S-1 1 d231495ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 20, 2011

No. 333-            

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Elevance Renewable Sciences, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   2860   26-1340859

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

2501 W. Davey Road

Woodridge, Illinois 60440

(866) 625-7103

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

K’Lynne Johnson

Chief Executive Officer

Elevance Renewable Sciences, Inc.

2501 W. Davey Road

Woodridge, Illinois 60440

(866) 625-7103

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

 

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

R. Henry Kleeman

Christopher P. Bennett

Kirkland & Ellis LLP

300 North LaSalle

Chicago, Illinois 60654

(312) 862-2000

 

Richard D. Truesdell, Jr.

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 this Registration Statement becomes effective.

 

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, 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 (Check one):

 

Large accelerated filer

 

¨

      Accelerated filer   ¨

Non-accelerated filer

 

þ

   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered    Proposed Maximum
Aggregate
Offering
Price(1)(2)
   Amount of
Registration
Fee(2)

Common Stock, $0.0001 par value per share

   $100,000,000    $11,610

 

 

  (1)   Includes the offering price of shares of common stock that may be sold if the over-allotment option granted by us to the underwriters is exercised.
  (2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

 

 

 

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 this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

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 and sale is not permitted.

 

PROSPECTUS (Subject to completion)

Issued September 20, 2011

 

             Shares

LOGO

COMMON STOCK

 

 

 

Elevance Renewable Sciences, Inc. 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 intend to apply for listing of our common stock on The NASDAQ Global Market under the symbol “ERSI.”

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

 

 

 

PRICE $         A SHARE

 

 

 

      

Price to
Public

    

Underwriting
Discounts

and
Commissions

    

Proceeds to

Elevance,
Before Expenses

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

We have granted the underwriters a 30-day option to purchase up to              additional shares of common stock to cover over-allotments.

 

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 on or about                    , 2011.

 

 

 

MORGAN STANLEY      J.P. MORGAN   JEFFERIES

 

        PIPER JAFFRAY    RAYMOND JAMES     

 

                    , 2011


Table of Contents

TABLE OF CONTENTS

 

Trademarks and Trade Names

     ii   

Prospectus Summary

     1   

Risk Factors

     10   

Forward-Looking Statements

     35   

Market and Industry Data

     36   

Use of Proceeds

     37   

Dividend Policy

     37   

Capitalization

     38   

Dilution

     40   

Selected Historical Consolidated Financial Data

     42   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Business

     65   

Management

     96   
 

 

We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted.

 

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in 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. The information in this prospectus or a free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                    , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

i


Table of Contents

TRADEMARKS AND TRADE NAMES

 

This prospectus includes our trademarks and service marks such as “Elevance,” “Elevance Renewable Sciences” and “NatureWax” which are protected under applicable intellectual property laws and are the property of Elevance Renewable Sciences, Inc. or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.

 

ii


Table of Contents

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. You should read this summary together with the entire prospectus, including the more detailed information regarding our company, the common stock being sold in this offering and our consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. You should carefully consider, among other things, our consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the matters discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus before deciding to invest in our common stock. Some of the statements in this summary constitute forward-looking statements, with respect to which you should review the section of this prospectus entitled “Forward-Looking Statements.” Except where the context otherwise requires or where otherwise indicated, the terms “ERS,” “we,” “us,” “our,” “our company” and “our business” refer to Elevance Renewable Sciences, Inc., together with its consolidated subsidiaries as a combined entity.

 

ELEVANCE RENEWABLE SCIENCES, INC.

 

Company Overview

 

We produce high performance specialty chemicals and intermediate chemicals from renewable natural oils. Our specialty chemicals address a potential market size that we estimate to be $176 billion. We produce these chemicals using our proprietary, low-cost, capital efficient production process based on Nobel Prize-winning innovations in metathesis catalysis. Our process uses a highly efficient and selective metathesis catalyst to break down the complex molecules found in natural oils and recombine the fragments to produce high value chemicals. We are producing our chemicals at commercial scale. Our process can produce these chemicals at lower cost and with lower capital investment than conventional processes positioning us to deliver attractive returns on capital. We are building what we believe will be the world’s largest integrated biorefinery in Gresik, Indonesia, as part of a 50/50 joint venture with Wilmar International Limited, the largest global processor and merchandiser of palm, palm kernel and coconut oils. We plan to begin commercial operations at this facility by the second quarter of 2012. We are also repurposing an existing facility in Natchez, Mississippi into an integrated biorefinery. We expect construction of our first two facilities to cost $165 to $360 per metric tonne ($0.07 to $0.16 per pound) of annual production capacity compared to $920 to $2,300 per metric tonne ($0.42 to $1.04 per pound) of annual production capacity for conventional facilities. We have established strategic partnerships with market leaders to accelerate the commercialization and rapid deployment of our technology.

 

Our specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. We believe these products will be key performance ingredients and building blocks used in large end markets including detergents, lubricants, personal care products, coatings and plastics. Our intermediate chemicals, namely olefins and oleochemicals, can directly replace critical molecules in large, attractive markets. We expect that prevailing market dynamics, such as the desire for new and increasingly demanding performance characteristics, changing regulatory requirements and structural supply shortages will support rapid adoption of our specialty chemicals and market penetration of our intermediate chemicals. We are in discussions with existing partners and potential new customers for long-term purchasing or offtake agreements for the entirety of our projected 2013 production.

 

Our Manufacturing Plan

 

Our products are currently manufactured at commercial scale using tolling facilities, enabling us to validate our target cost of production for our biorefineries. We expect to have three world-scale facilities across three continents by the end of 2014, with combined annual production capacity of approximately one million metric

 

 

1


Table of Contents

tonnes (2.2 billion pounds). We have entered into the 50/50 joint venture (the “Wilmar JV”) with a subsidiary of Wilmar International Limited (“Wilmar”) to build an integrated biorefinery in Gresik, Indonesia (the “Indonesia facility”), our first world-scale biorefinery. The Indonesia facility, at a total construction cost of approximately $30 million, is fully funded and currently under construction. The Indonesia facility will have an annual production capacity of 185,000 metric tonnes (400 million pounds), with an option to expand the annual production capacity to 370,000 metric tonnes (810 million pounds). We plan to be operating a 280,000 metric tonne (610 million pound) biorefinery in Natchez, Mississippi ( the “Mississippi facility”) in the second half of 2013 at a site we have acquired. By the end of 2014, we expect to be operating an additional world-scale facility in South America. We plan to rapidly deploy our technology using a combination of modular facility design and repurposing of or integration into existing industrial sites.

 

Our Product Portfolio

 

Our products will include both specialty chemicals and intermediate chemicals. Our novel di-functional specialty chemicals enable the development of products that are both innovative and high value. Our customers are encouraged by our ability to produce specialty chemicals that allow them to manufacture products with enhanced functional attributes that can be sold at competitive prices. Our intermediate chemicals will be direct replacements for both olefins and oleochemicals. The following chart sets forth our intended product portfolio.

 

LOGO

 

Our Feedstocks

 

Our primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. These natural oils are available in liquid form in industrial quantities from a variety of geographic regions. These characteristics allow for low-cost transportation and storage compared to other renewable feedstocks such as industrial sugars, biomass and waste. Our ability to adjust our inputs in real time allows us to take advantage of changes in feedstock prices and product demand.

 

Our Partnerships

 

Our collaborative business model is designed to accelerate the commercialization and rapid deployment of our technology. We have established strategic partnerships with market leaders in the specialty chemical and intermediate chemical value chains, including: Cargill, Incorporated, one of the world’s largest agribusinesses

 

 

2


Table of Contents

(“Cargill”); Clariant International AG, a leading global specialty chemicals company (“Clariant”); Dow Corning Corporation, a global leader in silicone-based technology and innovation (“Dow Corning”); Royal DSM N.V., a global science-based company (“DSM”); Stepan Company, a leading producer of surfactants (“Stepan”); and Wilmar. These partners provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

 

Our Industry

 

We develop applications that will go into several large segments of the specialty chemical industry. Our primary target markets in the specialty chemical industry include surfactants, lubricants and additives and polymers. In addition, our manufacturing platform will produce two key categories of intermediate chemicals: olefins and oleochemicals.

 

Specialty Chemicals

 

According to Datamonitor, the size of the global specialty chemical industry was approximately $706 billion in 2010. Specialty chemicals are sold based on the additional value their unique and tailored performance characteristics deliver versus intermediate chemicals or commodity chemicals, which must only meet general specifications. As a result, demand for specialty chemicals is generally driven by customer-specific requirements to enable product performance.

 

A number of key challenges currently impact the specialty chemical industry, including the following: (1) demand for improved performance characteristics driven by evolving consumer preferences or changing regulatory requirements; (2) limited availability of certain critical feedstocks and intermediate chemicals; (3) feedstock price levels and volatility; and (4) increasing demand for products made from non-toxic, environmentally friendly and renewable sources.

 

Intermediate Chemicals

 

As the building blocks for most of the finished products in the industry, intermediate chemicals have higher margins per unit than commodity chemical feedstocks. We estimate that the total size of the oleochemical market was $38 billion in 2010. We estimate that the total size of the intermediate olefin market was $7 billion in 2008. This intermediate olefin market, on which we focus our olefin production, consists of higher value olefins, specifically linear alpha olefins (“LAOs”) or linear internal olefins (“LIOs”) with ten or more carbon atoms (“intermediate olefins”).

 

A number of key challenges are affecting the market for intermediate chemicals, including the following: (1) increasing cost, volatility and scarcity of certain key feedstocks leading to uncertain profitability; (2) limited flexibility to produce higher value chemicals without also producing other lower value chemicals given that conventional processes produce a largely fixed product mix; (3) need for new regional supply to meet increasing emerging market demand; and (4) increasing demand for products made from renewable sources.

 

Our Solution

 

Our proprietary catalyst and process technology enables us to produce both unique specialty chemicals with desirable functional attributes previously unavailable in the marketplace, as well as key intermediate chemicals that are in limited supply.

 

Our specialty chemicals provide functional attributes that our customers desire but that have not been commercially available. We believe we will be able to produce these specialty chemicals economically through our biorefineries and to sell them at competitive prices. We expect our product characteristics to drive rapid adoption by customers looking for solutions to their product performance needs.

 

 

3


Table of Contents

Our intermediate chemicals are produced from renewable feedstocks and are direct replacements for olefins and oleochemicals for which demand is growing and supply is constrained. Our ability to use a wide variety of natural oil feedstocks and to produce our intermediate chemicals in several regions can help our customers mitigate input cost volatility and reduce supply concerns.

 

Our Competitive Strengths

 

Our business model benefits from a number of competitive strengths, including the following:

 

   

Proprietary technology. Our proprietary metathesis technology platform is based on Nobel Prize-winning innovations in metathesis catalysis. Our platform enables us to produce high-value specialty chemicals and direct replacement intermediate chemicals that are cost-advantaged compared to those available from conventional production methods.

 

   

High performance products. Our specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. We are currently commercializing products such as fuel additives and personal care products that have enhanced performance features. In addition, we have demonstrated our ability to secure a premium price for certain high performance specialty chemicals.

 

   

Low capital requirements. Our biorefinery design requires less capital per unit of production than conventional technologies because of the following characteristics: (1) fewer major process steps; (2) lower operating temperatures and pressures; (3) limited production of hazardous and toxic by-products; and (4) the ability to integrate our process into existing industrial sites.

 

   

Low operating costs. Conversion using our process achieves lower unit-level production costs than alternative routes to comparable products because of the following characteristics: (1) more direct process, resulting in fewer conversion steps; (2) highly efficient and selective catalyst; (3) feedstock flexibility; and (4) lower operating temperatures and pressures, resulting in greater energy efficiency.

 

   

Established partnerships with industry leaders. We have developed strategic partnerships which provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

 

   

Feedstock flexibility. Our primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. Our ability to adjust our inputs in real time allows us to take advantage of changes in feedstock prices and product demand.

 

   

Large and well-established end markets. Our technology enables us to target a wide variety of end markets. We currently estimate our addressable specialty chemical markets represent $176 billion in annual commercial opportunity.

 

   

Rapid deployment of commercial production. We can rapidly deploy our technology because of: (1) our ability to repurpose or integrate into existing industrial sites; (2) our low capital requirement per unit of capacity; (3) existing and available large markets for our products; and (4) our relatively short engineering, procurement and construction cycle.

 

Our Strategy

 

Our goal is to become the global market leader in the design and production of specialty chemicals. The key elements for accomplishing our goal are:

 

   

Complete rapid deployment of multiple world-scale facilities. We expect to have three world-scale facilities across three continents by the end of 2014, with combined annual production capacity of approximately one million metric tonnes (2.2 billion pounds).

 

 

4


Table of Contents
   

Develop new and existing market partnerships to accelerate growth and maximize profitability. To accelerate growth, we plan to continue cultivating strategic partnerships with industry leaders. These partners provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

 

   

Invest in research and development to enhance product performance characteristics. We intend to leverage our extensive intellectual property portfolio to target unique solutions for customers demanding higher performance chemicals than those offered today. We plan to continue to develop new specialty chemicals with increased functional attributes, such as highly concentrated detergents and lubricants that enable better fuel economy.

 

   

Leverage feedstock flexibility to maximize margins. We continuously monitor the costs of various feedstock alternatives to take advantage of their imperfect price correlations to each other and to our selling prices.

 

Summary Risk Factors

 

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider these risks, including those highlighted in the section entitled “Risk Factors,” before investing in our common stock. Risks relating to our business include, among others, the following:

 

   

we have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability;

 

   

we may be unable to continue our business or may be prevented from operating our business as it is currently conducted if we are unsuccessful in defending against any claims by competitors or others that we or Materia are infringing upon their intellectual property rights;

 

   

if either the Indonesia facility or the Mississippi facility is not completed in a timely manner for any reason, our ability to produce specialty chemicals and intermediate chemicals could be materially adversely affected;

 

   

we lack direct experience operating world-scale commercial biorefineries, and may encounter substantial difficulties operating such biorefineries or expanding our business;

 

   

we may be unable to produce specialty chemicals and intermediate chemicals that meet our customers’ needs or specifications;

 

   

our specialty chemicals may not be accepted by the market; and

 

   

we are dependent on our partners, and our failure to successfully manage these relationships could delay or prevent us from developing and commercializing many of our products and achieving or sustaining profitability.

 

 

 

Corporate Information

 

We were incorporated in the State of Delaware on October 17, 2007, to pursue work started in 2004 in a collaboration between Cargill and Materia, Inc., a leading-edge catalyst technology company (“Materia”). Our corporate headquarters are located at 2501 W. Davey Road, Woodridge, Illinois 60440. Our telephone number is (866) 625-7103. Our website address is www.elevance.com. The information on our website is not deemed, and you should not consider such information, to be part of this prospectus.

 

 

5


Table of Contents

THE OFFERING

 

Common stock offered

  

             shares.

Common stock to be outstanding immediately after this offering

  

             shares.

Option to purchase additional shares

  

             shares.

Use of proceeds

   We estimate that the net proceeds from this offering will be approximately $             million, or approximately $             million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use substantially all of the net proceeds from this offering for general corporate purposes, including funding capital expenditures, research and development, working capital, product development and operating expenses. For additional information, see “Use of Proceeds.”

Risk factors

   Investing in shares of our common stock involves a high degree of risk. For additional information, see “Risk Factors” beginning on page 10 of this prospectus for a discussion of factors you should carefully consider before investing in shares of our common stock.

NASDAQ Global Market symbol

  

“ERSI”

 

Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after this offering:

 

 

   

gives effect to the             -for-             split of our common stock, which was effective                     , 2011 (the “            -for-             stock split”);

 

   

gives effect to the issuance of              shares of our common stock upon the automatic conversion of all of our outstanding shares of preferred stock upon consummation of this offering pursuant to the terms of our Fourth Amended and Restated Certificate of Incorporation (our “certificate of incorporation”);

 

   

gives effect to the issuance of              shares of our common stock to holders of our outstanding preferred stock as a dividend payment pursuant to our certificate of incorporation;

 

   

gives effect to the issuance of              shares of our common stock upon the conversion of each outstanding warrant to purchase shares of our preferred stock into a warrant to purchase shares of our common stock pursuant to the terms of such existing warrant and the exercise thereof (together with the three bullets above, the “IPO Share Adjustments”);

 

   

gives effect to the issuance of              shares of our common stock in this offering;

 

   

excludes (1) 2,310,484 shares of common stock that will be issuable upon the exercise of outstanding stock options as of June 30, 2011 at a weighted average exercise price of $2.13 per share; and (2) an aggregate of              shares of our common stock reserved for future grants under the 2011 Incentive

 

 

6


Table of Contents
 

Compensation Plan (the “2011 Plan”) that we intend to adopt in connection with this offering, which will amend and restate our 2007 Equity Incentive Plan (the “2007 Plan”);

 

   

assumes no exercise by the underwriters of their over-allotment option to purchase up to              additional shares of our common stock from us; and

 

   

assumes the effectiveness of our Fifth Amended and Restated Certificate of Incorporation (the “amended and restated certificate of incorporation”) and amended and restated bylaws, which we will adopt in connection with the consummation of this offering.

 

 

7


Table of Contents

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our financial data as of the dates and for the periods indicated. We have derived the summary consolidated financial data for the fiscal years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements for such fiscal years included elsewhere in this prospectus. We have derived the summary consolidated financial data as of June 30, 2011 and for the six months ended June 30, 2010 and 2011 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary historical and consolidated data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto and other financial data included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited combined financial statements, and in our opinion, include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations for such periods. Operating results for the six months ended June 30, 2010 and 2011 are not necessarily indicative of results for a full year or for any other period.

 

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

Statement of Operations Data:

         

Product sales

  $ 18,913      $ 12,186      $ 20,227      $ 7,719      $ 8,076   

Grants

                  961        528        476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    18,913        12,186        21,188        8,247        8,552   

Operating expenses:

         

Cost of product sales

    14,425        11,860        17,824        6,679        7,263   

Selling, general and administrative

    8,086        8,168        11,356        5,875        8,097   

Research and development

    5,539        7,760        8,896        4,741        4,263   

Intangible asset amortization

    1,506        1,506        1,506        753        753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    29,556        29,294        39,582        18,048        20,376   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,643     (17,108     (18,394     (9,801     (11,824

Gain (loss) on change in fair value of warrants

    1,787        652        (4,506     (1,839     (101,823

Interest expense

           (437     (4,415     (1,803       

Other income, net

    636        56        14        4        117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (8,220     (16,837     (27,301     (13,439     (113,530

Income taxes

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (8,220     (16,837     (27,301     (13,439     (113,530

Less net loss (gain) attributable to the noncontrolling interest

                  10               (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the company

    (8,220     (16,837     (27,291     (13,439     (113,552

Less accretion on Series A and B preferred stock and cumulative dividends on Series B, C and D preferred stock

    (6,689     (6,876     (6,349     (2,923     (6,466
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to our common shareholders

  $ (14,909   $ (23,713   $ (33,640   $ (16,362   $ (120,018
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to our common shareholders, basic and diluted

  $ (99.39   $ (33.08   $ (14.64   $ (7.24   $ (50.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to our common shareholders(1)

         
     

 

 

     

 

 

 

 

  (1)   Gives effect to the IPO Share Adjustments, but not this offering.

 

 

8


Table of Contents
     As of June 30, 2011
     Actual     Pro
Forma(1)
   Pro  Forma
As
Adjusted(2)
     (unaudited)
     (in thousands)

Balance Sheet Data:

       

Cash, cash equivalents and short-term investments

   $ 96,075        

Working capital

     3,565        

Total assets

     146,396        

Total debt

     114        

Preferred stock

     210,731        

Total company shareholder’s deficit

     (188,822     

 

  (1)   Gives effect to the IPO Share Adjustments, but not this offering.
  (2)   Gives effect to the IPO Share Adjustments and this offering.

 

 

9


Table of Contents

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

 

Risks Related to Our Business

 

We have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability.

 

We are an early stage company with a limited operating history and have incurred substantial net losses since our inception, including net losses attributable to our common stockholders of $14.9 million, $23.7 million and $33.6 million for the years ended December 31, 2008, 2009 and 2010, respectively. We expect these losses to continue for a period of time as we continue to invest in research and development, expand our manufacturing capacity and build out our product pipeline. As of June 30, 2011, we had an accumulated deficit of $188.8 million. For the foreseeable future, we expect to incur additional costs and expenses related to the continued development and expansion of our business, including: research and development; construction and operation of the Indonesia facility and the Mississippi facility; and management of operations as a public company. As a result, our annual operating losses will likely increase in 2011. Any assessments you make about our current business and predictions you make about our future success or viability may not be as accurate as they would be if we had a longer operating history.

 

We, along with our development and commercialization partners, will need to be successful developing additional products, producing them in commercial quantities cost effectively and marketing and selling them profitably. We and our partners will also need to obtain any necessary regulatory approvals. If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our business operations. There can be no assurance that we will ever achieve or sustain profitability.

 

We have generated limited revenues from the sale of our products and we face significant challenges to developing our business.

 

To date, we have had only modest sales of several products and have not commenced operations of our biorefineries. If we are not successful in constructing and operating our biorefineries or otherwise increasing our manufacturing capacity, developing products that meet our customers’ specifications and further advancing our existing commercial arrangements with strategic partners, we will be unable to generate meaningful revenues from our products. Consequently, we are subject to the substantial risk of failure facing businesses seeking to develop products based on a new technology. Certain factors that could, alone or in combination, prevent us from successfully commercializing our products include:

 

   

our ability to defend against any claims by competitors or others that we or Materia are infringing upon their intellectual property rights;

 

   

the completion of construction, and successful operation of, the Indonesia facility and the Mississippi facility;

 

   

our ability to develop, commercialize and manufacture new specialty chemicals that meet customer needs and specifications on a cost-effective basis, in a timely manner and in significant volumes;

 

   

our ability to manage our growth;

 

10


Table of Contents
   

our ability to gain market acceptance of our specialty chemicals and to establish and maintain relationships with our customers;

 

   

our ability to reliably secure sufficient volumes of feedstock at commercially viable prices;

 

   

actions of direct or indirect competitors that may seek to enter (or preserve their position in) the markets in which we expect to compete or that may seek to impose or maintain barriers to one or more of those markets;

 

   

our ability to adequately protect our proprietary technologies, including our ability to enforce our intellectual property rights around the world;

 

   

our ability to maintain our exclusive license with Materia;

 

   

our dependence on our feedstock, manufacturing and commercialization partners;

 

   

our reliance on our toll manufacturers;

 

   

our ability to retain key personnel;

 

   

our ability to secure and maintain necessary regulatory approvals for the production, distribution and sale of our products and to comply with applicable laws and regulations; and

 

   

public concerns about the legal, environmental and social ramifications of the use of our feedstocks in light of concerns regarding the diversion of resources from food production and the deforestation of tropical rainforests.

 

We may be unable to continue our business or may be prevented from operating our business as it is currently conducted if we are unsuccessful in defending against any claims by competitors or others that we or Materia are infringing upon their intellectual property rights.

 

The specialty chemical markets in which we operate are subject to litigation regarding patents and other intellectual property rights. In addition, many companies in intellectual property-dependent industries, including the chemical industry, have employed intellectual property litigation as a means to gain an advantage over their competitors. As a result, we may be required to defend against claims of intellectual property infringement that may be asserted by our competitors against us or Materia, from whom we license our proprietary catalyst. If the outcome of any such litigation is adverse to us or Materia, it may affect our ability to compete effectively or may prevent us from operating our business as it is currently conducted. Currently, Materia is defending against a lawsuit filed by Evonik Degussa GmbH (“Evonik Degussa”), in which Evonik Degussa has alleged that Materia has infringed its U.S. patents relating to specific types of catalysts for olefin metathesis chemical reactions. Previously, we were a co-defendant with Materia in such litigation, but were dismissed as a party in connection with entering into the Confidential Settlement Agreement with Mutual Release and Patent License with Evonik Degussa on June 23, 2010 (the “Degussa Settlement Agreement”). The license to certain of its U.S. patents, which Evonik Degussa granted to us pursuant to the Degussa Settlement Agreement, is scheduled to expire on December 31, 2012. We may elect to extend the license for an additional year to December 31, 2013 for $300,000. We currently have no right to extend the license granted to us by Evonik Degussa past December 31, 2013 and may be unsuccessful in any attempt to extend this license beyond December 31, 2013, which may have a material adverse effect on our business, financial condition or results of operations.

 

Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States could divert our management from focusing on business operations or cause us to spend significant amounts of money. Such involvement in litigation has no guarantee of success. Any current and potential intellectual property litigation also could force us to do one or more of the following:

 

   

stop selling, incorporating, manufacturing or using our products that use the intellectual property that is the subject of such litigation, including our proprietary licensed catalyst;

 

11


Table of Contents
   

obtain a license to sell or use the relevant intellectual property from any third party asserting its intellectual property rights (including Evonik Degussa), which license may not be available on commercially reasonable terms, or at all;

 

   

redesign those products or processes that use any allegedly infringing or misappropriated catalyst or technology, which may result in significant cost or delay to us, or which redesign could be technically infeasible; or

 

   

pay damages, including the possibility of treble damages in a patent case, if a court finds us to have willfully infringed certain intellectual property rights.

 

We are aware of a number of patents and patent applications relating to aspects of our technologies or those which we license from Materia filed by, and issued to, third parties, including, but not limited to Evonik Degussa. We cannot assure you that we or Materia will ultimately prevail if any third parties assert intellectual property claims against us or Materia, as applicable, or in the current patent infringement lawsuit recently filed by Evonik Degussa discussed above. If we or Materia do not prevail, such litigation could have a material adverse effect on our business, financial condition or results of operations.

 

If either the Indonesia facility or the Mississippi facility is not completed in a timely manner for any reason, our ability to produce specialty chemicals and intermediate chemicals could be materially adversely affected.

 

Our business plan contemplates bringing significant commercial capacity online over the next few years. We will need to complete construction of the Indonesia facility and the Mississippi facility, in a timely manner in order to commercialize our products in accordance with our business plans.

 

In June 2010, we entered into the Wilmar JV to construct a world-scale biorefinery. The Indonesia facility will be located within Wilmar’s new integrated manufacturing complex now under construction. Construction of the Indonesia facility commenced in November 2010. The Wilmar JV plans to complete construction of the Indonesia facility in the second quarter of 2012. Once construction is complete, we anticipate that the Indonesia facility will have an annual production capacity of 185,000 metric tonnes (400 million pounds), and the Wilmar JV will have the ability to expand annual production capacity to 370,000 metric tonnes (810 million pounds).

 

In June 2011, we acquired a former biodiesel facility, which we intend to repurpose into the Mississippi facility. We have commenced engineering design for the facility and are currently negotiating a related engineering, procurement and construction contract. We are also in discussions with petrochemical and agricultural processors to evaluate partnership and offtake opportunities for the Mississippi facility. Prior to the completion of construction, we will need to complete the design and related plans and secure the requisite permits, licenses and governmental approvals. We expect to begin commercial operations at the Mississippi facility in 2013, with annual production capacity of 280,000 metric tonnes (610 million pounds).

 

We may encounter significant delays, cost overruns, engineering problems, equipment supply constraints or other unexpected difficulties which could cause construction to cost more than we currently anticipate. These increased costs could require that we secure additional funding. Such funds may be unavailable when we need them or on terms that are acceptable to us. Furthermore, we may not be able to obtain the necessary regulatory approvals to complete construction of the biorefineries or operate either the Indonesia facility or the Mississippi facility in accordance with our business forecasts, including those approvals set forth below as further risks.

 

The Indonesia facility and the Mississippi facility may not perform as expected. For example, production rates may vary from our expectations. We may need to install additional equipment to achieve desired specifications, which could delay operations and increase costs. We may encounter these or other operational challenges and may be unable to devise workable and cost effective solutions, which could delay or prevent our ability to provide specialty chemicals or intermediate chemicals to our customers and could have a material adverse effect on our business, financial condition or results of operations.

 

12


Table of Contents

We lack direct experience operating world-scale commercial biorefineries, and may encounter substantial difficulties operating such biorefineries or expanding our business.

 

We have never operated a world-scale commercial biorefinery. We have only completed two commercial-scale toll production runs of specialty chemicals and intermediate chemicals utilizing our proprietary biorefinery technology using palm oil. Our future success depends on our ability to produce commercial quantities of a broad range of our specialty chemicals and intermediate chemicals using a variety of natural oils with our proprietary biorefinery technology. While we have successfully completed demonstration size production runs using soy and other oils, we may not be able to successfully increase the scale of production to commercial quantities using these oils in a timely or economic manner or at all. Accordingly, we may encounter significant difficulties operating a world-scale biorefinery. Even after construction is completed at the Indonesia facility and the Mississippi facility, we will continue producing specialty chemicals and intermediate chemicals through toll manufacturing arrangements. We will need to successfully administer and manage this production while we complete construction of our other facilities and transition production to these new facilities. Additionally, the skills and knowledge gained in operating our pilot facility in Illinois and managing our toll manufacturers may prove insufficient for successful operation of a world-scale biorefinery and we may be required to expend significant time and money to enhance our capabilities in commercial biorefinery operation, which could have a material adverse effect on our business, financial condition or results of operations.

 

We may be unable to produce specialty chemicals and intermediate chemicals that meet our customers’ needs or specifications, which may have a material adverse effect on our business, financial condition or results of operations.

 

A key component of our business strategy is to develop and market our specialty chemicals. We may be unable to produce specialty chemicals that meet customers’ needs or specifications even if we produce specialty chemicals at our targeted rates. If we fail to meet specific product or volume specifications contained in a supply agreement, the customer may have the right to seek an alternate supply of chemicals or to terminate the agreement. A failure to successfully meet the specifications of our potential customers could decrease demand or otherwise significantly hinder market adoption of our products and may have a material adverse effect on our business, financial condition or results of operations.

 

Our intermediate chemicals may fail to meet established product or customer specifications. If one of our intermediate chemicals fails to meet established specifications, our customer may reject the product. We may need to reduce the price of the product in order to find a replacement buyer or to sell it on the spot market, or we may be unable to sell the product. Even if we were able to sell the rejected intermediate chemical for an identical price, our costs may increase if we are required to store the intermediate chemical longer or transport it farther than originally anticipated.

 

Our facilities and process may fail to produce specialty chemicals or intermediate chemicals at the volumes, rates and costs we expect.

 

The facilities we repurpose or construct for chemical production may fail to perform as expected. When we repurpose an existing biorefinery, the equipment and subsystems installed during the repurposing may never operate as planned. Our systems may prove incompatible with the original facility or require additional modification after installation. Similarly, a newly constructed facility may not operate as we expect it to operate. Our proprietary catalyst may perform less efficiently than it did at any of our toll manufacturers or at our pilot facility in Illinois. Contamination of biorefinery equipment may reduce the efficiency of the catalyst and may require us to replace the catalyst more often than expected. Likewise, if we were to experience routine feedstock contamination from contaminants such as peroxide and water, it could reduce the purity of the chemicals that we produce and require us to invest in more costly separation or transesterification processes or equipment. Unexpected problems may force us to cease or delay production and the time and costs involved with such delays may prove prohibitive to commercial operation. Any or all of these risks could prevent us from achieving the production necessary to achieve our target annualized production run rates. Failure to achieve these rates, or

 

13


Table of Contents

achieving them only after significant additional expenditures, may have a material adverse effect on our business, financial condition or results of operations.

 

We have limited experience in structuring arrangements with customers for the purchase of our products and we may not be successful in this essential aspect of our business.

 

Because we currently only sell a limited number of products and have not yet completed development of many planned products, we have limited experience operating in many of our customers’ industries and interacting with the customers that we intend to target. Developing that expertise may take longer than we expect and may require that we expand and improve our sales and marketing infrastructure. These activities could delay our ability to capitalize on the opportunities that our technology and products present, and may prevent us from achieving commercialization of our specialty chemicals. The companies with which we expect to have customer arrangements are generally much larger than we are and have substantially longer operating histories and more experience in our target industries. As a result, we may not be effective in negotiating or managing the terms of our relationships with these companies, which may have a material adverse effect on our business, financial condition and results of operations.

 

Our specialty chemicals may not be accepted by the market.

 

Obtaining market acceptance in the chemical industry is complicated by the fact that many potential chemical industry customers have invested substantial amounts of time and money in developing established production channels. These potential customers generally have well-developed manufacturing processes and arrangements with suppliers of chemical components and may display substantial resistance to changing these processes. Preexisting contractual commitments, unwillingness to invest in new infrastructure, distrust of new production methods and long-standing relationships with current suppliers may all slow market acceptance of our products. To be successful, we must effectively demonstrate the commercial advantages of our specialty chemicals in lieu of other established chemicals. We must also demonstrate our ability to produce specialty chemicals reliably on a commercial scale and be able to sell them at a competitive price, or, we may experience a material adverse effect on our business, financial condition and results of operations.

 

We face substantial competition, which could adversely affect our performance and growth.

 

We face substantial competition in the specialty chemical and intermediate chemical markets. Our products will compete with traditional chemicals, petrochemicals and oleochemicals that serve our targeted markets, as well as products from emerging companies that have targeted the production of substitutes or replacements for existing products. The traditional chemical companies benefit from large, established production capabilities and business relationships. The incumbents’ greater resources and financial strength provide significant competitive advantages that we may not be able to overcome in a timely manner.

 

If any of our competitors succeed in producing competing specialty chemicals or intermediate chemicals more efficiently, in higher volumes or that offer performance superior to our chemicals, our financial performance may suffer. Furthermore, if our competitors have more success marketing their competing products or reach development or supply agreements with major customers or partners, our competitive position may also be harmed.

 

Our ability to compete successfully will depend on our ability to develop proprietary, high-performance products that reach the market in a timely manner and are priced competitively. Some of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. In addition, certain of our competitors may also benefit from local government subsidies and other incentives that are not available to us. As a result, our competitors may be able to develop competing or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological

 

14


Table of Contents

advances or entirely different approaches developed by one or more of our competitors. As more companies develop new intellectual property in our markets, we face the increased possibility of a competitor acquiring patent or other rights that may limit our ability to freely develop and sell our products. In order to secure purchase agreements from certain customers, we may be required to enter into exclusive supply contracts, which could limit our ability to further expand our sales to new customers. Potential customers may be locked into long-term, exclusive agreements with our competitors, which could inhibit our ability to compete for their business.

 

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 obtaining or maintaining profitability.

 

Fluctuations in the availability or price of our feedstocks may affect our cost structure and cause delayed production, reduced output and reduced revenues if the cost or availability of feedstocks or other factors requires us to change feedstocks.

 

Our business is dependent on ready access to feedstocks, which are the largest component of our cost of product sales. We cannot be sure that our suppliers (including Cargill, the current supplier of the majority of our feedstocks) will be able to supply them in sufficient quantities or in a timely manner. A decrease in the availability of feedstocks or an increase in their price, which cannot be offset by an increase in our product selling prices, may have a material adverse effect on our financial condition and operating results. If locally produced feedstocks are unavailable, we may elect to use alternative feedstocks, which may be more expensive to acquire or deliver. General market conditions might also cause increases in feedstock prices, which could increase our production costs. At certain levels, feedstock prices may make our products uneconomical to use and produce, as we may be unable to pass all or any amount of feedstock cost increases on to our customers.

 

We also face risks related to unexpected reductions in feedstock prices. If feedstock prices fall, then the prices that we will be able to charge for our products may similarly fall. Additionally, we will likely have a supply of feedstock which we acquired prior to the reduction in feedstock prices (or products produced with more expensive feedstocks) for a period of time. Until such time as we have depleted our inventory of the more expensive feedstocks and products produced with such inventory, our margins may be reduced when compared to those we would have been able to secure had we used a less expensive feedstock in our production.

 

The price and availability of our feedstocks may be influenced by general economic, market and regulatory factors and may be cyclical or volatile. The supply of feedstocks may be interrupted by growing season disruptions, low crop yields, crop disease, droughts, floods, infestations, natural disasters, farming decisions or governmental policies and subsidies. In particular, weather conditions have historically caused volatility in certain portions of the agricultural industry by causing crop failures or reduced harvests. Excessive rainfall can adversely affect the supply of certain feedstocks. Crop disease and pestilence can adversely affect growth, potentially rendering unusable all or a substantial portion of affected harvests. We cannot predict the future availability of such feedstocks or whether any replacement or substitute feedstocks will be successfully developed at commercial scale. Our product mix differs from feedstock to feedstock, so prices of various feedstocks may prevent us from optimizing our product mix. Inability to obtain feedstocks at commercially viable prices could materially adversely affect our results of operations and financial position and prevent us from obtaining or maintaining profitability.

 

Our current business is dependent on the supply of the appropriate catalyst.

 

At present, the only catalyst that has been proven to be technically viable and cost effective is one that we obtain from Materia. We have a license for this particular catalyst and other technology from Materia that is important to our business. Materia may not comply with all of the terms of the license. We also have a catalyst

 

15


Table of Contents

supply agreement with Materia. Although we are allowed to produce or obtain catalyst from third parties in the event of a breach of the license agreement by Materia, we would need to find, retain and certify (in accordance with the terms of the license agreement) an alternative production source and may not be able to do so quickly, in a cost-effective manner or at all. Any dispute over this license agreement or this supply agreement could, even if successfully resolved, result in significant legal fees and other expenses, diversion of management time and efforts and disruption to our business created by any time between a breach of the license agreement by Materia and our being able to acquire acceptable catalyst from an alternative source. There may also be other technical or economic factors that could disrupt our supply of catalyst, which could have a material adverse effect on our business, financial condition and results of operations.

 

Materia’s catalyst uses ruthenium, which is only available in limited quantities. The limited availability of ruthenium can result in cost volatility.

 

Ruthenium can only be obtained from a limited number of producers in a limited number of geographic sites. If worldwide demand for ruthenium increases, it could take significant time for production of ruthenium to be increased to meet demand. If we are unable to improve the efficiency of our metathesis catalysis process, economically recycle our catalyst, develop alternatives to our ruthenium-based catalyst or if annual ruthenium production does not increase, we will require a material percentage of the annual supply of ruthenium in order to support our annual biorefinery production. As a result, we could experience shortages of or increases in the cost to obtain Materia’s catalyst, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to compete may be adversely affected if we do not obtain adequate intellectual property protection for our proprietary technologies or if we lose some of our intellectual property rights through costly litigation or administrative proceedings.

 

Our success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property covering our technologies and products and potential products in the United States and other countries. We have adopted a strategy of seeking patent protection in the United States and in certain foreign countries with respect to certain of the technologies used in or relating to our products and processes. As such, as of June 30, 2011, we have exclusive license rights to Materia’s portfolio of 85 U.S. Patents, six published U.S. Patent Applications and 47 published Patent Cooperation Treaty (“PCT”) applications, together with the corresponding foreign patents and patent applications. The first of our licensed patents will expire as early as April 3, 2012. When and if issued, patents would expire at the end of their term and any patent would only provide us commercial advantage for a limited period of time, if at all. Our patent applications are directed to our enabling technologies and to our methods and products that support our business in the specialty chemical and intermediate chemical markets. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.

 

A filed patent application does not guarantee a patent will be issued and a patent issuing does not guarantee it will never be invalidated, nor does it give us the right to practice the patented technology or commercialize the patented product. Third parties may have or obtain rights to “blocking patents” that could be used to prevent us from commercializing our products or practicing our technology. The scope and validity of patents and success in prosecuting patent applications involve complex legal and factual questions and, therefore, issuance, coverage and validity cannot be predicted with any certainty. Patents issuing from our filed applications may be challenged, invalidated or circumvented. Moreover, third parties could practice our inventions in secret and in territories in which 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 and we may be unable to prove that such products were made using our inventions. Additional uncertainty may result from the passage of patent reform legislation by the U.S. Congress and from legal precedent as handed down by the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court, as they determine legal issues concerning the scope, validity and construction of patent claims.

 

16


Table of Contents

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 is additional uncertainty as to the validity of any patents that may issue and the potential for blocking patents coming into force at some future date. Accordingly, our currently filed or future patent applications may not result in issued patents, or even if related patents are issued, we cannot predict the scope of the claims that may issue in our and other companies’ patents.

 

The degree of future protection for our proprietary rights is uncertain because: (1) we may not have been the first to make the inventions covered by each of our filed applications; (2) we may not have been the first to file patent applications for these inventions; (3) the proprietary technologies we develop may not be patentable; (4) any patents issued may not be broad enough in scope to provide commercial advantage and prevent circumvention; and (5) competitors and other parties may have or may obtain patent protection that will block our development and commercialization activities. These concerns apply equally to patents we have licensed, which may likewise be challenged, invalidated or circumvented, and the licensed technologies may be obstructed from commercialization by competitors’ “blocking patents.”

 

In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, particularly where, as in our situation, the end products reaching the market generally do not reveal the processes used in their manufacture, and particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. As such, we cannot be certain that the steps we have taken in obtaining intellectual property and other proprietary rights will prevent unauthorized use of our technology. If competitors are able to use our technology without our authorization, our ability to compete effectively could be adversely affected. Moreover, competitors and other parties such as universities may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, the potential competitive advantages provided by our intellectual property may be adversely affected. We may then need to license these competing technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause material harm to our business. Accordingly, litigation may be necessary for us to assert claims of infringement, enforce patents we own or license, protect trade secrets or determine the enforceability, scope, validity and infringement of the intellectual property rights of others.

 

Under the provisions of some of our research, joint development and commercial agreements, ownership of certain intellectual property developed thereunder may be owned jointly by us and our contractual counterparty, or may be owned entirely by our counterparty. In addition, we may be restricted from using such developed intellectual property in certain fields or market areas or may be required to pay royalties to use such developed intellectual property in certain circumstances, either during the term of the applicable agreement or upon certain events of default or termination scenarios. Such provisions may limit our ability to exploit such jointly developed intellectual property in certain fields (or to do so without paying a royalty) and our ability to work with other parties in certain fields and may lead to costly and time-consuming inventorship or ownership disputes.

 

If any other party has filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention and, thus, the right to the patents for these inventions in the United States. Even if successful, an interference may result in loss of certain patent claims, significant legal fees and other expenses, diversion of management time and efforts and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete and may have a material adverse effect on our business, financial condition or results of operations.

 

17


Table of Contents

If we infringe the intellectual property rights of third parties, we might be required to obtain a license, redesign or forgo one or more of our current or future processes or products, rebrand our current or future products or services, pay damages or defend against litigation.

 

Patents that impact our technology may exist or may issue in the future in the United States or other countries. Trademark rights may exist or may come into existence in the United States or other countries which impact the marks that we use with our products and services. If our products, methods, processes, packaging or marketing infringe or are at least asserted to infringe the patents or trademarks of other parties, we could incur substantial costs and we might have to:

 

   

obtain licenses, which might not be available on commercially reasonable terms, if at all;

 

   

abandon an infringing mark, process or product;

 

   

redesign, reformulate or rebrand our products or processes to avoid infringement;

 

   

stop using the mark or the subject matter claimed in the patents held by others;

 

   

pay damages; or

 

   

defend litigation or administrative proceedings, which might be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.

 

Any of these events may have a material adverse effect on our business, financial condition and results of operations.

 

As is commonplace in both the specialty chemical and intermediate chemical industries, some of our directors, employees and consultants are or have been employed at, or associated with, companies and universities that compete with us or have or will develop similar technologies and related intellectual property. While employed at these companies, these employees, directors and consultants may have been exposed to or involved in research and technology similar to the areas of research and technology in which we are engaged. Though we have not received such a complaint, we may be subject to allegations that we or our directors, employees or consultants have inadvertently or otherwise used, misappropriated or disclosed alleged trade secrets or confidential or proprietary information of those companies. Litigation may be necessary to defend against such allegations, and the outcome of any such litigation would be uncertain and could have a material adverse effect on our business, financial condition or results of operations.

 

Under our license with Materia, we must make certain exclusivity payments each year to preserve our license thereunder and any failure to make such payments (or portion thereof) could cause us to lose our rights under the license which would have a material adverse effect on our business.

 

Under our license agreement with Materia, we must make an annual exclusivity payment of $250,000 to Materia during the first five years of the license agreement in order to maintain our exclusive license thereunder. If we fail to make any such payment in accordance with the terms of the license agreement, our exclusive license shall be converted into a non-exclusive license upon one month’s prior notice from Materia. Additionally, commencing January 2013, we must pay a minimum of $8.0 million annually in consideration to Materia as a result of the combination of any work or materials procured under the license agreement, the related catalyst supply agreement and joint development agreement. If we fail to make the $8.0 million minimum annual payment in any such year, we must pay the related shortfall to Materia by February 1 of the following calendar year in order to maintain our exclusive license. If we fail to do so, our exclusive license will be converted into a nonexclusive license. The conversion of our license from an exclusive license to a nonexclusive license may have a material adverse effect on our business, financial condition or results of operations.

 

We are dependent on our partners, and our failure to successfully manage these relationships could delay or prevent us from developing and commercializing many of our products and achieving or sustaining profitability.

 

Our ability to maintain and manage partnerships in our markets is fundamental to the success of our business model. We currently have license agreements, research and development agreements, supply

 

18


Table of Contents

agreements and distribution agreements with various partners. We may have limited or no control over the amount or timing of resources that any collaborator is able or willing to devote to our partnered products or partnership efforts. Any of our partners may fail to perform their obligations as expected. These partners may breach or terminate their agreements with us or otherwise fail to conduct their partnership activities successfully and in a timely manner. Further, our partners may not develop products arising out of our partnership arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of these products. Moreover, disagreements with a partner could develop and any conflict with a partner could reduce our ability to enter into future partnership agreements and negatively impact our relationships with one or more existing partners. If any of these events occur, or if we fail to maintain our agreements with our partners, we may not be able to commercialize our existing and potential products, grow our business or generate sufficient revenues to support our operations. Our partnership opportunities could be harmed if:

 

   

we or our partners do not achieve our research and development objectives under our partnership agreements in a timely manner or at all;

 

   

we develop products and processes or enter into additional partnerships that conflict with the business objectives of our other partners;

 

   

we disagree with our partners as to their rights to intellectual property developed, their research programs or their commercialization activities;

 

   

we are unable to manage multiple simultaneous partnerships;

 

   

our partners become competitors of ours or enter into agreements with our competitors;

 

   

our partners become unable or less willing to expend their resources on research and development or commercialization efforts due to general market conditions, their financial condition or other circumstances beyond our control; or

 

   

consolidation in our target markets limits the number of potential partners.

 

Additionally, our business, financial conditions and results of operations may be materially adversely affected if any of our partners or suppliers undergoes a change of control or were to otherwise assign the rights or obligations under any of our agreements.

 

Our relationship with Wilmar may not prove successful.

 

We have entered into the Wilmar JV for the purpose of constructing and operating the Indonesia facility with annual production capacity of up to 185,000 metric tonnes (400 million pounds) and to engage in certain related activities (including the manufacture of specialty chemicals and intermediate chemicals). Wilmar is the largest global processor and merchandiser of palm, palm kernel and coconut oils. Our ability to generate value from the Wilmar JV will depend, among other things, on our ability to work cooperatively with Wilmar to complete construction on the Indonesia facility and for the production and commercialization of the Wilmar JV’s products. For example, Wilmar is responsible for the construction of the Indonesia facility and may not be able to complete construction on time or on budget. In addition, the agreements governing the Wilmar JV are complex and cover a range of future activities, some of which require definitive agreements to be completed. Disputes may arise between us and Wilmar that could delay the completion of construction of the Indonesia facility and the development, commercialization and sale of the Wilmar JV’s products or cause the dissolution of the Wilmar JV, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, although expansion of the Indonesia facility is part of our expansion plans, the Wilmar JV must exercise its option to increase the Indonesia facility’s annual production capacity and cannot do so without Wilmar’s consent.

 

We may be unable to successfully negotiate final, binding agreements with our partners and customers, which could harm our commercial prospects.

 

We are engaged in negotiations with a number of companies regarding potential contracts for new specialty chemicals and certain intermediate chemicals. However, we may be unable to negotiate final terms in a timely

 

19


Table of Contents

manner, or at all, and there is no guarantee that the terms of any final agreement will be the same or similar to those currently contemplated in our preliminary discussions or as set forth in our existing customer and partnership agreements. Final terms may include less favorable pricing structures or volume commitments, more expensive delivery or purity requirements, reduced contract durations and other adverse changes. Delays in negotiating final contracts could slow our expansion plans, and failure to agree to definitive terms for sales of sufficient volumes of specialty chemicals or intermediate chemicals could prevent us from growing our business. Additionally, we have yet to produce or supply world-scale volumes of specialty chemicals or intermediate chemicals to any customer. If we increase production capacity more slowly than we expect, or if we encounter difficulties in successfully completing biorefinery constructions or asset repurposings, our potential customers, including those with whom we have current letters of intent, may be less willing to negotiate definitive supply agreements, or may demand terms less favorable to us, and together may have a material adverse effect on our business, financial condition or results of operations.

 

Our resources may be strained as we execute our growth and expansion plans.

 

We may face additional operational difficulties as we further expand our production capacity. Integrating the support required by our new locations into our facility in Illinois may prove difficult. Rapid growth, resulting from our operation of, or other involvement with, biorefineries or otherwise, may impose a significant burden on our administrative and operational resources. To effectively manage our growth and execute our expansion plans (including construction of the Indonesia facility and the Mississippi facility), we will need to expand our administrative and operational resources substantially and attract, train, manage and retain qualified management, technicians and other personnel. We may be unable to do so. Failure to meet the operational challenges of developing and managing increased chemical production, or failure to otherwise manage our growth, may have a material adverse effect on our business, financial condition and results of operations.

 

We may not successfully identify or acquire or otherwise gain access to facilities or sites suitable for repurposing or for the construction of new facilities.

 

Our strategy currently includes acquiring and repurposing, either independently or with potential development partners, existing facilities or constructing new facilities to produce large quantities of specialty chemicals and intermediate chemicals for distribution and sale. Other than the Indonesia facility and the Mississippi facility, we may not be able to obtain facilities through acquisition, lease or joint venture or find sites suitable for construction and development. Even if we successfully acquire a facility suitable for efficient repurposing or a site suitable for construction, we may be unable to acquire the rights to either repurpose the existing facility or construct a new facility. The owners of an existing facility or proposed site may reach an agreement with another party, refuse to consider an acquisition, lease or joint venture, or demand more or different consideration than we are willing to provide. Even if the owners of the facility or site are interested in reaching an agreement that grants us access to the facility or site, negotiations may take longer, or cost more, than we expect, and we may never achieve a final agreement. Failure to acquire access to sufficient capacity in a timely manner, or at all, may cause our business performance to suffer and may have a material adverse effect on our business, financial condition or results of operations.

 

When we acquire or construct facilities, we may be unable to repurpose or construct them successfully to produce specialty chemicals and intermediate chemicals, or we may not be able to repurpose or construct them in a timely and cost-effective manner.

 

When we acquire or construct facilities, we may be unable to repurpose or construct them successfully to produce specialty chemicals and intermediate chemicals, or we may be unable to repurpose or construct them in a timely and cost-effective manner. Constructing world-scale production facilities is a complex and lengthy undertaking that requires sophisticated, multi-disciplinary planning and precise execution.

 

20


Table of Contents

Each facility will require individualized engineering and design work. There is no guarantee that we will be able to successfully design a commercially viable facility, or properly complete the construction once the engineering plans are completed. We have never built, through repurposing or otherwise, a world-scale commercial biorefinery. Our estimates of the capital costs that we will need to incur to repurpose or construct a world-scale commercial biorefinery are based upon comparable capital costs for similar industrial manufacturing process units and our own engineering modeling. These estimates may prove to be inaccurate, and each repurposing or new construction project may cost materially more to engineer and build than we currently anticipate. For example, our estimates assume that each biorefinery we construct or repurpose will be performing at full production capacity within six months of completion of construction, and we may need to expend substantial sums to repair underperforming facilities prior to the repurposing. Additionally, for each facility, we will be required to obtain numerous regulatory approvals and permits to repurpose or construct and operate the facility, including complex air and wastewater discharge permits. We may not be able to obtain these approvals and permits in a timely manner, or at all. International, federal, state and local governmental requirements (including environmental, health and safety requirements) may also substantially increase our costs or delay or prevent the completion of a repurposing or construction project. Any such cost increases or delay in or failure to complete our repurposing or construction could have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, the repurposing of acquired facilities or the construction of new facilities will be subject to the risks inherent in the build-out of any manufacturing facility. These include risks of delays and cost overruns as a result of factors (whether caused by us or beyond our control) such as increases in cost of construction materials, shortages of raw materials, poor workmanship, shortages of skilled construction labor, the difficulty or impossibility of obtaining necessary permits or approvals from governmental agencies, injuries sustained by workers on the jobsite, delays in the delivery of equipment and subsystems or the failure of such equipment to perform as expected once delivered. We may also encounter delays and attendant costs associated with requirements to conduct environmental assessment, investigation, remediation or cleanup work in connection with repurposing or constructing our biorefineries, including the Mississippi facility. In addition, we will depend on third-party relationships to expand our production capacity and such third parties may not fulfill their obligations to us under our arrangements with them. Delays, cost overruns or failures in the repurposing or construction process could slow our commercial production of specialty chemicals and intermediate chemicals and harm our performance. Furthermore, with respect to the Indonesia facility, each of these risks is beyond our control since Wilmar is responsible for the construction of the Indonesia facility.

 

We may require substantial additional financing to achieve our goals, and a failure to obtain funding when needed or on acceptable terms could force us to delay, limit, reduce or terminate our development and commercialization efforts.

 

Since our inception, most of our resources have been dedicated towards research and development, as well as demonstrating the effectiveness of our technology. We believe that we will continue to expend substantial resources for the foreseeable future on further developing our technologies and accessing facilities necessary for world-scale production of our specialty chemicals and intermediate chemicals. These expenditures will include costs associated with research and development and constructing the Indonesia facility, the Mississippi facility and our planned third facility. We will also incur costs related to obtaining government and regulatory approvals, acquiring or constructing storage facilities and negotiating partnership and supply agreements for the chemicals we produce. In addition, other unanticipated costs may arise. Because the costs of developing our technology are uncertain, we may not accurately estimate the amounts necessary to successfully commercialize our production.

 

To date, we have funded our operations primarily through private equity offerings and the issuance of convertible debt. We may need additional funds sooner than planned. We may also choose to seek additional capital sooner than required due to favorable market conditions or strategic considerations.

 

21


Table of Contents

Our future capital requirements will depend on many factors, including:

 

   

the timing of, and costs involved in developing our technologies for world-scale production of our specialty chemicals and intermediate chemicals;

 

   

the timing of, and costs involved in, completing construction of the Indonesia facility and the Mississippi facility;

 

   

the timing of, and costs involved in, constructing capacity subsequent to completing construction of the Indonesia facility (including its potential expansion) and the Mississippi facility;

 

   

the cost of operating and maintaining our biorefineries;

 

   

our ability to negotiate agreements for the supply of suitable feedstock to our biorefineries, and the timing and terms of those agreements;

 

   

the timing of, and the costs involved in, developing adequate storage facilities for the chemicals we produce;

 

   

our ability to negotiate supply and partnership agreements for the specialty chemicals and intermediate chemicals we produce, and the timing and terms of those agreements;

 

   

our ability to negotiate sales of specialty chemicals and intermediate chemicals and the timing and terms of those sales;

 

   

our ability to establish and maintain strategic partnerships, licensing or other arrangements and the timing and terms of those arrangements; and

 

   

the cost of preparing, filing, prosecuting, maintaining, defending and enforcing patent, trademark and other intellectual property claims, including litigation costs and the outcome of such litigation.

 

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

 

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If needed funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate:

 

   

our research and development activities;

 

   

our plans to construct new facilities and repurpose existing facilities; or

 

   

our activities in developing storage capacity and negotiating supply and partnership agreements that may be necessary for the commercialization of our chemical production.

 

Such delay, limitation, reduction or termination could materially adversely affect our business, financial condition and results of operations.

 

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.

 

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and licensing arrangements. To the extent that we raise additional capital through the sale or issuance of common or preferred stock, warrants or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. If we raise capital through debt financing, it may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships and licensing agreements with third parties, we may have to relinquish valuable rights to our technologies, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when needed, our business, financial condition and results of operations may be materially adversely affected.

 

22


Table of Contents

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

 

If appropriate opportunities become available, we may acquire businesses, assets, technologies or products to enhance our business in the future. In connection with any future acquisitions, we could:

 

   

issue additional equity securities, which would dilute our current stockholders;

 

   

incur substantial debt; or

 

   

assume significant liabilities.

 

Acquisitions involve numerous risks, including: problems integrating the purchased operations, technologies or products; unanticipated costs and other liabilities; diversion of management’s attention from our core business; adverse effects on existing business relationships with current or prospective partners, customers and suppliers; risks associated with entering markets in which we have no or limited prior experience; and potential loss of key employees. We may be unable 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, and despite the allocation of additional resources the integration might not achieve our objectives. Moreover, the integration process could divert our management’s time and attention from focusing on operating our business, result in a decline in employee morale or 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; record 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 expenses, all of which could harm our operating results and financial condition. 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, financial condition and results of operations may be materially adversely affected.

 

We face risks associated with our international business.

 

Upon completion of the Indonesia facility, significant portions of our operations will be conducted outside of the United States, specifically in Indonesia, and we expect to continue to develop additional, significant foreign operations in the foreseeable future. International business operations are subject to a variety of risks, including:

 

   

changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products or repatriate profits to the United States;

 

   

the imposition of tariffs, trade protection measures and other regulatory requirements;

 

   

the imposition of limitations, or increase of withholding and other taxes, on remittances and other payments by foreign subsidiaries or joint ventures;

 

   

the imposition of limitations on genetically engineered products or processes and the production or sale of those products or processes in foreign countries;

 

   

inability to protect intellectual property;

 

   

currency exchange rate fluctuations;

 

   

uncertainties relating to foreign laws and legal proceedings including tax and exchange control laws and environmental, health and safety laws;

 

   

government subsidies or other incentives that benefit competitors in their local markets that are not available to us;

 

   

economic or political instability in foreign countries;

 

23


Table of Contents
   

difficulties in staffing and managing foreign operations; and

 

   

the need to comply with a variety of U.S. laws applicable to the conduct of overseas operations, including export control laws and the Foreign Corrupt Practices Act.

 

Through the Wilmar JV, we have a substantial investment in Indonesia, a nation that since 1997 has undergone financial crises and devaluation of its currency, outbreaks of political and religious violence and acts of terrorism, changes in national leadership and the secession of East Timor, one of its former provinces. Consequently, the Wilmar JV is subject to substantial economic and political risks. In addition, changes in the national policy toward foreign investors could result in unilateral modification of concessions or contracts, increased taxation, denial of permits or permit renewals or expropriation of assets. Economic or political turmoil in Indonesia could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patents and other proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to enforce our intellectual property rights in such countries may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our reliance on toll manufacturers to produce our products exposes us to risks relating to the price and availability of that toll manufacturing and could adversely affect our business.

 

We currently rely on a small number of toll manufacturers to manufacture all of our specialty chemicals and intermediate chemicals. We expect to continue to use toll manufacturers to a limited extent even after completion of our biorefineries. As we grow and begin commercial operations at our biorefineries, it is possible that there will be periods when the demand for our products exceeds our production capacity, in which case we will need to utilize toll manufacturers. If any of these manufacturers is unable to meet our volume or product specification requirements or if we or any such manufacturer terminates our relationship prematurely, we will need to contract with other suppliers. Toll manufacturers with the desired capacity may not be available when we need their services, they may not possess the operational expertise to meet desired specifications, they may not be willing to dedicate a portion of their production capacity to our products or we may not be able to reach acceptable price and other terms with them for the provision of their production services. Any such delay or inability to contract with other suppliers when and as needed could adversely affect our ability to commercialize our products or could harm our relationships with our customers and partners, which could have a material adverse effect on our business, financial condition and results of operations.

 

Technological innovation may render our products and processes obsolete.

 

Our success will depend on our ability to maintain a competitive position with respect to technological change. Our technologies and products may be rendered obsolete or uneconomical by technological advances, more efficient and cost-effective catalysts or entirely different approaches developed by one or more of our competitors or others, which could have a material adverse effect on our business, financial condition and results of operations.

 

24


Table of Contents

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 protection to protect our confidential and proprietary information and processes. However, trade secrets can be difficult to protect. We have taken physical and electronic measures and have entered into agreements to protect our trade secrets and proprietary information, but these measures and agreements may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not be disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. These agreements may be unenforceable, our proprietary information may be disclosed, third parties may reverse engineer our proprietary catalysts and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection may have a material adverse effect on our business, financial condition or results of operations.

 

We may face substantial delay and cost in obtaining regulatory approvals for the use, manufacture or distribution of our chemicals, which could substantially hinder our ability to commercialize our products.

 

Some of our chemical products and their registration, use, manufacture, processing and distribution are subject to government regulation in our target markets, including pursuant to, in the United States, the Toxic Substances Control Act (the “TSCA”) and, in the European Union, REACH (Registration, Evaluation, Authorisation, and Restriction of Chemical substances). Under the TSCA, before we can manufacture or distribute significant volumes of a chemical, we may need to file a pre-manufacture notice with the U.S. Environmental Protection Agency (the “EPA”) for a review period of up to 90 days excluding extensions. We may not be able to receive approval from the EPA, resulting in delays or significant increases in testing requirements. Under REACH, we are required to register some of our products with the European Chemicals Agency, and this process could cause significant delays or costs. To the extent that other nations, such as Australia, China, Japan, South Korea, Taiwan, the Philippines and other countries also require chemical registration, potential delays similar to those in the United States or Europe may delay our entry into these markets as well. We are in various stages of testing and regulatory approvals with the specialty chemicals that we currently develop at our pilot facility in Illinois. While the United States and Europe are the major targeted markets, other regulatory requirements are likely to exist for every country into which our products will be sold.

 

Renewable fuels (such as biodiesel) sold in the United States receive a “renewable identification number,” or RIN, under the Renewable Fuel Standard Program. For a RIN to be generated for our products, we must register our related facility with the EPA and our product must meet specified regulatory requirements established by the EPA. While we currently have a RIN registration for the Mississippi facility, any future delay or failure in generating the desired RIN for our products or loss of the RIN registration for the Mississippi facility could make our intermediate chemicals less attractive to our customers for use as a biofuel, which could harm our competitiveness.

 

In addition, any specialty chemicals developed using our technologies will need to meet a significant number of regulations and standards. In the United States, this will include regulations imposed by the U.S. Department of Transportation, the EPA, the Occupational Safety and Health Administration and various other federal and state agencies. Any failure to comply, or delay in compliance, with the various existing and evolving industry regulations and standards could prevent or delay the commercialization of any specialty chemicals developed using our technologies and subject us to fines and other penalties. We will also incur time and cost to comply with regulations in other countries in which we operate.

 

25


Table of Contents

Any failure to obtain or delay in obtaining regulatory approvals for our chemical products or noncompliance with associated requirements could have a material adverse effect on our business, financial condition and results of operations.

 

We produce and use hazardous materials in our business and are subject to costs, liabilities and compliance obligations and to possible enforcement actions, cleanup obligations and third-party lawsuits with regard to environmental, health and safety matters. Any claims arising from the handling, storage or disposal of, or exposure to, hazardous materials or noncompliance with environmental, health and safety laws and regulations could be costly and time consuming and could adversely affect our business and results of operations.

 

Our research and development processes involve, and the construction, repurposing and operation of our biorefineries will entail, the production and use of hazardous materials (including Materia’s catalyst), the generation of hazardous waste, and the release of regulated air emissions and wastewater discharges. As a result of these and other activities, we are regulated by international, federal, state and local environmental, health and safety laws and regulations, including those that govern the use, manufacture, storage, handling and disposal of, contamination by, and human exposure to, hazardous materials. Pursuant to such laws and regulations, we are required to maintain regulatory authorizations and permits for certain of our operations and products. Compliance with applicable environmental laws, regulations, authorizations and permits may be expensive, and the failure to comply with such past, present, or future requirements could result in the imposition of fines, third-party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations. There can be no assurance that violations of environmental, health and safety requirements will not occur in the future as a result of human error, accident, equipment failure or other causes. In addition, we cannot eliminate from our operations the risk of contamination or discharge of hazardous materials to the environment and any resultant injury or environmental harm. We may be held jointly and severally liable, without regard to fault, in connection with contamination at or emanating from our properties, or third-party waste disposal sites. In addition to incurring potentially significant investigation and remediation costs, as a result of such matters we may be sued for any injury or contamination that results from the use, release or disposal of hazardous materials, and our liability may exceed our total assets. Environmental, health and safety laws, regulations, authorizations and permits could become more stringent over time imposing greater liabilities and compliance costs and increasing risks and penalties associated with violations. Our costs, liabilities and obligations relating to environmental, health and safety matters could impair our research, development or production efforts and otherwise have a material adverse effect on our business, financial condition and results of operations.

 

Our operations are subject to operational hazards that could cause damage to property or injury to individuals.

 

Our operations are subject to operational hazards inherent in the manufacturing and distribution of our products. These hazards include explosions, fires, severe weather and natural disasters, mechanical failures, unscheduled downtimes, human error, spills, discharges (including of Materia’s catalyst) into the environment or other releases of toxic or hazardous substances or gases, storage tank leaks, and safety and security risks relating to the transport of a variety of hazardous and non-hazardous raw materials, intermediates and finished products. If any of these risks were to materialize and cause bodily injury or loss of life, severe damage to, or destruction of, property and equipment or environmental damage, we could be subject to fines assessed by federal and state agencies, our operations could be suspended and we could become subject to civil and criminal penalties and liabilities in connection with property damage or injury to our employees or third parties, which could have a material adverse effect on our business, results of operations and financial condition.

 

Climate change legislation, regulation and litigation could result in increased operating costs.

 

In recent years, the U.S. Congress has been considering legislation to restrict or regulate emissions of greenhouse gases (“GHGs”), such as carbon dioxide and methane, which are understood to contribute to global

 

26


Table of Contents

warming. In addition, almost half of the states in the United States, either through individual or multi-state regional initiatives, have begun to address GHG emissions. The EPA also regulates GHG emissions under its existing Clean Air Act authority, as a result of which certain large stationary sources and modification projects are subject to permitting and reporting requirements for GHG emissions.

 

International climate change regulations could also impact our business. The Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force in 2005 and attention is now focused on development of a post-2012 international policy framework to guide international action to address climate change when the Kyoto Protocol expires in 2012. Proposed and existing legislative efforts in international jurisdictions, including those under the European Union’s Emission Trading Scheme, to control or limit GHG emissions could not only increase the cost of compliance but could also adversely affect our energy source and supply choices and increase the cost of energy and raw materials derived from fossil fuels. These efforts could also increase our estimated capital and operating costs associated with the Indonesia facility.

 

Any future application to our business of GHG laws, regulations or permitting requirements, or litigation arising from GHG emissions, could restrict GHG emissions from our operations or require us to incur increased operating costs. The potential increase in the costs of our operations resulting from any such matters could include new or increased costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to our GHG emissions and administer and manage a GHG emissions program. We cannot predict with any certainty at this time how current or future GHG requirements may affect our operations, but they could have a material adverse effect on our business, results of operations and financial condition.

 

Environmental, legal and social concerns about feedstocks grown on land that could be used for food production or extracted from trees grown in tropical rainforests could limit or prevent the use of our products, processes and technologies and limit our revenues.

 

Palm oil is extracted from the pulp of the fruit of the oil palm tree. The planting of oil palm trees subjects our palm oil sources to concerns regarding the deforestation of tropical rainforests. Our feedstocks may also be grown on land that could be used for food production. If we are not able to overcome the legal and social issues that may arise over land use or the industrial use of our feedstock oils, our access to feedstocks or customer acceptance of our products and processes may be materially impaired. Any of the risks discussed below could result in increased expenses, delays or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions, which could have a material adverse effect on our business, financial condition and results of operations. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:

 

   

public attitudes and ethical concerns surrounding production of feedstocks on land which could be used to grow food, which could influence public acceptance of our technologies, products and processes;

 

   

public attitudes and environmental concerns regarding the planting of oil palm trees, which may contribute to deforestation and sustainability issues; and

 

   

governmental reaction to negative publicity concerning feedstocks produced on land which could be used to grow food or feedstocks extracted from trees in tropical rainforests, which could result in greater government regulation of feedstock sources.

 

If we lose key personnel, including key management and scientific personnel, or are unable to attract additional personnel, it could delay our product development programs or harm our research and development efforts, making it more difficult for us to pursue partnerships or to develop products.

 

Our business is complex and we intend to target a variety of markets. Therefore, it is critical that our management team and employee workforce are knowledgeable in the areas in which we operate. The loss of any key member of our management, including our named executive officers, or the failure to attract or retain other

 

27


Table of Contents

key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing our products for our target markets and from entering into partnerships or licensing arrangements to execute our business strategy. In addition, the loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing and commercializing our products for our target markets and from entering into partnerships or licensing arrangements to execute our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among chemical companies and other technology-based businesses or due to the limited availability of personnel with the qualifications or experience necessary for our specialty chemical and intermediate chemical business. 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 meet the demands of our partners and customers in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists and engineers. Competition for experienced scientists, engineers and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

 

Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technology platform or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require the addition of new personnel and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to develop the necessary expertise may have a material adverse effect on our business, financial condition or results of operations.

 

We do not currently have a hedging strategy to mitigate the impact of foreign currency or feedstock price volatility. In the event we implement such a strategy, it may not effectively mitigate the impact of such volatility and our hedging activities could result in losses and may limit potential gains.

 

We have entered into supply and risk management agreements with Cargill, who currently supplies the majority of our feedstocks. Cargill uses its own risk management services, which we cannot direct, when acquiring the feedstocks it provides to us under our feedstock supply and risk management agreements. For feedstocks not provided by Cargill, we do not currently use derivative instruments or otherwise engage in hedging strategies to mitigate the impact of volatility in foreign currencies or feedstock prices for feedstock (including the feedstock to be provided by Wilmar to the Indonesia facility). In the future, we may elect to enter into hedging strategies or purchase derivatives. However, any hedging strategies that we enter into may not be successful, may not mitigate the impact of volatility in foreign currencies or feedstock prices and may result in losses or limit potential gains. Furthermore, the Wilmar JV would need to approve any hedging strategy adopted by the Wilmar JV, which would also require that Wilmar consent to any such strategy. In the future we may also elect to not hedge our exposures to foreign currencies or feedstock prices and volatility in such prices could have a material adverse effect on our business, results of operations or financial condition.

 

We may be sued for product liability.

 

The design, development, manufacture and sale of our products involve an inherent risk of product liability claims and the associated adverse publicity. We may be named directly in product liability suits relating to the chemicals we produce or products that are produced using our specialty chemicals or intermediate chemicals. These claims could be brought by various parties, including customers who purchase products directly from us, other companies who purchase products from our customers or by the end users of products produced using our chemicals. We could also be named as co-parties in product liability suits that are brought against our toll manufacturers who manufacture our specialty chemicals and intermediate chemicals. Insurance coverage is expensive and may be difficult to obtain, and may not be available in the future on acceptable terms, or at all. We cannot assure you that our toll manufacturers will have adequate insurance coverage to cover against potential

 

28


Table of Contents

claims. In addition, if the coverage limits of our insurance policies are not adequate, a claim brought against us, whether covered by insurance or not, may have a material adverse effect on our business, financial condition and results of operations. We have agreed to indemnify some of our customers for certain claims that may arise out of the use of our products, which could expose us to significant liabilities and have a material adverse effect on our business, financial condition and results of operations.

 

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

 

We are vulnerable to events that could disrupt our operations, such as riots, civil disturbances, war, terrorist acts and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur would have a material adverse effect on our business, financial condition and results of operations.

 

The Indonesia facility and the Mississippi facility are located in regions that make us vulnerable to risks associated with damage or business interruptions from natural disasters.

 

We may be affected by delays or interruptions in constructing or repurposing, as applicable, and operating the biorefineries as a result of natural disasters, such as tropical cyclones, tsunamis, flooding and earthquakes. Such disturbances could in the future have any or all of the following adverse effects on our business:

 

   

interruptions to our operations as we suspend construction or production in advance of rising river levels or approaching storms;

 

   

damage to our facilities and equipment, including damage that disrupts or delays our construction or production;

 

   

disruption to the transportation systems we rely upon to deliver our products to customers; and

 

   

damage to or disruption of the facilities of our customers or partners that prevents us from taking delivery of our products.

 

Any of these could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to interruptions or failures in our information technology systems.

 

We currently rely on information technology systems to run our business, and as we complete production of our manufacturing facilities, we will transition to and rely on sophisticated information technology systems and infrastructure to support our commercial production operations, including process control technology at our biorefineries. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures and similar events. The failure of any of our information technology systems may cause disruptions in our operations, adversely affecting our sales and profitability.

 

A terrorist attack or armed conflict could harm our business.

 

Terrorist activities, anti-terrorist efforts and other armed conflicts could adversely affect the global economy and could prevent us from meeting financial and other obligations. We could experience loss of business, delays or defaults in payments from payors or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce feedstock supplies or economic growth that drives demand for our products. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect our results of operations, impair our ability to raise capital or otherwise adversely impact our ability to realize certain business strategies.

 

29


Table of Contents

If we fail to maintain an effective system of internal controls, we might not be able 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 (the “Sarbanes-Oxley Act”) will require us and, in the event we become an accelerated filer, 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,         . 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, and our independent registered public accounting firm concurs, 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 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 or our independent registered public accounting firm 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 (“SEC”) action, ineligibility for short-form resale registration, the suspension or delisting of our common stock from the stock exchange on which it is listed 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.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

 

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your share of common stock at a price that is attractive to you, or at all.

 

Market volatility may affect our stock price and the value of your investment.

 

Following the completion of this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been previously traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

   

announcements of new product launches, commercial relationships, acquisitions or other events by us or our competitors;

 

   

failure of any of our products to achieve commercial success;

 

   

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

variations in our operating results, or the operating results of our competitors;

 

   

changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

   

changes in accounting principles;

 

30


Table of Contents
   

sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

 

   

additions or departures of any of our key personnel;

 

   

announcements related to litigation;

 

   

changing legal or regulatory developments in the United States and other countries; and

 

   

discussion of us or our stock price by the financial press and in online investor communities.

 

In addition, the stock market in general, and The NASDAQ Global Market (“NASDAQ”) in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

 

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

 

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $         per share, because the initial public offering price of $         is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, directors and consultants under our stock option and equity incentive plans. For additional information, see “Dilution.”

 

Our quarterly operating results may fluctuate significantly in the future.

 

Our quarterly operating results may fluctuate significantly in the future. As a result of these fluctuations, we may fail to meet or exceed the expectations of research analysts covering the company or of investors, which could cause our stock price to decline.

 

Future quarterly fluctuations, many of which are beyond our control, may result from a number of factors, including:

 

   

the timing and cost associated with the completion of our manufacturing facilities;

 

   

fluctuations in the prices of our feedstocks and our end products;

 

   

the degree of market acceptance of our products;

 

   

the timing associated with the launch of new products;

 

   

changes in demand for our products;

 

   

changes in product development costs due to the achievement of certain milestones under third-party development agreements;

 

   

unanticipated regulatory delays in connection with the development of new products;

 

   

the level and timing of expenses for product development and sales, general and administrative expenses;

 

   

competition by existing competitors and new entrants to the markets for our products;

 

31


Table of Contents
   

our continued commercial success with our existing products and success in identifying and sourcing new product opportunities;

 

   

our ability to control costs;

 

   

our ability to attract and retain qualified personnel;

 

   

changes in our strategy;

 

   

foreign exchange fluctuations; and

 

   

general economic conditions.

 

Based on factors (including those listed above), we believe our future operating results will vary significantly from quarter to quarter and year to year. As a result, quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful nor do they indicate what our future performance will be.

 

Following this offering, investment funds managed by TPG Capital and Naxos Capital Partners S.C.A. SICAR will beneficially own a substantial percentage of our common stock, which may prevent new investors from influencing significant corporate decisions.

 

Upon completion of this offering, investment funds managed by TPG Capital and Naxos Capital Partners S.C.A. SICAR (“Naxos”) will beneficially own approximately              shares, or     %, and              shares, or     %, respectively, of our outstanding common stock. As a result, TPG Capital and Naxos will, for the foreseeable future, have significant influence over all matters requiring stockholder approval, including election of directors, adoption or amendments to equity-based incentive plans, amendments to our certificate of incorporation and certain mergers, acquisitions and other change-of-control transactions. The ownership by TPG Capital and Naxos of a large amount of our voting power may have an adverse effect on the price of our common stock. Following the completion of this offering, investment funds managed by TPG Capital and Naxos will continue to have representatives serving on our board of directors. The interests of TPG Capital and Naxos may not be consistent with your interests as a stockholder.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may cause our stock price to decline.

 

Upon completion of this offering, there will be              shares of our common stock outstanding. Of these,              shares being sold in this offering will be freely tradable immediately after this offering (except for any shares purchased by affiliates, if any) and approximately              shares may be sold upon expiration of lock-up agreements 180 days after the date of this prospectus (subject in some cases to volume limitations) and the remaining              shares may be freely tradable. In addition, as of June 30, 2011, we had outstanding options to purchase 2,310,484 shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. A large portion of these shares and options are held by a small number of persons and investment funds. Sales by these stockholders or optionholders of a substantial number of shares, or the perception that such sales may occur, after this offering could significantly reduce the market price of our common stock. Moreover, certain holders of shares of common stock have rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

 

We also intend to register all common stock that we may issue under our 2007 Plan and the 2011 Plan. Upon the completion of this offering, an aggregate of              shares of our common stock will be reserved for future issuance under our 2007 Plan and of              shares of our common stock will be reserved for future issuance under our 2011 Plan. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

 

32


Table of Contents

We will have broad discretion in how we use the proceeds of this offering and we may not use these proceeds effectively. This could affect our profitability and cause our share price to decline.

 

Our officers and board of directors will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We currently intend to use the net proceeds for general corporate purposes, which could include a variety of uses such as funding working capital, operating expenses, the continued development of our product pipeline and portfolio, the maintenance and expansion of our current collaboration arrangements, the strengthening of our existing commercial organization and the selective pursuit of business development opportunities in our focus segment areas. From time to time, for example, we will consider acquisitions or investments if a suitable opportunity arises, in which case a portion of the proceeds may be used to fund such an acquisition or investment. We have no commitments or understandings to make any such acquisition or investment. We may use the net proceeds for corporate purposes that do not improve our profitability or increase our market value, which could cause our share price to decline.

 

We will incur significantly increased costs as a result of operating as a public company, and our management will be required to divert attention from product development to devote substantial time to new compliance initiatives.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular, commencing in fiscal year         , we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance with Section 404. We currently do not have an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

 

33


Table of Contents

Anti-takeover provisions in our charter documents and under Delaware corporate law might discourage or delay acquisition attempts for us that you might consider favorable.

 

Provisions in our amended and restated certificate of incorporation and bylaws, each of which we intend to adopt in connection with this offering, may make the acquisition of our company more difficult without the approval of our board of directors. These provisions include:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders, unless such action is recommended by all directors then in office;

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

   

require at least 662/3% of the outstanding common stock to amend the amended and restated certificate of incorporation or the amended and restated bylaws.

 

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

34


Table of Contents

FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

we have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability;

 

   

we may be unable to continue our business or may be prevented from operating our business as it is currently conducted if we are unsuccessful in defending against any claims by competitors or others that we or Materia are infringing upon their intellectual property rights;

 

   

if either the Indonesia facility or the Mississippi facility is not completed in a timely manner for any reason, our ability to produce specialty chemicals and intermediate chemicals could be materially adversely affected;

 

   

we lack direct experience operating world-scale commercial biorefineries, and may encounter substantial difficulties operating such biorefineries or expanding our business;

 

   

we may be unable to produce specialty chemicals and intermediate chemicals that meet our customers’ needs or specifications;

 

   

our specialty chemicals may not be accepted by the market; and

 

   

we are dependent on our partners, and our failure to successfully manage these relationships could delay or prevent us from developing and commercializing many of our products and achieving or sustaining profitability.

 

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

 

We caution you that the important factors referenced above may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

35


Table of Contents

MARKET AND INDUSTRY DATA

 

Market data and certain industry data and forecasts included in this prospectus were obtained or derived from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications and surveys, including ACME-Hardesty Co., Chemical Week, Datamonitor, The Freedonia Group, Inc., ICIS, The Jacobsen and the United States Department of Agriculture (“USDA”). Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, market research, market definitions and industry forecasts, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. We believe that the market opportunity and market size information included in this prospectus is generally reliable; however, these data involve a number of assumptions and limitations. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry 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 “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. This prospectus may only be used for the purpose for which it has been published.

 

36


Table of Contents

USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of              shares of common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We expect to use substantially all of the net proceeds for general corporate purposes, which we expect to include funding capital expenditures, research and development, working capital, product development and operating expenses. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

 

DIVIDEND POLICY

 

We have not paid any dividends on our common stock since our initial incorporation. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and therefore we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant.

 

37


Table of Contents

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of June 30, 2011 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to the IPO Share Adjustments, including the conversion of all of the outstanding shares of our preferred stock into              shares of common stock; and

 

   

a pro forma as adjusted basis to give effect to the IPO Share Adjustments our issuance and sale of              shares of common stock in this offering at an initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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

 

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

Cash, cash equivalents and short-term investments

   $ 96,075      $                $            
  

 

 

   

 

 

    

 

 

 

Preferred stock:

       

Series A preferred stock, $0.0001 par value per share, no shares authorized, actual; no shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

   $      $       $   

Series B preferred stock, $0.0001 par value per share, 18,600,000 shares authorized, actual; 8,830,640 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     90,481                  

Series C preferred stock, $0.0001 par value per share, 7,200,000 shares authorized, actual; 5,649,718 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     70,329                  

Series D preferred stock, $0.0001 par value per share, 3,100,000 shares authorized, actual; 2,556,238 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     49,921                  
  

 

 

   

 

 

    

 

 

 

Total preferred stock

     210,731                  

Shareholders’ equity:

       

Common stock, $0.0001 par value per share, 34,500,000 shares authorized; 2,437,820 shares issued and outstanding, actual;             shares authorized,              shares issued and outstanding, pro forma;              shares authorized              shares issued and outstanding, pro forma as adjusted

            

Preferred stock, $0.0001 par value per share; 28,900,000 shares authorized, 17,036,596 shares issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                      

Additional paid-in capital

            

Accumulated other comprehensive income

     20        

Accumulated deficit

     (188,842     
  

 

 

   

 

 

    

 

 

 

Total company shareholders’ deficit

     (188,822     
  

 

 

   

 

 

    

 

 

 

Noncontrolling interest

     4,449        
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ (184,373   $         $     
  

 

 

   

 

 

    

 

 

 

 

  (1)   Each $1.00 increase or decrease in the initial public offering price would increase or decrease, respectively, the amounts of cash, cash equivalents and short-term investments, additional paid-in capital and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

38


Table of Contents

The number of shares of common stock to be outstanding after this offering is based on              shares of our common stock outstanding as of June 30, 2011, as adjusted to give effect to the IPO Share Adjustments and excludes:

 

   

             shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $2.13 per share, as of June 30, 2011; and

 

   

an aggregate of              shares of our common stock reserved for future issuance under the 2011 Plan that we intend to adopt in connection with this offering.

 

39


Table of Contents

DILUTION

 

Our pro forma net tangible book value (deficit) as of June 30, 2011 was approximately $         million, or approximately $         per share. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding at June 30, 2011 after giving effect to the IPO Share Adjustments, prior to the sale of shares of common stock offered in this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the net tangible book value per share of our common stock outstanding immediately after this offering.

 

After giving effect to the sale of              shares of common stock in this offering, based upon an initial public offering price of $         per share, after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering, after giving effect to the IPO Share Adjustments, our pro forma as adjusted net tangible book value (deficit) as of June 30, 2011 would have been approximately $         million, or $         per share of common stock. This represents an immediate increase in pro forma net tangible book value (deficit) of $         per share to existing stockholders and immediate dilution of $         per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

 

The following table illustrates this per share dilution:

 

Initial public offering price per share

   $            

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

  

Increase in net tangible book value (deficit) per share attributable to new investors

  
  

 

 

 

Pro forma as adjusted net tangible book value per share as of June 30, 2011 (after giving effect to this offering)

  
  

 

 

 

Dilution per share to new investors

   $     
  

 

 

 

 

The following table summarizes, as of June 30, 2011, on a pro forma as adjusted basis giving effect to the sale of shares of common stock in this offering, after giving effect to the IPO Share Adjustments, the number of shares of our common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock from us in this offering at an initial public offering price of $         per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

 

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

Existing stockholders

                   $                             $            

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $                  100  
  

 

  

 

 

   

 

 

    

 

 

   

 

Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares and no exercise of any outstanding options. If the underwriters’ option to purchase additional shares is exercised in full, our existing stockholders would own approximately     % and our new investors would own approximately     % of the total number of shares of our common stock outstanding after this offering.

 

40


Table of Contents

The tables and calculations above are based on shares of common stock outstanding as of June 30, 2011 (after giving effect to the IPO Share Adjustments) and exclude:

 

   

             shares of our common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $         per share, as of June 30, 2011; and

 

   

an aggregate of              shares of our common stock reserved for future issuance under the 2011 Plan that we intend to adopt in connection with this offering.

 

To the extent that any outstanding options are exercised or if new options or other equity incentive grants are issued in the future with an exercise price or purchase price below the initial public offering price, new investors will experience further dilution.

 

41


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following tables set forth our selected historical consolidated financial data as of and for the periods indicated. We have derived the selected historical consolidated financial data as of and for the period or fiscal years, as applicable, ended December 31, 2006, November 19, 2007 and December 31, 2007, 2008, 2009 and 2010 from our consolidated financial statements for such periods or fiscal years, as applicable, that are included elsewhere in this prospectus. We have derived the selected historical consolidated financial data as of June 30, 2011 and for the six months ended June 30, 2010 and 2011 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited combined financial statements, and in our opinion, include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations for such periods. Operating results for the six months ended June 30, 2010 and 2011 are not necessarily indicative of results for a full year or for any other period.

 

We began operations on November 20, 2007 when we acquired (1) the NatureWax business line of Cargill’s Dressing Sauces and Oils Business on a carve-out basis and (2) the metathesis business operated by Cargill. The fiscal year ended December 31, 2006 and the period ended November 19, 2007 are referred to as the “Predecessor” periods and all other periods presented are referred to as the “Successor” periods in this prospectus. Due to our business being operated by Cargill during the Predecessor period, the financial statements for the Successor periods are not comparable to those of the Predecessor periods included in this prospectus. Our consolidated financial statements of and for the fiscal year ended December 31, 2006 and for the period ended November 19, 2007 were prepared on a carve-out basis from Cargill. The carve-out consolidated financial statements include allocations of certain costs from Cargill. In the Successor periods, we no longer incur these allocated costs, but we do incur certain expenses as a standalone company for similar functions. These allocated costs were based upon various assumptions and estimates and actual results may differ from these allocated costs, assumptions and estimates. Accordingly, the carve-out consolidated financial statements may not be a comparable presentation of our financial position or results of operations as if we had operated as a standalone entity during the Predecessor periods. For additional information, see “Risk Factors—Risks Related to Our Business—We have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for a period of time, and may never achieve or sustain profitability.”

 

42


Table of Contents

The selected historical consolidated data presented below should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto and other financial data included elsewhere in this prospectus.

 

    Predecessor          Successor  
    Year Ended
December 31,

2006
    Period from
January 1,
2007 to
November 19,
2007
         Period  from
November 20,
2007 to

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

Statement of Operations Data:

                   

Product sales

  $ 12,291      $ 16,285          $ 2,074      $ 18,913      $ 12,186      $ 20,227      $ 7,719      $ 8,076   

Grants

                                           961        528        476   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    12,291        16,285            2,074        18,913        12,186        21,188        8,247        8,552   
 

Operating expenses:

                   

Cost of product sales

    10,740        16,500            2,017        14,425        11,860        17,824        6,679        7,263   

Selling, general and administrative

    3,996        1,670            709        8,086        8,168        11,356        5,875        8,097   

Research and development

    4,095        1,379            10,153        5,539        7,760        8,896        4,741        4,263   

Intangible asset amortization

                      167        1,506        1,506        1,506        753        753   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    18,831        19,549            13,046        29,556        29,294        39,582        18,048        20,376   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (6,540     (3,264         (10,972     (10,643     (17,108     (18,394     (9,801     (11,824

Gain (loss) on change in fair value of warrants

                      199        1,787        652        (4,506     (1,839     (101,823

Interest expense

                                    (437     (4,415     (1,803       

Other income (expense), net

                      (52     636        56        14        4        117   

Income taxes

    33        12            (1,505                                   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (6,573     (3,276         (9,320     (8,220     (16,837     (27,301     (13,439     (113,530

Less net loss (gain) attributable to noncontrolling interest

                                           10               (22
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the company

    (6,573     (3,276         (9,320     (8,220     (16,837     (27,291     (13,439     (113,552

Less accretion on Series A and B preferred stock and cumulative dividends on Series B, C and D preferred stock

                      (713     (6,689     (6,876     (6,349     (2,923     (6,466
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to our common shareholders

  $ (6,573   $ (3,276       $ (10,033   $ (14,909   $ (23,713   $ (33,640   $ (16,362   $ (120,018
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to our common shareholders, basic and diluted

  $      $          $ (66.89   $ (99.39   $ (33.08   $ (14.64   $ (7.24   $ (50.49
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to our common shareholders(1)

                   
               

 

 

     

 

 

 
     
    Predecessor          Successor  
    December  31,
2006
    November 19,
2007
         December 31,     June 30,  
             2007     2008     2009     2010     2010     2011  
                                   (unaudited)  
    (in thousands)          (in thousands)  

Balance Sheet Data:

                   

Cash, cash equivalents and short term investments

  $      $          $ 19,862      $ 14,946      $ 7,807      $ 77,358      $ 6,249      $ 96,075   

Working capital(2)

    904        646            1,476        (1,326     198        1,379        2,196        3,565   

Total assets

    943        1,830            43,768        38,181        31,278        103,390        32,088        146,396   

Total debt

                                    9,959        100        21,321        114   

Preferred stock

                      42,548        53,007        47,991        154,429        50,914        210,731   

Total company shareholders’ deficit

                      (9,759     (24,340     (35,937     (67,775     (52,094     (188,822

 

  (1)   Gives effect to the IPO Share Adjustments, but not this offering.
  (2)   Current assets (excluding cash, cash equivalents and short-term investments) less current liabilities (excluding current debt).

 

43


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

 

Overview

 

We produce high performance specialty chemicals and intermediate chemicals from renewable natural oils. Our specialty chemicals address a potential market size that we estimate to be $176 billion. We produce these chemicals using our proprietary, low-cost, capital efficient production process based on Nobel Prize-winning innovations in metathesis catalysis. Our process uses a highly efficient and selective metathesis catalyst to break down the complex molecules found in natural oils and recombine the fragments to produce high value chemicals. We are producing our chemicals at commercial scale. Our process can produce these chemicals at lower cost and with lower capital investment than conventional processes positioning us to deliver attractive returns on capital. We have established strategic partnerships with market leaders to accelerate the commercialization and rapid deployment of our technology.

 

Our specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. We believe these products will be key performance ingredients and building blocks used in large end markets including detergents, lubricants, personal care products, coatings and plastics. Our intermediate chemicals, namely olefins and oleochemicals, can directly replace critical molecules in large, attractive markets. We expect that prevailing market dynamics, such as the desire for new and increasingly demanding performance characteristics, changing regulatory requirements and structural supply shortages will support rapid adoption of our specialty chemicals and market penetration of our intermediate chemicals. We are in discussions with existing partners and potential new customers for long-term purchasing or offtake agreements for the entirety of our projected 2013 production.

 

In 2007, we were formed with $45.0 million of funding to pursue work started in 2004 in a collaboration between Cargill, one of the world’s largest agribusinesses, and Materia, a leading-edge catalyst technology company. Since our inception, we have been focused on bridging the renewable and chemical industries, transforming natural plant-based oils, such as palm, soy and rapeseed oil, into specialty high-performance, cost-effective commercial products.

 

To date, we have derived the majority of our revenue from product sales in the performance waxes and candle markets, often under the NatureWax brand and in the personal care markets. In November 2010, we completed our first commercial production of specialty chemicals and intermediate chemicals through our proprietary biorefinery process. In May 2011, we completed a toll production run utilizing our proprietary biorefinery technology, converting one million pounds (approximately 450 metric tonnes) of feedstock into specialty chemicals and intermediate chemicals.

 

We have entered into joint development arrangements with several partners including Cargill, Clariant, Dow Corning, Materia, Stepan and Wilmar, to accelerate the commercialization of our specialty chemicals. To meet demand from our commercial partnerships, we are currently constructing the Indonesia facility, a biorefinery with annual production capacity of 185,000 metric tonnes (400 million pounds), as part of the Wilmar JV. We expect to begin commercial operations at the Indonesia facility in the second quarter of 2012. We will market the

 

44


Table of Contents

specialty chemicals produced at the Indonesia facility, and we and Wilmar will market the intermediate chemicals. We also purchased an 80 million gallon biodiesel facility in Natchez, Mississippi in 2011, which we expect to repurpose into the Mississippi facility, a biorefinery with annual production capacity of 280,000 metric tonnes (610 million pounds). We expect to begin commercial operations at the Mississippi facility in 2013. We are currently evaluating sites for the construction of a third biorefinery in South America and expect to begin commercial operations at this facility in 2014. As we begin commercial operations at our biorefineries, we plan to sell our products into the specialty chemical and intermediate chemical markets.

 

In the six months ended June 30, 2011, we generated $8.6 million in revenues and incurred a net loss attributable to our common stockholders of $120.0 million. As of June 30, 2011, we had an accumulated deficit of $188.8 million. Since our inception, we have raised $168.8 million from the private placement of convertible preferred stock and $30.0 million from the private placement of convertible debt. In December 2010, the debt was converted into 3,768,772 shares of Series B preferred stock.

 

Key Milestones

 

Since our inception, we have been focused on bridging the renewable and chemical industries, transforming natural plant-based oils, such as palm, soy and rapeseed oil, into specialty high-performance, cost-effective commercial products. We have established, or are seeking to establish, partnerships with industry leading feedstock, technology and commercialization partners. Key milestones in our development include:

 

   

In 2007 and 2008, we commenced operations and established the foundation of our business by:

 

   

acquiring Cargill’s NatureWax business and also acquiring intellectual property developed as part of a collaboration between Cargill and Materia;

 

   

raising $48.8 million of capital;

 

   

hiring key members of our executive team;

 

   

partnering with Tetramer Technologies, LLC to develop and commercialize renewable specialty chemicals;

 

   

partnering with Dow Corning to market naturally derived ingredients in personal care applications; and

 

   

opening our pilot facility in Illinois, including approximately 7,000 square feet of laboratory space.

 

   

In 2009, we established the commercial viability of our process by:

 

   

identifying, testing and completing initial engineering on our biorefinery concept;

 

   

completing multiple toll metathesis production runs for our personal care and performance waxes business;

 

   

meeting universally accepted compost specifications for certain coating applications when blended with paraffin;

 

   

demonstrating the viability of our fuel additive products and producing at pilot plant scale;

 

   

achieving a 50% reduction in catalyst usage in our metathesis reaction;

 

   

filing a provisional patent application for our biorefinery process; and

 

   

refining and metathesizing drum quantities of mustard, palm and jatropha oils, demonstrating feasibility for biorefinery use.

 

   

In 2010, we made substantial progress in commercializing our technology by:

 

   

completing our first toll production run utilizing our proprietary biorefinery technology, involving the conversion of 40,000 pounds of feedstock into specialty chemicals and intermediate chemicals;

 

45


Table of Contents
   

forming the Wilmar JV to construct what we believe will be the world’s largest integrated biorefinery;

 

   

having the Wilmar JV commence construction of the Indonesia facility;

 

   

entering into a joint development agreement with Stepan to evaluate and commercialize surfactants, antimicrobials and polyurethane polyols based on our specialty feedstocks; and

 

   

raising $100.0 million of capital, consisting of $70.0 million of equity and $30.0 million of debt (including $10.0 million face value of convertible notes issued on each of October 19, 2009, March 5, 2010 and August 6, 2010, all of which were converted into Series B preferred stock on December 6, 2010).

 

   

In 2011, we moved toward world-scale production and commercialization of our products by:

 

   

completing a toll production run utilizing our proprietary biorefinery technology, converting one million pounds (450 metric tonnes) of feedstock into specialty chemicals and intermediate chemicals;

 

   

acquiring an 80 million gallon per year biodiesel facility in Natchez, Mississippi and commencing engineering to repurpose the facility into a biorefinery;

 

   

entering into an agreement with Clariant;

 

   

selling commercial quantities of specialty chemicals to Clariant for the production of polymer additives;

 

   

announcing a collaboration with DSM to evaluate our unique monomers for production of specialty bio-based high performance thermoplastic materials for DSM’s engineering plastics portfolio;

 

   

filing eight patent applications on our lubricant and additive products;

 

   

refining our cold flow product and providing samples to a prospective partner for evaluation;

 

   

entering into a licensing agreement with XiMo Ltd, founded by Nobel laureate Dr. Richard Schrock and Dr. Amir Hoveyda (“XiMo”) to use XiMo’s proprietary molybdenum and tungsten metathesis catalysts in the field of natural oils;

 

   

announcing a collaboration with Hutchinson Worldwide, a global conglomerate, to evaluate the use of our renewable products as processing aids in Hutchinson’s rubber compounds; and

 

   

raising $50.0 million of capital.

 

Significant Partner Agreements

 

We utilize our market partnerships to accelerate growth. We have entered into partnerships related to: sales, marketing and application development; manufacturing; technology; and feedstock supply. We currently have license agreements, joint development agreements, supply agreements and tolling agreements with various partners. We expect our commercialization partners to provide expanded distribution channels, product application testing, marketing expertise and long-term purchasing agreements. In order to accelerate our application development, we have, and plan to continue working with, partners to provide research and development activities. We use, and plan to continue using, partners to assist with the construction and operation of our biorefineries. Our current principal partnerships and strategic arrangements, listed chronologically, include the following:

 

Materia

 

In November 2007, we entered into a License Agreement with Materia, pursuant to which Materia granted us an exclusive license to a wide variety of patents and patent applications involving olefin metathesis catalyst

 

46


Table of Contents

compositions and their use in cross-metathesis that Materia either owns or licenses from third parties. Also in November 2007, we entered into a Catalyst Supply Agreement with Materia, whereby Materia has agreed to provide us with all of our supply of its proprietary catalyst.

 

In connection with both the License Agreement and the Catalyst Supply Agreement, we entered into a Joint Development Agreement with Materia (the “Materia JDA”). Pursuant to the Materia JDA, Materia will conduct research for the purpose of developing and commercializing chemicals and other materials derived from natural oils in return for us providing research funding to both Materia and Dr. Robert H. Grubbs.

 

Cargill

 

In November 2007, we entered into a Product Supply Agreement with Cargill through which we source the majority of our current requirements of (1) bulk vegetable- or animal-based oils and fats, including, but not limited to, vegetable-based oils that are otherwise a component of one or more NatureWax-related products and (2) modified vegetable- and animal-based oils and fats, including those that have been further formulated for use in or as paraffin replacer products that may or may not be further processed prior to sale by us or our customers. In connection with the Product Supply Agreement, we entered into a Risk Management Agreement with Cargill whereby Cargill provides natural oil risk management services to us. The risk management services that Cargill provides are used in connection with determining the price of the natural oil feedstock they provide to us under the Product Supply Agreement. We are not obligated to purchase any specific quantity of products from Cargill during any given time period.

 

Dow Corning

 

In July 2008, we entered into a Joint Development Agreement (the “Dow Corning JDA”) and a Supply Agreement with Dow Corning. Pursuant to the Dow Corning JDA, we and Dow Corning collaborate to develop modified natural oil-based products to address unmet needs in the personal care industry. We have commercialized two products (Dow Corning HY 3050 and Dow Corning 3051) with Dow Corning under the Supply Agreement and are now commercializing a third product (Dow Corning HY 3200) developed under the Dow Corning JDA.

 

Wilmar

 

In June 2010, we entered into the Wilmar JV with a wholly owned subsidiary of Wilmar. The purpose of the Wilmar JV is to construct and operate a biorefinery based on our proprietary metathesis process and engage in manufacturing, distribution, sales and marketing of specialty chemicals, oleochemicals and olefins. The Wilmar JV will establish what we believe will be the world’s largest integrated biorefinery in Gresik, Indonesia, which will be operated by Wilmar. We expect that the Indonesia facility will be completed by the second quarter of 2012 with an initial annual production capacity of 185,000 metric tons (400 million pounds) and the ability to expand the annual production capacity to 370,000 metric tons (810 million pounds). Wilmar has committed to provide 50% of the capital and all natural oil feedstocks required by the Indonesia facility, including, among other things, palm, soy and rapeseed oils. We have agreed to provide 50% of the capital and our technological expertise and catalyst to the Wilmar JV. Pursuant to the terms of the Wilmar JV, we share with Wilmar the rights to market the olefins and oleochemicals that the Indonesia facility will produce. Pursuant to the terms of the Wilmar JV, we exclusively retain the right to market the specialty chemicals that the Indonesia facility will produce.

 

The Wilmar JV also grants to the joint venture company a 30-day right of first offer for any new Elevance project in the Asia Pacific region for an integrated biorefinery utilizing our cross-metathesis process in conjunction with transesterification or hydrolysis to convert certain natural oils, subject to the terms and conditions set forth in the Wilmar JV.

 

47


Table of Contents

Stepan

 

In August 2010, we entered into a Joint Development Agreement with Stepan (the “Stepan JDA”) to collaborate on the development of new chemical derivatives of modified natural oil-based products for use in fields such as surfactants, polyurethanes and antimicrobials. The Stepan JDA defines terms for how license fees and royalties, as well as marketing and intellectual property rights, from the Stepan JDA will be shared.

 

XiMo

 

In January 2011, we entered into a Joint Development Agreement with XiMo (the “XiMo JDA”). We and XiMo entered into the XiMo JDA to collaborate in connection with research related to developing commercially viable early transition metal metathesis catalysts. We have identified the potential for these catalysts to produce molecules similar to those produced with ruthenium-based catalysts.

 

Clariant

 

In June 2011, we entered into a Commercialization and Supply Agreement with Clariant (the “Clariant CSA”). We and Clariant entered into the Clariant CSA to collaborate in connection with lubricants for chlorinated vinyl thermoplastics. Clariant has introduced Licocare SBW 11 TP, a product based on our technology. Under the Clariant CSA, there are certain minimum volume requirements that Clariant must purchase from us.

 

Factors Affecting Our Performance

 

Manufacturing Capacity

 

To date, we have utilized tolling facilities to manufacture our commercial products. The Indonesia facility is currently being constructed and is expected to begin commercial operations in the second quarter of 2012. The Indonesia facility is fully funded and is expected to have annual manufacturing capacity of 185,000 metric tonnes (400 million pounds). In June 2011, we purchased a biodiesel facility in Natchez, Mississippi that we intend to repurpose into the Mississippi facility. We expect this facility to have annual manufacturing capacity of 280,000 metric tonnes (610 million pounds). We have started the design and engineering of the Mississippi facility and expect it to begin commercial operation in 2013. We are also evaluating sites for construction of a third facility, which we expect to build in South America. We expect this third facility to begin commercial operations by the end of 2014. In addition, by the end of 2014, we expect that the combined annual production capacities of the three facilities will have reached approximately one million metric tonnes (2.2 billion pounds) through capacity additions and expansions. Our ability to successfully begin commercial operations at these facilities and produce at full capacity when and as planned could affect our revenues and operating expenses. We will continue to opportunistically use toll manufacturing as a means to scale additional manufacturing capacity and commercialize opportunities for new products after our biorefineries become operational.

 

Feedstock and Other Input Costs

 

Obtaining feedstocks in sufficient quantities and at a commercially viable price is critical to our business. We use various feedstocks including palm, soy and rapeseed oils, though our technology has the ability to use many other natural oils. These feedstocks are available at industrial scale globally in liquid form. We currently source the majority of our feedstocks through Cargill. The Indonesia facility will source feedstocks through Wilmar. Feedstock availability and pricing can be affected by numerous factors outside of our control including weather conditions, government programs and regulations. Other important inputs to our process include catalysts, butene and methanol.

 

Rate of Commercialization of Our Specialty Chemicals

 

Our revenues will be impacted by the rate of adoption of our specialty chemicals. We expect our products’ functional attributes to drive adoption by customers looking for solutions to their product performance needs.

 

48


Table of Contents

Our ability to continue to identify and develop applications for our specialty chemicals will drive the rate of commercialization.

 

Intermediate Chemical Pricing

 

Our revenues will be impacted by the prices received for and volumes sold of our intermediate chemicals, which will be direct replacements for intermediate chemicals produced from conventional processes. Declines in these intermediate chemical prices, which may be driven by declines in commodity prices, the perception of a future decline in these prices, increased manufacturing capacity and declining consumer demand, among others, may adversely affect the prices we can obtain for our intermediate chemicals. By utilizing inputs whose costs are correlated with the prices of our intermediate chemicals, we benefit from a natural hedge on our profit margins. However, if the prices of our intermediate chemicals significantly decrease from current levels and the prices of our inputs do not have a corresponding decrease, our margins would be impacted adversely. Similarly, if our feedstock costs increase and we are unable to increase intermediate chemical selling prices, our margins would be impacted adversely.

 

Partnerships and Other Commercial Relationships

 

A key element of our strategy is to partner with industry leaders to accelerate commercialization and rapid deployment of our technology. In particular, we expect these partnerships to accelerate the commercial adoption of our specialty chemicals. Our ability to enter into, maintain and manage partnerships and strategic collaborations is important to the success of our business. These partnerships provide access to downstream markets, marketing expertise, infrastructure and feedstock supply.

 

Financial Operations Overview

 

Revenues

 

To date our revenues have been derived from product sales and from several grants. In 2010, product sales accounted for 95.5% of our revenue.

 

Product sales

 

To date our product sales have consisted of global specialty chemical sales in the performance waxes and candle markets, often under our NatureWax brand, and in personal care markets. As we begin commercial operations at our biorefineries, we expect to sell our products into a variety of specialty chemical and intermediate chemical markets. The specialty chemical markets we are targeting have higher product prices per pound than those we have obtained on our sales to the performance waxes, candle and personal care markets. Our intermediate chemical sales are expected to have lower prices per pound and higher volumes than our sales into the specialty chemical markets.

 

Our Wilmar JV is consolidated in our consolidated financial statements included elsewhere in this prospectus. When the Indonesia facility begins commercial operations in 2012, we will recognize product sales and expenses for the entire Wilmar JV with noncontrolling interest recorded to offset the portion of the Wilmar JV that we do not own.

 

Grants

 

Grant revenue consists of payments from governments or other agencies. The terms of these agreements generally provide us with reimbursement for research and development services. Revenues from grants are recognized in the period during which the related costs are incurred, provided that the conditions under which the grants were made have been met and only perfunctory obligations are outstanding.

 

49


Table of Contents

Operating Expenses

 

Operating expenses consist of: the cost of product sales; sales, general and administrative; research and development; and intangible asset amortization expenses. Third-party toll manufacturing, research and development and personnel and related costs, including share-based compensation costs, comprise a majority of total operating expenses.

 

Cost of product sales

 

To date, cost of product sales primarily consist of third-party toll manufacturing, packaging and distribution costs for our products. When our biorefineries begin commercial operations, our cost of product sales will include costs related to the operation of the biorefineries, including feedstock and other inputs.

 

Sales, general and administrative

 

Sales, general and administrative expenses consist primarily of personnel and related costs including compensation of our executive management, corporate administration and sales and marketing functions, as well as facility and overhead expenses other than those associated with our research and development programs. We expect these expenses to increase as we expand our sales and administrative staffs in anticipation of our business’ growth. We will also incur higher legal, accounting, investor relations and governance expenses when we become a public company and are required to comply with securities laws applicable to public companies.

 

Research and development

 

Research and development expenses consist of internal research costs and fees paid for contract research in conjunction with the research and development of our proprietary product portfolio as well as costs incurred for grant programs. These costs include salaries and other personnel-related expenses including: share-based compensation costs; travel costs; facility costs; piloting costs; supplies and depreciation of laboratory equipment; research consultant costs; and the cost of funding research at other research institutions. All such costs are expensed as they are incurred. We expect our research and development costs to continue to increase as we continue to invest in our technology platform.

 

Intangible asset amortization

 

Amortization expense of our intangible assets consists primarily of purchased technology and technology licenses, which are amortized using the straight-line method over their estimated useful lives.

 

Other Income (Expense), Net

 

Gain (loss) on change in fair value of warrants

 

Gains or losses due to the change in fair value of warrants result from the revaluation of our outstanding warrants at each balance sheet date. The redeemable convertible preferred warrants that were outstanding prior to the closing of this offering were classified as a liability and the change in value of these warrants varied based on multiple factors, but generally increased as the estimated fair value of our common stock increased. We estimated the fair value of these warrants by using the Black-Scholes model and recognized any change in fair value resulting from changes in estimated business enterprise value. We expect the warrants to be exercised upon the consummation of this offering.

 

Interest expense

 

Interest expense consists of interest related to our convertible debt securities. This debt was converted in December 2010 to Series B preferred stock.

 

50


Table of Contents

Other income, net

 

Other income consists primarily of interest income earned on investments, cash balances and miscellaneous income. Our interest income will vary for each period depending on our average investment balances during the period and market interest rates.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates, assumptions and judgments on an ongoing basis.

 

We believe the following critical accounting policies involve significant areas of management’s judgments and estimates in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

We currently recognize revenues from the sale of products and from grants. Revenues are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.

 

For each source of revenues, we apply the above revenue recognition criteria in the following manner:

 

Product sales

 

We sell specialty chemicals under short-term agreements and in spot transactions at prevailing market prices. Revenues are recognized, net of discounts and allowances, once passage of title and risk of loss have occurred and contractually specified acceptance criteria have been met, provided all other revenue recognition criteria have also been met. Shipping and handling costs charged to customers are recorded as revenues. Shipping costs are included in cost of product sales. Such charges were not significant in any of the periods presented.

 

Grants

 

Grants are made pursuant to agreements that generally provide cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues from grants are recognized in the period during which the related costs are incurred, provided that the conditions under which the grants were provided have been met and only perfunctory obligations are outstanding.

 

Cost of Product Sales

 

We currently toll produce a majority of our products through a supply agreement with Cargill. In connection with the Product Supply Agreement, we entered into a Risk Management Agreement with Cargill whereby Cargill provides natural oil risk management services to us. The risk management services that Cargill provides are used in connection with determining the price of the natural oil feedstock they provide to us under the Product Supply Agreement. ASC 815 requires a company to evaluate contracts to determine whether the contracts are derivatives. Certain contracts that meet the literal definition of a derivative may be exempted as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities

 

51


Table of Contents

expected to be used or sold over a reasonable period in the normal course of business. Our contracts under the Risk Management Agreement with Cargill meet the requirements of normal purchases and are documented as normal and are not subject to the accounting and reporting requirements of ASC 815.

 

Convertible Preferred Warrants

 

We accounted for all issued warrants to purchase our preferred stock as liabilities on our consolidated balance sheets at fair value because the warrants could have obligated us to redeem the underlying convertible preferred. The warrants were subject to remeasurement at each balance sheet date, and any change in fair value was recognized as gain (loss) on change in fair value of warrants in the consolidated statement of operations. We estimated the fair value of these warrants at the respective balance sheet dates utilizing the Black-Scholes model to allocate an estimated business enterprise value to the various classes of our equity stock and related warrants. The Black-Scholes pricing model requires a number of variables that require management judgment including the estimated price of the underlying instrument, the risk-free interest rate, the expected volatility, the expected dividend yield and the expected exercise period of the warrants. Our Black-Scholes assumptions are discussed in greater detail in “—Share-Based Compensation” below.

 

In the six months ended June 30, 2011, and 2010, we recorded a charge of $101.8 million and $1.8 million, respectively. Gain (loss) on fair value of warrants in 2010, 2009 and 2008 were $(4.5) million, $0.7 million and $1.8 million, respectively.

 

Share-Based Compensation

 

Our share-based compensation expense for options is as follows.

 

     Years Ended
December 31,
     Six Months Ended
June  30,
 
       2008          2009          2010          2010          2011    
                          (unaudited)  
     (in thousands)  

Sales, general and administrative

   $ 290       $ 172       $ 252       $ 111       $ 161   

Research and development

     38         46         41         21         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 328       $ 218       $ 293       $ 132       $ 174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

In future periods, our share-based compensation expense is expected to increase as a result of unrecognized share-based compensation still to be recognized due to options currently outstanding and as we issue additional share-based awards in order to attract and retain employees and nonemployee consultants.

 

The following table summarizes the options granted from January 1, 2009 through the date of this prospectus.

 

     Number of
Options
Granted
     Exercise
Price Per
Share
     Estimated
Fair Value
Per Share
 

January 1, 2009

     25,197       $ 2.12       $ 1.45   

March 15, 2009

     94,911         2.12         1.22   

April 20, 2009

     2,000         2.12         1.22   

July 20, 2009

     15,000         2.12         1.22   

January 20, 2010

     560,751         2.12         0.98   

May 10, 2010

     50,000         2.12         0.98   

June 21, 2010

     71,086         2.12         0.98   

March 24, 2011

     888,892         2.14         2.14   

 

52


Table of Contents

All stock options were granted with exercise prices at or above the then-current fair market value of our common stock. We believe that the estimates of the value of our common stock were fair and reasonable at the time they were made. We utilized methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants (“AICPA”) Practice Guide entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

 

We estimated the fair value of our share-based compensation awards using the Black-Scholes option pricing model, which requires several inputs such as those outlined in the table below. Our expected dividend yield was assumed to be zero, as we have not paid, nor do we 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 similar to the option’s expected term. We calculate our expected volatility rate from the historical volatilities of several comparable public companies in 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. Due to our limited history of grant activity, we calculate our expected term utilizing the “simplified method” permitted by the SEC, which is calculated as the average of the total contractual term of the option and its vesting period. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors.

 

The fair value of employee stock options was estimated using the following weighted average assumptions (except for share price).

 

     Years Ended December 31,
     2009   2010

Expected dividend yield

     0.0%     0.0%

Risk-free interest rate

     2.0%     2.8%

Expected volatility

   65.0%   56.0%

Expected term (in years)

     6.1         6.1    

Forfeiture rate

     0.0%     0.0%

Common stock valuation

   $1.22 - $1.45   $0.98 - $2.14

 

We will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to our share-based compensation on a prospective basis and incorporating these factors into the Black-Scholes option pricing model.

 

Significant factors, assumptions and methodologies used in estimating fair value

 

We have regularly conducted valuations to assist us in estimating the fair value of our common stock for each stock option grant. Our board of directors was regularly apprised that each valuation was being conducted and considered the relevant objective and subjective factors in each valuation conducted. Our board of directors also concluded that the assumptions and inputs used in connection with such valuations reflected the best estimates of our business condition, prospects and operating performance at each valuation date.

 

Our board of directors considered the results of common stock valuations performed as of the dates provided below in estimating the grant date fair value of common stock. The estimates at each valuation date considered numerous objective and subjective factors at each option grant date including, but not limited to:

 

   

the absence of a public market for our common stock;

 

   

progress and milestones attained in our business;

 

   

projected sales and earnings for multiple future periods;

 

   

the probabilities of various financing and liquidation events, including winding up and dissolution;

 

53


Table of Contents
   

prices of preferred stock issued by us to outside investors in arm’s-length transactions;

 

   

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

 

   

our performance and the status of research and product development efforts;

 

   

our stage of development and business strategy; and

 

   

the likelihood of achieving a liquidity event such as an initial public offering or sale of our company, given then-prevailing market conditions.

 

Using these valuations, we made the following estimates of fair value of our common stock.

 

Valuation Date

   Fair Value Per Share  

December 31, 2008

   $ 1.45   

March 31, 2009

     1.22   

October 19, 2009

     1.41   

March 5, 2010

     0.98   

December 6, 2010

     2.14   

 

The valuation of the common stock began with estimating a business enterprise value using one or more of three generally accepted approaches: discounted cash flow; comparable public company; or comparable acquisition. For each valuation we prepared financial forecasts that took into account our past experience and future expectations. There is inherent uncertainty in these estimates because the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business. We balanced the uncertainty associated with achieving the forecast through the selection of a discount rate. We then allocated the equity value among the securities that comprise the capital structure of the company using the Option-Pricing Method, as described in the AICPA Practice Aid entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

 

The aggregate value of the common stock derived was then divided by the number of shares of common stock outstanding to arrive at the per share value.

 

We granted stock options with exercise prices of $2.12 per share during 2010 and 2009 and $2.14 per share in 2011. The common stock valuation at each valuation date reflected a combination of facts and circumstances as described below.

 

The valuations related to the stock options granted on March 24, 2011 considered:

 

   

The business enterprise value as of December 6, 2010 was estimated to be $107.0 million based on an income approach using a discount rate of 85% and implied value from recent financing rounds.

 

   

We used volatility of 50% based on data from a comparable group of companies. We estimated a time until liquidity of 2.1 years, applying a risk free interest rate of 0.42%. We estimated a fair market value of $2.14 per common share.

 

   

The impact of entering into the Wilmar JV to demonstrate our technology through construction of our first world-scale biorefinery.

 

   

The impact of entering into a joint development agreement with Stepan to evaluate and commercialize surfactants, antimicrobials, and polyurethane polyols based on our specialty feedstocks.

 

   

Raising $100.0 million of capital, consisting of $70.0 million of equity and $30.0 million of debt.

 

The valuation related to the stock options granted on January 20, 2010, May 10, 2010 and June 21, 2010 considered:

 

   

The business enterprise value as of March 5, 2010 was estimated to be $56.1 million based on an income approach using a discount rate of 85%.

 

54


Table of Contents
   

We used volatility of 49% based on data from a comparable group of companies. We estimated a time until liquidity event of 2.3 years, applying a risk-free interest rate of 2.8%. We estimated a fair market value of $0.98 per common share.

 

   

Forming a partnership with Trent University to develop new biomaterials, biochemicals and bioproducts from natural oils.

 

   

The issuance of $10.0 million of convertible redeemable preferred notes which closed on March 5, 2010.

 

The valuation related to the stock options granted on March 15, 2009, April 20, 2009, and July 20, 2009, considered:

 

   

The business enterprise value as of March 31, 2009 was estimated to be $41.1 million based on an income approach and assuming a discount rate of 85%.

 

   

We used volatility of 65% based on data from a comparable group of companies. We estimated a time until liquidity event of 2.75 years, applying a risk-free interest rate of 1.2%. We estimated a fair market value of $1.22 per common share.

 

   

Demonstrating a 50% reduction in catalyst used in our metathesis reaction.

 

   

Identifying testing and completing initial engineering on our biorefinery concept.

 

The valuations related to the stock options granted on January 1, 2009 considered:

 

   

The business enterprise value as of December 31, 2008 was estimated to be $36.4 million based on an income approach and using a discount rate of 80%.

 

   

We used volatility of 70% based on data from a comparable group of companies. We estimated a time until liquidity event of 3 years, applying a risk free interest rate of 1.0%. We estimated a fair market value of $1.45 per common share at December 31, 2008.

 

   

The impact of:

 

   

hiring key members of our executive team;

 

   

partnering with Dow Corning to market naturally derived ingredients in personal care applications; and

 

   

opening our facility in Bolingbrook, Illinois.

 

Income Taxes

 

We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provisions for income taxes. We use the asset and liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We record a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. As of June 30, 2011, we had a full valuation allowance against all of our deferred tax assets given our history of losses.

 

Intangible Assets and Other Long-Lived Assets

 

Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its

 

55


Table of Contents

carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Goodwill

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase businesses combination. Goodwill is reviewed for impairment at least annually. The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with business combination rules. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. We perform our annual impairment test of goodwill during the fourth fiscal quarter, and when a triggering event occurs between annual impairment tests.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principals and International Financial Reporting Standards.” ASU 2011-04 amends the application of the “highest and best use” concept to be used only in the measurement of the fair value of nonfinancial assets, clarifies that the measurement of the fair value of financial instruments classified as equity should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure to those risks can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. These provisions are effective for reporting periods beginning on or after December 15, 2011 applied prospectively. Early application is not permitted. We are currently reviewing what effect, if any, this new provision will have on our Consolidated Financial Statements.

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220)—Presentation of Comprehensive Income.” ASU 2011-05 requires the components of net income and other comprehensive income to be presented either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. An entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for us beginning November 1, 2012 and requires retrospective application. As this guidance only amends the presentation of the components of comprehensive income, the adoption will not have an impact on our consolidated financial position or results of operations.

 

56


Table of Contents

Results of Operations

 

The following table presents our consolidated statements of operations for the years ended December 31, 2008, 2009, and 2010 and for the six months ended June 30, 2010 and 2011 and forms the basis for the following discussion of our operating activities and results of operations.

 

    For the Years Ended December 31,     Change     For the Six Months Ended
June 30,
    Change  
    2008     2009     2010     2009 vs.
2008
    2010 vs.
2009
          2010                 2011           2011 vs.
2010
 
                                  (unaudited)     (unaudited)     (unaudited)  
    (in thousands)  

Revenues:

               

Product sales

  $ 18,913      $ 12,186      $ 20,227      $ (6,727   $ 8,041      $ 7,719      $ 8,076      $ 357   

Grants

                  961               961        528        476        (52
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    18,913        12,186        21,188        (6,727     9,002        8,247        8,552        305   

Operating Expense:

               

Cost of product sales

    14,425        11,860        17,824        (2,565     5,964        6,679        7,263        584   

Sales, general and administrative

    8,086        8,168        11,356        82        3,188        5,875        8,097        2,222   

Research and development

    5,539        7,760        8,896        2,221        1,136        4,741        4,263        (478

Intangible asset amortization

    1,506        1,506        1,506                      753        753          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    29,556        29,294        39,582        (262     10,288        18,048        20,376        2,328   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,643     (17,108     (18,394     (6,465     (1,286     (9,801     (11,824     (2,023

Gain (loss) on change in fair value of warrants

    1,787        652        (4,506     (1,135     (5,158     (1,839     (101,823     (99,984

Interest expense

           (437     (4,415     (437     (3,977     (1,803            1,803   

Other income, net

    636        56        14        (580     (43     4        117        113   

Income taxes

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (8,220   $ (16,837   $ (27,301   $ (8,617   $ (10,464   $ (13,439   $ (113,530   $ (100,091
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of Six Months Ended June 30, 2011 and 2010

 

Revenues

 

Product sales. Our product sales increased by $0.4 million, or 4.6%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was driven by a change in the mix of products sold and an increase in soy oil prices offset by a decrease in performance wax product volumes.

 

Grants. Our grant revenue decreased by $0.1 million, or 9.8%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was primarily driven by a decrease related to the $2.5 million grant from the U.S. Department of Energy that was awarded in 2009 and on which draws commenced in 2010.

 

Operating expenses

 

Cost of product sales. Our cost of product sales increased by $0.6 million, or 8.7%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was primarily due to increased product feedstock costs.

 

57


Table of Contents

Sales, general and administrative. Our sales, general and administrative expenses increased by $2.2 million, or 37.8%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was primarily due to an increase of $1.5 million in personnel related expenses and a $0.6 million increase in fees paid to outside consultants, including expenses related to the acquisition of the Mississippi facility.

 

Research and development. Our research and development expenses decreased by $0.5 million, or 10.1%, in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was primarily due to a decrease of $0.4 million related to the amortization of a license agreement entered into during 2010.

 

Intangible asset amortization. Our intangible asset amortization expenses consisted primarily of purchased technology and technology licenses and amounted to $0.8 million for the six months ended June 30, 2011 and June 30, 2010.

 

Other income (expense)

 

Gain (loss) on change in fair value of warrants. We incurred a loss of $101.8 million and $1.8 million in the six months ended June 30, 2011 and the six months ended June 30, 2010, respectively, related to the increase in the fair value of the outstanding warrants to acquire our Series B preferred stock resulting from the increase in the value of our business.

 

Interest expense. Our interest expense decreased by $1.8 million in the six months ended June 30, 2011 compared to the six months ended June 30, 2010, which was due to the conversion of $30.0 million of redeemable convertible preferred notes into shares of Series B preferred stock on December 6, 2010.

 

Comparison of Years Ended December 31, 2010 and 2009

 

Revenues

 

Product sales. Our product sales increased by $8.0 million in 2010 compared to 2009, or 66.0%. This was primarily driven by a 60.8% increase in performance wax product volume due to a favorable soy oil-to-paraffin spread, which drove price sensitive customers to purchase products derived from soy oil.

 

Grants. Our grant revenue increased by $1.0 million in 2010 compared to 2009, which was due to the receipt of $1.0 million of a $2.5 million grant from the U.S. Department of Energy that we were awarded in December 2009.

 

Operating expenses

 

Cost of product sales. Our cost of product sales increased by $6.0 million, or 50.3%, in 2010 compared to 2009, which was primarily driven by an increase in our product sales, partially offset by a decrease of 6.6% in our feedstock costs in 2010 compared to 2009 achieved through advantaged feedstock purchases.

 

Sales, general and administrative. Our sales, general and administrative expenses increased $3.2 million or 39.0% in 2010 compared to 2009, which was primarily due to an increase of $1.2 million in personnel related expenses due to increased headcount and an increase of $1.0 million in legal fees related to general corporate matters.

 

Research and development. Our research and development expense increased $1.1 million, or 14.6% in 2010 compared to 2009, which was primarily due to a $0.6 million amortization expense related to a license agreement that was entered into during 2010.

 

Intangible asset amortization. Our intangible asset amortization expenses consisted primarily of purchased technology and technology licenses and amounted to $1.5 million in 2010 and 2009.

 

58


Table of Contents

Other income (expense)

 

Gain (loss) on change in fair value of warrants. We incurred a loss of $4.5 million and a gain of $0.7 million in 2010 and 2009, respectively, related to the change in the fair value of the outstanding warrants to acquire our Series B preferred stock. The loss in 2010 was related to the increased value of our business and thus the value of the warrants, because in 2010, we achieved several strategic milestones with third parties which validated our technical and commercial progress.

 

Interest expense. Our interest expense increased $4.0 million in 2010 compared to 2009, which was due to the sale of $30.0 million of redeemable convertible preferred notes. These notes were converted into shares of Series B preferred stock on December 6, 2010.

 

Comparison of Years Ended December 31, 2009 and 2008

 

Revenues

 

Product sales. Our product sales decreased $6.7 million, or 35.6%, in 2009 compared to 2008, which was primarily due to a 22.5% decrease in performance wax sales volume which was primarily related to a loss of a customer.

 

Operating expenses

 

Cost of product sales. Our cost of product sales decreased $2.6 million, or 17.8%, in 2009 compared to 2008, which was primarily due to a 22.5% decrease in product sales and an increase in our feedstock costs in 2009 compared to 2008.

 

Sales, general and administrative. Our sales, general and administrative expense increased $0.1 million, or 1.0%, in 2009 compared to 2008, which was primarily due to an increase in personnel related expenses.

 

Research and development. Our research and development expense increased $2.2 million, or 40.1%, in 2009 compared to 2008, which was primarily due to a $1.8 million increase in personnel related expenses due to increased headcount.

 

Intangible asset amortization. Our intangible asset amortization expenses consisted primarily of purchased technology and technology licenses and amounted to $1.5 million in 2009 and 2008.

 

Other gain (loss)

 

Gain (loss) on change in fair value of warrants. We recorded a gain of $0.7 million and a gain of $1.8 million in 2009 and 2008, respectively, related to the decrease in the fair value of the outstanding warrants to acquire our Series B preferred stock. This gain was a result of a decline in the term to a liquidity event, which resulted in a lower value of the security while the value of our business was relatively constant.

 

Interest expense. Our interest expense increased $0.4 million in 2009 compared to 2008, which was due to the sale of $10.0 million of convertible notes on October 19, 2009.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Since our inception, we have financed our operations primarily from an aggregate of $198.8 million raised from private placements of equity securities, $8.1 million of product sales less cost of product sales and $1.4 million from grants.

 

59


Table of Contents

Gross proceeds from sales of our convertible preferred stock and convertible notes since our inception were as follows.

 

Date

   Amount     

Financing

     (in thousands)       

November 2007—February 2008

   $ 48,770       Series B preferred stock

October 2009—August 2010

     30,000       Convertible Redeemable Preferred Notes(1)

December 2010

     70,000       Series C preferred stock

June 2011

     50,000       Series D preferred stock
  

 

 

    

Total

   $ 198,770      
  

 

 

    

 

  (1)   Converted into Series B preferred stock in December 2010.

 

The primary uses of our capital resources to date have been to fund operating activities, including research and development and manufacturing expenses, and to fund investing activities primarily related to capital expenditures. During the years ended December 31, 2009 and 2010 and the six months ended June 30, 2011, we used cash of $1.0 million, $1.9 million, and $20.1 million to fund capital expenditures. We currently anticipate making additional capital expenditures of $4.5 million (net of Wilmar contributions to the Wilmar JV) to fund completion of the Indonesia facility and approximately $85.0 million to fund completion of the Mississippi facility.

 

In the second quarter of 2012, we expect to begin operating the Indonesia facility, our first world-scale facility through the Wilmar JV. In addition, we plan to begin operating the Mississippi facility in the second half of 2013, and we are evaluating sites for the construction of a third biorefinery in South America. The amount of capital required to build the South American facility will depend on the existing infrastructure at the site and the terms and conditions of any agreements we enter into with partners. By 2014, we expect these three facilities to have a combined annual production capacity of approximately one million metric tonnes (2.2 billion pounds) assuming an expansion of one of our first two facilities.

 

We may also use our capital resources to fund working capital, product development, operating expenses, strategic initiatives or acquisitions. If we are unable to access additional capital, our growth may be slowed. For additional information, see “Risk Factors—Risks Related to Our Business—We may require substantial additional financing to achieve our goals, and a failure to obtain funding when needed or on acceptable terms could force us to delay, limit, reduce or terminate our development and commercialization efforts.”

 

We believe our existing cash, cash equivalents and short-term investments and the net proceeds from this offering will be sufficient to fund our operations and capital expenditures through the completion of our first three biorefineries.

 

Cash, Cash Equivalents and Short-Term Investments

 

Our cash, cash equivalents and short-term investments are held primarily in money market funds. Our short-term investments in marketable securities are all classified as held-to-maturity, and are recorded at their amortized cost. We make our investments in accordance with our investment policy, the primary objectives of which are liquidity and capital preservation. The balances of our cash, cash equivalents and short-term investments as of the dates listed below were as follows.

 

     Years Ended
December 31,
     Six Months
Ended
June 30,

2011
 
     2009      2010     
                   (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 7,557       $ 36,665       $ 73,224   

Short-term investments

     250         40,693         22,851   

 

60


Table of Contents

Our cash, cash equivalents and short-term investments increased by $69.6 million in 2010, primarily due to net proceeds of $67.6 million received from the sale of 5,649,718 shares of our Series C preferred stock during 2010 at a price of $12.39 per share and net proceeds of $19.9 million received from the sale of convertible redeemable preferred notes and warrants, partially offset by cash used in operating activities of $17.3 million and capital expenditures of $1.9 million. Cash, cash equivalents and short-term investments increased by $18.7 million during the six months ended June 30, 2011, primarily due to net proceeds of $49.9 million received from the sale of 2,556,238 shares of our Series D preferred stock during 2011 at a price of $19.56 per share, partially offset by cash used in operating activities of $13.3 million and capital expenditures of $20.1 million.

 

The following table shows a summary of our cash flows for the periods indicated.

 

     Years Ended December 31,     Six Months Ended
June 30,
 
     2008     2009     2010     2010     2011  
                       (unaudited)  
     (in thousands)  

Net cash used in operating activities

   $ (5,401   $ (16,021   $ (17,298   $ (11,074   $ (13,281

Net cash provided by (used in) investing activities

     13,780        565        (42,645     (283     (3,224

Net cash provided by financing activities

     3,770        9,997        89,044        10,049        53,070   

 

Operating Activities

 

Our primary uses for cash from operating activities are costs for product sales, personnel-related expenses and research and development-related expenses. Uses of cash are offset by cash received from product sales and grant revenue. Our primary source of grant revenue is a $2.5 million grant from the U.S. Department of Energy that we were awarded in December 2009.

 

Cash used in operating activities of $13.3 million during the six months ended June 30, 2011 reflected our net loss of $113.5 million offset, in part, by non-cash charges totaling $103.1 million and changes in operating assets and liabilities of $2.8 million. Non-cash charges primarily included a loss of $101.8 million from a change in fair value of our warrants. The net change in our operating assets and liabilities was primarily a result of an increase in our inventories of $3.1 million. The increase in inventories was the result of a toll campaign to produce olefins and esters in anticipation of sales.

 

Cash used in operating activities of $11.1 million during the six months ended June 30, 2010, reflected our net loss of $13.4 million offset by non-cash charges totaling $4.8 million and changes in operating assets and liabilities of $2.4 million. Non-cash charges primarily included depreciation and amortization of $1.0 million and a loss of $1.8 million from a change in fair value of our warrants and non-cash interest expense and amortization of debt discounts of $1.8 million. The net change in our operating assets and liabilities was primarily a result of an increase in accounts receivable of $1.3 million.

 

Cash used in operating activities of $17.3 million in 2010 reflected our net loss of $27.3 million offset by non-cash charges totaling $11.3 million and changes in operating assets and liabilities of $1.3 million. Non-cash charges included depreciation and amortization of $2.1 million, a loss of $4.5 million from a change in fair value of our warrants and non-cash interest expense and amortization of debt discounts of $4.4 million. The net change in our operating assets and liabilities was primarily a result of an increase in inventory of $2.0 million and an increase in accounts payable of $1.2 million. The increase in inventories reflected purchases of catalyst in anticipation of commercial production of biorefinery products.

 

Cash used in operating activities of $16.0 million in 2009 reflected our net loss of $16.8 million offset by non-cash charges totaling $2.0 million and changes in operating assets and liabilities of $1.1 million. Non-cash charges included depreciation and amortization of $2.0 million. The net change in our operating assets and liabilities was primarily a result of an increase in other current assets of $0.8 million.

 

61


Table of Contents

Cash used in operating activities of $5.4 million in 2008 reflected our net loss of $8.2 million offset by non-cash charges totaling $0.3 million and changes in operating assets and liabilities of $2.5 million. The net change in our operating assets and liabilities was primarily a result of a decrease in a related party receivable from Cargill of $1.2 million, a decrease in other current assets of $1.3 million, a decrease in accounts payable of $0.8 million. The decrease in other current assets includes a $0.6 million prepayment to Materia in December 2008 for catalyst.

 

Investing Activities

 

Our investing activities consist of capital expenditures and the purchases and sales of short-term investments. We invest proceeds from equity offerings in money market accounts or short-term debt securities until the capital is required for operating purposes.

 

During the six months ended June 30, 2011, cash used in investing activities totaled $3.2 million and was comprised of capital expenditures totaling $20.1 million which were primarily related to the purchase of the Mississippi facility, and a letter of credit related to a facility lease totaling $1.2 million. These cash expenditures were offset by the net sales of short-term investments totaling $18.1 million which was used to fund operating requirements.

 

During the six months ended June 30, 2010, cash used in investing activities totaled $0.3 million and was comprised of capital expenditures for the construction of a pilot plant at our Bolingbrook, Illinois facility.

 

In 2010, cash used in investing activities was $42.6 million and was comprised of capital expenditures totaling $1.9 million, which were primarily related to the construction of the Indonesia facility and the expansion of our Bolingbrook facility. Additionally, we made net purchases of $40.7 million of short-term investments.

 

In 2009, cash provided by investing activities totaled $0.6 million.

 

In 2008, cash provided by investing activities totaled $13.8 million and was comprised of capital expenditures totaling $3.0 million primarily related to leasehold improvements, which was offset by cash provided by the net sale of short-term investments which totaled $17.1 million.

 

Financing Activities

 

During the six months ended June 30, 2011, cash provided by financing activities was $53.1 million primarily due to the net proceeds of $49.9 million received from the sale of our Series D preferred stock and $3.0 million of contributions from Wilmar, our partner in the Wilmar JV.

 

During the six months ended June 30, 2010, cash provided by financing activities was $10.0 million primarily due to the net proceeds of $9.9 million received from the sale of convertible notes and warrants and $0.1 million from the proceeds of sale of common shares.

 

In 2010, cash provided by financing activities was $89.0 million primarily due to the net proceeds of $67.6 million from the sale of our Series C preferred stock and $19.9 million from the sale of convertible notes and warrants.

 

In 2009, cash provided by financing activities was $10.0 million primarily due to proceeds of $9.9 million from the sale of convertible notes and warrants.

 

In 2008, cash provided by financing activities was $3.8 million primarily due to the proceeds from the exercise of warrants for the purchase of Series B preferred stock.

 

62


Table of Contents

Contractual Obligations and Commitments

 

The following table summarizes our long-term contractual obligations and commitments as of June 30, 2011.

 

     Payments Due by Period  

Contractual Obligations

   Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 
     (in thousands)  

Long-term debt obligations

   $ 114       $ 8       $ 16       $ 16       $ 74   

Operating lease obligations

     13,520         136         1,997         2,452         8,936   

Purchase commitments

     53,602         2,497         18,437         16,668         16,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67,236       $ 2,641       $ 20,450       $ 19,136       $ 25,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The majority of our purchase commitments arise from license and joint development agreements. Commitments under our license agreements require annual minimum purchases that generally remain fixed from year to year. The annual minimum purchases are at or below what management believes it will need to spend to run the business irrespective of contract requirements. Commitments arising from joint development agreements represent funding requirements for contracted research staff, which can vary over the term of a particular agreement. We have prepared the commitment table assuming current staffing levels will continue through the remainder of each agreement.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any relationships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Quantitative and Qualitative Disclosure about Market Risk

 

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

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations. We do not enter into investments for trading or speculative purposes. We generally invest our cash in investments with short maturities or with frequent interest reset terms. As of June 30, 2011, our investment portfolio consisted primarily of AAA money market funds and corporate bonds rated A- or higher, all of which are highly liquid investments. Due to the short-term nature of our investment portfolio, our exposure to interest rate risk is minimal.

 

Foreign Currency Risk

 

Our operations currently include manufacturing and sales activities primarily in the United States, as well as research activities primarily in the United States. We occasionally pay for contractor or research services in a currency other than the U.S. dollar. Today, we have minimal exposure to fluctuations in foreign currency exchange rates as the difference from the time period for any services performed which require payment in a foreign currency and the date of payment is short. We are actively expanding outside the United States, in particular through the Wilmar JV. As we expand internationally, our results of operations and cash flows will

 

63


Table of Contents

become increasingly subject to fluctuations due to changes in foreign currency exchange rates. We have not hedged our foreign currency since the exposure has not been material to our historical operating results. Although substantially all of our feedstock and sales are currently denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products outside the United States. We may consider hedging our foreign currency risk as we continue to expand internationally.

 

Commodity Price Risk

 

Our exposure to market risk for changes in commodity prices currently relates primarily to our purchases of soy oil. We manage our exposure to this risk primarily through our Risk Management Agreement with Cargill. Pursuant to the Risk Management Agreement, prices that we pay Cargill are computed using a formula that may take into account both quarterly average feedstock futures prices and Cargill’s ownership cost of feedstocks, as adjusted to account for all of Cargill’s gains and losses from its futures and derivatives trading. We have not historically hedged the price volatility of soy oil. We are actively expanding our production capacity, in particular through our Wilmar JV and through the Mississippi facility. We will rely on commodity feedstocks such as palm, soy and rapeseed oils. In the future, we may manage our exposure to this risk by hedging the price volatility of feedstock, principally through futures contracts or entering into joint venture agreements that would enable us to obtain secure access to feedstock.

 

64


Table of Contents

BUSINESS

 

Our Company

 

We produce high performance specialty chemicals and intermediate chemicals from renewable natural oils. Our specialty chemicals address a potential market size that we estimate to be $176 billion. We produce these chemicals using our proprietary, low-cost, capital efficient production process based on Nobel Prize-winning innovations in metathesis catalysis. Our process uses a highly efficient and selective metathesis catalyst to break down the complex molecules found in natural oils and recombine the fragments to produce high value chemicals. We are producing our chemicals at commercial scale. Our process can produce these chemicals at lower cost and with lower capital investment than conventional processes positioning us to deliver attractive returns on capital. We are building the Indonesia facility as part of the Wilmar JV. We plan to begin commercial operations at this facility by the second quarter of 2012. We are also repurposing an existing facility in Natchez, Mississippi into an integrated biorefinery. We expect construction of our first two facilities to cost $165 to $360 per metric tonne ($0.07 to $0.16 per pound) of annual production capacity compared to $920 to $2,300 per metric tonne ($0.42 to $1.04 per pound) of annual production capacity for conventional facilities. We have established strategic partnerships with market leaders to accelerate the commercialization and rapid deployment of our technology.

 

Our specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. We believe these products will be key performance ingredients and building blocks used in large end markets including detergents, lubricants, personal care products, coatings and plastics. Our intermediate chemicals, namely olefins and oleochemicals, can directly replace critical molecules in large, attractive markets. We expect that prevailing market dynamics, such as the desire for new and increasingly demanding performance characteristics, changing regulatory requirements and structural supply shortages will support rapid adoption of our specialty chemicals and market penetration of our intermediate chemicals. We are in discussions with existing partners and potential new customers for long-term purchasing or offtake agreements for the entirety of our projected 2013 production.

 

Our conversion process is more direct and energy-efficient than conventional conversion processes, which results in lower unit level production costs and lower up-front capital expenditures. In addition, we have demonstrated our ability to secure a premium for certain high performance specialty chemicals. Unlike conventional processes, we are able to adjust the mix of chemicals we produce by changing our feedstock and operating conditions in real time. This allows us to both target the production of specific high-value chemicals in response to market dynamics and avoid the production of less desirable, lower priced co-products.

 

We currently manufacture our products at commercial scale using tolling facilities, which has validated our target cost of production. We have entered into the Wilmar JV with a subsidiary of Wilmar to build our first world-scale biorefinery. The Indonesia facility, at a total construction cost of approximately $30 million, is fully funded and under construction and will have an annual production capacity of 185,000 metric tonnes (400 million pounds) with an option to expand to 370,000 metric tonnes (810 million pounds). We have structured feedstock and product marketing arrangements with Wilmar for the Indonesia facility. By the end of 2014, we expect to be operating additional world-scale facilities in both North and South America and expect to have combined annual production capacity from our first three facilities of approximately one million metric tonnes (2.2 billion pounds). We plan to rapidly deploy our technology using a combination of modular facility design and repurposing of or integration with existing industrial sites.

 

65


Table of Contents

The following chart sets forth our intended product portfolio.

 

Intended Product Portfolio

 

LOGO

 

Our primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. These natural oils are available in liquid form in industrial quantities from a variety of geographic regions. These characteristics allow for low-cost transportation and storage compared to other renewable feedstocks such as industrial sugars, biomass and waste. Our ability to adjust our inputs in real time allows us to take advantage of changes in feedstock prices and product demand.

 

Our collaborative business model is designed to accelerate the commercialization and rapid deployment of our technology. We have established strategic partnerships with market leaders in the specialty chemical and intermediate chemical value chains, including Cargill, Clariant, Dow Corning, DSM, Stepan and Wilmar. These partners provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure.

 

Industry Overview

 

According to Chemical Week, an IHS industry trade publication, the market size of the global chemical industry was approximately $3.7 trillion as of August 2011. Chemicals are a key component used in the production of most products and materials used in everyday life.

 

Chemical families are grouped based on the feedstocks from which they are produced. For example, petrochemicals are produced from petroleum and natural gas feedstocks. Oleochemicals are produced from plant oils, such as palm, soy or rapeseed, or animal oils, such as tallow. Key value drivers for chemical producers include product demand and resulting pricing trends, production economics, feedstock strategy and geographic footprint.

 

   

Product demand and resulting pricing trends. Product demand is driven by customer preferences and requirements, market supply, regulatory specifications and the cost and performance of competing products and technologies.

 

   

Production economics. Chemical industry production economics are driven by both the capital cost of building facilities and the cash flow generated by these facilities which is a function of operating costs and the price of the final products.

 

66


Table of Contents
   

Feedstock strategy. Feedstock costs typically represent a significant portion of product cost. Therefore, chemical producers can create value by mitigating the cost and volatility of their feedstocks. Key drivers to manage these costs are developing and licensing process technologies and locating in regions with access to cost advantaged feedstocks.

 

   

Geographic footprint. Some feedstocks or chemical products are located or produced in only certain regions and are difficult or costly to ship, requiring producers to locate facilities close to cost-advantaged feedstock sources or customers. In addition, the geography of the production footprint often drives producer supply chain economics.

 

Chemical families are also grouped based on their performance, their relative availability and their ability to add value to downstream products.

 

Market Structure and Value

 

LOGO

 

Specialty Chemicals

 

According to Datamonitor, the size of the global specialty chemical industry was approximately $706 billion in 2010. Specialty chemicals are sold based on the additional value their unique and tailored performance characteristics deliver versus intermediate chemicals or commodity chemicals, which must only meet general specifications. As a result, demand for specialty chemicals is generally driven by customer-specific requirements to enable product performance.

 

Because specialty chemicals are sold into specific applications, they generally command a higher price and margin than intermediate chemicals and commodity chemicals. Due to their use in specific applications, the added value of specialty chemicals is more affected by performance attributes than supply and demand dynamics or raw material pricing. Once specialty chemicals are tailored to a given customer’s specifications, there are generally high switching costs for that customer. Specialty chemical producers are required to maintain a strong application development function and a knowledgeable technical sales force to develop, market and support the use of specialty products. These capabilities allow producers to develop product solutions with their customers in response to evolving consumer preferences or changing regulatory requirements.

 

67


Table of Contents

A number of key challenges currently impact the specialty chemical industry, including the following:

 

   

demand for improved performance characteristics driven by evolving consumer preferences or changing regulatory requirements;

 

   

limited availability of certain critical feedstocks and intermediate chemicals;

 

   

feedstock price level and volatility; and

 

   

increasing demand for products made from non-toxic, environmentally friendly and renewable sources.

 

We develop applications that will go into several large segments of the specialty chemical industry. Our primary target markets in the specialty chemical industry include surfactants, lubricants and additives and polymers.

 

Surfactants

 

Surfactants are substances that give products the ability to remove dirt from surfaces such as skin, plastics and textiles. This property is what allows laundry detergents, for example, to penetrate fabric and capture and lift dirt away from clothing. Surfactant performance is primarily driven by the ability of the liquid in which it is carried to wet, or penetrate, another material, such as a fabric. This property is known as “wettability” and is what allows the surfactant to access the dirt particles that it has been designed to remove. The primary use of surfactants is in the detergents, cleaners and personal care markets. Today, surfactants are derived from two main sources, olefins and oleochemicals.

 

Within surfactants, specialty surfactants provide multiple functional attributes, better efficacy and offer better characteristics for formulation that cannot be obtained with intermediate and commodity surfactants. For example, one key performance attribute that we believe consumers are demanding is cold water surfactant efficacy. Consumers in developed countries desire cold water performance, as it reduces energy intensity for everyday fabric cleaning. In addition, consumers in developing countries look for cold water performance due to limited access to hot water. Other attributes of specialty surfactants include increased formulation concentration, which reduces shipping and packaging costs, and multifunctionality, such as two-in-one products driven by consumer demand for convenience.

 

Specialty surfactant pricing varies widely based on the efficacy and functional attributes they deliver and they are typically sold at a premium to high volume surfactants. According to the Freedonia Group, Inc., specialty surfactants sold for a price ranging from $2,690 to $5,997 per metric tonne ($1.22 to $2.72 per pound) in 2009.

 

Lubricants and additives

 

Lubricants are used to reduce friction between moving surfaces. Other functional attributes of lubricants include transporting foreign particles and distributing heat. Lubricants are utilized primarily in engines and gear boxes found in automobiles, trucks and industrial equipment. They are formulated using base oil, typically 80% to 90% of the finished lubricant formulation, and additives which enhance the resistance to friction, corrosion and wear, improve the stability or otherwise boost the performance of the base oil. These enhanced properties enable the lubricant to meet performance requirements for a given application.

 

Lubricant base oils are classified by the American Petroleum Institute (“API”) into groups based on their composition and physical properties. Group I, II and III base oils are produced using mineral oils. Base oils made from alpha olefins are known as polyalphaolefins (“PAOs”) or Group IV base oils and those made from esters, alcohols or glycols are known as Group V base oils.

 

Management estimates the size of the existing synthetic high performance base oil market, which we define as API Group III, Group IV and Group V base oils, is approximately 4 million metric tonnes (9 billion pounds)

 

68


Table of Contents

per year and represents approximately $8.5 billion in annual revenues. These synthetic base oils represent both the fastest-growing and highest-performing segment of the lubricants market. Management estimates the average selling prices in this market range from $1,720 to $4,410 per metric tonne ($0.78 to $2.00 per pound). Several factors are driving increased usage of Groups III, IV and V base oils compared to Groups I and II: desire for reduced oil change frequency; requirements for improved fuel economy; and improved lubricating performance.

 

A new base oil that is expected to come to market in 2011 is gas-to-liquids (“GTL”) base oil. Under a development and production sharing agreement with the government of the state of Qatar, Royal Dutch Shell plc has invested billions of dollars in a GTL facility designed to produce products including fuel and high purity base oils that commenced operations in 2011. GTL base oils are expected to have better performance characteristics than Group III base oils and are being commercialized by Shell through their own lubricant brands. Shell’s major lubricant competitors are looking for alternative, high-performing technology that will enable them to differentiate their lubricants and compete effectively against this new entrant.

 

We are also targeting the additives market segment. Management estimates that 3.8 million metric tonnes (8.4 billion pounds) of additives were used in lubricants and fuels in 2007 to enable them to meet performance requirements. For example, additives are required in diesel fuel and rapidly growing bio-diesel fuel blends to prevent them from becoming thick or even solid in cold temperatures. Additives enable lubricant formulators and fuel blenders to improve lubricity, modify viscosity at different temperatures, provide detergency to control soot or other impurities, and prevent or reduce corrosion in final products. Management estimates that typical fuel additives prices range from $1,874 to $3,968 per metric tonne ($0.85 to $1.80 per pound) and common lubricant additives prices range from $1,102 to $5,732 per metric tonne ($0.50 to $2.60 per pound).

 

Polymers

 

Polymers, commonly referred to as plastics, consist of a broad range of polymer resins manufactured from monomers. Monomers, typically olefins and other highly reactive chemicals, are linked together in long chains to produce polymers with performance attributes that are a function of the type and mix of monomers utilized. Polymers generally are replacing traditional materials, such as metals and ceramics, in order to reduce weight and cost and improve end product performance. The market includes high volume commodity polymers and lower volume, higher performance specialty polymers. Specialty polymers offer unique and tailored functional attributes and characteristics that cannot be addressed by the commodity classes. For example, the melting point of polypropylene, a low-cost commodity polymer, is 160 degrees Celsius while specialty polymer melting points can exceed 300 degrees Celsius. In addition to better thermal properties, attributes of specialty polymers include increased strength, corrosion resistance and electrical insulation.

 

The ability of engineering polymers to provide benefits such as high temperature performance or weight reduction has led to strong growth. A key challenge facing specialty polymer producers is procuring enough feedstock or monomer on a cost-effective basis given episodes of limited availability and increasing and volatile pricing.

 

Specialty polymer pricing varies widely based on the type of resin and the performance characteristics offered by the material. These specialty resins are typically priced at a premium to commodity plastics. Management estimates that in the first quarter of 2011, commodity plastics generally sold at prices ranging from $1,186 to $1,988 per metric tonne ($0.54 to $0.90 per pound) and specialty polymers, depending on the type of polymer, generally sold at prices ranging from $6,614 to $15,432 per metric tonne ($3.00 to $7.00 per pound). In 2004, this category of plastic constituted just over 10% of the total plastic market on a volume basis and amounted to approximately 16 million metric tonnes (35 billion pounds) per year of consumed material.

 

69


Table of Contents

Intermediate Chemicals

 

As the building blocks for most of the finished products in the industry, intermediate chemicals have higher margins per unit than commodity chemical feedstocks. A number of key challenges are affecting the market for intermediate chemicals, including the following:

 

   

Increasing cost, volatility and scarcity of certain key feedstocks leading to uncertain profitability;

 

   

Limited flexibility to produce higher value chemicals without also producing other lower value chemicals given that conventional processes produce a largely fixed product mix;

 

   

Need for new regional supply to meet increasing emerging market demand; and

 

   

Increasing demand for products made from renewable sources.

 

Our manufacturing platform will convert renewable feedstocks into two key categories of intermediate chemicals: olefins and oleochemicals.

 

Olefins

 

Olefins are chemicals used, in combination with other olefins or intermediate chemicals, to produce a large portion of downstream chemical products. Olefins are generally produced through a highly energy intensive, multi-step process involving high temperatures and pressures to convert naphtha (a petroleum derivative) and natural gas feedstocks into molecules with added functional attributes. The most common olefin is ethylene, a two carbon molecule with a double bond. Olefins are very reactive with other chemicals, making them useful in the conversion into downstream higher value added products.

 

Olefins are categorized based on the number of carbon atoms each molecule contains. For example, ethylene and propylene, the smallest of the olefins, have two (C2) and three (C3) carbon atoms, respectively. These olefins represent the largest volume and lowest value olefins derived from petroleum and natural gas. Examples of higher value olefins are LAOs and LIOs with four or more carbon atoms per molecule. We estimate that the total LAO and LIO market size was $7 billion in 2008.

 

We focus our production output on higher value olefins, specifically those LAOs or LIOs with ten or more carbon atoms. Intermediate olefins are generally used in the production of alcohols used in detergents and PAOs used in Group IV synthetic lubricants and oilfield chemicals.

 

Conventional LAO production technology is limited by the inability to change product mix to match demand. As demand for different LAOs is growing at different rates while the supply mix has remained fairly static, certain types of LAOs are in short supply while other types are in surplus. For example, increasing use of synthetic lubricants has driven higher demand for decene (C10) versus other LAOs, but the supply of decene has not kept pace because producers have limited ability to change the production mix at their plants. Additionally, new construction of conventional LAO capacity would produce a combination of both C10 and lower value co-products. Our technology has inherently greater flexibility to change our product mix, and thus, in response to market dynamics, we currently focus our production on C10 to C14 molecules, while minimizing the production of other less profitable molecules.

 

Oleochemicals

 

Oleochemicals are a diverse set of building block chemicals derived from natural oil feedstocks such as plant oils and animal fats. These chemicals include fatty acids, fatty esters, fatty alcohols and glycerols. Plant oils and animal fats are made up of triglycerides, which are fatty acids of various lengths and levels of saturation linked together by a glycerol backbone. We estimate the market size for oleochemicals to be $38 billion in 2010. Some of the key raw materials used in the production of oleochemicals are palm, coconut, palm kernel and soy

 

70


Table of Contents

oils. Oleochemicals are typically produced through hydrolysis or transesterification. Hydrolysis, sometimes called steam or fat splitting, is a process whereby steam is reacted with a plant oil or animal fat to separate it into fatty acids and glycerol. Transesterification, which is also used for the production of biodiesel, is a process where methanol or other alcohols are reacted with these oils to produce fatty esters and glycerol. These oleochemical products can then be converted to derivatives or consumed in applications such as detergents, lubricants, personal care products, plastics, soaps and solvents.

 

Conventional technologies for producing oleochemicals have limited flexibility as their product mix is fixed based on the type of feedstock oil used. For example, an oleochemical producer who uses hydrolysis to process palm oil would produce a high proportion of palmitic acid, a C16 saturated fatty acid, while a producer who processes rapeseed oil would produce a high proportion of oleic acid, a C18 monounsaturated fatty acid.

 

The table below shows the fatty acid profiles (in percent) that are derived from several common natural oils using conventional hydrolysis technology.

 

Fatty Acid

Name

  Caprylic*     Capric*     Lauric*     Myristic*     Palmitic*     Palmitoleic     Stearic*     Oleic     Linoleic     Linolenic     Gadoleic     Erucic     Others     Total  
Number of
Carbons :
                                                                                         
Number of
Double Bonds
  C8:0     C10:0     C12:0     C14:0     C16:0     C16:1     C18:0     C18:1     C18:2     C18:3     C20:1     C22:1     Various     Saturated     Unsaturated  

Canola oil

                                5.0        0.4        1.8        57.5        22.7        10.6        1.5               0.5        7.3        92.7   

Coconut oil

    5.8        6.5        51.2        17.6        8.5               2.7        6.5        1.2                                    92.3        7.7   

Corn oil

                                12.5               1.8        27.4        57.6        0.7                             14.3        85.7   

Palm kernel oil

    3.6        3.5        47.3        16.4        8.1        Trace        2.3        16.2        1.8        Trace                      0.8        81.9        18.1   

Palm oil

                  0.2        1.1        44.0        0.1        4.5        39.2        10.1        0.4                      0.4        50.2        49.8   

Rapeseed oil

                                3.4        0.3        1.2        16.5        16.2        9.5        8.8        41.4        2.7        7.3        92.7   

Soy oil

                                11.3               3.4        23.1        55.8        6.4                             14.7        85.3   

Tallow (beef)

           Trace        Trace        3.5        27.4        4.5        18.2        40.0        2.6        Trace                      3.8        51.3        48.7   

Source: ACME-Hardesty Co.

* Indicates saturated, or no carbon-carbon double bonds.

 

These various fatty acids have different chemical properties which make them desirable in different products. The applications in which fatty acids and fatty esters are used are determined by their carbon chain lengths, which range from C8 to C22. The fastest growing and highest value oleochemicals due to their increasing use in liquid detergents made from fatty alcohols are lauric (C12) and myristic acids (C14).

 

C10, C12 and C14 acids experience periodic significant price increases compared to other fatty acids such as C16 and C18 and bulk oils like palm oil. Historical spot prices published with permission from ICIS for various fatty acids in Southeast Asia are shown below and illustrate these price trends.

 

71


Table of Contents

Historical Fatty Acid Prices in Southeast Asia by ICIS

 

LOGO

 

Fatty acid prices are influenced by their value in end-use applications and their supply availability. The value in end-use applications of a given fatty acid relates to its chemical properties, while its availability relates to its proportional presence in various natural oils and the supply of those oils.

 

Our Solution

 

Our proprietary catalyst and process technology enables us to produce both unique specialty chemicals with desirable functional attributes previously unavailable in the marketplace, as well as key intermediate chemicals that are in limited supply.

 

Our specialty chemicals provide functional attributes that our customers desire but that have not been commercially available. We believe we will be able to produce these specialty chemicals economically through our biorefineries and to sell them at competitive prices. We expect our product characteristics to drive rapid adoption by customers looking for solutions to their product performance needs.

 

Our intermediate chemicals are produced from renewable feedstocks and are direct replacements for olefins and oleochemicals for which demand is growing and supply is constrained. Our ability to use a wide variety of natural oil feedstocks and to produce our intermediate chemicals in several regions can help our customers mitigate input cost volatility and reduce supply concerns.

 

Our Competitive Strengths

 

Our business model benefits from a number of competitive strengths, including the following:

 

   

Proprietary technology. Our proprietary metathesis technology platform is based on Nobel Prize-winning innovations in metathesis catalysis. Our platform enables us to produce high-value specialty chemicals and direct replacement intermediate chemicals that are cost-advantaged compared to those available from

 

72


Table of Contents
 

conventional production methods. We own or have exclusive rights to intellectual property that protect this technology, including innovations in feedstocks, catalysts, manufacturing and processing, intermediate chemicals and finished products. As of June 30, 2011, our patent portfolio included title to 32 U.S. and foreign patents, 133 patent applications and over 138 exclusively licensed patents.

 

   

High performance products. Our specialty chemicals have unique and desirable functional attributes previously unavailable in the marketplace. We are currently commercializing products that have enhanced performance features such as: fuel additives that enhance cold flow properties; plastic processing additives that provide excellent thermal stability, extremely low volatility and good release/anti-sticking effects; and personal care products that provide natural moisturizing for the skin, but impart a smoother feel than petrolatum (petroleum jelly). In addition, we have filed patent applications for both surfactants and lubricants where our specialty chemicals have enabled advancements in performance. We expect new and increasingly demanding performance characteristics together with changing regulatory requirements will support rapid adoption of our specialty chemicals.

 

   

Low capital requirements. Our biorefinery design requires less capital per unit of production than conventional technologies because of the following characteristics: (1) fewer major process steps; (2) lower operating temperatures and pressures; (3) limited production of hazardous and toxic by-products; and (4) the ability to integrate our process into existing industrial sites. To produce a similar range of intermediate olefins via conventional technologies would require at least one additional major processing step and would require approximately $2,300 per metric tonne ($1.04 per pound) of production capacity if constructed in the United States. This cost is more than six times what we estimate the Mississippi facility will cost to repurpose.

 

   

Low operating costs. Conversion using our process achieves lower unit-level production costs than alternative routes to comparable products because of the following characteristics: (1) more direct process, resulting in fewer conversion steps; (2) highly efficient and selective catalyst; (3) feedstock flexibility; and (4) lower operating temperatures and pressures, resulting in greater energy efficiency. For each metric tonne (or pound) of intermediate olefins produced, our process reduces the average conversion cost net of feedstock from $313 per metric tonne ($0.14 per pound), when using conventional processes, to $63 per metric tonne ($0.03 per pound) when using ours. We expect our low unit production costs will allow us to operate without subsidies, mandates or green premiums.

 

   

Established partnerships with industry leaders. We have developed strategic partnerships which provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure. We currently have agreements with Cargill, Clariant, Dow Corning, DSM, Stepan and Wilmar, among others, and continue to explore additional partnerships that we believe will accelerate commercialization of our products.

 

   

Feedstock flexibility. Our primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. These natural oils are available in liquid form in industrial quantities from a variety of geographic regions. These characteristics allow for low-cost transportation and storage compared to other renewable feedstocks such as industrial sugars, biomass and waste. Our ability to adjust our inputs in real time allows us to take advantage of changes in feedstock prices and product demand. This capability provides us with a competitive advantage versus producers that operate facilities that only process a single feedstock, which typically results in a fixed product mix.

 

   

Large and well-established end markets. Our technology enables us to target a wide variety of end markets. We currently estimate our addressable specialty chemical markets represent $176 billion in annual commercial opportunity. Our ability to manufacture products addressing the detergents, cleaners, personal care products, specialty waxes, lubricants, lubricant and fuel additives, engineered polymers and coatings and intermediate chemicals markets diversifies our revenues across several products, customers and end markets.

 

73


Table of Contents
   

Rapid deployment of commercial production. We can rapidly deploy our technology because of: (1) our ability to repurpose or integrate into existing industrial sites; (2) our low capital requirement per unit of capacity; (3) existing and available large markets for our products; and (4) our relatively short engineering, procurement and construction cycle.

 

Our Strategy

 

Our goal is to become the global market leader in the design and production of specialty chemicals. The key elements for accomplishing our goal are:

 

   

Complete rapid deployment of multiple world-scale facilities. We expect to have three world-scale facilities across three continents by the end of 2014, with combined annual production capacity of approximately one million metric tonnes (2.2 billion pounds). We expect the Indonesia facility, our first world-scale facility through the Wilmar JV, will begin commercial operations in the second quarter of 2012. We expect to be independently operating the Mississippi facility, our second facility, in 2013. We are evaluating sites for the construction of a third biorefinery in South America and expect this facility to begin commercial operations in 2014. As demand for our products grows, we intend to continue to construct new facilities across a broad range of geographic regions, employing a modular design that facilitates expedient and capital-efficient growth.

 

   

Develop new and existing market partnerships to accelerate growth and maximize profitability. To accelerate growth, we plan to continue cultivating strategic partnerships with industry leaders. These partners provide us with sales and marketing expertise, established distribution channels, technical know-how, product and application development expertise and manufacturing infrastructure. We plan to continue to retain exclusive marketing rights to our specialty chemicals, providing us control over the most valuable components of our product mix.

 

   

Invest in research and development to enhance product performance characteristics. We intend to leverage our extensive intellectual property portfolio to target unique solutions for customers demanding higher performance chemicals than those offered today. We plan to continue to develop new specialty chemicals with increased functional attributes, such as highly concentrated detergents and lubricants that enable better fuel economy. As we broaden our product offering, we believe our technology platform positions us to deliver superior functional attributes and sell competitively. We believe such products, tailored to meet performance specifications, benefit from high barriers to entry and strong customer retention.

 

   

Leverage feedstock flexibility to maximize margins. We continuously monitor the costs of various feedstock alternatives to take advantage of their imperfect price correlations to each other and to our selling prices. Based on our analysis of historical prices over the past decade, we believe our ability to use more than one feedstock at a single facility could improve gross profits (revenue less input and conversion costs) as a percent of revenue by approximately 4% to 5% per year on average and up to 16% in a single year.

 

74


Table of Contents

Our Technology

 

Our proprietary process is based on Nobel Prize-winning innovations in metathesis catalysis, a chemical reaction that uses a highly efficient and selective catalyst to break down and recombine molecules into new chemicals. We use metathesis to make novel, di-functional molecules, which will be the building blocks of our specialty chemical business. As shown below, these molecules combine the functional attributes of an olefin and a mono-functional ester or acid, typical of oleochemicals, in a single molecule.

 

LOGO

 

We believe we are the only company that can economically produce these di-functional chemicals which provide access to a large market opportunity. By providing both an olefin functional group and an ester or acid functional group, these di-functional building blocks allow us and our partners to access performance characteristics of both traditional petrochemical and traditional oleochemical chemistries on one molecule. For example, each of our 9-decenoic acid methyl ester and 9-dodecenoic acid methyl ester consists of olefin and methyl ester functional attributes.

 

Conventional producers have developed manufacturing capabilities using either olefins and related derivatives (largely produced from petroleum) or esters and acids (often oleochemicals derived from natural oils), though they and their customers desire the functional attributes of both. To access these functional attributes simultaneously, these producers have to blend and formulate a number of separate ingredients, which increases their production costs. Our di-functional building blocks change this paradigm by allowing the creation of specialty chemical molecules which simultaneously include desired attributes enabled by both chemistry families, such as lubricant base oils with improved stability or surfactants with improved solvency. In addition, our products can be used to provide a lower cost route to manufacture existing specialty molecules, such as diacids which are highly valued in the manufacture of polymers.

 

75


Table of Contents

Our breakthrough and cost-advantaged route to these di-functional molecules is enabled by metathesis. Metathesis is a powerful chemical reaction, initiated by using a catalyst, involving carbon-based molecules with at least one double bond between two carbon atoms (a “carbon-carbon double bond”). Metathesis breaks the carbon-carbon double bond and re-connects the molecule fragments in new ways. By changing the process conditions under which this reaction occurs, we can tailor which fragments are created. Metathesis can be used to perform chemical operations such as cleaving, coupling, ring-closing, ring-opening or polymerization. An example of the metathesis reaction is shown in the figure below.

 

LOGO

 

The earliest examples of metathesis date to the 1950s and showed that double bonds in olefins could be rearranged using certain catalysts. The first industrial olefin metathesis processes were developed in the petrochemical industry to produce higher-value chemicals through the metathesis of lower-value olefins. The early commercial applications of metathesis all utilized catalyst systems that were sensitive to air, water and the presence of polar functional groups. These catalyst limitations prevented significant utilization of olefin metathesis for synthesis of value-added functional molecules and polymers. Furthermore, these limitations made metathesis of functionalized molecules, such as natural oils, infeasible.

 

The 2005 Nobel Prize in Chemistry was shared by three researchers for their breakthroughs that made the metathesis of functional molecules possible. Among these laureates, Dr. Robert Grubbs of the California Institute of Technology (“Caltech”) developed metathesis catalysts that are highly active, stable in air and tolerant of reactants with functional attributes. Dr. Grubbs shared the Prize with Dr. Yves Chauvin and Dr. Richard Shrock. Dr. Chauvin discovered the mechanism by which metathesis operates, and Dr. Shrock invented metathesis catalysts that are highly active. As described below in “—Intellectual Property,” we have an exclusive license for the patents, for use with natural oils, owned and licensed to Materia, which includes all of the innovations created by Dr. Grubbs. We also have a license with XiMo for innovations either created by Dr. Schrock and his team or developed in collaboration with us.

 

76


Table of Contents

Because natural oils are functionalized molecules, without Dr. Grubbs’ innovations, the metathesis of natural oils would be technically impractical and commercially uneconomic. Our proprietary biorefinery combines metathesis of natural oils with established industrial processes, such as transesterification and distillation, to economically produce specialty chemicals and direct replacement intermediate chemicals through a single process. Natural oils provide a wide array of useful molecule fragments that can be accessed through metathesis. The fragments below are among the most common that can be created from natural oils.

 

LOGO

 

In our proprietary biorefinery design, a stream of natural oils, which are chemically made of triglycerides, is reacted with short-chain olefins, such as butene. This reaction allows us to cleave olefin molecules from the triglyceride, producing what we believe to be higher value olefins, including decene. Moreover, the metathesis reaction of the natural oil cleaves its triglycerides into ones rich in valuable, medium chain-length unsaturated fragments (C10-C15), as well as unreacted saturated long chain fragments (C16-C22). An example of how we react 1-butene with methyl oleate, a common natural oil component, is demonstrated below.

 

LOGO

 

77


Table of Contents

When these unsaturated and saturated fragments are freed from the triglyceride’s glycerol backbone, the resulting unsaturated fragments produce a distribution of di-functional molecules, including fatty acids and esters, as further described below. The saturated fragments, which are inert to metathesis because they lack a carbon-carbon double bond, produce saturated acids, esters or oleochemicals. The figure below illustrates how we plan to produce our products from our biorefinery process.

 

LOGO

 

The reactor we have been using in toll manufacturing to date operates at a similar scale as will the reactor being installed at our first biorefinery.

 

Also, as demonstrated above, our biorefinery produces three main product streams: one stream of specialty chemicals and two streams of intermediate chemicals, namely olefins and oleochemicals, with which we will access a large commercial opportunity.

 

78


Table of Contents

Our Products and End Markets

 

Our products will include both specialty chemicals and intermediate chemicals. Our novel di-functional specialty chemicals enable the development of products that are both innovative and high value. Our customers are encouraged by our ability to produce specialty chemicals that allow them to manufacture products with enhanced functional attributes that can be sold at competitive prices. Our intermediate chemicals will be direct replacements for both olefins and oleochemicals.

 

LOGO

 

79


Table of Contents

Specialty Chemicals

 

The specialty chemicals we and our marketing partners derive from our building blocks will target large end markets with demand drivers such as: customer demand for improved performance characteristics; structural supply shortages for existing specialty chemicals and their respective feedstocks; increasing regulatory requirements; and desire for products made from non-toxic, environmentally friendly and renewable sources. Our three market platforms, Consumer Ingredients & Intermediates, Lubricants & Additives and Engineered Polymers & Coatings, through which we intend to initially sell our specialty chemicals, have a combined addressable market size that we estimate to be $176 billion.

 

Consumer Ingredients & Intermediates

 

Market Platform/Segment (Addressable Market Size*)    Our Value Proposition
Consumer Ingredients & Intermediates ($31 billion)      

Detergents and cleaners ($20 billion)

  

•   Specialty surfactants

  

•   Various formulation benefits including improved cold water performance, concentration, compaction, hard water tolerance and solvency

 

•   Alternative alcohol feedstock to palm kernel oil, coconut oil and fossil fuels to address price and supply concerns

Personal care products ($6 billion)

  

•   High performance soy wax

  

•   Naturally derived wax, eliminates brittleness, adds body

•   Emulsifiers

  

•   Improved emulsification, improved film forming and emolliency, naturally derived

•   Soy petrolatum

  

•   Naturally derived and elegant aesthetics

 

•   Anti-frizz and shine for leave-in hair care

 

•   Moisturizing benefits and smoother feel for skin care

Performance waxes ($5 billion)

  

•   Plastic processing additives

  

•   Thermal stability with low volatility and good release/anti-stick effects

•   Soy and palm formulated wax blends for candles

  

•   Reliability of supply, increased fragrance loading

•   Palm wax blends for corrugated coatings

  

•   Improved recyclability, reliability of supply, sustainability

* Management estimates

  

 

Within our Consumer Ingredients & Intermediates platform, we are initially targeting the following three sub-segments: detergents and cleaners, personal care products and performance waxes.

 

Detergents and cleaners. We and our partners have identified high value differentiated surfactants addressing challenging performance and cost requirements for detergents and cleaners. Surfactant performance requirements that we intend to address include improving cold-water efficacy, which enables more concentrated formulations and improving solvency for better cleaning.

 

Cold water efficacy has a large impact on sustainability metrics and reduces energy costs. In addition, enabling cold water washing is critical in developing countries as segments of their households do not have access to hot water for laundry. As a result, there is a strong incentive for washing equipment manufacturers and detergent producers to develop, formulate and sell products that provide similar or better cleaning performance in colder water.

 

Another area where new solutions are desired by major consumer packaged goods companies is compaction. Compaction is the effort to reduce the quantity (volume) of detergent needed to wash a load of clothes. Enabling the consumer to wash more with less detergent creates significant value for the detergent producer resulting from reduced ingredient and packaging costs and reduced transportation and supply chain costs. Compaction would also assist consumer packaged goods companies in making progress on their sustainability goals. Given the

 

80


Table of Contents

di-functional nature of our starting materials, we are also working to develop surfactants that address more than one performance attribute. For example, certain of our surfactants also contain anti-microbial efficacy, which may lower the amount of anti-microbial additives required in product formulation and therefore reduce formulation and ingredient cost.

 

Today, we believe the functional attributes of the surfactants made from our biorefinery products will enable significant improvements on these and other highly desired performance attributes. Our work with Stepan, a leading producer of surfactants, has resulted in substantial progress and the filing of patent applications in the area of specialty surfactants.

 

Personal care products. Our personal care products address increasing consumer demand for natural ingredients and improved performance. We currently supply naturally-derived alternatives to petrolatum (petroleum jelly), which enables formulators to reduce the undesirable oily feel of traditional petrolatum and allows them to market the product as renewable. We provide ingredients for consumer products that are currently sold at major retailers in the United States. Through our partnership with Dow Corning, we are selling our personal care ingredients in South America, Europe and Asia. Consumer products into which our ingredients are currently formulated include skin and hair care products such as creams, lotions, lipsticks and hair pomades. We have been selling products to this market since 2008.

 

Performance waxes. We are currently commercializing, through our partnership with Clariant, plastic processing additives that provide excellent thermal stability, extremely low volatility and good release/anti-sticking effects. Our NatureWax candle products hold a significant share in the growing soy-based candle wax market in the United States. We attribute our market share to the demonstrated superior characteristics of our performance and candle wax products over those of conventional wax products, including improved glass container adhesion, support of higher fragrance loads and good hot and cold scent properties. Our products also avoid the security of supply and price issues of paraffin, beeswax, montan, carnauba and other performance waxes. For example, paraffins, the primary feedstock for petroleum derived waxes are shrinking in supply due to refining technology shifting to lubricants production instead of waxes. This dynamic creates a market opportunity for our renewable waxes.

 

Lubricants & Additives

 

Market Platform/Segment (Addressable Market Size*)    Our Value Proposition
Lubricants & Additives ($29 billion)      

Lubricant base oils ($17 billion)

  

•   Reduction in formulation costs

 

•   Improved fuel economy, wear and sludge resistance and stability

 

•   Less frequent oil changes

 

•   Alternative and renewable source of olefins for PAO

Lubricant and fuel additives ($12 billion)

  

•   Viscosity improvers, extreme pressure and anti-wear additives, dispersants

 

•   Cold flow modifiers, lubricity enhancers, deposit control additives

  

•   Improved lubricity, detergency to control impurities, corrosion prevention

 

•   Renewable and novel fuel additives to improve cold flow and lubricity

 

•   Supply chain improvements

* Management estimates

  

 

The Lubricant & Additives platform represents a large market including lubricants used for automobile engines, industrial equipment, fluids in fabricating metals and fuel additives. Within the Lubricants & Additives platform, we are initially targeting two sub-segments with a combined addressable market size that we estimate to be approximately $29 billion: lubricant base oils and lubricant and fuel additives.

 

81


Table of Contents

Lubricant base oils. Within the broader lubricant base oil market, we focus on high performance synthetic base oils and the non-synthetic base oils our products can replace. We estimate our addressable markets in these segments to total $17 billion. Globally, high performance synthetic base oils represent the fastest growing segment of the lubricant base oils market. This growth is largely driven by increased demand from consumers and original equipment manufacturers for higher fuel efficiency and increased engine performance. We believe our products will replace critical feedstocks for PAOs and high value formulated lubricants. In addition, we have applied for patent protection for novel and groundbreaking functionalized base oils that can reduce the amount of expensive additives in lubricants while providing the same or better performance attributes.

 

Our di-functional specialty chemicals will produce functionalized base oils that will provide the consistency and stability of Group IV PAOs combined with the functional attributes of Group V products. This allows us to produce lubricants that reduce formulated costs and improve several performance metrics, including fuel economy, wear and sludge resistance and stability. The chart below shows relative performance on key base oil properties based on initial laboratory testing and structure analysis of our base oils.

 

Synthetic Base Oil Comparison

 

Characteristic    Group  III    Group  IV    Group  V*    Our  Base
Oils

Temperature Performance

(Viscosity Index)

   +    ++    ++    +++

Drain Interval

(Oxidative stability)

   ++    +++    Varies    +++

Deposit Control

(Polarity)

   +    ++    +++    +++

Improved Fuel Economy

(Viscosity, Lubricity, CCS)

   +    ++    ++    +++

Wear Resistance for improved engine/equipment life

(Film properties: thickness/lubricity)

   +    ++    ++    +++

 

* Ester-derived base oil used for comparison.

Source: Management estimates

 

We are able to provide lubricant marketers a favorable cost position and superior performance attributes through our functionalized base oils due to their di-functional nature. The enhanced performance of our functionalized base oils will provide lubricant marketers the opportunity to differentiate their products by providing increased performance while requiring fewer additives, which could reduce production costs. We are in advanced discussions with several global petroleum companies to commercialize our functionalized base oil products and lubricants products based on them.

 

Lubricant and fuel additives. Lubricants and fuels are typically enhanced with additives that allow a given product to meet performance requirements that the fuel or lubricant alone is not able to achieve. Currently, we are targeting several fuel and lubricant additives that provide a renewable alternative and also have the potential to improve cold flow properties and increase lubricity and detergency. Laboratory evaluations of our fuel additives have demonstrated significant positive impact on cold flow properties for which we have applied for patent protection. Major fuel producers are sampling our products, and we expect their feedback on this first generation of cold flow additives before the end of 2011.

 

In lubricant additives, we are evaluating products for both greases and engine oils. We have established a collaboration with NL Grease, a private-label grease manufacturer, to evaluate and commercialize new, renewable, high performance materials. We are also working with a leading lubricant manufacturer that has completed successful initial evaluations of our blend additives that enhance the performance of Group III base oil.

 

82


Table of Contents

Engineered Polymers & Coatings

 

Market Platform/Segment (Addressable Market Size*)    Our Value Proposition
Engineered Polymers & Coatings ($116 billion)      

Monomers and building block chemicals used in:

  

•   Specialty polyamides, polyesters and polyols ($25 billion)

 

•   Epoxies and polyurethanes ($58 billion)

 

•   Coatings and cross linking agents for coatings ($33 billion)

  

•   Enhanced corrosion, chemical and heat resistance and improved electrical insulation over existing alternatives

 

•   Light-weight replacement for metal alternatives

 

•   Ability to produce existing products via lower cost routes

 

•   New source of C10 molecules

 

•   Renewable products

* Management estimates

  

 

Within our Engineered Polymers & Coatings platform, we are initially targeting high performance polymers made from our di-functional building block molecules. We are targeting the following three sub-segments: specialty polyamides, polyesters and polyols; epoxies and polyurethanes; and coatings.

 

We believe one of our key specialty chemicals, 9-decenoic acid (“9DA”) ester, can be used as a renewable raw material to make many different types of engineering polymers and coatings. The flexible structure of 9DA ester enables us to produce a wide variety of monomers that can be reacted to produce specific engineered polymers and coatings. Our specialty chemicals enable di-functional monomers that provide more efficient routes to manufacture existing polymers. In addition, we intend to manufacture novel monomers to produce new polymers to meet emerging performance requirements and renewable monomers with more secure supply.

 

Specialty polyamides, polyesters and polyols. Engineered polymers, which include polyamides, polyesters, epoxies and polyurethanes, can be made from di-functional monomers and are used today in many industries and applications including automotive (under the hood applications, cables and hoses), electrical and electronics (electronic components, wire and cable and cell phones), fibers and textiles (carpet, high performance canvas, bristles and filters). These polymers are often replacements for metal components, but weigh less and can often be easier to process.

 

Specialty polyamides such as polyamide 12 and co-polymers such as polyamide 6,10 or polyamide 6,12 are produced from diacid monomers with nine or more carbon atoms, all of which are produced today using petrochemical feedstocks. Currently, only three diacids ranging in length from nine carbon atoms to twelve carbon atoms are commercially available for polymer applications. The use of chemical synthesis has not been commercially viable for producing polymer-grade diacids with more than twelve carbon atoms. Longer chain diacids may be produced by microbial oxidation of alkanes and fatty acids, but their commercialization has been limited by high production costs and inability to reach the purity levels required for polymers. In addition, the multi-step chemical conversion processes for petrochemical derived diacids produce unwanted hazardous by-products, which result in yield losses. These by-products must be destroyed before releasing to the environment. Disposal of a hazardous waste stream adds to the cost of production.

 

Another specialty polyamide, polyamide 11, is made from derivatives of castor oil, a vegetable oil harvested from the castor bean. Castor oil has numerous supply issues that have created a significant increase in price and volatility. Between July 2010 and July 2011, castor oil prices have risen from $1,816 per metric tonne ($0.82 per pound) to $2,632 per metric tonne ($1.19 per pound). Additionally, the process to manufacture polyamide 11 from castor oil involves toxic chemicals (cyanide) and high capital costs.

 

Our target specialty polyamides are high value and high performing polymers made from long chain diacids. These polymers include homopolymers (polymers made from the same monomer) such as polyamide 11 and

 

83


Table of Contents

polyamide 12 which in 2009 had an average selling price in the United States of $15,432 per metric tonne ($7.00 per pound) and $7,275 per metric tonne ($3.30 per pound), respectively. Other specialty co-polymers (polymers made from two different monomers) include products such as polyamide 6,10 and polyamide 6,12, which in 2009 had average selling prices in the United States of $6,614 per metric tonne ($3.00 per pound) and $8,818 per metric tonne ($4.00 per pound), respectively.

 

Using our di-functional specialty chemicals, we have produced and sampled customers with diacids, including products with up to eighteen carbon atoms at purities required for polymer use. Our ability to produce diacids longer than twelve carbon atoms enables the production of polymers and co-polymers with unique performance characteristics. In addition, our diacid production requires less capital and is based on a widely available renewable oil. We believe these attributes will enable us to significantly expand the market for polyamides.

 

We are in advanced discussions with a variety of global chemical companies in the Engineered Polymers & Coatings platform, including DSM, to commercialize our engineered polymers products. DSM’s Engineering Plastics business unit is the market leader in high-temperature polyamides.

 

Epoxies, polyurethanes and coatings. Epoxies and polyurethanes are commonly used as high performance coatings to provide resistance to chemicals, heat and corrosion. We have demonstrated the ability to make novel epoxy molecules and polyols (a monomer for polyurethanes) based on our specialty chemicals and expect to develop products to meet the needs of these segments.

 

Intermediate Chemicals

 

Our intermediate chemicals include olefins and oleochemicals, both produced from renewable natural oils. We intend to sell our intermediate chemicals into large existing markets as direct replacements meeting current industry specifications.

 

The following table sets forth the principal products in our olefin portfolio.

 

Olefin Portfolio

 

   
Key Products   End Uses

Decene (C10)

  PAOs for lubricants

C11+ mixed cut

  Multiple, including hydrogenation to paraffins and fuels

C11-C14 cut

  Surfactants

C15+ cut

  Oil field chemicals, lubricants, paper sizing

 

Our olefins portfolio includes direct replacement products such as decene, a C10 olefin, octadecene, a C18 olefin, and other intermediate olefins (C10-C22). We believe this range of intermediate olefins includes high value-added intermediate chemicals where supply is constrained in the market. In addition to addressing unmet demand, our olefin products also satisfy increasing customer demand for sustainable product offerings. We are in discussions with existing partners and potential new customers for offtake agreements for the entirety of our projected 2013 olefin production.

 

A key product within our olefins portfolio is decene, which is the primary feedstock for PAOs. Strong growth of PAOs and the fixed LAO product distribution made from petrochemicals has resulted in a systemic shortage of decene. This has forced PAO producers to substitute less desirable olefins and produce lower quality base oil in order to meet consumer demand. This dynamic has created a strong opportunity for our naturally derived olefins, including decene made from our biorefineries.

 

84


Table of Contents

The following table sets forth the principal products in our oleochemical portfolio.

 

Oleochemical Portfolio

 

   
Key Products   End Uses

Fatty acids and esters

  Detergents, lubricants, solvents, plastics

Fatty alcohol feedstocks

  Personal care, detergents

 

Our oleochemicals portfolio primarily includes C16 through C18 fatty esters, which can be sold as esters or converted into typical oleochemical intermediate chemicals such as fatty acids or fatty alcohols using a single processing step. We will also be able to produce oleochemicals as acids directly at the Indonesia facility. We intend to sell our oleochemicals into large existing markets as direct replacements meeting current industry specifications at prevailing market prices. For example, our saturated C16 oleochemicals can be sold into large markets, such as C16 acid and as a biodiesel component. Wilmar will act as the primary offtaker or marketing agent for our oleochemical production from the Wilmar JV. In addition, we are in discussions with existing partners and potential new customers for offtake agreements for the entirety of our projected 2013 oleochemical production from facilities other than the Indonesia facility.

 

In addition to the production of C16 through C18 fatty esters, we also intend to produce di-functional C10 through C15 fatty ester building blocks. While our goal is to sell these products as specialty chemicals, they also can be sold as intermediate chemicals that directly replace esters used in the production of fatty alcohols and detergents. These intermediate chemicals can be sourced otherwise at industrial scale only from palm kernel oil (“PKO”) and coconut oil. However, using our process, we could provide a cost-competitive alternative to imported PKO and CNO in the Americas or Europe using locally sourced soy or rapeseed oil.

 

A comparison of the fatty acid distribution possible from CNO and PKO compared with that available from soy or palm using our technology is shown below.

 

LOGO

 

Source: ACME-Hardesty Co., management estimates

 

PKO and CNO are typically traded at a premium to bulk oils such as soy. Nearly all PKO and CNO is produced in Indonesia and Malaysia, whereas approximately 60% of global demand comes from other regions. In 2010, our ability to produce replacements for PKO and CNO from locally sourced and typically lower-cost oils would have created a $4.4 billion opportunity in the Americas or Europe alone. According to The Jacobsen, from January 2011 to July 2011, the average price of refined, bleached and deodorized PKO free on board New York was $2,219 per metric tonne ($1.01 per pound), while the average price of soy oil on the same basis during the same period was $1,382 per metric tonne ($0.63 per pound). This represented a historical peak spread of $837 ($0.38 per pound) per metric tonne, providing an immediate feedstock cost advantage.

 

85


Table of Contents

Manufacturing Operations

 

We expect to have three world-scale facilities across three continents by the end of 2014, with a combined annual production capacity of approximately one million metric tonnes (2.2 billion pounds). In the second quarter of 2012, we expect to begin operating our first world-scale facility, the Indonesia facility through the Wilmar JV. We believe the Indonesia facility will be the world’s largest integrated biorefinery with an annual production capacity of 185,000 metric tonnes (400 million pounds), with an option to expand the additional production capacity to 370,000 metric tonnes (810 million pounds). We plan to be operating the Mississippi facility, a 280,000 metric tonne (610 million pound) biorefinery in the second half of 2013 at a site we have acquired. By the end of 2014, we expect to be operating an additional world-scale facility in South America.

 

Our biorefinery design requires less capital per unit of production than conventional technologies because of the following characteristics:

 

   

fewer major process steps;

 

   

lower operating temperatures and pressures;

 

   

limited production of hazardous and toxic by-products; and

 

   

ability to integrate our process into existing industrial sites.

 

The following chart sets forth a comparison of the anticipated capital costs of our first two biorefineries and those of alternative routes to comparative products.

 

Our Capital Costs Compared to

Alternative Routes to Comparative Products

 

     Kerosene to N-Paraffin for
Linear Alkyl Benzene
    Naphtha to Ethylene to
Intermediate Olefins
    Our Process to
Intermediate Olefins
 
       
     $/metric tonne     $/metric tonne     $/metric tonne  

Capital investment

  $ 920      $ 2,300      $ 165-$360   

 

Source: Management estimates

 

Our conversion process yields lower unit level production costs than alternative routes to comparable products. Attributes of our conversion process that reduce operating costs include the following:

 

   

more direct process, resulting in fewer conversion steps;

 

   

highly efficient and selective catalyst;

 

   

feedstock flexibility; and

 

   

lower operating temperatures and pressures, resulting in greater energy efficiency.

 

86


Table of Contents

The following chart sets forth a comparison of our conversion costs and alternative routes to comparative products.

 

Our Conversion Costs Compared to

Alternative Routes to Comparative Products

 

     Kerosene to N-Paraffin for
Linear Alkyl Benzene
  Naphtha to Ethylene to
Intermediate Olefins
  Our Process to
Intermediate  Olefins
       
     $/metric tonne   $/metric tonne   $/metric tonne

Utility

  $53   $164   $24

Direct labor

  $49   $74   $15

Fixed costs, excluding
depreciation

  $42   $75   $24

Total conversion costs

  $144   $313   $63

 

Source: Management estimates

 

The Indonesia facility is structured within the Wilmar JV. Wilmar is constructing the facility based on our design parameters, will provide operators to run the facility and will supply natural oil feedstocks. We currently anticipate that it will cost approximately $30 million to construct this facility, of which the majority has been invested to date. Wilmar will also market the oleochemicals produced at the biorefinery. We will provide the technology and have exclusive marketing rights to the specialty chemicals produced at this facility. The olefins produced at this facility will be jointly placed by us and Wilmar through supply agreements and in the spot markets.

 

The Wilmar JV’s Facility in Gresik, Indonesia

 

LOGO

 

Our second world-scale facility, which we will own and operate, is located in Natchez, Mississippi. We currently anticipate that the Mississippi facility will cost approximately $85 million to construct and will have annual capacity of 280,000 metric tonnes (610 million pounds). We acquired the facility, a former 80 million gallon per year biodiesel facility, in June 2011 for approximately $16 million. We have begun engineering, are currently negotiating a related engineering, procurement and construction contract and expect to begin commercial operations in 2013. We are in discussions with petrochemical and agricultural processors to evaluate partnership and offtake opportunities for this facility.

 

87


Table of Contents

Our Biorefinery Facility in Natchez, Mississippi

 

LOGO

 

We expect our third world-scale facility to be located in South America. We are evaluating sites for the construction of this facility and expect to begin commercial operations in 2014. We are in discussions with petrochemical and agricultural processors to evaluate partnership and offtake opportunities for this facility.

 

We currently utilize tolling relationships with various partners. Although we do not have committed tolling capacity, we believe tolling manufacturers have sufficient capacity to continue to produce our products. We currently produce the majority of our NatureWax products through our supply agreement with Cargill. These products are produced at various Cargill facilities in the United States. We produce our biorefinery products at multiple toll manufacturers in the United States.

 

Our Primary Inputs

 

Feedstocks

 

We have the capability to use a wide variety of natural oils in our process, including emerging oils, such as those derived from algae. Our primary feedstocks include palm, soy and rapeseed oils, though our technology has the flexibility to use many other natural oils. These natural oils are available in liquid form in industrial quantities from a variety of geographic regions. These characteristics allow for low-cost transportation and storage compared to other renewable feedstocks such as industrial sugars, biomass and waste. The ability to use a wide range of feedstocks in various geographies will allow us to optimize feedstocks dynamically based on the total cost to use the oils and the value created from the resulting product mix. This flexibility allows us to maximize the profitability of our biorefineries.

 

Palm oil

 

Palm oil is extracted from the pulp of the fruit of oil palm trees. According to the USDA, approximately 26% of total palm oil today is used in industrial products. These products include coatings, cosmetics, detergents and industrial lubricants, among many others. Indonesia and Malaysia are currently the largest producers of palm oil, representing approximately 87% of global production in the 2010/2011 season, according to the USDA. There is also emerging production of palm oil in South America. Global production of palm oil exceeded 47 million metric tonnes (100 billion pounds) in the 2010/2011 season.

 

88


Table of Contents

Soy oil

 

Soy oil is extracted from soybeans. According to the USDA, approximately 17% of soy oil is used in industrial products. These products include biodiesel, inks, paints, plasticizers and waxes, among many others. China, the United States, Argentina and Brazil are currently the largest producers of soy oil, representing approximately 78% of global production in the 2010/2011 season, according to the USDA. Global production of soy oil exceeded 41 million metric tonnes (90 billion pounds) in the 2010/2011 season.

 

Rapeseed oil

 

We defi