received $31.6 million in collaboration funding, including $13.0 million under a collaboration agreement with a flavors and fragrances partner. In January 2015, we received $10.85 million in additional research and development funding from Total through the issuance of a 1.5% Senior Secured Convertible Note to Total as described above under “Overview - Total Relationship". This amount was the final installment of the third closing under the Total Purchase Agreement. We received additional collaboration funding from various other partners during 2015, including $2.2 million in January 2015 under an isoprene collaboration with Michelin and Braskem, and $2.0 million in March 2015 under a farnesene collaboration with Kuraray.

 

We depend on collaboration funding to support our research and development and operating expenses. While part of this funding is committed based on existing collaboration agreements, we will be required to identify and obtain funding from additional collaborations. In addition, some of our existing collaboration funding is subject to our achievement of milestones or other funding conditions.

 

If we cannot secure sufficient collaboration funding to support our operating expenses in excess of cash contributions from product sales and existing debt and equity financings, we may need to issue additional preferred and/or discounted equity, agree to onerous covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights or grant licenses on terms that are not favorable to us. If we fail to secure such funding, we could be forced to curtail our operations, which would have a material adverse effect on our ability to continue with our business plans.

 

Government Contracts . In June 2012, we entered into a Technology Investment Agreement with DARPA, under which we are performing certain research and development activities funded in part by DARPA. The work is to be performed on a cost-share basis, where DARPA funds 90% of the work and we fund the remaining 10% (primarily by providing specified labor). The agreement provided for funding of up to approximately $7.7 million over two years based on achievement of program milestones, and, accordingly, if fully funded, we would be responsible for contributions equivalent to approximately $0.9 million. The agreement had an initial term of one year and at DARPA's option, was renewable for an additional year. The agreement was renewed by DARPA in May 2013 and extended in July 2014. Through September 30, 2015, we had recognized $7.7 million in revenue under this agreement, of which $0.1 million was recognized during the nine months ended September 30, 2015. Total cash received under this agreement as of September 30, 2015 was $7.7 million, of which $0.2 million was received during the nine months ended September 30, 2015.

 

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In September 2015, we entered into a Technology Investment Agreement (the “Agreement”) with DARPA under which the Company, with the assistance of five specialized subcontractors, will work to create new research and development tools and technologies for strain engineering and scale-up activities. The program that is the subject of the Agreement is scheduled to commence on November 1, 2015 and will be performed and funded on a milestone basis, where DARPA, upon the Company’s successful completion of each milestone event in the Agreement, would pay the Company the amount in the Agreement corresponding to such milestone event. Under the Agreement, the Company and its subcontractors could collectively receive DARPA funding of up to $35.0 million over the program’s four year term if all of the program’s milestones are achieved. In conjunction with DARPA’s funding, the Company and its subcontractors are obligated to collectively contribute approximately $15.5 million toward the program over its four year term (primarily by providing specified labor and/or purchasing certain equipment). The Company can elect to retain title to the patentable inventions it produces in the program, but DARPA receives certain data rights as well as a government purposes license to certain of such inventions. Either party may, upon written notice and subject to certain consultation obligations, terminate the Agreement upon a reasonable determination that the program will not produce beneficial results commensurate with the expenditure of resources.

 

Convertible Note Offerings. In February 2012, we sold $25.0 million in principal amount of senior unsecured convertible promissory notes due March 1, 2017 as described in more detail in Note 5, "Debt."

 

In July and September 2012, we issued $53.3 million worth of 1.5% Senior Unsecured Convertible Notes to Total under the July 2012 Agreements for an aggregate of $30.0 million in cash proceeds and our repayment of $23.3 million in previously-provided research and development funds pursuant to the Total Purchase Agreement as described in more detail under "Related Party Convertible Notes" in Note 5, "Debt." As part of our December 2012 private placement, we issued 1,677,852 shares of our common stock in exchange for the cancellation of $5.0 million of an outstanding senior unsecured convertible promissory note held by Total.

 

In June 2013, we sold and issued a 1.5% Senior Unsecured Convertible Note to Total in the face amount of $10.0 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement. In July 2013, we sold and issued a 1.5% Senior Unsecured Convertible Note to Total in the face amount of $20.0 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement.

 

In August 2013, we entered into an agreement with Total and Temasek to sell up to $73.0 million in convertible promissory notes in private placements over a period of up to 24 months from the date of signing as described in more detail in Note 5, "Debt" (such agreement referred to as the “August 2013 SPA” and such financing referred to as the “August 2013 Financing”). The August 2013 Financing was divided into two tranches (one for $42.6 million and one for $30.4 million). Of the total possible purchase price in the financing, $60.0 million was to be paid in the form of cash by Temasek ($35.0 million in the first tranche and up to $25.0 million in the second tranche) and $13.0 million was to be paid by cancellation of outstanding convertible promissory notes held by Total in connection with its exercise of pro rata rights ($7.6 million in the first tranche and $5.4 million in the second tranche).

 

In September 2013, prior to the initial closing of the August 2013 Financing, our stockholders approved the issuance in the private placement of up to $110.0 million aggregate principal amount of convertible promissory notes, the issuance of a warrant to purchase 1,000,000 shares of our common stock and the issuance of the common stock issuable upon conversion or exercise of such notes and warrant.

 

In September 2013, we entered into a bridge loan agreement with an existing investor to provide additional cash availability of up to $5.0 million as needed before the initial closing of the August 2013 Financing. The bridge loan agreement provided for the sale of up to $5.0 million in principal amount of unsecured convertible notes at any time prior to October 31, 2013 following the satisfaction of certain closing conditions, including that we pay an availability fee for the bridge loan. We did not use this facility and it expired in October 2013 in accordance with its terms.

 

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In October 2013, we sold and issued a senior secured promissory note to Temasek for a bridge loan of $35.0 million (or the “Temasek Bridge Note”). The Temasek Bridge Note was due on February 2, 2014 and accrued interest at a rate of 5.5% each four month period from October 4, 2013 (with a rate of 2% per month applicable if a default occurred). The Temasek Bridge Note was cancelled as payment for Temasek's purchase of a first tranche convertible note in the initial closing of the August 2013 Financing.

 

In October 2013, we amended the August 2013 SPA to include certain entities affiliated with FMR, LLC (or the “Fidelity Entities”) in the first tranche closing (participating for a principal amount of $7.6 million), and to proportionally increase the amount acquired by exchange and cancellation of outstanding convertible promissory notes by Total to $14.6 million ($9.2 million in the first tranche and up to $5.4 million in the second tranche). Also in October 2013, we completed the closing of the first tranche of notes contemplated by the August 2013 Financing (or the “Tranche I Notes”) for cash proceeds of $7.6 million and cancellation of outstanding convertible promissory notes of $44.2 million, of which $35.0 million resulted from the cancellation of the Temasek Bridge Note. In December 2013, we amended the August 2013 SPA to sell $3.0 million of senior convertible notes under the second tranche of the August 2013 Financing (or the “Tranche II Notes”) to funds affiliated with Wolverine Asset Management (or “Wolverine”) and we elected to call $25.0 million in additional funds from Temasek pursuant to its previous commitment to purchase such amount of convertible promissory notes in the second tranche. Additionally, pursuant to that amendment, we sold approximately $6.0 million of convertible promissory notes in the second tranche to Total through cancellation of the same amount of principal of previously outstanding convertible notes held by Total (in respect of Total’s preexisting contractual right to maintain its pro rata ownership position through such cancellation of indebtedness). The closing of the sale of such Tranche II Notes under the December amendment to the August 2013 SPA occurred in January 2014. The August 2013 Financing is more fully described in Note 5, “Debt.”

 

In December 2013, in connection with our entry into agreements establishing our joint venture with Total, we exchanged the $69.0 million of the then-outstanding Total unsecured convertible notes issued pursuant to the Total Purchase Agreement for replacement 1.5% Senior Secured Convertible Notes, in principal amounts equal to the principal amount of the cancelled notes.

 

In the Rule 144A Convertible Note Offering in May 2014, we sold and issued $75.0 million in aggregate principal amount of 6.5% Convertible Senior Notes due 2019 to Morgan Stanley & Co. LLC as the Initial Purchaser in a private placement, and for initial resale by the Initial Purchaser to qualified institutional buyers pursuant to Rule 144A of the Securities Act. The Rule 144A Convertible Note Offering is described in more detail in Note 5, "Debt."

 

In each of July 2014 and January 2015, we sold and issued a 1.5% Senior Secured Convertible Note to Total pursuant to the Total Purchase Agreement. The aggregate principal amount of these two notes was $21.7 million and each of such notes has a March 1, 2017 maturity date.

 

On October 20, 2015, we sold and issued $57.6 million aggregate principal amount of the Company's 9.50% Convertible Senior Notes due 2019, which were sold only to qualified institutional buyers and institutional accredited investors in a private placement under the Securities Act of 1933, as amended.

 

The notes pay interest semi-annually at a rate of 9.50% per annum and mature on April 15, 2019, unless earlier converted or repurchased. Interest is payable, at the Company's election, entirely in cash or entirely in shares of common stock. The notes have an initial conversion rate, subject to adjustment, of 443.6557 shares of the Company's common stock per $1,000 principal amount of the notes, representing a conversion price of approximately $2.25 per share of the Company's common stock.

 

The notes are convertible at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, the notes will be settled in shares of the Company's common stock. With respect to any conversion on or after the earlier of (i) the date that a registration statement covering the resale of common stock issuable upon conversion of the notes, in connection with an early conversion payment or as interest payments on the notes, is effective or (ii) April 15, 2016, in addition to the shares deliverable upon conversion, holders will be entitled to receive a payment equal to the present value of the remaining scheduled payments of interest that would have been made on the notes being converted from the date of conversion (or, in the case of conversion between a record date and the following interest payment date, from such interest payment date) until the earlier of the date that is three years after the date the Company receives such notice of conversion or maturity.

 

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The net proceeds from the offering after offering expenses were $54.4 million. We expect to use the net proceeds from the offering of the notes for general corporate purposes, which may include the development of our sales and marketing infrastructure, as well as other strategic transactions and acquisitions. In addition, we used approximately $18.3 million of the proceeds of the offering to repurchase $22.9 million aggregate principal amount of our outstanding 6.50% Convertible Senior Notes due 2019 and approximately $8.8 million to repurchase $9.7 million aggregate principal amount of the Company's outstanding 3% Convertible Senior Notes due 2017, in each case held by purchasers of notes participating in the offering.

 

Export Financing with ABC Brasil . In March 2013, we entered into a one-year export financing agreement with ABC for approximately $2.5 million to fund exports through March 2014. This loan was collateralized by future exports from our subsidiary in Brazil. As of September 30, 2015, the loan was fully paid.

 

In March 2014, we entered into an additional one-year-term export financing agreement with ABC for approximately $2.2 million to fund exports through March 2015. This loan is collateralized by future exports from our subsidiary in Brazil. As of September 30, 2015, the principal amount outstanding under this agreement was zero.

 

In April 2015, we entered into an additional one-year-term export financing agreement with ABC for approximately $1.6 million to fund exports through April 2016. This loan is collateralized by future exports from our subsidiary in Brazil. As of September 30, 2015, the principal amount outstanding under this agreement was $1.6 million.

 

Banco Pine/Nossa Caixa Financing . In July 2012, we entered into a Note of Bank Credit and a Fiduciary Conveyance of Movable Goods agreement with each of Nossa Caixa and Banco Pine. Under these instruments, we borrowed an aggregate of R$52.0 million (approximately US$13.1 million based on the exchange rate as of September 30, 2015) as financing for capital expenditures relating to our manufacturing facility in Brotas, Brazil. Under the loan agreements, Banco Pine agreed to lend R$22.0 million and Nossa Caixa agreed to lend R$30.0 million. The loans have a final maturity date of July 15, 2022 and bear a fixed interest rate of 5.5% per year. The loans are also subject to early maturity and delinquency charges upon occurrence of certain events including interruption of manufacturing activities at our manufacturing facility in Brotas, Brazil for more than 30 days, except during sugarcane off-season. The loans are secured by certain of our farnesene production assets at the manufacturing facility in Brotas, Brazil and we were required to provide parent guarantees to each of the lenders. As of September 30, 2015 and December 31, 2014, a principal amount of $11.2 million and $18.6 million, respectively, was outstanding under these loan agreements.

 

BNDES Credit Facility . In December 2011, we entered into the BNDES Credit Facility to finance a production site in Brazil. The BNDES Credit Facility was for R$22.4 million (approximately US$5.6 million based on the exchange rate as of September 30, 2015). This BNDES Credit 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. As of September 30, 2015 and December 31, 2014, we had R$8.6 million (approximately US$2.2 million based on the exchange rate as of September 30, 2015) and R$11.5 million (approximately US$4.3 million based on the exchange rate as of December 31, 2014), respectively, in outstanding advances under the BNDES Credit Facility.

 

The principal of loans under the BNDES Credit Facility is required to be repaid in 60 monthly installments, with the first installment due in January 2013 and the last due in December 2017. Interest was initially due on a quarterly basis with the first installment due in March 2012. From and after January 2013, interest payments are due on a monthly basis together with principal payments. The loaned amounts carry interest of 7% per year. Additionally, 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.

 

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The BNDES Credit Facility is collateralized by first priority security interest in certain of our equipment and other tangible assets totaling R$24.9 million (approximately US$6.3 million based on the exchange rate as of September 30, 2015). We are a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, we were required to provide a bank guarantee equal to 10% of the total approved amount (R$22.4 million in total debt) available under the BNDES Credit Facility. For advances in the second tranche (above R$19.1 million), we are required to provide additional bank guarantees equal to 90% of each such advance, plus additional Amyris guarantees equal to at least 130% of such advance. The BNDES Credit Facility contains customary events of default, including payment failures, failure to satisfy other obligations under the credit facility or related documents, defaults in respect of other indebtedness, bankruptcy, insolvency and inability to pay debts when due, material judgments, and changes in control of Amyris Brasil. If any event of default occurs, BNDES may terminate its commitments and declare immediately due all borrowings under the facility.

 

FINEP Credit Facility. In November 2010, we entered into a credit facility with Financiadora de Estudos e Projetos (or "FINEP"), a state-owned company subordinated to the Brazilian Ministry of Science and Technology (or the “FINEP Credit Facility”) to finance a research and development project on sugarcane-based biodiesel (or the “FINEP Project”) and provided for loans of up to an aggregate principal amount of R$6.4 million (approximately US$1.6 million based on the exchange rate as of September 30, 2015) which are secured by a chattel mortgage on certain equipment of Amyris as well as by bank letters of guarantee. All available credit under this facility was fully drawn. As of September 30, 2015, the total outstanding loan balance under this credit facility was R$3.5 million (approximately US$0.9 million based on the exchange rate as of September 30, 2015).

 

Interest on loans drawn under the FINEP Credit Facility is fixed at 5.0% per annum. In case of default under, or non-compliance with, the terms of the agreement, the interest on loans will be dependent on the long-term interest rate as published by the Central Bank of Brazil (such rate, the “TJLP”). If the TJLP at the time of default is greater than 6%, then the interest will be 5.0% plus a TJLP adjustment factor otherwise the interest will be at 11.0% per annum. In addition, a fine of up to 10.0% will apply to the amount of any obligation in default. 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. Interest on loans drawn and other charges are paid on a monthly basis and commenced in March 2011.

 

Hercules Loan Facility. In March 2014, we entered into the Hercules Loan Facility to make available a loan in the aggregate principal amount of up to $25.0 million. The original Hercules Loan Facility accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 6.25% or 9.5%. We may repay the loaned amounts before the maturity date (generally February 1, 2017) if we pay an additional fee of 3% of the outstanding loans (1% if after the initial twelve-month period of the loan). We were also required to pay a 1% facility charge at the closing of the transaction, and are required to pay a 10% end of term charge. In connection with the original Hercules Loan Facility, Amyris agreed to certain customary representations and warranties and covenants, as well as certain covenants that were subsequently amended (as described below). The total available credit of $25.0 million under this facility was fully drawn down.

 

In June 2014, we and Hercules entered into a first amendment (or the “First Hercules Amendment”) of the Hercules Loan Facility. Pursuant to the First Hercules Amendment, the parties agreed to adjust the term loan maturity date from May 31, 2015 to February 1, 2017 and remove (i) a requirement for us to pay a forbearance fee of $10.0 million in the event certain covenants were not satisfied, (ii) a covenant that we maintain positive cash flow commencing with the fiscal quarter beginning October 1, 2014, (iii) a covenant that, beginning with the fiscal quarter beginning July 1, 2014, we and our subsidiaries achieve certain projected cash product revenues and projected cash product gross profits, and (iv) an obligation for us to file a registration statement on Form S-3 with the SEC by no later than June 30, 2014 and complete an equity financing of more than $50.0 million by no later than September 30, 2014. We further agreed to include a new covenant requiring us to maintain unrestricted, unencumbered cash in an amount equal to at least 50% of the principal amount then outstanding under the Hercules Loan Facility and borrow an additional $5.0 million. The additional $5.0 million borrowing was completed in June 2014, and accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 5.25% or 8.5%. The Hercules Loan Facility is secured by liens on our assets, including on certain of our intellectual property. The Hercules Loan Facility includes customary events of default, including failure to pay amounts due, breaches of covenants and warranties, certain cross defaults and judgments, and insolvency. If an event of default occurs, Hercules may require immediate repayment of all amounts due.

 

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In March 2015, the Company and Hercules entered into a second amendment (or the “Second Hercules Amendment”) of the Hercules Loan Facility. Pursuant to the Second Hercules Amendment, the parties agreed to, among other things, establish an additional credit facility in the principal amount of up to $15.0 million, which would be available to be drawn by the Company at its sole election (in increments of $5.0 million) through the earlier of March 31, 2016 or such time as the Company raises an aggregate of at least $20.0 million through the sale of new equity securities, subject to certain conditions, including the receipt of third party consents and a requirement to first make certain draw-downs under an equity line of credit that the Company previously secured (to the extent the Company is permitted to do so under the terms thereof). The additional facility was cancelled undrawn upon the completion of the Company’s private offering in July 2015.

 

As of September 30, 2015, $23.5 million was outstanding under the Hercules Loan Facility, net of discount of $0.2 million. The Company’s loan facility with Hercules requires the Company to maintain unrestricted, unencumbered cash in U.S. bank accounts in an amount equal to at least 50% of the principal amount outstanding under such facility. The Company received a waiver from Hercules with respect to non-compliance with such covenants. As of the date of issuance of this report, the Company is in compliance with all of its Hercules debt agreements.

 

Common Stock Offerings. In December 2012, we completed a private placement of 14,177,849 shares of our common stock for aggregate cash proceeds of $37.2 million, of which $22.2 million was received in December 2012 and $15.0 million was received in January 2013. Of the 14,177,849 shares issued in the private placement, 1,677,852 of such shares were issued to Total in exchange for cancellation of $5.0 million of an outstanding convertible promissory note we previously issued to Total.

 

In March 2013, we completed a private placement of 1,533,742 of our common stock to Biolding for aggregate proceeds of $5.0 million. This private placement represented the final tranche of Biolding's preexisting contractual obligation to fund $15.0 million upon satisfaction by us of certain criteria associated with the commissioning of our production plant in Brotas, Brazil.

 

In March 2014, we completed a private placement of 943,396 shares of our common stock to Kuraray for aggregate proceeds of $4.0 million.

 

In July 2015, we entered into the SPA with certain purchasers under which we agreed to sell 16,025,642 shares of our common stock at a price of $1.56 per share, with aggregate proceeds to the Company of $25 million. The sale of common stock under the SPA was completed on July 29, 2015. Pursuant to the SPA, the Company granted to each of the purchasers a Private Offering Warrant exercisable at an exercise price of $0.01 per share for the purchase of a number of shares of the Company’s common stock equal to 10% of the shares purchased by such investor The exercisability of the Private Offering Warrants was subject to stockholder approval, which was obtained on September 17, 2015.

 

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Cash Flows during the Nine Months Ended September 30, 2015 and 2014

 

Cash Flows from Operating Activities

 

Our primary uses of cash from operating activities are costs related to production and sales of our products and personnel-related expenditures, offset by cash received from product sales, grants and collaborations. Cash used in operating activities was $52.2 million and $64.1 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Net cash used in operating activities of $52.2 million for the nine months ended September 30, 2015 was attributable to our net loss of $176.1 million, offset by net non-cash charges of $97.7 million and net change in our operating assets and liabilities of $26.2 million. Net non-cash charges of $97.7 million for the nine months ended September 30, 2015 consisted primarily of a $54.6 million of amortization of debt discount, including a $36.6 million charge due to acceleration of accretion of debt discount on the Total and Temasek convertible notes converted to equity in July 2015, 10.3 million change in the fair value of derivative instruments related to the embedded derivative liabilities associated with our senior secured convertible promissory notes and currency interest rate swap derivative liability, $9.9 million of depreciation and amortization expenses, $7.3 million of loss on purchase commitments and impairment of production assets, $7.0 million of stock-based compensation, $6.0 million of expense associated with extinguishment and cancellation of convertible note, $2.1 million of loss from investment in affiliates, $0.4 million of other noncash expenses and $0.1 million on disposition of property, plant and equipment. Net change in operating assets and liabilities of $26.2 million for the nine months ended September 30, 2015 primarily consisted of $18.7 million increase in accounts payable and accrued other liabilities, $5.1 million decrease in accounts receivable and related party accounts receivable, $2.7 million increase in deferred revenue related to the funds received under collaboration agreements and $3.3 million increase in inventory, offset by $3.6 million decrease in prepaid expenses and other assets and deferred rent.

 

Net cash used in operating activities of $64.1 million for the nine months ended September 30, 2014 was attributable to our net loss of $55.8 million and net non-cash charges of $7.6 million, offset by a $0.7 million net change in our operating assets and liabilities. Net change in operating assets and liabilities of $0.7 million for the nine months ended September 30, 2014 primarily consisted of a $3.2 million increase in accounts receivable and related party accounts receivable (mainly from product sales in the third quarter of 2014), a $6.1 million increase in inventory, and a $1.3 million increase in prepaid expenses and other assets, offset by a $6.1 million increase in deferred revenue related to the funds received under a collaboration agreement, and a $3.8 million increase in accounts payable and accrued other liabilities. Non-cash charges of $7.6 million for the nine months ended September 30, 2014 consisted primarily of a $48.1 million change in the fair value of derivative instruments related to the embedded derivative liabilities associated with our senior secured convertible promissory notes and currency interest rate swap derivative liability, offset by $11.3 million of depreciation and amortization expenses, $10.8 million of stock-based compensation, $6.8 million of amortization of debt discount, $10.5 million loss associated with the extinguishment of convertible debt, and a $1.3 million loss on purchase commitments and write-off of production assets and loss on disposal of property and equipment.

 

Cash Flows from Investing Activities

 

Our investing activities consist primarily of capital expenditures and other investment activities. Net cash used in investing activities of $3.3 million for the nine months ended September 30, 2015, resulted from $2.3 million of purchases of property, plant and equipment and $1.2 million in loans made to our equity method investee, Novvi, offset by $0.2 million of change in restricted cash.

 

Net cash used in investing activities of $6.9 million for the nine months ended September 30, 2014, resulted from $3.6 million of capital expenditures, mainly for maintenance and upgrades at our Brotas production facility, and from $2.1 million of equity in our joint venture with Novvi and $1.2 million loans to Novvi.

 

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Cash Flows from Financing Activities

 

Net cash provided by financing activities of $25.8 million for the nine months ended September 30, 2015, was a result of the receipt of $ 25.0 million from the issuance of common stock in private placements, the receipt of $10.9 million from debt issued to a related party, which related to the closing of the final installment of the Senior Secured Convertible Notes issued to Total under the July 2012 Agreements, the receipt of $1.6 million of proceeds from a one-year term export financing agreement with ABC and the receipt of $0.4 million from exercise of common stock options, offset by $11.2 million of principal payments on debt, $0.6 million of principal payments on capital leases and $0.3 million of employee's taxes paid upon vesting of restricted stock units.

 

Net cash provided by financing activities of $131.9 million for the nine months ended September 30, 2014, was a result of the net receipt of $137.0 million from debt and equity financing, which related to the closing of the second tranche of our convertible promissory note offering under the August 2013 Share Purchase Agreement of $28.0 million, borrowings under the Hercules Loan Facility of $29.7 million, the closing of our 144A Convertible Note Offering for approximately $72.0 million proceeds (less payments of discount and expenses of $3.0 million), the sale of $10.9 million of the Total R&D Notes, $2.2 million from a one-year term export financing agreement with ABC and $4.0 million in proceeds from issuance of common stock to Kuraray, offset by the $9.7 million settlement of Total R&D Convertible Notes. These cash inflows were offset by other payments of debt and capital leases of $5.5 million.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any material off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our condensed consolidated financial statements.

 

Contractual Obligations

 

The following is a summary of our contractual obligations as of September 30, 2015 (in thousands):

    Total   2015   2016   2017   2018   2019   Thereafter
Principal payments on long-term debt   $ 174,142     $ 4,773     $ 21,168     $ 35,912     $ 21,398     $ 86,665     $ 4,226  
Interest payments on long-term debt, fixed rate (1)     41,001       3,573       7,486       8,889       13,332       7,415       306  
Operating leases     53,567       1,696       6,755       6,642       6,700       6,748       25,026  
Principal payments on capital leases     834       171       487       176                    
Interest payments on capital leases     70       16       42       12                    
Terminal storage costs     51       17       34                          
Purchase obligations (2)     2,047       751       562       709       25              
Total   $ 271,712     $ 10,997     $ 36,534     $ 52,340     $ 41,455     $ 100,828     $ 29,558  

____________________

(1) Does not include any obligations related to make-whole interest or downround provisions. The fixed interest rates are more fully described in Note 5, "Debt" of our condensed consolidated financial statements.
(2) Purchase obligations include noncancellable contractual obligations and construction commitments of $1.1 million, of which zero have been accrued as loss on purchase commitments.

 

Recent Accounting Pronouncements

 

The information contained in Note 2 to the Unaudited Condensed Consolidated Financial Statements under the heading "Recent Accounting Pronouncements" is hereby incorporated by reference into this Part I, Item 2.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices, foreign currency exchange rates, and interest rates as described below.

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations (including embedded derivatives therein). We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of September 30, 2015, our investment portfolio consisted primarily of money market funds and certificates of deposit, all of which are highly liquid investments. Due to the short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio. Additionally, as of September 30, 2015, 100% of our outstanding debt is in fixed rate instruments or instruments which have capped rates. Therefore, our exposure to the impact of variable interest rates is limited. Changes in interest rates may significantly change the fair value of our embedded derivative liabilities.

 

Foreign Currency Risk

 

Most of our sales contracts are principally denominated in U.S. dollars and, therefore, our revenues are currently not subject to significant foreign currency risk. The functional currency of our wholly-owned consolidated subsidiary in Brazil is the local currency (Brazilian real) in which recurring business transactions occur. We do not use currency exchange contracts as hedges against amounts permanently invested in our foreign subsidiary. The amount we consider permanently invested in our foreign subsidiary and translated into U.S. dollars using the September 30, 2015 exchange rate is $94.8 million as of September 30, 2015 and $134.4 million at December 31, 2014. The decrease in the permanent investments in our foreign subsidiary between December 31, 2014 and September 30, 2015 is due to the appreciation of the U.S. dollar versus the Brazilian real. The potential loss in value, which would be principally recognized in Other Comprehensive Loss, resulting from a hypothetical 10% adverse change in quoted Brazilian real exchange rates, is $9.5 million and $13.4 million as of September 30, 2015 and December 31, 2014, respectively. Actual results may differ.

 

We make limited use of derivative instruments, which include currency interest rate swap agreements, to manage the Company's exposure to foreign currency exchange rate and interest rate related to the Company's Banco Pine loan. In June 2012, we entered into a currency interest rate swap arrangement with Banco Pine for R$22.0 million (approximately US$5.5 million based on the exchange rate as of September 30, 2015). The swap arrangement exchanges the principal and interest payments under the Banco Pine loan entered into in July 2012 for alternative principal and interest payments that are subject to adjustment based on fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real. The swap has a fixed interest rate of 3.94%. This arrangement hedges the fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real.

 

We analyzed our foreign currency exposure to identify assets and liabilities denominated in other currencies. For those assets and liabilities, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined that there would be an immaterial effect on our results of operations from such a shift.

 

Commodity Price Risk

 

Our primary exposure to market risk for changes in commodity prices currently relates to our purchases of sugar feedstocks. When possible, we manage our exposure to this risk primarily through the use of supplier pricing agreements.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer (or “CEO”) and chief financial officer (or “CFO”), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our CEO and CFO concluded that, as of September 30, 2015, our disclosure controls and procedures are designed and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our third fiscal quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on the Effectiveness of Internal Controls

 

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

 

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PART II

ITEM 1. LEGAL PROCEEDINGS

 

We may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of our business. Such matters are subject to many uncertainties and there can be no assurance that legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, results of operations, financial position or cash flows.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition or future results. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely harmed. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.

 

Risks Related to Our Business

 

We have incurred losses to date, anticipate continuing to incur losses in the future, and may never achieve or sustain profitability.

 

We have incurred significant losses in each year since our inception and believe that we will continue to incur losses and negative cash flow from operations into at least 2016. As of September 30, 2015, we had an accumulated deficit of $995.2 million and had cash, cash equivalents and short term investments of $11.9 million. We have significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments of $2.0 million. As of September 30, 2015, our debt totaled $153.8 million, net of discount of $17.3 million, of which $20.9 million matures within the next twelve months. In addition to upcoming debt maturities, our debt service obligations over the next twelve months are significant and may include potential early conversion payments of up to approximately $18.9 million (assuming all note holders convert) that could become due at any time after May 15, 2015 under our outstanding convertible promissory notes sold on May 22, 2014 pursuant to Rule 144A of the Securities Act (or the “144A Notes”). Furthermore, our debt agreements contain various covenants, including restrictions on business that could cause us to be at risk of defaults. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including construction and operation of our manufacturing facilities, contract manufacturing, research and development operations, and operation of our pilot plants and demonstration facility. There can be no assurance that we will ever achieve or sustain profitability on a quarterly or annual basis.

 

We have limited experience producing our products at commercial scale and may not be able to commercialize our products to the extent necessary to sustain and grow our current business.

 

To commercialize our products, we must be successful in using our yeast strains to produce target molecules at commercial scale and at a commercially viable cost. If we cannot achieve commercially-viable production economics for enough products to support our business plan, including through establishing and maintaining sufficient production scale and volume, we will be unable to achieve a sustainable integrated renewable products business. Virtually all of our production capacity is through a purpose-built, large-scale production plant in Brotas, Brazil. This plant commenced operations in 2013, and scaling and running the plant has been, and continues to be, a time-consuming, costly, uncertain and expensive process. Given our limited experience commissioning and operating our own manufacturing facilities and our limited financial resources, we cannot be sure that we will be successful in achieving production economics that allow us to meet our plans for commercialization of various products we intend to offer. In addition, until very recently we have only produced Biofene at the Brotas plant. Our attempts to scale production of new molecules at the plant are subject to uncertainty and risk. For example, even to the extent we successfully complete product development in our laboratories and pilot and demonstration facilities, and at contract manufacturing facilities, we may be unable to translate such success to large-scale, purpose-built plants. If this occurs, our ability to commercialize our technology will be adversely affected and we may be unable to produce and sell any significant volumes of our products. Also, with respect to products that we are able to bring to market, we may not be able to lower the cost of production, which would adversely affect our ability to sell such products profitably.

 

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We will require significant inflows of cash from financing and collaboration transactions to fund our anticipated operations and to service our debt obligations and may not be able to obtain such financing and collaboration funding on favorable terms, if at all.

 

Our planned 2015 and 2016 working capital needs, our planned operating and capital expenditures for 2015 and 2016, and our ability to service our outstanding debt obligations are dependent on significant inflows of cash from existing and new collaboration partners and cash contribution from growth in renewable product sales. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, storage, distribution and other aspects of our business. Some of our anticipated financing sources, such as research and development collaborations, are subject to the risk that we cannot meet milestones, that the collaborations may end prematurely for reasons that may be outside of our control (including technical infeasibility of the project or a collaborator's right to terminate without cause), or the collaborations are not yet subject to definitive agreements or mandatory funding commitments and, if needed, we may not be able to secure additional types of financing in a timely manner or on reasonable terms, if at all. The inability to generate sufficient cash flow, as described above, could have an adverse effect on our ability to continue with our business plans and our status as a going concern.

 

If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, we would take the following actions as early as the fourth quarter of 2015 to support our liquidity needs through the remainder of 2015 and into 2016:

 

Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities.

 

Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts.

 

Reduce production activity at our Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers.

 

Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors.

 

Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects.

 

Closely monitor the Company working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities.

 

Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:

 

Achieve planned production levels;

 

Develop and commercialize products within planned timelines or at planned scales; and

 

Continue other core activities.

 

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Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on our ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.

 

Future revenue is difficult to predict, and our failure to predict revenue accurately may cause our results to be below our expectations or those of analysts or investors and could result in our stock price declining.

 

Our revenues are comprised of product revenues and grants and collaborations revenues. We generate the substantial majority of our product revenues from sales to distributors or collaborators and only a small portion from direct sales. Our collaboration and distribution agreements do not include any specific purchase obligations. The sales volume of our products in any given period has been difficult to predict. A significant portion of our product sales is dependent upon the interest and ability of third party distributors to create demand for, and generate sales of, such products to end-users. For example, if such distributors are unsuccessful in creating pull-through demand for our products with their customers, such distributors may purchase less of our products from us than we expect. In addition, many of our new and novel products are intended to be a component of other companies’ products; therefore, sales of our products may be contingent on our collaborators’ and/or customers’ timely and successful development and commercialization of end-use products that incorporate our products. Furthermore, we are beginning to market and sell some of our products directly to end-consumers, initially in the cosmetics and industrial cleaning markets. Because we have no prior experience in marketing and selling directly to consumers, it is difficult to predict how successful our efforts will be and we may not achieve the product sales we expect to achieve in the timeline we anticipate (if at all).

 

In addition, we have entered into, and continue to look for, research and development collaboration arrangements pursuant to which we receive payments from our collaborators. Some of such collaboration arrangements include advance payments in consideration for grants of exclusivity or research efforts to be performed by us. It has in the past been difficult for us to know with certainty when we will sign a new collaboration arrangement. As a result, achievement of our quarterly and annual goals, expressed in part via a non-GAAP financial measure that we refer to as cash revenue inflows consisting of GAAP product revenues plus cash payments from collaborations and grants, has been difficult to predict with certainty. Once a collaboration agreement has been signed, receipt of payments and/or recognition of related revenues may depend on our achievement of milestones. In addition, a portion of the revenue we report each quarter results from the recognition of deferred revenue from advance payments we have received from these collaborators during previous quarters. Since our business model depends in part on collaboration agreements with advance payments that we recognize over time, it may also be difficult for us to rapidly increase our revenues through additional collaborations in any period, as revenue from such new collaborations will often be recognized over multiple quarters or years.

 

These factors have made it difficult to predict future revenue and have resulted in our revenue being below our previously announced guidance or analysts’ estimates. We continue to face these risks in the future, which may cause our stock price to decline.

 

A limited number of distributors, customers and collaboration partners account for a significant portion of our revenue, and the loss of major distributors, customers or collaboration partners could harm our operating results.

 

Our revenues have varied significantly from quarter to quarter and are dependent on sales to, and collaborations with, a limited number of distributors, customers and/or collaboration partners. We cannot be certain that distributors, customers and/or collaboration partners that have accounted for significant revenue in past periods, individually or as a group, will continue to generate similar revenue in any future period. If we fail to renew with, or if we lose a major distributor, customer or collaborator or group of distributors, customers or collaborators, our revenue could decline if we are unable to replace the lost revenue with revenue from other sources.

 

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Our existing financing arrangements may cause significant risks to our stockholders and may impact our ability to pursue certain transactions and operate our business.

 

As of September 30, 2015, our debt totaled $153.8 million, net of discount of $17.3 million, of which $20.9 million matures within the next twelve months. Our cash balance is substantially less than the principal amount of such debt, and we will be required to generate cash from operations or raise additional working capital through future financings or sales of assets to enable us to repay this indebtedness as it becomes due. There can be no assurance that we will be able to do so.

 

In addition, we have agreed to significant covenants in connection with our debt financing transactions. For example, our loan facility with Hercules Technology Growth Capital, Inc. (“Hercules”) required us to maintain unrestricted, unencumbered cash in U.S. bank accounts in an amount equal to at least 50% of the principal amount outstanding under this facility. We have received a waiver from Hercules with respect to our non-compliance with such covenants. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required would generally result in events of default under such instruments, which could permit acceleration of such indebtedness. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness permitting acceleration of such other outstanding indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness.

 

If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. Any debt financing that is available could cause us to incur substantial costs and subject us to covenants that significantly restrict our ability to conduct our business. If we seek to complete additional equity financings, the interests of existing equity holders will be diluted.

 

In addition, the covenants in our debt agreements materially limit our ability to take certain actions, including our ability to incur indebtedness, pay dividends, and make certain investments and other payments, enter into certain mergers and consolidations, and encumber and dispose of assets. For example, the purchase agreement for the Tranche I and Tranche II Notes requires us to obtain the consent of a majority of the purchasers of these notes before completing any change-of-control transaction, or purchasing assets in one transaction or a series of related transactions in an amount greater than $20.0 million, in each case while the notes are outstanding. The holders of these notes also have pro rata rights under which they could cancel up to the full amount of their outstanding notes to pay for equity securities that we issue in certain financings, which could delay or prevent us from completing such financings.

 

Our substantial leverage could adversely affect our ability to fulfill our obligations under our existing indebtedness and may place us at a competitive disadvantage in our industry.

 

Even with the completion of the Exchange, we continue to have substantial debt outstanding and we may incur additional indebtedness from time to time to finance working capital, product development efforts, strategic acquisitions, investments and alliances, capital expenditures or other general corporate purposes, subject to the restrictions contained in our existing indebtedness and in any other agreements under which we incur indebtedness. Our significant indebtedness and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of indebtedness presents the following risks:

 

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we will be required to use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and other general corporate requirements;

 

our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;

 

our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;

 

our level of indebtedness and the covenants within our debt instruments may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and

 

our substantial leverage may make it difficult for us to attract additional financing when needed.

 

If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

 

A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required, could result in events of default under such instruments, and which could permit acceleration of such indebtedness. If such indebtedness is accelerated, it could also constitute an event of default under our other outstanding indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment on the notes.

 

Our GAAP operating results could fluctuate substantially due to the accounting for the early conversion payment features of outstanding convertible promissory notes.

 

Several of our outstanding convertible debt instruments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging (or ASC 815) as an embedded derivative. For instance, with respect to our 144A Notes, if the holders elect convert their 144A Notes on or after May 15, 2015, and if the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date we receive a notice of such election exceeds the conversion price in effect on each such trading day, such converting holders will receive an early conversion payment equal to the present value of the remaining scheduled payments of interest that would have been made on the 144A Notes being converted from the earlier of the date that is three years after the date we receive such notice of conversion and maturity of the 144A Notes. The early conversion payment feature of the 144A Notes is accounted for under ASC 815 as an embedded derivative. ASC 815 requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The fair value of the derivative is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative being charged to earnings (loss). We have determined that we must bifurcate and account for the Early Conversion Payment feature of the notes as an embedded derivative in accordance with ASC 815. We have recorded this embedded derivative liability as a non-current liability on our consolidated balance sheet with a corresponding debt discount at the date of issuance that is netted against the principal amount of the 144A Notes. The derivative liability is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative liability being recorded in other income and loss. There is no current observable market for this type of derivative and, as such, we determine the fair value of the embedded derivative using the binomial lattice model. The valuation model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. Changes in the inputs for these valuation models may have a significant impact on the estimated fair value of the embedded derivative liabilities. For example, an increase in the company's stock price results in an increase in the estimated fair value of the embedded derivative liabilities. The embedded derivative liability may have, on a GAAP basis, a substantial effect on our balance sheet from quarter to quarter and it is difficult to predict the effect on our future GAAP financial results, since valuation of these embedded derivative liabilities are based on factors largely outside of our control and may have a negative impact on our earnings and balance sheet.

 

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If our major production facilities do not successfully commence or scale up operations, our customer relationships, business and results of operations may be adversely affected.

 

A substantial component of our planned production capacity in the near and long term depends on successful operations at our initial and planned large-scale production plants in Brazil. We are in the early stages of operating our first purpose-built, large-scale production plant in Brotas, Brazil and may complete construction of certain other facilities in the coming years. Delays or problems in the construction, start-up or operation of these facilities will cause delays in our ramp-up of production and hamper our ability to reduce our production costs. Delays in construction can occur due to a variety of factors, including regulatory requirements and our ability to fund construction and commissioning costs. For example, in 2012 we determined it was necessary to delay further construction of our large-scale manufacturing facility with São Martinho in order to focus on the construction and commissioning of our Brotas facility. Once our large-scale production facilities are built, we must successfully commission them and they must perform as we have designed them. If we encounter significant delays, cost overruns, engineering issues, contamination problems, equipment or raw material supply constraints, unexpected equipment maintenance requirements, safety issues, work stoppages or other serious challenges in bringing these facilities online and operating them at commercial scale, we may be unable to produce our initial renewable products in the time frame we have planned. For example, we have just begun using our plant at Brotas to produce molecules beyond Biofene, and we have, until recently, only successfully produced Biofene at scale at the plant. In order to produce additional molecules at Brotas, we have been and will be required to perform thorough transition activities, and modify the design of the plant. Any modifications to the production plant could cause complications in the start-up and operations of the plant, which could result in delays or failures in production. We may also need to continue to use contract manufacturing sources more than we expect (e.g., if the modifications to the Brotas plant are not successful or have a negative impact on the plant's operations), which would reduce our anticipated gross margins and may prevent us from accessing certain markets for our products. Further, if our efforts to increase (or commence, as the case may be) production at these facilities are not successful, other mill owners in Brazil or elsewhere may decide not to work with us to develop additional production facilities, demand more favorable terms or delay their commitment to invest capital in our production.

 

Our reliance on the large-scale production plant in Brotas, Brazil subjects us to execution and economic risks.

 

Our decision to focus our efforts for production capacity on the manufacturing facility in Brotas, Brazil means that we have limited manufacturing sources for our products in 2015 and beyond. Accordingly, any failure to establish operations at that plant could have a significant negative impact on our business, including our ability to achieve commercial viability for our products. With the facility in Brotas, Brazil, we are, for the first time, operating a commercial fermentation and separation facility ourselves. We may face unexpected difficulties associated with the operation of the plant. For example, we have in the past, at certain contract manufacturing facilities and at the Brotas facility, encountered delays and difficulties in ramping up production based on contamination in the production process, problems with plant utilities, lack of automation and related human error, issues arising from process modifications to reduce costs and adjust product specifications or transition to producing new molecules, and other s