INVESTMENT IN EQUITY METHOD INVESTMENTS

Solazyme Bunge JV

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.

The Solazyme Bunge JV's operational focus from inception to date has been primarily to support the construction, ramp up and optimization of the commercial-scale production facility. While the Solazyme Bunge JV has incurred significant losses to date, the Company believes that long-term 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 the 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; and


•	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; and


•	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; and


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

The Company contributed $7.8 million and $19.5 million to the Solazyme Bunge JV in the nine months ended September 30, 2016 and 2015, respectively. The Company also contributed $2.7 million and $5.5 million to the Solazyme Bunge JV in the nine months ended September 30, 2016 and 2015, respectively, 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 $36.0 million and $35.9 million as of September 30, 2016 and December 31, 2015, respectively. During the nine months ended September 30, 2016 and 2015, the Company recognized $16.6 million and $18.3 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 September 30, 2016, 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 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 September 30, 2016 and December 31, 2015 (in thousands):



	As of September 30, 2016
	Assets						Liabilities
	Accounts Receivable		Unbilled Revenues		Investments in Unconsolidated Joint Ventures		Loan Guarantee		Maximum Exposure to Loss⁽¹⁾
Equity investment - Solazyme Bunge JV	$	12	$	563	$	35,959	$	—	$	47,703



	As of December 31, 2015
	Assets						Liabilities
	Accounts Receivable		Unbilled Revenues		Investments in Unconsolidated Joint Ventures		Loan Guarantee		Maximum Exposure to Loss⁽²⁾
Equity investment - Solazyme Bunge JV	$	12	$	839	$	35,910	$	—	$	45,692


⁽¹⁾	Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of $10.9 million and non-cancelable purchase obligations of $0.3 million (based on the exchange rate at September 30, 2016).

⁽²⁾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).

The Company may be required to contribute additional capital to the Solazyme Bunge JV 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 September 30, 2016 and December 31, 2015, and for the three and nine months ended September 30, 2016 and 2015 respectively, was as follows (in thousands):



	As of September 30, 2016		As of December 31, 2015
Current assets	$	13,829	$	5,654
Property, plant and equipment, net	114,991		100,755
Recoverable taxes⁽¹⁾	20,852		16,144
Total assets	$	149,672	$	122,553

Current liabilities	$	41,929	$	23,009
Noncurrent liabilities	42,966		43,054
JV’s partners’ capital, net	64,777		56,490
Total liabilities and partners’ capital, net	$	149,672	$	122,553

⁽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 the Solazyme Bunge JV in Brazil. The realization of these recoverable tax payments could take in excess of five years.



	Three months ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net sales	$	2,495		$	953		$	5,491		$	1,611
Net losses	$	(12,357	)	$	(11,435	)	$	(32,036	)	$	(34,610	)

During 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank ("BNDES" or "BNDES Loan") under which it could borrow up to $75.4 million (based on the exchange rate as of September 30, 2016). Outstanding borrowings were $55.6 million and $53.4 million as of September 30, 2016 and December 31, 2015, 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 September 30, 2016, 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 three and nine months ended September 30, 2016 and 2015.

Impairment Assessment

The Company assessed the recoverability of its equity investment in the 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 Company is not aware of any events since that assessment was done that would indicate its equity investment was impaired as of September 30, 2016.

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 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 impairments may be required in future reporting periods.

Algenist Holdings, Inc.

As further described in Note 3, on August 16, 2016 the Company sold its Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc. in exchange for $20.2 million in cash (before $1.4 million closing costs), 19.9% of the fully diluted equity of Algenist Holdings, Inc. and the assumption of substantially all of the liabilities related to the Algenist skincare business by Algenist Holdings, Inc. The Company recognized the 19.9% ownership interest in Algenist Holdings, Inc. at fair value on the date of closing of the transaction. After the sale, the Company considers that it has sufficient influence over Algenist Holdings, Inc. to require equity accounting. Hence the Company recognizes its proportionate share of the earnings (losses) of Algenist Holdings, Inc. under the equity method of accounting within results of continuing operations.

The Company's investment in Algenist Holdings, Inc. included in equity method investment assets on the condensed consolidated balance sheet was $1.6 million as of September 30, 2016, and the Company's equity income from its investment in Algenist Holdings, Inc. for the period from August 16, 2016 to September 30, 2016 was de minimis.