S-1/A 1 d230618ds1a.htm AMENDMENT NO.3 TO FORM S-1 Amendment No.3 to Form S-1
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As filed with the Securities and Exchange Commission on March 13, 2012.

Registration No. 333-176881

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 3

to

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, Jr.

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   ¨

 

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                     , 2012

 

            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 New York Stock Exchange under the symbol “MCM.”

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 14.

 

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                     , 2012.

 

MORGAN STANLEY   UBS INVESTMENT BANK     CREDIT SUISSE   

 

BAIRD     CANACCORD GENUITY

 

                    , 2012


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LOGO


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     14   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     43   

USE OF PROCEEDS

     45   

DIVIDEND POLICY

     46   

CAPITALIZATION

     47   

DILUTION

     49   

SELECTED CONSOLIDATED FINANCIAL DATA

     51   

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

     54   

INDUSTRY

     81   

BUSINESS

     88   

MANAGEMENT

     115   
 

 

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. 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.

 

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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 bioengineered 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 are initially targeting the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with collaborators to develop and construct commercial-scale facilities to convert hardwood feedstocks into cellulosic ethanol. In December 2011, we entered into definitive agreements with Valero Energy Corporation, or Valero, an international manufacturer and marketer of ethanol and other transportation fuels, to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan, based on our proprietary CBP technology. We believe the Kinross facility and future 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. We have also produced propanol from glucose at our demonstration facility in Rome, New York, and plan to continue 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 multiple 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 December 31, 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 227 pending patent applications in the United States and various foreign jurisdictions.

 

 

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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 bioengineered MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. Our initial MGT product is currently available for commercial use. 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 for us. We have targeted 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 in this market. Certain by-products of the corn ethanol conversion process are used as animal feed and are therefore subject to regulatory review by the U.S. Food and Drug Administration. Our MGT products are bioengineered and are considered processing aids in the production of animal feed. See the section entitled “Business—Regulatory Matters” for more information about the regulations applicable to our MGT products.

 

Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production. We believe that our initial MGT product will reduce the enzyme costs of corn ethanol production by approximately $0.01 to $0.02 per gallon, based on laboratory test runs and management estimates of total enzyme costs between $0.03 to $0.04 per gallon of corn ethanol. As a result, we believe that this product will create significant and immediate value to corn ethanol producers, which, according to the Renewable Fuels Association, or the RFA, collectively produced approximately 13.9 billion gallons of corn ethanol in the United States in 2011. 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. In pilot-scale test runs by ICM, Inc., or ICM, the leading provider of engineering services to the ethanol industry, we have demonstrated ethanol yield improvements of up to 3.4% with the next generation of our MGT product and we expect further ethanol yield improvements through additional research and development efforts. We expect the anticipated improvements in ethanol yield to be driven by technology improvements and as a result, we do not anticipate any potential margin losses when the production process is performed on a commercial scale.

 

We expect commercial sales of our initial MGT product to begin in the first quarter of 2012. As part of our commercialization efforts, several leading corn ethanol producers have initiated testing and performance validation of our initial MGT product for commercial use. Following testing and performance validation, we intend to enter into commercial arrangements, which may include long-term agreements, with these and other corn ethanol producers that enable us to receive a significant portion of the incremental margin generated by our products. In November 2011, we entered into a commercial agreement with Valero that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. According to the RFA, Valero’s total production volume represented approximately 8.1% of total U.S. ethanol capacity in 2011. In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand Inc., or Lallemand, a global developer, producer and marketer of yeast, bacteria and related products, for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. We have also entered into a definitive three-year collaboration agreement with ICM to provide certain testing and technical support services at our customers’ facilities during the launch of each of the initial generations of our MGT products. We believe our definitive, long-term agreements with recognized partners and our first-of-a-kind MGT yeast product will enable us to rapidly grow our MGT business.

 

The second stage of our commercialization strategy is to work with our collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. We have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. Based on current cost estimates, we believe this facility will be fully financed by Valero in addition to grants and awards from the DOE and the State of

 

 

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Michigan. Pursuant to the terms of our agreements, we expect to receive a development reimbursement amount, royalties for a specified period of time and an ownership interest in the project in exchange for providing our proprietary CBP technology, grant and award funding, organism supply, engineering and additional support. Valero will construct and operate the facility and receive a controlling ownership interest in the facility. Valero will also market the ethanol produced at the facility. The agreements provide Valero with an option to increase the capacity of this facility. We have also developed a framework to partner with Valero on a non-exclusive basis to construct additional cellulosic ethanol facilities beyond our planned Kinross facility. 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 like Valero to fund, build, develop and operate the facilities, while we contribute technology and receive fees and/or an equity interest in the facilities.

 

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, or BDT, of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per BDT of hardwood and we are working to continue to improve conversion yields. Based on management expectations for additional technology improvements, some of which have been developed and are currently being tested, at our planned 20 million gallons per year commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per BDT of hardwood with unsubsidized cash operating costs of approximately $1.77 per gallon. These unsubsidized cash operating costs consist of feedstock costs, enzyme costs, raw material costs (e.g., organism nutrients), processing costs (e.g., electricity and water) and other costs (e.g., denaturant, labor, maintenance and overhead). We expect the improvements in our cash operating costs from our demonstration facility in Rome, New York, to our planned Kinross facility, operating at 20 million gallons per year, to be driven entirely by anticipated improvements in yield and enzyme reduction. Our expected unsubsidized cash operating costs do not take into account potential cost reductions from further process improvements or operating efficiencies. See section entitled “Business—Our Strategy—Convert Hardwood Pulpwood into Cellulosic Ethanol on a Commercial Scale” for more information on operating costs. These estimates assume a hardwood feedstock cost of $66 per BDT of hardwood logs and are based on a 20 million gallons per year facility. Over the next several years we are targeting further reductions in our cash operating costs, and ethanol yields of 93 gallons per BDT of hardwood, based on increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility to start within 12 to 24 months. 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, in our demonstration facility in Rome, New York, we have converted glucose to propanol, and in a laboratory setting, we have converted glucose to fatty acids. Using standardized industrial processes, these chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements. We expect to continue to develop potential end-products other than propanol and fatty acids.

 

Our Operating History

 

We have a limited operating history. Through December 31, 2011, we generated revenues primarily from government grants and awards and sales of pretreatment equipment for biomass feedstocks. As we continue the commercial launch of our initial MGT product, an increasing proportion of our revenues will be attributable to our CBP technology. We have incurred substantial net losses since our inception, and as of December 31, 2011,

 

 

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we had an accumulated deficit of $164.8 million. Our stockholders’ deficit, recurring net losses and history of negative cash flow 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, 2011 with respect to this uncertainty.

 

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

 

According to the DOE, 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 3.4 billion gallons in 2004 to approximately 13.9 billion gallons in 2011, which represented a compound annual growth rate of over 22% for that period, and ethanol exports in 2011 hit a record high of over 1 billion gallons. According to the RFA, as of 2011, there were 209 ethanol plants in the United States. We believe this large and established industry presents a compelling market for our drop-in MGT yeast product. Prior to December 31, 2011, the Volumetric Ethanol Excise Tax Credit, or VEETC, commonly referred to as the Blender’s Credit, provided blenders and marketers of fuel with a federal tax credit of $0.45 on each gallon of ethanol blended with their gasoline; corn-based ethanol qualified for this tax credit. In addition, in connection with the Blender’s Credit, a 2.5 percent ad valorem tax and a tariff of $0.54 per gallon were imposed on imports of ethanol from all countries except Caribbean Basin Initiative countries. The credit, the tax and the tariff all expired on December 31, 2011. As a result, 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.

 

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 we expect corn 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 the 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, currently mandate that 36 billion gallons of renewable fuels, including advanced biofuels and cellulosic biofuels, from multiple sources be blended into transportation fuels by 2022. Of the 36 billion gallons of renewable fuels currently 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. Under RFS2, 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. Under RFS2, 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. According to the U.S. Department of Agriculture, 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.

 

 

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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. As a result, 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. We believe 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, according to the DOE, 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, according to the Agricultural Resource Marketing Center. We expect that future growth in this industry will come from non-food feedstocks. In addition, we believe that 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:

 

   

Independent review of the performance of our initial and next-generation MGT yeast products by ICM;

 

   

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;

 

   

Evaluation of our hardwood CBP technology by independent engineers at the DOE in connection with a project-related review of our readiness to enter the construction phase as further described in the section entitled “Business—Our Key Relationships—Government Grants and Awards—DOE”;

 

 

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Previous 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;

 

   

Confirmation of the technical viability of our MGT 1.0 yeast product and the viability of our hardwood CBP technology, based on an assessment of the core technology, its yield, and its scale-up plan, by Nexant, Inc., a leading technology consulting firm to the energy industry; and

 

   

Extensive review of our technology by our partners as part of their due diligence process prior to entering into commercial arrangements with us.

 

   

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. In addition to ethanol, we have also demonstrated our ability to use our technology to produce high-value chemicals such as propanol and fatty acids, which we believe will further expand our market opportunity.

 

   

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 have collaborated, and intend to continue 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. In furtherance of this business model, we have entered into definitive agreements with Valero relating to the development of a first-of-its-kind cellulosic ethanol facility in Kinross, Michigan. We have also developed a framework to partner with Valero on a non-exclusive basis to construct additional cellulosic ethanol facilities beyond our planned Kinross facility. We believe this 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

 

 

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the ability to use our technology to convert a number of additional feedstocks including corn stover, sugarcane 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.

 

Our Strategy

 

We have a staged approach for the commercialization of our CBP technology. We intend to go to market first with our bioengineered MGT yeast product while also working with Valero and other collaborators 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 bioengineered yeast product that can be used by corn ethanol producers as a drop-in substitute for conventional fermenting yeast. We intend to market this product to the 209 corn ethanol plants that produced approximately 13.9 billion gallons of ethanol in the United States in 2011. We believe our initial MGT product is capable of significantly improving the economics for corn ethanol producers and will generate near-term revenue for us and requires negligible capital expenditures. 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. The second stage of our commercialization strategy is to work with collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. 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 feedstocks. We have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility 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

 

 

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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. We believe that 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.

 

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.

 

   

Our inability to receive required regulatory approvals for our MGT yeast products would 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, review and commercialize our MGT yeast products, 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 be dependent on Valero Energy Corporation, the majority owner and operator of our initial hardwood CBP facility in Kinross, Michigan, for the initial commercialization of our hardwood CBP technology.

 

   

The size of our ownership interest in the Kinross project is not yet determined and will not be definitive until after construction of this facility is completed.

 

   

If our commercial arrangement with Valero is terminated or delayed, or if Valero does not elect to increase the capacity of our initial facility or if we fail to enter into an arrangement or arrangements with Valero for future facilities, our growth strategy will be materially and adversely impacted.

 

   

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 awards and the construction of our initial commercial-scale hardwood CBP facilities may be materially delayed.

 

 

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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 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 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              shares of our common stock outstanding as of December 31, 2011, and excludes:

 

   

11,860,215 shares of our common stock issuable upon exercise of outstanding options as of December 31, 2011 at a weighted-average exercise price of $2.34 per share;

 

   

2,156,993 shares of our common stock reserved as of December 31, 2011 for future issuance under our 2006 Stock Incentive Plan, or our 2006 Stock Plan, that are not issued or subject to outstanding grants; provided, however, that immediately upon completion of this offering, our 2006 Stock Plan will terminate so that no further awards may be granted under our 2006 Stock Plan;

 

   

             shares of common stock reserved for future issuance under our 2012 Stock Option and Incentive Plan, or our 2012 Stock Plan, which will become effective upon completion of this offering; plus shares of our common stock that are represented by awards granted under our 2006 Stock Plan that are forfeited, expire or are cancelled without delivery of shares or which result in the return of shares of our common stock to us, following the termination of the 2006 Stock Plan;

 

   

2,993,417 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2011 at a weighted-average exercise price of $3.69 per share;

 

 

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             shares of common stock that will be issued upon the automatic net exercise of two warrants to purchase a total of 659,898 shares of our common stock upon the completion of this offering;

 

   

             shares of common stock issuable upon the exercise of warrants to be issued upon the completion of this offering to certain investors who participated in our 2011 subordinated convertible note financing; and

 

   

3,164,557 shares of common stock issuable upon the exercise of a warrant at an exercise price of $3.16 per share, to be issued to an affiliate of Valero upon the execution of ancillary agreements with Valero related to our planned hardwood CBP facility in Kinross, Michigan.

 

Except as otherwise indicated, all information in this prospectus is as of December 31, 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 47,651,790 shares of our common stock upon the consummation of this offering;

 

   

the issuance of              shares of our common stock upon the automatic conversion of approximately $7.4 million in principal amount of outstanding subordinated convertible notes issued pursuant to the agreement described below, at a 30% discount to an assumed initial public offering price of $         per share, which is the midpoint of the price range on the cover page of this prospectus; and

 

   

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

 

In August 2011, we entered into an agreement, amended in September 2011, pursuant to which we issued approximately $7.4 million of subordinated convertible notes, or the 2011 Notes, to certain of our existing stockholders. Interest on the 2011 Notes accrues at the rate of 8% per year. The unpaid principal amount of the 2011 Notes, together with any interest accrued but unpaid thereon, will automatically convert upon the closing of this offering into a number of shares of our common stock equal to the quotient obtained by dividing the unpaid principal amount of the 2011 Notes plus interest accrued but unpaid thereon by the initial public offering price discounted by 30%. Assuming an initial public offering price of $         per share, which is the midpoint of the price range on the cover page of this prospectus, the $7.4 million principal amount of the outstanding 2011 Notes will convert into approximately              shares of our common stock. Investors who participated in this financing at or above their pro rata participation amount are entitled to receive a warrant to purchase common stock at a 30% discount to the price paid by the public upon the closing of this offering.

 

If the actual initial public offering price is not equal to the expected midpoint of the price range on the cover page of this prospectus, or the midpoint price, the number of shares of common stock into which the 2011 Notes will convert upon completion of this offering will differ from that set forth above. A $1.00 decrease in the midpoint price would increase the number of shares of common stock issuable upon the conversion of 2011 Notes by an aggregate of              shares. A $1.00 increase in the midpoint price would decrease the number of shares of common stock issuable upon the conversion of the 2011 Notes by an aggregate of              shares. Following the closing of this offering, the actual shares of common stock to be issued will be based on the amount of accrued interest then outstanding and the actual initial public offering price.

 

 

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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, 2009, 2010 and 2011 presented below are derived from our audited 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,  
     2009     2010     2011  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

      

Total revenues

   $ 8,436      $ 15,492      $ 10,737   
  

 

 

   

 

 

   

 

 

 

Costs and operating expenses

      

Cost of pretreatment equipment sales and services

            1,120        490   

Amortization of acquired intangible assets

            513        1,540   

Research and development(1)

     28,270        26,539        27,191   

Selling, general and administrative(1)

     5,059        9,699        15,373   

Loss on asset disposals and lease abandonment

     9,213                 
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     42,542        37,871        44,594   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (34,106     (22,379     (33,857

Other income (expense), net

     (1,366     (3,407     (7,289

Equity in loss of equity method investment

            (143     (479
  

 

 

   

 

 

   

 

 

 

Net loss

     (35,472     (25,929     (41,625

Amount attributable to redeemable noncontrolling interest

     (2,830     201        290   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Mascoma Corporation

     (38,302     (25,728     (41,335

Accretion of redeemable convertible preferred stock

     (253     (205     (146
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders of Mascoma Corporation

   $ (38,555   $ (25,933   $ (41,481
  

 

 

   

 

 

   

 

 

 

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

   $ (12.61   $ (5.39   $ (5.36
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic and diluted

     3,058,138        4,813,191        7,737,665   

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

       $ (0.75

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

         55,389,555   

 

(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 47,651,790 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.

 

 

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     As of December 31, 2011
     Actual     Pro forma(1)     Pro forma as
adjusted(2)
     (in thousands)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 11,417      $   11,417     

Working capital

     (661     (661  

Total assets

     80,045        80,045     

Long-term debt, including current portion

     10,000        10,000     

Subordinated convertible notes and attached warrants

     10,547            

Warrant liabilities

     8,209            

Redeemable convertible preferred stock

     163,136            

Redeemable common stock

     1,560            

Stockholders’ (deficit) equity

     (140,372     43,080     

 

(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, (iii) the 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, (iv) the issuance of              shares of common stock upon the automatic net exercise upon completion of this offering of two warrants to purchase a total of 659,898 shares of common stock and the related reclassification of the warrant liability to stockholders’ equity, and (v) the conversion of the subordinated convertible notes into              shares of common stock and the issuance of common stock warrants related thereto and the related classification of the fair value of the subordinated convertible notes and attached warrants 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) the 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, (iv) the issuance of              shares of common stock upon the automatic net exercise upon completion of this offering of two warrants to purchase a total of 659,898 shares of common stock and the related reclassification of the warrant liability to stockholders’ equity, (v) the conversion of the subordinated convertible notes into              shares of common stock and the issuance of common stock warrants related thereto and the related classification of the fair value of the subordinated convertible notes and attached warrants to stockholders’ equity upon the completion of this offering, and (vi) 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 December 31, 2011, we generated revenue primarily from government grants and awards and sales of equipment for the pretreatment of biomass feedstocks. In the year ended December 31, 2011, our total revenue was $10.7 million with government grants and awards constituting 93% of our revenue and sales of pretreatment equipment and services constituting 6% of our revenue. We have incurred substantial net losses since our inception, including net losses of $38.3 million, $25.7 million and $41.3 million for the years ended December 31, 2009, 2010 and 2011, respectively. We expect these losses to continue. As of December 31, 2011, we had an accumulated deficit of $164.8 million. We have not yet commercialized any of our products or technologies, except for our initial Mascoma Grain Technology, or MGT, yeast product, which has been delivered to several leading corn ethanol producers for testing and performance validation. The construction of our initial hardwood consolidated bioprocessing, or CBP, facility in Kinross, Michigan, has not begun yet. The risks associated with our ability to commercialize our MGT yeast product and our hardwood CBP technology are described in more detail below. We expect to continue to incur substantial costs and expenses in connection with our continuing commercialization of our MGT yeast product, the planned construction and scale-up of our initial hardwood CBP facility in Kinross, Michigan, the development and financing of additional hardwood CBP facilities, including our planned facility in 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 $31.7 million, $22.7 million and $23.6 million in the years ended December 31, 2009, 2010 and 2011, respectively. Since our inception through December 31, 2011, we have raised an aggregate of $152.2 million from private placements of equity securities and debt financing, including $115.3 million in proceeds from the sale of preferred equity securities, $16.9 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 initial hardwood CBP facility in Kinross, Michigan, and our planned facility in Drayton Valley, Alberta, we intend to use government grants and awards in addition to equity funding from strategic partners. 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, 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,

 

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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.

 

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

 

We are selling our bioengineered initial MGT yeast product to corn ethanol producers for use in the ethanol production process as a replacement to the yeast currently used by those producers. However, the yeast 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., or ICM, the leading provider of engineering services to the ethanol industry, has reviewed the performance of our initial MGT product; however, this product has not yet been tested by a broad range of potential customers. 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 replicated 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 what 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 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 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 initial MGT product until the benefits are demonstrated at additional test sites. Further, even if producers adopt our initial MGT 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 initial 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 initial MGT product. If corn ethanol producers do not adopt our initial MGT product and future generations of our MGT products, our business and results of operations will be materially and adversely affected.

 

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

 

In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand Inc., or Lallemand, a global developer, producer and marketer of yeast, bacteria and related products, for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. Our use of a third party reduces our control over our product and exposes us to certain risks. For example, our operations could be materially disrupted if Lallemand terminates our agreement or experiences a significant interruption in its business and is unable meet our demand. If it is necessary to replace Lallemand with either 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 will also rely on Lallemand, ICM and 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

 

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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.

 

We will also rely on third parties in connection with the commercialization of future MGT products, including product testing. There can be no assurance that the results of these product tests will be favorable. If any of our commercial arrangements with third parties related to our MGT yeast products were terminated for any reason, 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 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 collaborators 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 be dependent on Valero Energy Corporation, the majority owner and operator of our initial hardwood CBP facility in Kinross, Michigan, for the initial commercialization of our hardwood CBP technology.

 

We expect to work with collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. For our initial cellulosic ethanol facility in Kinross, Michigan, we have entered into definitive agreements with Valero Energy Corporation, or Valero, an international manufacturer and marketer of ethanol and other transportation fuels. Valero will construct and operate the Kinross facility and receive a controlling ownership interest in the facility. While we expect to have a minority interest in the facility and monitoring rights of the Kinross facility, we will be dependent on Valero to execute on the initial stage of our strategy to commercialize our hardwood CBP technology. Our reliance on Valero reduces our control over the construction of the Kinross facility and the production and sale of the ethanol produced using our technology, including the operating costs of the Kinross facility, which will expose us to certain risks. The Kinross facility is a first-of-its-kind project, and we cannot assure you that Valero 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. Our agreement with Valero does not require Valero to complete this project within any specified time period or at all. If and when the Kinross facility is completed, we will have limited or no control over the amount or timing of resources that Valero commits to this project. Valero may experience a change in priorities or may fail to perform its obligations as expected. Valero may also pursue competing technologies, which would reflect poorly on our technology, particularly if Valero or its affiliates invest more time and resources in these technologies. If

 

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Valero, for whatever reason, does not devote sufficient resources to the manufacturing, marketing or sale of cellulosic ethanol produced using our CBP technology, our business and results of operations will be materially and adversely impacted.

 

As majority owner, Valero will be the manager of the project company with authority to manage the business, subject to certain approval rights we have over select major decisions. Affiliates of Valero will also be engaged to perform construction management services for development of the Kinross facility, operate the Kinross facility, and market the ethanol produced at the Kinross facility. Agreements related to the construction and operation of the Kinross facility and the marketing of the off-take have not yet been executed. We expect that these unexecuted agreements will also contain provisions related to the pricing of the cellulosic ethanol that Valero produces using our technology. The terms of these agreements could have a material impact on our business. These agreements are yet to be negotiated and even if these agreements are entered into on terms satisfactory to us, Valero or any of its affiliates could breach or terminate its agreements with us or otherwise fail to conduct its activities successfully and in a timely manner. As Valero or its affiliates will also be responsible for engaging and managing third parties that work with the project company, our business could be harmed if any of these parties fails to perform its obligations. Moreover, disagreements with any of these parties regarding strategic direction, economics of our relationship, intellectual property or other matters could develop, and any such conflict could negatively impact our relationships and our business. Additionally, if Valero 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.

 

The size of our ownership interest in the Kinross project is not yet determined and will not be definitive until after construction of this facility is completed.

 

Our ownership interest in the Kinross project will have a material impact on our business, financial condition and results of operations. Pursuant to our agreements with Valero, the size of our minority interest in the Kinross facility is not yet determined and is directly impacted by the overall cost of the project and the performance of our technology and the amount of government grants and awards contributed to the project. While through Frontier Renewable Resources, LLC, our majority owned subsidiary, or Frontier, we expect to own up to 20% of the net cash flows from the project, if our technology does not enable Valero to process hardwood feedstocks at anticipated yields and volumes, or if the government grants and awards we and Valero expect to receive for the Kinross project are terminated or delayed, our minority interest could be significantly reduced. In the event that the actual costs of completing this project significantly exceed our and Valero’s expectations, our technology does not meet minimum performance requirements and we are unable to contribute expected grant and award amounts, we may have little to no ownership interest in the Kinross facility. If our ownership interest is materially reduced, our expected revenue from this project could be materially and adversely impacted and our control over this project could be further reduced. See “—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 awards and the construction of our initial commercial-scale hardwood CBP facilities may be materially delayed” below for additional information related to risks related to these grants and awards. Furthermore, our eventual ownership interest will not be definitely determined until after construction of the Kinross facility is completed. While we expect the Kinross facility to begin operations in mid-2014 there can be no assurances that operations will begin by then or at all. As a result, if you purchase shares of our common stock in this offering, you will be doing so without any assurance as to the size of our eventual ownership interest in, and share of the economics of, this project.

 

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If our commercial arrangement with Valero is terminated or delayed, or if Valero does not elect to increase the capacity of our initial facility or if we fail to enter into an arrangement or arrangements with Valero for future facilities, our growth strategy will be materially and adversely impacted.

 

Our definitive agreements with Valero are critical to the success of our hardwood CBP business and our ability to achieve and maintain profitability. If these agreements were to be terminated, we would need to identify and negotiate agreements with other potential collaborators, which could delay or prevent us from executing on our growth strategy. We do not anticipate construction of our next hardwood CBP facility in Drayton Valley, Alberta, to begin for another 12 to 24 months. During this time, competitors or competing technologies may be commercialized and make it more difficult for us to collaborate with third parties to commercialize our technology. These Kinross agreements enable Valero to terminate the arrangements or delay its capital contribution in the event that:

 

   

a change to, or adoption, termination or expiration of, any applicable law relating to the development, use, or production of, or mandates for, biofuels, including, without limitation, any U.S. Renewable Fuel Standard Program, Second Stage, or RFS2, legislation (or related EPA regulations) that could restrict, inhibit, prohibit or prevent the project company from constructing or operating the Kinross facility as planned;

 

   

the costs to Valero for the construction of the 20 million gallons per year facility exceed a specified amount;

 

   

the project company fails to obtain or maintain any governmental, administrative or regulatory approval, consent, license, permit, waiver or other authorization necessary to construct or operate the Kinross facility as planned;

 

   

there is any failure in the performance of our technology, or any impairment in our ability to deliver our technology, that restricts, inhibits, prohibits, or prevents the project company from constructing or operating the Kinross facility as planned; or

 

   

we fail to contribute a certain amount of grant and award funding to the project company, unless such shortfall is made up by sources of funds other than Valero.

 

As of the date hereof, we cannot assure you that Valero will not terminate the agreement with us or delay its capital contribution as a result of any of these events. As described below under the heading “—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,” we have little to no ability to effect changes to existing or adoption of new domestic or foreign federal, state or local legislative initiatives that impact our business. We, Valero and the project company have not yet received all governmental, administrative or regulatory approvals, consents, licenses, permits, waivers or other authorization necessary to construct or operate the Kinross facility. While we are in the process of securing these, we can provide no assurance that we will do so as planned. Finally, see “—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 awards and the construction of our initial commercial-scale hardwood CBP facilities may be materially delayed” below for additional information related to risks related to our ability to secure the grant and award amounts.

 

In addition, while our agreement with Valero provides Valero with an option to increase the capacity of this facility to up to 80 million gallons per year and establishes a framework for partnering with Valero on additional cellulosic ethanol facilities beyond Kinross, we can provide no assurance that Valero will exercise its option to increase the capacity of our initial facility or that we will be able to enter into an arrangement or arrangements with Valero for future facilities. If Valero does not collaborate with us to grow our hardwood CBP business, and if we are unable to identify alternative collaborators, our ability to execute on our growth strategy will be severely and adversely impacted.

 

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

 

While we have entered into definitive agreements with Valero to construct and operate our initial facility in Kinross, Michigan, both this facility as well as our planned facility in 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 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 facility in Kinross, Michigan. 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 and awards, 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 and award 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 awards 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 the 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 design, construction and operation of an integrated cellulosic ethanol plant for transforming locally grown mixed hardwoods into ethanol. Under this award, the DOE will provide us with up to approximately $80.0 million, payable in phases and dependent on the results of each phase. Of this $80.0 million award, $33.0 million has been obligated by the DOE, $22.0 million is expected to be obligated during the 2012 budget cycle and $25.0 million is expected to be

 

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obligated during the 2013 budget cycle. We can provide no assurance as to the size and timing of the unapproved amounts. In addition, these amounts are not paid out as a lump sum, but rather, they are paid as needed on a monthly basis. As a result, we will not be able to ensure full payment in advance. 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. Entitlements to resources provided by the federal government are generally conditioned upon compliance with terms and conditions of the grant or award agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all federal financial assistance is subject to Congressional appropriations and financial and compliance audits. Any disallowances become liabilities of the recipient company and could result in a refund of award proceeds. If the DOE terminates this or any other award 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 December 31, 2011, we have received approximately $12.1 million from MSF. In January 2012, we received the remaining $7.9 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 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 and awards, including grants and awards 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 December 31, 2011, we have received approximately $6.4 million from BESC. The loss of any of our government grants or awards, 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, 2011, approximately 93% of our revenue was derived from government grants and awards, 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.

 

The Finding of No Significant Impact that was issued by the DOE in connection with our planned CBP facility in Kinross, Michigan, was challenged in federal court, and its validity was called into question.

 

The National Environmental Policy Act, or NEPA, requires federal agencies to consider the environmental impacts of activities they perform, fund, or permit, as well as alternatives to those activities and ways to mitigate or lessen those impacts. Under NEPA, unless such actions are categorically excluded from NEPA review, federal agencies must prepare an environmental assessment to determine whether the proposed action will have a significant effect on the quality of the environment. If the agency determines that the action will not have a significant effect on the environment, it issues a finding of no significant impact, or FONSI, and the project can move forward; if the agency finds to the contrary, it must then prepare an environmental impact statement, detailing the environmental impacts, alternatives, and mitigation measures.

 

On December 22, 2011, the Sierra Club and an individual residing near our planned hardwood CBP facility in Kinross, Michigan, filed a complaint against the DOE in the United States District Court for the Western District of Michigan in the case of Larry Klein and Sierra Club v. United States Department of Energy, or the Sierra Club litigation. An amended complaint was filed on December 31, 2011. The claims allege that the DOE violated NEPA and the Administrative Procedure Act, or the APA, by failing to adequately disclose and analyze the environmental impacts of our planned facility in its environmental assessment, by issuing the FONSI with

 

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respect to our planned facility without requiring an environmental impact statement under NEPA, by failing to analyze an adequate range of alternatives to our planned facility in its environmental assessment, by deferring specifics regarding mitigation measures to a future time in the environmental assessment and by failing to prepare a supplemental environmental assessment to reflect changes in circumstances which allegedly took place after the original environmental assessment was completed, such as our collaboration with Valero and for the potential expansion of our planned hardwood CBP facility’s capacity to up to 80 million gallons per year. The plaintiffs sought an order to, among other things, enjoin the DOE from undertaking any activities related to our planned hardwood CBP facility until the DOE has complied with NEPA and the APA.

 

While there currently are no other defendants to the Sierra Club litigation, we or our collaborators on our planned hardwood CBP facility in Kinross, Michigan, could later be added as defendants, and the plaintiffs may seek to stop the planned facility in its entirety. Additionally, we, either directly or through Frontier, may move to join the Sierra Club litigation to ensure that our planned hardwood CBP facility’s interests are being adequately represented, which would result in substantial litigation costs. Furthermore, while the plaintiffs in the Sierra Club litigation have not sought preliminary injunctive relief, the plaintiffs may seek to do so at a later time. If preliminary injunctive relief were granted, such relief could immediately bar the DOE from undertaking any activities related to our planned hardwood CBP facility, and could result in substantial delays or endanger the development of our planned hardwood CBP facility. Even before the merits of the Sierra Club litigation are decided, the DOE could itself stay its funding of our planned hardwood CBP facility, which could delay or otherwise impair the development of our Kinross, Michigan facility. Moreover, as a result of the Sierra Club litigation, our collaborators and potential collaborators could be less willing to work with us on the planned hardwood CBP facility or our other projects, which could result in delays or other harm to our commercialization strategy. Finally, if the plaintiffs prevail on any or all of their claims, and the DOE is required to prepare an environmental impact statement or a supplemental environmental assessment, or the initial environmental assessment is required to be revised in whole or in part to address the plaintiffs’ claims, significant delays to developing our planned hardwood CBP facility in Kinross, Michigan could result. Moreover, the costs involved in obtaining a supplemental environmental assessment or environmental impact statement, or a revised environmental assessment, are significant. The occurrence of any or all of these events will have a material adverse effect on our business, financial condition and results of operations.

 

Our inability to receive required regulatory approvals for our MGT yeast products would have a material adverse effect on our business, financial condition and results of operations.

 

Certain by-products of the corn ethanol conversion process are used as animal feed and are therefore subject to regulatory review by the U.S. Food and Drug Administration, or the FDA. Our MGT products are bioengineered and are considered processing aids in the production of animal feed. As a result, pursuant to the Federal Food, Drug, and Cosmetic Act, our MGT products are subject to review and approval by the FDA’s Center for Veterinary Medicine, or CVM, before they can be marketed, unless, in certain states, their use has been determined to be “generally recognized as safe,” or GRAS. A substance can be listed or affirmed as GRAS by the FDA or self-affirmed by its manufacturer upon determination that there is credible evidence that the substance is safe for use under the conditions of the intended use and the safety evidence is generally known and accepted by qualified experts.

 

We are currently seeking approval that our initial MGT product is acceptable for use as a processing aid in the production of animal feed through the Association of American Feed Control Officials’ New and Modified Ingredient Definitions Process, which includes review of our initial MGT product by CVM. In February 2012, CVM notified the Association of American Feed Control Officials, or AAFCO, that it had completed its scientific review of our initial MGT product and recommended that it be included in the AAFCO Official Publication as a new animal feed ingredient. We believe that AAFCO will approve the listing of our initial MGT product as an accepted feed ingredient in its Official Publication, creating the broadest possible marketability for our initial MGT product across the United States. We can provide no assurances that AAFCO will approve our initial MGT product for listing in its Official Publication, as approval by CVM does not guarantee approval by AAFCO.

 

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We have determined, based in part on a review by an expert panel, that the intended use of our initial MGT product as a processing aid in the production of animal feed is GRAS. This GRAS determination allows us to sell our initial MGT product in states that allow reliance on GRAS for feed products and processing aids while we wait for AAFCO to approve our initial MGT product for listing in its Official Publication. Our current MGT customers have determined that the state regulations applicable to such customers permits them to rely on that GRAS determination. However, there can be no assurance that these manufacturers and states will not change their view as to the acceptability of relying on GRAS or that the FDA will not change its policies with respect to the permissibility of self-affirmed GRAS determinations. In addition, not all manufacturers and state regulations currently permit reliance on GRAS.

 

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 approvals for 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 awards and sales of pretreatment equipment, the planned sale of our MGT products to corn ethanol producers is our only potential near-term source of revenue. Anything that prevents us from selling our MGT products to certain customers and in certain jurisdictions based on the GRAS determination, or any delay in receiving CVM and AAFCO approval, 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 hardwood CBP commercialization strategy relies heavily on our ability to negotiate and execute definitive agreements with third parties.

 

While we have already entered into definitive agreements with Valero for our initial facility in Kinross, Michigan, in order to execute on our commercialization strategy, we need to negotiate and enter into definitive agreements for the financing, construction and operation of future facilities, including our planned hardwood CBP facility in Drayton Valley, Alberta. We do not have any such definitive agreements in place, and we have limited 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. 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.

 

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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 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.

 

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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 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 more directly 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 Cellulosic Ethanol, KL Energy Corporation 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 larger and more mature 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 compete 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.

 

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

 

RFS2 allows additional Renewable Identification Number, or 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 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, regulations and permitting requirements, and failure to comply with these laws, regulations and permitting requirements could expose us to significant liabilities.

 

Our operations are subject to a variety of foreign, federal, state and local environmental laws, regulations and permitting requirements 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 bioengineered or genetically-modified organisms, or GMOs, in our demonstration facility in Rome, New York, and such materials will be used at our facility in Kinross, Michigan, and in our additional 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, or TSCA, program of the U.S. Environmental Protection Agency, or the 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 hazardous materials, we or our collaborators 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, regulations and permitting requirements, 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, the disqualification of the RIN credits we generate, 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, regulations and permitting requirements 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.

 

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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, or EISA, 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 December 2011, the EPA finalized the mandated volumes for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2012, as required under RFS. Although the total renewable fuel target, set at 15.2 billion ethanol equivalent gallons, and the advanced biofuel target of 2.0 billion ethanol equivalent gallons, match the targets (in actual volumes) set under the EISA in 2007, the cellulosic biofuel standard is set at 10.45 million ethanol equivalent gallons, which is equal to 8.65 million actual gallons of cellulosic biofuel, a much lower target than the 500 million actual gallons required in 2012 as mandated under the EISA in 2007. 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. An October 2011 National Research Council report projects that the United States will not meet its 16 billion gallon cellulosic biofuels target in 2022 due to lack of supply. The elimination of, or any reduction in, mandated requirements for fuel 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 EPA may issue notices of violation and/or proceed with enforcement actions related to RIN credits it alleges were improperly generated.

 

In addition, prior to December 31, 2011, the Volumetric Ethanol Excise Tax Credit, or VEETC, commonly referred to as the Blender’s Credit, provided blenders and marketers of fuel with a federal tax credit of $0.45 on each gallon of ethanol blended with their gasoline; corn-based ethanol qualified for this tax credit. Additionally, in connection with the Blender’s Credit, a 2.5 percent ad valorem tax and a tariff of $0.54 per gallon were imposed on imports of ethanol from all countries except Caribbean Basin Initiative countries. The credit, the tax and the tariff all expired on December 31, 2011. 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. Relatedly, there have been recent efforts in state legislatures to repeal or otherwise pare back state initiatives to promote renewable energy. State legislatures are considering a variety of proposals to weaken renewable energy standards, oftentimes based on justifications related to concerns about economic conditions and the costs of renewable energy. Such legislative efforts include measures that would repeal state initiatives promoting renewable energy or otherwise scale back mandates in states’ renewable energy standards, potentially reducing demand for renewable energy and shrinking the market and industry in which we operate. Other proposed measures would expand the types of energy technologies that would be permitted to meet states’ renewable energy standards, thus potentially adversely affecting the demand for renewable energy based on our technologies related to ethanol and cellulosic ethanol. Such efforts at the state level could adversely affect 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

 

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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 bioengineered or 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 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 bioengineered or 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, GMOs 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 bioengineered or genetically engineered products or feedstocks grown on land suitable for food production or other purposes.

 

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

 

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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 awards, 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 and awards. In the year ended December 31, 2011, we recognized $10.0 million in government grant and award revenues, as compared to total research and development expense of $27.2 million. Based solely on currently secured grants and awards, 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 or awards 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 and awards. Our ongoing obligations under these grants and awards may include providing regular progress reports on the status of the relevant project and the milestones achieved. Funds available under grants and awards must be applied by us toward the research and development programs specified by the granting or awarding 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;

 

   

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

 

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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 initial facility in Kinross, Michigan, and additional 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 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. 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;

 

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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 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 have 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

 

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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 December 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, 2011 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 we successfully commercialize our initial MGT product. 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 December 31, 2011, our total assets included $28.0 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.

 

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We have a history of material weaknesses in our internal control over financial reporting. Failure to 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 three years in the period ended December 31, 2011, 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 and arose primarily from a history of 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.

 

Management implemented remediation efforts in the latter half of 2011. These remediation efforts included hiring a chief financial officer, a corporate controller and supplementing our staff with consultants and third party professionals. Our chief financial officer joined us in June 2011 and our controller joined us in October of 2011. With the addition of these personnel, we have significantly enhanced our resources within the accounting and finance function, and we have continued to augment and formalize our policies and procedures related to financial reporting. However, due to the fact that the staffing changes and other improvements were not implemented until the latter part of 2011, it was concluded that sufficient time had not elapsed to evidence that the remediation efforts were effective at December 31, 2011. If during 2012 these remediation efforts do not prove to be effective or additional deficiencies in our internal control over financial reporting are identified, one or more significant deficiencies or material weaknesses in our internal control over financial reporting may be deemed to exist. We would be required to disclose any material weakness in future filings with the SEC, which could cause our reputation to be harmed and our stock price to decline.

 

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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 financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2013. 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 the New York Stock Exchange, or the NYSE, 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.

 

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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 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 December 31, 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 December 31, 2011, we owned approximately 47 pending U.S. patent applications (including 11 provisional applications), 5 issued foreign patents, 113 pending foreign applications, and 12 Patent Cooperation Treaty, or PCT, applications eligible for nationalization. As of December 31, 2011, we had licensed rights to approximately 3 issued U.S. patents, 17 pending U.S. 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;

 

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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;

 

   

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 in the United States (including the recently enacted “America Invents Act”) or other jurisdictions and from interpretations of the patent laws of the United States 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

 

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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.

 

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 United States 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

 

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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.

 

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 bioengineered yeasts and bacteria. For example, the technology license and supply agreement we intend to enter into with Valero would require us to escrow a proprietary microorganism and the microorganism would be released to Valero in the event we become unable or unwilling to continue to supply it to Valero. If our microorganisms, or the genes that code for our microorganisms, were stolen, misappropriated or reverse engineered based on any disclosures, including in our patent applications or were made available under our escrow arrangements 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.

 

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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.

 

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 and awards 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 or award 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 and awards, the government may gain rights to the intellectual property developed in our related research.

 

Furthermore, the terms of our research grants and awards from U.S. government agencies may prohibit us from using the new technologies we have developed using those grants and awards 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 or award 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;

 

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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 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                 

 

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shares of common stock outstanding as of December 31, 2011, 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 December 31, 2011, 2,156,993 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 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 by-laws 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;

 

 

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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 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 plan to apply to have our shares of common stock listed on the NYSE 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 the NYSE. 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.

 

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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, 2013, 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 and maintain our relationships with strategic collaborators with development and commercialization expertise;

 

   

the performance by us and our strategic collaborators of the obligations under agreements to which we are a party and are important to our business;

 

   

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 feedstocks;

 

   

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;

 

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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;

 

   

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 approvals 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 and award 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 and cash equivalents and capitalization as of December 31, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the conversion of all of our outstanding convertible preferred stock into an aggregate of 47,651,790 shares of our common 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, (iii) the 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, (iv) the issuance of             shares of common stock upon the automatic net exercise upon the completion of this offering of two warrants to purchase a total of 659,898 shares of common stock and the related reclassification of the warrant liability to stockholders’ equity, and (v) the conversion of approximately $7.4 million in principal amount of subordinated convertible notes into shares of common stock at a 30% discount to an assumed initial public offering price of $         per share, which is the midpoint of the price range on the cover page of this prospectus and the issuance of common stock warrants related thereto and the related classification of the fair value of the subordinated convertible notes and attached warrants to stockholders’ equity upon the completion of this offering; 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 consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2011
       Actual       Pro
  Forma  
    Pro Forma
as
    Adjusted(1)    
     (in thousands, except share and per share data)

Cash and cash equivalents

   $ 11,417      $ 11,417     
  

 

 

   

 

 

   

Long-term debt, including current portion

     10,000        10,000     
  

 

 

   

 

 

   

Subordinated convertible notes and attached warrants

     10,547            
  

 

 

   

 

 

   

Warrant liabilities

     8,209            
  

 

 

   

 

 

   

Redeemable noncontrolling interest

     2,339        2,339     
  

 

 

   

 

 

   

Total redeemable convertible preferred stock

     163,136            
  

 

 

   

 

 

   

Redeemable common stock; 400,000 shares outstanding actual,
none pro forma and pro forma adjusted

     1,560            
  

 

 

   

 

 

   

Stockholders’ (deficit) equity:

      

Common stock; $0.001 par value, 75,000,000 shares authorized, actual and pro forma; 200,000,000 shares authorized, pro forma as adjusted; 7,517,192 shares issued and 7,357,192 outstanding, actual;              shares issued and              outstanding, pro forma;             shares issued and outstanding, pro forma as adjusted

     8        55     

Additional paid-in capital

     24,883        208,288     

Accumulated deficit

     (164,793     (164,793  

Treasury stock

     (470     (470  
  

 

 

   

 

 

   

Total stockholders’ (deficit) equity

     (140,372     43,080     
  

 

 

   

 

 

   

Total capitalization

   $ 55,419      $ 55,419     
  

 

 

   

 

 

   

 

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(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.

 

The outstanding share information in the capitalization table above is based on the number of shares outstanding as of December 31, 2011, and excludes:

 

   

11,860,215 shares of common stock issuable upon the exercise of outstanding options as of December 31, 2011, with a weighted-average exercise price of $2.34 per share;

 

   

2,156,993 shares of common stock reserved as of December 31, 2011 for future issuance under our 2006 Stock Incentive Plan, or our 2006 Stock Plan; provided, however, that immediately upon completion of this offering, our 2006 Stock Plan will terminate so that no further awards may be granted under our 2006 Stock Plan;

 

   

             shares of common stock reserved for future issuance under our 2012 Stock Option and Incentive Plan, or our 2012 Stock Plan, which will become effective upon completion of the offering; plus shares of our common stock that are represented by awards granted under our 2006 Stock Plan that are forfeited, expired or are cancelled without delivery of shares or which result in the return of shares of our common stock to us, following the termination of the 2006 Stock Plan;

 

   

2,993,417 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2011 at a weighted-average exercise price of $3.69 per share; and

 

   

3,164,557 shares of common stock issuable upon the exercise of a warrant at an exercise price of $3.16 per share, to be issued to an affiliate of Valero upon the execution of ancillary agreements with Valero related to our planned hardwood CBP facility in Kinross, Michigan.

 

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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 December 31, 2011, was approximately ($168.3) million, or ($22.88) per share, based on 7,357,192 shares of common stock outstanding as of December 31, 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 December 31, 2011 was approximately $15.1 million, or approximately $             per share, based on              shares of common stock outstanding after giving effect to (i) the conversion of all of our outstanding convertible preferred stock into an aggregate of 47,651,790 shares of our common 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, (iii) the 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, (iv) the issuance of              shares of common stock upon the automatic net exercise of two warrants to purchase a total of 659,898 shares of common stock and the related reclassification of the warrant liability to stockholders’ equity, upon the completion of this offering and (v) the conversion of approximately $7.4 million in principal amount of subordinated convertible notes into shares of common stock at a 30% discount to an assumed initial public offering price of $         per share, which is the midpoint of the price range on the cover page of this prospectus and the issuance of common stock warrants related thereto and the related classification of the fair value of the subordinated convertible notes and attached warrants to stockholders’ equity 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 December 31, 2011 would have been          million, or $         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 December 31, 2011

   $                   

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.

 

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The following table summarizes as of December 31, 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 (including 11,268,868 shares of series D preferred stock and 3,756,290 shares of common stock having a combined value of $49,658,146, which were provided in consideration of the equity of SunOpta Bioprocess Inc. during 2010) 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

     55,408,982         100   $ 171,566,637         100   $ 3.10   

New investors

            
  

 

 

      

 

 

      

Total

               $                %   $     
  

 

 

      

 

 

      

 

The above discussion and tables give effect to (i) the conversion of all of our outstanding preferred stock into 47,651,790 shares of common stock; (ii) the issuance of          shares of our common stock upon the automatic conversion of approximately $7.4 million in principal amount of outstanding subordinated convertible notes, or the 2011 Notes, upon completion of this offering and the issuance of the common stock warrants related thereto; and (iii) the              shares of common stock that will be issued upon the automatic net exercise of two warrants to purchase a total of 659,898 shares of our common stock upon the completion of this offering, and exclude:

 

   

11,860,215 shares of our common stock issuable upon exercise of outstanding options as of December 31, 2011 at a weighted-average exercise price of $2.34 per share;

 

   

2,156,993 shares of our common stock reserved as of December 31, 2011 for future issuance under our 2006 Stock Incentive Plan, or our 2006 Stock Plan, that are not issued or subject to outstanding grants; provided, however, that immediately upon completion of this offering, our 2006 Stock Plan will terminate so that no further awards may be granted under our 2006 Stock Plan;

 

   

             shares of common stock reserved for future issuance under our 2012 Stock Option and Incentive Plan, or our 2012 Stock Plan, which will become effective upon completion of this offering; plus shares of our common stock that are represented by awards granted under our 2006 Stock Plan that are forfeited, expired or are cancelled without delivery of shares or which result in the return of shares of our common stock to us, following the termination of the 2006 Stock Plan;

 

   

2,993,417 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2011 at a weighted-average exercise price of $3.69 per share; and

 

   

3,164,557 shares of common stock issuable upon the exercise of a warrant at an exercise price of $3.16 per share, to be issued to an affiliate of Valero upon the execution of ancillary agreements with Valero related to our planned hardwood CBP facility in Kinross, Michigan.

 

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 Statements of Operations Data” for the years ended December 31, 2009, 2010 and 2011 and the selected consolidated financial data presented below under the heading “Consolidated Balance Sheet Data” as of December 31, 2010 and 2011, have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

 

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The selected consolidated financial data presented below under the headings “Consolidated Statements of Operations Data” for the years ended December 31, 2007 and 2008 and under “Consolidated Balance Sheet Data” as of December 31, 2007, 2008 and 2009, 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,  
    2007     2008     2009     2010(3)     2011  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

         

Total revenues

  $      $ 3,896      $ 8,436      $ 15,492        $ 10,737   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses

         

Cost of pretreatment equipment sales and services

                         1,120        490   

Amortization of acquired intangible assets

                         513        1,540   

Research and development(1)

    15,089        24,327        28,270        26,539        27,191   

Selling, general and administrative(1)

    9,886        9,344        5,059        9,699        15,373   

Loss on asset disposals and lease abandonment

           799        9,213                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

    24,975        34,470        42,542        37,871        44,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (24,975     (30,574     (34,106     (22,379     (33,857

Other income (expense), net

    967        113        (1,366     (3,407     (7,289

Equity in loss of equity method investment

                         (143     (479
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (24,008     (30,461     (35,472     (25,929     (41,625

Amount attributable to redeemable noncontrolling interest

                  (2,830     201        290   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Mascoma Corporation

    (24,008     (30,461     (38,302     (25,728     (41,335

Accretion of redeemable convertible preferred stock

    (52     (216     (253     (205     (146
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders of Mascoma Corporation

  $ (24,060   $ (30,677   $ (38,555   $ (25,933   $ (41,481)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (10.91   $ (12.25   $ (12.61   $ (5.39   $ (5.36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—basic and diluted

    2,204,499        2,505,159        3,058,138        4,813,191        7,737,665   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

            $(0.75
         

 

 

 

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

            55,389,555   
         

 

 

 

 

(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 47,651,790 shares of common stock upon the completion of this offering as if such conversion had occurred at the beginning of the period.

 

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(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.

 

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

Consolidated Balance Sheet Data:

          

Cash, cash equivalents and short-term investments

     9,289      $ 35,784      $ 15,989      $ 11,889        11,417   

Working capital (deficit)

     4,428        25,364        6,175        4,275        (661

Total assets

     28,702        79,761        51,590        87,125        80,045   

Subordinated convertible notes
and attached warrants

                                 10,547   

Long-term debt and capital leases, including current portion

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

Warrant liabilities

     399        2,395        2,597        5,445        8,209   

Total liabilities

     12,066        31,490        37,639        35,576        53,382   

Redeemable convertible preferred stock

     43,961        104,051        104,304        153,212        163,136   

Accumulated deficit

     (28,967     (59,428     (97,730     (123,458     (164,793

Stockholders’ deficit

     (28,501     (57,652     (94,363     (105,080     (140,372

 

(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 bioengineered 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 are initially targeting the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with collaborators to develop and construct commercial-scale facilities to convert hardwood feedstocks into cellulosic ethanol. In December 2011, we entered into definitive agreements with Valero Energy Corporation, or Valero, an international manufacturer and marketer of ethanol and other transportation fuels, to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan, based on our proprietary CBP technology. We believe the Kinross facility and future 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. We have also produced propanol from glucose at our demonstration facility in Rome, New York, and plan to continue 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 multiple 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 bioengineered MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. Our initial MGT product is currently available for commercial use. 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 for us. We have targeted 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 in this market. Certain by-products of the corn ethanol conversion process are used as animal feed and are therefore subject to regulatory review by the U.S. Food and Drug Administration. Our MGT products are bioengineered and are considered processing aids in the production of animal feed. See the section entitled “Business—Regulatory Matters” for more information about the regulations applicable to our MGT products.

 

Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production. We believe that our initial MGT product will reduce the enzyme costs of corn ethanol production by approximately $0.01 to $0.02 per gallon, based on laboratory test runs and management estimates of total enzyme costs between $0.03 to $0.04 per gallon of corn ethanol. As a result, we believe that this product will create significant and immediate value to corn ethanol producers, which, according to the Renewable Fuels Association, or RFA, collectively produced approximately 13.9 billion gallons of corn ethanol in the United States in 2011. 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. In pilot-scale test runs by ICM, Inc., or ICM, the leading provider of engineering services to the ethanol industry, we have

 

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demonstrated ethanol yield improvements of up to 3.4% with the next generation of our MGT product and we expect further ethanol yield improvements through additional research and development efforts. We expect the anticipated improvements in ethanol yield to be driven by technology improvements and as a result, we do not anticipate any potential margin losses when the production process is performed on a commercial scale.

 

We expect commercial sales of our initial MGT product to begin in the first quarter of 2012. As part of our commercialization efforts, several leading corn ethanol producers have initiated testing and performance validation of our initial MGT product for commercial use. Following testing and performance validation, we intend to enter into commercial arrangements, which may include long-term agreements, with these and other corn ethanol producers that enable us to receive a significant portion of the incremental margin generated by our MGT products. In November 2011, we entered into a commercial agreement with Valero that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. According to the RFA, Valero’s total production volume represented approximately 8.1% of total U.S. ethanol capacity in 2011. In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand Inc., or Lallemand, a global developer, producer and marketer of yeast, bacteria and related products, for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. We have also entered into a definitive three-year collaboration agreement with ICM to provide certain testing and technical support services at our customers’ facilities during the launch of each of the initial generations of our MGT products. We believe our definitive, long-term agreements with recognized partners and our first-of-a-kind MGT yeast product will enable us to rapidly grow our MGT business.

 

The second stage of our commercialization strategy is to work with our collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood into cellulosic ethanol. We have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. Based on current cost estimates, we believe this facility will be fully financed by Valero in addition to grants and awards from the DOE and the State of Michigan. Pursuant to the terms of our agreements, we expect to receive a development reimbursement amount, royalties for a specified period of time and an ownership interest in the project in exchange for providing our proprietary CBP technology, grant and award funding, organism supply, engineering and additional support. Valero will construct and operate the facility and receive a controlling ownership interest in the facility. Valero will also market the ethanol produced at the facility. The agreements provide Valero with an option to increase the capacity of this facility. We have also developed a framework to partner with Valero on a non-exclusive basis to construct additional cellulosic ethanol facilities beyond our planned Kinross facility. 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 like Valero to fund, build, develop and operate the facilities, while we contribute technology and receive fees and/or an equity interest in the facilities.

 

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, or BDT, of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per BDT of hardwood and we are working to continue to improve conversion yields. Based on management expectations for additional technology improvements, some of which have been developed and are currently being tested, at our planned 20 million gallons per year commercial-scale hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per BDT of hardwood with unsubsidized cash operating costs of approximately $1.77 per gallon. These unsubsidized cash operating costs consist of feedstock costs, enzyme costs, raw material costs (e.g., organism nutrients), processing costs (e.g., electricity and water) and other costs (e.g., denaturant, labor, maintenance and overhead). We expect the improvements in our cash operating costs from our demonstration facility in Rome, New York, to our planned Kinross facility, operating at 20 million gallons per year, to be driven entirely by anticipated improvements in yield and enzyme reduction. Our expected unsubsidized cash operating costs do not take into account potential cost reductions from further process improvements or operating efficiencies. See section entitled “Business—Our Strategy—Convert Hardwood

 

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Pulpwood into Cellulosic Ethanol on a Commercial Scale” for more information on operating costs. These estimates assume a hardwood feedstock cost of $66 per BDT of hardwood logs and are based on a 20 million gallons per year facility. Over the next several years we are targeting further reduction in our unsubsidized cash operating costs, and ethanol yields of 93 gallons per BDT of hardwood, based on increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility to start within 12 to 24 months. 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, in our demonstration facility in Rome, New York, we have converted glucose to propanol, and in a laboratory setting, we have converted glucose to fatty acids. Using standardized industrial processes, these chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements. We expect to continue to develop potential end-products other than propanol and fatty acids.

 

Through December 31, 2011, we generated revenues primarily from government grants and awards and sales of pretreatment equipment for biomass feedstocks. As we continue the commercial launch of our initial MGT product, an increasing proportion of our revenues will be attributable to our CBP technology. We have incurred substantial net losses since our inception and as of December 31, 2011, we had an accumulated deficit of $164.8 million. We anticipate that we will continue to incur net losses as we progress with the commercial launch of 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 December 31, 2011, we have raised an aggregate of $152.2 million from private placements of equity securities and debt financing, including $115.3 million in proceeds from the sale of preferred equity securities, $16.9 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 bioengineered yeast product that can be used by corn ethanol producers as a drop-in substitute to conventional yeast.

 

Our initial commercial product, MGT 1.0, is currently available for commercial use. MGT 1.0 is a first-of-a-kind product – an advanced yeast that will provide significant value to ethanol producers by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. 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 expect commercial sales of MGT 1.0 to begin in the first quarter of 2012. As part of our commercialization efforts, several leading corn ethanol producers have initiated testing and performance validation of MGT 1.0 for commercial use. Following testing and performance validation, we intend to enter into commercial arrangements, which may include long-term agreements, with these and other corn ethanol producers that enable us to receive a significant portion of the incremental margin generated by our MGT products. In November 2011, we entered into a commercial agreement with Valero that provides terms and pricing for any

 

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purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. According to the RFA, Valero’s total production volume represented approximately 8.1% of total U.S. ethanol capacity in 2011. In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. Several other corn ethanol producers are currently testing our initial MGT product on a commercial scale. We have also entered into a definitive three-year collaboration agreement with ICM to provide certain testing and technical support services at our customers’ facilities during the launch of each of the initial generations of our MGT products. We believe our definitive, long-term agreements with recognized partners and our first-of-a-kind MGT yeast product will enable us to rapidly grow our MGT business.

 

We expect that the fundamental drivers of our MGT product revenues 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 have collaborated, and intend to continue 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 have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility to start within 12 to 24 months. For our initial hardwood CBP facility in Kinross, Michigan, we are using state and federal grants and awards in addition to equity financing from Valero, and expect to also utilize both government grants and awards and equity financing from strategic partners for Drayton Valley, Alberta. For future facilities, we expect to rely primarily on equity and debt 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.

 

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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.

 

   

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

 

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 collaborators that develop and construct our hardwood CBP facilities. We believe these facilities could benefit from synergies arising in the future from the use of our pretreatment equipment in conjunction with our CBP technology platform. 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 operating expenses 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.

 

   

Reduced operating expenses. We expect that as a result of our focus on future plant installations utilizing our CBP technology platform, our level of sales and marketing expenses required to sell our pretreatment equipment will be beneficially impacted.

 

Financial Operations Overview

 

Revenues

 

Currently, our revenues consist primarily of government grants and awards and sales of pretreatment equipment and services. During the years ended December 31, 2010 and 2011, we also received revenue from other service arrangements.

 

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

 

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Current commercial revenues consist of sales of pretreatment equipment for the conversion of biomass feedstocks. 100% and 74% of our pretreatment equipment sales and services for the years ended December 31, 2010 and 2011, respectively, related to a single customer from whom we do not expect any future revenues. We plan to expand and diversify our revenue and customer bases significantly in the future. In addition, while we will continue to sell our pretreatment equipment and services in the future, we expect that these sales will represent only one component of our overall revenue stream. Revenues from sales of pretreatment equipment and services 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 2011, we received revenue from one commercial research and development agreement, which has been terminated.

 

Cost of Pretreatment Equipment Sales and Services

 

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

 

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. In addition, we have elected to record the 2011 issuance of our subordinated convertible notes and attached warrants at their fair value. We have recorded the excess in the fair value of these instruments

 

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over the original proceeds of these instruments as interest expense and other financing costs. 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 of operations. Upon the closing of this initial public offering, 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 recognize fair value adjustments. In addition, the subordinated convertible notes and attached warrants will be converted to common stock and common stock warrants and no future adjustments to fair value will be required following this offering.

 

Income Tax Expense

 

We are subject to federal and 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, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. At December 31, 2011, 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 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, 2011, we had a full valuation allowance against our deferred tax assets, which totaled approximately $51.7 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

 

Historically, the majority of our revenue has been generated through government grants and awards and other research and development arrangements with federal and state government agencies, including the DOE, New York and Michigan. Revenues from government grants and awards to construct and operate facilities are deferred and recognized over the useful life of those facilities. Revenues from government grants and awards to conduct research and development are recognized in the period in which the underlying costs are incurred.

 

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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 $1.6 million, $0.6 million and $0.5 million in revenue associated with the award during the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011, there was approximately $0.2 million in revenue remaining to be recognized.

 

   

Approved funding of $20.0 million to develop and design the technologies necessary to construct and operate an integrated cellulosic ethanol plant for transforming locally-grown mixed hardwoods or switchgrass into ethanol. We recognized $3.8 million, $10.0 million and $5.1 million in revenue associated with the award during the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011 there was no revenue remaining to be recognized. In September 2011, we received an award modification of the 2008 award. This modification extended the period of performance under the award to April 2014, and the DOE will provide up to an additional $80.0 million towards the construction of our planned hardwood CBP facility in Kinross, Michigan. Of this $80.0 million award, $33.0 million has been obligated by the DOE, $22.0 million is expected to be obligated during the 2012 budget cycle and $25.0 million is expected to be obligated during the 2013 budget cycle.

 

Revenue from the cooperative agreements with the DOE is recognized in the period during which the underlying research and development expenses are incurred. To date, none of the proceeds from the arrangements with the DOE have been used to construct facilities. 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 50% of the total projected costs for each project. Entitlements to resources provided by the federal government are generally conditioned upon compliance with terms and conditions of the grant or award and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all federal financial assistance is subject to Congressional appropriations and financial and compliance audits. Failure to comply with the terms of these grants and awards could result in a refund of the award proceeds. We believe we have complied with all terms of these grants and awards. In addition, the payment of funds by the DOE to us under these awards is subject to satisfying the following conditions: an invoice has been submitted in the required form describing the costs incurred that are eligible for reimbursement under each award; the costs incurred are consistent with the approved budget as defined under each award; and periodic reporting as required under each award is up to date. All of these conditions have been met for all funds received to date under each award and we expect to meet the conditions to permit the release of all remaining funds under each award.

 

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 facility in Rome, New York. As of December 31, 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 demonstration facility, which was estimated to be approximately five years. We recognized $3.1 million, $2.6 million and $2.9 million in revenue associated with the grant during the years ended December 31, 2009, 2010 and 2011, respectively.

 

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 December 31, 2011, we received $12.1 million in proceeds from this award, which has been recorded as deferred revenue. In January 2012, we received the remaining $7.9 million in proceeds under this award.

 

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

 

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the development of our planned hardwood CBP facility in Drayton Valley, Alberta. Under this arrangement, Alberta will provide up to $0.8 million to be used to assess the feasibility of 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. We recognized $0.0 million and $0.6 million in revenue associated with this grant agreement during the years ended December 31, 2010 and 2011, respectively.

 

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 and awards with the government will continue to be a significant portion of our revenues for at least the next 24 months, and we expect to continue to avail ourselves of these revenue arrangements to the extent that the government continues to fund such programs. To date, we have elected to present the revenues related to the government grants and awards on a gross basis because we believe that the gross presentation facilitates comparison with other expenses not affected by government grants or awards. Historically, the proceeds from the government grants and awards only represent a portion (approximately 50% on average) of the total costs of the specified projects. Because we act as the principal and primary obligor under these agreements, we believe that it is important for the users of our financial statements to understand the total costs of such projects rather than to net the costs with the proceeds from the government grants and awards. The costs incurred related to the research and development efforts associated with government grants and awards are reflected as a component of research and development expense in the consolidated statements of operations. Property and equipment that is funded from government grants and awards and constructed and operated by us are depreciated, with the depreciation expense being classified as research and development expenses.

 

Revenues from the sale of pretreatment equipment 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 long-term construction projects, with our equipment 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. Occasionally, we will enter into short duration service contracts or contracts for a single piece of equipment, and we recognize these revenues when the service or equipment is delivered on a completed contract basis.

 

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

 

Stock-Based Compensation

 

We recognize compensation expense related to stock-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,  
     2009      2010      2011  

Research and development

   $ 1,328       $ 988       $ 2,426   

Selling, general and administrative

     504         1,496         4,478   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,484       $ 6,904   
  

 

 

    

 

 

    

 

 

 

 

Stock-based compensation expense of approximately $12.0 million was unrecognized for non-vested awards as of December 31, 2011, and is expected to be recognized over a weighted-average period of 3.51 years.

 

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

 

We estimate the fair value of the stock-based awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of stock-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,  
     2009      2010      2011  

Expected dividend yield

     0%         0%         0%   

Risk-free interest rate

     2.09%-3.11%         1.36%-2.86%         0.88%-2.66%   

Expected term (in years)

     5.00-6.32         5.00-6.32         5.00-6.76   

Expected volatility

     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 midpoint 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, 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)

    2,826,250        1.97        1.97        1.71   

April 27, 2011

    33,000        1.97        1.97        1.57   

August 22, 2011

    2,070,325        2.93       2.93       2.26  

September 14, 2011

    223,335        2.93        2.93        2.10   

October 26, 2011

    168,000        3.16        3.16        2.45   

December 20, 2011

    223,335        3.90        3.90        2.80   
 

 

 

       

Total

    8,682,264         
 

 

 

       

Weighted-Average

    $ 2.53      $ 2.53      $ 2.01   

 

(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 shares underlying options that vest upon the achievement of the 2011 performance targets and 649,000 shares underlying options that vest upon the achievement of the 2012 performance targets. In August 2011, our board of directors established the corporate goals for 2012. As such, the key terms and conditions of these awards are mutually agreed upon between the employees and us and as of August 31, 2011, for those deemed probable of achievement, the related compensation cost, adjusted for forfeitures, started being recognized as expense from the August 2011 grant date. Because of the discretion of our board of directors in determining the achievement of the performance targets, the awards with performance targets are being remeasured at each reporting date until the awards vest. In December 2011, our board of directors deemed the 2011 performance targets to be 90% achieved.

 

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 December 31, 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 an independent 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 arms’ length transactions;

 

   

the prices of our common stock sold to investors in arms’ 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.

 

In addition to the factors above, we obtained independent third-party contemporaneous valuation reports 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   

September 30, 2011

     3.16   

December 31, 2011

     3.90   

 

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 stockholders 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 stockholders. 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 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 valuations that were performed in June, September and December 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. The adoption of the PWERM 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 August 31, 2010 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 grant date 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 we 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 short-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 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 shorter term reflected our belief in the likelihood of obtaining regulatory clearance for our initial MGT product 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 and awards, 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 between August 22, 2011 and September 14, 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. Given the limited amount of time that elapsed from June 30, 2011 to August 22, 2011 and September 14, 2011, management relied upon the valuation performed as of June 30, 2011 in determining the fair value per common share for options granted on August 22, 2011 and September 14, 2011. In arriving at this determination, management considered the technological advancements and other developments occurring within the Company. In addition, management also considered actual operating and financial performance relative to management’s expectations, 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 June 30, 2011 valuation. 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 initial MGT product 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 and awards, 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);

 

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ongoing discussions with the Food and Drug Administration’s Center for Veterinary Medicine relating to the review of our submission for our initial MGT product;

 

   

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).

 

Valuation for options granted on October 26, 2011

 

In October 2011, we completed a valuation to estimate the fair market value of a share of our common stock as of September 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 (3 months) and five valuations with a longer term view (9 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 $3.16 per share as of September 30, 2011, an increase of $0.23 from the prior fair value on September 14, 2011. The aggregate probability of the five scenarios associated with the completion of an initial public offering in the short-term (i.e., 3 months) was estimated to be approximately 18%. In addition, the aggregate probability of the five scenarios associated with the completion of an initial public offering in the longer term (i.e., 9 months) was estimated to be approximately 37%, for an aggregate probability of an initial public offering equal to 55%. These 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 initial MGT product 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 and awards, 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 the previous valuation was also determined to reflect the following factors:

 

   

continued progress toward an initial public offering of our common stock as evidenced by the filing of a registration statement on Form S-1 with the SEC on September 16, 2011;

 

   

on September 28, 2011, the DOE awarding us up to an additional $80 million in funding, subject to cost-sharing and other conditions related to the Kinross project; and

 

   

no additional equity issuances.

 

Valuation for options granted on December 20, 2011

 

In January 2012, we completed a valuation to estimate the fair market value of a share of our common stock as of December 31, 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 (3 months) and five valuations with a longer term view (9 months);

 

   

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

 

 

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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 $3.90 per share as of December 31, 2011, an increase of $0.74 from the prior fair value on October 26, 2011. The aggregate probability of the five scenarios associated with the completion of an initial public offering in the short-term (i.e., 3 months) was estimated to be approximately 35%. In addition, the aggregate probability of the five scenarios associated with the completion of an initial public offering in the longer term (i.e., 9 months) was estimated to be approximately 35%, for an aggregate probability of an initial public offering equal to 70%. These 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 continued progress toward the launch of our initial MGT product in the first quarter of 2012 as well as our receipt of a commitment from Valero to invest in our planned hardwood CBP facility in Kinross, Michigan, such that, together with guaranteed federal and state government grants and awards, 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 the previous valuation was also determined to reflect the following factors:

 

   

continued progress toward an initial public offering of our common stock as evidenced by the filing of Amendments No. 1 and No. 2 to the registration statement on Form S-1 with the SEC on December 9, 2011 and January 13, 2012, respectively;

 

   

continued customer testing of our MGT product as well as our November 2011 signing of agreements with industry participants Lallemand and ICM in support of the commercialization of our MGT product;

 

   

entry into a commercial agreement with Valero in November 2011 that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and validation;

 

   

entry into definitive agreements with Valero in December 2011 with respect to the development of a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan utilizing our CBP technology; and

 

   

no additional equity issuances.

 

The assumptions used in determining fair value of stock-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 stock-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 and Common 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 years ended December 31, 2010 and 2011, we recorded a credit of $0.8 million and a charge of $0.6 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 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

 

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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,  
     2009        2010        2011  

Risk-free rate

     2.69%-3.85%           2.01%-2.71%           0.60%-1.35%   

Contractual terms

     4.62-9.0 years           4.67-8.0 years           3.67-7.00 years   

Expected volatility

     95%           95%           95%   

Expected dividend

     0%           0%           0%   

 

On June 1, 2011, we issued warrants for the purchase of 659,898 shares of common stock in connection with a loan commitment from a lender. The exercise price is $1.97 per share and the warrant is exercisable at any time from the warrant date until June 1, 2021, or an occurrence of change of control event (i.e., sale or merger of our company), or the completion of a registered public offering of our stock. In the event of a change in control and if the net proceeds from the exercise of the warrants results in less than $1.5 million in net proceeds to the warrant holder, the warrant will be cancelled and we will pay the warrant holder a cash settlement of up to $1.5 million. We measure the fair value of these warrants using a lattice model incorporating a term to maturity of 0.75 years, a volatility of 70%, and probabilities of settlement values equal to $2.0 million, $1.5 million and $1.5 million of 70%, 20% and 10%, respectively. The fair value of the warrant at issuance and December 31, 2011 was $2.0 million and $1.8 million, respectively.

 

Fair Value Option and Fair Value Measurements

 

We have the option to account for certain financial instruments and certain other items at fair value. Under this guidance, unrealized gains and losses on items for which the fair value option has been elected are reported in the statement of operations each reporting period. We elected to account for the subordinated convertible notes and attached warrants using the fair value option. As a result of electing this option, we record our subordinated convertible notes and attached warrants at fair value in order to measure this liability at fair value.

 

The fair value of the subordinated convertible notes and attached warrants was determined by utilizing a probability weighted discounted cash flow analysis. This analysis determined the amount to be paid on the loan in either cash or shares at the occurrence of certain events in which the subordinated convertible notes and attached warrants would be converted into shares of preferred stock, converted into shares of our common stock or repaid to the lender in cash. The probability weighted discounted cash flow analysis utilized assumptions related to the probability of each of the various events occurring and discount rates. We utilized the same scenarios in determining the fair value of this instrument as those scenarios used in determining the fair value of our common stock as discussed above. As the probability of completion of the proposed initial public offering increases or upon completion of the proposed offering, the fair value of this instrument is expected to increase, and the increase could be significant. Upon completion of the proposed offering, the subordinated convertible notes and attached warrants will be converted to common stock and common stock warrants and no future adjustments to fair value will subsequently be required.

 

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Upon the issuance of convertible instruments, including convertible preferred stock and convertible debt, we are required to assess whether there is any intrinsic value in the conversion feature at the commitment date, which is generally the issuance date of each instrument. The difference between the effective conversion price and the fair value of the securities into which the preferred stock or debt is convertible at the commitment date results in a beneficial conversion feature. If the conversion ratio is not fixed at issuance, the beneficial conversion feature will be recognized upon resolution of the contingency. To date, we have not recognized any beneficial conversion features and do not anticipate that we will be required to recognize any contingent beneficial charges related to our outstanding convertible preferred stock and convertible debt.

 

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 goodwill; and (2) on an event-driven basis for all long-lived assets (including 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.

 

Our Canadian segment is the only reporting unit with goodwill, which totaled approximately $22.5 million at December 31, 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. We determined fair values for the Canadian reporting unit using an income approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. We use our internal forecast to estimate future cash flows which require assumptions related to the continuation of current cellulosic biofuel mandates promulgated by the Energy Independence and Security Act of 2007, or RFS2, future biorefinery plant deployment, sales of pretreatment equipment by our Canadian segment, operating expenditures, working capital levels and other factors. Actual results may differ from those assumed in our forecasts. We derive our discount rate using a capital asset pricing model and analyzing published rates for industries relevant to our reporting unit to estimate the cost of equity financing. We used a 25% discount rate which we believe is commensurate with the risks and uncertainty inherent in the reporting unit and in our internally developed forecasts. We completed step 1 of the goodwill impairment analysis and, we concluded that as of December 31, 2011, the fair value of the reporting unit exceeded the carrying value by approximately 20% and no indications of impairment were identified. Our estimates of fair value are sensitive to changes in the assumptions used in our valuation analyses and, as a result, actual performance in the near and longer-term could be different from these expectations and assumptions. These differences could be caused by events such as strategic decisions made by our customer base in response to economic and competitive conditions and the impact of economic, political, and other factors, such as any modifications or curtailments of cellulosic biofuel mandates under RFS2. If our future actual results are significantly lower than our current operating results or our estimates and assumptions used to calculate fair value are materially different, the value determined using the discounted cash flow analysis could result in a lower value. A significant decrease in value could result in a fair value lower than carrying value, which could result in impairment of our remaining goodwill. While we believe we have made reasonable estimates and assumptions used to calculate the fair value of the reporting units and other intangible assets, it is possible a material change could occur, which may ultimately result in the recording of a non-cash impairment charge.

 

We assess impairment of long-lived assets, such as intangible assets and property and equipment, 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

 

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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.

 

During 2008, 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 only certain of the accumulated costs had value to a similar planned facility in Michigan. Due to delays in funding and changes in the proposed facility in Michigan, as well as ongoing uncertainty with respect to the Michigan facility during 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 impairments were identified in 2010 and 2011.

 

Other factors may affect the carrying value of certain of our long term assets such as changes in the financial and operating performance of Xylitol Canada, Inc., or Xylitol, an equity method investment in which we hold a 30% interest. If the quoted price of the Xylitol common stock were to decrease significantly or remain below its carrying value for a period that is considered other-than-temporary or should Xylitol experience unexpected future financial or operational difficulties or be required to raise additional funds at less than the current market price of its stock, we could be required to record an impairment charge which might be significant. The carrying value of our investment in Xylitol totaled $4.2 million at December 31, 2011 and the estimated fair value totaled $6.7 million, based on the quoted stock price of Xylitol common stock on December 31, 2011.

 

Results of Operations

 

Comparison of Years Ended December 31, 2009, 2010 and 2011

 

Revenues

 

Our total revenues for the years ended December 31, 2009, 2010 and 2011 consisted of the following (in thousands):

 

    For the Years Ended
December 31,
    Change for the Years Ended
December 31, 2011 and  2010
    Change for the Years Ended
December 31, 2010 and 2009
 
    2009     2010     2011     $ Change     % Change     $ Change     % Change  

Pretreatment equipment sales and services

  $ —        $ 1,466      $ 686      $ (780     -53   $ 1,466        N/A   

Government grants and awards

    8,436        13,276        9,951        (3,325     -25     4,840        57

Other service arrangements

    —          750        100        (650     -87     750        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total revenues

  $ 8,436      $ 15,492      $ 10,737      $ (4,755     -31   $ 7,056        84
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

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2011 as compared to 2010

 

The $4.8 million decrease in our total revenues in the year ended December 31, 2011 as compared to the same period in 2010 was primarily attributable to a $3.3 million decrease in government grants and awards, a $0.8 million decrease in pretreatment equipment sales and services, and a $0.7 million decrease under other service arrangements. The decrease in government grants and awards was largely due to the completion of one project and resulting decreases in qualifying research and development expenses that are reimbursed under the arrangement with the DOE. The decrease in pretreatment equipment sales and services resulted primarily from the lack of new contracts for pretreatment equipment during 2011. In addition, one customer, for whom we completed delivery on the contract in early 2011, represented 100% of the revenues recognized during 2010 and 74% of the revenues recognized in 2011.

 

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 pretreatment equipment sales and services, a $4.8 million increase in government grants and awards, and a $0.8 million increase in other service arrangements, specifically revenues from one commercial research and development agreement. The increase in pretreatment equipment sales and services was a result of our acquisition of SBI in August 2010, and the sales of pretreatment equipment from Mascoma Canada. The increase in government grant and award 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.

 

Costs and Operating Expenses

 

Our total costs and operating expenses for the years ended December 31, 2009, 2010 and 2011 consisted of the following (in thousands):

 

    For the Years Ended December 31,     Change for the Years Ended
December 31, 2011 and 2010
    Change for the Years Ended
December 31, 2010 and  2009
 
        2009             2010             2011           $ Change         % Change         $ Change         % Change    

Cost of pretreatment equipment sales and services

  $ —        $ 1,120      $ 490      $ (630     -56   $ 1,120        N/A   

Amortization of acquired intangible assets

    —          513        1,540        1,027        >100     513        N/A   

Research and development

    28,270        26,539        27,191        652        2     (1,731     -6

Selling general and administrative

    5,059        9,699        15,373        5,674        59     4,640        92

Loss on asset disposals and lease abandonment

    9,213        —          —          —          N/A        (9,213     -100
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total costs and operating expenses

  $ 42,542      $ 37,871      $ 44,594      $ 6,723        18   $ (4,671     -11
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

Cost of Pretreatment Equipment Sales and Services

 

2011 as compared to 2010

 

Our cost of pretreatment equipment sales and services were $0.5 million and $1.1 million, or 71% and 76% of net pretreatment equipment sales and services, during the years ended December 31, 2011 and 2010 respectively. These amounts were comprised of manufacturing costs associated with fiber preparation and pretreatment equipment at Mascoma Canada.

 

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2010 as compared to 2009

 

Our cost of pretreatment equipment sales and services were $1.1 million, or 76% of net pretreatment equipment sales and services, during the year ended December 31, 2010, which were comprised of manufacturing costs associated with fiber preparation and pretreatment equipment at Mascoma Canada. We did not derive any revenue or costs from pretreatment equipment sales and services 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.

 

Amortization of Acquired Intangible Assets

 

2011 as compared to 2010

 

Total amortization of acquired intangible assets incurred in the year ended December 31, 2011 increased by $1.0 million, or greater than 100%, from the year ended December 31, 2010. The increase was due primarily to a full year of amortization of the intangible assets in 2011 compared to a partial year of amortization in the prior year. Amortization of intangible assets began in September 2010 as a result of the acquisition of SBI.

 

2010 as compared to 2009

 

We began amortization of acquired intangible assets as a result of the acquisition of SBI and accordingly, incurred $0.5 million in amortization expense during for the year ended December 31, 2010 compared to none during the year ended December 31, 2009.

 

Research and Development Expenses

 

2011 as compared to 2010

 

Total research and development expenses incurred in the year ended December 31, 2011 increased by $0.7 million, or 2%, from the year ended December 31, 2010. The increase was primarily due to an increase of $2.4 million in compensation, benefits and other personnel related costs largely offset by reduced materials, supplies and other costs. The increase in compensation and benefit costs was principally related to additional costs of $1.0 million associated with a full year of Mascoma Canada employees during 2011 versus a partial year in 2010 combined with a $1.4 million increase in stock-based compensation expense. This increase was offset by a $1.7 million decrease in other research and development expenses, principally related to $1.8 million decrease in non-capitalized equipment and other supplies expenses at our demonstration facility in Rome, New York. We expect research and development expense will increase as we develop our next-generation MGT products, adapt our CBP technology to convert new feedstocks, such as Brazilian sugarcane bagasse, and produce new end-products such as renewable chemicals.

 

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.

 

Selling, General and Administrative Expenses

 

2011 as compared to 2010

 

Total selling, general and administrative expenses incurred in the year ended December 31, 2011 increased by $5.7 million, or 59%, from the year ended December 31, 2010. The increase was due primarily to an increase of $4.4 million in compensation, benefits and other personnel related costs and an increase of $1.3 million related

 

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primarily to increased legal fees associated with intellectual property and contractual matters and other professional service fees. The increase of $4.4 million was principally related to $3.0 million additional stock-based compensation expense associated primarily with additional stock option grants to executive management. We expect selling, general and administrative expense will increase as we incur additional general and administrative costs associated with being a public company and as we increase selling and marketing activities related to our MGT line of products.

 

2010 as compared to 2009

 

Total selling, general and administrative expenses incurred in the year ended December 31, 2010 increased by $4.6 million, or 92%, from the year ended December 31, 2009. The increase was due primarily to an increase of $3.6 million in legal fees and other costs related to the acquisition of SBI, combined with an increase of $1.0 million in stock compensation expense principally related to the hiring of a new chief executive officer.

 

Loss on Asset Disposals and Lease Abandonment Expense

 

Loss on asset disposals and lease abandonment expenses were $9.2 million in 2009 and were not material in 2010 or 2011. These changes were due primarily to exiting two separate leases related to office and laboratory space in Boston and Woburn, Massachusetts and entering 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 31, 2009, 2010 and 2011 consisted of the following (in thousands):

 

     For the Years Ended
December 31,
    Change for the Years Ended
December 31, 2011 and  2010
    Change for the Years Ended
December 31, 2010 and  2009
 
     2009     2010     2011     $ Change     % Change     $ Change     % Change  

Interest income

   $ 152      $ 62      $ 36      $ (26     -42   $ (90     -59

Interest expense and other financing costs

     (1,518     (3,469     (7,325     (3,856     > 100     (1,951     > 100
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Other Income (Expense)

   $ (1,366   $ (3,407   $ (7,289   $ (3,882     > 100   $ (2,041     > 100
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

Interest Expense and Other Financing Costs

 

2011 as compared to 2010

 

Our interest expense and other financing costs are comprised of interest expense incurred in connection with our long-term debt, changes in the fair value of our debt and equity instruments issued and/or carried at fair value, foreign currency transaction gain or loss, and other financing costs. Interest expense and other financing costs incurred in the year ended December 31, 2011 increased by $3.9 million from the year ended December 31, 2010 primarily due to a $3.2 million charge recorded as other financing costs which related to subordinated convertible notes and attached warrants issued in August and September 2011 and which represented the amount by which the fair value of these instruments exceeded original proceeds. We also incurred $1.4 million in increased financing costs during 2011 as compared to 2010 associated with the recording of changes in the fair value of the warrant liability. These increases were offset by $1.3 million less expense associated with warrants granted in connection with the issuance of convertible notes and long term debt.

 

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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 greater than 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.

 

Liquidity and Capital Resources

 

From our inception in 2005 through December 31, 2011, we have funded our operations primarily through $115.3 million in proceeds from the sale of preferred equity securities, $16.9 million in proceeds from the sale of convertible notes, $20.0 million in borrowings under our secured debt financing arrangements, and $38.6 million in revenue comprised primarily of government grants and awards. As of December 31, 2011, our cash and cash equivalents totaled $11.4 million. Approximately $1.8 million of our total cash and cash equivalents as of December 31, 2011 is included in Frontier Renewable Resources, LLC, or Frontier, a partnership we formed in December 2008 with J.M. Longyear, L.L.C., to finance our planned hardwood CBP facility in Kinross, Michigan. In addition, we have $0.3 million of restricted cash primarily related to certain awards and letters of credit to secure certain purchase commitments. As of December 31, 2011, we had total long-term debt, inclusive of the current portion and subordinated convertible notes and attached warrants, of $20.5 million.

 

On August 5, 2011, August 15, 2011 and September 1, 2011, we issued unsecured subordinated convertible notes and attached warrants for aggregate proceeds of $6.9 million. In addition, accounts payable totaling $0.5 million were converted to unsecured subordinated convertible notes and attached warrants. The subordinated convertible notes bear interest at 8% annually. The subordinated convertible notes and accrued interest are required to be repaid five years after the respective dates they were issued, if not earlier converted.

 

In January 2011, we issued 1.3 million shares of our Series D preferred stock for proceeds of $5.0 million and warrants to purchase an aggregate of 1.3 million shares of our Series D preferred stock at an exercise price of $3.75 per share to an affiliate of Valero. In August 2011, that affiliate of Valero exercised this warrant for 1.3 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, will be sufficient to fund our current operations until at least December 2012. 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.

 

We expect to scale up cellulosic ethanol production capacity in a capital-efficient manner by entering into agreements with collaborators, obtaining grants and awards from government entities and securing debt financing to fund capital expenditures necessary in building production capacity. For example, our first planned commercial-scale CBP facility to convert hardwood pulpwood to cellulosic ethanol will be built, operated and majority-owned by Valero in Kinross, Michigan. Based on external engineering estimates, we expect the cost to construct, commission and start up this facility will be approximately $232 million. This amount reflects certain up-front infrastructure costs that enable us to expand this facility in the future to a 40 million gallons per year facility. As a result of these infrastructure investments and economies of scale, we believe the expansion from a 20 million gallons per year facility to a 40 million gallons per year facility will cost approximately an additional

 

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$147.0 million. Therefore, the aggregate capital cost of the Kinross facility at 40 million gallons per year is approximately $380 million. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. Based on current cost estimates, the 20 million gallons per year facility will be fully financed by Valero in addition to grants and awards from the DOE and the State of Michigan. Pursuant to the terms of our agreements, we expect to receive a development reimbursement amount, royalties for a specified period of time and a minority ownership interest in the Kinross project. We expect to contribute our proprietary CBP technology, supply the necessary organisms, and provide engineering and other technical support. We are also responsible for contributing grants and awards that we have already received. Depending on the specifics of each future facility and discussions with collaborators, 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 under which we borrowed $10.0 million. 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, subject to certain conditions, on or before December 31, 2011. All borrowings under this amended loan and security agreement are secured by a first lien on all of our assets. 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. The loan and security agreement does not impose any ratios or financial covenants on us. We did not draw the other $10.0 million under the amended facility.

 

Cash Flows

 

    Years Ended December 31,  

(in thousands)

      2009             2010               2011        

Cash flows used in operating activities

  $ (21,530   $ (14,344   $ (19,784

Cash flows (used in) provided by investing activities

    (18,265     7,253        2,861   

Cash flows provided by financing activities

    11,859        5,984        21,599   

 

Years Ended December 31, 2009, 2010 and 2011

 

Cash Flows from Operating Activities

 

During the year ended December 31, 2011, our use of cash in operating activities was $19.8 million, which was due principally to our net loss of $41.6 million, adjusted for the following:

 

   

a decrease of $2.9 million in deferred government grants and awards, primarily as a result of continuing recognition of grant proceeds received from NYSERDA;

 

   

non-cash operating items of $23.5 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 $1.9 million in accounts receivable; and

 

 

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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 statements of operations.

 

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 statements 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 statements of operations.

 

Cash Flows from Investing Activities

 

Cash provided by investing activities was $2.9 million in 2011, which was due primarily to $12.8 million in proceeds from the sale or maturity of short-term investments, a $1.5 million decrease in restricted cash primarily related to the Alberta grant, partially offset by $7.6 million related to the purchase of short-term investments and $3.8 million of capital expenditures. These capital expenditures consisted primarily of hardwood CBP facility development costs, laboratory equipment purchases and leasehold improvements in our laboratories.

 

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, leasehold improvements in our laboratories and hardwood CBP facility development costs.

 

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.

 

 

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Cash Flows from Financing Activities

 

Cash provided by financing activities was $21.6 million in 2011, which was due primarily to $16.8 million in proceeds from the issuance of long-term and subordinated convertible debt, $9.9 million in net proceeds from issuance of preferred stock, partially offset by $3.5 million in principal payments on our debt obligations and $1.6 million in payments of deferred offering costs associated with this offering.

 

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 and award revenue, partially offset by $2.6 million in principal payments on our debt obligations.

 

Contractual Obligations and Commitments

 

The following is a summary of our contractual obligations and commitments as of December 31, 2011 (in thousands).

 

     Total      2012      2013      2014      2015      2016 and
Thereafter
 

Secured long-term debt, including current portion

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

Subordinated convertible notes

     7,354         —           —           —           —           7,354   

Operating leases

     8,856         1,994         1,166         1,134         1,013         3,549   

Cash interest payments on long-term debt and convertible notes

     5,246         819         489         471      

 

—  

  

     3,467   

Research and development Dartmouth & Purdue

     1,942         1,092         850         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,398       $ 7,637       $ 6,568       $ 3,810       $ 1,013       $ 14,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 worldwide, royalty bearing license on any other inventions arising from the research program. In December 2009, we 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 statements of operations.

 

In December 2008, we and Longyear, formed Frontier to develop and operate an integrated commercial-scale cellulosic ethanol production facility in the State of Michigan. At December 31, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%. At any time between the second and third anniversaries of the date that the board of directors of Frontier determines that Frontier is ready to commence actual development of the site in Kinross, Michigan, 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. To date, Longyear has not contributed any assets to Frontier. 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 within temporary equity as redeemable noncontrolling interest.

 

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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.

 

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 December 31, 2011. Actual results may differ materially.

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our outstanding debt obligations.

 

As of December 31, 2011, our outstanding debt was fixed-rate debt and totaled $20.5 million. If interest rates increased or decreased by 100 basis points related to the outstanding amounts as of December 31, 2011, the impact would not be material.

 

Foreign Currency Risk

 

All of our current revenues from pretreatment equipment sales and services 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, including some component of cost of revenues, in currencies other than the U.S. dollar in relation to 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 statements of operations and consolidated statements of cash flows, and no such hedging contracts are outstanding as of December 31, 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 are initially targeting the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with collaborators 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 multiple 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. According to the United States Energy Information Association, or EIA, ethanol is the primary renewable fuel consumed in the United States and is primarily used as an oxygenate to gasoline. According to the EIA, approximately 130 billion gallons of gasoline were sold in the United States in 2011. In addition, according to the RFA, approximately 13.9 billion gallons of ethanol were sold in the United States in 2011 and ethanol replaced the need for approximately 485 million barrels of oil in the United States on an energy equivalent basis. We believe that the ability to create fuel from 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. According to the RFA, in 2011, there were 209 ethanol plants in the United States producing approximately 13.9 billion gallons of ethanol and ethanol exports hit a record high of over 1 billion gallons. According to the U.S. Department of Energy, or the DOE, 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 3.4 billion gallons in 2004 to approximately 13.9 billion gallons in 2011, which represented a compound annual growth rate of over 22%. We believe that 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

 

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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. According to the DOE, many flexible-fuel vehicles can accept a mixture of up to 85 percent ethanol, or E85, or up to 85 percent methanol, and 15 percent gasoline by volume. According to the DOE, 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 U.S. fuel stock has increased in the past several years, which we believe 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. According to the DOE, 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 U.S. 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. According to the State Energy Conservation Office of Texas, or SECO, 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, according to the EIA, to allow it to burn more cleanly and to reduce ozone-forming compounds and carbon monoxide emissions. According to the California Air Resources Board, 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 generally removed from the nation’s motor fuel supply due to public health and environmental concerns and state bans. According to the EPA, 25 states have issued full or partial bans on the use of MTBE. According to SECO, 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, and the refining industry has all but abandoned the use of MTBE, making ethanol the current 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 $42.4 billion to U.S. GDP in 2011 and was responsible for 401,600 direct and indirect jobs and $29.9 billion in household 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 we expect corn 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. We believe that 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, according to the Energy Independence and Security Act of 2007, or EISA, second generation biofuels provide the additional advantage of offering significantly (at least 50%) lower lifecycle GHG emissions relative to gasoline and corn-based ethanol.

 

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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.

 

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 Environmental Protection Agency, or 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 (which was subsequently revised to 6.5 million gallons), increasing to 16 billion gallons by 2022.

 

In December 2011, the EPA finalized the mandated volumes for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2012, as required under RFS. Although the total renewable fuel target, set at 15.2 billion ethanol equivalent gallons, and the advanced biofuel target of 2.0 billion ethanol equivalent gallons, match the targets (in actual volumes) set under the EISA in 2007, the cellulosic biofuel standard is set at 10.45 million ethanol equivalent gallons, which is equal to 8.65 million actual gallons of cellulosic biofuel, a much lower target than the 500 million actual gallons required in 2012 as mandated under the EISA in 2007.

 

The size of the potential renewable fuel market for cellulosic biofuel in 2022 cannot be accurately predicted. The current rule under RFS2 indicates a 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 current RFS2 mandate in 2022. We expect that a significant portion of the shortfall will be due to a shortfall in cellulosic biofuels.

 

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Mandated Renewable Fuels Production under RFS2

 

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Source: EPA

 

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 United States for the preceding twelve months. For 2012, waiver credits are priced at $0.78 per gallon.

 

We believe that 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, we believe that 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.

 

Expiration of Volumetric Ethanol Excise Tax Credit

 

Prior to December 31, 2011, the Volumetric Ethanol Excise Tax Credit, or VEETC, commonly referred to as the Blender’s Credit, provided blenders and marketers of fuel with a federal tax credit of $0.45 on each gallon of ethanol blended with their gasoline; corn-based ethanol qualified for this tax credit. In addition, in connection with the Blender’s Credit, a 2.5 percent ad valorem tax and a tariff of $0.54 per gallon were imposed on imports of ethanol from all countries

 

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except Caribbean Basin Initiative countries. The credit, the tax and the tariff all expired on December 31, 2011. As a result, 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 renewable basis, and meets the fuel and fuel additive registration requirements of the 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 growing market for biofuels with a total of 528 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. We expect this to be achieved through the widespread use of E5, a gasoline blend with 5% ethanol by volume. According to Statistics Canada, in 2010, gasoline consumption in Canada was approximately 11.1 billion gallons. To meet the 5% requirement, we expect Canada to be a net importer of ethanol until domestic supply becomes available. As the Canadian supply of cellulosic ethanol increases, we expect 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 collaborators to convert abundant and low-cost hardwood pulpwood biomass feedstocks into cellulosic ethanol. According to management belief and knowledge, 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.

 

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We believe that 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, feedstocks that we believe can be grown on marginal lands not suitable for other crops. We believe that 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 DOE, 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 DOE. According to that report, current removals from United States forestlands are about 320 million dry tons annually, which is estimated to be well below net annual forest growth. Additionally, in 2006, forest growth net of harvesting, land clearing and mortality is estimated to have exceeded removals by 71%. We estimate that the amount of forest biomass available varies with price, and we expect it to grow over time. According to the DOE and 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

 

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Hardwood Feedstock

 

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

 

United States Biomass Resources (Forest Residues)

 

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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. According to the American Hardwood Export Council there was a 15% increase in growing stock between 1997 and 2007 despite strong growth in demand for hardwoods during this period. U.S. Forest Service forecasts indicate that further increases of 15-20% are expected in the hardwood growing stock inventory through 2030. According to the American Hardwood Export Council, 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-food 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 bioengineered 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 are initially targeting the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product. We are also working with collaborators to develop and construct commercial-scale facilities to convert hardwood feedstocks to cellulosic ethanol. In December 2011, we entered into definitive agreements with Valero Energy Corporation, or Valero, an international manufacturer and marketer of ethanol and other transportation fuels, to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan, based on our proprietary CBP technology. We believe the Kinross facility and future 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. We have also produced propanol from glucose at our demonstration facility in Rome, New York, and plan to continue 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 multiple 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 December 31, 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 227 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 bioengineered MGT yeast product that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. Our initial MGT product is currently available for commercial use. 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 for us. We have targeted 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 in this market. Certain by-products of the corn ethanol conversion process are used as animal feed and are therefore subject to regulatory review by the U.S. Food and Drug Administration, or the FDA. Our MGT products are bioengineered and are considered to be processing aids in the production of animal feed. See the section entitled “—Regulatory Matters” for more information about the regulations applicable to our MGT products.

 

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Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production. We believe that our initial MGT product will reduce the enzyme costs of corn ethanol production by approximately $0.01 to $0.02 per gallon, based on laboratory test runs and management estimates of total enzyme costs between $0.03 to $0.04 per gallon of corn ethanol. As a result, we believe that this product will create significant and immediate value to corn ethanol producers, which according to the Renewable Fuels Association, or the RFA, collectively produced approximately 13.9 billion gallons of corn ethanol in the United States in 2011. 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. In pilot-scale test runs by ICM, Inc., or ICM, the leading provider of engineering services to the ethanol industry, we have demonstrated ethanol yield improvements of up to 3.4% with the next generation of our MGT product and we expect further ethanol yield improvements through additional research and development efforts. We expect the anticipated improvements in ethanol yield to be driven by technology improvements and as a result, we do not anticipate any potential margin losses when the production process is performed on a commercial scale.

 

We expect commercial sales of our initial MGT product to begin in the first quarter of 2012. As part of our commercialization efforts, several leading corn ethanol producers have initiated testing and performance validation of our initial MGT product for commercial use. Following testing and performance validation, we intend to enter into commercial arrangements, which may include long-term agreements, with these and other corn ethanol producers that enable us to receive a significant portion of the incremental margin generated by our products. In November 2011, we entered into a commercial agreement with Valero that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. According to the RFA, Valero’s total production volume represented approximately 8.1% of total U.S. ethanol capacity in 2011. In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand Inc., or Lallemand, a global developer, producer and marketer of yeast, bacteria and related products, for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. We have also entered into a definitive three-year collaboration agreement with ICM to provide certain testing and technical support services at our customers’ facilities during the launch of each of the initial generations of our MGT products. We believe our definitive, long-term agreements with recognized partners and our first-of-a-kind MGT yeast product will enable us to rapidly grow our MGT business.

 

The second stage of our commercialization strategy is to work with our collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. We have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in the next 3 to 6 months and we expect the facility to begin operations in mid-2014. Based on current cost estimates, we believe this facility will be fully financed by Valero in addition to grants and awards from the DOE and the State of Michigan. Pursuant to the terms of our agreements, we expect to receive a development reimbursement amount, royalties for a specified period of time and an ownership interest in the project in exchange for providing our proprietary CBP technology, grant and award funding, organism supply, engineering and additional support. Valero will construct and operate the facility and receive a controlling ownership interest in the facility. Valero will also market the ethanol produced at the facility. The agreements provide Valero with an option to increase the capacity of this facility. We have also developed a framework to partner with Valero on a non-exclusive basis to construct additional cellulosic ethanol facilities beyond our planned Kinross facility. 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.

 

 

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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, or BDT, of hardwood. In a laboratory setting we have achieved ethanol conversion yields of 71 gallons per BDT of hardwood and we are working to continue to improve conversion yields. Based on management expectations for additional technology improvements, some of which have been developed and are currently being tested, at our planned hardwood CBP facility in Kinross, Michigan, we expect to achieve hardwood to ethanol conversion yields of 83 gallons per BDT of hardwood, with unsubsidized cash operating costs of approximately $1.77 per gallon. These unsubsidized cash operating costs consist of feedstock costs, enzyme costs, raw material costs (e.g., organism nutrients), processing costs (e.g., electricity and water) and other costs (e.g., denaturant, labor, maintenance and overhead). We expect the improvements in our cash operating costs from our demonstration facility in Rome, New York, to our planned Kinross facility, operating at 20 million gallons per year, to be driven entirely by anticipated improvements in yield and enzyme reduction. Our expected unsubsidized cash operating costs do not take into account potential cost reductions from further process improvements or operating efficiencies. See section entitled “—Our Strategy—Convert Hardwood Pulpwood into Cellulosic Ethanol on a Commercial Scale” for more information on operating costs. These estimates assume a hardwood feedstock cost of $66 per BDT of hardwood logs and are based on a 20 million gallons per year facility. Over the next several years we are targeting further reductions in our unsubsidized cash operating costs, and ethanol yields of 93 gallons per BDT of hardwood, based on increases in process efficiencies, economies of scale and ongoing improvements in enzyme expression and metabolic engineering in our microorganisms.

 

We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility to start within 12 to 24 months. 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, in our demonstration facility in Rome, New York, we have converted glucose to propanol, and in a laboratory setting, we have converted glucose to fatty acids. Using standardized industrial processes, these chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements. We expect to continue to develop potential end-products other than propanol and fatty acids.

 

Our Operating History

 

We have a limited operating history. Through December 31, 2011, we generated revenues primarily from government grants and awards and sales 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. We have incurred substantial net losses since our inception and as of December 31, 2011, we had an accumulated deficit of $164.8 million. Our stockholders’ deficit, recurring net losses and history of negative cash flow 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, 2011 with respect to this uncertainty.

 

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.

 

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First Generation Ethanol

 

According to the DOE, 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 3.4 billion gallons in 2004 to approximately 13.9 billion gallons in 2011, which represented a compound annual growth rate of over 22% for that period, and ethanol exports in 2011 hit a record high of over 1 billion gallons. According to the RFA, as of 2011, there were 209 ethanol plants in the United States. We believe this large and established industry presents a compelling market for our drop-in MGT yeast product. Prior to December 31, 2011, the Volumetric Ethanol Excise Tax Credit, or VEETC, commonly referred to as the Blender’s Credit, provided blenders and marketers of fuel with a federal tax credit of $0.45 on each gallon of ethanol blended with their gasoline; corn-based ethanol qualified for this credit. In addition, in connection with the Blender’s Credit, a 2.5 percent ad valorem tax and a tariff of $0.54 per gallon was imposed on imports of ethanol from all countries except Caribbean Basin Initiative countries. The credit, the tax and the tariff all expired on December 31, 2011. As a result, 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.

 

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 we expect corn 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, including advanced biofuels and cellulosic 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. Under RFS2, 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. Under RFS2, 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. According to the U.S. Department of Agriculture, or USDA, 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.

 

In December 2011, the EPA finalized the mandated volumes for cellulosic biofuel, advanced biofuel, and total renewable fuel for 2012, as required under RFS. Although the total renewable fuel target, set at 15.2 billion ethanol equivalent gallons, and the advanced biofuel target of 2.0 billion ethanol equivalent gallons, match the targets (in actual volumes) set under the EISA in 2007, the cellulosic biofuel standard is set at 10.45 million ethanol equivalent gallons, which is equal to 8.65 million actual gallons of cellulosic biofuel, a much lower target than the 500 million actual gallons required in 2012 as mandated under the EISA in 2007.

 

The size of the potential renewable fuel market for cellulosic biofuel in 2022 cannot be accurately predicted. The current rule under RFS2 indicates a 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

 

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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 current RFS2 mandate in 2022. We expect that a significant portion of the shortfall will be due to a shortfall in cellulosic biofuels.

 

Mandated Renewable Fuels Production under RFS2

 

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Source: EPA

 

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 at our demonstration facility in Rome, New York, which can be converted into ethylene and propylene, respectively. Propylene is a high-value chemical primarily used as a solvent, cleaning product and chemical intermediate in multiple applications and end-markets. We have also begun laboratory tests to use our CBP technology to develop an organism that converts acetic acid, which is currently a waste product of our hardwood to ethanol conversion process, to propanol. If successful, we believe we would, in a single process, be able to produce a valuable co-product by utilizing a waste product and, because acetic acid is an inhibitor to our current conversion process, also increase ethanol yields.

 

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. As a result, we believe that the validation and adoption of a particular technology by independent third parties are critical.

 

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Comprehensive, Integrated Process. We believe 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. We believe 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, according to the DOE, 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, according to the Agricultural Resource Marketing Center. We expect that future growth in this industry will come from non-food feedstocks. We believe that 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:

 

   

Independent review of the performance of our initial and next-generation MGT yeast products by ICM;

 

   

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;

 

   

Evaluation of our hardwood CBP technology by independent engineers at the DOE in connection with a project-related review of our readiness to enter the construction phase as further described in the section entitled “—Our Key Relationships—Government Grants and Awards—DOE”;

 

   

Previous 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;

 

 

   

Confirmation of the technical viability of our MGT 1.0 yeast product and the viability of our hardwood CBP technology, based on an assessment of the core technology, its yield, and its scale-up plan, by Nexant, Inc., a leading technology consulting firm to the energy industry; and

 

   

Extensive review of our technology by our partners as part of their due diligence process prior to entering into commercial arrangements with us.

 

   

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-

 

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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. In addition to ethanol, we have also demonstrated our ability to use our technology to produce high-value chemicals such as propanol and fatty acids, which we believe will further expand our market opportunity.

 

   

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 have collaborated, and intend to continue 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. In furtherance of this business model, we have entered into definitive agreements with Valero relating to the development of a first-of-its-kind cellulosic ethanol facility in Kinross, Michigan. We have also developed a framework to partner with Valero on a non-exclusive basis to construct additional cellulosic ethanol facilities beyond our planned Kinross facility. We believe this 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 bioengineered MGT yeast product while also working with Valero and other collaborators 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 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 bioengineered yeast product that can be used by corn ethanol producers as a drop-in substitute for conventional fermenting yeast. We intend to market this product to the 209 corn ethanol plants that produced approximately 13.9 billion gallons of ethanol in the United States in 2011. We believe our initial MGT yeast product is capable of significantly improving the economics for corn ethanol producers and will generate near-term revenue for us and requires negligible capital expenditures. In pilot-scale test runs by ICM, we have demonstrated ethanol yield improvements of up to 3.4% with the next generation of our MGT product and we expect further ethanol yield improvements through additional research and development efforts. We expect the anticipated improvements in ethanol yield to be driven by technology improvements and as a result, we do not anticipate any potential margin losses when the production process is performed on a commercial scale. 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. The second stage of our commercialization strategy is to work with collaborators to develop and construct commercial-scale facilities to convert abundant and low-cost hardwood pulpwood to cellulosic ethanol. 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 feedstocks. Our hardwood CBP commercialization strategy is “capital-light,” in that rather than build and operate the hardwood CBP facilities directly, we have collaborated, and intend to continue 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 have entered into definitive agreements with Valero to develop a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. We anticipate construction of this facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility 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 facility in Kinross, Michigan, we are using state and federal government grants and awards in addition to equity funding from Valero, and expect to also utilize both government grants and awards and equity funding from strategic partners for Drayton Valley, Alberta. For future facilities we expect to rely primarily on equity and debt 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 gallons 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/Bone Dry Short Ton of Hardwood

LOGO         LOGO

 

(1)   The operating cost of $3.00 for 2009 is based on a hardwood to ethanol conversion yield of 52 gallons per BDT. The operating cost of $2.13 for 2010 is based on a hardwood to ethanol conversion yield of 67 gallons per BDT. The current operating cost of $2.00 is based on a hardwood to ethanol conversion yield of 71 gallons per BDT. The yields for 2009 and 2010 and our current yields have been demonstrated in pilot production runs at our 200,000 gallons per year 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 BDT, 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 BDT of hardwood logs (as well as an additional $7 per BDT to convert the hardwood logs to hardwood chips) and estimated operating expenses for a 20 million gallons per year facility. None of the operating costs includes depreciation or cost of financing the facility nor do they include any revenues from co-product sales.

 

(2)   Our estimated unsubsidized operating cost of $1.77 for our planned 20 million gallons per year facility in Kinross, Michigan, is based on our current operating costs at our 200,000 gallons per year demonstration facility in Rome, New York, as adjusted for economies of scale and regional differences in raw materials, labor and other costs. Set forth below is a detailed break-down of management’s estimates:
     $/
gal
 

Feedstock costs

     0.87   

Enzyme costs

     0.10   

Raw material costs (e.g., organism nutrients)

     0.14   

Processing costs (e.g., electricity and water)

     0.14   

Other costs (e.g., denaturant, labor, maintenance and overhead)

     0.52   
  

 

 

 
     1.77   

 

We expect the improvements in our cash operating costs from our demonstration facility in Rome, New York, to our planned Kinross facility, operating at 20 million gallons per year, to be driven entirely by anticipated improvements in yield and enzyme reduction. Our expected unsubsidized cash operating costs do not take into account potential cost reductions from further process improvements or operating efficiencies.

 

   

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 according to the Electronic Journal of Biotechnology, 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

 

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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 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. We believe that 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 bioengineered 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 bioengineered 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 generations 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 209 corn ethanol plants that produced approximately 13.9 billion gallons of ethanol in the United States in 2011. We believe this compelling value proposition and our definitive agreements with recognized partners will drive rapid adoption of our MGT product among first generation ethanol producers.

 

We expect commercial sales of our initial MGT product to begin in the first quarter of 2012. As part of our commercialization efforts, several leading corn ethanol producers have initiated testing and performance validation of our initial MGT product for commercial use. Following testing and performance validation, we intend to enter into commercial arrangements, which may include long-term agreements, with these and other corn ethanol producers that enable us to receive a significant portion of the incremental margin generated by our products. In November 2011, we entered into a commercial agreement with Valero that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. According to the RFA, Valero’s total production volume represented

 

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approximately 8.1% of total U.S. ethanol capacity in 2011. In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. 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 have also entered into a three-year collaboration agreement with ICM to provide certain testing and technical support services at our customers’ facilities during the launch of each of the initial generations 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 previously engaged ICM to review the technical readiness of our initial MGT yeast product for commercialization. During this review process, ICM ran our initial MGT yeast product through a simulated ethanol fermentation process in an ICM-designed facility. The results of ICM’s evaluation demonstrated the technical readiness of our initial MGT product. Going forward, we expect ICM’s role will be to assist in the initial commercialization of our MGT products, which will include pilot testing in its research and pilot plant facility in St. Joseph, Missouri, and direct technical support from ICM personnel in the initial rollout to commercial facilities. ICM is also currently in the process of reviewing our next generation MGT product.

 

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

 

   

MGT 1.0: Our initial commercial product, MGT 1.0, is planned for commercial demonstration and launch in the first quarter of 2012. MGT 1.0 will be a first-of-a-kind product – an advanced yeast that we believe will provide significant value to ethanol producers by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. We believe that MGT 1.0 will reduce the enzyme costs of corn ethanol production by approximately $0.01 to $0.02 per gallon, based on laboratory test runs and management estimates of total enzyme costs between $0.03 to $0.04 per gallon of corn ethanol. MGT 1.0 can be used as a direct replacement and has production cost similar to yeasts currently used in corn 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 improving the overall conversion of starch to ethanol, which will enable ethanol producers to increase the amount of ethanol produced, with no changes in the amount of feedstock utilized, no productivity losses, and no significant changes to their current operations. In pilot-scale test runs by ICM, we have demonstrated ethanol yield improvements of up to 3.4% with MGT 1.1 and we expect further ethanol yield improvements through additional research and development efforts. 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 and are therefore subject to regulatory review by the FDA. Our MGT products are bioengineered and are considered to be processing aids in the production of animal feed. See the section entitled “—Regulatory Matters” for more information about the regulations applicable to our MGT products.

 

Our Hardwood CBP Technology

 

We have also used our CBP technology to convert hardwood feedstock into cellulosic ethanol. By 2022, RFS2 currently 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 currently mandates the use of 16 billion gallons of cellulosic biofuels, which are a subset of advanced biofuels that produce at least

 

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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, according to the RFA.

 

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.

 

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

 

Our first commercial-scale facility to convert hardwood pulpwood to cellulosic ethanol will be built, operated and majority-owned by Valero. In December 2011, we entered into a definitive joint venture agreement and a definitive contribution agreement with Valero for a first-of-its-kind 20 million gallons per year cellulosic ethanol facility in Kinross, Michigan. Based on external engineering estimates, we expect the cost to construct, commission and start-up this facility will be approximately $232 million. This amount reflects certain up-front infrastructure costs that enable us to expand this facility in the future to a 40 million gallons per year facility. As a result of these infrastructure investments and economies of scale, we believe the expansion from a 20 million gallons per year facility to a 40 million gallons per year facility will cost approximately an additional $147 million. Therefore, the aggregate capital cost of the Kinross facility at 40 million gallons per year would be approximately $380 million, or approximately $9.50 per gallon of annual ethanol production capacity. However, there can be no assurance that an expansion from a 20 million gallons per year facility to a 40 million gallons per year facility will occur.

 

We anticipate construction of the 20 million gallons per year facility to start in 3 to 6 months and we expect the facility to begin operations in mid-2014. Based on current cost estimates, the 20 million gallons per year facility will be fully financed by Valero in combination with grants and awards from the DOE and the State of Michigan. Pursuant to the terms of our agreements, we expect to receive a development reimbursement amount, royalties for a specified period of time and a minority ownership interest in the Kinross project. We expect to contribute our proprietary CBP technology, supply the necessary organisms, and provide engineering and other

 

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technical support. We are also responsible for contributing grants and awards that we have already received. Valero will construct and operate the facility and receive a controlling ownership interest in the facility. Valero will also market the ethanol produced at the facility.

 

Our participation in this project will be through Frontier Renewable Resources, LLC, or Frontier, a partnership we formed in December 2008 with J.M. Longyear, L.L.C., or Longyear, a Michigan limited liability company that operates a number of natural resource-based businesses in Michigan, Minnesota and Canada, including timber, mineral and real estate interests. We have a 75% ownership interest in Frontier and Longyear owns the remaining 25%. See “Our Key Relationships—Commercial Arrangements Related to Hardwood CBP—Longyear” for additional information related to this partnership. We are currently working with Valero to finalize ancillary agreements relating to construction, enzyme supply, feedstock and off-take. The joint venture agreement provides Valero with an option to increase the capacity of this facility and the initial construction at the Kinross project will include infrastructure to accommodate this larger capacity facility. The arrangement also establishes a framework for partnering with Valero on additional cellulosic ethanol facilities beyond the Kinross project.

 

We expect that our next hardwood CBP facility will be built in Drayton Valley, Alberta. We anticipate construction of this facility to start within 12 to 24 months. The hardwood CBP facility in Drayton Valley, Alberta, is expected to be a 20 million gallons per year facility that will produce ethanol, as well as co-products 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. See “Our Key Relationships—Government Grants and Awards—Alberta” for additional information related to this grant and award. Under this arrangement, Alberta will provide up to $0.8 million to be used to assess the feasibility of this project. The planned Drayton Valley, Alberta, facility is in the design phase and, as a result, estimates of construction costs and the timing of completion have not yet been established. We are in the process of securing third party and additional government financing, as well as long-term feedstock and off-take agreements from potential collaborators.

 

We intend to build on our experience at our initial facilities and replicate this model by partnering to build additional commercial facilities near other large sources of hardwood biomass. We have identified additional potential development sites in the Great Lakes region and Ontario and 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 conversion into ethanol of 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, we have used our CBP technology to convert glucose to propanol at our demonstration facility in Rome, New York, and convert glucose to fatty acids in a laboratory setting. Using standardized industrial processes, these chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements. We expect to continue to develop potential end-products other than propanol and fatty acids. 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

 

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technology through the development of microorganisms to convert sugarcane bagasse and cane trash into ethanol, which are, according to the Electronic Journal of Biotechnology, abundant and low-cost feedstocks in Brazil. 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, sugarcane 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. We have entered into a memorandum of understanding with a leading Brazilian bioenergy producer to establish commercial scale production of second generation sugar cane ethanol in Brazil, utilizing our CBP technology and the partner’s infrastructure and commercial capabilities. We and our partner have been selected by the Brazilian National Development Bank and the Brazilian Innovation Agency to receive funding to jointly adapt our proprietary technology to the conversion of sugarcane bagasse and cane trash into ethanol and other specialty products.

 

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.

 

Our Key Relationships

 

Commercial Arrangements Related to MGT Yeast Products

 

Lallemand

 

In December 2011, we entered into a five-year agreement with a subsidiary of Lallemand for the manufacturing and distribution of our initial MGT product, and for joint sales and marketing activities. We expect to sell our line of MGT products to corn ethanol producers under commercial arrangements that enable us to receive a significant portion of the incremental margin generated by our products. We will receive a portion of the net sales of our initial MGT product based on customers’ cost savings and Lallemand will receive a portion based on the market price of conventional yeast, as well as ongoing incentive payments based on sales performance. We will also receive a technology license fee from Lallemand. In connection with this agreement with Lallemand, we have granted to Lallemand an exclusive, non-royalty-bearing license related to the production, sale and distribution of our initial MGT product in North America. We will own all rights to all intellectual property developed under the agreement relating to the modified yeast and improvements thereto and remain responsible for the development and regulatory approval process. We and Lallemand will be jointly responsible for sales and marketing and technical support, while Lallemand will be solely responsible for all manufacturing, supply, and packaging. The agreement may be terminated if, among other things, the terminating party determines that its performance is no longer commercially viable. In addition, we may terminate if

 

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Lallemand is unable to supply our initial MGT product for 120 days, and in such case Lallemand is obligated to assist us in transferring to an alternate supplier.

 

ICM

 

In October 2011, we entered into a collaboration agreement with ICM to develop and commercialize our MGT yeast products. Under this agreement, ICM will conduct application research and development activities of our yeast strains, as well as assist with transitioning the first three customer plants to our CBP technology for each of our initial MGT product and our next MGT product. We will provide organism development and laboratory applications work, as well as on-site technical support for piloting and engineering efforts as required. At the outset, we and ICM will collaborate to develop a joint-launch plan containing milestones for the development and commercialization of our MGT yeast products. We expect initial milestones to relate to the successful adoption of our MGT product at specified customer plant locations within a set period of time. For each of our initial MGT product and our next MGT product, we will pay ICM a share of fees paid by certain customers for our MGT yeast products. We will also pay ICM a service fee for review work previously conducted with our initial MGT yeast product. This agreement lasts for three years and automatically renews for successive one-year terms.

 

Valero

 

We have entered into a commercial agreement with Valero that provides terms and pricing for any purchases by Valero of our initial MGT product at its dry mill corn ethanol facilities, subject to testing and performance validation. This agreement expires on the date 42 months following the date of the successful deployment by the first Valero facility of commercial use of our initial MGT product. The pricing for our initial MGT product is based on the market price for the yeast our product replaces as well as an additional amount based on cost savings created by our product, in particular, on the cost of the enzymes that Valero no longer has to purchase as a result of transitioning to our product. We expect that the adoption of initial MGT product will be followed by a phased transition to our next MGT product as soon as commercially practicable.

 

Commercial Arrangements Related to Hardwood CBP

 

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. We have a 75% ownership interest in Frontier and Longyear owns the remaining 25%. We have the right to appoint four directors to Frontier’s board of directors and Longyear may appoint one director to the board of directors. 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 anniversaries of the date that the board of directors of Frontier determines that Frontier is ready to commence actual development of the site in Kinross, Michigan, 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

 

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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.

 

Valero

 

In December 2011, pursuant to the terms of a joint venture agreement, Frontier and Diamond Alternative Energy, LLC, an affiliate of Valero, or Diamond, formed Kinross Cellulosic Ethanol LLC, or Kinross Cellulosic, to develop and operate our planned hardwood CBP facility in Kinross, Michigan. In this agreement, we, through Frontier, agreed to contribute grant and award proceeds from the DOE and the State of Michigan, a license to use our proprietary CBP technology, and the organisms needed to operate the Kinross facility. In addition, in connection with the joint venture agreement, we entered into a contribution agreement with JML Heirs LLC, the parent entity of Longyear, in which Longyear agreed to contribute land on behalf of Frontier for construction of the facility and Frontier agreed to contribute certain other rights under licenses, permits, approvals, plans and other items acquired or developed by Frontier. Diamond will contribute the additional capital required beyond the grant and award proceeds to develop the Kinross facility, including a development reimbursement amount payable to Frontier and additional amounts required for cost overruns. Valero may terminate our arrangements or delay its capital contributions due to changes in RFS2 legislation, construction costs for the Kinross facility exceeding a specified amount, failure to obtain necessary approvals to construct or operate the Kinross facility, failure in the performance of our technology that prohibits construction or operation of the Kinross facility, or our failure to contribute a specified amount of grant and award funding. In connection with the closing of these transactions, we have negotiated and agreed in principle on a form of warrant purchase agreement with Diamond. Once this agreement is executed, we plan to issue to Diamond an initial warrant exercisable for up to 3,164,557 shares of our common stock at an exercise price of $3.16 per share, and within 30 days after the achievement of certain milestones (or immediately upon a change of control transaction provided certain conditions are met) we will issue to Diamond a subsequent warrant exercisable for up to 5,333,333 shares of our common stock at an exercise price of $3.75 per share. Unless earlier exercised, the initial warrant will terminate on June 30, 2012 and the subsequent warrant will terminate on the earlier of five years from its date of issuance or the consummation of a change of control transaction.

 

The respective ownership interests of Kinross Cellulosic to be held by Frontier and Valero will depend on the final cost of the facility and aggregate grant and award proceeds contributed by us; however, based on grant and award amounts we expect to receive and capital expenditure requirements, we anticipate that through Frontier we will hold an approximately 20% interest in the net cash flow from the facility after Valero has been reimbursed for its capital invested to develop the facility. If additional capital is needed for the development, operation or expansion of the facility, Frontier has the right, but not the obligation, to contribute up to 20% of such additional capital in order to avoid dilution of its interest in the net cash flow from the facility. As majority owner, Valero will be the manager of Kinross Cellulosic with authority to manage the business of Kinross Cellulosic, subject to certain Frontier approval rights over select major decisions. Under the terms of the Kinross Cellulosic transaction, affiliates of Valero will be engaged to perform construction management services for development of the Kinross facility, operate the Kinross facility, and market the ethanol produced at the Kinross facility. Agreements related to the construction and operation of the Kinross facility and the marketing of the off-take, have not yet been executed.

 

In connection with the closing of these transactions, we have negotiated and agreed in principle on the form of technology license and supply agreement pursuant to which we would license to Kinross Cellulosic certain intellectual property owned or licensed by us for the use of our proprietary CBP process for the production of cellulosic ethanol at the Kinross facility. This license would be exclusive to Valero within a 150 mile radius of the Kinross facility subject to certain limited exceptions. We would receive a license fee consisting of equity in Kinross Cellulosic for the initial 20 million gallons per year of capacity. Valero would have the option to expand

 

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the capacity of this facility to 80 million gallons per year, subject to the payment of an additional cash license fee for each additional 20 million gallons per year of capacity. Based on the applicable ethanol yield achieved, royalties would be payable for the initial 20 million gallons per year of capacity for a specified period after start-up as well as for any expanded capacity for an additional specified period. We also expect to provide certain start-up technical support for so long as the agreement is in effect and would have ongoing obligations to provide the project with certain improvements to our technology. If our technology platform does not meet the applicable minimum performance requirements designed to measure the commercial viability of our proprietary CBP process, which include satisfying certain ethanol yields, fuel production rates and CBP fermentation cycle times among others, we would forfeit up to one-half of the applicable license fee corresponding to the capacity tested. In addition, we would deposit a stock of our organism in an escrow account, and Valero would have the right to access and use the organism in the event that we became unable or unwilling to continue to supply it to Valero. Valero would have the ability to terminate the license agreement at any time after its tenth anniversary, after which Valero may continue to use our proprietary process, but would no longer receive access to improvements to the process or future enhancements of our yeast organism. If Valero determines that the Kinross, Michigan site is not economical, it may transfer the license to another site (subject to any rights granted previously by us) in North America.

 

These payments and contributions related to the Valero collaboration are represented in the following graphic:

 

LOGO

 

Government Grants and Awards

 

DOE

 

In October 2007, we entered into a cooperative agreement with the DOE for the development of an organism for the conversion of lignocellulose to ethanol. Under this award, 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 December 31, 2011, we were in material compliance with the terms of this award. As of December 31, 2011, we have received $4.2 million in proceeds from the DOE under this award and we do not expect significant additional revenues, if any, in the future related to this award.

 

In September 2008, we entered into a cooperative agreement with the DOE, or the 2008 award, 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 December 31, 2011, we have received approximately $19.5 million under this award. Under this award, the DOE initially provided us with up to approximately $20.0 million, payable in phases and dependent on the results of each phase. As of December 31, 2011, we were in material compliance with the terms of this award and we expect to continue to advance our research and development activities consistent with the terms and requirements of 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.

 

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In September 2011, we received an award modification of the 2008 award. This modification extended the period of performance under the award to April 2014, and the DOE will, subject to review and approval of cost sharing commitments, provide up to an additional $80.0 million towards this project. Of this $80.0 million award, $33.0 million has been obligated by the DOE, $22.0 million is expected to be obligated during the 2012 budget cycle and $25.0 million is expected to be obligated during the 2013 budget cycle. Under this arrangement with the DOE, we are obligated to grant access to information, including allowing site visits, to the DOE for purposes of oversight, as well as to permit a private, independent engineering firm to evaluate the progress of our project and provide timely and accurate reports to the DOE. These awards include cost-sharing arrangements associated with the award, under which the federal government will contribute to the costs of the project, while the balance of the costs will be funded by other sources. As described above, we have entered into an agreement with Valero for the balance of the funding for the Kinross project based on current cost estimates.

 

In connection with receiving an amendment to the 2008 award, the DOE completed a critical decision review process with respect to our planned CBP facility in Kinross, Michigan. As part of this review process, the DOE contracted an independent engineer to analyze and evaluate our technology and plans for the Kinross facility. As a result of the review, including the analysis and evaluation of the independent engineer, the DOE determined that we were ready to enter budget period 2, which corresponds to the construction phase, for the Kinross facility.

 

On December 22, 2011, the Sierra Club and an individual residing near our planned hardwood CBP facility in Kinross, Michigan, filed a complaint, which was amended on December 31, 2011, against the DOE in the United States District Court for the Western District of Michigan in the case of Larry Klein and Sierra Club v. United States Department of Energy, or the Sierra Club litigation. The Sierra Club litigation challenges the DOE’s issuance of a “finding of no significant impact”, or FONSI, with respect to our planned hardwood CBP facility in Kinross, Michigan, under the National Environmental Policy Act, or NEPA, and the Administrative Procedure Act, or the APA. NEPA requires federal agencies to consider the environmental impacts of activities they perform, fund, or permit, as well as alternatives to those activities and ways to mitigate or lessen those impacts. Under NEPA, unless such actions are categorically excluded from NEPA review, federal agencies must prepare an environmental assessment to determine whether the proposed action will have a significant effect on the quality of the environment. If the agency determines that the action will not have a significant effect on the environment, it issues a FONSI, and the project can move forward; if the agency finds to the contrary, it must then prepare an environmental impact statement, detailing the environmental impacts, alternatives, and mitigation measures. The plaintiffs allege that the DOE violated NEPA and the APA by failing to adequately disclose and analyze the environmental impacts of our planned hardwood CBP facility, in its environmental assessment, by issuing the FONSI with respect to our planned hardwood CBP facility without requiring an environmental impact statement under NEPA, by failing to analyze an adequate range of alternatives to our planned hardwood CBP facility in its environmental assessment, by deferring specifics regarding mitigation measures to a future time in the environmental assessment and by failing to prepare a supplemental environmental assessment to reflect changes in circumstances which allegedly took place after the original environmental assessment was completed, such as our collaboration with Valero and the potential for expansion of our planned hardwood CBP facility’s capacity to up to 80 million gallons per year. The plaintiffs seek relief through a variety of remedies, including judicial declaration that the DOE failed to comply with NEPA and the APA, and an injunction to prevent the DOE from undertaking any activities related to our planned hardwood CBP facility until the DOE has complied with NEPA and the APA.

 

Unless and until enjoined by a court, the DOE may continue to fund the project, although the DOE can decide to stay its funding of the project until a decision has been reached in the Sierra Club litigation. At present, the DOE has continued to make funds available to the project pursuant to our cooperative agreement.

 

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

 

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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 $6.9 million to fund our portion of the project. As of December 31, 2011, we have received $6.4 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 U.S. 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 December 31, 2011, we have received $12.1 million from MSF. In January 2012, we received the remaining $7.9 million from MSF. As of December 31, 2011, our consolidated balance sheet includes approximately $1.8 million of cash and cash equivalents and restricted cash that are held by Frontier and which are intended to be used for construction of our planned hardwood CBP facility in Kinross, Michigan. 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 December 31, 2011, we have received $13.8 million in proceeds from NYSERDA.

 

Alberta

 

In March 2010, we entered into a Biorefining Commercialization and Market Development Program Grant Agreement with Alberta in connection with receiving financial assistance for the development of our planned commercial cellulosic ethanol facility in Drayton Valley, Alberta. Under this arrangement, Alberta will provide up to $0.8 million to be used to assess the feasibility of 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 bioengineered yeast and bacteria to convert cellulosic biomass into high-value end-products in a single step that combines hydrolysis and fermentation.

 

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.

 

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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 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.

 

 

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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 larger and more mature patent portfolios 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. We believe that the principal methods of competition and competitive differentiation in the ethanol industry are price and product effectiveness, particularly as it relates to the overall cost of producing ethanol.

 

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 S.A., BP, p.l.c., DuPont Danisco Cellulosic Ethanol LLC, KL Energy Corporation 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. We believe that the principal methods of competition and competitive differentiation in the renewable fuels industry are price and product performance, including manufacturing yield.

 

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 $28.3 million, $26.5 million and $27.2 million for the years ended December 31, 2009, 2010 and 2011, respectively, and we anticipate that our research and development expense will increase for the foreseeable future as we adapt our CBP technology to convert new feedstocks, such as Brazilian sugarcane bagasse, and produce new end-products, such as renewable chemicals.

 

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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 whom plays 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 award 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 gallons 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 U.S. Patent and Trademark Office and foreign patent offices.

 

As of December 31, 2011, 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 approximately 55 of these patent families. More specifically, as of December 31, 2011, we owned approximately 47 pending U.S. patent applications (including 11 provisional applications), 5 issued foreign patents, 113 pending foreign applications, and 12 Patent Corpora