INVESTMENT IN SOLAZYME BUNGE JOINT VENTURE

Background and Operations

In April 2012, the Company and Bunge formed the Solazyme Bunge JV to build, own and operate the Solazyme Bunge JV Plant, a commercial-scale renewable algae oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil, leveraging the Company's technology. The Solazyme Bunge JV is 50.1% owned by the Company and 49.9% owned by Bunge and is governed by a six member board of directors, three from each investor.

Solazyme Bunge JV's operational focus from inception through 2015 was primarily on supporting the construction, ramp up and optimization of the commercial-scale renewable algae oils production facility. Construction of the Solazyme Bunge JV Plant commenced in the second quarter of 2012. By the end of the second quarter of 2014, the Solazyme Bunge JV Plant was operational including large fermenters and formal operations began with production of saleable product. By the second quarter of 2015, the Solazyme Bunge JV Plant completed the construction and activation of the electrical grid tie-in and activation of a second steam boiler which allowed for improvements on up-time and downstream recovery efficiency. While the Solazyme Bunge JV has incurred significant losses to date, the Company believes that the overall long-term expectation of profitability will drive positive cash flows sufficient for the Company to recover its investment in the Solazyme Bunge JV.

In October 2015, the Company and Bunge entered into an amended and restated joint venture agreement to expand the Solazyme Bunge JV to add a worldwide focus on human food and animal nutrition. Also in October 2015, the Company and Bunge entered into an amended and restated Development Agreement under which the Company granted to the Solazyme Bunge JV a worldwide royalty-bearing, field-limited license to all of its technology that is necessary or useful for the manufacture of certain algae oil products. Concurrently with the entry into such agreements, the Company and Solazyme Bunge JV entered into two funded research programs targeted at completing the development of additional products for the Solazyme Bunge JV; pursuant to these agreements:

Solazyme Bunge JV will:


•	continue to use the Company's proprietary technology to produce a range of algae-based oils and products from cane sugar through microbe-based catalysis.


•	pay the Company a royalty for certain products sold by the joint venture.


•	pay the Company a technology maintenance fee in recognition of the Company's ongoing research investment in technology.

The Company will:


•	provide sales, marketing and application development for certain oils and technical expertise in regard to the implementation of its technology.


•	provide access to the Company's proprietary technology for the production of certain oils and structuring fats for the food and animal nutrition markets.


•	retain co-primary sales rights for certain products.

Bunge will:


•	continue to provide cane sugar feedstock and utilities to the Solazyme Bunge JV Plant from Bunge's adjacent sugar cane processing mill.


•	provide sales, marketing and application development for certain food oils and will also provide oil processing, global distribution and logistics.


•	serve as the primary sales channel for some of the joint venture's products, with the Company as an additional sales channel, in each case in exchange for a distribution fee.


•	continue to provide working capital to the Solazyme Bunge JV through a revolving loan facility.

The Company contributed $22.3 million, $32.6 million and $12.4 million during the years ended December 31, 2015, 2014 and 2013, respectively. The Company also contributed $5.5 million and $15.3 million in the years ended December 31, 2015 and 2014, respectively, to the Solazyme Bunge JV through a reduction in the Company’s receivables due from the Solazyme Bunge JV.

Equity Accounting

The Company accounts for its interest in the Solazyme Bunge JV under the equity method of accounting. The Company's equity investment in the Solazyme Bunge JV was $35.9 million and $40.9 million as of December 31, 2015 and 2014, respectively. During the years ended December 31, 2015, 2014 and 2013, the Company recognized $22.4 million, $23.0 million and $6.8 million of losses, respectively, related to its equity method investment in the Solazyme Bunge JV.

The Company has determined that the Solazyme Bunge JV is a VIE based on the insufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of the Solazyme Bunge JV. The optimization and ramping up of the Solazyme Bunge JV Plant is the activity of the Solazyme Bunge JV that most significantly impacts its current economic performance. Although the Company has the obligation to absorb losses and the right to receive benefits of the Solazyme Bunge JV that could potentially be significant to the Solazyme Bunge JV, each of the Company and Bunge has equally shared decision–making powers over certain significant activities of the Solazyme Bunge JV, including those related to the construction, optimization and ramping up of the Solazyme Bunge JV. Therefore, as of December 31, 2015, the Company does not consider itself to be the Solazyme Bunge JV’s primary beneficiary, and as such has not consolidated the financial results of the Solazyme Bunge JV. Consolidation may be required in the future due to changes in events and circumstances impacting the power to direct the activities that most significantly affect the Solazyme Bunge JV’s economic performance. The Company will continue to reassess its potential designation as the primary beneficiary of the Solazyme Bunge JV.

The following table summarizes the carrying amounts of the assets and the fair value of the liabilities included in the Company’s consolidated balance sheets and the maximum loss exposure related to the Company’s interest in the Solazyme Bunge JV as of December 31, 2015 and 2014 (in thousands):



	As of December 31, 2015
	Assets						Liabilities
VIE	Accounts Receivable		Unbilled Revenues		Investments in Unconsolidated Joint Ventures		Loan Guarantee		Maximum Exposure to Loss⁽¹⁾
Solazyme Bunge JV	$	12	$	839	$	35,910	$	—	$	45,692



	As of December 31, 2014
	Assets						Liabilities
VIE	Accounts Receivable		Unbilled Revenues		Investments in Unconsolidated Joint Ventures		Loan Guarantee		Maximum Exposure to Loss⁽²⁾
Solazyme Bunge JV	$	446	$	2,435	$	40,934	$	—	$	57,618


⁽¹⁾	Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of $8.9 million (based on the exchange rate at December 31, 2015).

⁽²⁾Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of $13.2 million and non-cancelable purchase obligations of $0.6 million (based on the exchange rate at December 31, 2014).

The Company may be required to contribute additional capital to the VIE which would increase the Company’s maximum exposure to loss. These future contribution amounts cannot be quantified at this time.

Summarized Financial Information

Summarized information on the Solazyme Bunge JV’s balance sheets and income statements as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2015, 2014 and 2013, respectively, was as follows (in thousands):



	As of December 31, 2015		As of December 31, 2014
Current assets	$	5,654	$	4,339
Property, plant and equipment, net	100,755		141,147
Recoverable taxes⁽¹⁾	16,144		20,604
Total assets	$	122,553	$	166,090

Current liabilities	$	23,009	$	24,881
Noncurrent liabilities	43,054		78,666
JV’s partners’ capital, net	56,490		62,543
Total liabilities and partners’ capital, net	$	122,553	$	166,090

⁽¹⁾Recoverable taxes are comprised of value-added taxes paid upon the acquisition of property, plant and equipment items and other goods and services, and other transactional taxes which can be recovered in cash or as compensation against income taxes or other taxes owed by Solazyme Bunge JV in Brazil. The realization of these recoverable tax payments could take in excess of five years.



	Year ended December 31, 2015			Year ended December 31, 2014			Year ended December 31, 2013
Net sales	$	3,713		$	805		$	—
Net losses	$	(42,398	)	$	(46,165	)	$	(16,280	)

During the year ended December 31, 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank ("BNDES" or "BNDES Loan") under which it may borrow up to $62.0 million (based on the exchange rate as of December 31, 2015). Outstanding borrowings were $53.4 million and $91.6 million as of December 31, 2015 and 2014, respectively. The Company has provided a bank guarantee equal to 14.39% of the total amount available under the BNDES Loan and may be required to provide a corporate guarantee equal to 35.71% of the total amount available under the BNDES Loan (with the total amount covered by the guarantees not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding has supported the construction of the Solazyme Bunge JV’s production facility. The term of the BNDES Loan is eight years and the loan has an average interest rate of approximately 4.0% per annum. As of December 31, 2015, the Company’s bank guarantee was in place and the corporate guarantee was not in place. The fees incurred on the cancelable bank guarantee were not material during the year ended December 31, 2015, 2014 and 2013.

Impairment Assessment

The Company assessed the recoverability of its $35.9 million equity investment in Solazyme Bunge JV as of December 31, 2015 using a discounted cash flow analysis. Based upon such analysis, the Company expects to recover the carrying amount of its equity investment and concluded that its equity investment was not impaired.

The process of evaluating the potential impairment is subjective and requires significant estimates and assumptions. The Company’s estimated future cash flows are based on assumptions that are consistent with its annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ significantly from those estimates. Changes in assumptions or circumstances could result in an impairment in the period the change occurs and in future years. Management’s conclusion that its equity investment was not impaired as of December 31, 2015 was based upon the following critical estimates and assumptions:


•	No significant adverse change in the regulatory or economic environment in Brazil or other countries, as applicable


•	No significant difficulties as production increases from minimal capacity to full capacity over the next several years


•	Sales mix of products currently commercially produced and sold to existing customers as well as certain oil products for food and animal nutrition markets under development and expected to be commercialized in 2016 and 2017


•	Average selling prices based on current contracted prices and at or above market prices for comparable products


•	Additional capital investment to increase plant capacity for new products and process improvements of approximately $50.0 million in total


•	Increased fermentation and recovery efficiencies over the next 5 years based on strain and process improvements


•	Reduction to production costs based on ramp up of production volume to an aggregate maximum plant capacity in line with sales volume


•	Discount rate of approximately 14%

In order for the Solazyme Bunge JV to achieve sufficient cash flows to enable the Company to fully recover its equity investment, the Solazyme Bunge JV must:


•	Increase production volumes by:


◦	Optimizing plant throughput


◦	Improving lipid and oil content output


◦	Increasing final recovery yields


•	Maintain access to low-cost cane sugar feedstock and power


•	Commercialize and sell its high value products

The estimates used for cash flow forecasts required significant exercise of judgment and are subject to change in future reporting periods as facts and circumstances change. Additionally, the Company may make changes to its business plan that could result in changes to the expected cash flows. As a result, it is possible that an equity method investment may be impaired in future reporting periods.

Joint Development and Other Agreements

The Company has three agreements with the Solazyme Bunge JV:


•	Development Agreement with the Solazyme Bunge JV to continue to conduct research and development activities that are intended to benefit the Solazyme Bunge JV, including activities in the areas of strain development, molecular biology and process development


•	Technology Service Agreement with the Solazyme Bunge JV for technical services related to the operations of the production facility


•	Commercial support services agreement

These agreements with Solazyme Bunge JV require the Solazyme Bunge JV to pay the Company for such research activities and support services. The Company accounts for these Agreements as an obligation to perform research and development services for others in accordance with FASB ASC 730-20, Research and Development Arrangements, and recorded the payments for the performance of these services as revenue in its consolidated statement of operations. The Company recognized revenue on these Agreements based on proportionate performance of actual efforts to date relative to the amount of expected effort incurred. The cumulative amount of revenue recognized under the Agreements were limited by the amounts the Company was contractually obligated to receive as cash reimbursements.

In October 2015, the Company and Solazyme Bunge JV entered into an amended and restated joint development agreement (“JDA”), and project plans thereunder, incorporating development work from a previous JDA with Bunge associated with the development of a unique food ingredient, as well as new development work on nutrition products intended to benefit the Solazyme Bunge JV. This JDA provides that the Solazyme Bunge JV will provide research funding to the Company covering periods through December 2018, payable quarterly in advance throughout the research term.

Research and development program revenues include $6.3 million, $13.6 million and $8.1 million from the Solazyme Bunge JV for the years ended December 31, 2015, 2014 and 2013, respectively. Product sales include $1.6 million and $2.9 million from the Solazyme Bunge JV during the years ended December 31, 2015 and 2014, respectively, and none during the year ended December 31, 2013. The Company had receivables of $12,000 and $0.4 million due from the Solazyme Bunge JV as of December 31, 2015 and 2014, respectively. Unbilled revenues from the Solazyme Bunge JV was $0.8 million and $2.4 million as of December 31, 2015 and 2014, respectively. Deferred revenues from Solazyme Bunge JV were $4.2 million as of December 31, 2015.

Accounting for Bunge Warrant

In 2011, the Company granted Bunge a warrant (the “Bunge Warrant”) to purchase 1,000,000 shares of its common stock at an exercise price of $13.50 per share. The Bunge Warrant was to vest (i) 25% on the date that Solazyme and Bunge entered into a joint venture agreement to construct and operate a commercial-scale renewable oil production facility; (ii) 50% upon the commencement of construction of the production facility; and (iii) 25% on the date upon which the aggregate output of triglyceride oil reached certain levels.

The Company accounted for the Bunge Warrant pursuant to FASB ASC 505-50, Equity-Based Payments to Non-Employees, which establishes that share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued (whichever is more reliably measurable).

In 2012, the Company recorded an investment in the Solazyme Bunge JV of $10.4 million, equal to the fair value of the Bunge Warrant, and recorded a corresponding $7.3 million of additional paid-in capital for the first two vested tranches of the Bunge Warrant. The fair value of the Bunge Warrant was determined using the Black-Scholes option pricing model. As of December 31, 2015 and 2014, 750,000 of the Bunge Warrant shares had vested, and the remaining 250,000 shares under the third tranche could no longer vest; accordingly, no warrant liability associated with the Bunge Warrant shares was recorded as of December 31, 2015 and 2014. The Company recorded a net unrealized gain related to the change in the fair value of the warrant liability of $0.7 million and $0.1 million during the years ended December 31, 2014 and 2013, respectively.