INVESTMENT IN SB OILS JV

Background and Operations

In April 2012, we formed with Bunge Solazyme Bunge Renewable Oils Cooperatief U.A., (SB Oils JV) to build, own and operate the SB Oils JV Plant, a commercial-scale renewable algae oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil, leveraging our technology. SB Oils JV is governed by a six member board, three from each investor.

The SB Oils 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 SB Oils JV has incurred significant losses to date, we believe that long-term profitability will drive positive cash flows sufficient for us to recover our investment.

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

SB Oils JV will:


•	continue to use our proprietary technology to produce a range of algae-based oils and products from cane sugar through microbe-based catalysis;


•	pay us a royalty for certain products sold by the joint venture; and


•	pay us a technology maintenance fee in recognition of our ongoing research investment in technology.

We will:


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


•	provide access to our 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 SB Oils 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 us as an additional sales channel, in each case in exchange for a distribution fee; and


•	continue to provide working capital to SB Oils until April 2, 2017 through a revolving loan facility.

Equity Accounting

We account for our interest in the SB Oils JV under the equity method of accounting. Our equity investment in the SB Oils JV was $42.4 million and $35.9 million as of December 31, 2016 and 2015, respectively. During 2016, 2015 and 2014, we recognized $22.3 million, $22.4 million and $23.0 million of losses, respectively, related to our equity method investment in the SB Oils JV.

We contributed $19.3 million, $22.3 million and $32.6 million during 2016, 2015 and 2014, respectively. We also contributed $4.2 million, $5.5 million and $15.3 million in 2016, 2015 and 2014, respectively, to the SB Oils JV through a reduction in our receivables due from the SB Oils JV.

We have determined that the SB Oils JV is a VIE based on the insufficiency of each party’s equity investment at risk to absorb their respective share of the expected losses of the SB Oils JV. The optimization and ramping up of the SB Oils JV Plant is the activity of the SB Oils JV that most significantly impacts its current economic performance. Although we have the obligation to absorb losses and the right to receive benefits of the SB Oils JV that could potentially be significant to the SB Oils JV, we have equal shared decision–making powers with Bunge over certain significant activities of the SB Oils JV, including those related to the construction, optimization and ramping up of the SB Oils JV. Therefore, through and as of December 31, 2016, we do not consider ourselves to be the SB Oils JV’s primary beneficiary, and as such have not consolidated the financial results of the SB Oils 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 SB Oils JV’s economic performance. We will continue to reassess our designation as the primary beneficiary of the SB Oils JV.

The following table summarizes the carrying amounts of the assets and the fair value of the liabilities included in our consolidated balance sheets and the maximum loss exposure related to our interest in the SB Oils JV as of December 31, 2016 and 2015 (in thousands):



	As of December 31, 2016
	Assets						Liabilities
VIE	Accounts Receivable		Unbilled Revenues		Investments in Unconsolidated Joint Ventures		Loan Guarantee		Maximum Exposure to Loss⁽¹⁾
SB Oils JV	$	—	$	—	$	42,373	$	—	$	54,162



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


⁽¹⁾	Includes maximum exposure to loss attributable to our bank guarantee required to be provided for the SB Oils JV of $10.8 million and non-cancelable purchase obligations of $0.9 million (based on the exchange rate at December 31, 2016).


⁽²⁾	Includes maximum exposure to loss attributable to our bank guarantee required to be provided for the SB Oils JV of $8.9 million (based on the exchange rate at December 31, 2015).

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

During 2013, the SB Oils 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 December 31, 2016). Outstanding borrowings were $52.6 million and $53.4 million as of December 31, 2016 and 2015, respectively. We have 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 our ownership percentage in the SB Oils JV). The BNDES funding has supported the construction of the SB Oils 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, 2016, our 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 2016, 2015 and 2014.

Impairment Assessment

We assessed the recoverability of our $42.4 million equity investment in the SB Oils JV as of December 31, 2016 using a discounted cash flow analysis. We also compared the discounted cash flow analysis to a market approach based upon relevant market multiples. Our analysis was performed using the guidance from ASC 323, Investments - Equity Method and Joint Ventures, Subsequent Measurement, which states that a loss in value of an investment that is an other than a temporary decline shall be recognized. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. However, a decline in the quoted market price below the carrying amount or the existence of operating losses is not necessarily indicative of a loss in value that is other than temporary. With consideration to the above guidance, we evaluated our ongoing business activities at the SB Oils JV and concluded there was no impairment of our investment in the SB Oils JV as of December 31, 2016. The process of evaluating the potential impairment is subjective and requires significant estimates and assumptions. Our estimated future cash flows are based on assumptions that are consistent with our 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 our equity investment in SB Oils JV was not impaired as of December 31, 2016 was based upon the following critical estimates and assumptions:

Revenues


•	material increases in product revenues from $10 million in 2016 to over $200 million in 2021 and future years, primarily from AlgaPrime™ DHA sales;


•	maintain current average selling prices based on current contracted prices;

Costs


•	maintain access to cane sugar feedstock;


•	increase production volumes by optimizing plant throughput and increasing yields, drying rates and final recovery rates;


•	reduction of production costs through increased fermentation and recovery efficiencies combined with increasing volumes;


•	increase in contribution margins;

Capital Expenditures


•	capital expenditure of $3 million in 2017 on dryer refurbishment;


•	additional capital investment of $20 million to $30 million over the next five years to improve throughput rates and increase capacity;

Other


•	discount rate of approximately 14%; and


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

We also performed independent breakeven sensitivity analyses, and determined there would be no impairment as of December 31, 2016, as follows:


•	If sales volume were 37% less than forecast in the years 2017 through 2030;


•	If the contribution margin was 47% less than forecast in the years 2017 through 2030; or


•	If the discount rate was increased to approximately 20%.

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, we may make changes to our and the SB Oils JV business plans that could result in changes to the expected cash flows. As a result, it is possible that impairments may be required in 2017 or future reporting periods.