S-1 1 d230618ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on September 16, 2011.

Registration No. 333-            

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

MASCOMA CORPORATION

(Exact Name of Registrant As Specified in Its Charter)

Delaware   2869   20-3639247

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

67 Etna Road, Suite 300

Lebanon, New Hampshire 03766

(603) 676-3320

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

William J. Brady

President and Chief Executive Officer

Mascoma Corporation

67 Etna Road, Suite 300

Lebanon, New Hampshire 03766

(603) 676-3320

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Jocelyn M. Arel, Esq.

Michael J. Minahan, Esq.

William J. Schnoor, Jr., Esq.

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

(617) 570-1000

 

Deanna L. Kirkpatrick, Esq.

Richard D. Truesdell, Jr., Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  ¨      Accelerated Filer   ¨
Non-Accelerated Filer  x(Do not check if a smaller reporting  company)      Smaller Reporting Company   ¨

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of

Securities to Be Registered

  

Proposed

Maximum Aggregate
Offering  Price(1)(2)

  Amount of
Registration Fee

Common Stock, par value $0.001 per share

   $100,000,000   $11,610

 

 

(1)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
(2)   Includes additional shares of Common Stock that the underwriters have an option to purchase.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2011

 

            Shares

 

LOGO

 

COMMON STOCK

 

Mascoma Corporation is offering shares of its common stock. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $             and $             per share.

 

We have applied to list our common stock on the             under the symbol “     .”

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11 .

 

PRICE $             A SHARE

 

      

Price to
Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Mascoma
Corporation

Per Share

     $               $                   $            

Total

     $               $                   $            

 

We have granted the underwriters the right to purchase up to an additional             shares of common stock.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2011.

 

MORGAN STANLEY   UBS INVESTMENT BANK     CREDIT SUISSE   

 

BAIRD     CANACCORD GENUITY

 

                    , 2011


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     11   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     35   

USE OF PROCEEDS

     37   

DIVIDEND POLICY

     38   

CAPITALIZATION

     39   

DILUTION

     40   

SELECTED CONSOLIDATED FINANCIAL DATA

     42   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     45   

INDUSTRY

     70   

BUSINESS

     77   

MANAGEMENT

     98   
 

 

We and the underwriters have not authorized anyone to provide you with additional or different information from that contained in this prospectus or any free writing prospectus. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other earlier date stated in this prospectus or in such free-writing prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

For investors outside of the United States: Neither we nor any of the underwriters has done anything that would permit this offering outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, and those which we intend to target, is based on information from various sources (including industry publications, surveys and forecasts and our internal research), on assumptions that we have made, which we believe to be reasonable, based on that data and other similar sources and on our knowledge of those markets. In most cases, our internal research has not been verified by any independent source. While we believe the industry information included in this prospectus is generally reliable, such information is inherently based on a number of assumptions and limitations and is therefore imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

Mascoma, MGT, the Mascoma logo and other trademarks or service marks of Mascoma appearing in this prospectus are the property of Mascoma. This prospectus contains additional tradenames, trademarks and service marks of other companies.

 

Until and including,                    , 2011 (25 days after commencement of this offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus. Unless otherwise stated, all references to “us,” “our,” “Mascoma,” “we,” the “Company” and similar designations in this prospectus refer to Mascoma Corporation and its subsidiaries. In addition, all references to “our hardwood CBP facilities” refer to the first two hardwood CBP facilities that will be built, owned and operated by our collaborators in Kinross, Michigan and Drayton Valley, Alberta and to which we intend to license our technology.

 

Mascoma Corporation

 

Overview

 

We are a renewable fuels company that has developed innovative technology for the low-cost conversion of abundant biomass. Our highly adaptable technology has also been demonstrated to convert biomass to renewable chemicals. Using our proprietary consolidated bioprocessing, or CBP, technology platform, we have developed genetically-modified yeasts and other microorganisms to reduce costs and improve yields in the production of renewable fuels and chemicals. Our CBP technology provides us with the ability to use a variety of feedstocks to produce multiple renewable fuel and chemical end-products. We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. We believe that these facilities will offer compelling economic value to us and our collaborators based on the expected operating costs of these facilities and today’s market prices for fuel and feedstocks. In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple high-value end-products, such as advanced fuels and chemicals, from many different feedstocks.

 

Conversion of cellulosic biomass typically involves a difficult process of breaking down the complex sugars found in plant material into simple, easy-to-process sugars and then converting these simple sugars into end-products. Our proprietary microorganisms, and our methodology for producing them, allow us to streamline the biomass conversion process and alleviate the need to purchase most of the expensive enzymes used in the process. Our microorganisms have been demonstrated to convert different types of plant material into fuel and chemical end-products in industrial processing conditions. We have built on decades of research to develop and acquire intellectual property related to biomass conversion technologies, including in the fields of pretreatment, hydrolysis, metabolic pathway engineering, enzyme expression and processes for biomass conversion. As of September 1, 2011, we owned or had licensed rights to approximately 75 distinct patent families in the United States, Canada and various other foreign jurisdictions covering our products, technologies and processes, which included approximately 9 issued patents and approximately 205 pending patent applications in the United States and various foreign jurisdictions.

 

We have established a staged strategy for the commercialization of our innovative CBP technology platform in the renewable fuels and chemicals industries. Our first commercial application of CBP technology is our genetically-modified MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. We expect to begin selling this product in 2012. We believe this product is capable of significantly improving the economics of corn ethanol production with negligible capital expenditures and will generate near-term revenue and gross margin for our company. We intend to capture, through a license

 

 

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agreement or other arrangement, a significant portion of the incremental margin generated by our line of MGT yeast products. We plan to pursue the corn ethanol market first in order to capitalize on the size and maturity of this market, the technologically advanced nature of our MGT product compared to conventional yeasts and our ability to cost-effectively deploy our CBP technology. Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. Based on laboratory test runs and management estimates of ethanol production costs, we believe that our initial MGT product will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon. As a result, we believe that this product can create significant and immediate value to corn ethanol producers, which collectively produced over 13 billion gallons of corn ethanol in the United States in 2010. Future generations of our MGT product are also expected to improve ethanol yields, further lowering production costs and potentially increasing revenue for corn ethanol producers. Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements of up to 4%. Our MGT yeast products are subject to scientific review by the Center for Veterinary Medicine, or CVM, section of the Food and Drug Administration. See the section entitled “Business—Regulatory Matters” for more information about this regulatory process.

 

We are also working with leading industry participants to develop and construct commercial scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. Based on pilot production runs at our demonstration facility in Rome, New York, we have achieved hardwood to ethanol conversion yields of 67 gallons per bone dry short ton of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per bone dry short ton of hardwood and we are working to continue to improve conversion yields. At our planned 20 million gallon per year commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per bone dry short ton of hardwood with unsubsidized cash operating costs of approximately $1.77 per gallon. These estimates assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood and are based on a 20 million gallon per year facility. Over the next several years we are targeting unsubsidized cash operating costs, net of revenue from the sale of co-products such as electricity, of less than $1.00 per gallon based on ethanol yields of 87 gallons per bone dry short ton of hardwood, increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

We expect that our first two hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we expect to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees and/or an equity interest in the facilities. For these two initial hardwood CBP facilities we expect to use government grants in addition to equity funding from strategic partners, but for future facilities we expect to rely primarily on financing from strategic and financial partners.

 

In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple fuel and chemical end-products from a variety of feedstocks. Beyond corn and hardwood, we have already shown the flexibility of our CBP technology platform through the conversion into ethanol of a number of additional feedstocks in a laboratory setting, including corn stover, sugarcane bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum, many of which are abundant and have limited end uses. We believe our feedstock flexibility will enable us to more effectively enter new geographic markets. In terms of end-products, we have demonstrated in a laboratory setting the production of propanol and fatty acids. These chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements, and we plan to continue to expand the number of potential end-products.

 

 

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Market Opportunity

 

As a result of our highly adaptable CBP technology platform, we intend to operate across the renewable fuels and chemicals industries, with a near-term focus on ethanol. We believe there is a significant market need for a low-cost, more sustainable alternative to petroleum-based products that is less volatile with respect to price and supply.

 

First Generation Ethanol

 

Virtually all the ethanol produced globally today is from edible sugar and starch sources, including corn in the United States and sugarcane in Brazil. These fuels are commonly referred to as first generation biofuels. The ethanol industry has grown significantly over the past several years. According to the Renewable Fuels Association, or RFA, U.S. corn ethanol production increased from 3.6 billion gallons in 2005 to over 13 billion gallons in 2010, which represented a compound annual growth rate of over 30% for that period, and ethanol exports in 2010 hit a record high of 350 million gallons. As of 2010, over 200 ethanol plants existed in the United States. We believe this large and established industry presents a compelling market for our drop-in MGT yeast product. In addition, current ethanol producers benefit from a volumetric ethanol excise tax credit from the Internal Revenue Service of $0.45 per gallon of ethanol produced or sold domestically. With the potential expiration of this credit in the near-term, we believe corn ethanol producers will be motivated to purchase products that reduce operating costs and improve ethanol yields to support their margins.

 

Second Generation Ethanol

 

As the demand for biofuels continues to grow, we believe production will shift increasingly from food-based to non-food based sources. Fuels produced from municipal solid waste and non-food plant materials such as hardwood, bagasse, corn stover and dedicated energy crops like switchgrass and miscanthus, are commonly referred to as second generation biofuels. While corn is expected to remain the primary feedstock for ethanol production in the United States in the near-term, there is an increasing push to produce ethanol and other biofuels from non-food plant materials. The U.S. Renewable Fuel Standard Program, or RFS, was established by the U.S. Environmental Protection Agency, or EPA, in 2005 under the Energy Policy Act of 2005. As required by the Energy Independence and Security Act of 2007, the standards were revised in February 2010. We refer to these modifications as RFS2, which, among other requirements, mandate that 36 billion gallons of renewable fuels (such as biofuels) from multiple sources be blended into transportation fuels by 2022. Of the 36 billion gallons of renewable fuels mandated by 2022, 20 billion gallons are mandated to be advanced biofuels (excluding 1 billion gallons of biomass-based diesel), with at least 16 billion gallons required to be cellulosic biofuels. Biofuels are primarily produced from corn, cereal grains, sugarcane and other organic materials. Advanced biofuels are renewable fuels that produce at least 50% less greenhouse gases, or GHG, on a life cycle basis compared to GHG emissions of petroleum products as measured in 2005. Cellulosic biofuels are renewable fuels produced from wood, grasses or non-edible parts of plants that produce at least 60% less GHG on a life cycle basis compared to GHG emissions of petroleum products as measured in 2005. The vast majority of ethanol consumed in the United States today is produced from corn and does not satisfy RFS2 advanced biofuels requirements. We expect the ethanol produced at our hardwood CBP facilities will be a cellulosic biofuel and we intend to capitalize on this mandated market.

 

Market Challenges

 

The market for renewable fuels and chemicals has evolved significantly over the past several years, with many companies seeking to capitalize on the growing market potential and the environmental benefits offered by these products. However, many challenges exist and we believe that companies will need to satisfy the following criteria to succeed in this market:

 

   

Demonstrated and Validated Technology. Numerous technologies have been offered as solutions for producing renewable fuels and chemicals. However, in order to become economically viable, many

 

 

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of these emerging technologies rely on anticipated technological improvements and future cost reductions. We believe there is a clear market demand for technologies that have been demonstrated and are expected to be cost-competitive at a commercial scale. We believe that the validation and adoption of a particular technology by independent third parties, whether as engineering, off-take or feedstock partners, are critical.

 

   

Comprehensive, Integrated Process. Many of the emerging technologies in the second generation biofuels markets are focused on just one of the steps in the biomass conversion process. These solutions rely on compatibility with, and often improvements in, other stages of the process by third parties in order to achieve economic viability. As a result, we believe there is a strong need for a comprehensive and viable biochemical solution that facilitates biomass conversion without dependence on other pending emerging technologies.

 

   

Low Cost. We believe that market participants are focused on a technology’s all-in cost, which takes into account upfront capital spending as well as ongoing operating costs. Most of the non-feedstock operating costs in current processes are related to the need to purchase most of the expensive enzymes required to make the technology work. For example, we believe enzymes may account for approximately $0.50 per gallon in operating costs for cellulosic ethanol facilities. As a result, we believe a process that eliminates or reduces enzyme and associated costs would have an advantage over other technologies.

 

   

Flexibility. Currently, the vast majority of biofuels are developed from food-based feedstocks such as corn, cereal grains and sugarcane. Given their dependence on a single feedstock, corn ethanol producers have been significantly impacted by volatility in the price of corn. It is expected that future growth in this industry will come from non-food feedstocks. The technologies utilized by producers of first generation ethanol are currently used to produce one primary end-product and are generally unable to process inputs other than their primary feedstock. We believe ethanol producers and other industry participants are looking for a flexible technology that can be applied to different feedstocks and can produce various end-products.

 

Our Competitive Strengths

 

We believe that we benefit from the following competitive strengths:

 

   

Proven CBP Technology. We have demonstrated the performance of our MGT yeast product and hardwood CBP technology as follows:

 

   

Validation of the performance of our initial MGT yeast product by ICM, Inc., the leading provider of engineering services to the ethanol industry;

 

   

Successful production runs using our hardwood CBP microorganisms, including more than 1,000 continuous hours of operating data on a fully-integrated basis at our demonstration facility in Rome, New York;

 

   

Validation of our hardwood CBP technology by independent engineers at the U.S. Department of Energy and by independent third parties; and

 

   

Proven commercial use of the core equipment used in our biomass conversion process, with the front-end pretreatment equipment traditionally used in the pulp and paper industries, and the back-end distillation equipment used in the fuels and petrochemical industries.

 

   

Comprehensive and Efficient Biochemical Solution for Biomass Conversion. We know of no other company that provides a comprehensive biochemical solution for the production of renewable fuels and chemicals from multiple feedstocks that covers the full spectrum of the biomass conversion process, including pretreatment, hydrolysis and fermentation. By controlling key aspects of our manufacturing process, we are not reliant on technological improvements or cost reductions by third parties to be

 

 

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cost-competitive. We believe our CBP technology platform, which converts cellulosic biomass into high-value end-products in a single step, increases our ability to reduce costs for both corn ethanol producers and producers of second generation ethanol and provides us with a competitive advantage over other technologies and processes.

 

   

Low All-in Cost Solution. CBP is distinct from other, less integrated configurations, in that it alleviates the need to purchase most of the expensive enzymes associated with most other ethanol production methods while also improving yields. In doing so, the technology enables the cost-effective conversion of cellulosic biomass into renewable fuels and chemicals, and lowers costs in first generation ethanol production. Our substantial experience with CBP technology has enabled us to develop an integrated biomass conversion solution that is differentiated by its cost-effectiveness today, without government subsidies or incentives or third-party improvements in technology or yield. In addition, we believe there will be significant future cost reduction opportunities using our CBP technology as we gain experience with commercial processing and benefit from economies of scale.

 

   

Capital-Light Path to Revenue Generation. The commercialization of our initial MGT yeast product is not dependent on any meaningful capital expenditures by us or any third parties. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we intend to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees from and/or an equity interest in each facility to provide us with a share of that facility’s profits and related cash flow. As a result, we believe our business model has the potential to generate significant financial returns while minimizing our operational and financial risk.

 

   

Feedstock Flexible and Adaptable Technology. CBP is a flexible technology that we believe can be adapted for a wide variety of potential feedstocks. As a result, we expect that we will be able to adjust our focus based on long-term changes in the market demand for particular feedstocks. Being feedstock flexible also allows us to provide a value-add product to the mature first generation ethanol market in the near-term, while, over time, adapting our technology for use in different regions based on the feedstock that is the least expensive and most abundant in the region. To date, in addition to our proven ability to convert corn and hardwood, we have also successfully demonstrated in a laboratory setting the ability to convert a number of additional feedstocks including corn stover, bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum. In the long-term, we believe our adaptable CBP technology will also enable us to produce a variety of end-products, including advanced fuels and chemicals.

 

   

Deep Domain Expertise. We believe that our business is differentiated by our ability to leverage the deep domain expertise of an exceptional and distinguished group of executives, scientists and partners. Our management team has a strong, demonstrated record of leadership and growth in the fuel, chemical and biotechnology industries. We were founded by pioneers in consolidated bioprocessing and cellulose conversion, Dr. Lee Lynd and Dr. Charles Wyman, who, together with Dr. Michael Ladisch, are our key science officers. They possess deep domain knowledge of cellulosic biomass, biomass conversion, pretreatment, fermentation and related processes and regularly provide us with insight into important technical and engineering aspects of the conversion of cellulosic biomass into renewable fuels and chemicals. We believe that our combination of management, intellectual property, know-how and technical expertise sets us apart in the industry.

 

 

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Our Strategy

 

We have a staged approach for the commercialization of our CBP technology. We intend to go to market first with our genetically-modified MGT yeast product while also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. Our long-term goal is to provide the leading technology to advanced biorefineries for the conversion of biomass from non-food plants to fuels and chemicals.

 

   

Deploy our Proprietary MGT Product to the Large and Established Corn Ethanol Market. Our first commercial application of CBP technology is our proprietary MGT product, which is a genetically-modified yeast product that can be used by corn ethanol producers as a drop-in substitute for conventional fermenting yeast. Following the completion of CVM review and approval, we intend to market this product to the more than 200 corn ethanol plants that, according to the RFA, produced over 13 billion gallons of ethanol in the United States in 2010. We believe our initial MGT product is capable of significantly improving the economics for corn ethanol producers and will generate near-term revenue and gross margin for our company and requires negligible capital expenditures. Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements in commercial-scale ethanol production of up to 4%. We believe this compelling value proposition will drive rapid adoption of our MGT products among first generation ethanol producers, solidify our technology leadership position and help establish our credibility in the larger fuel market.

 

   

Convert Hardwood Pulpwood into Cellulosic Ethanol on a Commercial Scale. We believe that converting hardwood to cellulosic ethanol is the best entry point into the advanced biofuels market given the abundant supply and low cost of hardwood feedstock. We are working with leading industry participants to develop and construct our first two hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta. We expect construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. We believe that our hardwood CBP facilities will serve as the foundation for our expansion into new feedstocks and end-products and that the success of our initial hardwood CBP facilities may facilitate the use of traditional project financing for future facilities.

 

   

Expand into New Geographies and Different Feedstocks. Upon successful commercial application of our CBP technology platform to hardwood feedstocks in North America, we believe we will be able to apply this highly adaptable technology to different feedstocks and enter new geographic markets. For example, we believe there is significant market opportunity to adapt our CBP technology through the development of microorganisms to convert sugarcane bagasse and cane trash into ethanol, which are abundant and low-cost feedstocks in Brazil and other geographies. We are also exploring the application of our technology in other countries including Canada, China, India and South Africa.

 

   

Enable Advanced Biorefineries. Our long-term goal is to enable the development of advanced biorefineries that utilize multiple feedstocks to produce a wide variety of high-value fuels and chemicals. The biorefinery concept is analogous to petroleum refineries that currently produce a wide spectrum of fuels and chemicals from petroleum. However, unlike petroleum refineries, a biorefinery utilizing our technology could be adapted for a different feedstock or end-product without significant changes to its installed infrastructure. Through a biorefinery approach, we intend to expand into the industrial chemicals market through conversion of biomass feedstock into higher-value chemicals such as ethylene and propylene derivatives by adding on to existing hardwood CBP facilities and by developing dedicated biomass-to-chemical refineries. The markets for these chemicals are global, growing and significant, and we believe that in the future we will be able to access these markets with our technology platform.

 

 

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Risk Factors

 

Our business is subject to many risks and uncertainties, as more fully described in the section entitled “Risk Factors” in this prospectus, of which you should be aware before investing in our common stock. For example:

 

   

We have a limited operating history, a history of losses and the expectation of continuing losses.

 

   

We may not achieve or sustain positive cash flow and we may be unable to obtain additional financing to grow our business, develop or enhance our products or respond to competitive pressures.

 

   

In order to sell any of our MGT yeast products to corn ethanol producers we must obtain regulatory approval, and any delays in receiving approval could have a material adverse effect on our business, financial condition and results of operations.

 

   

Our MGT yeast products may not perform as expected or be accepted by ethanol producers.

 

   

We will rely on third parties to manufacture, validate and commercialize our MGT yeast product, and actions by these third parties may adversely affect the commercialization and market acceptance of our MGT products.

 

   

We have no experience applying our CBP technology to the production of renewable fuels or chemicals at commercial scale and our management has limited experience in the renewable fuels and chemicals business, and as a result, we may not be successful in commercializing our hardwood CBP technology.

 

   

We will rely on third parties to commercialize our hardwood CBP technology and as a result the successful implementation of our technology will be dependent on these parties performing satisfactorily.

 

   

We and our collaborators may encounter unforeseen operational and financial difficulties in constructing our hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta.

 

   

The government grants and awards that we receive are subject to certain conditions and obligations and if we fail to meet our obligations the research funded by these grants and the construction of our initial commercial-scale hardwood CBP facilities may be materially delayed.

 

   

Our hardwood CBP commercialization strategy relies heavily on our ability to negotiate and execute definitive agreements with third parties.

 

   

The market for renewable fuels and chemicals may not develop as anticipated.

 

Our Corporate Information

 

We were incorporated in the state of Delaware on October 14, 2005. Our principal executive offices are located at 67 Etna Road, Suite 300, Lebanon, New Hampshire 03766 and our telephone number is (603) 676-3320. Our website address is www.mascoma.com. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock to be outstanding after this offering

             shares

 

Underwriter’s option to purchase additional shares

The underwriters have an option to purchase a maximum of             additional shares of              common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $            , or $             if the underwriters fully exercise their option to purchase additional shares, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including for sales and marketing activities related to our MGT yeast product and for research and development activities, including those related to our next-generation MGT yeast products, the scale-up of our hardwood CBP technology and the application of our technology to other potential feedstocks and end-products, including renewable chemicals. We may also use net proceeds for possible investments in, or acquisitions of, complementary businesses, services or technologies. See the section entitled “Use of Proceeds.”

 

Risk factors

You should read carefully the section entitled “Risk Factors” for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

The number of shares of our common stock to be outstanding after this offering is based on 54,043,199 shares of our common stock outstanding as of June 30, 2011, and excludes:

 

   

9,535,916 shares of our common stock issuable upon exercise of outstanding options as of June 30, 2011 at a weighted-average exercise price of $2.14 per share;

 

   

4,986,648 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2011 at a weighted-average exercise price of $3.48 per share; and

 

   

4,513,742 shares of our common stock reserved as of June 30, 2011 for future issuance under our equity incentive plans that are not issued or subject to outstanding grants.

 

Except as otherwise indicated, all information in this prospectus is as of June 30, 2011 and reflects or assumes:

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended bylaws as part of the consummation of this offering;

 

   

the conversion of the outstanding shares of our convertible preferred stock into an aggregate of 46,318,457 shares of our common stock upon the consummation of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional              shares of our common stock in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following table presents our summary consolidated financial data for the periods indicated. The summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 presented below are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statement of operations data for the six months ended June 30, 2010 and 2011 and the summary condensed consolidated balance sheet data as of June 30, 2011 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. Historical results are not necessarily indicative of the results for future periods. You should read this summary consolidated financial data in conjunction with the sections entitled “Capitalization,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Years Ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2010     2011  
    (in thousands, except share and per share data)  

Consolidated statements of operations data:

         

Total revenues

  $ 3,896      $ 8,436      $ 15,492      $ 5,711      $ 6,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost or product sales and operating expenses

         

Cost of product sales

                  1,120               455   

Research and development(1)

    24,327        28,270        26,539        12,450        13,203   

Selling, general and administrative(1)

    9,344        5,059        10,212        3,947        5,036   

Loss on asset disposals and lease abandonment

    799        9,213                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    34,470        42,542        37,871        16,397        18,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (30,574     (34,106     (22,379     (10,686     (12,026

Other income (expense), net

    113        (1,366     (3,407     288        (2,337

Equity in loss of equity method investment

                  (143            (173
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (30,461     (35,472     (25,929     (10,398     (14,536

Amount attributable to redeemable noncontrolling interest

           (2,830     201        87        19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Mascoma Corporation

    (30,461     (38,302     (25,728     (10,311     (14,517

Accretion of redeemable convertible preferred stock

    (216     (253     (205     (124     (279
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders of Mascoma Corporation

  $ (30,677   $ (38,555   $ (25,933   $ (10,435   $ (14,796
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Mascoma common stockholders per share—basic and diluted

  $ (12.25   $ (12.61   $ (5.39   $ (3.15   $ (1.92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic and diluted

    2,505,159        3,058,138        4,813,191        3,315,566        7,724,742   

Pro forma net loss attributable to Mascoma common stockholders per share (unaudited)—basic and diluted(2)

      $ (0.52     $ (0.27

Pro forma weighted-average common shares outstanding (unaudited)—basic and diluted(2)

        49,798,315          54,043,199   

 

 

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(1)   Includes stock-based compensation expense (see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-Based Compensation” elsewhere in this prospectus for additional information).
(2)   Net loss used in computing pro forma basic and diluted net loss per share and the number of weighted-average common shares used in computing pro forma basic and diluted net loss per share give effect to the automatic conversion of all of our outstanding convertible preferred stock into 46,318,457 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.

 

     As of June 30, 2011
     Actual     Pro forma(1)      Pro forma as
adjusted(2)
     (in thousands)

Consolidated Balance Sheet Data:

       

Cash, cash equivalents and short-term investments

   $ 12,092      $ 12,092      

Working capital

     6,382        6,382      

Total assets

     85,826        85,826      

Long-term debt (including current portion)

     10,000        10,000      

Redeemable convertible preferred stock

     158,269             

Redeemable common stock

     1,172             

Warrant liabilities

     7,429             

Stockholders’ (deficit) equity

     (118,722     48,148      

 

(1)   The pro forma consolidated balance sheet data gives effect to (i) the conversion of all of our outstanding convertible preferred stock in connection with the completion of this offering, (ii) the termination of the put rights held by the holder of our redeemable common stock, and (iii) conversion of all of our warrants for convertible preferred stock into warrants for common stock and the related reclassification of the warrant liabilities to stockholders’ equity upon the completion of this offering.
(2)   The pro forma as adjusted consolidated balance sheet data gives effect to (i) the conversion of all of our outstanding convertible preferred stock in connection with the completion of this offering, (ii) the termination of the put rights held by the holder of our redeemable common stock, and (iii) conversion of all of our warrants for convertible preferred stock into warrants for common stock and the related reclassification of the warrant liabilities to stockholders’ equity upon the completion of this offering, and (iv) the sale of              shares of common stock in this offering at the initial public offering price of $             per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks or uncertainties actually occurs, causing you to lose all or part of your investment. Certain statements below are forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

 

Risks Related to Our Business and Our Industry

 

We have a limited operating history, a history of losses and the expectation of continuing losses.

 

Our company has only been in existence since October 2005 and we have no experience in the markets in which we intend to operate. Through June 30, 2011, we generated revenue primarily from government grants and product sales consisting of equipment for the pretreatment of biomass feedstocks. In the year ended December 31, 2010, our total revenue was $15.5 million with government grants constituting 86% of our revenue and product sales and other service agreements constituting 14% of our revenue. We have incurred substantial net losses since our inception, including net losses of $30.5 million, $35.5 million and $25.9 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $14.5 million for the six months ended June 30, 2011. We expect these losses to continue. As of June 30, 2011, we had an accumulated deficit of $138.0 million. We have not yet commercialized any of our products and technologies. We intend to sell our Mascoma Grain Technology, or MGT, yeast product to corn ethanol producers but have not yet negotiated agreements for the manufacture or sale of our MGT yeast product. We also intend to participate in the development and construction of facilities in Kinross, Michigan and Drayton Valley, Alberta for the production of ethanol from hardwood feedstocks, however we and our collaborators have not yet secured financing for the development and construction of these facilities. The risks associated with our ability to commercialize our MGT yeast product and our hardwood consolidated bioprocessing, or CBP, technology are described in more detail below. We expect to continue to incur substantial costs and expenses in connection with our planned commercialization of our MGT yeast product, the planned construction and scale-up of our hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta and the expansion of our research and development activities. We will need to generate and sustain increased revenue levels in future periods in order to become profitable. We cannot assure you that we will ever achieve or sustain profitability on a quarterly or annual basis. Any assessments of our business and predictions you make about our future success or viability may not be as accurate as they could be if we had an operating history on which you could base your assessments and predictions, including our ability to generate revenue and execute our business plan.

 

We may not achieve or sustain positive cash flow and we may be unable to obtain additional financing to grow our business, develop or enhance our products or respond to competitive pressures.

 

We are entirely dependent on financing activities to fund our capital expenditures and working capital requirements. To develop our products and technology, we have made significant investments in research and development. Our cash used in operating activities and capital expenditures was $54.5 million, $31.7 million and $22.7 million in the years ended December 31, 2008, 2009 and 2010, respectively, and $11.1 million in the six months ended June 30, 2011. Since our inception through June 30, 2011, we have raised an aggregate of $135.3 million from private placements of equity securities and debt financing, including $105.3 million in proceeds from the sale of preferred equity securities, $10.0 million in proceeds from the sale of convertible notes, and $20.0 million in borrowings under our secured debt financing arrangements. In addition, for our two initial hardwood CBP facilities we expect to use government grants in addition to equity funding from strategic partners, and for future facilities we expect to rely primarily on financing from strategic and financial partners. We anticipate that we will continue to have negative cash flow for the next several years as we continue to incur substantial costs and expenses related to the development and expansion of our business, including our research,

 

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testing and development expenses. Our business will also require significant amounts of working capital to support our growth. Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, our interest expense would increase. Our inability to generate positive cash flow in the future or raise additional capital on reasonable terms would materially and adversely affect our business, financial condition and results of operations.

 

In order to sell any of our MGT yeast products to corn ethanol producers, we must obtain regulatory approval, and any delays in receiving approval will have a material adverse effect on our business, financial condition and results of operations.

 

We intend to sell our proprietary MGT yeast product to corn ethanol producers. Certain by-products of the corn ethanol conversion process are used as animal feed. Our MGT products are genetically modified and are considered to be processing aids in the production of animal feed. As a result, our MGT products are subject to regulation by the U.S. Food and Drug Administration’s Center for Veterinary Medicine, or CVM, and must subsequently be approved by the American Association of Feed Control Officers, or AAFCO. The first release of our MGT product, or MGT 1.0, is currently under scientific review at CVM. Because our MGT product is a genetically modified organism, or GMO, the CVM review process may require significant time. While we expect CVM to complete its review in the fourth quarter of 2011 or early 2012, such reviews can take years, and there is no guarantee the scientific review of our MGT yeast product will result in a positive outcome. Further, approval by CVM does not guarantee approval by AAFCO. We are also developing next-generation MGT product releases that increase yields in addition to further reducing the need for exogenous enzymes, and we will also need to secure regulatory approval of these and any future MGT products used as processing aids in the production of animal feed. We have spent considerable time and resources developing our line of MGT yeast products. Other than government grants and sales of pretreatment equipment, the planned sale of our MGT product to corn ethanol producers is our only potential near-term source of revenue. Any delay in receiving regulatory clearance will slow or prevent the commercialization of these products, which will have a material adverse effect on our business, financial condition and results of operations.

 

Our MGT yeast products may not perform as expected or be accepted by ethanol producers.

 

Subject to CVM review and approval and the execution of agreements with third parties required for the manufacture and commercialization of our MGT 1.0 product, we intend to begin selling our MGT 1.0 yeast product to corn ethanol producers for use in the ethanol production process. However, the yeast products currently being used by corn ethanol producers have been used for many years and corn ethanol producers may not be willing to add, or may be skeptical of adding, a new product to their production process. We expect new customers, particularly early adopters, to conduct tests of our products and/or to initially use our products for a limited percentage of their operations in order to confirm for themselves the products’ efficacy and performance. These trials may result in a slower roll-out than expected. ICM, Inc., the leading provider of engineering services to the ethanol industry, has validated the performance of our MGT 1.0 product, however, this product has not yet been tested by a broad range of potential customers or at commercial scale. In addition, while ICM is also in the process of testing our next-generation MGT product, the expected yield increases associated with that product have not yet been validated by any third parties. There can be no assurance that the results of any future tests by ICM, potential customers or other third parties of our MGT products will be consistent with results achieved by us in a pilot or laboratory setting. There can be no assurance that these or any future generations of our MGT product will perform as expected or that the cost savings to corn ethanol producers will meet our or their expectations. Any revenue from our MGT product will be primarily based on the incremental cost savings to corn ethanol producers from using our MGT product and their actual cost savings may not meet our expectations. We intend to sell our MGT product at a higher price than corn ethanol producers currently pay for conventional fermenting yeast. To be successful, we will need to convince corn ethanol producers that the higher price of our

 

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product is justified by the benefits that the product provides. We cannot guarantee that our efforts to educate corn ethanol producers about the benefits of our genetically-modified MGT products will be effective. Even if effective, these efforts may take a significant amount of time and corn ethanol producers may delay large purchases of our MGT product until the benefits are demonstrated at additional test sites. Further, even if producers adopt our MGT 1.0 product, there is no assurance that they will also adopt future releases of our MGT products. Failure by us to successfully market and sell our MGT product to one or more of the corn ethanol industry’s leading participants would directly limit our market penetration and could influence the credibility of our MGT product. If corn ethanol producers do not adopt our MGT product, our business and results of operations will be materially and adversely affected.

 

We will rely on third parties to manufacture, validate and commercialize our MGT yeast product, and actions by these third parties may adversely affect the commercialization and market acceptance of our MGT products.

 

While we have not finalized any commercial arrangements, we expect to rely on third parties for the manufacture of our MGT yeast product. Our use of third parties reduces our control over our product and exposes us to certain risks. For example, our operations could be materially disrupted if we lose one of our manufacturers or if one of our manufacturers experiences a significant interruption in its business and is unable meet our demand. If it is necessary to replace our manufacturers, either with toll manufacturers or with our internal resources, we may need to incur additional costs. If any of these manufacturers do not fulfill their contractual duties, meet expected deadlines or provide quality products, we may not be able to meet our obligations to our customers, which could result in damage to our reputation and adversely affect our business and results of operations. We may also rely on our yeast manufacturer or other third parties to assist in the sale of our MGT product to corn ethanol producers. These third parties may not be effective at selling our products. If the third parties we rely on to sell our products do not fulfill their contractual duties or perform effectively, our business, results of operations and financial condition could be materially and adversely affected. Further, if we rely on a single or small number of third parties for the manufacture of our MGT product, we will be exposed to the credit risk of those third parties.

 

In addition, while we have not yet entered into a definitive agreement, our commercialization strategy for our MGT product also relies in part on our relationship with ICM. ICM is an ethanol plant engineering company that has designed approximately 60% of the operating ethanol production capacity in the United States. ICM helps test and, if the results warrant, validate our MGT product. To date, ICM has provided independent validation of the performance of our initial MGT product and is currently in the process of validating our next-generation MGT product. There can be no assurance that these or future generations of our MGT products will receive validation from ICM or any other third parties on the schedule we expect or at all. We may experience difficulty commercializing these products without third party validation. We expect to rely on ICM to facilitate the adoption of the MGT product by third party corn ethanol producers in their production process. We cannot be certain that a definitive agreement with ICM with regard to the testing of our MGT product will be reached or that ICM will agree to facilitate the adoption of our products by corn ethanol producers. If we do not enter into an agreement or if our relationship with ICM is terminated for any reason or if ICM fails to validate our products, we may encounter difficulties in commercializing our products and accordingly, our business and prospects could be materially and adversely affected.

 

We have no experience applying our CBP technology to the production of renewable fuels or chemicals at commercial scale and our management has limited experience in the renewable fuels and chemicals business, and as a result, we may not be successful in commercializing our hardwood CBP technology.

 

To date, we have only produced renewable fuels at pilot scale and have only produced renewable chemicals in a laboratory setting. To successfully commercialize our CBP technology, we must be able to deploy our technology to enable the production of cellulosic ethanol on a cost-competitive basis at commercial scale. We cannot provide any assurance that we will be able to do so. Our management team has significant experience in

 

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our technology, however, the skills and knowledge gained in operating our demonstration facility in Rome, New York may prove insufficient to successfully scale our technology for use at a commercial-scale facility. While we have demonstrated CBP for the conversion of hardwood feedstock into cellulosic ethanol at our demonstration facility in Rome, New York, there are still significant technical, logistical and financial hurdles for us to overcome prior to commercialization. Our management has limited experience with facilities of commercial scale and as a result, we and our collaborators may not be able to resolve technological challenges associated with biomass conversion at this scale. We can provide no assurance that our technology will perform as expected when applied at commercial scale. We are working with leading industry participants to develop and construct our initial hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta. If constructed, these facilities will be the first of their kind in the world. As a result, we and our collaborators will not be able to benefit from the experience of others and are likely to encounter unexpected problems and challenges in the construction and operation of these facilities. The failure of our technology to perform as expected at commercial scale would have a material adverse effect on our business, financial condition and results of operations.

 

We will rely on third parties to commercialize our hardwood CBP technology and as a result the successful implementation of our technology will be dependent on third parties performing satisfactorily.

 

While we have not finalized commercial arrangements, we expect to collaborate with third parties to fund, build, develop and operate the commercial-scale hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta, and for future facilities. Our reliance on third parties reduces our control over the funding and construction of these facilities and the production and sale of the ethanol produced using our technology, including the operating costs of the facilities, which will expose us to certain risks. These facilities are first-of-kind projects, and we cannot assure you that our collaborators will be able to complete construction on schedule, effectively operate our CBP technology, produce cellulosic ethanol of sufficient quality or convert hardwood into ethanol at high enough yields and low enough costs to be profitable. If and when these facilities are completed, we will have limited or no control over the amount or timing of resources that our collaborators commit to our collaboration. Our collaborators may experience a change of policy or priorities or may fail to perform their obligations as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not devote sufficient resources to the manufacturing, marketing or sale of cellulosic ethanol produced using our CBP technology. Moreover, disagreements with a collaborator regarding strategic direction, economics of our relationship, intellectual property or other matters could develop, and any such conflict could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one or more existing strategic collaborators. In addition, our collaborators may also pursue competing technologies that may ultimately prove more compelling than ours. If any of these events occur, we may not be able to successfully commercialize our hardwood CBP technology. Additionally, our business could be negatively impacted if any of our collaborators undergo a change of control or assigns the rights or obligations under any of our agreements. If any of our collaborators were to assign these agreements to our competitors or to a third party who is not willing to work with us on the same terms or commit the same resources as the current collaborator, our business and prospects could be materially and adversely affected.

 

We and our collaborators may encounter unforeseen operational and financial difficulties in constructing our hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta.

 

Currently, our hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta are only in the planning stages and therefore we cannot assure you that these facilities will be completed on the schedules we expect or at all. If and when our collaborators complete construction of our initial-scale hardwood CBP facilities, our collaborators may not be able to process hardwood feedstocks at anticipated yields and volumes, and we and our collaborators may be unable to improve its performance. Constructing a commercial-scale biomass conversion facility of this type and size is a complex and lengthy undertaking that requires sophisticated, multi-disciplinary planning and precise execution. The successful processing of hardwood feedstocks will require integrating the multiple steps in the process into one continuous operation. The production of cellulosic ethanol

 

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in our hardwood CBP facility in Kinross, Michigan represents a “first of its kind” commercialization, and the complete process from sourcing the feedstock to producing ethanol has not yet been demonstrated in one contiguous operation at commercial scale.

 

Our CBP technology platform is highly complex and the specifications for the pretreatment, hydrolysis, fermentation and distillation processes may need to be adjusted to meet required feedstock, end-product or volume specifications. These adjustments may require additional resources or equipment which could increase costs and delay commercialization. For example, we may not be able to successfully integrate distinct pretreatment processes piloted at our demonstration facility in Rome, New York into a single unit at our planned hardwood CBP facilities. The volume, characteristics and purity of our products may not meet expectations and we may not achieve the economies of scale that we expect. The optimal metabolic pathways needed to reach our targeted yield levels may be patented by other companies, making it expensive or impossible for us to utilize those pathways. If any of these risks were to occur, it would impact the viability and credibility of our CBP technology. We may be unable to lower operating costs and increase our overall yields in order to produce renewable fuels and chemicals on a cost-competitive basis with existing petroleum-based fuel products without government incentives.

 

Our hardwood CBP facilities will have substantial capital costs, which pose significant risks to the economic viability of these facilities and may make it more difficult to attract government grants, third party investors and collaborators to fund these projects. If we fail to receive expected financing, or if we require additional financing, we may need to seek out new collaborators, which would create delays and increased costs. As described in more detail below, we and our collaborators are relying to some extent on government funding to build these facilities. If these grant agreements are terminated, our and our collaborators’ ability to complete the construction of our planned facilities could be impaired. The construction of additional facilities in the future may also be delayed by increased costs, weather delays, and the receipt of approvals and permits from various regulatory agencies, which may materially impact our business, financial condition and results of operations. Any significant delays in the timing or our commercialization strategy could materially and adversely affect our business, financial condition and results of operations.

 

The government grants and awards that we receive are subject to certain conditions and obligations and if we fail to meet our obligations the research funded by these grants and the construction of our initial commercial-scale hardwood CBP facilities may be materially delayed.

 

We are the recipient of government grants and awards, including an award from the U.S. Department of Energy, or DOE, providing for a cost share arrangement related to the construction of a hardwood CBP facility in Kinross, Michigan. The terms of this award require us to use the funds for the construction of an industrial scale fermenter system and the design, construction and operation of an integrated cellulosic ethanol plant for transforming locally grown mixed hardwoods or switchgrass into ethanol. Under this grant, the DOE will provide us with up to approximately $20.0 million, payable in phases and dependent on the results of each phase. As of June 30, 2011, we have received approximately $16.5 million under this award. We are required to make periodic progress reports on the status of our project and notify the DOE of any significant favorable or adverse events during the course of the project. If the DOE terminates this or any other grant agreements with us, our ability to complete the construction of our planned hardwood CBP facility in Kinross, Michigan could be impaired, which could harm our business.

 

We have also received a grant of up to $20.0 million from the Michigan Strategic Fund, or MSF, to fund our planned hardwood CBP facility in Kinross, Michigan. These funds are to be paid in installments upon certain milestones such as filing required environmental permits and finalizing commercial agreements relating to supply, construction and operation of the planned facility. As of June 30, 2011, we have received approximately $12.1 million from MSF. Our ongoing obligations under this grant agreement include providing regular progress reports on the status of the project and the milestones achieved. Unless earlier terminated for default for, among other things, the failure to meet certain milestones identified in the grant agreement, the term of this grant

 

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agreement lasts through December 2013. If the MSF terminates this grant, our ability to complete the construction of our planned hardwood CBP facility in Kinross, Michigan could be impaired, which could harm our business.

 

We have also received additional government grants, including grants from the Province of Alberta, Canada, in connection with our planned commercial hardwood CBP facility in Drayton Valley, Alberta and from the BioEnergy Science Center, or BESC, in connection with our research into CBP processing of biomass into ethanol and other end-products. As of June 30, 2011, we have received approximately $5.1 million from BESC. The loss of any of our government grants, for any reason, could materially and adversely impact our research and development efforts and our ability to execute on our staged commercialization strategy. For the year ended December 31, 2010, approximately 86% of our revenue was derived from government grants, and any termination or reduction in this funding, or ability to secure additional government funding, will materially and adversely impact our results of operations and financial condition.

 

Our hardwood CBP commercialization strategy relies heavily on our ability to negotiate and execute definitive agreements with third parties.

 

In order to commercialize our hardwood CBP technology, we need to negotiate and enter into definitive agreements with our collaborators for the financing, construction and operation of our planned hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta, as well as enzyme and feedstock supply agreements. We do not have any such definitive agreements in place, and we have no prior experience negotiating these types of agreements. Each of these agreements is crucial to our staged commercialization strategy and we cannot be certain of entering into definitive agreements with any of these parties. If we lose our business relationships with any of our collaborators or potential collaborators for any reason, our business and prospects could be adversely affected.

 

The market for renewable fuels and chemicals may not develop as anticipated.

 

We intend to deploy our CBP technology to convert hardwood feedstocks into renewable fuels for use in the biofuels market. However, this market may not develop as quickly as we expect or at all. The market for advanced biofuels, including cellulosic biofuels, is heavily influenced by foreign, federal, state and local government regulations and policies. If the cost of oil decreases significantly, the outlook for the long-term supply of oil to the United States improves or gasoline prices decline over extended periods of time, the perception in government and the private sector could change to our detriment. That is, a diminished belief that cheaper, more readily available energy alternatives should be developed or produced could change and thus reduce the demand for renewable fuels. Changes to existing or adoption of new domestic or foreign federal, state and local legislative initiatives that impact the production, distribution or sale of biofuels may reduce the demand for our technology. The cellulosic biofuels market is still at an early stage of development. There can be no assurance that governmental support for, and commercial interest in, this industry will continue. If the number and capacity of cellulosic biomass conversion facilities does not reach anticipated levels, there will be less demand for our cellulosic conversion technology and our business and results of operations would be adversely affected. In addition, while we utilize a biochemical process for the production of cellulosic ethanol, there are several competing technologies for producing cellulosic ethanol, including a thermochemical process, and we can provide no assurance that these other technologies will not prove to be more effective or successful than ours.

 

The production of cellulosic biofuels will require significant amounts of feedstock, and our collaborators may experience difficulties obtaining such feedstock.

 

Following the completion of our planned commercial-scale hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta, the successful production of cellulosic biofuels using our CBP technology will require our collaborators to acquire and process large amounts of hardwood feedstock. We cannot predict the future availability of hardwood or be sure that our collaborators’ feedstock suppliers will be able to supply it in

 

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sufficient quantities, at acceptable prices or in a timely manner. Feedstock availability may be adversely affected by growing-season disruptions, crop yields, increased demand by competitors, crop disease, droughts, floods, infestations, heavy rain storms, hail storms, freezing conditions, hurricanes, fires, other natural disasters, farming decisions or government policies and subsidies. These planned hardwood CBP facilities may be unable to secure access to hardwood feedstock or to secure the transportation of such feedstock on terms acceptable to our collaborators or at all. If these facilities are unable to secure cost-effective access to feedstock, the ability of our technology to produce renewable fuels and, in the long term, chemicals and our ability to execute our business plan would be adversely affected.

 

We and our collaborators may be unable to locate future facilities near low-cost, abundant and sustainable sources of biomass and adequate infrastructure, which may have an adverse effect on the ability to produce cost-effective renewable fuels and chemicals.

 

Following the completion of our planned commercial-scale hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta, we expect to locate additional future hardwood CBP facilities in proximity to large sources of hardwood biomass and partner with local project developers and feedstock providers. Our ability to place future facilities in locations where our collaborators can economically produce renewable fuels and chemicals from nearby feedstock and transport those fuels to potential customers will be subject to the availability and cost of land, the availability of adequate infrastructure and skilled labor resources in such areas, the legal and regulatory risks related to land use, permitting and environmental regulations, as well as our collaborators’ ability to finance these facilities. If we and our collaborators are unable to locate facilities at sites that allow economical production and transport of end-products, the ability to cost-effectively produce renewable fuels and chemicals using our technology could be adversely affected.

 

Our growth depends on customer acceptance of and demand for cellulosic biofuels.

 

At our planned and future commercial-scale hardwood CBP facilities, we expect to receive fees and/or an equity interest in the hardwood facilities, which would provide us with a share in the returns of the facilities. As a result, we expect our results of operations will be directly impacted by our collaborators’ abilities to successfully market and sell the cellulosic ethanol they produce. Cellulosic ethanol is typically used as a blendstock and consumers of these products frequently impose lengthy and complex product qualification procedures on any new blendstocks, based on finished product specifications, processing considerations, regulatory issues and other factors. Potential customers may be reluctant to adopt new blendstocks due to a lack of familiarity with the cellulosic ethanol to be produced at our hardwood CBP facilities. Any off-take agreements for the sale and purchase of cellulosic ethanol to be produced at our hardwood CBP facilities will be subject to the satisfaction of certain technical, commercial and production requirements, and will contain detailed product specifications. If we do not satisfy these contractual requirements, demand for the cellulosic ethanol to be produced at our hardwood CBP facilities may be adversely affected. In addition, given the rapid technological change and product innovation in our industry, it is possible that the cellulosic ethanol to be produced at our hardwood CBP facilities will be less competitive or less desirable than fuels made using alternative processes and technologies. Any technological breakthroughs in our industry or innovations in alternative sources of energy could reduce demand for the cellulosic ethanol to be produced at our hardwood CBP facilities. If the cellulosic ethanol to be produced at our hardwood CBP facilities does not meet customers’ requirements or if there are technological breakthroughs that reduce customer demand for these products, our business will be adversely affected.

 

We may face substantial and varied competition, possibly from companies with greater experience and resources.

 

In the near-term, we expect to sell our MGT yeast product to corn ethanol producers as a drop-in substitute for conventional yeast products that alleviates the need for exogenous enzymes. As a result, our product will compete with both conventional yeast producers as well as companies, such as Novozymes A/S and Genencor, that sell the enzyme that is replaced in part by our MGT product. Many of these companies are substantially larger than us and may have substantially greater resources and larger patent portfolios than we do, and these

 

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companies may reduce the prices of their enzymes in order to compete with our MGT product and retain market share. In addition, we can provide no assurance that these companies will not start developing products that compete with ours.

 

In addition, we intend to initially deploy our CBP technology to convert hardwood feedstocks into ethanol. While we utilize a biochemical process for the production of cellulosic ethanol, there are several competing technologies for the production of cellulosic ethanol, including a thermochemical process, and we can provide no assurance that these other technologies will not prove to be more effective or successful than ours. In the production of cellulosic biofuels, key competitors include Abengoa Bioenergy, BP, p.l.c., DuPont Danisco Cellulosic Ethanol L.L.C., which is a joint venture between Danisco A/S and E.I. Du Pont De Nemours and Company, and POET, LLC, all of which are developing biological approaches to break down biomass into end-products. None of these companies use exactly the same technological platform or processes as we currently use. More broadly, we expect that the cellulosic ethanol produced at our hardwood CBP facilities will compete with other cellulosic biofuels, advanced biofuels, and renewable fuels developed by established enterprises and new companies that seek to produce these renewable fuels to satisfy RFS2 mandates.

 

Our ability to compete successfully in these markets will depend on our ability to develop proprietary technologies that produce fuel and chemical products in large volumes and at costs below the prevailing market prices for these products. Many of our competitors have substantially greater production, financial, research and development, personnel and marketing resources and patent portfolios than we do. In addition, certain of our competitors may also benefit from local government programs and incentives that are not available to us. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Of immediate concern, a competitor might beat us to the market with a more cost-effective form of consolidated bioprocessing. In addition, certain of our collaborators may purchase products or license technology from, or invest in, our competitors or in technologies that compare with our CBP technology.

 

Moreover, our technologies and products may be rendered uneconomical or otherwise obsolete by technological advances or entirely different approaches developed by one or more of our competitors. As more companies develop new intellectual property in our markets, the possibility of a competitor acquiring patent or other rights that may limit our freedom to operate, including our ability to exploit products or potential products increases, which could lead to litigation and harm our competitive advantage. In addition, various governments have recently announced a number of spending programs focused on the development of clean technology, including alternatives to petroleum-based fuels and the reduction of carbon emissions. Such spending programs could lead to increased funding for our competitors or the rapid increase in the number of competitors within those markets.

 

Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position, and prevent us from achieving or maintaining profitability.

 

The price of renewable fuel credits may reduce demand for our technology.

 

RFS2 allows additional RIN credits to be granted to any refiner or importer of gasoline or diesel fuel who blend into their fuel more than the required percentage of renewable fuels in a given year. These credits may be traded to other parties or may be used in subsequent years to satisfy RFS2 requirements. The trading prices of renewable fuel and advanced biofuel RIN credits are influenced by, among other factors, the transportation costs associated with renewable fuels, the mandated level of renewable fuel use for a specific year, the possibility of waivers of renewable fuel mandates and the expected supply of renewable fuel products. Any reduction in the price of RIN credits could reduce the demand for the cellulosic ethanol produced at our hardwood CBP facilities. Our future success may depend on the ability of our collaborators to produce cellulosic ethanol with our CBP

 

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technology without government incentives on a cost-competitive basis with petroleum-based fuels. If RIN credits, or other current or anticipated government incentives, are reduced significantly or eliminated and petroleum-based fuel prices are lower or comparable to the cost of the cellulosic ethanol to be produced at our hardwood CBP facilities, demand for such products may decline, which could adversely affect our future results of operations.

 

We may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

 

Our operations are subject to a variety of foreign, federal, state and local environmental laws and regulations governing, among other matters, emissions and discharges to the air, ground and water, and the use, treatment, storage, generation, manufacture and disposal of hazardous and biological materials. For example, we use biological materials and GMOs in our demonstration facility in Rome, New York and such materials will be used in our planned commercial-scale hardwood CBP facilities. Our fermentation process utilizes a GMO which, when used in an industrial process, is regulated as a new microorganism under the Toxic Substances Control Act program, or TSCA, of the U.S. Environmental Protection Agency, or EPA. TSCA requires us to comply with the EPA’s Microbial Commercial Activity Notice submission process to operate our hardwood CBP facilities. In the event of contamination or injury from the use, treatment, storage, generation, manufacture, release, or disposal of these or other hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our insurance coverage. There can be no assurance that violations of environmental, health and safety laws will not occur as a result of human error, accident, equipment failure or other causes.

 

Compliance with applicable environmental laws and regulations, including current and future greenhouse gas regulation, may be expensive, and the failure to comply with past, present, or future laws could result in, among other things, the imposition of fines or other penalties, regulatory oversight costs, responsibility for third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations. Additionally, we could be jointly and severally liable for environmental damage or contamination at our current or former facilities, including for historical contamination caused by former owners and operators of such facilities. We may also be held liable at third party sites where we have disposed or arranged for disposal of hazardous materials. We expect to encounter similar laws and regulations in most, if not all, of the countries in which we may seek to establish production capabilities. Environmental laws and regulations could become more stringent over time, which could impose greater compliance costs, increase risks and penalties associated with violations, impair our research, development or production efforts and harm our business. The costs of complying with environmental, health and safety laws and regulations, and claims concerning noncompliance or liability with respect to such laws and regulations, could have a material adverse effect on our financial condition or operating results.

 

Changes in government regulation, including mandates, tax credits, subsidies and other incentives, could have a material adverse effect upon our business and results of operations.

 

The market for renewable fuels is heavily influenced by foreign, federal, state and local government regulation and policies. Changes to existing or adoption of new domestic or foreign federal, state or local legislative initiatives that impact the production, distribution, sale or import and export of renewable fuels may harm our business. For example, the Energy Independence and Security Act of 2007 set targets for alternative sourced liquid transportation fuels (approximately 14 billion gallons in 2011, increasing to 36 billion gallons by 2022). Of the 2022 target amount, a minimum of 21 billion gallons must be advanced biofuels. In the United States and in a number of other countries, regulations and policies like the U.S. Renewable Fuel Standard Program have been modified in the past and may be modified again in the future. In the United States, the Administrator of the EPA, in consultation with the Secretary of Energy and the Secretary of Agriculture, may waive certain renewable fuels standards, on his or her own motion or in response to a petition requesting such waiver, to avert economic harm or in response to inadequate supply. The Administrator of the EPA is also required to reduce the mandate for cellulosic biofuel use if projected supply for a given year falls below a minimum threshold for that year. The elimination of, or any reduction in, mandated requirements for fuel

 

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alternatives and additives to gasoline may cause demand for biofuels to decline and may deter investment in the research and development of renewable fuels. The Administrator of the EPA could also revise qualification standards for renewable fuels in ways that increase production expenses by requiring different feedstocks, imposing extensive tracking and sourcing requirements, or preventing ethanol produced using our CBP technology from qualifying as a renewable fuel under applicable standards.

 

In addition, the U.S. Congress has passed legislation, including the Volumetric Ethanol Excise Tax Credit, commonly known as the Blender’s Credit, that extends tax credits to blenders of certain renewable fuel products. However, there is no assurance that this or any other favorable legislation will remain in place. In fact, the Senate recently voted to end the Blender’s Credit, and it is possible that the credit, which currently expires December 31, 2011, will not ultimately be extended by Congress or will survive in a greatly diminished form. Any reduction in, phasing out or elimination of existing tax credits, subsidies and other incentives in the United States and foreign markets for renewable fuels, or any inability of our customers or collaborators to access such credits, subsidies and incentives, may adversely affect demand for our products and increase the overall cost of commercialization of our renewable fuels, which would adversely affect our business. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations. In addition, concerns associated with renewable fuels, including land usage, national security interests and food crop usage, are receiving legislative, industry and public attention. To the extent these concerns adversely impact the business of the corn ethanol producers to which we intend to sell our products, our business may also be adversely affected. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business or the business of our collaborators or customers, and consequently our financial condition and our results of operations.

 

Ethical, legal and social concerns about genetically engineered products and processes, and similar concerns about the production of fuel from food-based feedstocks, could limit or prevent the use of our products, processes and technologies and limit our revenues.

 

Some of our products and processes involve the use of GMOs, or genetic engineering technologies. The use of GMOs is subject to laws and regulations in many countries, some of which are new and some of which are still evolving. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:

 

   

public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and processes, which could influence public acceptance of our technologies, products and processes;

 

   

public attitudes regarding, and potential changes to laws governing, ownership of genetic material, which could harm our intellectual property rights with respect to our genetic material and discourage others from supporting, developing or commercializing our products, processes and technologies;

 

   

public attitudes and ethical concerns surrounding production of feedstocks on land that could be used for other purposes, which could influence public acceptance of our technologies, products and processes or could result in delays or inhibit our ability to construct our initial hardwood CBP facilities;

 

   

governmental reaction to negative publicity concerning GMOs, which could result in greater government regulation of genetic research and derivative products; and

 

   

governmental reaction to negative publicity concerning feedstocks produced on land which could be used for other purposes, which could result in greater government regulation of feedstock sources.

 

Any of the risks discussed above could result in increased expenses, delays or other impediments to the public acceptance and commercialization of our products and technologies. In addition, genetically engineered organisms and the production of fuel from food-based feedstocks have received negative publicity and have been the subject of public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically engineered products or feedstocks grown on land suitable for food production or other purposes.

 

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If we lose key personnel or are unable to attract and retain additional key personnel, it could harm our research and development efforts, delay the commercialization of our products, delay launch of products in our development pipeline and impair our ability to meet our business objectives.

 

Our business spans a variety of disciplines and requires a management team and employee workforce that is knowledgeable in the many areas necessary for our operations. The loss of any key member of our management team, such as our Chief Executive Officer, or key research and development or operational employees, or the failure to attract and retain such employees, could prevent us from developing and commercializing our products for our target markets and executing our business plans. In particular, our key science officers play an active role in guiding the direction of our research and development program, and the loss of any of these individuals may impact our research and development efforts. We may not be able to attract or retain qualified employees due to the intense competition for qualified personnel among biotechnology and other technology-based businesses and the scarcity of personnel with the qualifications or experience necessary for our business. Hiring, training and successfully integrating qualified personnel into our operation is lengthy and expensive. The market for qualified personnel is very competitive because of the limited number of people available with the necessary technical skills and understanding of our technology and anticipated products. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to support our internal research and development programs or satisfy customer demands for our products. In particular, our product development and research and development programs are dependent on our ability to attract and retain highly skilled scientific, technical and operational personnel. Competition for such personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms, or at all. Many of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

 

We receive part of our research and development funding through government grants, and a decrease in government support could negatively affect our research and development efforts.

 

A portion of our research and development activities is funded through government grants. In the year ended December 31, 2010, we recognized $13.3 million in government grant revenues, as compared to total research and development expense of $26.5 million. Based solely on currently secured grants, government funding of our programs will decrease over the next several years. There is no guarantee that we will be able to secure additional grants in the future. The level of government funding of research and development is unpredictable and subject to a variety of factors, including the political process. We may also be subject to audits by government agencies as part of routine audits of our activities funded by government grants. Our ongoing obligations under these grants may include providing regular progress reports on the status of the relevant project and the milestones achieved. Funds available under grants must be applied by us toward the research and development programs specified by the granting agencies, rather than for all of our programs generally. If any of our costs are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed may have to be refunded. Accordingly, an audit could result in an adjustment to our revenues and results of operations. In addition to audits, as a recipient of government funding, we are subject to employment standards and diversity requirements, all of which may require management attention and expenditures to ensure compliance.

 

The rapid growth of our company may place significant demands on our management and our infrastructure.

 

We have experienced, and may continue to experience, expansion of our business as we continue to make efforts to develop and commercialize our CBP technology. Our growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued growth could strain our ability to:

 

   

develop and improve our operational, financial and management controls;

 

   

enhance our reporting systems and procedures;

 

   

recruit, train and retain highly skilled personnel;

 

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develop and maintain our relationships with existing and potential collaborators;

 

   

maintain our quality standards; and

 

   

ensure customer satisfaction.

 

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operations and financial condition would be harmed.

 

Our prospects and our ability to execute on our business plan are subject to fluctuations in the price of petroleum.

 

We believe that some of the present and projected demand for advanced biofuels results from relatively recent increases in the cost of petroleum. We intend to use our CBP technology to enable the production of renewable fuels and chemicals as alternatives to corresponding petroleum-based products. If the prices of petroleum-based products decline, the cellulosic ethanol and other products produced using our CBP technology may not be cost-effective alternatives to their petroleum-based counterparts or may be unable to be cost-effective without government incentives. Declining oil prices, or the perception of a future decline in oil prices, would adversely affect corn ethanol prices and the prices our collaborators will be able to obtain for the cellulosic ethanol produced using our CBP technology. As a result, any economic conditions and other factors that impact the price of oil indirectly impact our business. Lower petroleum prices over extended periods of time may change the perceptions in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. If petroleum prices were to decline from present levels and remain at lower levels for extended periods of time, the demand for renewable fuels could be reduced, and our results of operations and financial condition may be adversely affected. In the future, we will also encounter similar risks in our specialty chemicals business, where declines in the price of oil may make petroleum-based hydrocarbons less expensive, which could reduce the competitiveness of our CBP technology.

 

Our business will be subject to fluctuations in feedstock prices, such as hardwood, corn and sugar, as well as the price of ethanol.

 

We expect the success of our planned hardwood CBP facilities to be dependent on the price of hardwood, corn, sugar and other feedstocks. A decrease in the availability of some or all of these feedstocks or an increase in the price may have a material adverse effect on our financial condition and operating results. At certain levels, feedstock prices may make production of ethanol and other products uneconomical, as our collaborators may be unable to pass the full amount of feedstock cost increases on to customers. The price and availability of these feedstocks may be influenced by general economic, market and regulatory factors. These factors include weather conditions, farming decisions, government policies and subsidies with respect to agriculture and international trade, and global demand and supply. The significance and relative impact of these factors on the price of our feedstocks is difficult to predict. In addition, our MGT yeast business will be dependent on the price of, demand for and cost to produce ethanol. Changes in the price of ethanol, whether caused by changes in ethanol production, gasoline prices, regulations, such as the expiration of the Blender’s Credit, seasonal fluctuations or otherwise, will likely impact the demand for our products. To the extent that ethanol production costs increase or the price of ethanol decreases, earnings from ethanol production could suffer, which could have a material adverse effect on our business.

 

We may not be successful in expanding our business into new geographies, and even if we are successful, we will be exposed to additional risks that we do not face in the United States, which could have an adverse effect on our operations.

 

Following the construction of our initial commercial-scale hardwood CBP facility in Kinross, Michigan, we expect that we will begin expanding into other new geographies with large sources of feedstocks. We believe Canada and Brazil are attractive markets for our products and technology, however there can be no assurance that

 

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our expansion plans will be realized, or if realized, be successful. There are significant regulatory, business and scientific hurdles to overcome in each of these markets and while we have begun planning for a hardwood CBP facility in Drayton Valley, Alberta, we currently have no immediate plans in Brazil. If we are unable to capitalize on these potential markets, or if we expend significant time and resources on expansion plans that fail or are delayed, our business will be adversely affected. In addition, our Canadian, Brazilian and any other future international business operations could be harmed by a variety of factors relating to international operations, including:

 

   

political, economic, diplomatic or social instability;

 

   

tariffs, export or import restrictions, restrictions on remittances abroad or repatriation of profits, duties or taxes that limit our ability to move our products out of these countries or interfere with the import of essential materials into these countries;

 

   

difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act and labor and environmental laws;

 

   

inflation and changing interest rates;

 

   

fluctuation in currency exchange rates;

 

   

tax burden and policies;

 

   

changes in laws, regulations and policies related to renewable fuels and chemicals;

 

   

delays or failures in securing licenses, permits or other governmental approvals necessary to build and operate facilities and use our yeast strains to produce products;

 

   

an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action;

 

   

insufficient investment in developing countries in public infrastructure, including transportation infrastructure, and disruption of transportation and logistics services; and

 

   

difficulties and costs of staffing and managing foreign operations.

 

These and other factors could have a material adverse impact on our business, financial condition and results of operations.

 

If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and operations.

 

If appropriate opportunities become available, we may acquire additional businesses, assets, technologies, or products to enhance our business in the future. For example, in 2010 we acquired a pretreatment equipment business from SunOpta Inc. In connection with any future acquisitions, we could issue additional equity securities which would dilute our current stockholders, incur substantial debt to fund the acquisitions, or assume significant liabilities. Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs, environmental and other liabilities, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. We do not have extensive experience in managing the integration process and we may not be able to successfully integrate any businesses, assets, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses

 

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related to certain intangible assets, and incur large and immediate write offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

 

If we fail to continue to develop new products and technologies and identify additional market opportunities for our existing products and technologies, our future financial performance would be materially adversely affected.

 

In competitive, dynamic and rapidly changing industries such as the renewable fuels and chemicals industries, it is critical that we continue to improve our technology and develop new products and these technologies in a timely manner with demonstrable improvements in performance and cost-effectiveness. As new products and technologies enter the market, our products and technologies may become obsolete and customer preference for new products and technologies may adversely impact our business. Our product and technology development efforts has required, and will require, that we expend significant financial and management resources. We have incurred, and we expect to continue to incur, significant research and development expenses. If we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis, our products could lose market share, our revenue could decline and we could experience operating losses. We will need to be able to quickly adapt our development and production processes to meet the advancing needs of the biofuels and advanced chemicals industries. The products we currently derive from our processes, and the feedstocks we use in the production of our products, may not be applicable or compatible with demands in existing or future markets. We may not be able to identify new opportunities as they arise since future applications of any given product may not be readily determinable, and we cannot reasonably estimate the size of any markets that may develop. If we are not able to successfully develop new products, we may be unable to expand or maintain our business.

 

The terms of our loan and security agreements with Pinnacle may restrict our ability to engage in certain transactions.

 

In June 2011, we entered into an amended and restated loan agreement and various security agreements with Pinnacle Ventures, L.L.C., or Pinnacle. Pursuant to the terms of these loan and security agreements, we cannot engage in certain actions, including disposing of certain assets, granting or otherwise allowing the imposition of a lien against certain assets, incurring certain kinds of additional indebtedness, acquiring or merging with another entity, or declaring dividends unless we receive the prior approval of Pinnacle. In addition, we granted security interests in substantially all of our assets as collateral for the loan, including all of our registrations or applications for registrations of patents in or to which we have any right, title, interest, claim or demand. If Pinnacle does not consent to any of the actions that we desire to take, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders or could be forced to pay the outstanding balance of the loan in full. As of August 31, 2011, the aggregate outstanding principal and interest under the loan from Pinnacle was approximately $10.0 million.

 

Our stockholders’ deficit, recurring net losses and history of negative cash flows from operations have raised substantial doubt regarding our ability to continue as a going concern.

 

Our stockholders’ deficit, recurring net losses and history of negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2010 with respect to this uncertainty. We have limited current sources of revenue to sustain our present activities, and we do not expect to generate significant revenue until, and unless, we increase revenue from pretreatment equipment or CVM approves MGT 1.0 and we successfully commercialize MGT 1.0.

 

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Accordingly, to continue as a going concern, we will need to obtain additional financing to fund our operations. Any perceived doubts about our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by current and potential collaborators or customers.

 

Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.

 

As of June 30, 2011, our total assets included $28.7 million of net intangible assets. Net intangible assets consist of goodwill and intangible assets associated with the August 2010 acquisition of SunOpta BioProcess Inc., or SBI. We now refer to that business as Mascoma Canada. We test goodwill for impairment on December 31 of each year, and more frequently if potential impairment indicators arise. Our amortizing intangible assets are evaluated for impairment should discrete events occur that call into question the recoverability of the intangible assets. Adverse changes in our business, or adverse changes in the assumptions used to determine the fair value of the Mascoma Canada reporting unit, including our failure to implement our planned commercialization strategy for pretreatment technologies of Mascoma Canada, may result in impairment of our goodwill and intangible assets, which could adversely affect our results of operations.

 

We have a history of material weaknesses in our internal control over financial reporting, including a material weakness that remains unremediated at December 31, 2010. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.

 

Management has identified, and our independent registered public accounting firm has noted in its communications with our audit committee in connection with the audits of our financial statements for the years ended December 31, 2008, 2009 and 2010, that we had material weaknesses in the design and operating effectiveness of our internal control over financial reporting. The term material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. These material weaknesses resulted in a number of audit adjustments to our financial statements for the periods under audit.

 

For the years ended December 31, 2008, 2009 and 2010, we have had a material weakness due to insufficient personnel within our accounting function possessing an appropriate level of experience to provide reasonable assurance that transactions were being appropriately recorded in accordance with generally accepted accounting principles. This material weakness remains unremediated at December 31, 2010. Also, for the year ended December 31, 2009, we had a material weakness regarding our failure to have adequate controls to ensure that property and equipment is properly valued and that such assets exist.

 

During 2010 and 2011 we commenced actions to remediate these material weaknesses, which relate in large part to inadequate staffing. In 2010, we implemented additional procedures and controls and we concluded that the material weakness relating to our controls over the valuation and existence of property and equipment was remediated by December 31, 2010. As is common for companies of our size and development stage, we have outsourced certain administrative functions to a third party, including aspects of our finance and accounting operations. We are, however, in the process of sourcing and hiring additional staff members to our finance organization to continue to address and remediate our remaining material weakness. Any additional weakness in our internal control over financial reporting or failure to make all necessary improvements to address the existing material weakness would require continued disclosure of a material weakness in future filings with the SEC, which could cause our reputation to be harmed and our stock price to decline.

 

If we fail to maintain an effective system of internal controls, we might be unable to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, will require us and our independent registered public accounting firm to evaluate and report on our internal control over

 

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financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2012. The process of implementing our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect all fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including Securities and Exchange Commission, or SEC, action, ineligibility for short form resale registration, the suspension or delisting of our common stock from              and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.

 

During the ordinary course of business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.

 

From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings. These actions may seek, among other things, compensation for alleged personal injury, workers compensation, employment discrimination, environmental violations or liabilities, breach of contract, property damages or civil penalties and other losses or injunctive or declaratory relief. In the event that such actions or indemnities are ultimately resolved unfavorably at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.

 

Our business could be harmed by natural disasters, accidents, systems failures or other unanticipated business interruptions.

 

We are vulnerable to natural or man-made disasters and other events that could disrupt our and our collaborators’ construction and operations, such as earthquakes, hurricanes, riots, civil disturbances, war, terrorist acts, flood, contamination in our laboratory or production facilities or those of our collaborators, and other events beyond our control. In addition, telecommunications failures or other unanticipated catastrophes, such as computer viruses or other cyber-attacks could cause interruptions in our operations. System failures could cause disruption in our laboratory processes. Disruption in transportation infrastructure could cause delays in shipments to our customers, which could result in the loss of sales and damage to our reputation. In addition, even in the absence of direct damage to our or our collaborators’ operations, these events could have a significant impact on our customers’ businesses, which in turn could result in a negative impact on our results of operations. Extensive or multiple disruptions in our or our collaborators’ operations or our customers’ businesses due to unanticipated catastrophes could have a material adverse effect on our results of operations. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our cash flows and success as an overall business.

 

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

 

In general, under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards, or NOLs, and its excess credits to offset future taxable income. We have not performed a detailed analysis to determine whether an ownership change as defined in Section 382 of the Code has

 

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occurred after each of our previous issuances of common stock, preferred stock and convertible debt. In addition, if we undergo an ownership change in connection with or after this public offering, our ability to utilize NOLs and excess credits could be limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change as defined in Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. Furthermore, we operate both in the United States and in certain jurisdictions outside the United States. Our non-U.S. operations may in the future generate taxable income that is subject to income or other taxes in the jurisdictions in which those operations are conducted. We cannot utilize NOLs attributable to our U.S. operations to reduce our liability for any such non-U.S. taxes, and we may also be limited in our ability to offset our U.S. taxable income with NOLs from foreign jurisdictions in which we operate.

 

Risks Related to Our Intellectual Property

 

Our patents and other protective measures may not adequately protect our products and technologies, and any loss of our intellectual property or unauthorized use of our technologies by others could materially adversely affect our business, financial condition and results of operations.

 

Our intellectual property portfolio is a valuable asset of our business. To protect our proprietary rights, we rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions, and physical security measures in the United States and in certain foreign jurisdictions. As of September 1, 2011, we owned or had licensed rights to approximately 75 distinct patent families in the United States, Canada and various other foreign jurisdictions covering our products, technologies and processes. More specifically, as of September 1, 2011, we owned approximately 42 pending United States patent applications (including 8 provisional applications), 5 issued foreign patents, 97 pending foreign applications, and 11 Patent Cooperation Treaty, or PCT, applications eligible for nationalization. As of June 30, 2011, we had licensed rights to approximately 3 issued United States patents, 17 pending United States patent applications (including 3 provisional applications), 1 issued foreign patent, 34 pending foreign applications and 4 PCT applications eligible for nationalization.

 

In addition, we generally enter into confidentiality and assignment of inventions agreements with our employees, consultants, contractors, collaboration partners and scientific and other business advisers. Such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including, but not limited to, the following:

 

   

we may fail to apply for patents on important technologies or processes in a timely fashion, or at all, or we may also abandon applications when we determine that a product or method is no longer of interest;

 

   

there can be no assurance that our pending patent applications will result in issued patents for various reasons, including the existence of conflicting patents or defects in our applications, or that any patents that issue from such pending patent applications will adequately protect our intellectual property, or that such patents will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable;

 

   

we do not know whether the examination of any of our patent applications by the U.S. Patent and Trademark Office or any similar foreign patent offices will require us to narrow any of the claims in our pending patent applications;

 

   

we may not be able to obtain patent protection for some or many of our innovations, and even if we receive patent protection, the scope of our intellectual property rights pursuant to such patents may offer insufficient protection from competition or unauthorized use of our innovations by third parties;

 

   

our products and processes may rely on the technology of others and, therefore, require us to obtain intellectual property licenses from third parties in order for us to manufacture or commercialize our products or practice our processes and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all;

 

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the patents we have been granted may not include claims covering our products and processes, may lapse or expire, be challenged, invalidated, circumvented or be deemed unenforceable because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons, or we may subsequently abandon them;

 

   

our confidentiality agreements may not effectively prevent disclosure or use of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure or use;

 

   

the costs associated with enforcing patents, confidentiality and invention assignment agreements or other intellectual property rights may make effective enforcement prohibitive;

 

   

we may not be aware of infringements or misappropriation, or we may be unable to prevent them;

 

   

our efforts to safeguard our trade secrets may be insufficient to prohibit the dissemination of this confidential information;

 

   

even if we enforce our rights aggressively, injunctions, fines and other penalties may be insufficient to deter violations of our intellectual property rights;

 

   

if we seek to enforce our rights, we may be subject to claims that our intellectual property rights are invalid, otherwise unenforceable, or are licensed to the party against whom we are asserting the claim; and

 

   

other persons may independently develop proprietary technology, information and processes that are functionally equivalent or superior to our proprietary intellectual property and processes but do not infringe or conflict with our patented or unpatented proprietary rights, or may use their own proprietary intellectual property rights to block us from taking full advantage of the market.

 

Our patent rights may not provide commercially meaningful protection against competition.

 

Our success will depend in part on our ability and our licensors’ ability to obtain patents and other intellectual property rights to protect various aspects of our technologies, processes and products. We have adopted a strategy of seeking patents and patent licenses in the United States and in certain foreign countries with respect to certain technologies used in, or relating to, our products and processes.

 

The scope and validity of patents and success in prosecuting patent applications involve complex legal and factual questions, and, consequently, the issuance, scope, validity, and enforceability of patent positions in our industry are generally uncertain. Patents issued or licensed to us may be challenged, invalidated or circumvented. Moreover, third parties could practice our inventions in secret and/or in territories where we do not have patent protection. Such third parties may then try to sell or import products made using our inventions in and into the United States or other territories. We may be unable to prove that such products were made using our inventions. Additional uncertainty may result from patent reform legislation proposed by the U.S. Congress (including the “America Invents Act” recently approved by the U.S. Congress) and other national governments and from interpretations of the patent laws of the U.S. and other countries by applicable courts and agencies. In addition, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publication of discoveries in the scientific literature often lags behind the actual discoveries, there may be additional uncertainty as to the inventorship, and therefore the validity, of any of our owned or licensed issued patents. Accordingly, we cannot be certain that any of our or our licensors’ patent applications will result in issued patents, or even if issued, be sure of their validity or enforceability. Moreover, we cannot predict whether any of our or our licensors’ patent rights will be broad enough in scope to provide commercial advantage and prevent circumvention. In any event, patents are enforceable only upon issuance and only for a limited term. Further, at present, we have a limited number of issued patents and most of our owned and licensed patent portfolio is comprised of pending applications. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide us with a competitive advantage.

 

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We may not be able to enforce our intellectual property rights throughout the world.

 

We may in the future build, or collaborate with others in building, manufacturing facilities using our technologies in countries other than the United States. However, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Many companies have encountered significant problems in protecting and enforcing intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to bioindustrial technologies. This could make it difficult for us or our licensors to stop any infringement of our or our licensors’ patents or misappropriation of the subject matter of our other proprietary or intellectual property rights. Proceedings or litigation that we or our licensors initiate to enforce our and our licensors’ patents and other proprietary rights in the U.S. or foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, and put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or in-license.

 

Claims that the operation of our business infringes or misappropriates the intellectual property rights of others could seriously harm our business, operating results and financial condition.

 

We may not be able to operate our business without infringing third-party patents. Our ability to manufacture and commercialize our proposed technologies, processes and products depends on our and our licensors’ ability to develop, manufacture, market, license and/or sell our proposed technologies, processes and products without infringing the proprietary rights of third parties. Numerous U.S. and foreign patents and pending patent applications owned by third parties exist in fields that relate to our proposed technologies, processes and products and our underlying methodologies and discoveries. In addition, many companies have employed intellectual property litigation as a way to gain a competitive advantage. Third parties may allege that our proposed technologies, processes and products or our methods infringe their patent rights. It is possible that infringement claims may occur as the number of products and competitors in our market increases. In addition, to the extent that we gain greater visibility and market exposure as a public company, we face a greater risk of being the subject of intellectual property infringement claims. We cannot be certain that the conduct of our business does not and will not infringe intellectual property or other proprietary rights of others in the United States and in foreign jurisdictions. If the making, using, selling, offering for sale or importing of our proposed products or practice of our proprietary technologies or processes are found to infringe third party patent rights, we could be prohibited from manufacturing and commercializing the infringing technology, process or product unless we obtain a license under the applicable third party patent and pay royalties or are able to design around such patent. We may be unable to obtain a license on terms acceptable to us, or at all, and we may not be able to redesign our products, microorganisms or processes to avoid infringement. Even if we are able to redesign our products, microorganisms or processes to avoid an infringement claim, our efforts to design around the patent could require significant time, effort and expense and ultimately may lead to an inferior or more costly product and/or process. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business. Furthermore, if any such claim is successful, a court could order us to pay substantial damages, including compensatory damages for any infringement, plus prejudgment interest and could, in certain circumstances, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently prohibit us, our licensees and our customers from making, using, selling, offering to sell or importing one or more of our products or practicing our proprietary technologies or processes, or could enter an order mandating that we undertake certain remedial activities. Any of these events could seriously harm our business, operating results and financial condition.

 

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In addition to our patent rights, we rely in part on a combination of trade secret laws, confidentiality procedures and contractual provisions, and physical security measures to protect our proprietary technology. Trade secrets can be difficult to protect and enforce. Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

 

We rely in part on trade secret laws and contractual restrictions to protect some of our confidential and proprietary information, technology and processes, particularly where we do not believe patent protection is appropriate or obtainable. We have taken various measures to protect our trade secrets and other confidential or proprietary information, including requiring our employees and consultants to execute confidentiality agreements upon the commencement of employment or consulting engagement with us. However, trade secrets are difficult to maintain and protect and our security measures may not be effective or sufficient to prevent circumvention or disclosure. In addition, our strategy for scale-up of production and collaborating with third party manufacturers requires us to share confidential and proprietary information with our business partners and other third parties. Our business partners’ employees, consultants, contractors or scientific and other business advisers may unintentionally or willfully breach their confidentiality and/or non-use obligations, including by disclosing our confidential or proprietary information to our competitors. Such agreements may be deemed unenforceable, not provide adequate remedies, or be the subject of disputes that may not be resolved in our favor. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

If our microorganisms are stolen, misappropriated or reverse engineered, others could use these microorganisms to produce processes or products that compete with ours.

 

A number of third parties, including various collaborators, contract manufacturers, university scientists and researchers, customers and those involved in the shipping and handling of our microorganisms and our primary fermentation products, have access to our proprietary microorganisms and related technologies, including, our genetically modified yeasts and bacteria. If our microorganisms, or the genes that code for our microorganisms, were stolen, misappropriated or reverse engineered based on our disclosures in our patent applications or otherwise, they could be used by third parties for their own commercial gain. In addition, third parties may independently develop substantially similar, analogous or alternative information and technologies to ours. If any of this were to occur, it could be difficult for us to discover, challenge or stop them from using or commercializing our technology, especially in countries with limited intellectual property protection.

 

Our rights to key intellectual property are licensed to us by third parties and termination of the related agreements would be highly detrimental to us.

 

We are a party to certain license agreements, pursuant to which we have the right to develop and commercialize key intellectual property underlying certain technology used in our business. Certain of these license agreements impose various diligence, milestone, payment, royalty, insurance and other obligations on us. If we fail to comply with any of these obligations, the applicable licensors may have the right to convert an exclusive license of intellectual property to a nonexclusive license or to terminate the license completely, in which case our competitors may gain access to these important licensed technologies or we may be unable to develop or market products, technologies or processes covered by the licensed intellectual property. Some of our licensors have the right to control the filing, prosecution, maintenance and defense of all licensed intellectual property and, if a third party infringes on any of the licensed intellectual property, to control any legal or other proceedings instituted against that third party for infringement. As a result, our licensors may take actions or make decisions relating to these matters with which we do not agree or which could harm our business or impact our license rights.

 

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There can be no assurance that we will be successful in maintaining our relationships with our licensors or any other research institutions or others or in negotiating additional in-licensing agreements on terms acceptable to us or at all, or that any such arrangements will be successful. In addition, there can be no assurance that other third parties will not enter into arrangements with our licensors or collaboration partners for the development or commercialization of the same or similar products or technologies or that the parties with whom we have made such arrangements will not pursue alternative technologies or develop products on their own or in collaboration with others, including our competitors. If we do not establish sufficient in-licensing arrangements, or if we are unable to maintain or renew our existing agreements in the future, or if we are unable to obtain additional licenses to add to or replace them as the technology advances, or if such rights are licensed to competitors, our business, financial condition and results of operations may be adversely affected. We may enter into additional licenses in the future, and if we fail to comply with obligations under those agreements, we could suffer similar consequences.

 

We and certain colleges and universities that license intellectual property to us, receive funding from U.S. government agencies, which could negatively affect our intellectual property rights.

 

Some of our research, as well as some of the research undertaken by the colleges and universities with which we have relationships, has been funded by grants from U.S. government agencies. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents and technical data, generally including, at a minimum, a nonexclusive license authorizing the government to use the invention or technical data for noncommercial purposes. U.S. government funding must be disclosed in any resulting patent applications, and our rights in such inventions will normally be subject to government license rights, periodic progress reporting, foreign manufacturing restrictions and march-in rights. March-in rights refer to the right of the U.S. government, under certain limited circumstances, to require us to grant a license to technology developed under a government grant to a responsible applicant, or, if we refuse, to grant such a license itself. March-in rights can be triggered if the government determines that we have failed to work sufficiently towards achieving practical application of a technology or if action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to U.S. industry. If we breach the terms of our grants, the government may gain rights to the intellectual property developed in our related research.

 

Furthermore, the terms of our research grants from U.S. government agencies may prohibit us from using the new technologies we have developed using those grants in non-U.S. manufacturing plants, which could adversely affect our business. Under the Bayh-Dole Act of 1980, a party that acquires an exclusive license for an invention that was funded in whole or in part by a federal research grant is subject to the following government rights:

 

   

products using the invention that are sold in the United States are to be manufactured substantially in the United States, unless a waiver is obtained;

 

   

the government may force the granting of a license to a third party who will make and sell the needed product if the licensee does not pursue reasonable commercialization of a needed product using the invention; and

 

   

the U.S. government may use the invention for its own needs.

 

If we fail to meet these guidelines, we would lose our exclusive rights to these inventions and we would lose potential revenue derived from these inventions.

 

We may not retain exclusive rights to intellectual property created as a result of our collaborations.

 

Under certain of our license agreements, our license rights are limited to a certain field of use and/or our licensors have retained certain rights in and outside of our field of use. In addition, under certain of our license agreements and agreements with our research, development or collaboration partners, we are obligated to grant such licensors and collaborators certain rights in and outside of our field of use under any new technology or

 

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intellectual property created as a result of our research, development or collaborations. Such provisions may limit our ability to gain commercial benefit from some of the intellectual property we develop and may lead to costly or time-consuming disputes with parties with whom we have commercial relationships over rights to certain innovations.

 

Risks Related to Our Common Stock

 

Our stock price may fluctuate significantly.

 

Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after the completion of this offering. We will negotiate and determine the initial public offering price with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The market price of our common stock could fluctuate significantly after this offering. In recent years, the stock market has experienced significant volatility, particularly with respect to technology stocks. The volatility of technology stocks often does not relate to the operating performance of the companies represented by the stock. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from other business concerns.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. We cannot predict the effect, if any, that future public sales of these shares or the availability of these shares for sale will have on the market price of our common stock. Based on                  shares of common stock outstanding as of                 , upon the completion of this offering, we will have              outstanding shares of common stock. Of these shares,              shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. Our officers, directors and certain stockholders have executed lock-up agreements preventing them from selling any stock they hold for a period of 180 days from the date of this prospectus, subject to certain limited exceptions and extensions described under the section entitled “Underwriting.” The representatives of the underwriters may, in their sole discretion, permit our officers, directors and current stockholders to sell shares prior to the expiration of these lock-up agreements.

 

After the lock-up agreements pertaining to this offering expire, an additional              shares will be eligible for sale in the public market in accordance with and subject to the limitation on sales by affiliates as provided in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, as of June 30, 2011, 4,513,742 shares reserved for future issuance under our equity incentive plans, that are not issued or subject to outstanding grants, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of              shares of our

 

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common stock will have the right to require us to register these shares under the Securities Act pursuant to a registration rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

 

We will have broad discretion in how we use the net proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

 

We will have considerable discretion in the application of the net proceeds of this offering. We currently intend to use the net proceeds from this offering for working capital and other general corporate purposes, including for sales and marketing activities related to our MGT yeast product and for research and development activities, including those related to our next-generation MGT yeast products, the scale-up of our hardwood CBP technology at our initial hardwood CBP facilities and the application of our technology to other feedstocks and end-products, including renewable chemicals. We may also use net proceeds for possible investments in, or acquisitions of, complementary businesses, services or technologies. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

Provisions of Delaware law, our charter documents and our loan agreements could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.

 

Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated by-laws, which will be effective upon the completion of this offering, may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

   

a classified board of directors;

 

   

limitations on the removal of directors;

 

   

advance notice requirements for stockholder proposals and nominations;

 

   

the inability of stockholders to act by written consent or to call special meetings;

 

   

the ability of our board of directors to make, alter or repeal our amended and restated by-laws; and

 

   

the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.

 

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, is generally necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote. In addition, upon the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common

 

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stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

 

We do not intend to pay cash dividends. We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our common stock will likely depend on whether the price of our common stock increases.

 

We have not paid dividends on any of our capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

 

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to have our shares of common stock listed on the              in connection with this offering, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

 

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

We have never operated as a stand-alone public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a public company, we will be subject to rules and regulations that regulate corporate governance practices of public companies, including the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act, and rules promulgated by             . We expect that compliance with these public company requirements will make some activities more time consuming and may result in a diversion of management’s time and attention from revenue-generating activities. For example, we will create new board committees, adopt new internal controls and disclosure controls and procedures, and devote significant management resources to our SEC reporting requirements. A number of those requirements will require us to carry out activities we have not done previously. For example, beginning with our Annual Report on Form 10-K filed after our fiscal year ended December 31, 2012, we will need to document and test our internal control procedures, our management will need to assess and report on our internal control over financial reporting and our independent registered public accounting firm will need to issue an opinion on that assessment and the effectiveness of those controls. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our independent registered public accounting firm identify a material weakness in our internal control over financial reporting), we may be required to devote additional management attention to rectify those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us.

 

Investors in this offering will pay a much higher price than the book value of our common stock.

 

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $             per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the section entitled “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

In particular, forward-looking statements in this prospectus include statements about:

 

   

the size and growth potential of the potential markets for renewable fuels and advanced fuels and chemicals, and our ability to serve these markets;

 

   

the rate and degree of market acceptance of our initial MGT product and of any future product releases by corn ethanol producers;

 

   

the ability of our MGT product to improve corn ethanol producers’ gross margins in the near-term and to improve corn ethanol yields in the future and our ability to capture some of the economics of these improvements;

 

   

our ability to attract strategic partners with development and commercialization expertise;

 

   

the acceptance and success of our capital-light model for the application of our technology platform at our hardwood CBP facilities;

 

   

the timing of the construction and commencement of operations at our planned hardwood CBP facilities;

 

   

the availability of suitable and cost-competitive feedstock;

 

   

the expected operating costs, cost competitiveness and relative performance attributes of our hardwood CBP facilities, including ethanol yields;

 

   

the ability of our technology to facilitate the production of renewable fuels at commercial scale;

 

   

our research and development activities, including development of new products, and projected expenditures;

 

   

our plans to develop, manufacture and commercialize our products with respect to multiple feedstocks, and to expand into new geographic markets;

 

   

changes in laws, regulations, and policies, including those relating to environmental requirements and renewable fuel standards;

 

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our ability to expand the application of our CBP technology to develop advanced biorefineries that produce advanced fuels and chemicals;

 

   

the ethanol produced at facilities using our hardwood CBP technology qualifying as cellulosic biofuel and thereby satisfying the RFS2 advanced biofuels requirements;

 

   

our ability to obtain and maintain regulatory approval for our products;

 

   

timing of commercial sales of our products;

 

   

our plans to develop, manufacture, and commercialize our products;

 

   

our use of the proceeds of this offering;

 

   

our ability to obtain and maintain intellectual property protection for our products and processes;

 

   

the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing and our ability to obtain additional financing;

 

   

the future price of corn and other renewable feedstocks;

 

   

the future price of petroleum and products derived from petroleum;

 

   

our ability to secure continued government grant funding; and

 

   

our share of the cash flow from our hardwood CBP facilities.

 

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this prospectus.

 

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USE OF PROCEEDS

 

We estimate that our net proceeds from the sale of the             shares of our common stock in this offering will be approximately $            , or $             if the underwriters fully exercise their option to purchase additional shares, based upon an assumed initial public offering price of $             per share, which represents the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently intend to use the net proceeds of this offering for working capital and other general corporate purposes, including for sales and marketing activities related to our MGT yeast product and for research and development activities, including those related to our next-generation MGT products, the scale-up of our hardwood CBP technology and the application of our technology to other potential feedstocks and end-products, including renewable chemicals. We may also use net proceeds for possible investments in, or acquisitions of, complementary businesses, services or technologies. We have no current agreements or commitments with respect to any investment or acquisition and we currently are not engaged in negotiations with respect to any investment or acquisition. In addition, the amount of what, and timing of when, we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in the section entitled “Risk Factors” in this prospectus. Accordingly, our management will have broad discretion in applying the net proceeds of this offering. Pending specific application of our net proceeds, we intend to invest the net proceeds in high quality, investment grade, short-term fixed income instruments which include corporate, financial institution, federal agency or U.S. government obligations.

 

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DIVIDEND POLICY

 

We have never declared or paid dividends on our common stock. We do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. In addition, the terms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us from paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

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CAPITALIZATION

 

The following table sets forth our cash, cash equivalents and short-term investments, and capitalization as of June 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of the outstanding shares of our convertible preferred stock, par value $0.001 per share, into an aggregate of 46,318,457 shares of our common stock, the termination of the put rights held by the holder of our redeemable common stock, and conversion of all of our warrants for convertible preferred stock into warrants for common stock and the related reclassification of the warrant liabilities to stockholders’ equity; and

 

   

on a pro forma as adjusted basis to give further effect to the filing of our amended and restated certificate of incorporation and our sale in this offering of             shares of our common stock at an assumed initial public offering price of $         per share, which represents the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table in conjunction with the sections entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2011  
       Actual       Pro
  Forma  
    Pro Forma
as
     Adjusted(1)    
 
     (in thousands, except share and per share data)  

Cash, cash equivalents and short-term investments

   $ 12,092      $ 12,092     
  

 

 

   

 

 

   

 

 

 

Long-term debt, including current portion

   $ 10,000      $ 10,000     
  

 

 

   

 

 

   

Warrant liabilities

     7,429                 
  

 

 

   

 

 

   

Redeemable noncontrolling interests

     2,610        2,610     
  

 

 

   

 

 

   

Total redeemable convertible preferred stock

     158,269                 
  

 

 

   

 

 

   

Redeemable common stock

     1,172            
  

 

 

   

 

 

   

Stockholders’ equity (deficit):

      

Common stock; $0.001 par value, 75,000,000 shares authorized, actual and pro forma;              shares authorized, pro forma as adjusted; 7,884,738 shares issued and 7,324,742 outstanding, actual; 54,043,199 shares issued and outstanding pro forma;             shares issued and outstanding, pro forma as adjusted

     7        54     

Additional paid-in capital

     19,716        186,539     

Accumulated deficit

     (137,975     (137,975  

Treasury stock

     (470     (470  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (118,722     48,148          
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 60,758      $ 60,758      $   
  

 

 

   

 

 

   

 

 

 

 

(1)   Each $1.00 increase (decrease) in the expected initial public offering price of $         per share would increase (decrease) each of our unaudited pro forma as adjusted cash and cash equivalents and short term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $         million, assuming that the number of shares offered by us under this prospectus remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses paid or payable by us.

 

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DILUTION

 

If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

 

Our historical net tangible book value (deficit) as of June 30, 2011, was approximately ($147.4) million , or ($20.13) per share, based on 7,324,742 shares of common stock outstanding as of June 30, 2011. Historical net tangible book value (deficit) per share is determined by dividing our total tangible assets less total liabilities and redeemable noncontrolling interests, redeemable convertible preferred stock and redeemable common stock by the actual number of outstanding shares of our common stock. Our pro forma net tangible book value as of June 30, 2011 was approximately $19.4 million, or approximately $0.36 per share, based on 54,043,199 shares of common stock outstanding after giving effect to the conversion of shares of our convertible preferred stock into an aggregate of 46,318,457 shares of our common stock upon the completion of this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities and redeemable noncontrolling interests, divided by the pro forma number of shares of common stock outstanding before giving effect to this offering.

 

After giving effect to our sale of             shares of common stock in this offering based on an assumed initial public offering price of $         per share, which represents the midpoint of the estimated price range set forth on the cover of the prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2011 would have been $         per share. This represents an immediate increase in pro forma net tangible book value per share of $         to existing stockholders and immediate dilution in pro forma net tangible book value of $         per share to new investors purchasing our common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed initial public offering price per share paid by a new investor. The following table illustrates the per share dilution without giving effect to the over-allotment option granted to the underwriters:

 

Assumed initial public offering price per share(1)

      $                

Pro forma net tangible book value per share as of June 30, 2011

   $ 0.36      

Increase per share attributable to new investors

     

Pro forma net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $     

 

(1)   The midpoint of the estimated price range set forth on the cover page of this prospectus.

 

The following table summarizes as of June 30, 2011 the number of shares of our common stock purchased from us, the total cash consideration paid to us and the average price per share paid to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $         per share, which represents the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     54,043,199         100   $ 166,510,487         100   $ 3.08   

New investors

            
  

 

 

      

 

 

      

Total

               $                %   $     
  

 

 

      

 

 

      

 

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The above discussion and tables are based on 54,043,199 shares of common stock issued and outstanding as of June 30, 2011 and also reflects the conversion of shares of our convertible preferred stock into an aggregate of 46,318,457 shares of our common stock upon the completion of this offering, and excludes:

 

   

9,535,916 shares of our common stock issuable upon exercise of outstanding options as of June 30, 2011 at a weighted-average exercise price of $2.14 per share;

 

   

4,986,648 shares of common stock issuable upon the exercise of outstanding warrants as of June 30, 2011 at a weighted-average exercise price of $3.48 per share; and

 

   

4,513,742 shares of our common stock reserved as of June 30, 2011 for future issuance under our equity incentive plans that are not issued or subject to outstanding grants.

 

To the extent that outstanding options, warrants or other equity awards are exercised or become vested or any additional options, warrants or other equity awards are granted and exercised or become vested or other issuances of shares of our common stock are made, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the selected consolidated financial data presented below in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus and our consolidated financial statements and the related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of results for future periods. The selected consolidated financial data presented below under the heading “Consolidated Statement of Operations Data” for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2009 and 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data presented below under the heading “Consolidated Statement of Operations Data” for the six months ended June 30, 2010 and 2011 and the selected consolidated financial data presented below under the heading “Consolidated Balance Sheet Data” as of June 30, 2011, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

 

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The selected consolidated financial data presented below under the headings “Consolidated Statement of Operations Data” for the years ended December 31, 2006 and 2007 and under “Consolidated Balance Sheet Data” as of December 31, 2006, 2007 and 2008, have been derived from consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results of operations to be expected for future periods.

 

    Years Ended December 31,     Six Months Ended
June 30,
 
    2006     2007     2008     2009     2010(3)     2010     2011  
    (in thousands, except share and per share data)  

Total revenues

  $      $      $ 3,896      $ 8,436      $ 15,492      $ 5,711      $ 6,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of product sales and operating expenses

             

Cost of product sales

                                1,120               455   

Research and development(1)

    2,462        15,089        24,327        28,270        26,539        12,450        13,203   

Selling, general and administrative(1)

    2,731        9,886        9,344        5,059        10,212        3,947        5,036   

Loss on asset disposals and lease abandonment

                  799        9,213                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    5,193        24,975        34,470        42,542        37,871        16,397        18,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (5,193     (24,975     (30,574     (34,106     (22,379     (10,686     (12,026

Other income (expense)

    370        967        113        (1,366     (3,407     288        (2,337

Equity in loss of equity method investment

                                (143            (173
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (4,823     (24,008     (30,461     (35,472     (25,929     (10,398     (14,536

Amount attributable to redeemable noncontrolling interest

                         (2,830     201        87        19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Mascoma Corporation

    (4,823     (24,008     (30,461     (38,302     (25,728     (10,311     (14,517

Accretion of redeemable convertible preferred stock

    (28     (52     (216     (253     (205     (124     (279
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders of Mascoma Corporation

  $ (4,851   $ (24,060   $ (30,677   $ (38,555   $ (25,933   $ (10,435   $ (14,796
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Mascoma Corporation common stockholders per share—basic and diluted

  $ (11.60   $ (10.91   $ (12.25   $ (12.61   $ (5.39   $ (3.15   $ (1.92
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic and diluted

    418,244        2,204,499        2,505,159        3,058,138        4,813,191        3,315,566        7,724,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss attributable to Mascoma common stockholders per share (unaudited)—basic and diluted(2)

          $ (0.52     $ (0.27
         

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding (unaudited)—basic and diluted(2)

            49,798,315          54,043,199   
         

 

 

     

 

 

 

 

(1)   Includes stock-based compensation expense (see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-Based Compensation” elsewhere in this prospectus for additional information).
(2)   Net loss used in computing pro forma basic and diluted net loss per share and the number of weighted-average common shares used in computing pro forma basic and diluted net loss per share give effect to the automatic conversion of all of our outstanding convertible preferred stock into 46,318,457 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.
(3)   SunOpta BioProcess Inc. or SBI, was acquired on August 31, 2010, and our consolidated results of operations for the year ended December 31, 2010 include the results of operations of SBI in the period following the acquisition.

 

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     As of December 31,     As of June 30,  
     2006     2007     2008     2009     2010(1)     2011  
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash, cash equivalents and short-term investments

   $ 34,034      $ 9,289      $ 35,784      $ 15,989      $ 11,889      $ 12,092   

Working capital

     32,737        4,428        25,364        6,175        4,275        6,382   

Total assets

     35,998        28,702        79,761        51,590        87,125        85,826   

Warrant liabilities

     101        399        2,395        2,597        5,445        7,429   

Long-term debt (including current portion)

                   10,008        7,415        3,451        10,000   

Total liabilities

     1,874        12,066        31,490        37,639        35,576        42,497   

Redeemable convertible preferred stock

     38,659        43,961        104,051        104,304        153,212        158,269   

Accumulated deficit

     (4,959     (28,967     (59,428     (97,730     (123,458     (137,975

Stockholders’ deficit

     (4,883     (28,501     (57,652     (94,363     (105,080     (118,722

 

(1)   Since SunOpta BioProcess Inc., or SBI, was acquired on August 31, 2010, our balance sheet as of December 31, 2010 includes SBI.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly those in the section entitled “Risk Factors.” Dollars in tabular format are presented in thousands, except per share data or as otherwise indicated.

 

Overview

 

We are a renewable fuels company that has developed innovative technology for the low-cost conversion of abundant biomass. Our highly adaptable technology has also been demonstrated to convert biomass to renewable chemicals. Using our proprietary consolidated bioprocessing, or CBP, technology platform, we have developed genetically-modified yeasts and other microorganisms to reduce costs and improve yields in the production of renewable fuels and chemicals. According to the U.S. Department of Energy, or the DOE, CBP technology is the ultimate low-cost configuration for the hydrolysis and fermentation of cellulosic feedstocks. Our CBP technology provides us with the ability to use a variety of feedstocks to produce multiple renewable fuel and chemical end-products. We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. We believe that these facilities will offer compelling economic value to us and our collaborators based on the expected operating costs of these facilities and today’s market prices for fuel and feedstocks. In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple high-value end-products, such as advanced fuels and chemicals, from many different feedstocks.

 

We have established a staged strategy for the commercialization of our innovative CBP technology platform in the renewable fuels and chemicals industries. Our first commercial application of CBP technology is our genetically-modified MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. We expect to begin selling this product in 2012. We believe this product is capable of significantly improving the economics of corn ethanol production with negligible capital expenditures and will generate near-term revenue and gross margin for our company. We intend to capture, through a license agreement or other arrangement, a significant portion of the incremental margin generated by our line of MGT products. We plan to pursue the corn ethanol market first in order to capitalize on the size and maturity of this market, the technologically advanced nature of our MGT product compared to conventional yeasts and our ability to cost-effectively deploy our CBP technology. Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. Based on laboratory test runs and management estimates of ethanol production costs, we believe our initial MGT product will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon. As a result, we believe that this product can create significant and immediate value to corn ethanol producers, which collectively produced over 13 billion gallons of corn ethanol in the United States in 2010. Future generations of our MGT product are also expected to improve ethanol yields, further lowering production costs and potentially increasing revenue for corn ethanol producers. Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements of up to 4%. Certain by-products of the corn ethanol conversion process are used as animal feed. Our MGT products are genetically modified and are considered to be processing aids in the production of animal feed. As a result, our MGT products are subject to regulation by the U.S. Food and Drug Administration’s Center for Veterinary Medicine, or CVM, and must subsequently be approved by the American Association of Feed Control Officers, or AAFCO. See the section entitled “Business—Regulatory Matters” for more information about this regulatory process.

 

We are also working with leading industry participants to develop and construct commercial scale facilities to convert abundant and low-cost hardwood pulpwood into cellulosic ethanol. We expect that our first two

 

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hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. Based on pilot production runs at our demonstration facility in Rome, New York, we have achieved hardwood to ethanol conversion yields of 67 gallons per bone dry short ton of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per bone dry short ton of hardwood and we are working to continue to improve conversion yields. At our planned 20 million gallon per year commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per bone dry short ton of hardwood with unsubsidized cash operating costs of approximately $1.77 per gallon. These estimates assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood and are based on a 20 million gallon per year facility. Over the next several years we are targeting unsubsidized cash operating costs, net of revenue from the sale of co-products such as electricity, of less than $1.00 per gallon based on ethanol yields of 87 gallons per bone dry short ton of hardwood, increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple fuel and chemical end-products from a variety of feedstocks. Beyond corn and hardwood, we have already shown the flexibility of our CBP technology platform through the conversion into ethanol of a number of additional feedstocks in a laboratory setting, including corn stover, sugarcane bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum, many of which are abundant and have limited end uses. We believe our feedstock flexibility will enable us to more effectively enter new geographic markets. In terms of end-products, we have demonstrated in a laboratory setting the production of propanol and fatty acids. These chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements, and we plan to continue to expand the number of potential end-products.

 

Through June 30, 2011, we generated revenues primarily from government grants and product sales consisting of pretreatment equipment for biomass feedstocks. As we initiate the commercial launch of our initial MGT product, an increasing proportion of our revenues will be attributable to our CBP technology. As of June 30, 2011, we had an accumulated deficit of $138.0 million. We anticipate that we will continue to incur net losses as we prepare for and initiate the commercial launch our initial MGT product, scale-up our planned hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta, and expand our research and development activities. Since our inception through June 30, 2011, we have raised an aggregate of $135.3 million from private placements of equity securities and debt financing, including $105.3 million in proceeds from the sale of preferred equity securities, $10.0 million in proceeds from the sale of convertible notes, and $20.0 million in borrowings under our secured debt financing arrangements.

 

Our Commercialization Plan

 

Our MGT Yeast Products

 

Our first commercial application of CBP technology is our MGT yeast product. Our proprietary MGT product is a genetically-modified yeast product that can be used by corn ethanol producers as a drop-in substitute to conventional yeast.

 

Our first commercial product, MGT 1.0, is planned for commercial demonstration and launch in the next eight months, subject to regulatory review and approval. MGT 1.0 will be a first of a kind product – an advanced yeast which will provide significant value to ethanol producers by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production. Our next MGT product, MGT 1.1, is planned for commercial demonstration and launch in the next two years. MGT 1.1 builds upon cost savings associated with our MGT 1.0 technology by significantly increasing the yield of ethanol per bushel of corn without any reduction in the robustness of the yeast.

 

We plan to establish partnerships with the leading yeast producers, such that they will manufacture, distribute, market and sell our MGT product to corn ethanol producers. We also plan to establish a small sales and marketing

 

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team to sell and promote our MGT product to corn ethanol producers, both directly and together with our yeast production partners, as well as providing technology support to customers. We intend to either enter into agreements directly with corn ethanol producers in which they agree to pay us a fee based on the incremental improvement in their margins or recoup such a payment through agreements with our yeast production partners.

 

We expect that the fundamental drivers of our MGT product revenues and gross margin will be the following:

 

   

Penetration of the corn ethanol industry. We expect that the success of our MGT product will depend on our ability to grow market share, which depends upon our product efficacy, and number of customers.

 

   

Value creation. We expect that our MGT yeast products will deliver significant value to customers, as we believe they can improve both the costs and the revenues associated with the production of corn ethanol.

 

   

New releases of our MGT product. In order to grow our MGT business we will need to develop, secure regulatory approval for, and commercialize subsequent generations of our MGT product beyond MGT 1.0, which we believe will generate improved yields for corn ethanol producers.

 

Our Hardwood CBP Technology

 

We have also used our CBP technology to convert hardwood feedstock into cellulosic ethanol. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we expect to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees and/or an equity interest in the facilities to provide us with a share of that facility’s profits and related cash flow. We are working with leading industry participants to develop and construct our first two hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. For our initial hardwood CBP facilities we expect to receive contributions from government and strategic partners, but for future facilities we expect to focus on financing from strategic and financial partners. We believe that our hardwood CBP facilities will serve as the foundation for our expansion into new end-products and feedstocks and that successful use of our CBP technology platform with hardwood at our initial hardwood CBP facilities may also provide us with access to traditional project financing for future facilities.

 

Based on our laboratory and pilot-scale test runs, we believe we are able to convert hardwood feedstocks at costs that are competitive with costs to produce corn ethanol based on ethanol producers’ current yields and current corn prices. Our hardwood conversion process is cost competitive as a result of our streamlined biomass conversion process and the reduced need to purchase most of the expensive enzymes currently used in the process.

 

We expect that the fundamental drivers of our hardwood CBP revenues and gross margin will be the following:

 

   

Yield improvements. We expect to be able to improve yields at our initial commercial-scale hardwood CBP facilities in the first few years of operation through ongoing improvements in enzyme expression and metabolic engineering in our microorganisms. The expected improvement in our hardwood plant yields will drive cost savings and generate additional revenues from the same amount of feedstock.

 

   

Operating experience. We expect the skills gained through the operation and management of larger scale plants will provide us and our collaborators with significant cost savings over time, driven by process improvements and increases in operating efficiencies.

 

   

Economies of scale. Our hardwood CBP facilities are expected to increase in size from our initial 20 million gallons per year facility in Kinross, Michigan and as a result we expect to increase cost savings and improve yields over time.

 

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Strategic collaborations. Our ability to develop, optimize, and maintain collaborations is central to our hardwood CBP strategy. We envision developing new plants through a network of partners to secure feedstock, offtake, and financing agreements.

 

Pretreatment Equipment: SunOpta BioProcess Acquisition

 

In addition to our CBP technology platform, we also design our own proprietary pretreatment systems that can be used in conjunction with or independently from our hardwood CBP technology. We acquired our pretreatment equipment business from SunOpta Inc. in 2010. Pretreatment of the biomass feedstock is the first step in the process of converting biomass into sugars and fuels, to break down the structure of the biomass and make it more conducive to extracting usable sugars. Pretreatment is typically done chemically, using harsh acids and chemicals to break down biomass. Our pretreatment technology uses steam and pressure to break down biomass, in a simpler, less expensive method. We know of no other technology provider in the marketplace that provides a comprehensive biochemical solution to biofuels producers, from upstream pretreatment equipment to downstream CBP conversion technologies. We intend to sell our pretreatment equipment to the third parties that develop and construct our hardwood CBP facilities. We believe these facilities could benefit from synergies from using our pretreatment equipment in conjunction with our hardwood CBP technology. We also expect to pursue independent sales of our pretreatment equipment to customers other than those using our hardwood CBP technology, particularly in international markets where we do not intend to have a hardwood CBP presence. We currently manufacture our pretreatment equipment through third-party contract manufacturers and expect to continue to do so.

 

We expect that the fundamental drivers of our pretreatment equipment revenues and gross margin will be the following:

 

   

Number of customers. Our ability to sell pretreatment equipment will largely depend upon the construction by us and our collaborators of new commercial-scale hardwood facilities and on increasing the customer base for our pretreatment technology.

 

   

Margin per equipment sale. As we continue to gain experience in developing and operating our pretreatment equipment business, we expect that we will be able to improve gross margin per equipment sale due to process and design innovations.

 

Financial Operations Overview

 

Revenues

 

Currently, our revenues consist primarily of government grants and product sales. During the year ended December 31, 2010 and the six months ended June 30, 2011, we also received revenue from other service arrangements.

 

Government grants consist of payments from government entities. The terms of these grants generally provide us with cost reimbursement to conduct certain types of research and development activities over a contractually defined period. Revenues from government grants to conduct research and development are recognized in the period in which the underlying costs are incurred. Historically, we have received U.S. federal and state government grants as well as grants from Canada.

 

Current product sales consist of sales of pretreatment equipment for the conversion of biomass feedstocks. All of our product sales for the year ended December 31, 2010 related to a single customer. Revenues from product sales are recognized using the percentage of completion method.

 

Revenues from other service arrangements consist of research and development services that we provide to third parties, and revenues are recognized as services are performed by us. During 2010 and the six months ended June 30, 2011, we received revenue from one commercial research and development agreement. This agreement has been terminated as of June 30, 2011.

 

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Cost of Product Sales

 

Cost of product sales includes both internal and third-party fixed and variable costs, materials and supplies, labor, facilities and other overhead costs associated with our product sales.

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred to discover, develop and test our pretreatment equipment systems and our CBP technology and to develop related commercial applications. Research and development expenses include salaries and other personnel-related expenses (including stock-based compensation), facility costs, research and development equipment costs, supplies, depreciation of facilities and laboratory equipment, contract research and related services, license fees and other general costs related to research and development. We expense all of our research and development costs as they are incurred. We expect to continue to devote substantial resources to our research and development activities, and as we adapt our CBP technology to convert new feedstocks, such as Brazilian bagasse, and produce new end-products, such as renewable chemicals, we expect that research and development expenses will increase in the future.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of salaries and other personnel-related expenses (including stock-based compensation), hiring and training costs, facility costs, professional services expenses and consulting costs, marketing costs, depreciation of facilities, amortization of intangible assets, and travel expenses. We expect that our selling, general and administrative expenses will increase substantially in the future as we establish a sales and marketing team to sell and promote our MGT yeast product to corn ethanol producers, expand our finance and accounting staff, add infrastructure and incur additional costs associated with being a public company, including directors’ and officers’ liability insurance, investor relations programs and increased professional services fees.

 

Interest Expense and Other Financing Costs

 

We incur interest expense in connection with our financing arrangements, which is recorded as interest expense and other financing costs. We have historically issued warrants in connection with the issuance of our long-term debt. These warrants are initially recognized as debt discount and result in increased other financing costs over the term of the debt or upon issuance. Our outstanding warrants to purchase shares of our convertible preferred stock and warrants to purchase common stock that are not indexed to our own stock are required to be classified as liabilities and to be adjusted to fair value at the end of each reporting period. Any changes in the fair value of these warrant liabilities are recorded as interest expense and other financing costs in the period that the change in value occurs. Changes in fair value have been material in the past and we would expect that these changes in the future may be significant, which will generate significant volatility in our results. Upon the closing of this initial public offering and the conversion of the underlying preferred stock to common stock, all outstanding warrants to purchase shares of preferred stock will automatically convert into warrants to purchase shares of our common stock. The then-current aggregate fair value of these warrants will be reclassified from liabilities to additional paid-in capital, a component of stockholders’ equity, and we will cease to record any related periodic fair value adjustments.

 

Income Tax Expense

 

We are subject to federal and various state income taxes in the United States, and we use estimates in determining our provision for these income taxes. In addition, we are subject to Canadian taxes for profits generated from our wholly owned subsidiary. Deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. At December 31, 2010, our deferred tax assets consisted primarily of federal net operating loss carryforwards and state research and development credit carryforwards. We assess the likelihood that deferred tax assets will be realized, and we

 

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recognize a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2010, we had a full valuation allowance against our deferred tax assets, which totaled approximately $41.4 million, due to the current uncertainty related to when, if ever, these assets will be realized. In the event that we determine in the future that we will be able to realize all or a portion of our net deferred tax asset, an adjustment to the deferred tax valuation allowance would increase earnings in the period in which such a determination is made.

 

Critical Accounting Policies and Estimates

 

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our accounts and the accounts of our subsidiaries. The preparation of our consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

 

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

 

Revenue Recognition

 

We recognize revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and risk of loss has passed; (iii) the seller’s price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured. Revenue arrangements with multiple deliverables are divided into separate units of accounting when certain criteria are met.

 

Historically, the majority of our revenue has been generated through government grants and other research and development arrangements with the government, including the DOE. We currently have two ongoing arrangements with the DOE:

 

   

Approved funding of $4.3 million for the development of an organism for the conversion of lignocellulose to ethanol. We recognized $1.4 million, $1.6 million and $0.6 million in revenue associated with the contract during the years ended December 31, 2008, 2009 and 2010, respectively, and $0.6 million during the six months ended June 30, 2011. As of June 30, 2011 there was approximately $0.1 million in revenue remaining to be recognized.

 

   

Approved funding of $20.0 million to design, construct, and operate an integrated cellulose ethanol plant for transforming locally-grown mixed hardwoods or switchgrass into ethanol. We recognized $1.1 million, $3.8 million and $10.0 million in revenue associated with the contract during the years ended December 31, 2008, 2009 and 2010, respectively, and $3.8 million during the six months ended June 30, 2011. As of June 30, 2011 there was approximately $1.3 million in revenue remaining to be recognized.

 

Revenue from the arrangements with the DOE is recognized in the period during which the underlying research and development expenses are incurred. Funding for each project is based upon a budget that has been approved by the DOE; with the DOE funding a portion of the total project costs and the difference comprising our matching contribution. The approved DOE funding for the two projects described above comprises approximately 59% of the total projected costs for the first project and approximately 48% of the total projected costs for the second project.

 

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In October 2007, we were awarded $14.8 million from the New York State Energy Research and Development Authority, or NYSERDA, to build and operate a biomass-to-ethanol demonstration plant in Rome, New York. As of June 30, 2011, we have received $13.8 million in proceeds from NYSERDA, and the proceeds have been deferred and are being recognized ratably over the weighted-average depreciable life of the Rome demonstration plant, which was estimated to be approximately five years. We recognized $1.4 million, $3.1 million and $2.6 million in revenue associated with the grant during the years ended December 31, 2008, 2009 and 2010, respectively, and $1.4 million during the six months ended June 30, 2011.

 

In December 2008, we entered into a grant agreement with the Michigan Strategic Fund for an award of $20.0 million from the State of Michigan to promote the development, acceleration, and sustainability of energy excellence sectors in the State of Michigan. As of June 30, 2011, we received $12.1 million in proceeds from this award, which has been recorded as deferred revenue and is expected to be amortized to revenue when our hardwood CBP facility in Kinross, Michigan begins operations.

 

We consider these government funded programs an effective means of funding and advancing our own research and development efforts. We expect that revenue from research and development grants with the government will continue to be a significant portion of our revenues for at least the next twelve months, and we expect to continue to avail ourselves of these revenue arrangements to the extent that the government continues to fund such programs.

 

Product sales consist of sales of pretreatment equipment for biomass feedstocks. Revenues from product sales are recognized once the revenue recognition criteria have been met and using the percentage of completion method. We believe that this revenue model is appropriate given that these revenue arrangements are similar to long-term construction projects, with our product and services being delivered during the construction period. This methodology involves recognizing revenue over the term of the agreement, as underlying services are performed, and measured on the basis of input measures such as labor and other direct costs incurred. We believe that these input measures approximate the output measures as the costs incurred are directly proportional to the services that are being provided. However, many factors can and do change during the performance period of each revenue arrangement, which can result in changes to these estimates from one financial reporting period to another. We make adjustments, if necessary, to the estimates used in these calculations as work progresses and as such changes become known. Changes in estimates of total project costs and our estimates of state of completion can have a material impact on our financial statements and are reflected in our consolidated statement of operations when they become known. To date, the changes in estimates have not been material in any period.

 

If we successfully execute our commercialization strategy, product revenue will include revenue from fees associated with sales of our MGT products and use of our CBP technology.

 

Stock-Based Compensation

 

We recognize compensation expense related to share-based transactions, including the awarding of employee stock options, based on the grant date estimated fair value. We amortize the fair value of the employee stock options on a straight-line basis over the requisite service period of the award, which is generally the vesting period.

 

In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation and as we issue additional stock-based awards in order to attract and retain employees and non-employee consultants.

 

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Our stock-based compensation expense is as follows (in thousands):

 

     Years Ended December 31,      Six Months Ended
June  30,
 
     2008      2009      2010          2010              2011      

Research and development

   $ 810       $ 1,328       $ 988       $ 667       $ 527   

Selling, general and administrative

     835         504         1,496         355         1,011   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,645       $ 1,832       $ 2,484       $ 1,022       $ 1,538   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Stock-based compensation expense of approximately $7.4 million was unrecognized for non-vested awards as of June 30, 2011, and is expected to be recognized over a weighted-average period of 2.68 years.

 

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

 

We estimate the fair value of the share-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of share-based awards requires the use of highly subjective assumptions, including the fair value of our common stock underlying the award, the expected term of the award and expected stock price volatility. These inputs are subjective and generally require significant judgment.

 

The fair value of employee stock options was estimated using the following weighted-average assumptions:

 

     Years Ended December 31,     Six Months Ended
June 30,
 
     2008     2009     2010     2010     2011  

Expected dividend yield

     0     0     0     0     0

Risk-free interest rate

     1.42%-3.59     2.09%-3.11     1.36%-2.86     2.41%-2.86     2.03%-2.66

Expected term (in years)

     5.39-9.28        5.00-6.32        5.00-6.32        5.00-6.32        5.00-6.76   

Expected volatility

     90     95     95     95     95

 

Our expected dividend yield was assumed to be zero as we have not paid, and do not anticipate paying, cash dividends on our shares of common stock.

 

Our risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each option’s expected term.

 

Our expected term is estimated based on the simplified method, which uses the mid-point between the vesting date and the end of the contractual term. We use the simplified method because we do not have sufficient option exercise data to provide a reasonable basis upon which to estimate the expected term.

 

Our expected volatility is derived from the historical volatilities of several unrelated public companies within our industry over a period equal to the expected term of our options because we do not have any trading history to use for calculating the volatility of our own common stock.

 

We estimate our forfeiture rate based on historical pre-vesting forfeiture activity to generate the estimated future expected forfeitures. Because the majority of our awards include monthly and quarterly vesting provisions, the impact of forfeitures and changes in estimated rates of forfeitures has not had a material impact on our financial statements.

 

We also account for equity instruments issued to non-employee consultants at fair value. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counterparty’s performance is complete. Awards to non-employee consultants have been nominal in the three years ended December 31, 2010 and through the six months ended June 30, 2011.

 

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The following table summarizes the options granted from January 1, 2010, through the date of this prospectus:

 

Date of issuance

  Number of shares
subject to options
granted
    Per share exercise
price of options
    Per share estimated
fair value of
common stock(1)
    Per share
estimated fair
value of options(2)
 

January 26, 2010

    2,040,019      $ 2.95      $ 2.95      $ 2.32   

October 15, 2010 to November 18, 2010

    1,098,000        1.97        1.97        1.46   

January 26, 2011(3)

    2,846,000        1.97        1.97        1.70   

April 27, 2011

    33,000        1.97        1.97        1.57   

July 22, 2011

    2,054,325        2.93        2.93        2.25   

August 22, 2011

    16,000       2.93       2.93       2.25  
 

 

 

       

Total

    8,087,344         
 

 

 

       

Weighted-Average

    $ 2.46      $ 2.46      $ 1.97   

 

(1)   The per share estimated fair value of common stock represents the determination by our Board of Directors of the fair value of our common stock as of the date of grant, taking into account various objective and subjective factors.
(2)   The per share estimated fair value of options was estimated for the date of grant using the Black-Scholes options pricing model.
(3)   This grant includes 649,000 options that vest upon the achievement of the 2012 performance targets. As such the key terms and conditions of the award are not mutually agreed upon between the employees and the Company, the awards are not deemed granted for accounting purposes and no compensation expense was recognized through June 30, 2011.

 

Based upon an assumed initial public offering price of $         per share, which represents the midpoint of the estimated price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding stock options as of June 30, 2011 was $         million.

 

The fair value of the common stock underlying our stock options has historically been determined by our Board of Directors with input from management and a third party valuation firm. In the absences of a public trading market for our common stock, our Board of Directors has determined the fair value of the common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to herein as the “AICPA Practice Guide.” In addition, our Board of Directors considered numerous objective and subjective factors including:

 

   

the prices for our convertible preferred stock sold to outside investors in arm’s length transactions;

 

   

the prices of our common stock sold to investors in arm’s length transactions;

 

   

rights, preferences and privileges of the convertible preferred stock relative to those of our common stock;

 

   

our stage of development;

 

   

actual operating and financial performance based on management’s estimates;

 

   

the execution of strategic and development agreements;

 

   

the hiring of key personnel;

 

   

status of product development;

 

   

the risks inherent in the development and expansion of our products;

 

   

the lack of an active public market for our common and convertible preferred stock;

 

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the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given prevailing market conditions and the nature and history of our business;

 

   

the performance of similarly-situated companies in our industry; and

 

   

trends in the renewable fuels and chemicals industries as well as macro-economic conditions.

 

We considered the factors outlined above, as well as the results of independent outside valuations performed as of the dates listed in the table below, in determining the underlying fair value of our common stock at each measurement date. Depending upon the circumstances, we used an option pricing method, or OPM, or the probability weighted expected return method, or PWERM, to estimate the fair value of our common stock.

 

Valuation Date

   Fair Value Per Share  

February 29, 2008

   $ 2.94   

October 31, 2008

     2.86   

October 31, 2009

     2.95   

August 31, 2010

     1.97   

June 30, 2011

     2.93   

 

The OPM treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock. Under this method, the common stock has value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event (for example, merger or sale), assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the shareholders. The common stock is modeled as a call option that gives its owner the right but not the obligation to buy the underlying enterprise value at a predetermined or exercise price. In the model, the exercise price is based on a comparison with the enterprise value rather than, as in the case of a “regular” call option, a comparison with a per-share stock price. Thus, common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. This method it is best used when the range of possible future outcomes and their corresponding time frames are uncertain.

 

Under a PWERM, the value of the common stock is estimated based upon an analysis of future values for the enterprise assuming various future outcomes. Share value is based upon the probability-weighted present value of expected future investment returns, considering each of the possible future outcomes available to the enterprise, as well as the rights of each share class. Although the future outcomes considered in any given valuation model will vary based upon the enterprise’s facts and circumstances, common future outcomes modeled might include an initial public offering, merger or sale, dissolution, or continued operation as a viable private enterprise. This method involves a forward-looking analysis of the possible future outcomes available to the enterprise, the estimation of ranges of future and present value under each outcome, and the application of a probability factor to each outcome as of the valuation date.

 

We utilized the OPM for all valuations that were performed prior to 2011. For the valuation that was performed in June 2011, we used the PWERM. In addition, we used the PWERM for a retrospective valuation as of January 26, 2011. The OPM was initially selected because we could reliably estimate the inputs in the OPM, specifically, we had evidence of the enterprise value as determined by the most recent round of preferred stock financing. The terms in these preferred stock transactions were assumed to reflect the expectations of future liquidity events and the values that may be realized in a future transaction. Conversely, the PWERM relies upon factors that could not be accurately estimated, specifically the enterprise value at a projected liquidity event and the estimated time to the liquidity event. Commencing with the 2011 valuations, we utilized the PWERM. The adoption of this method was deemed appropriate given the proposed initial public offering of our common stock and the expected probability as to valuation and timing of such an offering.

 

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Valuation for options granted between October 31, 2009 and January 26, 2010

 

In December 2009, we completed a valuation to estimate the fair market value of a share of our common stock as of October 31, 2009 using the OPM. To determine our estimated enterprise value, we applied a market-based approach based on the investment in our preferred stock by venture capital firms, including the issuance of 9.5 million shares of Series C preferred stock at a price of $6.40 per share in February, March and April 2008. When considering the time elapsed from the closing of the Series C financing and the October 31, 2009 valuation date, management considered the developments at the Company as well as the general market conditions, including the worldwide economic recession, and noted that there were no events or circumstances that would significantly impact the enterprise value. We used the OPM to allocate the estimated enterprise value between common and preferred stockholders. We used a volatility of 70% based upon three years of data from a set of comparable public company stocks. Applying an appropriate risk free interest rate of 0.90%, a term to liquidity of 2.25 years, and a 15% adjustment for the lack of marketability of our common stock, we estimated a fair market value at October 31, 2009 of $2.95 per common share. We used this fair value per common share for options granted between October 31, 2009 and January 26, 2010.

 

Valuation for options granted between October 15, 2010 and November 18, 2010

 

In September 2010, we completed a valuation to estimate the fair market value of a share of our common stock as of August 31, 2010 using the OPM. To determine our estimated enterprise value, we applied a market-based approach based on the investment in our preferred stock, including the issuance of 2.7 million shares of Series D preferred stock at a price of $3.75 per share in August 2010, and the issuance of 11.3 million shares of Series D preferred stock at a price of $3.75 per share and 3.8 million shares of common stock as consideration in our purchase of SunOpta Bioprocess, Inc. on August 31, 2010. We used the option-pricing method to allocate the estimated enterprise value between common and preferred stockholders. We used a volatility of 70% based upon three years of data from a set of comparable public company stocks. Applying an appropriate risk free interest rate of 0.39%, a term to liquidity of 1.3 years and a 15% adjustment for the lack of marketability of our common stock, we estimated a fair market value at October 31, 2009 of $1.97 per common share. We used this fair value per common share for options granted between October 15, 2010 and November 18, 2010.

 

Valuation for options granted on January 26, 2011 and April 27, 2011

 

Given the limited amount of time that elapsed from August 31, 2010 to January 26, 2011 and April 27, 2011, management relied upon the valuation performed as of August 31, 2010 in determining the fair value per common share for options granted on January 26, 2011 and April 27, 2011. In arriving at this determination, management considered the technological advancements and other developments occurring within the Company. In addition, management considered the actual operating and financial performance relative to management’s original estimates as well as trends in the renewable fuels and chemicals industries and macro-economic conditions. After consideration of these factors, management concluded that there were no facts or circumstances that would materially impact the fair value considerations that were included in the August 31, 2010 valuation. Furthermore, it was noted that the Company issued 1.3 million shares of our Series D preferred stock to a new investor at a price of $3.75 per share for gross proceeds of $5.0 million in January 2011. The sale of this stock to a new investor corroborates the conclusion that there were no substantive changes in the enterprise value. Finally, we retrospectively completed a valuation to estimate the fair market value of a share of our common stock as of January 26, 2011 using the PWERM. This valuation method took into consideration the following scenarios:

 

   

Eight different scenarios for the completion of an initial public offering – four valuations with a shorter term view (i.e., completion of initial public offering by year-end 2011) and four valuations with a longer term view (i.e., completion of initial public offering by mid-year 2012);

 

   

a sale to a strategic acquirer at a significant premium to the liquidation preference;

 

   

a sale to a strategic acquirer at or below the liquidation preference; and

 

   

a restructuring as a result of no near-term liquidity event.

 

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The aggregate probability of the four scenarios associated with the completion of an initial public offering in the shorter term (i.e., by year-end 2011) was estimated to be 20%. The aggregate probability of the four scenarios associated with the completion of an initial public offering in the longer term (i.e., by mid-year 2012) was estimated to be 20%. These four scenarios in each of the shorter term and longer term views were based on various expected enterprise values at the time of an initial public offering. The probability and expected enterprise value associated with each scenario was based, in part, on the enterprise value at the time of the initial public offering of other renewable fuels companies that recently completed such offerings and an assessment of our capabilities and competencies as compared to these companies. The aggregate probability of the completion of an initial public offering in the shorter term reflected our belief in the likelihood of obtaining regulatory clearance for our MGT technology and of obtaining commitment from an industry partner to invest in a commercial-scale hardwood cellulosic ethanol plant in Kinross, Michigan such that, together with federal and state government grants, the capital expenditures to construct and equip the facility would be fully funded, in light of prevailing market conditions and our relative financial condition at the time. The fair value of our common stock from this retrospective valuation corroborated the previous conclusion that there were no substantive changes in our enterprise value.

 

Valuation for options granted on July 22, 2011 and August 22, 2011

 

In August 2011, we completed a valuation to estimate the fair market value of a share of our common stock as of June 30, 2011 using the PWERM. This valuation method took into consideration the following scenarios:

 

   

ten different scenarios for the completion of an initial public offering – five valuations with a short-term view (6 months) and five valuations with a longer term view (12 months);

 

   

a sale to a strategic acquirer at a significant premium to the liquidation preference;

 

   

a sale to a strategic acquirer at or below the liquidation preference; and

 

   

a restructuring as a result of no near-term liquidity event.

 

The fair value of our common stock was determined to be $2.93 per share as of June 30, 2011, an increase of $0.96 from the prior fair value on April 27, 2011. The aggregate probability of the five scenarios associated with the completion of an initial public offering in the short-term (i.e., 6 months) was estimated to be 25%. The aggregate probability of the five scenarios associated with the completion of an initial public offering in the longer term (i.e., 12 months) was estimated to be 25%. These five scenarios in each of the short-term and longer term views were based on various expected enterprise values at the time of an initial public offering. The probability and expected enterprise value associated with each scenario was based, in part, on the enterprise value at the time of the initial public offering of other renewable fuels companies that recently completed such offerings and an assessment of our capabilities and competencies as compared to these companies. The aggregate probability of the completion of an initial public offering in the short-term reflected our belief in the increased likelihood of obtaining regulatory clearance for our MGT technology and of obtaining commitment from an industry partner to invest in a commercial-scale hardwood cellulosic ethanol plant in Kinross, Michigan such that, together with guaranteed federal and state government grants, the capital expenditures to construct and equip the facility would be fully funded, in light of prevailing market conditions and our relative financial condition at the time. The increase in the fair value of our common stock from April 27, 2011 was also determined to reflect the following factors:

 

   

the holding of an organizational meeting with the representatives of the underwriters for the initial public offering of our common stock contemplated by this prospectus (July 2011);

 

   

ongoing discussions with CVM relating to the review and approval of our MGT submission;

 

   

additions to our management team, including the Executive Vice President of Research and Development and the Chief Financial Officer (March and June 2011, respectively); and

 

   

our liquidity and needs for financing, including our bridge note financing where we issued approximately $7.4 million in principal amount of bridge notes (August through September 2011).

 

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The assumptions used in determining fair value of share-based awards represent management’s and our Board of Directors’ best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change, and we use different assumptions, our share-based compensation expense could be materially different in the future. We believe that the valuation methodologies used in the valuations are reasonable and consistent with the AICPA Practice Aid.

 

Estimation of Fair Value of Warrants to Purchase Preferred Stock

 

Our outstanding warrants to purchase shares of our preferred stock and warrants to purchase common stock that are not considered indexed to our own stock are required to be classified as liabilities on our consolidated balance sheet at fair value. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of interest expense and other financing costs in the consolidated statement of operations. For the year ended December 31, 2010 and the six months ended June 30, 2011, we recorded a credit of $0.8 million and a charge of $0.2 million, respectively, in interest expense and other financing costs to reflect the change in the fair value of the warrants. Adjustments to the fair value of the warrants were immaterial in 2008 and 2009. Upon the closing of this initial public offering and the conversion of the underlying preferred stock to common stock, all outstanding warrants to purchase shares of preferred stock will automatically convert into warrants to purchase shares of our common stock. The then-current aggregate fair value of these warrants will be reclassified from liabilities to additional paid-in capital, a component of stockholders’ equity, and we will cease to record any related periodic fair value adjustments. Accordingly, we estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing model, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying common stock. These estimates, especially the market value of the underlying common stock and the expected volatility, are highly judgmental and could differ materially in the future. When measuring the fair value of warrants that have a variable exercise price or include terms that have variable outcomes, we applied the lattice model to options pricing models.

 

Similar to the estimates discussed above related to measuring stock compensation at fair value, the estimates of the fair value of the warrant liabilities are based upon estimates, most significantly the estimates of the fair value of the classes of preferred stock and common stock which underlie the warrant. We have consistently applied the valuation approaches discussed above in estimating the fair value of the various classes of preferred stock and common stock. In addition, we have applied the following assumption in the Black-Scholes option-pricing models used to estimate fair value of the warrants at the respective measurement dates:

 

     For the Years Ended December 31,     For the Six Months Ended
June 30,
 
     2008     2009     2010     2010     2011  

Risk-free rate

     1.87%-2.25     2.69%-3.85     2.01%-2.71     2.42%-3.28     1.00%-3.18

Contractual term

     7.73-10.0 years        4.62-9.0 years        4.67-8.0 years        1.12-8.85 years        4.17-10.0 years   

Expected volatility

     90     95     95     95     95

Expected dividend

     0     0     0     0     0

 

Impairment of Goodwill and Intangible Assets and Other Long-lived Assets

 

We carry a variety of long-lived assets on our consolidated balance sheet. These are all currently classified as held for use. These include property and equipment, identifiable intangibles, and goodwill. An impairment review is undertaken on (1) an annual basis for assets such as goodwill; and (2) on an event-driven basis for all long-lived assets (including indefinite lived intangible assets and goodwill) when facts and circumstances suggest that cash flows emanating from such assets may be diminished. We have historically reviewed the carrying value of all these assets based partly on our projections of anticipated cash flows. These projections are, in part, dependent upon anticipated market conditions, operational performance, and legal status. Any impairment charge that is recorded negatively impacts our earnings. Cash flows are generally not impacted.

 

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Our Canadian segment is the only reporting unit with goodwill, which totals approximately $22.5 million at December 31, 2010 and June 30, 2011. As noted elsewhere, the goodwill recognized in our financial statements originated when we acquired SBI in August 2010. We have adopted a measurement date of December 31 for our annual impairment test. Because of the short time that had elapsed since the acquisition (only four months) and given that there were few (if any) changes in the expectations of the performance of that business and no significant changes in macro-economic environment or the industry in which that business operates, we concluded that, as of December 31, 2010, the fair value of the reporting unit was equal to the original purchase price. The fair value of the reporting unit exceeded the carrying value of the reporting unit at December 31, 2010, and no indications of impairment were indicated. While we believe that our estimates of fair value are reasonable, different assumptions regarding items such as future cash flows and the volatility inherent in markets which we serve could materially affect our valuations and result in impairment charges.

 

We assess impairment of long-lived assets when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to, the following: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

 

Recoverability is initially assessed based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized in the consolidated statements of operations when the carrying amount is not recoverable and exceeds fair value, which is determined on a discounted cash flow basis. The impairment charge recognized is measured as the difference between the carrying value of the asset and its estimated fair value.

 

We make estimates and judgments about future undiscounted cash flows and fair value. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flows attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated future cash flows could be reduced significantly in the future. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future. Changes in estimated future cash flows could also result in a shortening of the estimated useful life of long-lived assets including intangibles for depreciation and amortization purposes.

 

As a result of our decision to discontinue efforts to form an agreement relating to research and development activities and the design of a demonstration facility in the state of Tennessee, it was concluded that impairment indicators existed in 2008 and 2009. In 2008, management had concluded that substantially all of the design costs related to the Tennessee plant could be utilized for the planned construction of a similar facility in Michigan. Certain costs, totaling $0.8 million, which were deemed to have no value to the Michigan facility, were charged to operations in 2008. Due to delays in funding and changes in the proposed facility in Michigan, as well as ongoing uncertainty with respect to the Michigan facility in 2009, the remaining carrying value of the assets originally recognized for the Tennessee facility were deemed impaired and we recognized an impairment charge totaling $7.5 million in 2009. No goodwill or intangible asset impairment were identified in the periods presented.

 

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Results of Operations

 

Comparison of Six Months Ended June 30, 2010 and 2011

 

Revenues

 

Our total revenues for the six months ended June 30, 2010 and 2011 consisted of the following (in thousands):

 

     For the Six Months Ended June 30,                
         2010              2011          $ Change      % Change  

Product sales

   $ —         $ 615       $    615         N/A   

Government grants

     5,645         5,953         308         5

Other service arrangements

     66         100         34         52
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 5,711       $ 6,668       $ 957         17
  

 

 

    

 

 

    

 

 

    

 

The $1.0 million increase in our total revenues in the six months ended June 30, 2011 as compared to the same period in 2010 was primarily attributable to a $0.6 million increase in product sales and a $0.3 million increase in government grants. The increase in product sales was a result of our acquisition of SBI in August 2010, which became our wholly-owned subsidiary, Mascoma Canada, Inc., or Mascoma Canada, and we then generated product sales of fiber preparation and pretreatment equipment from Mascoma Canada. The increase in government grants was largely due to increases in qualifying research and development expenses that are reimbursed under the revenue arrangements with the U.S. government.

 

Cost of Product Sales and Operating Expenses

 

Our total operating expenses for the six months ended June 30, 2010 and 2011 consisted of the following (in thousands):

 

     For the Six Months Ended June 30,                
         2010              2011          $ Change      % Change  

Cost of product sales

   $ —         $ 455       $ 455         N/A   

Research and development

     12,450         13,203         753         6

Selling, general and administrative

     3,947         5,036         1,089         28
  

 

 

    

 

 

    

 

 

    

Total cost of product sales and operating expenses

   $ 16,397       $ 18,694       $ 2,297         14
  

 

 

    

 

 

    

 

 

    

 

Cost of Product Sales

 

Our cost of product sales were $0.5 million, or 74% of net product sales, during the six months ended June 30, 2011, which were comprised of manufacturing costs associated with fiber preparation and pretreatment equipment at our Mascoma Canada subsidiary. We did not derive any product sales or cost of product sales during 2009, as these are related to fiber preparation and pretreatment equipment, which was as a result of our acquisition of SBI in August 2010.

 

Research and Development Expenses

 

Total research and development expenses incurred in the six months ended June 30, 2011 increased by $0.8 million, or 6%, from the six months ended June 30, 2010. The increase was primarily due to an increase of $0.9 million in compensation and benefits costs, principally related to the addition of Mascoma Canada employees, partially offset by $0.1 million decrease in spending in other areas.

 

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Selling, General and Administrative Expenses

 

Total selling, general and administrative expenses incurred in the six months ended June 30, 2011 increased by $1.1 million, or 28%, from the six months ended June 30, 2010. The increase was due primarily to an increase of $0.9 million in depreciation and amortization expense, related to the acquisition of SBI, which occurred in August 2010.

 

Other Income (Expense)

 

Our total other income (expense) for the six months ended June 30, 2010 and 2011 consisted of the following (in thousands):

 

     For the Six Months Ended June 30,              
         2010              2011         $ Change     % Change  

Interest income

   $ 83       $ 15      $ (68     -82

Interest expense and other financing costs

     205         (2,352     (2,557     < -100
  

 

 

    

 

 

   

 

 

   

Total other income (expense)

   $ 288       $ (2,337   $ (2,625     < -100
  

 

 

    

 

 

   

 

 

   

 

Interest Expense and Other Financing Costs

 

Our interest expense and other financing costs are comprised of interest expense in connection with our long-term debt, the change in the fair value of the outstanding warrants on our preferred and common stock, foreign currency transaction gain or loss, and other financing costs. Interest expense and other financing costs incurred in the six months ended June 30, 2011 increased by $2.6 million from the six months ended June 30, 2010 due primarily to an increase of $2.0 million in other financing costs related to the fair value of warrants for the purchase of common stock issued in conjunction with the issuance of our long-term debt in June 2011 and $0.3 million in other costs in connection with the issuance of our long-term debt in June 2011.

 

Net Loss

 

For the reasons stated above, we incurred a net loss of $14.5 million for the six months ended June 30, 2011 as compared to a net loss of $10.4 million for the six months ended June 30, 2010.

 

Years Ended December 31, 2008, 2009 and 2010

 

Revenues

 

Our total revenues for the years ended December 31, 2008, 2009 and 2010 consisted of the following (in thousands):

 

    For the Years Ended
December 31,
    For the Years Ended
December 31, 2010 and 2009
    For the Years Ended
December 31, 2009 and 2008
 
    2008     2009     2010     $ Change     % Change     $ Change     % Change  

Product sales

  $ —        $ —        $ 1,466      $ 1,466        N/A      $ —          N/A   

Government grants

    3,896        8,436        13,276        4,840        57     4,540        > 100

Other service arrangements

    —          —          750        750        N/A        —          N/A   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total revenues

  $ 3,896      $ 8,436      $ 15,492      $ 7,056        84   $ 4,540        > 100
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

2010 as compared to 2009

 

The $7.1 million increase in our total revenues in 2010 as compared to 2009 was principally attributable to a $1.5 million increase in product sales, a $4.8 million increase in government grants, and a $0.8 million increase in other service arrangements, specifically revenues from one commercial research and development agreement.

 

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The increase in product sales was a result of our acquisition of SBI in August 2010, and the product sales of fiber preparation and pretreatment equipment from Mascoma Canada. The increase in government grants revenue was due to increases in qualifying research and development expenses that are reimbursed under the revenue arrangements with U.S. federal and state governments. In 2010, we had one commercial research and development agreement with a third party for which we recognized $0.8 million in 2010. There were no such revenue arrangements in 2009.

 

2009 as compared to 2008

 

Our total revenues increased by $4.5 million during the year ended December 31, 2009 as compared to the year ended December 31, 2008. The increase was due primarily to increased government grants as a result of increases in qualifying research and development expenses that are reimbursed under the revenue arrangements with U.S. federal and state governments.

 

Cost of Product Sales and Operating Expenses

 

Our total operating expenses for the years ended December 31, 2008, 2009 and 2010 consisted of the following (in thousands):

 

    For the Years Ended December 31,     For the Years Ended
December 31, 2010 and 2009
    For the Years Ended
December 31, 2009 and 2008
 
        2008             2009             2010           $ Change         % Change         $ Change         % Change    

Cost of product sales

  $ —        $ —        $ 1,120      $ 1,120        N/A      $ —          N/A   

Research and development

    24,327        28,270        26,539        (1,731     -6     3,943        16

Selling general and administrative

    9,344        5,059        10,212        5,153        > 100     (4,285     -46

Loss on asset disposals and lease abandonment

    799        9,213        —          (9,213     -100     8,414        > 100
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total cost of product sales and operating expenses

  $ 34,470      $ 42,542      $ 37,871      $ (4,671     -11   $ 8,072        23
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

Cost of Product Sales

 

2010 as compared to 2009

 

Our cost of product sales were $1.1 million, or 76% of net product sales, during the year ended December 31, 2010, which were comprised of manufacturing costs associated with fiber preparation and pretreatment equipment at our Mascoma Canada subsidiary. We did not derive any product sales or cost of product sales during 2009, as these are related to fiber preparation and pretreatment equipment, which was as a result of our acquisition of SBI in August 2010.

 

Research and Development Expenses

 

2010 as compared to 2009

 

Total research and development expenses incurred in the year ended December 31, 2010 decreased by $1.7 million, or 6%, from the year ended December 31, 2009. The decrease was due primarily to a decrease of $1.6 million in compensation, benefits and stock compensation expense, and a decrease of $1.8 million in facilities costs, both of which were related to the 2009 closure of our Massachusetts facilities and relocation to our Lebanon, New Hampshire headquarters in 2009, including associated reductions in headcount. The decreases were partially offset by an increase of $1.5 million in non-capitalized equipment expense at our demonstration facility in Rome, New York.

 

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2009 as compared to 2008

 

Total research and development expenses incurred in the year ended December 31, 2009 increased by $3.9 million, or 16%, from the year ended December 31, 2008. The increase was due primarily to an increase of $2.6 million in facilities costs related to facilities in Massachusetts and our Lebanon, New Hampshire headquarters in 2009, as well as an increase of $3.9 million in depreciation expense related to our demonstration facility in Rome, New York, partially offset by a decrease of $2.2 million in research conducted by third parties and outside services expenses.

 

Selling, General and Administrative Expenses

 

2010 as compared to 2009

 

Total selling, general and administrative expenses incurred in the year ended December 31, 2010 increased by $5.2 million, or >100%, from the year ended December 31, 2009. The increase was due primarily to an increase of $3.1 million in legal fees and other professional services fees principally related to the acquisition of SBI, an increase of $1.0 million in stock compensation expense principally related to the hiring of a new chief executive officer, and an increase of $0.6 million in amortization expense related to intangible assets acquired in the acquisition of SBI.

 

2009 as compared to 2008

 

Total selling, general and administrative expenses incurred in the year ended December 31, 2009 decreased by $4.3 million, or 46%, from the year ended December 31, 2008. The decrease was due primarily to a decrease of $2.2 million in compensation, benefits, stock compensation expense and other personnel-related costs and a decrease of $1.8 million in legal fees and other professional services fees.

 

Loss on Asset Disposals and Lease Abandonment Expense

 

Loss on asset disposals and lease abandonment expenses increased from $0.8 million in 2008 to $9.2 million in 2009 and were not material in 2010. These changes were due primarily to discontinuing our efforts to form an agreement relating to research and development activities and the design of a demonstration facility in Tennessee during 2009 and our conclusion that impairment had occurred. As a result, we recorded an impairment charge of $7.5 million in 2009. In addition, during 2009 we exited two separate leases related to office and laboratory space in Boston and Woburn, Massachusetts and entered into subleases with subtenants for both leases. The excess lease obligations over the sublease income for the term of the leases in Boston and Woburn were recognized as a lease abandonment expense and a liability totaling $1.4 million was recorded in 2009.

 

Other Income (Expense)

 

Our total other income (expense) for the years ended December 30, 2008, 2009 and 2010 consisted of the following (in thousands):

 

     For the Years Ended
December 31,
    For the Years Ended
December 31, 2010 and 2009
    For the Years Ended
December 31, 2009 and 2008
 
     2008     2009     2010     $ Change     % Change     $ Change     % Change  

Interest income

   $ 975      $ 152      $ 62      $ (90     -59   $ (823     -84

Interest expense and other financing costs

     (862     (1,518     (3,469     (1,951     > 100     (656     76
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Other Income (Expense)

   $ 113      $ (1,366   $ (3,407   $ (2,041     > 100   $ (1,479     < -100
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

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Interest Income

 

2010 as compared to 2009

 

Interest income earned in the year ended December 31, 2010 decreased by $0.1 million, or 59%, from the year ended December 31, 2009, as a result of the decrease in our cash and short-term investment balances.

 

2009 as compared to 2008

 

Interest income earned decreased from $1.0 million in the year ended December 31, 2008 to $0.2 million in the year ended December 31, 2009 as a result of the decrease in our cash and short-term investment balances.

 

Interest Expense and Other Financing Costs

 

2010 as compared to 2009

 

Interest expense and other financing costs incurred in the year ended December 31, 2010 increased by $2.0 million, or >100%, from the year ended December 31, 2009. The increase was due primarily to a $3.5 million charge related to preferred stock warrants issued in connection with convertible notes, partially offset by a decrease of $0.6 million in interest expense due to lower outstanding debt balances and a decrease of $0.9 million due to the change in the fair value of existing preferred stock warrants.

 

2009 as compared to 2008

 

Interest expense and other financing costs incurred in the year ended December 31, 2009 increased by $0.7 million, or 76%, from the year ended December 31, 2008. The increase was due primarily to a $1.0 million increase in interest expense as a result of outstanding principal on our long-term debt, partially offset by $0.3 million decrease in other financing costs.

 

Net Loss

 

2010 as compared to 2009

 

For the reasons stated above, we incurred a net loss of $25.9 million for the year ended December 31, 2010 as compared to a net loss of $35.5 million for the year ended December 31, 2009.

 

2009 as compared to 2008

 

For the reasons stated above, we incurred a net loss of $35.5 million for the year ended December 31, 2009 as compared to a net loss of $30.5 million for the year ended December 31, 2008.

 

Liquidity and Capital Resources

 

From our inception in 2005 through June 30, 2011, we have funded our operations primarily through $105.3 million in proceeds from the sale of preferred equity securities, $10.0 million in proceeds from the sale of convertible notes, $20.0 million in borrowings under our secured debt financing arrangements, and $34.5 million in revenue. As of June 30, 2011, our cash, cash equivalents and short-term investments totaled $12.1 million. Approximately $3.5 million of our total cash, cash equivalents and short-term investments as of June 30, 2011 is included in our Frontier subsidiary and is related to government grant proceeds to finance the cellulosic ethanol production facility in Michigan. In addition, we have $1.8 million of restricted cash primarily related to letters of credit to secure certain purchase commitments. As of June 30, 2011, we had total long-term debt, including the current portion, of $10.0 million.

 

In August and September 2011, we issued approximately $7.4 million in convertible notes to certain of our existing shareholders. These notes bear interest at 8.0% per annum, accrue interest for the period that they are

 

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outstanding, and are due to mature on or before August 2016. Under the terms of the note, if not previously converted or paid, the aggregate principal and accrued and unpaid interest under the notes shall automatically be converted into shares of common stock when we complete our initial public offering at a conversion price equal to a 30% discount to the issuance price of our common stock in our initial public offering. Upon the conversion of the convertible notes into shares of common stock upon an initial public offering we will realize a beneficial conversion charge in our consolidated statement of operations. Investors who participated at or above their pro rata participation amount are entitled to receive a warrant to purchase either our preferred stock at the price at which the securities are sold upon a qualified financing or our common stock at a 30% discount to the issuance price in our initial public offering, whichever occurs first.

 

In January 2011, we issued warrants to purchase an aggregate of 1.33 million shares of our Series D preferred stock at an exercise price of $3.75 per share to Diamond Alternative Energy, LLC, or Valero. In August 2011, Valero exercised this warrant for 1.33 million shares of our Series D preferred stock at an exercise price of $3.75 per share for gross proceeds of $5.0 million.

 

We believe that the net proceeds from this offering, together with our current cash, cash equivalents and short-term investments, proceeds of $6.9 million from the sale of our convertible notes and proceeds of $5.0 million from the exercise of warrants on our Series D preferred stock by Valero, will be sufficient to fund our current operations for at least the next 12 months. The proceeds of $6.9 million exclude the principal amount of the note issued to MPC Investment LLC in satisfaction of the approximately $0.4 million owed by us to Marathon Petroleum Company LP under the Master Engineering and Design Services Agreement, as described in more detail under the section entitled “Certain Relationships and Related Party Transactions” in this prospectus. However, it is possible that we may seek additional financing within this period of time. We may seek such financing through a combination of public or private financing, collaborative relationships and other arrangements. Additional funding may not be available to us or, if available, may not be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. If additional funding is not available to us, we may need to implement cost reductions. Our failure to raise funds when needed or our need to reduce costs in response to a lack of or a delay in funding may harm our business and operating results.

 

Consistent with our planned commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to scale up cellulosic ethanol production capacity in a capital-efficient manner by entering into agreements with partners, obtaining grants and loans from government entities and securing debt financing to fund capital expenditures necessary in building production capacity. Depending on the specifics of each facility and discussions with partners, government entities and sources of debt financing, we may choose to deploy some portion of the equity capital required to construct a hardwood CBP facility, as such capital contribution may influence the scope and timing of our relationship. We expect to evaluate the optimal amount of capital expenditures that we agree to fund on a case-by-case basis. As such, we may be required to access additional capital through equity or debt offerings. If we are unable to access additional capital, our growth may be limited due to the inability to build out additional cellulosic ethanol production capacity.

 

In February 2008, we entered into a loan and security agreement with Pinnacle Ventures that provided for a $20.0 million credit facility consisting of (i) up to a $10.0 million term loan that may be borrowed on or before April 30, 2008 and (ii) up to a $10.0 million term loan that may be borrowed on or before October 31, 2008. All borrowing under this loan and security agreement is secured by a first lien on all of our assets. In October 2008, we borrowed $10.0 million under this credit facility. The borrowings bore interest at a rate of 6.25% per annum and were subject to an end of term payment equal to 2.5% of the amount borrowed. In June 2011, we amended our loan and security agreement with Pinnacle Ventures to provide for an additional $20.0 million credit facility consisting of (i) up to a $10.0 million term loan upon execution of the amended agreement and (ii) up to a $10.0 million term loan that may be borrowed on or before December 31, 2011, with the amount available being determined by the amount of equity raised in a subsequent qualified financing. All borrowing under this amended loan and security agreement is secured by a first lien on all of our assets. The interest rate charged under the

 

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amended loan and security agreement are fixed at the time of loan execution and equals prime (based on the prime rate published in the Wall Street Journal) plus 7.75% per annum, but shall never be lower than 11.0% per annum. In June 2011, we borrowed $10.0 million under the amended loan and security agreement and, as a condition of this borrowing, repaid $1.4 million in outstanding principal under the prior loan and security agreement. This repayment used amounts borrowed pursuant to the amended loan and security agreement. The borrowings bear interest at a rate of 11.0% per annum and are subject to an end of term payment equal to 4.0% of the amount borrowed. The loan matures on June 30, 2014 and provides for interest only payment during the first six months with monthly interest and principal for the next 30 months.

 

Cash Flows

 

    For the Years Ended December 31,     For the Six Months  Ended
June 30,
 

(in thousands)

      2008             2009             2010               2010                 2011        

Cash flows (used in) operating activities

  $ (29,810   $ (21,530   $ (14,344   $ (7,785   $ (7,903

Cash flows (used in) provided by investing activities

    (22,956     (18,265     7,253        373        (296

Cash flows provided by financing activities

    79,261        11,859        5,984        8,030        11,294   

 

Six Months Ended June 30, 2010 and 2011

 

Cash Flows from Operating Activities

 

During the six months ended June 30, 2011, our use of cash in operating activities was $7.9 million, which was due principally to our net loss of $14.5 million, adjusted for the following:

 

   

a decrease of $1.5 million in deferred revenues, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $8.8 million including stock-based compensation expense, depreciation and amortization, warrants issued for financing and debt discount amortization, and other non-cash items;

 

   

a decrease of $1.3 million in accounts payable; and

 

   

changes in other operating assets and liabilities of $0.7 million, which reflect timing differences between the receipt and payment of cash associated with certain transactions and when such transactions are recognized in our consolidated statement of operations.

 

During the six months ended June 30, 2010, our use of cash in operating activities was $7.8 million, which was due principally to our net loss of $10.4 million adjusted for the following:

 

   

a decrease of $1.3 million in deferred revenues, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $4.4 million including stock-based compensation expense, depreciation and amortization, warrants issued for financing and debt discount amortization, and other non-cash items; and

 

   

changes in other operating assets and liabilities of ($0.5) million, which reflect timing differences between the receipt and payment of cash associated with certain transactions and when such transactions are recognized in our consolidated statement of operations.

 

Cash Flows from Investing Activities

 

Cash used in investing activities was $0.3 million for the six months ended June 30, 2011, which was due primarily to $10.5 million in proceeds from the sale or maturity of short-term investments, partially offset by $7.6 million related to the purchase of short-term investments and $3.2 million of capital expenditures. These capital expenditures consisted primarily of laboratory equipment purchases and leasehold improvements in our laboratories.

 

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Cash provided by investing activities was $0.4 million for the six months ended June 30, 2010, which was due primarily to $5.6 million in proceeds from the sale or maturity of short-term investments, partially offset by $3.1 million related to the purchase of short-term investments and $2.0 million of capital expenditures. These capital expenditures consisted primarily of laboratory equipment purchases and leasehold improvements in our laboratories.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities for the six months ended June 30, 2011 was $11.3 million, which was due primarily to $9.9 million in proceeds from the issuance of long-term debt, $4.9 million in net proceeds from issuance of preferred stock, partially offset by $3.5 million in principal payments on our debt obligations.

 

Cash provided by financing activities for the six months ended June 30, 2010 was $8.0 million, which was due primarily to $10.0 million in proceeds from the issuance of convertible debt, partially offset by $1.9 million in principal payments on our debt obligations.

 

Years Ended December 31, 2008, 2009 and 2010

 

Cash Flows from Operating Activities

 

During the year ended December 31, 2010, our use of cash in operating activities was $14.3 million, which was due principally to our net loss of $25.9 million, adjusted for the following:

 

   

a decrease of $2.6 million in deferred revenues, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $14.8 million including stock-based compensation expense, depreciation and amortization, warrants issued for financing and debt discount amortization, and other non-cash items;

 

   

a decrease of $1.1 million in accrued expenses and other liabilities; and

 

   

changes in other operating assets and liabilities of $0.5 million, which reflect timing differences between the receipt and payment of cash associated with certain transactions and when such transactions are recognized in our consolidated statement of operations.

 

During the year ended December 31, 2009, our use of cash in operating activities was $21.5 million, which was due principally to our net loss of $35.5 million, adjusted for the following:

 

   

a decrease of $3.1 million in deferred revenues, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $18.9 million including $9.2 million of loss on asset disposal and lease abandonment, stock-based compensation expense, depreciation and amortization, warrants issued for financing and debt discount amortization, and other non-cash items;

 

   

a decrease of $4.1 million in accrued expenses and other liabilities; and

 

   

changes in other operating assets and liabilities of $2.2 million, which reflect timing differences between the receipt and payment of cash associated with certain transactions and when such transactions are recognized in our consolidated statement of operations.

 

During the year ended December 31, 2008, our use of cash in operating activities was $29.8 million, which was due principally to our net loss of $30.5 million adjusted for the following:

 

   

a decrease of $1.4 million in deferred revenues, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $6.7 million including stock-based compensation expense, depreciation and amortization, warrants issued for financing and debt discount amortization, and other non-cash items;

 

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a decrease of $5.4 million in accounts payable; and

 

   

changes in other operating assets and liabilities of $0.8 million, which reflect timing differences between the receipt and payment of cash associated with certain transactions and when such transactions are recognized in our consolidated statement of operations.

 

Cash Flows from Investing Activities

 

Cash provided by investing activities was $7.3 million in 2010, primarily attributable to the $11.1 million net cash received as part of our acquisition of SBI, $17.4 million in proceeds from the sale or maturity of short-term investments and $1.5 million increase in restricted cash, partially offset by $14.4 million related to the purchase of short-term investments and $8.4 million of capital expenditures. These capital expenditures consisted primarily of laboratory equipment purchases and leasehold improvements in our laboratories.

 

Cash used by investing activities was $18.3 million in 2009, primarily attributable to $17.1 million in purchases of short-term investments and $10.1 million in capital expenditures, partially offset by $9.0 million in proceeds from the sale or maturity of short-term investments.

 

Cash used by investing activities was $23.0 million in 2008, primarily attributable $24.7 million in capital expenditures, partially offset by a $1.8 million increase in restricted cash. The capital expenditures consisted primarily of laboratory equipment, computer and test equipment, and software purchases.

 

Cash Flows from Financing Activities

 

Cash provided by financing activities was $6.0 million in 2010, primarily attributable to $10.0 million in proceeds from the issuance of convertible debt, partially offset by $4.0 million in principal payments on our debt obligations.

 

Cash provided by financing activities was $11.9 million in 2009, primarily attributable to $14.7 million in proceeds from deferred grant revenue, partially offset by $2.6 million in principal payments on our debt obligations.

 

Cash provided by financing activities was $79.3 million in 2008, primarily attributable to $9.4 million in proceeds from deferred grant revenue, $60.2 million in proceeds from the issuance of preferred stock, and $10.0 million of proceeds from the issuance of long-term debt.

 

Contractual Obligations and Commitments

 

The following is a summary of our contractual obligations and commitments as of June 30, 2011 (in thousands).

 

     Total      July 1, 2011 -
December, 31,
2011
     2012      2013      2014      2015 and
Thereafter
 

Long-term debt, including current portion

   $ 10,000       $ —         $ 3,732       $ 4,063       $ 2,205       $ —     

Cash interest payments on long-term debt

     2,421         642         819         489         471         —     

Operating leases

     8,875         813         1,705         891         932         4,534   

Research and development commitments

     2,049         295         904         850         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,345       $ 1,750       $ 7,160       $ 6,293       $ 3,608       $ 4,534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

In April 2006, we entered into a research agreement with the Trustees of Dartmouth College, or Dartmouth, to fund research at Dartmouth College for a total of $1.8 million over two years, with additional annual extensions at our option. We entered into a license agreement with Dartmouth in July 2006. We also agreed to reimburse Dartmouth for patent costs related to the licensed technology. Certain inventions arising from the research program become subject to the license agreement. Dartmouth granted us an option to obtain a

 

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worldwide, royalty bearing license on any other inventions arising from the research program. In March 2008, we amended the research agreement to provide at least $0.5 million per year in research support for five consecutive years commencing April 1, 2008. In December 2009, we further amended the research agreement to provide an aggregate total of at least $2.5 million in research support over the five consecutive years commencing April 1, 2008. The amounts paid under the research agreement are recognized as research and development expense in our consolidated statement of operations.

 

We entered into a license agreement with Koninklijke Nedalco B.V., a company incorporated under the laws of the Netherlands, dated November 23, 2006, providing Mascoma with a non-exclusive, royalty-bearing license to yeast strains and related technology for use in the field of production of ethanol and coproducts from cellulosic materials. We will likely owe royalties under this agreement for hardwood ethanol sales. Unless earlier terminated, the license agreement remains in force as long as any of the patents remain valid or the patent applications remain pending.

 

In December 2008, we and Longyear, a private natural resources company, formed Frontier to develop and operate an integrated commercial-scale cellulosic fuel production facility in the State of Michigan. At June 30, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%. At any time between the second and third anniversary of the date of commencement of development at the site, we have the right to acquire the noncontrolling interest held by Longyear. During that same period, Longyear has the right to put its interest in Frontier to us, or the put right. The amount to be paid under our call option and Longyear’s put right is equal to Longyear’s capital contribution plus a guaranteed 12% annual rate of return on Longyear’s capital contribution. Longyear’s put right has been accounted for as part of the carrying value of the non-controlling interest. Because the put right is not within our control, the noncontrolling interest has been classified with temporary equity as redeemable noncontrolling interest.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any 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 consolidated balance sheet.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the required effective dates. We have not identified any newly released pronouncements that we believe will have a material impact on our condensed consolidated financial position, consolidated statement of operations, or cash flows.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to financial market risks, primarily changes in interest rates and currency exchange rates. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions as of June 30, 2011. Actual results may differ materially.

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and our outstanding debt obligations. As of December 31, 2010 and June 30, 2011, our short-term investments equaled $5.1 million and $2.3 million, respectively, and were invested in commercial paper, and U.S. treasury and government agency securities with remaining maturities of less than three months. These investments are

 

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subject to interest rate risk and will fall in market value if market interest rates increase. However, even if market interest rates for comparable investments were to increase immediately and uniformly by 100 basis points from levels at December 31, 2010 and June 30, 2011, this impact would not be material.

 

As of December 31, 2010 and June 30, 2011, our outstanding debt was fixed-rate debt and equaled $3.5 million and $10.0 million, respectively. If interest rates had increased by 100 basis points related to the outstanding amounts as of December 31, 2010 and June 30, 2011, this impact would not be material.

 

Foreign Currency Risk

 

All of our current product sales contracts are denominated in U.S. dollars and, therefore, our revenues are not currently subject to significant foreign currency risk. We do incur certain operating expenses in currencies other than the U.S. dollar in relation to our subsidiary, Mascoma Canada, and, therefore, are subject to volatility in cash flows due to fluctuations in foreign currency exchange rates, particularly changes in the Canadian dollar. We have previously entered into hedging contracts to manage Canadian dollar to U.S. dollar exchange rate fluctuations for Mascoma Canada, however, these have had minimal impact on our consolidated statement of operations and cash flows, and no such hedging contracts are outstanding as of June 30, 2011.

 

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INDUSTRY

 

We are a renewable fuels company that has developed innovative technology for the low-cost conversion of abundant biomass. Our highly adaptable technology has also been demonstrated to convert biomass to renewable chemicals. We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. In the future, we plan to expand the application of our consolidated bioprocessing, or CBP, technology to develop advanced biorefineries that produce multiple high-value end-products, such as advanced fuels and chemicals, from many different feedstocks.

 

We believe that the industries that are important to our business are the renewable fuels and chemicals industries, particularly first and second generation ethanol, from an end-products perspective, and the wood product biomass industry from a feedstock perspective.

 

The Market Opportunity

 

As a result of our highly adaptable CBP technology platform, we intend to operate across the renewable fuels and chemicals industries, with a near-term focus on improving first generation ethanol. We believe the large and established ethanol industry in the United States presents a compelling market for our drop-in MGT yeast product. We believe there is a market need for a low-cost, more sustainable fuel such as cellulosic ethanol, or second generation ethanol, that is less volatile with respect to price and supply as compared to petroleum-based products, has lower greenhouse gas, or GHG, emissions, addresses concerns about depleting global food supplies and helps advance energy independence.

 

The Renewable Fuels Industry

 

Renewable fuels are fuels produced from renewable resources such as plant biomass, in contrast to fuels produced from non-renewable sources such as crude oil and natural gas. Ethanol is the primary renewable fuel consumed in the United States and is primarily used as an oxygenate to gasoline. According to the United States Energy Information Association, or EIA, approximately 123 billion gallons of gasoline were sold in the United States in 2010. In addition, according to the Renewable Fuels Association, or RFA, approximately 13 billion gallons of ethanol were sold in the United States in 2010 and ethanol replaced the need for approximately 445 million barrels of oil in the United States on an energy equivalent basis. The ability to create fuel from plant and non-plant biomass would help meet the increasing demand for renewable fuels to comply with rising federal and state blending requirements and help reduce American dependence on foreign oil imports.

 

The Current Ethanol Industry

 

The ethanol industry has grown significantly over the past several years. In 2010, there were over 200 ethanol plants in the United States producing over 13 billion gallons of ethanol and ethanol exports hit a record 350 million gallons. Virtually all the ethanol produced globally today is from edible sugar and starch sources, including corn in the United States and sugarcane in Brazil. These fuels are commonly referred to as first generation biofuels. According to the RFA, U.S. corn ethanol production increased from 3.6 billion gallons in 2005 to over 13 billion gallons in 2010, which represented a compound annual growth rate of over 30%. Demand for ethanol in the United States is expected to continue to increase, driven by multiple factors including the growing focus on reducing reliance on petroleum-based transportation fuels. We believe ethanol is important to the fuels market in the following ways:

 

Extends fuel supplies: Ethanol is a valuable blend component that is used by refiners in the United States to extend gasoline supplies. According to the EIA, from 2000 to 2010, ethanol as a component of the United States gasoline supply grew from 1.3% to 9.0%. Ethanol use is also being driven in part by the rise in flexible-fuel vehicles in the United States. A flexible-fuel vehicle is an automobile that can alternate between two or more sources of fuel such as gasoline or ethanol mixtures. Many flexible-fuel vehicles can accept a mixture of up to 85 percent ethanol, or

 

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E85, or up to 85 percent methanol, or M85, and 15 percent gasoline by volume. According to the U.S. Department of Energy, there were 8.4 million flexible-fuel vehicles on the road in 2009 as compared to 4.1 million in 2005.

 

EPA blending approvals. The relative proportion of ethanol that can be blended into the United States fuel stock has increased in the past several years, which has helped drive demand for ethanol. In October 2010, the EPA approved the use of E15 (a blend of gasoline and up to 15% ethanol by volume) in model year 2007 and newer passenger vehicles, including cars, SUVs, and light pickup trucks. In January 2011, the EPA approved the use of E15 in model year 2001 to 2006 passenger vehicles. With these approvals, over 129 million vehicles or 60% of the passenger vehicles in service as of January 2011 are eligible to use E15. We believe that ethanol blended in the United States gasoline supply is an important step towards the long-term introduction of more renewable fuels into the transportation sector.

 

Environmental benefits. Ethanol, when blended with gasoline, reduces vehicle GHG emissions. Oxygenated gasoline continues to be used to help meet separate federal and state air emission standards, and ethanol is the primary clean air oxygenate currently used. The Clean Air Act Amendments of 1990 mandated increased oxygen content for gasoline to meet ozone and carbon monoxide standards. In order to meet these requirements, gasoline refiners and blenders had to add an oxygenate to motor gasoline to allow it to burn more cleanly and to reduce ozone-forming compounds and carbon monoxide emissions. The two predominant oxygenates used to meet both oxy-fuel and reformulated gasoline requirements were methyl tertiary butyl ether, or MTBE, and ethanol. MTBE is an ether made from methanol produced from natural gas and was the most widely used oxygenate until it was voluntarily removed from the nation’s motor fuel supply due to public health and environmental concerns. Although the federal oxygenate requirement was eliminated in 2006, oxygenated gasoline continues to be used in order to help meet federal and state air emission standards. The refining industry has all but abandoned the use of MTBE, making ethanol the primary clean air oxygenate currently used.

 

Economic benefits. The ethanol industry is important economically, helping to reduce expensive oil imports, and supporting domestic manufacturing and job growth. According to the RFA, the ethanol industry contributed nearly $53.6 billion to U.S. GDP in 2010 and was responsible for 400,000 direct and indirect jobs and upwards of $36 billion in personal income.

 

Mandated Use of Renewable Fuels. Growth in ethanol usage has also been supported by legislative requirements dictating the use of renewable fuels, including ethanol. The U.S Renewable Fuel Standard Program, or RFS, is a United States renewable fuel volume mandate further described in more detail under the section entitled “—Government Programs, Incentives and Regulations.”

 

Second Generation Ethanol

 

As the demand for biofuels continues to grow, we believe production will shift increasingly from food-based to non-food based sources. Fuels produced from municipal solid waste and non-food plant materials such as hardwood, bagasse, corn stover and dedicated energy crops like switchgrass and miscanthus, are commonly referred to as second generation biofuels. While corn is expected to remain the primary feedstock for ethanol production in the United States in the near-term, there is an increasing push to produce second generation biofuels. This push is largely driven by concerns about strains placed on global food supplies and the environment by food-based feedstock sources. Aside from being sourced from non-food sources, second generation biofuels provide the additional advantage of offering significantly (at least 50%) lower lifecycle GHG emissions relative to gasoline and corn-based ethanol.

 

Government Programs, Incentives and Regulations

 

The renewable fuels industry benefits from government programs, incentives and regulations that seek to promote the development and commercialization of renewable fuel technologies, including renewable fuel standards, state and local programs and tax credits and incentives.

 

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Renewable Fuel Standard

 

RFS was created under the Energy Policy Act of 2005 and established the first renewable fuel volume mandate in the United States. According to the second stage of the RFS, which was established through a revision of RFS in 2010 (as required by the Energy Independence and Security Act of 2007, or EISA) and which we refer to as RFS2, any refiner or importer of gasoline or diesel fuel in the United States is an “obligated party” and must comply on an annual basis with volume requirements for both renewable fuels as a whole as well as those for each renewable fuel category. The regulation allows the total renewable fuel mandate to be met using 12 billion gallons of corn-derived renewable fuels in the United States in 2010, increasing annually by 0.6 million gallons to 15 billion gallons in 2015 and thereafter. The general renewable fuel requirement is set for 36 billion gallons by 2022, with the following additional specifications:

 

   

Advanced Biofuels: Advanced biofuels are a subset of the renewable fuel category that reduces lifecycle GHG emissions by at least 50% compared to GHG emissions of petroleum products as measured in 2005, and does not include corn ethanol. Of the total RFS2 requirement for the volume of renewable fuel, at least 950 million gallons of renewable fuel was required by the EPA to be advanced biofuels in 2010, increasing to 20 billion gallons by 2022 (excluding 1 billion gallons of biomass-based diesel).

 

   

Cellulosic Biofuel: Cellulosic biofuel is a subset of the renewable fuel and the advanced biofuel categories that reduces lifecycle GHG emissions by at least 60% compared to GHG emissions of petroleum products as measured in 2005, and does not include corn ethanol. Of the total RFS2 requirement for the volume of renewable fuel, at least 100 million gallons of renewable fuel was required by the EPA to be cellulosic biofuel in 2010, increasing to 16 billion gallons by 2022.

 

The size of the potential renewable fuel market for cellulosic biofuel in 2022 under RFS2 is the minimum cellulosic biofuels mandate of 16 billion gallons up to the entire renewable fuels mandate of 36 billion gallons. In 2022, total production of all renewable fuels, including those not considered to be cellulosic biofuels, is projected by the EIA to be 25.7 billion gallons versus 36 billion gallons required under the RFS2 mandate in 2022. It is expected that a significant portion of the shortfall will be due to a shortfall in cellulosic biofuels.

 

Mandated Renewable Fuels Production under RFS2

 

LOGO

 

Source: EPA

 

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RINs and Waiver Credits

 

The EPA assigns Renewable Identification Numbers, or RINs, to each batch of renewable fuel produced or imported. RINs demonstrate compliance with, and are the credit currency of, RFS2. Each fuel category has a unique set of RINs. Each obligated party must obtain its requisite number of RINs for each fuel category based on its volume obligations. If an obligated party meets or exceeds its volume obligations, that obligated party may either trade its excess RINs to other refiners or use its excess RINs to satisfy its volume obligations in subsequent years.

 

Under RFS2, in any compliance year for which the projected volume of cellulosic biofuel production is less than the mandate required, the EPA is required to make waiver credits available for sale for that compliance year to ensure that obligated parties have the ability to meet their cellulosic biofuel RIN volume obligations. The EPA is required to sell the waiver credits for an inflation-adjusted price that is the higher of $0.25 per gallon or the amount by which $3.00 per gallon exceeds the average wholesale price of a gallon of gasoline in the Unites States for the preceding twelve months. For 2011, waiver credits are priced at $1.13 per gallon.

 

The RFS2 volume obligations combined with the waiver credits can operate as a floor price for cellulosic ethanol, since all refiners or importers of gasoline or diesel fuel in the United States must meet the RFS2 volume standard either by purchasing cellulosic ethanol RINs or by purchasing the waiver credit in a given compliance year where the projected production volume falls below the mandated volume. As a result, qualified cellulosic ethanol producers can expect to receive a floor price equal to the wholesale price of gasoline plus the price of a waiver credit for every gallon of qualified cellulosic ethanol produced in a compliance year.

 

Volumetric Ethanol Excise Tax Credit

 

Ethanol’s production economics are further enhanced in the United States by the Volumetric Ethanol Excise Tax Credit, or VEETC, commonly referred to as the Blender’s Credit. The Blender’s Credit, which was created by the American Jobs Creation Act of 2004, provides blenders and marketers of fuel with a federal tax credit of $0.45 on each gallon of ethanol blended with their gasoline. The Blender’s Credit is set to expire on December 31, 2011. All ethanol blended with gasoline in the United States qualifies for the Blender’s Credit, no matter the country of origin of the fuel ethanol. In connection with the Blender’s Credit, a 2.5 percent ad valorem tax and a tariff of $0.54 per gallon is imposed on imports of ethanol from all countries except Caribbean Basin Initiative countries. This tariff is in effect through December 31, 2011. In June 2011, the United States Senate voted 73-27 with bipartisan support not to extend the Blender’s Credit. With the increased likelihood of the credit and tariff expiring, we believe additional pressure will be put on the margins of corn ethanol producers and, as a result, we believe that they will be particularly interested in products that improve ethanol yields and reduce production costs.

 

Cellulosic Biofuel Producer Tax Credit

 

A cellulosic biofuel producer that is registered with the Internal Revenue Service may be eligible for a tax incentive, allowed as a credit against the producer’s income tax liability, in the amount of up to $1.01 per gallon of cellulosic biofuel that is:

 

  (i)   sold and used by the purchaser in the purchaser’s trade or business to produce a cellulosic biofuel mixture;

 

  (ii)   sold and used by the purchaser as a fuel in a trade or business;

 

  (iii) sold at retail for use as a motor vehicle fuel;

 

  (iv)   used by the producer in a trade or business to produce a cellulosic biofuel mixture; or

 

  (v)   used by the producer as a fuel in a trade or business.

If the cellulosic biofuel also qualifies for alcohol fuel tax credits, the credit amount is reduced to $0.46 per gallon for biofuel that is ethanol. For the purpose of the Cellulosic Biofuel Producer Tax Credit, cellulosic biofuel is defined as liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a

 

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renewable basis, and meets the fuel and fuel additive registration requirements of the U.S. Environmental Protection Agency, or EPA. Alcohol with a proof of less than 150, fuel with a water or sediment content of more than 4%, and fuel with an ash content of more than 1% are not considered cellulosic biofuels. Under current law, only qualified fuel produced in the United States between January 1, 2009, and December 31, 2012 for use in the United States may be eligible.

 

Canada’s Renewable Fuel Standard and Biofuel Policies

 

Canada also represents a significant and growing market for biofuels with a total of 476 million gallons produced annually according to Ethanol Producer Magazine. Over the past decade, the Canadian government has made a clear commitment to renewable fuels and advanced green technologies through timely and effective programs and grants. In December 2010, the Canadian federal government began implementing its national renewable fuel standards as part of a strategy to meet its international GHG reduction commitments. Canada’s renewable fuel standards requires that a national average of 5% of gasoline be replaced by renewable fuels. This is expected to be achieved through the widespread use of E5, a gasoline blend with 5% ethanol by volume. In 2009, gasoline consumption in Canada was approximately 10.5 billion gallons. To meet the 5% requirement, Canada is expected to be a net importer of ethanol until domestic supply becomes available. As the Canadian supply of cellulosic ethanol increases, it is expected that Canada will follow the United States in mandating that 10% of gasoline be replaced by renewable fuels.

 

Cellulosic Feedstock Overview

 

We are working with leading industry participants to convert abundant and low-cost hardwood pulpwood biomass feedstocks into cellulosic ethanol. Cellulosic biomass feedstocks suited to ethanol production include the following:

 

   

forest biomass and waste resources: logging residues such as hardwood and softwood chips, thinnings, pulpwood, mill residues and urban wood waste;

 

   

agricultural biomass and waste resources: crop residues such as corn stover (stalks, leaves, and cobs), sweet sorghum stubble, crop processing residues, and sugarcane residue such as bagasse; and

 

   

energy crops: perennial, fast-growing grasses such as switch grass and miscanthus, woody crops such as poplar, willow, southern pine and eucalyptus, and energy sorghum.

 

Cellulosic biomass feedstocks are an abundant resource that can be used to produce substantial amounts of ethanol and other fuels to meet U.S. fuel demand. They are waste products or, in the case of trees and grasses grown specifically for ethanol production, can be grown on marginal lands not suitable for other crops. The use of cellulosic feedstock to produce ethanol also alleviates food supply concerns attendant to starch- and sugar-based feedstocks.

 

We believe that the wood product biomass industry provides a compelling alternative feedstock source for biofuels production, given the size of the ethanol market, the established infrastructure available to collect and transport the hardwood feedstock and the high energy content of the hardwood feedstock. According to the U.S. Department of Agriculture, or USDA, there are 226 million dry tons of total forestland resources currently in use and available for prices below $60 per dry ton, accounting for 48% of total current and potential biomass resources available in 2012 under baseline assumptions.

 

Wood Product Biomass Feedstock

 

The total forestland in the United States is approximately 750 million acres, about one-third of the nation’s total land area, according to a 2011 report by the USDA. Current removals from United States forestlands are about 320 million dry tons annually, which is estimated to be well below net annual forest growth. In 2006, forest growth net of harvesting, land clearing and mortality is estimated to have exceeded removals by 71%. The

 

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amount of forest biomass available is estimated to vary with price, and is expected to grow over time. As shown in the table below, at feedstock prices below $40 per dry ton nearly 80 million tons of forest biomass and wood wastes are available for use in 2012; and at prices of below $60 per dry ton of feedstock, nearly 100 million dry tons are projected to be available in 2012.

 

Estimated Forest Biomass Available in 2012 (Millions of dry tons)

 

Feedstock price ($ per dry ton)

   Forest Residues      Urban Wood Waste      Mill Residues      Other      Total  

< $20

     14         12         7                 33   

< $40

     48         23         7         1         79   

< $60

     55         32         7         3         97   

< $80

     60         32         7         20         119   

 

Source: USDA “U.S. Billion-Ton Update: Biomass Supply for a Bioenergy and Bioproducts Industry”, August 2011

 

Hardwood Feedstock

 

Hardwood trees make up a major component of U.S. forests and play an important role in the commercial wood products industry. According to the American Hardwood Export Council, approximately 25% of total annual U.S. production of lumber, plywood and veneer comprises hardwood, which makes the United States the largest hardwood producer in the world.

 

United States Biomass Resources (Forest Residues)

 

LOGO

 

Source: USDA, U.S. Forest Service’s Timber Product Output database, 2007

 

According to the U.S. Forest Service, between 1953 and 2007, the volume of U.S. hardwood growing stock more than doubled from 5,210 million cubic meters to 11,326 million cubic meters. There was a 15% increase in growing stock between 1997 and 2007 despite strong growth in demand for hardwoods during this period. U.S.

 

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Forest Service forecasts indicate that further increases of 15-20% are expected in the hardwood growing stock inventory through 2030. Projections of hardwood growth and removals nationwide indicate that growth will continue to exceed removals through 2050.

 

The Industrial Chemicals Industry

 

The other industry that we believe is important to us from an end-products perspective is the industrial chemicals industry. Biomass feedstocks can be converted to organic chemicals that have similar characteristics as chemicals derived from fossil fuels such as petroleum. Through advanced development of our CBP platform technology, we expect to produce these primary petrochemicals using non-plant biomass feedstock. We intend to expand into the industrial chemicals market by adding additional production equipment to our hardwood CBP facilities or by developing dedicated biomass-to-chemical refineries.

 

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BUSINESS

 

Overview

 

We are a renewable fuels company that has developed innovative technology for the low-cost conversion of abundant biomass. Our highly adaptable technology has also been demonstrated to convert biomass to renewable chemicals. Using our proprietary consolidated bioprocessing, or CBP, technology platform, we have developed genetically-modified yeasts and other microorganisms to reduce costs and improve yields in the production of renewable fuels and chemicals. According to the DOE, CBP technology is the ultimate low-cost configuration for the hydrolysis and fermentation of cellulosic feedstocks. Our CBP technology provides us with the ability to use a variety of feedstocks to produce multiple renewable fuel and chemical end-products. We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. We believe that these facilities will offer compelling economic value to us and our collaborators based on the expected operating costs of these facilities and today’s market prices for fuel and feedstocks. In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple high-value end-products, such as advanced fuels and chemicals, from many different feedstocks.

 

Conversion of cellulosic biomass typically involves a difficult process of breaking down the complex sugars found in plant material into simple, easy-to-process sugars and then converting these simple sugars into end-products. Our proprietary microorganisms, and our methodology for producing them, allow us to streamline the biomass conversion process and alleviate the need to purchase most of the expensive enzymes used in the process. Our microorganisms have been demonstrated to convert different types of plant material into fuel and chemical end-products in industrial processing conditions. We have built on decades of research to develop and acquire intellectual property related to biomass conversion technologies, including in the fields of pretreatment, hydrolysis, metabolic pathway engineering, enzyme expression and processes for biomass conversion. As of September 1, 2011, we owned or had licensed rights to approximately 75 distinct patent families in the United States, Canada and various other foreign jurisdictions covering our products, technologies and processes, which included approximately 9 issued patents and approximately 205 pending patent applications in the United States and various foreign jurisdictions.

 

We have established a staged strategy for the commercialization of our innovative CBP technology platform in the renewable fuels and chemicals industries. Our first commercial application of CBP technology is our genetically-modified MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. We expect to begin selling this product in 2012. We believe this product is capable of significantly improving the economics of corn ethanol production with negligible capital expenditures and will generate near-term revenue and gross margin for our company. We intend to capture, through a license agreement or other arrangement, a significant portion of the incremental margin generated by our line of MGT yeast products. We plan to pursue the corn ethanol market first in order to capitalize on the size and maturity of this market, the technologically advanced nature of our MGT product compared to conventional yeasts and our ability to cost-effectively deploy our CBP technology. Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. Based on laboratory test runs and management estimates of ethanol production costs, we believe that our initial MGT product will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon. As a result, we believe that this product can create significant and immediate value to corn ethanol producers, which collectively produced over 13 billion gallons of corn ethanol in the United States in 2010. Future generations of our MGT product are also expected to improve ethanol yields, further lowering production costs and potentially increasing revenue for corn ethanol products. Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements of up to 4%. Certain by-products of the corn ethanol conversion process are used as animal feed. Our MGT products are genetically modified and are considered to be processing aids in the production of animal feed. As a result, our MGT products are subject to regulation by the U.S. Food and Drug Administration’s Center for Veterinary Medicine, or CVM, and must

 

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subsequently be approved by the American Association of Feed Control Officers, or AAFCO. See the section entitled “—Regulatory Matters” for more information about this regulatory process.

 

We are also working with leading industry participants to develop and construct commercial scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. Based on pilot production runs at our demonstration facility in Rome, New York, we have achieved hardwood to ethanol conversion yields of 67 gallons per bone dry short ton of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per bone dry short ton of hardwood and we are working to continue to improve conversion yields. At our planned 20 million gallon per year commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per bone dry short ton of hardwood, with unsubsidized cash operating costs of approximately $1.77 per gallon. These estimates assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood and are based on a 20 million gallon per year facility. Over the next several years we are targeting unsubsidized cash operating costs, net of revenue from the sale of co-products such as electricity, of less than $1.00 per gallon based on ethanol yields of 87 gallons per bone dry short ton of hardwood, increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

We expect that our first two hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we expect to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees and/or an equity interest in the facilities. For these two initial hardwood CBP facilities we expect to use government grants in addition to equity funding from strategic partners, but for future facilities we expect to rely primarily on financing from strategic and financial partners.

 

In the future, we plan to expand the application of our CBP technology to develop advanced biorefineries that produce multiple fuel and chemical end-products from a variety of feedstocks. Beyond corn and hardwood, we have already shown the flexibility of our CBP technology platform through the conversion into ethanol of a number of additional feedstocks in a laboratory setting, including corn stover, sugarcane bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum, many of which are abundant and have limited end uses. We believe our feedstock flexibility will enable us to more effectively enter new geographic markets. In terms of end-products, we have demonstrated in a laboratory setting the production of propanol and fatty acids. These chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements, and we plan to continue to expand the number of potential end-products.

 

Market Opportunity

 

As a result of our highly adaptable CBP technology platform, we intend to operate across the renewable fuels and chemicals industries, with a near-term focus on ethanol. We believe there is a significant market need for a low-cost, more sustainable alternative to petroleum-based products that is less volatile with respect to price and supply.

 

First Generation Ethanol

 

Virtually all the ethanol produced globally today is from edible sugar and starch sources, including corn in the United States and sugarcane in Brazil. These fuels are commonly referred to as first generation biofuels. The ethanol industry has grown significantly over the past several years. According to the RFA, U.S. corn ethanol production increased from 3.6 billion gallons in 2005 to over 13 billion gallons in 2010, which represented a compound annual growth rate of over 30% for that period, and ethanol exports in 2010 hit a record high of 350 million gallons. As of 2010, over 200 ethanol plants existed in the United States. We believe this large and

 

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established industry presents a compelling market for our drop-in MGT yeast product. In addition, current ethanol producers benefit from a volumetric ethanol excise tax credit from the Internal Revenue Service of $0.45 per gallon of ethanol produced or sold domestically. With the potential expiration of this credit in the near-term, we believe corn ethanol producers will be motivated to purchase products that reduce operating costs and improve ethanol yields to support their margins.

 

Second Generation Ethanol

 

As the demand for biofuels continues to grow, we believe production will shift increasingly from food-based to non-food based sources. Fuels produced from municipal solid waste and non-food plant materials such as hardwood, bagasse, corn stover and dedicated energy crops like switchgrass and miscanthus, are commonly referred to as second generation biofuels. While corn is expected to remain the primary feedstock for ethanol production in the United States in the near-term, there is an increasing push to produce ethanol and other biofuels from non-food plant materials. The U.S. Renewable Fuel Standard Program, or RFS, was established by the U.S. Environmental Protection Agency, or EPA, in 2005 under the Energy Policy Act of 2005. As required by the Energy Independence and Security Act of 2007, the standards were revised in February 2010. We refer to these modifications as RFS2, which, among other requirements, mandate that 36 billion gallons of renewable fuels (such as biofuels) from multiple sources be blended into transportation fuels by 2022. Of the 36 billion gallons of renewable fuels mandated by 2022, 20 billion gallons are mandated to be advanced biofuels (excluding 1 billion gallons of biomass-based diesel), with at least 16 billion gallons required to be cellulosic biofuels. Biofuels are primarily produced from corn, cereal grains, sugarcane and other organic materials. Advanced biofuels are renewable fuels that produce at least 50% less greenhouse gases, or GHG, on a life cycle basis compared to GHG emissions of petroleum products as measured in 2005. Cellulosic biofuels are renewable fuels produced from wood, grasses or non-edible parts of plants that produce at least 60% less GHG on a life cycle basis compared to GHG emissions of petroleum products as measured in 2005. The vast majority of ethanol consumed in the United States today is produced from corn and does not satisfy RFS2 advanced biofuels requirements. We expect the ethanol produced at our hardwood CBP facilities will be a cellulosic biofuel and we intend to capitalize on this mandated market.

 

Mandated Renewable Fuels Production under RFS2

 

LOGO

 

Source: EPA

 

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Advanced Chemicals

 

In the future we expect to apply our CBP technology platform to the production of advanced chemicals from renewable biomass sources. Petrochemicals, which have traditionally been derived from fossil fuels such as petroleum, natural gas or coal, represent a large and established market. To date, using our CBP technology platform, we have produced ethanol and propanol in laboratory settings, which can be converted into ethylene and propylene, respectively.

 

Market Challenges

 

The market for renewable fuels and chemicals has evolved significantly over the past several years, with many companies seeking to capitalize on the growing market potential and the environmental benefits offered by these products. However, many challenges exist and we believe that companies will need to satisfy the following criteria to succeed in this market:

 

   

Demonstrated and Validated Technology. Numerous technologies have been offered as solutions for producing renewable fuels and chemicals. However, in order to become economically viable, many of these emerging technologies rely on anticipated technological improvements and future cost reductions. We believe there is a clear market demand for technologies that have been demonstrated and are expected to be cost-competitive at a commercial scale. We believe that the validation and adoption of a particular technology by independent third parties, whether as engineering, off-take or feedstock partners, are critical.

 

   

Comprehensive, Integrated Process. Many of the emerging technologies in the second generation biofuels markets are focused on just one of the steps in the biomass conversion process. These solutions rely on compatibility with, and often improvements in other stages of the process by third parties in order to achieve economic viability. As a result, we believe there is a strong need for a comprehensive and viable biochemical solution that facilitates biomass conversion without dependence on other pending emerging technologies.

 

   

Low Cost. We believe that market participants are focused on a technology’s all-in cost, which takes into account upfront capital spending as well as ongoing operating costs. Most of the non-feedstock operating costs in current processes are related to the need to purchase most of the expensive enzymes required to make the current technology work. For example, we believe enzymes may account for approximately $0.50 per gallon in operating costs for cellulosic ethanol facilities. As a result, we believe a process that eliminates or reduces enzyme and associated costs would have an advantage over other technologies.

 

   

Flexibility. Currently, the vast majority of biofuels are developed from food-based feedstocks such as corn, cereal grains and sugarcane. Given their dependence on a single feedstock, corn ethanol producers have been significantly impacted by volatility in the price of corn. It is expected that future growth in this industry will come from non-food feedstocks. The technologies utilized by producers of first generation ethanol are currently used to produce one primary end-product and are generally unable to process inputs other than their primary feedstock. We believe ethanol producers and other industry participants are looking for a flexible technology that can be applied to different feedstocks and can produce various end-products.

 

Our Competitive Strengths

 

We believe that we benefit from the following competitive strengths:

 

   

Proven CBP Technology. We have demonstrated the performance of our MGT yeast product and hardwood CBP technology as follows:

 

   

Validation of the performance of our initial MGT yeast product by ICM, Inc., the leading provider of engineering services to the ethanol industry;

 

   

Successful production runs using our hardwood CBP microorganisms, including more than 1,000 continuous hours of operating data on a fully-integrated basis at our demonstration facility in Rome, New York;

 

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Validation of our hardwood CBP technology by independent engineers at the U.S. Department of Energy and by independent third parties; and

 

   

Proven commercial use of the core equipment used in our biomass conversion process, with the front-end pretreatment equipment traditionally used in the pulp and paper industries, and the back-end distillation equipment used in the fuels and petrochemical industries.

 

   

Comprehensive and Efficient Biochemical Solution for Biomass Conversion. We know of no other company that provides a comprehensive biochemical solution for the production of renewable fuels and chemicals from multiple feedstocks that covers the full spectrum of the biomass conversion process, including pretreatment, hydrolysis and fermentation. By controlling key aspects of our manufacturing process, we are not reliant on technological improvements or cost reductions by third parties to be cost-competitive. We believe our CBP technology platform, which converts cellulosic biomass into high-value end-products in a single step, increases our ability to reduce costs for both corn ethanol producers and producers of second generation ethanol and provides us with a competitive advantage over other technologies and processes.

 

   

Low All-in Cost Solution. CBP is distinct from other, less integrated configurations, in that it alleviates the need to purchase most of the expensive enzymes associated with most other ethanol production methods while also improving yields. In doing so, the technology enables the cost-effective conversion of cellulosic biomass into renewable fuels and chemicals and lowers costs in first generation ethanol production. Our substantial experience with CBP technology has enabled us to develop an integrated biomass conversion solution that is differentiated by its cost-effectiveness today, without government subsidies or incentives or third-party improvements in technology or yield. In addition, we believe there will be significant future cost reduction opportunities using our CBP technology as we gain experience with commercial processing and benefit from economies of scale.

 

   

Capital-Light Path to Revenue Generation. The commercialization of our initial MGT yeast product is not dependent on any meaningful capital expenditures by us or any third parties. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we intend to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees from and/or an equity interest in each facility to provide us with a share of that facility’s profits and related cash flow. As a result, we believe our business model has the potential to generate significant financial returns while minimizing our operational and financial risk.

 

   

Feedstock Flexible and Adaptable Technology. CBP is a flexible technology that we believe can be adapted for a wide variety of potential feedstocks. As a result, we expect that we will be able to adjust our focus based on long-term changes in the market demand for particular feedstocks. Being feedstock flexible also allows us to provide a value-add product to the mature first-generation ethanol market in the near-term, while, over time, adapting our technology for use in different regions based on the feedstock that is the least expensive and most abundant in the region. To date, in addition to our proven ability to convert corn and hardwood, we have also successfully demonstrated in a laboratory setting the ability to convert a number of additional feedstocks including corn stover, bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum. In the long-term, we believe our adaptable CBP technology will also enable us to produce a variety of end-products, including advanced fuels and chemicals.

 

   

Deep Domain Expertise. We believe that our business is differentiated by our ability to leverage the deep domain expertise of an exceptional and distinguished group of executives, scientists and partners. Our management team has a strong, demonstrated record of leadership and growth in the fuel, chemical and biotechnology industries. We were founded by pioneers in consolidated bioprocessing and cellulose conversion, Dr. Lee Lynd and Dr. Charles Wyman, who, together with Dr. Michael Ladisch, are our key science officers. They possess deep domain knowledge of cellulosic biomass, biomass conversion, pretreatment, fermentation and related processes and regularly provide us with insight into

 

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important technical and engineering aspects of the conversion of cellulosic biomass into renewable fuels and chemicals. We believe that our combination of management, intellectual property, know-how and technical expertise sets us apart in the industry.

 

Our Strategy

 

We have a staged approach for the commercialization of our CBP technology. We intend to go to market first with our genetically-modified MGT yeast product while also working with leading industry participants to develop and construct commercial scale facilities to convert hardwood feedstocks into cellulosic ethanol. Our long-term goal is to provide the leading technology to advanced biorefineries for the conversion of biomass from non-food plants to fuels and chemicals.

 

   

Deploy our Proprietary MGT Product to the Large and Established Corn Ethanol Market. Our first commercial application of CBP technology is our proprietary MGT product, which is a genetically-modified yeast product that can be used by corn ethanol producers as a drop-in substitute for conventional fermenting yeast. Following the completion of CVM review and approval, we intend to market this product to the more than 200 corn ethanol plants that, according to the RFA, produced over 13 billion gallons of ethanol in the United States in 2010. We believe our initial MGT yeast product is capable of significantly improving the economics for corn ethanol producers and will generate near-term revenue and gross margin for our company and requires negligible capital expenditures. Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements in commercial-scale ethanol production of up to 4 %. We believe this compelling value proposition will drive rapid adoption of our MGT products among first generation ethanol producers, solidify our technology leadership position and help establish our credibility in the larger fuel market.

 

   

Convert Hardwood Pulpwood into Cellulosic Ethanol on a Commercial Scale. We believe that converting hardwood to cellulosic ethanol is the best entry point into the advanced biofuels market given the abundant supply and the low cost of hardwood feedstock. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we expect to collaborate with third parties to fund, build, develop and operate the facilities, while we contribute technology and receive fees from and/or an equity interest in each facility to provide us with a share of that facility’s profits and related cash flow. We are working with leading industry participants to develop and construct our first two hardwood CBP facilities in Kinross, Michigan and Drayton Valley, Alberta. We expect construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months. We expect to locate additional future hardwood CBP facilities in proximity to large sources of hardwood biomass, partner with local project developers and feedstock providers and expand our ability to capitalize on the co-products, such as electricity, produced at future facilities. For our initial hardwood CBP facilities we expect to use state and federal government grants in addition to equity funding from strategic partners, but for future facilities we expect to focus on financing from strategic and financial partners. We believe that our hardwood CBP facilities will serve as the foundation for our expansion into new feedstocks and end-products and that the success of our initial hardwood CBP facilities may facilitate the use of traditional project financing for future facilities.

 

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As set forth in the chart below, over time, we have significantly increased ethanol conversion yields in pilot production runs at our demonstration facility in Rome, New York and we expect to generate additional yield increases as we further improve upon our technology. We also expect that future facilities will be larger than our planned 20 million gallon per year facility in Kinross, Michigan and, as a result, these future facilities will have lower operating costs due to improved economies of scale.

 

Operating Costs(1)

 

Dollars per Gallon of Ethanol

        

Ethanol Yields

 

Gallons/Tons of Biomass

LOGO         LOGO

 

(1)   The operating cost of $3.00 for 2009 is based on a hardwood to ethanol conversion yield of 52 gallons per bone dry short ton. The operating cost of $2.13 for 2010 is based on a hardwood to ethanol conversion yield of 67 gallons per bone dry short ton. The current operating cost of $2.00 is based on a hardwood to ethanol conversion yields of 71 gallons per bone dry short ton. The yields for 2009 and 2010 and our current yields have been demonstrated in pilot production runs at our 200,000 gallon demonstration facility in Rome, New York. The estimated operating cost of $1.77 for our planned hardwood CBP facility in Kinross, Michigan assumes that the facility is built to our specifications with a hardwood to ethanol conversion yield of 83 gallons per bone dry short ton, which is what we expect when the facility is fully operational. All of the operating cost estimates set forth in the table above assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood and estimated operating expenses for a 20 million gallon per year facility. None of the operating costs includes depreciation or cost of financing the facility.

 

   

Expand into New Geographies and Different Feedstocks. Upon successful commercial application of our CBP technology platform to hardwood feedstocks in North America, we believe we will be able to apply this highly adaptable technology to different feedstocks and enter new geographic markets. For example, we believe there is significant market opportunity to adapt our CBP technology through the development of microorganisms to convert sugarcane bagasse and cane trash into ethanol, which are abundant and low-cost feedstocks in Brazil and other geographies. Sugarcane bagasse refers to the crushed stalks that remain after sugar is extracted from cane and cane trash refers to the leaves and plant tops that are disposed of during cane harvesting. We believe these feedstocks are an attractive next target for our commercialization plans because, much like hardwood, bagasse and cane trash are plentiful and inexpensive biomass feedstocks relative to corn. Similar to our hardwood strategy in North America, we expect to generate revenue through a combination of fees from and/or ongoing equity interests in new production facilities. According to Hart Energy Consulting, Brazil may need to double its supply capacity over the next 10 years in order to meet increasing demand. Given the constraints in the availability of sugarcane, we believe a significant portion of this incremental demand will need to be met through conversion methods such as ours used to create second generation ethanol. We are also exploring the application of our technology in other countries including Canada, China, India and South Africa.

 

   

Enable Advanced Biorefineries. Our long-term goal is to enable the development of advanced biorefineries that utilize multiple feedstocks to produce a wide variety of high-value fuels and

 

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chemicals. The National Renewable Energy Laboratory defines a “biorefinery” as a facility that integrates biomass conversion processes and equipment to produce fuels, power, and chemicals from biomass. The biorefinery concept is analogous to petroleum refineries that currently produce a wide spectrum of fuels and chemicals from petroleum. However, unlike petroleum refineries, a biorefinery utilizing our technology could be adapted for a different feedstock or end-product without significant changes to its installed infrastructure. A biorefinery can produce multiple end-products from the sugars, lignin and other components and intermediates that result from the conversion of different feedstocks. Through a biorefinery approach, we intend to expand into the industrial chemicals market through conversion of biomass feedstock into higher-value chemicals such as ethylene and propylene derivatives by adding on to existing hardwood CBP facilities and by developing dedicated biomass-to-chemical refineries. The markets for these chemicals are global, growing and significant, and we believe that in the future we will be able to access these markets with our technology platform.

 

Our Commercialization Plan

 

We are pursuing multiple applications for our highly adaptable CBP technology platform, including a genetically-modified MGT yeast product and the licensing of technology enabling the production of cellulosic ethanol and, in the future, other advanced biofuels and chemicals.

 

Our MGT Yeast Products

 

Our first commercial application of CBP technology is our MGT yeast product. Our proprietary MGT product is a genetically-modified yeast product that can be used by corn ethanol producers as a drop-in substitute to conventional yeast. Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, which lowers costs. Future versions of our MGT products are expected to improve ethanol yields, which further lowers costs and could also increase revenue for corn ethanol producers. We intend to market this product to the more than 200 corn ethanol plants that, according to the RFA, produced over 13 billion gallons of ethanol in the United States in 2010. We believe this compelling value proposition will drive rapid adoption of our MGT product among first generation ethanol producers.

 

We are currently working with ICM to support the launch of our MGT products. ICM is an industry leader in the design, building, and support of ethanol plants, having engineered and built over 100 ethanol facilities. We intend to leverage this relationship to gain access to potential corn ethanol producer customers. We expect ICM’s role will be to assist in the initial commercialization of our MGT products, which will include pilot testing in their research and pilot plant facility in St. Joseph, Missouri and direct technical support from ICM personnel in the initial rollout to commercial facilities. ICM has also provided independent validation of the performance of our initial MGT yeast product and is currently in the process of validating our next MGT product.

 

We plan to establish partnerships with the leading yeast producers, such that they will manufacture, distribute, market and sell our MGT product to corn ethanol producers. We plan to establish a small sales and marketing team to sell and promote our MGT product to corn ethanol producers, both directly and together with our yeast production partners, as well as providing technology support to customers. We intend to either enter into agreements directly with corn ethanol producers in which they agree to pay us a fee based on the incremental improvement in their margin or we recoup such a payment through agreements with our yeast production partners.

 

We have several products under development that we expect to launch over the next several years under our MGT brand:

 

   

MGT 1.0: Our first commercial product, MGT 1.0, is planned for commercial demonstration and launch in the next eight months, subject to regulatory review and approval. MGT 1.0 will be a first of a kind product – an advanced yeast which will provide significant value to ethanol producers by

 

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alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production. Based on laboratory test runs and management estimates of ethanol production costs, we believe that MGT 1.0 will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon. MGT 1.0 can be used as a direct replacement and has production cost similar to yeasts currently used in ethanol production.

 

   

MGT 1.1: Our next MGT product, MGT 1.1, is planned for commercial demonstration and launch in the next two years. MGT 1.1 builds upon cost savings associated with our MGT 1.0 technology by significantly increasing the yield of ethanol per bushel of corn without any reduction in the robustness of the yeast. Our MGT 1.1 product increases yields by converting more recalcitrant sugars to ethanol, which are unable to be converted in the process typically used by ethanol producers today. Based on laboratory test runs, we believe MGT 1.1 will provide up to 4% yield improvements. We believe that MGT 1.1 will be a disruptive product in the market and provide significant incremental value over that provided by conventional yeast and enzymes.

 

Certain by-products of the corn ethanol conversion process are used as animal feed. Our MGT products are genetically modified and are considered to be processing aids in the production of animal feed. As a result, our MGT products are subject to regulation by CVM and must subsequently be approved by AAFCO. See the section entitled “—Regulatory Matters” for more information about this regulatory process. Our MGT 1.0 product is currently under scientific review at CVM. We expect CVM to complete its review by the fourth quarter of 2011 or early 2012, and we expect to initiate regulatory review of MGT 1.1 following the completion of our validation tests.

 

Our Hardwood CBP Technology

 

We have also used our CBP technology to convert hardwood feedstock into cellulosic ethanol. By 2022, RFS2 mandates the use of 20 billion gallons of advanced biofuels (excluding 1 billion gallons of biomass-based diesel), which are renewable fuels that produce at least 50% less GHG on a life cycle basis compared to the GHG emissions of petroleum products as measured in 2005. By 2022, RFS2 mandates the use of 16 billion gallons of cellulosic biofuels, which are renewable fuels that produce at least 60% less GHG on a life cycle basis compared to the GHG emissions of petroleum products as measured in 2005. As a result, there has been increased market interest in producing cellulosic ethanol to, among other things, provide an alternative to fossil fuels and reduce carbon emissions.

 

Based on our laboratory and pilot-scale test runs, we believe we are able to convert hardwood feedstocks at costs that are competitive with costs to produce corn ethanol based on yields that ethanol producers currently realize and current corn prices. Our hardwood conversion process is cost competitive as a result of our streamlined biomass conversion process and the reduced need to purchase most of the expensive enzymes currently used in the process.

 

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The graphic below illustrates the difference between producing cellulosic ethanol using the conventional conversion approach and our approach, as well as the primary advantages offered by our CBP process:

 

LOGO

 

We expect that our first two hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We expect to receive fees from and/or an equity interest in each of these facilities, which will provide us with an ongoing share in their returns.

 

   

Kinross, Michigan: The hardwood CBP facility in Kinross, Michigan is expected to be a 20 million gallon per year facility. We intend to develop and construct this facility through a partnership with J.M. Longyear, L.L.C., a Michigan limited liability company, or Longyear. Longyear brings to this partnership large project development experience, local knowledge, and 120 years of timberland management experience. In December 2008, we and Longyear formed Frontier Renewable Resources, LLC, or Frontier, to develop and operate an integrated commercial-scale cellulosic fuel production facility in the state of Michigan. We expect that Frontier, in conjunction with a leading industry participant that will hold a majority ownership interest, will own and operate our hardwood CBP facility in Kinross, Michigan. At June 30, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%. We have contributed proceeds received under a grant agreement with the Michigan Economic Development Corporation toward construction of the Kinross facility through Frontier and Longyear has agreed to contribute land for the construction of the facility. At December 31, 2010, we had received grant proceeds of $12.1 million and contributed the entire amount to Frontier. We are also in the process of securing additional third party financing, as well as long-term enzyme supply, feedstock and off-take agreements from leading industry participants.

 

   

Drayton Valley, Alberta: The hardwood CBP facility in Drayton Valley, Alberta is expected to be a 20 million gallon per year facility that will produce ethanol, as well as coproducts such as renewable electricity and purified xylose. In March 2010, we entered into a Biorefining Commercialization and Market Development Program Grant Agreement with the Province of Alberta, Canada, or Alberta, in connection with receiving financial assistance for the development of our planned commercial cellulosic ethanol facility in Alberta, Canada. Under this arrangement, Alberta will provide up to $0.8 million in funding to be used exclusively for this project. We are in the process of securing third party and additional government financing, as well as long-term feedstock and off-take agreements from leading industry participants.

 

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We intend to build on our experience at the facilities at Kinross, Michigan and Drayton Valley, Alberta and intend to replicate this model by partnering to build additional commercial facilities near other large sources of hardwood biomass. We also intend to sell our pretreatment equipment to these additional facilities. In addition to Kinross, Michigan and Drayton Valley, Alberta we have identified additional potential development sites in the Great Lakes region and Alberta. We intend to continue to expand this pipeline of production sites over the coming years. We believe the commercial success of these initial hardwood CBP facilities may also provide us with access to traditional project financing.

 

Other CBP Applications

 

In the future, we plan to expand the application of our CBP technology to develop biorefineries that produce multiple fuel and chemical end-products from a variety of feedstocks. We have already shown the flexibility of our CBP technology platform through the conversion into ethanol of corn and hardwood at pilot-scale production as well as a number of additional feedstocks in a laboratory setting, including corn stover, bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum. In terms of end-products, in a laboratory setting, we have used our CBP technology to produce propanol and fatty acids, which can in turn be used to create propylene and alkanes, and we plan to continue to expand the number of potential end-products. We believe that with additional research and development work, we can use our CBP technology to create microorganisms and processes that can convert biomass into a variety of additional end-products such as biomass-based diesel, advanced fuels and petrochemicals.

 

We believe we will be able to apply this highly adaptable technology to different feedstocks and enter new geographic markets. For example, we believe there is significant market opportunity to adapt our CBP technology through the development of microorganisms to convert sugarcane bagasse and cane trash into ethanol, which are abundant and low-cost feedstocks in Brazil and other geographies. We believe our CBP technology platform can be readily adapted to convert both sugarcane bagasse and cane trash into ethanol. We believe these feedstocks are an attractive next target for our commercialization plans because, much like hardwood, bagasse and cane trash are plentiful and inexpensive biomass feedstocks relative to corn. According to Hart Energy Consulting, Brazil may need to double its ethanol capacity over the next 10 years in order to meet increasing demand. Given the constraints in the availability of sugarcane, we believe a significant portion of this incremental demand will need to be met through conversion methods such as ours that can be used to create second generation ethanol from feedstocks such as sugarcane bagasse and cane trash.

 

Pretreatment Equipment Applications

 

In addition to our CBP technology platform, we also design our own proprietary pretreatment systems that can be used in conjunction with or independently from our hardwood CBP technology. We acquired our pretreatment equipment business from SunOpta Inc. in 2010. Pretreatment of the biomass feedstock is the first step in the process of converting biomass into sugars and fuels, to break down the structure of the biomass and make it more conducive to extracting usable sugars. Pretreatment is typically done chemically, using harsh acids and chemicals to break down biomass. Our pretreatment technology uses steam and pressure to break down biomass, in a simpler, less expensive method. We know of no other technology provider in the marketplace that provides a comprehensive biochemical solution to biofuels producers, from upstream pretreatment equipment to downstream CBP conversion technologies. We intend to sell our pretreatment equipment to the third parties that are developing and constructing our hardwood CBP facilities. We believe these facilities could benefit from synergies from using our pretreatment equipment in conjunction with our hardwood CBP technology. We may also pursue independent sales of our pretreatment equipment to customers other than those using our hardwood CBP technology, particularly in international markets where we do not intend to have a hardwood CBP presence. We currently manufacture our pretreatment equipment through third-party contract manufacturers and expect to continue to do so.

 

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Our Key Relationships

 

Commercial Arrangements

 

JM Longyear

 

In December 2008, we and Longyear formed Frontier to develop and operate an integrated commercial-scale cellulosic fuel production facility in the state of Michigan. As of June 30, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%. We have the right to appoint four directors to Frontier’s board of directors and the other member may appoint one director to the board of directors. The members contribute capital based on their interest in Frontier and are reimbursed for their out-of-pocket expenses related to the formation of Frontier. The initial contribution by each member is set forth in an operating agreement, which also provides for the distribution of earnings and losses. The initial contribution that we made was from the proceeds received under a grant agreement with the Michigan Economic Development Corporation and Longyear has agreed to contribute the land for the construction of the facility. The operating agreement was amended in June 2010 to provide that Longyear will contribute the land at a date to be determined by the board of Frontier on or after January 1, 2012, upon commencement of development at the site. At any time between the second and third anniversary of this commencement date, we have the right to acquire the noncontrolling interest held by Longyear. During that same period, Longyear has the right to put its interest in Frontier to us. The amount to be paid under our call option and Longyear’s put option is equal to Longyear’s capital contribution plus a guaranteed 12% annual rate of return on Longyear’s capital contribution. Longyear’s put right has been accounted for as part of the carrying value of the noncontrolling interest. Because the put right is not within our control, the noncontrolling interest has been classified with temporary equity as noncontrolling interest.

 

In connection with the formation of Frontier by us and Longyear, we entered into a collaboration agreement with Frontier and Longyear in December 2008 to govern our partnership in developing our planned hardwood CBP facility in Kinross, Michigan. Unless earlier terminated, this collaboration agreement continues until Frontier dissolves or until either we or Longyear are no longer a member of Frontier, and may be terminated earlier by any party upon a material default or bankruptcy by another party. Under this collaboration agreement, we will own all inventions conceived of and reduced to practice in the course of the project. Longyear is prohibited from competing with us under this agreement so long as it is a member of Frontier and for 5 years thereafter. So long as Longyear is a member of Frontier and for 3 years thereafter, it is prohibited from selling timber products or other feedstock used by the planned facility to any third party within a 100-mile radius of the planned facility.

 

Government Grants

 

The U.S. Department of Energy

 

In October 2007, we entered into a grant agreement with the United States Department of Energy, or the DOE, for the development of an organism for the conversion of lignocellulose to ethanol. Under this grant, as amended, the DOE will provide us with up to approximately $4.3 million, payable in phases and dependent on the results of each phase. As of June 30, 2011, we have received $4.1 million in proceeds from the DOE under this grant.

 

In September 2008, we entered into a grant agreement with the DOE, for the construction of an industrial scale fermenter system and the design, construction and operation of an integrated cellulosic ethanol plant for transforming locally grown mixed hardwoods or switchgrass into ethanol. As of June 30, 2011, we have received approximately $16.5 million under this award. Under this grant, the DOE will provide us with up to approximately $20.0 million, payable in phases and dependent on the results of each phase. We are required to make periodic progress reports on the status of our project and notify the DOE of any significant favorable or adverse events during the course of the project.

 

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The BioEnergy Science Center

 

In June 2008, we entered into a subcontract with UT-Battelle, LLC governing funds for the research and development to achieve advances in sustainable production and economical conversion of lignocellulosic biomass to enable the production of biofuels. We are one of the more than a dozen participants in the BioEnergy Science Center, or BESC, supporting the multi-year effort to overcome recalcitrance of cellulosic biomass to conversion. BESC will provide up to approximately $6.3 million to fund our portion of the project. As of June 30, 2011, we have received $5.1 million from BESC. Our obligations include providing regular reports on the status of research and progress of the project, and ensuring that two of our employees and consultants remain on the project. Under the terms of the subcontract, we retain patent rights to inventions arising from the project, while the United States government receives a nonexclusive license to use such inventions. The term of the contract lasts through September 2012.

 

The Michigan Strategic Fund

 

In December 2008, we entered into a grant agreement with the Michigan Strategic Fund, or MSF, in connection with a grant of funds from the MSF to fund our planned hardwood CBP facility in Kinross, Michigan. In connection with this grant agreement, as amended in March 2009, we were awarded a grant of up to $20.0 million, to be paid in installments upon certain milestones such as filing required environmental permits and finalizing commercial agreements relating to supply, construction and operation of the planned facility. As of June 30, 2011, we have received $12.1 million from MSF. As of December 31, 2010, our consolidated balance sheet includes approximately $958,000 of cash and cash equivalents and $5.1 million of short-term investments that are held by Frontier related to the remaining grant proceeds, which are intended to be used for construction of the production facility. Our ongoing obligations under this grant agreement include providing regular progress reports on the status of the project and the milestones achieved. Unless earlier terminated for default under the terms identified in the grant agreement, the term of this grant agreement lasts until December 2013.

 

The New York State Energy Research and Development Authority

 

In October 2007, we entered into a grant agreement with the New York State Energy Research and Development Authority, or NYSERDA, to build and operate a biomass-to-ethanol demonstration plant in Rome, New York. In connection with this grant agreement, we were awarded a grant of up to $14.8 million, to be paid in installments upon certain milestones. As of June 30, 2011, we have received $13.8 million in proceeds from NYSERDA.

 

The Province of Alberta, Canada

 

In March 2010, we entered into a Biorefining Commercialization and Market Development Program Grant Agreement with the Province of Alberta, Canada in connection with receiving financial assistance for the development of our planned commercial cellulosic ethanol facility in Alberta, Canada. Under this arrangement, Alberta will provide up to $0.8 million in funding to be used exclusively for this project. Until the completion of the project, we are obligated to provide regular reports on the status of the project, and upon receipt of any study, analysis or report relating to the project, forward them to Alberta.

 

Our Technology

 

In a 2006 report on biomass conversion to biofuels, the DOE endorsed the view that CBP technology is widely considered the ultimate low-cost configuration for cellulose hydrolysis and fermentation. Our technology is focused on overcoming the key impediment to conversion of cellulose into fuels and chemicals: cost-effectively accessing the chemical building blocks locked in cellulosic materials. Our CBP platform utilizes genetically modified yeast and bacteria to convert cellulosic biomass into high-value end-products in a single step that combines hydrolysis and fermentation.

 

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Plant polysaccharides, such as starch, cellulose, and hemicellulose, are broken down naturally in the environment through the action of enzymes and microorganisms. Our CBP technology platform harnesses and accelerates these natural processes.

 

Typically, biomass conversion processes require a collection of saccharolytic enzymes (cellulases and hemicellulases), which hydrolyze the carbohydrates present in pretreated biomass to sugars, and microorganisms capable of fermenting the liberated sugars into ethanol or other end-products. When the microorganisms both produce the necessary saccharolytic enzymes and ferment the liberated sugars to end-products, the biomass conversion process is called consolidated bioprocessing, or CBP.

 

CBP is distinct from other, less integrated conversion technologies, in that it alleviates the need for third-party production of saccharolytic enzymes. Since the separate production of such enzymes is expensive, CBP offers a low-cost alternative to traditional biomass conversion processes. By alleviating the need for the high-cost enzymes associated with most other cellulosic-derived ethanol production methods, the technology enables the cost-effective conversion of cellulosic biomass, and lowers costs in first generation ethanol production.

 

CBP requires the development of engineered microorganisms, since naturally occurring microorganisms are not capable of simultaneously making the necessary saccharolytic enzymes and converting the sugars released by those enzymes into the desired end-products. In addition, CBP microorganisms need to be able to perform both of these tasks efficiently and rapidly under challenging, industrial processing conditions. Our scientists have developed robust, industrial microorganisms by combining the best qualities of naturally-occurring microorganisms into a single, industrial biocatalyst.

 

Our scientists have employed advanced biotechnology and bioengineering to develop a range of proprietary CBP microorganisms that in laboratory and pilot settings have demonstrated the capability to:

 

   

produce a collection of saccharolytic enzymes;

 

   

utilize a wide variety of sugar released by the saccharolytic enzymes;

 

   

convert sugars into valuable fuels and chemicals; and

 

   

thrive under industrial conditions.

 

Releasing the constituent sugars available in biomass requires the coordinated action of many enzymes. For example, amylase, glucoamylase and a number of other enzymes are utilized for the conversion of starch. Different collections of specialized enzymes are needed to break down the cellulose and hemicellulose in cellulosic biomass feedstock. In developing our CBP microorganisms, we have identified the naturally-occurring genes that are needed to produce these enzymes and that work best in our industrial biocatalysts. Using this collection of enzymes, we have developed microorganisms capable of producing many enzymes simultaneously and have developed more effective enzymes through well-established genetic engineering techniques.

 

The enzymatic hydrolysis described above releases a variety of simple and complex sugars, including glucose, xylose, mannose, galactose, and arabinose. In nature, all of these sugars serve as food and energy for a broad spectrum of microorganisms. However, many industrial microorganisms, including the yeasts used to produce fuel ethanol from corn starch and sugarcane, use only a few of these simple sugars effectively and are incapable of using more complex sugars. In 2007, we engineered the metabolism of robust, industrial yeasts to enable the production of ethanol from the most abundant sugars in hardwood. Using the same type of metabolic engineering, we believe we can develop other CBP microorganisms that utilize other sugars found in certain biomass materials.

 

We also employ metabolic engineering and directed evolution to create CBP microorganisms that efficiently produce ethanol and other products. Such tools have enabled the development of CBP microorganisms that produce more ethanol by reducing the production of certain by-products, such as glycerol, which are produced by

 

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conventional yeast during ethanol production from corn starch and sugarcane. In developing our CBP microorganisms for the production of propanol, fatty acids, and other products, we have employed these same tools. Our approach, which directly links product formation to fermentative growth of the microorganisms, creates strains of microorganisms that efficiently produce ethanol and other products at high yield.

 

Large-scale, low-cost production of ethanol and other commodity products rely on biocatalysts that can thrive under challenging industrial conditions. To address this need, we have screened diverse collections of microorganisms to find those that grow robustly under such conditions. The most robust strains have been utilized in engineering our CBP microorganisms. In addition, the performance of the microorganisms has been improved through a deliberate and long-term strain improvement program, which uses directed evolution and other techniques to create strains with greater capacity to tolerate conditions that would otherwise inhibit growth, such as the presence of ethanol, acetic acid, and inhibitors derived during the pretreatment of cellulosic biomass. Our current CBP microorganisms are more tolerant of inhibitors than their predecessors and with ongoing development, we expect the CBP microorganisms we develop in the future to be even more robust.

 

Our CBP microorganisms, which have the ability to produce saccharolytic enzymes, utilize the sugars present in biomass and have been demonstrated to efficiently produce ethanol and other products at high yields, while thriving under industrial conditions.

 

Competition

 

In the near-term, we expect to sell our MGT product to corn ethanol producers to lower their production costs. Although we do not believe that there is a product that functions in an identical manner to and competes directly with our MGT product, corn ethanol producers will use our product as a drop-in substitute for conventional yeast products. Therefore, our product will compete with conventional yeast products. While we expect to compete with some of the producers and marketers of conventional yeast products, we also plan to partner or collaborate with some of these companies to commercialize our MGT product. In addition to yeast producers, we will also compete with companies, such as Novozymes A/S and Genencor, that sell the enzyme that is replaced by our MGT yeast product. Many of these companies are substantially larger than us and may have substantially greater resources and a larger patent portfolio than we do, and these companies may reduce the prices of their enzymes in order to compete with our MGT product and retain market share. In addition, we can provide no assurance that these companies will not start developing products that compete with ours.

 

In addition, we intend to initially deploy our CBP technology to convert hardwood feedstocks into ethanol. As a result, we expect to compete with any company that produces cellulosic ethanol. While we utilize a biochemical process for the production of cellulosic ethanol, there are several competing technologies for the production of cellulosic ethanol, including a thermochemical process, and we can provide no assurance that these other technologies will not prove to be more effective or successful than ours. In the biochemical sphere, key competitors include Abengoa Bioenergy, BP, p.l.c., DuPont Danisco Cellulosic Ethanol L.L.C., which is a joint venture between Danisco A/S and E.I. Du Pont De Nemours and Company, and POET, LLC, all of which are developing biological approaches to break down biomass into end-products. More broadly, we expect that the cellulosic ethanol produced at our hardwood CBP facilities will compete with other cellulosic biofuels, advanced biofuels, and renewable fuels developed by established enterprises and new companies that seek to produce these renewable fuels to satisfy RFS2 mandates.

 

Research and Development

 

To date our research and development efforts have primarily focused on laboratory-scale development and pilot-scale demonstration of the biotechnology and process technology. Our research and development expenses were $24.3 million, $28.3 million and $26.5 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $13.2 million for the six months ended June 30, 2011, and we anticipate that our research and

 

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development expense will increase for the foreseeable future as we adapt our CBP technology to convert new feedstocks, such as Brazilian bagasse, and produce new end-products, such as renewable chemicals.

 

Our Scientists and Engineers

 

Our research and development organization includes 52 scientists and engineers with extensive experience in microbial strain development, metabolic engineering, analytics, process development, process scale-up and process economic modeling. We also employ 16 operators and support staff skilled in the operation of our laboratories and pilot facility. Of the 68 members of the research and development organization, 31 hold advanced scientific or engineering degrees including 19 with PhD’s.

 

Our technical staff also includes the following key science officers, each of which play an active role in guiding the direction of our research and development program:

 

   

Dr. Lee Lynd is our Chief Science Officer, a co-founder of Mascoma and a leading authority on CBP technology. Dr. Lynd is a recognized expert in biomass conversion, biotechnology and bioengineering and has extensive experience with our technology and the application of that technology in the renewable fuels and renewable chemicals sectors. Dr. Lynd is a Professor of Engineering at Dartmouth College’s Thayer School of Engineering, an Adjunct Professor of Biological Sciences at Dartmouth College, a Biomass Deconstruction Leader for DOE BioEnergy Science Center, a Professor Extraordinary of Microbiology at the University of Stellenbosch in South Africa and the Initiator and Steering Committee Coordinator of the Global Sustainable Bioenergy Project.

 

   

Dr. Charles Wyman is our Chief Process Development Officer, a co-founder of Mascoma and a recognized expert in biomass pretreatment. He is the Ford Motor Company Chair of Environmental Engineering and a Professor of Chemical and Environmental Engineering at the University of California, Riverside.

 

   

Dr. Michael Ladisch is our Chief Technology Officer and a recognized expert in the field of renewable fuels and cellulosic biofuels and a member of the National Academy of Engineering. Dr. Ladisch is project director of the DOE grant for the Kinross project and is providing his expertise in scale-up and process economics. He is also Distinguished Professor at Purdue University and Director of the Laboratory of Renewable Resources Engineering since 1999.

 

Each of these key science officers have won the Charles D. Scott Award, which is presented to one distinguished individual each year at the Symposium on Biotechnology for Fuels and Chemicals for outstanding research contributions in biotechnology for the production of fuels and chemicals.

 

Our Research and Development Facilities

 

We currently have the following research and development facilities:

 

   

Our approximately 33,000 square foot facility in Lebanon, New Hampshire includes laboratories and offices. At this facility, our team of scientists and engineers perform strain development, metabolic pathway engineering, small-scale fermentation and support analytical development and characterization needs.

 

   

Our approximately 54,700 square foot demonstration facility is located in Rome, New York. This facility has an approximately 200,000 gallon per year production capacity and is designed to evaluate new technologies and conduct large-scale process demonstration runs. We have conducted several complete process validation runs, taking raw materials from pretreatment through CBP and then producing ethanol in our demonstration scale distillation process.

 

   

Our facilities near Toronto, Canada include a 4,100 square foot pretreatment pilot plant that supports process development as well as pretreatment equipment sales activities, and 10,000 square feet of office space that we use to support our process engineering and project management activities.

 

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Intellectual Property

 

Our success depends in large part upon our ability to obtain and maintain proprietary protection for our products and technologies, and to operate without infringing the proprietary rights of others. For more information, see the section entitled “Risk Factors–Risks Related to Our Intellectual Property.” Our policy is to protect our proprietary position by, among other methods, filing for patent applications on inventions that are important to the development and conduct of our business with the United States Patent and Trademark Office and foreign patent offices.

 

As of September 1, 2010, we owned or had licensed rights to approximately 75 distinct patent families in the United States, Canada and various other foreign jurisdictions. Our employees are named inventors on 55 of these patent families. More specifically, as of September 1, 2011, we owned approximately 42 pending United States patent applications (including 8 provisional applications), 5 issued foreign patents, 97 pending foreign applications, and 11 Patent Corporation Treaty, or PCT, applications eligible for nationalization. As of June 30, 2011, we had licensed rights to approximately 3 issued United States patents, 17 pending United States patent applications (including 3 provisional applications), 1 issued foreign patent, 34 pending foreign applications and 4 PCT applications eligible for nationalization. These patents and patent applications relate to equipment and processes for biomass conversion, as well as engineered organisms and methods of producing our products. We have exclusive licensing arrangements with Dartmouth College, Stellenbosch University in South Africa, and Purdue University which provide us rights to intellectual property in fields relating to ethanol production from biomass, yeast engineering and biomass conversion. Our owned and licensed intellectual property portfolio relates to cellulose conversion technologies, including in the fields of pretreatment, hydrolysis, genetic tools, metabolic pathway engineering, and processes for biomass conversion.

 

We intend to continue to file additional patent applications directed to our products and technologies with particular emphasis on protecting our core technologies. As is the case with all patent application filings, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are rejected and we may subsequently abandon them. We may also abandon applications when we determine that a product or method is no longer of interest. Although there can be no assurance that these pending patent applications, if pursued and granted, will provide us with protection, we are focused on maximizing the likelihood of acquiring strong patent protection. We also use other forms of protection (such as trademark and trade secret) to protect our intellectual property, particularly where we do not believe patent protection is appropriate or obtainable. We also protect our proprietary information by requiring our employees, consultants, contractors and other advisers to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or engagement. Agreements with our employees also prohibit them from disclosing to us or using the confidential information of third parties. In addition, we also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.

 

In July 2006, we entered into a license agreement with Dartmouth College that grants us a royalty-free, exclusive, worldwide license to Dartmouth’s patents, patent applications and know-how (including certain pre-existing patents and patent applications) in the field of production of ethanol and other commodity products from plant biomass and biologically-based waste streams. This agreement also provides us with a royalty-free, exclusive license to the results of sponsored research in the field. In connection with the license agreement, we agreed to reimburse Dartmouth for patent prosecution costs and pay certain annual license maintenance fees and granted Dartmouth College 400,000 shares of our common stock. Dartmouth College may put those shares to us at any time after July 10, 2011, unless we are a public company. Unless earlier terminated, the term of this agreement lasts until the expiration of the last to expire of the licensed patent rights.

 

In October 2006, we entered into a similar royalty bearing license agreement with Stellenbosch University that grants us an exclusive, worldwide license under certain patent rights and know-how related to the engineering of yeast to degrade and ferment cellulosic biomass. In connection with this agreement, we issued

 

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200,000 shares of our common stock to the university. Unless earlier terminated in accordance with the provisions of the agreement, it will remain in effect until the later of (i) ten years from the date of the agreement, or (ii) the expiration of the last to expire of the licensed patents.

 

Through our acquisition of Celsys Biofuels, Inc., or Celsys, we have a royalty-bearing license from Purdue Research Foundation, or PRF, to PRF’s rights in certain intellectual property, including two issued U.S. patents and several pending counterpart patent applications, relating to processes and systems for pretreatment of cellulosic biomass, and a non-exclusive, royalty-free license from PRF to use related technology. This license agreement was assigned from Celsys to us in July 2011. Unless otherwise terminated, the agreement will remain in force until (i) ten years from the date of first commercial sale of a licensed product, or (ii) the expiration date of the last to expire of the licensed patents, whichever is greater.

 

Facilities

 

We currently own or lease the following facilities:

 

   

In Lebanon, New Hampshire we lease our corporate headquarters and primary executive offices, where we occupy approximately 33,000 square feet of office space. Our lease expires in August 2018. We have an option to extend this lease for five years.

 

   

In Rome, New York we own an approximately 200,000 gallon demonstration facility, where we occupy approximately 54,700 square feet of space on an 18.7 acre site. We acquired this property pursuant to a purchase of a leasehold interest from the Griffiss Local Development Corporation in April 30, 2008. The leasehold interest ends on July 30, 2028.

 

   

In Toronto, Ontario we lease two facilities including approximately 10,000 square feet of office space under a lease that expires in June 2013 and an approximately 4,100 square foot pilot plant under a lease that expires in November 2011.

 

   

In Woburn, Massachusetts we sub-lease approximately 15,000 square feet of office and laboratory space. This lease expires in July 2012 and we are not occupying any of this space at this time.

 

   

In Boston, Massachusetts we lease approximately 21,000 square feet under a lease that expires in December 2012. We currently have a subtenant who is subleasing the entire premises from us.

 

We believe that these facilities are sufficient to meet our needs for the immediate future and that additional space can be leased to provide for any future growth.

 

Regulatory Matters

 

Regulatory Review of our MGT Products

 

Manufacture of ethanol from corn results in the production of both fuel ethanol and distillers products, such as dried distillers grains with solubles, or DDGS. Distillers grains are a high protein, high energy feedstuff that are used to meet the nutritional requirements of dairy and beef cattle, as well as swine and poultry. In 2010, U.S. ethanol producers generated more than 30 million tons of DDGS, which were distributed primarily in the United States. In the United States, the use of food products, including feed for animals, is under the authority of the U.S. Food and Drug Administration, or the FDA, and the FDA’s Center for Veterinary Medicine, or CVM, is responsible for the regulation of feed products.

 

The FDA carries out its responsibility for the regulation of animal feed in cooperation with state and local partners through a variety of mechanisms: cooperative agreements, contracts, grants, memoranda of understanding and partnerships. For instance, the FDA cooperates with the Association of American Feed Control Officials, or AAFCO, for the implementation of uniform policies for regulating the use of animal feed products. This includes the establishment of uniform feed ingredient definitions and proper labeling to assure the

 

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safe use of feeds. AAFCO is a voluntary organization comprised largely of regulatory officials who have responsibility for enforcing their state’s laws and regulations concerning the registration and safety of animal feeds and feed ingredients. Its membership is comprised of representatives from each state in the United States, as well as representatives from Puerto Rico, Costa Rica, Canada, the FDA and the U.S. Department of Agriculture. A basic goal of AAFCO is to provide the means for ensuring the development and implementation of equitable laws, regulations, standards, definitions, and enforcement policies for regulating animal feed. AAFCO has no enforcement authority.

 

Under a 2007 Memorandum of Understanding, the FDA formally recognized AAFCO’s list of approved feed ingredients and defined the FDA’s role in deciding on the suitability of feed ingredients offered for addition to the list. AAFCO uses a “New and Modified Feed Ingredient Definitions Process” to determine the suitability of feed ingredients and to establish standard ingredient names used on feed labels as required by state and federal law. The 2007 memorandum allows the FDA to recognize formally the AAFCO process and to have a clearly defined role in reviewing ingredients for the list. Under the memorandum, CVM assigns scientists to work with AAFCO in reviewing petitions for new feed ingredients or for modifications to existing ingredient definitions. In addition, before it adopts a new feed ingredient definition or amends an existing one, AAFCO will ask CVM for scientific review and a letter of concurrence. The memorandum also requires AAFCO to remove a definition from its published list of feed ingredients if the FDA provides convincing scientific evidence that the ingredient is no longer suitable for its intended purpose.

 

Certain by-products of the corn ethanol conversion process are used as animal feed. Our MGT products are genetically modified and are considered to be processing aids in the production of animal feed. As a result, our MGT products are subject to regulation by CVM and must subsequently be approved by AAFCO. We have submitted a request to AAFCO and CVM, requesting that our MGT 1.0 yeast product be added to AAFCO’s list of approved feed ingredients. The request, which addresses the safety, utility and labeling of the new ingredient, is under review at CVM at this time. Because the MGT yeast products are genetically modified organisms, or GMOs, the CVM review and approval process may require significant time and the outcome cannot be guaranteed. Approval by CVM does not guarantee approval by AAFCO.

 

Environmental and Other Regulatory Matters

 

We and our products and our collaborators’ planned commercial facilities are subject to various federal, state, local and foreign environmental laws and regulations. These laws and regulations govern, among other matters, emissions and discharges to the air, ground and water, the use, treatment, handling, manufacture, storage and disposal of hazardous and biological substances and genetically modified organisms, renewable fuel standards, and soil and groundwater contamination. Compliance with applicable environmental laws and regulations may be expensive and the failure to comply with past, present and future laws or regulations could result in, among other matters, the imposition of fines or other penalties, regulatory oversight costs, responsibility for third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of our operations. Environmental laws and regulations have become more stringent over time, and changes in these laws and regulations could require us and our partners to make significant additional expenditures. Additionally, we could be jointly and severally liable for environmental damage or contamination at our current or former facilities, including for historical contamination caused by former owners and operators of such facilities. We may also be held liable at third party sites where we have disposed, or arranged for disposal, of hazardous materials. Our demonstration facility in Rome, New York is located on a portion of the former Griffiss Air Force Base, which is listed on the National Priorities List under the federal Comprehensive Environmental Response, Compensation and Liability Act. Environmental investigations and remediation activities have been undertaken by the Air Force.

 

The other material laws, regulations and requirements applicable to our business and to our facilities in Rome, New York and Lebanon, New Hampshire and our planned hardwood CBP facilities include:

 

Clean Air Act Regulation. The operations of our facilities and our planned hardwood CBP facilities are subject to certain requirements of the U.S. Clean Air Act, or CAA, and similar state and local regulations and

 

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permitting requirements. These laws, regulations and permitting requirements may restrict emissions from these facilities or require controls or limitations on operations. In the United States, legislative and regulatory initiatives have been implemented or are underway to limit GHG emissions by certain facilities such as our planned hardwood CBP facilities. We believe that these planned hardwood CBP facilities will be major sources of GHGs under existing regulations, and will accordingly be required to meet permitting, reporting and other requirements after operations begin. Because regulation of GHG emissions is relatively new, further regulatory, legislative and judicial developments are likely to occur. Compliance with existing and new laws and regulations may result in increased capital expenditures, increased operating costs and additional operating restrictions for our business. In addition to the costs expected to be incurred to maintain compliance with these requirements, new or more stringent standards may limit our operating flexibility or require the installation of additional controls at the planned and future facilities.

 

Hazardous Substances and Wastes. Operations at our facilities in Rome, New York and Lebanon, New Hampshire generate, and our planned hardwood CBP facilities will generate, solid wastes, including hazardous wastes, that are subject to the requirements of the U.S. Resource Conservation and Recovery Act, or RCRA, and comparable state laws and regulations. These laws and regulations impose strict requirements on the generation, storage, treatment, transportation and disposal of hazardous wastes, and the facilities with which we are associated need to comply with approved methods for disposal of certain wastes.

 

Water Discharges. The U.S. Clean Water Act, or CWA, and analogous state laws impose restrictions regarding the discharge of pollutants into state and federal waters. Further, general permits issued under the federal National Pollutant Discharge Elimination System, or NPDES, program prohibit discharges into surface waters, ground waters, wells and publicly-owned treatment works, or POTWs, except in strict conformance with the permits. We anticipate that the process waste water from our planned hardwood CBP facilities will not be directly discharged into state or federal waters, but rather will be discharged to POTWs and will need to comply with the requirements of such POTWs. In addition, the CWA and analogous state laws require permits for discharge of stormwater runoff from certain types of facilities.

 

Construction Permits. Our planned hardwood CBP facilities are subject to sewer, electrical, storage and construction permitting requirements. As a condition to granting necessary permits, regulators could make demands that increase the costs of our construction and operations, in which case we and our partners could be forced to obtain additional debt or equity capital. Permit conditions could also limit the extent of operations at our planned facilities. We cannot assure you that we and our partners will be able to obtain and comply with all necessary permits to construct our planned hardwood CBP facilities. Failure to obtain and comply with all applicable permits could halt construction and could subject us to future claims and sanctions.

 

Safety. The hazards and risks associated with producing and transporting renewable fuels may result in personal injury claims or damage to property and third parties. While we and our collaborators will maintain insurance coverage against some, but not all, potential losses that may occur, losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage.

 

OSHA. We are subject to the requirements of the federal Occupational Safety and Health Act, or OSHA, and comparable state laws and regulations. These laws and regulations govern the protection of the health and safety of employees and require that we organize and disclose information about hazardous materials used or produced at our sites.

 

TSCA. We are subject to the requirements of the Toxic Substances Control Act, or TSCA, which regulates the use of chemicals and microorganisms. In particular, our fermentation process utilizes a GMO which, when used in an industrial process, is regulated as a new microorganism under TSCA. TSCA requires companies using microorganisms in industrial processes to comply with the EPA’s Microbial Commercial Activity Notice (MCAN) submission process. We believe our microorganisms qualify for an exemption from the MCAN process, and as such, we will need to follow certain standard notification, control and containment procedures at these facilities.

 

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Employees

 

As of June 30, 2011, we had 96 full-time employees. Of these, 80 were in the United States and 16 were in Canada. None of our employees is represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider relations with our employees to be good.

 

Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of operations. We are not currently involved in any material legal proceedings.

 

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MANAGEMENT

 

Executive Officers, Key Science Officers and Directors

 

The following table sets forth certain information about our executive officers, key science officers and directors as of the date of this prospectus.

 

Name

   Age     

Position

Executive Officers:

     

William J. Brady, Jr.

     50       President, Chief Executive Officer and Director

David A. Arkowitz

     49       Chief Financial Officer, Treasurer and Secretary

Stephen R. Kennedy

     54       Executive Vice President, Research & Development

Alan H. Belcher

     62       Senior Vice President Operations

Key Science Officers:

     

Michael R. Ladisch, Ph.D.

     61       Chief Technology Officer

Lee R. Lynd, Ph.D.(3)

     53       Chief Science Officer and Director

Charles E. Wyman, Ph.D.

     66       Chief Development Officer

Non-Employee Directors:

     

Bruce A. Jamerson(1)(2)

     60       Director, Chairman of the Board

James V. Matheson(1)(2)(3)

     46       Director

Hemant Taneja(1)

     36       Director

Jeremy N. Kendall(1)(3)

     71       Director

David L. Whikehart

     52       Director

 

(1)   Member of the compensation committee.
(2)   Member of the audit committee.
(3)   Member of the nominating and corporate governance committee.

 

The following paragraphs provide information as of the date of this prospectus about our executive officers, key employees and directors. The information presented includes information about each of our director’s specific experience, qualifications, attributes and skills that led our board of directors to the conclusion that he should serve as a director.

 

Executive Officers

 

William J. Brady, Jr.

 

William J. Brady, Jr. has served as our President, Chief Executive Officer and a director since he joined our company in January 2010. Previously, Mr. Brady was Executive Vice President of Cabot Corporation, or Cabot, a specialty chemical company, from 2004 to 2009. Throughout his twenty-three year experience, Mr. Brady held numerous positions at Cabot in the United States and Japan, including General Manager of the Carbon Black business. Under his leadership, the business completed significant expansions in China and Brazil, and executed a major global initiative in energy efficiency. In addition, he led the commercialization of two start-up businesses at Cabot in ink jet colorants and elastomer composites. Mr. Brady currently serves on our board of directors and is Chairman of the Board of our affiliate, Frontier Renewable Resources, LLC. In addition, he is Chairman of the Washington D.C. based Advanced Ethanol Council, or AEC, which is working on the commercialization of advanced and cellulosic ethanol development by establishing public policies and expanding the market for ethanol. Mr. Brady is also a member of the Board of Trustees at the University of Scranton. Mr. Brady is a graduate of the University of Scranton with a B.S. in Chemistry and received his M.B.A. from Fairleigh Dickinson University. Mr. Brady’s senior management experience in leading significant business expansions and commercializing start-up businesses, involvement in the ethanol industry and understanding of our business and operations enable him to provide valuable insight and guidance to our board of directors.

 

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David A. Arkowitz

 

David A. Arkowitz has served as our Chief Financial Officer since joining our company in June 2011, and as our Treasurer and Secretary since July 2011. Prior to joining our company, Mr. Arkowitz served as Executive Vice President, Chief Financial Officer, Chief Business Officer and Treasurer at AMAG Pharmaceuticals, Inc., or AMAG, a public biopharmaceutical company, from 2007 to 2011. Prior to joining AMAG, Mr. Arkowitz served as Chief Financial Officer and Treasurer at Idenix Pharmaceuticals, Inc., or Idenix, a public biopharmaceutical company, from 2003 to 2007. Prior to his tenure at Idenix, Mr. Arkowitz was with Merck & Co. Inc., or Merck, a public pharmaceutical company, for over thirteen years, where he served as Vice President and Controller of the U.S. sales and marketing division from 2002 to 2003, as Controller of the global research and development division from 2000 to 2002, and as Vice President of Finance and Business Development of the Canadian subsidiary of Merck from 1997 to 2000. Mr. Arkowitz served on the board of directors and was the Chairman of the Audit Committee of Aegerion Pharmaceuticals, Inc., a pharmaceutical company, from 2007 to 2009, and served on the board of directors and was the Chairman of the Audit Committee of ImpactRx, Inc., a company that analyzes the impact of promotion on physicians’ prescribing behavior, from 2005 to 2009. Mr. Arkowitz holds a B.A. in Mathematics from Brandeis University and an M.B.A. from Columbia University.

 

Stephen R. Kennedy

 

Stephen R. Kennedy has served as our Executive Vice President, Research & Development since joining our company in May 2011. His most recent experience prior to joining our company was at the Massachusetts Institute of Technology in Cambridge, Massachusetts from October 2010 to May 2011, where he held appointments in the Department of Chemical Engineering as Interim Executive Director of the Novartis/MIT Center for Continuous Manufacturing and in the Department of Biology/Center for Biomedical Innovation, where his responsibilities included scale-up of fungible fuel technology. Mr. Kennedy spent 18 years in the biopharmaceutical industry at Genzyme Corporation, or Genzyme, where he held senior positions in process development from 1992 to 1998, led development of manufacturing operations in the United States, France and Belgium from 1998 to 2004, and served as Senior Vice-President, Biologics Technical Operations from 2004 until 2010. Prior to his tenure at Genzyme, Mr. Kennedy spent 12 years at Eastman Kodak’s BioProducts Division and Genencor International, or Genencor, in research, development and technology transfer. He played a key role in the successful start-up of Genencor, leading manufacturing process development activities in Finland from 1990 to 1992. Mr. Kennedy holds a B.S. in Chemical Engineering from the University of Michigan, an M.S. in Chemical Engineering from the University of Rochester and an M.B.A. from Boston University.