AMYRIS, INC. - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission File Number: 001-34885
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AMYRIS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 55-0856151 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
5885 Hollis Street, Suite 100, Emeryville, California 94608
(Address of principal executive offices and Zip Code)
(510) 450-0761
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Common Stock, $0.0001 par value per share | AMRS | Nasdaq Global Select Market | ||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter, was $226.5 million based upon the closing price of the registrant’s common stock reported for such date on the Nasdaq Global Select Market.
Number of shares of the registrant’s common stock outstanding as of March 6, 2020: 163,843,407
DOCUMENTS INCORPORATED BY REFERENCE
None.
AMYRIS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including any projections of financing needs, revenue, expenses, earnings or losses from operations, or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning product research, development and commercialization plans and timelines; any statements regarding expected production capacities, volumes and costs; any statements regarding anticipated benefits of our products and expectations for commercial relationships; any other statements of expectation or belief; and any statements of assumptions underlying any of the foregoing, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "predict," "intend," "expect," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements contained herein.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms "Amyris," the "Company," "we," "us," and "our" in this Annual Report on Form 10-K refer to Amyris, Inc., a Delaware corporation, and, where appropriate, its consolidated entities.
PART I
ITEM 1. BUSINESS
Overview
We are a leading industrial biotechnology company that applies its technology platform to engineer, manufacture and sell high performance, natural, sustainably-sourced products into the Health & Wellness, Clean Beauty, and Flavor & Fragrance markets. Our proven technology platform enables us to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into large volume, high-value ingredients. Our biotechnology platform and industrial fermentation process replaces existing complex and expensive manufacturing processes. We have successfully used our technology to achieve nine molecules in production, leading to 17 commercial ingredients used by thousands of leading global brands.
We believe that industrial biotechnology represents a third industrial revolution, bringing together biology and engineering to generate new, more sustainable materials to meet the growing global demand for bio-based replacements for petroleum-based and traditional animal- or plant-derived ingredients. We continue to build demand for our current portfolio of products through an extensive sales network provided by our collaboration partners that represent the leading companies in the world for our target market sectors. We also have a small group of direct sales and distributors who support our Clean Beauty market. Via our partnership model, our partners invest in the development of each molecule to bring it from the lab to commercial scale and use their extensive sales forces to sell our ingredients and formulations to their customers as part of their core business. We capture long-term revenue through a combination of direct product sales, production and sale of the molecule to our partners, and royalty revenues from our partners' product sales to their customers.
We were founded in 2003 in the San Francisco Bay area by a group of scientists from the University of California, Berkeley. Our first major milestone came in 2005 when, through a grant from the Bill & Melinda Gates Foundation, we developed technology capable of creating microbial strains that produce artemisinic acid, which is a precursor of artemisinin, an effective anti-malarial drug. In 2008, we granted royalty-free licenses to allow Sanofi S.A. to produce artemisinic acid using our technology. Building on our success with artemisinic acid, in 2007 we began applying our technology platform to develop, manufacture and sell sustainable alternatives to a broad range of markets.
We focused our initial development efforts primarily on the production of Biofene®, our brand of renewable farnesene, a long-chain, branched hydrocarbon molecule that we manufacture through fermentation using engineered microbes. Our farnesene derivatives are sold or included in thousands of products as nutrition, health, skincare, fragrances, solvents, and fragrance ingredients. The commercialization of farnesene pushed us to create a more cost efficient, faster and accurate development process in the lab and drive manufacturing costs down. This investment has enabled our technology platform to rapidly develop microbial strains and commercialize target molecules. In 2014, we began manufacturing additional molecules for the Flavor & Fragrance industry. In 2015, we began investing to expand our capabilities to other small molecule chemical classes beyond terpenes, which comprised our initial research efforts (including through a Technology Investment Agreement with the Defense Advanced Research Projects Agency (DARPA)). In 2016 we expanded into the production of proteins.
Since the Company's inception, we have invested $700 million in infrastructure and technology to create microbes that produce molecules from sugar or other feedstocks at commercial scale. This platform has been used to design, build, optimize and upscale strains for nine molecules in production, leading to 17 commercial ingredients used by thousands of leading global brands. Our time to market for molecules has decreased from seven years to potentially less than a year, mainly due to our ability to leverage the technology platform we have built.
Our technology platform has been in active use since 2007 and has been integrated with our commercial production since 2011, creating an organism development process that we believe makes us an industry leader in the successful scale-up and commercialization of biotech-produced ingredients. The key performance characteristics of our platform that we believe differentiate us include our proprietary computational tools, strain construction tools, screening and analytics tools, and advanced lab automation and data integration. Full integration of the platform with our large-scale manufacturing capability enables us to engineer precisely with the end specification and commercial production requirements guiding our developments. Our state-of-the-art infrastructure includes industry-leading strain engineering and lab automation located in Emeryville, California, pilot-scale production facilities in Emeryville, California and Campinas, Brazil, a demonstration-scale facility in Campinas, Brazil and a commercial-scale production facility in Leland, North Carolina, which is owned and operated by our Aprinnova joint venture to convert our Biofene into squalane and other final products.
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We are able to use a wide variety of feedstocks for production but have focused on accessing non-GMO Brazilian sugarcane for our large-scale production because of its renewability, low cost and relative price stability.
Several years ago, we made the strategic decision to transition our business model from developing and commercializing molecules in low margin commodity markets to higher margin specialty markets. We began the transition by commercializing and supplying farnesene-derived squalane as a cosmetic ingredient sold to formulators and distributors. We then entered into collaboration and supply agreements for the development and commercialization of molecules within the Flavor & Fragrance and Clean Beauty markets where we utilize our strain generation technology to develop molecules that meet the customer’s rigorous specifications.
During this transition, we solidified the business model of partnering with our customers to create sustainable, high-performing, low-cost molecules that replace an ingredient in their supply chain, commercially scale and manufacture those molecules, and share in the profits earned by our customers once our customers sell their products into these specialty markets. These three steps constitute our grants and collaborations revenues, renewable product revenues, and royalty revenues.
In 2017, we decided to monetize the use of one of our lower margin molecules, farnesene, in certain fields of use while retaining any associated royalties. We began discussions with our partners and ultimately made the decision to license farnesene to Koninklijke DSM N.V. (DSM) for use in these fields. We also sold to DSM our subsidiary Amyris Brasil Ltda. (Amyris Brasil), which owned and operated the purpose-built, large-scale manufacturing facility in Brotas, Brazil that manufactures farnesene, a key, bio-based intermediate ingredient in certain of our products, in 2017.
The Brotas facility was built to batch manufacture one commodity product at a time (originally for high-volume production of biofuels, a business we have exited), which is an inefficient manufacturing process that is not suited for the high margin specialty markets in which we operate today. The inefficiencies we experienced at the Brotas facility included idling the facility for two weeks at a time to clean and prepare the plant for the production of the next molecule to be manufactured. These inefficiencies caused a significant increase in our cost of goods sold. We are in the process of constructing a new purpose-built, large-scale production facility in Brazil (see the Manufacturing section below), which we anticipate will allow for the manufacture of five products concurrently and over 10 different products annually. As part of the December 2017 sale of the Brotas facility, we contracted with DSM for the use of the Brotas facility to manufacture products for us to fulfill our product supply commitments to our customers until our new production facility becomes operational. In November 2018 and April 2019, we amended the supply agreement with DSM and entered into various other agreements with DSM. See Note 9, “Revenue Recognition” and Note 10, "Related Party Transactions" in Part II, Item 8 of this Annual Report on Form 10-K for a full listing and details of agreements with DSM. In September 2019, we obtained the necessary permits and broke ground on our Specialty Ingredients Plant (SIP). We expect facility construction to be completed in the second quarter of 2021. This facility will allow us to manufacture five products at once and to produce both our specialty ingredients portfolio and our alternative sweetener product.
As discussed above, on December 28, 2017, we completed the sale of Amyris Brasil, which operated our Brotas production facility, to DSM and concurrently entered into a series of commercial agreements and a credit agreement with DSM. At closing, we received $33.0 million in contractual cash consideration for the capital stock of Amyris Brasil, which was subject to certain post-closing working capital adjustments and reimbursements from DSM contingent on DSM’s utilization of certain Brazilian tax benefits it acquired with its purchase of Amyris Brasil. We used $12.6 million of the cash proceeds received to repay certain indebtedness of Amyris Brasil. The total fair value of the contractual consideration received in connection with the sales agreement for Amyris Brasil was $56.9 million and resulted in a pretax gain of $5.7 million from continuing operations, recognized in fiscal 2017.
Concurrent with the sale of Amyris Brasil, we entered into a series of commercial agreements with DSM including (i) a license agreement to DSM of our farnesene product for DSM to use in the Vitamin E and Lubricants specialty markets; (ii) a royalty agreement, pursuant to which DSM agreed to pay us specified royalties representing a portion of the profit on the sale of Vitamin E produced from farnesene sold under the supply agreement with Nenter & Co., Inc. (“Nenter”), which was assigned to DSM; (iii) a performance agreement to perform research and development to optimize farnesene for production and sale of farnesene products; and (iv) a transition services agreement in which we provided finance, legal, logistics, and human resource services to support the Brotas facility under DSM ownership for a six-month period with a DSM option to extend for six additional months. At closing, DSM paid us a $27.5 million nonrefundable license fee and a $15.0 million nonrefundable minimum royalty revenue payment. DSM also agreed to pay us two additional future nonrefundable minimum annual royalty payments totaling $18.1 million related to 2019 and 2020 royalties. In June 2018, we received the 2019 non-refundable minimum royalty payment of $9.3 million (net of a $0.7 million early payment discount) and in March 2019, we received the 2020 payment of $7.4 million (net of a $0.7 million early payment discount).
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In the second quarter of 2018, we successfully demonstrated our industrial process at full-scale to produce a high-purity, zero calorie sweetener derived from sugarcane, and in December 2018, we received notification from the U.S. Food and Drug Administration (the FDA) that we received its "Generally Recognized As Safe" designation concurrence, and began producing commercial quantities of Steviol Glycoside Rebaudioside M (or Reb M) at DSM’s Brotas facility during the fourth quarter of 2018. Also, in the third and fourth quarters of 2019 we completed another successful campaign of Reb M utilizing the Brotas facility and a contract manufacturer for the purification steps and produced more than three times the volume of Reb M than in the December 2018/January 2019 campaign. We believe the Reb M molecule we are producing from sugarcane is one of the leading natural sweeteners. When derived from the Stevia plant, Reb M is found in very limited quantities. The Reb M we produce from sugarcane is more sustainable and lower cost than other natural sweeteners, and has a specific technical profile that we believe is advantaged in taste and total process economics for blends and formulations.
In June and December 2018, we and our contract manufacturer, Antibióticos de León (ADL), executed amendments to our January 2018 production agreement, thereby providing us additional tank capacity at ADL’s production facility in León, Spain. These amendments provide additional, cost-effective manufacturing capability to meet higher than expected product demand from our partners. The amended agreement includes a commitment to running a certain number of batches at ADL’s production facility from the period September 1, 2018 through December 31, 2019 for up to six of our products. In June 2019, we signed an additional amendment to this agreement extending our commitment through December 2020.
In the second quarter of 2018, we executed an agreement for a significant project consortium in Europe with the Universidade Católica Portuguesa (UCP) Porto Campus and AICEP Portugal Global (AICEP). UCP is a university system, including the leading biotech school in Portugal, and operates 15 research centers. AICEP is an independent public entity of the Government of Portugal, focused in encouraging foreign companies to invest in Portugal. In conjunction with this agreement, we opened a subsidiary in Porto, Portugal. The primary purpose of this subsidiary is to conduct a research and development project together with Escola Superior de Biotecnologia o Universidade Católica Portuguese. This subsidiary will be the second R&D center of Amyris and will be responsible for certain areas of research, namely valorization of fermentation residues and wastes and the advancement of the Company's Artificial Intelligence (AI) and Informatics platform. The overall multi-year project is valued up to approximately $50 million including investment funding and incentives allotted across the parties involved. We have sole responsibility for commercialization and majority ownership of all intellectual property (IP) generated. We believe this is the largest biotechnology grant ever awarded in Portugal and one of the largest ever approved by the AICEP for commercial applications.
In the third quarter of 2018, we entered into a supply and distribution agreement for our new, sugarcane-derived, zero calorie sweetener with ASR Group, the world’s largest cane sugar refiner. Also in the third quarter of 2018, we entered into a license and collaboration agreement with a subsidiary of Yifan Pharmaceutical Co., Ltd. (Yifan), which is one of the leading Chinese pharmaceutical companies. Such license and collaboration agreement was expanded in November 2018.
On May 2, 2019, we consummated a research, collaboration and license agreement (the Cannabinoid Agreement) with LAVVAN, Inc., a newly formed investment-backed company (Lavvan), for up to $300 million for the development, manufacture and commercialization of cannabinoids. Under the agreement, the Company will perform research and development activities and Lavvan will be responsible for the commercialization of the cannabinoids developed under the agreement. The Cannabinoid Agreement is being principally funded on a milestone basis, with the Company also entitled to receive certain supplementary research and development funding from Lavvan. The Company could receive aggregate funding of up to $300 million over the term of the Cannabinoid Agreement if all of the milestones are achieved. Additionally, the agreement provides for royalties to the Company on Lavvan's gross profit margin once products are commercialized; these payments will be due for the next 20 years. Consummation of the transactions contemplated by the Cannabinoid Agreement included the formation of a special purpose entity to hold certain intellectual property created during the collaboration (the Cannabinoid Collaboration IP), the licensing of certain Company intellectual property to Lavvan, the licensing of the Cannabinoid Collaboration IP to the Company and Lavvan, and the granting by the Company to Lavvan of a lien on our background intellectual property being licensed to Lavvan under the Cannabinoid Agreement, which would be subordinated to the lien on such intellectual property under the Foris LSA debt facility; see Note 4, “Debt” in Part II, Item 8 of this Annual Report on Form 10-K for more information.
On May 10, 2019, the Company and Raizen Energia S.A. (Raizen) entered into an agreement relating to the formation and operation of a joint venture relating to the production, sale and commercialization of alternative sweetener products. In connection with the formation of the joint venture, among other things, (i) the joint venture will construct a manufacturing facility on land owned by Raizen and leased to the joint venture (the Sweetener Plant), (ii) the Company will grant to the joint venture an exclusive, royalty-free, worldwide, license to certain technology owned by the Company relevant to the joint venture’s business, and (iii) the Company and Raizen will enter into a shareholders agreement setting forth the rights and obligations of the parties with respect to, and the management of, the joint venture. The formation of the joint venture is subject
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to certain conditions, including certain regulatory approvals and the achievement of certain technological and economic milestones relating to the Company’s existing production of its alternative sweetener product. If such conditions are not satisfied by May 2020, the joint venture will automatically terminate. In addition, notwithstanding the satisfaction of the closing conditions, Raizen may elect not to consummate the formation and operation of the joint venture, in which event, the Company will retain the right to construct and operate the Sweetener Plant.
Technology
We have developed innovative microbial engineering and screening technologies that allow us to transform the way microbes metabolize sugars. Specifically, we engineer microbes, such as yeast, and use them as catalysts to convert sugar, through fermentation, into high-value molecules. In 2015, we were awarded a technology investment agreement with DARPA to expand the capabilities of our technology platform. The investment has resulted in us developing an integrated platform with artificial intelligence that will speed up the development and commercialization of small molecules across 15 different chemical classes. We have also developed our technology to be able to produce large molecules, such as proteins.
We devote substantial resources to our research and development efforts. As of December 31, 2019, our research and development organization included 192 employees, 55 of whom held Ph.D.s. We also have an additional 30 Ph.D.s throughout the organization who contribute to the success of our technology platform. We have invested $700 million to date in our research and development capabilities that has resulted in an almost 6x improvement in speed to market and in the scale-up of nine successful molecules. These achievements are due to the leading strain engineering and upscaling and commercialization capabilities we have developed from our investment.
Strain Engineering
Companies and researchers around the world are continuously learning how the complex biological processes in organisms work. Because there is so much that is still unknown, the best method for development of commercially viable strains is to test as many hypotheses as accurately and quickly as possible to accelerate the learning curve.
We have developed a high-throughput strain engineering system that is currently capable of producing and screening more than 100,000 yeast strains per month, which enables us to achieve an approximately 90% lower cost per strain than we achieved in 2009. We generated more than 360,000 unique strains in 2019, surpassing 6.3 million unique strains created since our inception, with each strain testing for improved production of the target molecules. In addition, through our lab-scale and pilot-plant fermentation operations, and our proprietary analytical tools, we are now able to predict, with high reliability, the performance of candidate strains at industrial scale.
Upscaling and Commercialization
The riskiest part of commercializing biotechnology is often the scale up and manufacturing due to the perceived unpredictability of biotechnology at different scales. We have built scale-up and manufacturing capabilities as our advantage by heavily investing in prediction models and analytics to quickly ascertain how a strain’s behavior at one scale will translate in another scale. We have successfully scaled-up and manufactured nine distinct molecules at commercial volumes to date, leading to 17 commercial ingredients used by thousands of leading global brands. The results of our advantage are accelerated speed to market, lower overall development costs, and a significantly lower risk profile for any project we undertake.
A strain must be improved to increase the level of efficiency of production, and tested for performance in pilot-scale facilities before it is implemented at commercial-scale manufacturing facilities. Our unique infrastructure to support this scale-up process includes lab-scale fermenters (0.5 to 2 liter), operating pilot plants in our facilities in Emeryville, California, which operates a 300-liter fermenter, and Campinas, Brazil, which operates 300- and 2,000-liter fermenters, and five years’ experience owning and operating the 1,200,000-liter production facility in Brotas, Brazil that we sold in late 2017. Each of these stages mimic the conditions found in larger-scale fermentation so that our findings may translate predictably from lab-scale to pilot and ultimately to commercial-scale. Our infrastructure is so accurate that we can typically go straight from lab-scale to commercial-scale for our fermentations, and generally the only reason we ever invest in the pilot-scale step is to produce enough product to accurately test our downstream processing since our fermentation process is already robust.
The complexities that can arise at industrial-scale manufacturing are significant and it takes an experienced team to not only address issues as they arise, but to also have the foresight to prevent issues from arising. With five years of experience operating the production facility in Brotas, Brazil that we designed (prior to selling the facility in late 2017), we have been able to develop a world-class manufacturing team. This team has successfully brought online a production facility and scaled up and manufactured nine molecules at commercial-scale that are currently used in thousands of consumer goods products around the
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world. Our effort also expands into continued strain and process improvements to ensure our manufacturing is robust and the most cost advantaged.
Product Markets and Partnerships
There are three market areas that are our primary focus and key to our growth: Health & Wellness, Clean Beauty and Flavor & Fragrance. Each of these markets embodies our core competencies of sustainably providing clean ingredients in markets where we can be the most impactful, not only from a growth and revenue standpoint, but also for healthier living.
We believe that our leadership in biotechnology is demonstrated by collaboration partners, who come to us to access our platform and industrial fermentation expertise. Together we seek to reduce environmental impact, enhance performance, reduce supply and price volatility, and improve profit margins. Our partners include Flavor & Fragrance companies such as Firmenich S.A. (Firmenich) and Givaudan International, SA (Givaudan), and nutrition companies such as DSM and Yifan. A portion of our work has also been funded by the U.S. government, including the Department of Energy (DOE) and DARPA, to develop technologies and processes capable of improving the ability to utilize biotechnology for the production of a broader range of molecules.
Health & Wellness
Our Health & Wellness focus includes alternative sweeteners, nutraceuticals, such as vitamins, and food ingredients. As consumers continue to demand higher nutritional performance, healthier ingredients and convenience from their food, the demand will continue to grow for specific ingredients that are often difficult and expensive to procure. Animal farming is also being impacted by the growing demand for protein and the need to change farming practices, such as reducing antibiotic use. Our technology can be employed to provide affordable access to these desired ingredients for both human and animal health. To date, product revenue in this area has been from a derivative made from our Biofene® product by our partner. In late 2018, we began to produce at commercial-scale an alternative, healthier sweetener. We introduced our product to the public during December 2018, at an investor event in NYC. In 2019, we ran two production campaigns that resulted in feedback that our Reb M product is distinguished by one of the best-tasting profiles in the industry to date. The market and commercial uptake has been significant. We have sold out the production for both campaigns. Also, by the end of 2019 we also introduced our B2C sweetener brand: Purecane. We currently offer this brand through our own website: www.purecane.com and we also plan to expand the distribution in Amazon in March. Finally, we currently offer Purecane in two product forms: a 100 sachet for table-top, and a culinary bag that has a cup for cup equivalency with sugar.
During 2015, we announced the signings of our first ingredient supply agreement and collaboration agreement for the global nutraceuticals market. Under the supply agreement, we sourced Biofene to our partner, which was then further processed into a nutraceutical product. In 2016, we made the first large-scale shipments of Biofene to our partner, who successfully produced and sold a nutraceutical product to its customers. In 2017 and 2018, we expanded our collaborations in nutraceuticals to four vitamins and a human nutrition ingredient.
Flavor & Fragrance Markets
Our technology enables us to cost-effectively produce natural oils and aroma chemicals that are commonly used in the Flavor & Fragrance market. Many of the natural ingredients used in the Flavor & Fragrance market are expensive because there is limited supply and the synthetic alternatives require complex chemical conversions. We offer Flavor & Fragrance companies a natural route to procure these high-value ingredients without sacrificing cost or quality. To date, we have successfully brought four Flavor & Fragrance ingredients to market with our collaboration partners. We also have several other ingredients under development.
In late 2013, we commenced commercial production of our first Flavor & Fragrance ingredient for a range of applications, from perfumes to laundry detergent, which is marketed by a collaboration partner which is a global Flavor & Fragrance leader. In 2014, we completed our first production campaign of this ingredient and shipped it to this collaboration partner. In late 2015, we commenced production and initial sales of our second Flavor & Fragrance ingredient to the same collaboration partner. During 2019, we added two new Flavor & Fragrance molecules to our list of successfully scaled products and we shipped seven compounds destined for the Flavor & Fragrance market (including compounds converted by our partners to Flavor & Fragrance ingredients) to our partners.
We continue to work to develop and commercialize a variety of Flavor & Fragrance ingredients that are either direct fermentation products or derivatives of fermentation products.
Clean Beauty
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Our Clean Beauty focus includes clean skincare and cosmetic ingredients we develop and commercialize with our partners and our branded Biossance product line. In September 2019, we launched a new clean beauty baby brand, Pipette. We have several cosmetic ingredients currently under development. Our Biossance and Pipette products are discussed further in the Amyris-branded Product Markets section below.
Amyris-branded Product Markets
Through basic chemical finishing steps, we are able to convert our farnesene into squalane, which is used today as a premium emollient in clean skincare products. We believe that our squalane offers performance attributes equal or superior to those of squalane derived from conventional sources. The ingredient traditionally has been manufactured from olive oil or extracted from deep-sea shark liver oil, which requires that the shark be killed in order to harvest its liver oil. The relatively high price and unstable supply of squalane in the past meant that its use was generally limited to luxury products or small quantities in mass-market product formulations. With our ability to produce a reliable supply of low-cost squalane that eliminates the need to harvest shark liver oil, we offer this ingredient at a price that we believe will drive increasing adoption by formulators. In addition to squalane, we offer a second, lower-cost cosmetic ingredient, hemisqualane, for the cosmetics market. In December 2016, we and Nikko Chemicals Co., Ltd. (Nikko) formed a joint venture, in which we hold a 50% interest, for our business-to-business sales of Neossance squalane and hemisqualane. See below under “Joint Venture” for more information regarding our Aprinnova joint venture. The joint venture currently has supply agreements with several regional distributors, including those with locations in Japan, South Korea, Europe, Brazil and North America, and, in some cases, directly with cosmetics formulators, which we transferred to the joint venture during the formation process.
Our consumer clean skincare products, sold under our Biossance brand, feature our Biofene-derived squalane. Under our Biossance brand, we market and sell our products directly to retailers and consumers. Biossance was initially sold solely through our ecommerce branded website and in 2016, we expanded the product line to include an expansive line of clean high-performance skincare products and opened up sales through Home Shopping Network (HSN). In October 2016, we announced our Biossance product line would begin to be carried at Sephora in 2017. In February 2017, we launched a full squalane-based consumer cosmetic line at participating Sephora stores and Sephora online. All of the products are based on our commitment to No Compromise®. Since the launch of Biossance, sales have grown, and with Sephora’s partnership, we continued to expand to more stores through 2019.
We launched a clean beauty brand, Pipette, in September 2019 with an initial offering of seven products developed for babies and moms to support and nurture the skin. Currently, the brand now offers nine unique products.
Pipette is available for purchase at Pipettebaby.com, buybuyBABY.com, Amazon.com, Walmart.com, and Dermstore.com, in-store exclusively at buybuy BABY® stores nationwide, and at our own direct website. Pipette recently became available for purchase at Target.com, as well. The brand is seeking further expansion through online and brick-and-mortar retailers.
Manufacturing
Until December 2017, we owned and operated a purpose-built, large-scale production facility located in Brotas, Brazil. In December 2017, we sold the facility to a unit of DSM and entered into a supply agreement with DSM for us to purchase output from the facility. See Note 12, “Divestiture” and Note 10, "Related Party Transactions" in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our December 2017 transaction with DSM.
In September 2019, we obtained the necessary permits and broke ground on our Specialty Ingredients Plant (SIP). We expect facility construction to be completed in the second quarter of 2021. This facility will allow us to manufacture five products at once and to produce both our specialty ingredients portfolio and our alternative sweetener product. During construction, we are manufacturing our products at six contract manufacturing sites in Brazil, the U.S., Italy and Spain. In addition, in May 2019 we entered into an agreement with Raizen Energia S.A. (Raizen) for the formation and operation of a joint venture relating to the production, sale and commercialization of alternative sweetener products whereby the parties would construct a manufacturing facility exclusively for sweetener molecules on land owned by Raizen and leased to the joint venture; see Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in Part II, Item 8 of this Annual Report on Form 10-K for more details.
For many of our products, we perform additional distillation or chemical finishing steps to convert initial target molecules into other finished products, such as renewable squalane. We have agreements with several facilities in the U.S. and Brazil to perform these downstream steps for such products. We may enter into additional agreements with other facilities for finishing
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services and to access flexible production capacity and an array of other services as we develop additional products. In December 2016, we purchased a manufacturing facility in Leland, North Carolina, which had been previously operated by Glycotech Inc. (Glycotech) to convert our Biofene into squalane and other final products. We subsequently contributed that facility to our Aprinnova joint venture. See below under "Joint Venture" for more information regarding our Aprinnova joint venture.
Joint Venture
Aprinnova, LLC
In December 2016, we entered into joint venture agreements with Nikko related to the formation of a joint venture to focus on the worldwide commercialization of our Neossance cosmetic ingredients business. We formed the joint venture under the name Neossance, LLC, and later changed the name to Aprinnova, LLC (the Aprinnova JV), which is jointly owned by us and Nikko. Pursuant to the joint venture agreements, we contributed certain assets to the Aprinnova JV, including certain intellectual property and other commercial assets relating to our Neossance cosmetic ingredients business, as well as the production facility in Leland, North Carolina and related assets purchased by us from Glycotech in December 2016. We also agreed to provide the Aprinnova JV with licenses to certain intellectual property necessary to make and sell products associated with the Neossance business. At the closing of the formation of the joint venture, Nikko purchased a 50% interest in the Aprinnova JV in exchange for an initial payment to Amyris of $10.0 million and payment to Amyris of any profits distributed in cash to Nikko from the Aprinnova JV during the three year period following December 12, 2016, up to a maximum of $10.0 million. In addition, as part of the formation of the Aprinnova JV, we and Nikko agreed to make certain working capital loans to the Aprinnova JV and executed a supply agreement to supply farnesene to the Aprinnova JV, to purchase all of our requirements for the Aprinnova JV products from the Aprinnova JV, to transfer all of our customers for the Aprinnova JV products to the Aprinnova JV, to guarantee a maximum production cost for certain Aprinnova JV products, and to bear any cost of production above such guaranteed costs.
Product Distribution and Sales
We distribute and sell our products directly to distributors or collaboration partners, or through joint ventures, depending on the market. For most of our products, we sell directly to our collaboration partners, except for our consumer care products, which we sell to distributors and formulators (other than our Biossance brand, which we sell directly to retailers and consumers). Generally, our collaboration agreements include commercial terms, and sales are contingent upon achievement of technical and commercial milestones.
For the year ended December 31, 2019, revenue from 10%-or-more customers and from all other customers was as follows:
| (In thousands) | Renewable Products | Licenses and Royalties | Grants and Collaborations | Total Revenue | % of Total Revenue | ||||||||||||
| DSM | $ | 10 | $ | 49,051 | $ | 4,120 | $ | 53,181 | 34.9 | % | |||||||
| Lavvan | — | — | 18,342 | 18,342 | 12.0 | % | |||||||||||
| All other customers | 59,862 | 4,992 | 16,180 | 81,034 | 53.1 | % | |||||||||||
| Total revenue | $ | 59,872 | $ | 54,043 | $ | 38,642 | $ | 152,557 | 100.0 | % | |||||||
Intellectual Property
Our success depends in large part upon our ability to obtain and maintain proprietary protection for our products and technologies, and to operate without infringing on the proprietary rights of others. We seek to avoid the latter by monitoring patents and publications in our product areas and technologies to be aware of developments that may affect our business, and to the extent we identify such developments, evaluate and take appropriate courses of action. With respect to the former, our policy is to protect our proprietary position by, among other methods, filing for patent applications on inventions that are important to the development and conduct of our business with the U.S. Patent and Trademark Office (the USPTO), and its foreign counterparts.
As of December 31, 2019, we had 633 issued U.S. and foreign patents and 238 pending U.S. and foreign patent applications that are owned or co-owned by or licensed to us. We also use other forms of protection (such as trademark, copyright, and trade secret) to protect our intellectual property, particularly where we do not believe patent protection is appropriate or obtainable. We aim to take advantage of all of the intellectual property rights that are available to us and believe that this comprehensive approach provides us with a strong proprietary position.
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Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patent protection is obtained. The actual protection afforded by patents, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country. See “Risk Factors - Risks Related to Our Business - Our proprietary rights may not adequately protect our technologies and product candidates.”
We also protect our proprietary information by requiring our employees, consultants, contractors and other advisers to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or engagement. Agreements with our employees also prevent them from bringing the proprietary rights of third parties to us. In addition, we also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.
Trademarks
Amyris, the Amyris logo, Biofene, Biossance, Pipette, Purecane and No Compromise are trademarks or registered trademarks of Amyris, Inc or its subsidiaries. This report also contains trademarks and trade names of other businesses that are the property of their respective holders.
Competition
We expect that our renewable products will compete with products produced from traditional sources as well as from alternative production methods (including the intellectual property underlying such methods) that established enterprises and new companies are seeking to develop and commercialize.
Health & Wellness
Many active ingredients in the nutraceutical market are made via chemical synthesis by suppliers that have a deep chemistry knowhow and production facilities, including ingredient suppliers. We may compete directly with these companies with respect to specific ingredients or attempt to provide customers with more cost effective or higher performing alternatives. For food ingredients, we compete with companies that produce products from plant- and animal-derived sources as well as with companies that are also developing biotechnology production solutions to produce specific molecules.
Flavor & Fragrance
The main competition in the Flavor & Fragrance and cosmetic actives markets is from products derived from plant and animal sources as well as chemical synthesis. The products derived from plant and animal sources are typically produced at a higher cost, lower purity and create a greater impact on the environment compared to our products. Products derived from chemical synthesis are often produced at a low cost but may have ramifications on sustainability and on non-natural sourcing. There are also companies that are working to develop products using similar technology to us.
Clean Beauty
We develop and sell active cosmetic ingredients and consumer products in the Clean Beauty market, creating a competitive landscape that includes ingredient suppliers as well as consumer goods companies, such as Procter & Gamble and Estee Lauder. Most skincare ingredients are derived from plant and animal sources or created using chemical synthesis. Plant- and animal-sourced ingredients are typically higher in cost, lower in purity and have a greater impact on the environment versus our products. Products derived from chemical synthesis are often produced at a low cost but have ramifications on sustainability as well as non-natural sourcing. There are also companies that are working to develop products using similar technology to us.
Competitive Factors
We believe the primary competitive factors in our target markets are:
•product price;
•product performance and other measures of quality;
•product cost;
•infrastructure compatibility of products;
•sustainability; and
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•dependability of supply.
We believe that, for our products to succeed in the market, we must demonstrate that our products are comparable or better alternatives to existing products and to any alternative products that are being developed for the same markets based on some combination of product cost, pricing, availability, performance, and consumer preference characteristics.
Regulatory Matters
Environmental Regulations
Our development and production processes involve the use, generation, handling, storage, transportation and disposal of hazardous chemicals and radioactive and biological materials. We are subject to a variety of federal, state, local and international laws, regulations and permit requirements governing the use, generation, manufacture, transportation, storage, handling and disposal of these materials in the United States, Brazil, Europe, China and other countries where we operate or may operate or sell our products in the future. These laws, regulations and permits can require expensive fees, pollution control equipment or operational changes to limit actual or potential impact of our technology on the environment and violation of these laws could result in significant fines, civil sanctions, permit revocation or costs from environmental remediation. We believe we are currently in substantial compliance with applicable environmental regulations and permitting. However, future developments including the commencement of or changes in the processes relating to commercial manufacturing of one or more of our products, more stringent environmental regulation, policies and enforcement, the implementation of new laws and regulations or the discovery of unknown environmental conditions may require expenditures that could have a material adverse effect on our business, results of operations or financial condition. See “Risk Factors - Risks Relating to Our Business - We may incur significant costs to comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.”
GMM Regulations
The use of genetically modified microorganisms (GMMs), such as our yeast strains, is subject to laws and regulations in many countries. In the United States, the Environmental Protection Agency (EPA) regulates the commercial use of GMMs as well as potential industrial products produced from the GMMs. Various states within the United States could choose to regulate products made with GMMs as well. While the strain of genetically modified yeast that we use, S. cerevisiae, is eligible for exemption from EPA review because it is generally recognized as safe, we must satisfy certain criteria to achieve this exemption, including but not limited to, use of compliant containment structures and safety procedures. In Brazil, GMMs are regulated by the National Biosafety Technical Commission (CTNBio) under its Biosafety Law No. 11.105-2005. We have obtained commercial approvals from CTNBio to use our GMMs in a contained environment in our Brazil facilities for research and development purposes, in manufacturing and at contract manufacturing facilities in Brazil.
We expect to encounter GMM regulations in most if not all of the countries in which we may seek to make our products; however, the scope and nature of these regulations will likely vary from country to country. In addition, such regulations may change over time. If we cannot meet the applicable requirements in countries in which we intend to produce our products using our yeast strains, then our business will be adversely affected. See “Risk Factors - Risks Related to Our Business - Our use of genetically modified feedstocks and yeast strains to produce our products subjects us to risks of regulatory limitations and rejection of our products.”
Chemical Regulations
Our renewable products may be subject to government regulations in our target markets. In the United States, the EPA administers the requirements of the Toxic Substances Control Act (TSCA), which regulates the commercial registration, distribution and use of many chemicals. Before an entity can manufacture or distribute significant volumes of a chemical, it needs to determine whether that chemical is listed in the TSCA inventory. If the substance is listed, then manufacture or distribution can commence immediately. If not, then in most cases a “Chemical Abstracts Service” number registration and pre-manufacture notice must be filed with the EPA, which has 90 days to review the filing. A similar requirement exists in Europe under the Registration, Evaluation, Authorization and Restriction of Chemical Substances (REACH) regulation. See “Risk Factors - Risks Related to Our Business - We may not be able to obtain regulatory approval for the sale of our renewable products.” In 2013, the EPA registered farnesane as a new chemical substance under the TSCA, which enables us to manufacture and sell farnesane without restriction in the United States.
Other Regulations
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Certain of our current or emerging products in the Health & Wellness, Clean Beauty, and Flavor & Fragrance markets, including alternative sweeteners, nutraceuticals, Flavor & Fragrance ingredients, skincare ingredients, cosmetic actives, and our proposed cannabinoid products, are subject to regulation by either the FDA or the Drug Enforcement Administration (DEA) or both, as well as similar agencies of states and foreign jurisdictions where these products are manufactured, sold or proposed to be sold. Pursuant to the Federal Food, Drug, and Cosmetic Act (the FDCA), the FDA regulates the processing, formulation, safety, manufacture, packaging, labeling and distribution of food ingredients, vitamins, and cosmetics. Generally, in order to be marketed and sold in the United States, a relevant product must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued thereunder. The FDA has broad authority to enforce the provisions of the FDCA applicable to food ingredients, vitamins, drugs and cosmetics, including powers to issue a public warning letter to a company, to publicize information about illegal products, to request a recall of illegal products from the market, and to request the United States Department of Justice to initiate a seizure action, an injunction action, or a criminal prosecution in the U. S. courts. Failure to obtain requisite approval from, or comply with the laws and regulations of, the FDA or similar agencies of states and applicable foreign jurisdictions could prevent us from fully commercializing certain of our products. See “Risk Factors - Risks Related to Our Business - We may not be able to obtain regulatory approval for the sale of our renewable products.” Our proposed cannabinoid products may also be subject to regulation under various federal, state and foreign-controlled substance laws and regulations. See “Risk Factors - Our cannabinoid initiative is uncertain and may not yield commercial results and is subject to significant regulatory risks.”
In addition, our end-user products such as our Biossance and Pipette brands clean skincare products will be subject to the Natural Cosmetics/Personal Care Products Safety Act, if enacted. Cosmetic products are regulated by or under the FDA’s oversight. Also, our end-user products are subject to the regulations of the United States Federal Trade Commission (FTC) and similar agencies of states and foreign jurisdictions where these products are sold or proposed to be sold regarding the advertising of such products. In recent years, the FTC has instituted numerous enforcement actions against companies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading advertising claims. The FTC has broad authority to enforce its laws and regulations applicable to cosmetics, including the ability to institute enforcement actions which often result in consent decrees, injunctions, and the payment of civil penalties by the companies involved. Failure to comply with the laws and regulations of the FTC or similar agencies of states and applicable foreign jurisdictions could impair our ability to market our end-user products.
Employees
As of December 31, 2019, we had 561 full-time employees, of whom 440 were in the United States, 103 were in Brazil and 18 were in Portugal. Except for labor union representation for Brazil-based employees based on labor code requirements in Brazil, none of our employees is represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages, and we consider relations with our employees to be good.
Corporate Information
We were originally incorporated in California in 2003 under the name Amyris Biotechnologies, Inc. and then reincorporated in Delaware in 2010 and changed our name to Amyris, Inc. Our principal executive offices are located at 5885 Hollis Street, Suite 100, Emeryville, California 94608, and our telephone number is (510) 450-0761. Our common stock is listed on The Nasdaq Global Select Market under the symbol "AMRS".
Available Information
Our website address is www.amyris.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), as well as amendments thereto, are filed with the U.S. Securities and Exchange Commission (the SEC) and are available free of charge on our website at investors.amyris.com promptly after such reports are available on the SEC's website. We may use our investors.amyris.com website as a means of disclosing material non-public information and complying with our disclosure obligations under Regulation FD.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The information contained in or accessible through our website or contained on other websites is not incorporated into this filing. Further, any references to URLs contained in this report are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
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Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and related notes, which could materially affect our business, financial condition or future results. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely harmed. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Risks Related to Our Business
We have identified a material weakness in our internal control over financial reporting which, if not corrected, could affect the reliability of our consolidated financial statements and have other adverse consequences.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) and related SEC rules require management to assess the effectiveness of our internal control over financial reporting. Based on the assessment as of December 31, 2019, our management believes that our internal control over financial reporting was not effective at that date due to a material weakness we identified. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Based on management's assessment, we have identified the following material weakness:
•We did not have an effective internal and external information and communication process to ensure that relevant and reliable information was communicated timely across the organization, to enable financial personnel to effectively carry out their financial reporting and internal control roles and responsibilities.
As a consequence of the ineffective communication components, we did not design, implement, and maintain effective control activities at the transaction level over debt-related liability accounts to mitigate the risk of material misstatement in financial reporting, specifically:
•We did not design and operate effective controls over significant non-routine transactions related to certain debt-related contractual obligations.
Control deficiencies in 2017 and 2018 contributed to the restatement of our audited consolidated financial statements for the year ended December 31, 2017 and resulted in material errors to our interim condensed consolidated financial statements for the quarterly and year-to-date periods ended March 31, 2017, June 30, 2017, September 30, 2017, March 31, 2018, June 30, 2018 and September 30, 2018. Also, a control deficiency in 2019 contributed to a material misstatement, as described above, to the preliminary unissued consolidated financial statements as of and for the three and nine months ended September 30, 2019. While the material misstatement was corrected prior to the issuance of the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019, we concluded this control deficiency was a material weakness and our internal control over financial reporting was not effective as of December 31, 2019, and creates a reasonable possibility that a further material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
See Part II, Item 9A “Controls and Procedures” of this Annual Report on Form 10-K for additional information. If not remediated, the material weakness could result in further material misstatements to our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis, or in delayed filing of required periodic reports. Our management has developed, and begun to implement, a plan to remediate the material weakness. We cannot, however, assure you that we will be able to implement the plan, or to remediate the material weakness in a timely manner. Furthermore, during the course of re-design of existing processes and controls, implementation of additional processes and controls and testing of the operating effectiveness of such re-designed and additional processes and controls, we may identify additional control deficiencies that could give rise to other material weaknesses, in addition to the currently identified material weakness. We expect the remediation plan to extend over multiple financial reporting periods in 2020. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal controls are discovered or occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence and adversely affect the market price of our common stock and our ability to access the capital markets, and we could be subject to sanctions or investigations by the Nasdaq Stock Market (Nasdaq), the SEC or other regulatory authorities.
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If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or in a timely manner 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 help us to prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) requires us and our independent registered public accounting firm to evaluate and report on our internal control over financial reporting. The process of implementing our internal controls and complying with Section 404 is expensive and time consuming, and requires significant continuous attention of management. We cannot be certain that these measures will ensure that we maintain adequate controls over our financial processes and reporting in the future. In addition, to the extent we create joint ventures or have any variable interest entities and the financial statements of such entities are not prepared by us, we will not have direct control over their financial statement preparation. As a result, we will, for our financial reporting, depend on what these entities report to us, which could result in us adding monitoring and audit processes to those operations and increase the difficulty of implementing and maintaining adequate internal control over our financial processes and reporting in the future, which could lead to delays in our external reporting. In particular, this may occur in instances in which where we are establishing such entities with commercial partners that do not have sophisticated financial accounting processes in place, or where we are entering into new relationships at a rapid pace, straining our integration capacity. Additionally, if we do not receive the information from the joint venture or variable interest entity on a timely basis, it could cause delays in our external reporting. Even if we conclude in the future, 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, which could reduce the market’s confidence in our financial statements and harm our stock price. In addition, failure to comply with Section 404 could subject us to a variety of administrative sanctions, including SEC action, 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 the Company’s common stock, which could further reduce our stock price and could harm our business.
We have incurred losses to date, anticipate continuing to incur losses in the future, and may never achieve or sustain profitability.
We have incurred significant operating losses since our inception, and we expect to continue to incur losses and negative cash flows from operations for at least the next 12 months following the issuance of this Annual Report on Form 10-K. As of December 31, 2019, we had negative working capital of $87.5 million and an accumulated deficit of $1.8 billion.
As of December 31, 2019, our debt, net of a $20.3 million debt discount and a $15.4 million fair value adjustment, totaled $261.8 million, of which $63.8 million is classified as current. Our debt agreements contain various covenants, including certain restrictions on our business that could cause us to be at risk of contractual defaults, such as restrictions on additional indebtedness, material adverse effect and cross default clauses. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required, would generally result in events of default under such instruments, which could permit acceleration of a substantial portion of such indebtedness. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness, permitting acceleration of a substantial portion of such other outstanding indebtedness. We have in the past, including in July 2019, had certain of our debt instruments accelerated for failure to make a payment when due. While we have been able to cure these defaults to date to avoid additional cross-acceleration, we may not be able to cure such a default promptly in the future. See Note 15, “Subsequent Events” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Our cash and cash equivalents of $0.3 million as of December 31, 2019 is not sufficient to fund expected future negative cash flows from operations and cash debt service obligations through March 31, 2021. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern will depend, in large part, on our ability to raise additional proceeds through financings, achieve positive cash flows from operations during the 12 months from the date of this filing, and refinance or extend other existing debt maturities currently past due and those occurring later in 2020, all of which is uncertain and outside our control. Further, our operating plan for 2020 contemplates a significant reduction in our net operating cash outflows as compared to the year ended December 31, 2019, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs as a result of manufacturing and technical developments, (iii) reduced spending in general and administrative areas, and (iv) cash inflows from collaborations and grants. If we are unable to complete these actions, we expect to be unable to meet our operating cash flow needs and our obligations under our existing debt facilities.
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This could result in an acceleration of our obligation to repay all amounts outstanding under those facilities, and the Company may be forced to obtain additional equity or debt financing, which may not occur timely or on reasonable terms, if at all, and/or liquidate our assets. In such a scenario, the value received for assets in liquidation or dissolution could be significantly lower than the value reflected in these financial statements.
Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could have a material adverse effect on our financial condition and cause investors to suffer the loss of all or a substantial portion of their investment.
We will require significant cash inflows from the sales of renewable products, licenses and royalties, and grants and collaborations and, if needed, financings to fund our anticipated operations and to service our debt obligations and may not be able to obtain such funding on favorable terms, if at all.
Our planned working capital needs and operating and capital expenditures for 2020, and our ability to service our outstanding debt obligations, are dependent on significant inflows of cash from grants and collaborations, licenses and royalties, and product sales and, if needed, additional financing arrangements. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, procurement, storage, distribution and other aspects of our business. Some of our anticipated funding sources, such as research and development collaborations, are subject to the risks that we may not be able to meet milestones, or that collaborations may end prematurely for reasons that may be outside of our control (including technical infeasibility of the project or a collaborator’s right to terminate without cause). The inability to generate sufficient cash flow, as described above, could have an adverse effect on our ability to continue with our business plans and our status as a going concern.
If we are unable to raise additional funding, or if other expected sources of funding are delayed or not received, our ability to continue as a going concern would be jeopardized and we would take the following actions:
•Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts;
•Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors;
•Reduce or delay uncommitted capital expenditures, including expenditures related the construction and commissioning of the new production facility in Brazil, nonessential facilities and lab equipment, and information technology projects; and
•Closely monitor our working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities.
Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
•Achieve planned production levels;
•Develop and commercialize products within planned timelines or at planned scales; and
•Continue other core activities.
Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on our ability to meet contractual requirements and increase the severity of the consequences described above.
Our existing financing arrangements provide our secured lenders with liens on substantially all of our assets, including our intellectual property, and contain financial covenants and other restrictions on our actions, which may cause significant risks to our stockholders and may impact our ability to pursue certain transactions and operate our business.
As of December 31, 2019, our debt, net of a $20.3 million debt discount and a $15.4 million fair value adjustment, totaled $261.8 million, of which $63.8 million is classified as current. Our cash balance is substantially less than the principal amount of our outstanding debt, and we will be required to generate cash from operations and raise additional working capital through future financings or sales of assets to enable us to repay this indebtedness as it becomes due. There can be no assurance that we will be able to do so.
In addition, we have granted liens on substantially all of our assets, including our intellectual property, as collateral in connection with certain financing arrangements with a current aggregate principal amount outstanding of $133.2 million, and have agreed to significant covenants in connection with such transactions (see Note 4, “Debt” in Part II, Item 8 of this Annual Report on Form 10-K), including covenants that materially limit our ability to take certain actions, including our ability to pay dividends, make certain investments and other payments, incur additional indebtedness, undertake certain mergers and
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consolidations, and encumber and dispose of assets, and customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgements, and insolvency. For example, the loan and security agreements relating to our secured term loan credit facilities that closed in June 2018 and August 2019 (as further amended and restated in October 2019) prevent us from incurring additional indebtedness, making investments, encumbering our assets, engaging in certain corporate transactions, such as mergers and consolidations, and transferring or otherwise disposing of assets, subject in each case to certain exceptions, and also require us to maintain certain liquidity and asset coverage levels and meet certain revenue requirements. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required, would generally result in events of default under such instruments, which could permit acceleration of such indebtedness and could result in a material adverse effect on us. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness, permitting acceleration of a substantial portion of our indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness.
If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we would be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us, if at all. Any debt financing that is available could cause us to incur substantial costs and subject us to covenants that significantly restrict our ability to conduct our business. If we seek to complete additional equity financings, the interests of existing equity holders may be diluted. If we are unable to make payment on our secured debt instruments when due, the lenders under such instruments may foreclose on and sell the assets securing such indebtedness to satisfy our payment obligations, which could prevent us from accessing those assets for our business and conducting our business as planned, which could materially harm our financial condition and results of operations.
In addition, certain of our outstanding securities contain anti-dilution adjustment provisions that may be triggered by future issuances of equity or equity-linked instruments in financing transactions. If such adjustment provisions are triggered, the conversion or exercise price of such securities will decrease and/or the number of shares issuable upon conversion or exercise of such securities will increase. In such event, existing stockholders will be further diluted and the effective issuance price of such equity or equity-linked instruments will be reduced, which may harm our ability to engage in future financing transactions to fund our business.
Our substantial leverage may place us at a competitive disadvantage in our industry.
We continue to have substantial debt outstanding and we may incur additional indebtedness from time to time to finance working capital, product development efforts, strategic acquisitions, investments and partnerships, or capital expenditures, or for other general corporate purposes, subject to the restrictions contained in our debt agreements. Our significant indebtedness and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of indebtedness presents the following risks:
•we will be required to use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and for other general corporate requirements;
•our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;
•our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;
•our level of indebtedness and the covenants in our debt instruments may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and for other general corporate requirements;
•our secured loan agreements restrict our ability to grant additional liens on our assets, which may make it more difficult to secure additional financing in the future; and
•our substantial leverage may make it difficult for us to attract additional financing when needed.
We are currently ineligible to use a registration statement on Form S-3 to register the offer and sale of securities, which could adversely affect our ability to raise future capital.
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As a result of the delayed filing of our Annual Report on Form 10-K for the year ended December 31, 2018, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2019 and our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019 with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until one year from the date we regain and maintain status as a current filer. Should we wish to register the offer and sale of our securities to the public prior to the time we are eligible to use Form S-3, both our transaction costs and the amount of time required to complete the transaction could increase, potentially harming our financial condition.
Future revenues are difficult to predict, and our failure to predict revenue accurately may cause our results to be below our expectations or those of analysts or investors and could result in our stock price declining.
Our revenues are comprised of product revenues, licenses and royalties revenues, and grants and collaborations revenues. We generate the substantial majority of our product revenues from sales to collaboration partners and distributors, and only a small portion from direct sales. Our collaboration, supply and distribution agreements do not usually include any specific purchase obligations. The sales volume of our products in any given period has been difficult to predict. A significant portion of our product sales is dependent upon the interest and ability of third-party distributors to create demand for, and generate sales of, such products to end-users. For example, if such distributors are unsuccessful in creating pull-through demand for our products with their customers, such distributors may purchase less of our products from us than we expect. Also, under revenue recognition rules, we are required to estimate royalties. These estimates could be subject to material adjustment in subsequent periods.
In addition, many of our new and novel products are intended to be a component of other companies’ products; therefore, sales of our products may be contingent on our collaboration partners and/or customers’ timely and successful development and commercialization of end-use products that incorporate our products, and price volatility in the markets for such end-use products, which may include commodities, could adversely affect the demand for our products and the margin we receive for our product sales, which could harm our financial results. While we maintain certain clawback rights to our technology in the event our collaboration partners are unable or unwilling to commercialize the products we create for them, we may be restricted from or unable to market or sell such products or technologies to other potential collaboration partners, which could hinder the growth of our business. In addition, certain of our collaboration partners have the right to terminate their agreements with us if we undergo a change of control or a sale of our business, which could discourage a potential acquirer from making an offer to acquire us.
Further, we have in the past entered into, and expect in the future to enter into, research and development collaboration arrangements pursuant to which we receive payments from our collaboration partners. Some of such collaboration arrangements include advance payments in consideration for grants of exclusivity or research and development activities to be performed by us. It has in the past been difficult for us to know with certainty when we will sign a new collaboration arrangement and receive payments thereunder. In addition, a portion of the advance payments we receive under our collaboration agreements is typically classified as contract liabilities and recognized over multiple quarters or years. As a result, achievement of our quarterly and annual financial goals has been difficult to forecast with certainty. Once a collaboration agreement has been signed, receipt of cash payments and/or recognition of related revenues may depend on our achievement of research, development, production or cost milestones, which may be difficult to predict. Our collaboration arrangements may also include future royalty payments upon commercialization of the products subject to the collaboration arrangements, which is uncertain and depends in part on the success of the counterparty in commercializing the relevant product. As a result, our receipt of royalty revenues and the timing thereof is difficult to predict with certainty.
Furthermore, we market and sell some of our products directly to end-consumers, initially in the cosmetics market. Because we have limited experience in marketing and selling directly to consumers, it is difficult to predict how successful our efforts will be and we may not achieve the product sales we expect to achieve on the timeline we anticipate, if at all. These factors have made it difficult to predict future revenues and have resulted in our revenues being below our previously announced guidance or analysts’ estimates. We continue to face these risks in the future, which may cause our stock price to decline.
Our financial results could vary significantly from quarter to quarter and are difficult to predict.
Our revenues and results of operations could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that could cause our quarterly results of operations to fluctuate include:
•achievement, or failure, with respect to technology, product development or manufacturing milestones needed to allow us to enter identified markets on a cost-effective basis or obtain milestone-related payments from collaboration partners;
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•delays or greater than anticipated expenses associated with the completion, commissioning, acquisition or retrofitting of new production facilities, or the time to ramp up and stabilize production at a new production facility or the transition (including ramp up) to producing new molecules at existing facilities or with a new contract manufacturer;
•impairment of assets based on shifting business priorities and working capital limitations;
•disruptions in the production process at any manufacturing facility, including disruptions due to seasonal or unexpected downtime as a result of feedstock availability, contamination, safety or other technical difficulties, or scheduled downtime as a result of transitioning equipment to the production of different molecules;
•losses of, or the inability to secure new, major customers, collaboration partners, suppliers or distributors;
•losses associated with producing our products as we ramp to commercial production levels;
•failure to recover value added tax (VAT) that we currently reflect as recoverable in our financial statements (e.g., due to failure to meet conditions for reimbursement of VAT under local law);
•the timing, size and mix of product sales to customers;
•increases in price or decreases in availability of feedstock;
•the unavailability of contract manufacturing capacity altogether or at reasonable cost;
•exit costs associated with terminating contract manufacturing relationships;
•fluctuations in foreign currency exchange rates;
•change in the fair value of derivative instruments;
•fluctuations in the price of and demand for sugar, ethanol, petroleum-based and other products for which our products are alternatives;
•seasonal variability in production and sales of our products;
•competitive pricing pressures, including decreases in average selling prices of our products;
•unanticipated expenses or delays associated with changes in governmental regulations and environmental, health, labor and safety requirements;
•departure of executives or other key management employees resulting in transition and severance costs;
•our ability to use our net operating loss carryforwards to offset future taxable income;
•business interruptions such as earthquakes, tsunamis and other natural disasters, including pandemics;
•our ability to integrate businesses that we may acquire;
•our ability to successfully collaborate with joint venture partners;
•risks associated with the international aspects of our business; and
•changes in general economic, industry and market conditions, both domestically and in our foreign markets.
Due to the factors described above, among others, the results of any quarterly or annual period may not meet our expectations or the expectations of our investors and may not be meaningful indications of our future performance.
A limited number of customers, collaboration partners and distributors account for a significant portion of our revenues, and the loss of major customers, collaboration partners or distributors could harm our operating results.
Our revenues have varied significantly from quarter to quarter and are dependent on sales to, and collaborations with, a limited number of customers, collaboration partners and/or distributors. We cannot be certain that customers, collaboration partners and/or distributors that have accounted for significant revenues in past periods, individually or as a group, will continue to generate similar revenues in any future period. If we fail to renew with, or if we lose, a major customer, collaborator or distributor, or group of customers, collaboration partners or distributors, our revenues could decline if we are unable to replace the lost revenues with revenues from other sources. Further, since our business depends in part on such collaboration agreement, it may be difficult for us to replace any such lost revenues through additional collaborations in any period, as revenue from such new collaborations will often be recognized over multiple quarters or years.
If we do not meet technical, development and commercial milestones in our collaboration agreements, our future revenues and financial results will be adversely impacted.
We have entered into a number of agreements regarding the development of certain of our products and, in some cases, for ultimate sale of certain products to the customer under the agreement. Most of these agreements do not affirmatively obligate the other party to purchase specific quantities of any products, and most contain important conditions that must be satisfied before additional research and development funding or product purchases would occur. These conditions include research and development milestones and technical specifications that must be achieved to the satisfaction of our collaboration partners, which we cannot be certain we will achieve. If we do not achieve these contractual milestones or specifications, our revenues and financial results will be adversely affected.
We face challenges producing our products at commercial-scale or at reduced cost and may not be able to commercialize our products to the extent necessary to make a profit or sustain and grow our current business.
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To commercialize our products, we must be successful in using our yeast strains to produce target molecules at commercial-scale and at a commercially viable cost. If we cannot achieve commercially-viable production economics for enough products to support our business plan, including through establishing and maintaining sufficient production-scale and volume, we will be unable to achieve a sustainable products business.
In order to be competitive in the markets we are targeting, our products must have superior qualities or be competitively priced relative to alternatives available in the market. Our production costs depend on many factors that could have a negative effect on our ability to offer our planned products at competitive prices, including, in particular, our ability to establish and maintain sufficient production scale and volume, and feedstock and contract manufacturing costs.
We face financial risk associated with scaling up production to reduce our production costs. To reduce per-unit production costs, we must increase production to achieve economies of scale and to be able to sell our products with positive margins. However, if we do not sell production output in a timely manner or in sufficient volumes, our investment in production will harm our cash position and generate losses. Additionally, we may incur added costs in storage and we may face issues related to the decrease in quality of our stored products, which could adversely affect the value of such products. Since achieving competitive product prices generally requires increased production volumes and our manufacturing operations and cash flows from sales are in their early stages, we have had to produce and sell products at a loss in the past, and may continue to do so as we build our business. If we are unable to achieve adequate revenues from a combination of product sales and other sources, we may not be able to invest in production and we may not be able to pursue our business plans. In addition, in order to attract potential collaboration or joint venture partners, or to meet payment milestones under existing or future collaboration agreements, we have in the past and may in the future be required to guarantee or meet certain levels of production costs. If we are unable to reduce our production costs to meet such guarantees or milestones, our net cash flow will be further reduced.
If we are not able to successfully commence, scale-up or sustain operations at existing and planned manufacturing facilities, our customer relationships, business and results of operations may be adversely affected.
A substantial component of our planned production capacity in the near and long term depends on successful operations at our existing and potential large-scale production plants. We commenced operations at our first purpose-built, large-scale production facility located in Brotas, Brazil in 2012. In December 2016, we acquired a production facility in Leland, North Carolina, which facility had been previously operated by our partner Glycotech Inc. to perform chemical conversion and production of certain of our end-products, and which facility was subsequently transferred to our joint venture with Nikko, as further described in Note 10, “Related Party Transactions” in Part II, Item 8 of this Annual Report on Form 10-K. In December 2017, we sold the Brotas facility to DSM and concurrently entered into a supply agreement with DSM for us to purchase output from the facility, which represents a significant portion of our expected supply needs (see Note 12, “Divestiture”, Note 9, "Revenue Recognition" and Note 10, "Related Party Transactions" in Part II, Item 8 of this Annual Report on Form 10-K for more information). We are building a new purpose-built, large-scale specialty ingredients plant in Brazil, which we anticipate will allow for the manufacture of five products concurrently and to produce both our specialty ingredients portfolio and our alternative sweetener product. We currently anticipate facility construction to be completed in the second quarter of 2021; however, there can be no assurances that we will be able to complete such facility on our expected timeline, if at all. In addition, in May 2019 we entered into a joint venture agreement with Raizen for the production, sale and commercialization of alternative sweetener products, pursuant to which the parties would construct a manufacturing facility exclusively for alternative sweetener products on land owned by Raizen and leased to the joint venture. The consummation of the transactions contemplated by the opportunity to launch a joint venture with Raizen, including the construction of a manufacturing facility for the production of alternative sweetener products, is subject to conditions, including certain regulatory approvals and the achievement of certain technological and economic milestones relating to the production of our alternative sweetener product, and there can be no assurances that the construction of such facility will occur on our expected timeline, if at all. Delays or problems in the construction, start-up or operation of such facilities could cause delays in our ramp-up of production and hamper our ability to reduce our production costs. Delays in construction can occur due to a variety of factors, including regulatory requirements and our ability to fund construction and commissioning costs.
Once our large-scale production facilities are built, acquired or retrofitted, we must successfully commission them, if necessary, and they must perform as we expect. If we encounter significant delays, cost overruns, engineering issues, contamination problems, equipment or raw material supply constraints, unexpected equipment maintenance requirements, safety issues, work stoppages or other serious challenges in bringing these facilities online and operating them at commercial-scale, we may be unable to produce our renewable products in the time frame and at the cost we have planned. It is difficult to predict the effects of scaling up production of industrial fermentation to commercial-scale, as it involves various risks to the quality and consistency of our molecules. In addition, in order to produce molecules at existing and potential future plants, we have been and may in the future be required to perform thorough transition activities, and modify the design of the plant. Any
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modifications to the production plant could cause complications in the operations of the plant, which could result in delays or failures in production. If any of these risks occur, or if we are unable to create or obtain additional manufacturing capacity necessary to meet existing and potential customer demand, we may need to continue to use, or increase our use of, contract manufacturing sources, which may not be available on terms acceptable to us, if at all, and generally entail greater cost to us to produce our products and would therefore reduce our anticipated gross margins and may also prevent us from accessing certain markets for our products. Further, if our efforts to increase (or commence, as the case may be) production at these facilities are not successful, our partners may decide not to work with us to develop additional production facilities, demand more favorable terms or delay their commitment to invest capital in our production. If we are unable to create and sustain manufacturing capacity and operations sufficient to satisfy the existing and potential demand of our customers and partners, our business and results of operations may be adversely affected.
In addition, the production of our products at our planned purpose-built, large-scale production facilities will require large volumes of feedstock. For our planned large-scale production facilities in Brazil, we plan to rely primarily on Brazilian sugarcane. While in certain cases we have entered into feedstock agreements with suppliers, including Raizen, which we expect to supply the sugarcane feedstock necessary to produce our products at our planned large-scale production facilities in Brazil, that specify the pricing, quantity and product specifications for our feedstocks, we cannot predict the future availability or price of these various feedstocks, nor can we be sure that our mill partners, including Raizen, will be able to supply it in sufficient quantities or in a timely manner. Furthermore, to the extent we are required to rely on sugar feedstock other than Brazilian sugarcane, the cost of such feedstock may be higher than we expect, increasing our anticipated production costs. Feedstock crop yields and sugar content depend on weather conditions, such as rainfall and temperature. Weather conditions have historically caused volatility in the ethanol and sugar industries by causing crop failures or reduced harvests. Excessive rainfall can adversely affect the supply of sugarcane and other sugar feedstock available for the production of our products by reducing the sucrose content and limiting growers' ability to harvest. Crop disease and pestilence can also occur from time to time and can adversely affect feedstock growth, potentially rendering useless or unusable all or a substantial portion of affected harvests. With respect to sugarcane, our initial primary feedstock, seasonal availability and price, the limited amount of time during which it keeps its sugar content after harvest, and the fact that sugarcane is not itself a traded commodity, increases these risks and limits our ability to substitute supply in the event of such an occurrence. If production of sugarcane or any other feedstock we may use to produce our products is adversely affected by these or other conditions, our production will be impaired, increasing costs to our operations and adversely affecting our business.
Our use of contract manufacturers exposes us to risks relating to costs, contractual terms and logistics.
In addition to our existing and planned production facilities discussed above, we must commercially produce, process and manufacture our products through the use of contract manufacturers, including DSM, and we anticipate that we will continue to use contract manufacturers for the foreseeable future. Establishing and operating contract manufacturing facilities requires us to make significant capital expenditures, which reduces our cash and places such capital at risk. Also, contract manufacturing agreements may contain terms that commit us to pay for capital expenditures and other costs and amounts incurred or expected to be earned by the plant operators and owners, which can result in contractual liability and losses for us even if we terminate a particular contract manufacturing arrangement or decide to reduce or stop production under such an arrangement. Further, we cannot be sure that contract manufacturers will be available when we need their services, that they will be willing to dedicate a portion of their capacity to our projects, or that we will be able to reach acceptable price, delivery and other terms with them for the provision of their production services.
The locations of contract manufacturers can pose additional cost, logistics and feedstock challenges. If production capacity is available at a plant that is remote from usable chemical finishing or distribution facilities, or from customers, we will be required to incur additional expenses in shipping products to other locations. Such costs could include shipping costs, compliance with export and import controls, tariffs and additional taxes, among others. In addition, we may be required to use feedstock from a particular region for a given production facility. The feedstock available in such region may not be the least expensive or most effective feedstock for production, which could significantly raise our overall production cost or reduce our product’s quality until we are able to optimize the supply chain.
Loss or termination of contract manufacturing relationships could harm our ability to meet our production goals.
As discussed above, we rely on contract manufacturers, including DSM, to produce and/or provide downstream processing of our products, and we anticipate that we will need to use contract manufacturers for the foreseeable future. If we are unable to secure the services of contract manufacturers when and as needed, we may lose customer opportunities and the growth of our business may be impaired. If we shift priorities and adjust anticipated production levels (or cease production altogether) at contract manufacturing facilities, such adjustments or cessations could also result in disputes or otherwise harm our business relationships with contract manufacturers. In addition, reliance on external sources for our other target molecules
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could create a risk for us if a single source or a limited number of sources of manufacturing runs into operational issues, creating risk of loss of sales and profitability. Reducing or stopping production at one facility while increasing or starting up production at another facility generally results in significant losses of production efficiency, which can persist for significant periods of time. Also, in order for production to commence under our contract manufacturing arrangements, we generally must provide equipment for such operations, and we cannot be assured that such equipment can be ordered or installed on a timely basis, at acceptable costs, or at all. Further, in order to establish operations at new contract manufacturing facilities, we need to transfer our yeast strains and production processes from our labs to commercial plants controlled by third parties, which may pose technical or operational challenges that delay production or increase our costs.
Our ability to establish substantial commercial sales of our products is subject to many risks, any of which could prevent or delay revenue growth and adversely impact our customer relationships, business and results of operations.
There can be no assurance that our products will be approved or accepted by customers, including customers of our branded products, or that we will be able to sell our products profitably at prices and with features sufficient to establish demand. The potential customers for our products generally have well developed manufacturing processes and arrangements with suppliers of the chemical components of their products and may have a resistance to changing these processes and components. These potential customers frequently impose lengthy and complex product qualification procedures on their suppliers, influenced by consumer preference, manufacturing considerations such as process changes and capital and other costs associated with transitioning to alternative components, supplier operating history, established business relationships and agreements, regulatory issues, product liability and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months. Similarly, customers of our branded products may have a resistance to accept our alternative compositions for such products. Additionally, we may be subject to product safety testing and may be required to meet certain regulatory and/or product safety standards. Meeting these standards can be a time consuming and expensive process, and we may invest substantial time and resources into such qualification efforts without ultimately securing approval. If we are unable to convince these potential customers, the consumers who purchase end-products containing our products and the customers of our direct to consumer products that our products are comparable to the chemicals that they currently use or that the use of our products is otherwise to their benefit, we will not be successful in entering these markets and our business will be adversely affected. Moreover, in order to successfully market our direct to consumer products, we must continue to build our sales, marketing, managerial, compliance, and related capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize such products.
The price and availability of sugarcane and other feedstocks can be volatile as a result of changes in industry policy and may increase the cost of production of our products.
In Brazil, Conselho dos Produtores de Cana-de-Açúcar, Açúcar e Etanol do Estado de São Paulo (Council of Sugarcane, Sugar and Ethanol Producers in the State of São Paulo, or “Consecana”), an industry association of producers of sugarcane, sugar and ethanol, sets market terms and prices for general supply, lease and partnership agreements for sugarcane. If Consecana makes changes to such terms and prices, it could result in higher sugarcane prices and/or a significant decrease in the volume of sugarcane available for the production of our products. In addition, if the availability of sugarcane juice or syrup or other feedstocks is restricted or limited due to weather conditions, land conditions or any other reason, we may not be able to manufacture our products in a timely or cost-effective manner, or at all, which would have a material adverse effect on our business.
We expect to face competition for our products from existing suppliers, including from price declines in petroleum and petroleum-based products, and if we cannot compete effectively against these companies, products or prices, we may not be successful in bringing our products to market, demand for some of our renewable products may decline, or we may be unable to further grow our business.
We expect that our renewable products will compete with both the traditional products that are currently being used in our target markets and with the alternatives to these existing products that established enterprises and new companies are seeking to produce. In the markets that we have entered, and in other markets that we may seek to enter in the future, we will compete primarily with the established providers of ingredients currently used in products in these markets. Producers of these incumbent products include global health and nutrition companies, large international chemical companies and companies specializing in specific products, such as flavor or fragrance ingredients, squalane or essential oils. We may also compete in one or more of these markets with products that are offered as alternatives to the traditional products being offered in these markets.
With the emergence of many new companies seeking to produce products from renewable sources, we may face increasing competition from such companies. As they emerge, some of these companies may be able to establish production
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capacity and commercial partnerships to compete with us. If we are unable to establish production and sales channels that allow us to offer comparable products at attractive prices, we may not be able to compete effectively with these companies.
We believe the primary competitive factors in our target markets are:
•product price;
•product performance and other measures of quality;
•product cost;
•infrastructure compatibility of products;
•sustainability; and
•dependability of supply.
The global health and nutrition companies, large international chemical companies and companies specializing in specific products with whom we compete are much larger than us, have, in many cases, well developed distribution systems and networks for their products, have valuable historical relationships with the potential customers we are seeking to serve and have much more extensive sales and marketing programs in place to promote their products. In order to be successful, we must convince customers that our products are at least as effective as the traditional products they are seeking to replace and we must provide our products on a cost basis that does not greatly exceed these traditional products and other available alternatives. Some of our competitors may use their influence to impede the development and acceptance of renewable products of the type that we are seeking to produce.
While most of our products do not compete with, and do not serve as alternatives to, petroleum-based products, we anticipate that some of our renewable products will be marketed as alternatives to corresponding petroleum-based products. We believe that for our renewable products to succeed in the market, we must demonstrate that our products are comparable or better alternatives to existing products and to any alternative products that are being developed for the same markets based on some combination of product cost, availability, performance, and consumer preference characteristics.
We are subject to risks related to our reliance on collaboration arrangements to fund development and commercialization of our products, and our financial results may be adversely impacted if we fail to meet technical, development or commercial milestones in such agreements.
For most product markets we are seeking to enter, we have collaboration partners to fund the research and development, commercialization and production efforts required for the target products. Typically, we provide limited exclusive rights and revenue sharing with respect to the production and sale of particular products in specific markets in exchange for such up-front funding. These exclusivity, revenue-sharing and other similar terms limit our ability to commercialize our products and technology, and may impact the size of our business or our profitability in ways that we do not currently envision. In addition, most of these agreements do not affirmatively obligate the other party to purchase specific quantities of any products, and most contain important conditions that must be satisfied before additional research and development funding or product purchases would occur. These conditions include research and development programs and milestones, and technical specifications that must be achieved to the satisfaction of our collaboration partners. We may focus our efforts and resources on potential discovery efforts, product targets or candidates that require substantial technical, financial and human resources which we cannot be certain we will achieve.
In addition, we may encounter numerous uncertainties and difficulties in developing, manufacturing and commercializing any new products subject to these collaboration arrangements that may delay or prevent us from realizing their expected benefits or enhancing our business, including uncertainties on the feasibility of taking new molecules to commercial-scale. Any failure to successfully develop, produce and commercialize products under our existing and future collaboration arrangements could have a material adverse effect on our business, financial conditions, earnings and prospects.
Revenues from these types of relationships are a key part of our cash plan for 2020 and beyond. If we fail to collect expected collaboration revenues, or to identify and add sufficient additional collaborations to fund our planned operations, we may be unable to fund our operations or pursue development and commercialization of our planned products. To achieve our collaboration revenue targets from year to year, we may be obliged to enter into agreements that contain less favorable terms. Historically, the process of negotiating and finalizing collaboration arrangements with our partners has at times been lengthy and unpredictable. Furthermore, as part of our current and future collaboration arrangements, we may be required to make significant capital investments at our existing or planned production facilities in order to develop, produce and commercialize molecules or other products. Any failure or difficulties in maintaining existing collaboration arrangements or establishing new collaboration arrangements, or building up or retooling our operations to meet the demands of our collaboration partners could have a significant negative impact on our business, including our ability to achieve commercial viability for our products, lead
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to the inability to meet our contractual obligations and could cause us to allocate or divert capital, personnel and other resources from our organization which could adversely affect our business and reputation.
Our collaboration arrangements may restrict or prevent our future business activity in certain markets or industries, which could harm our ability to grow our business.
As part of our collaboration arrangements in the ordinary course of business, we may grant to our partners exclusive rights with respect to the development, production and/or commercialization of particular products or types of products in specific markets in exchange for up-front funding and/or downstream royalty arrangements. These rights may inhibit potential collaboration or strategic partners or potential customers from entering into negotiations with us about further business opportunities, and we may be restricted or prevented from engaging with other partners or customers in those markets, which may limit our ability to grow our business or influence our strategic focus, and may lead to an inefficient allocation of capital resources.
In the past, we have had to grant concessions to existing partners in exchange for such partners waiving or modifying their exclusive rights with respect to a particular product, type of product or market so that we could engage with a third party with respect to such product, product type or market. There can be no assurance that existing partners will be willing to grant waivers of or modify their exclusive rights in the future on favorable terms, if at all. If we are unable to engage other potential partners with respect to particular products, product types or markets for which we have previously granted exclusive rights, our ability to grow our business would be harmed and our results of operations may be adversely affected.
Certain rights we have granted to Total S.A., DSM and other existing stockholders, including in relation to our future securities offerings, could substantially impact our company.
In connection with certain investments of Total S.A. (Total) in our company, our Certificate of Incorporation includes a provision that excludes Total from prohibitions on business combinations between us and an “interested stockholder.” This provision could have the effect of discouraging potential acquirers from making offers to acquire us, and give Total more access to Amyris than other stockholders if Total decides to pursue an acquisition.
In addition, each of Total, DSM, Vivo Capital LLC and Naxyris S.A. has the right to designate one or more directors to serve on our Board of Directors pursuant to agreements between us and such investors.
In May 2017, we entered into an agreement with DSM, which was amended and restated in August 2017, pursuant to which we agreed (i) that for as long as there is a DSM-designated director serving on our Board of Directors, we will not engage in certain commercial or financial transactions or arrangements without the consent of such director, and (ii) to provide DSM with certain exclusive negotiating rights in connection with certain future commercial projects and arrangements. These provisions could discourage other potential partners from approaching us with business opportunities, and could restrict, delay or prevent us from pursuing or engaging in such opportunities, which could adversely affect our business.
Additionally, in connection with their investments in Amyris, we granted certain investors, including DSM, a right of first investment if we propose to sell securities in certain financing transactions. With these rights, such investors may subscribe for a portion of any such new financing and require us to comply with certain notice periods, which could discourage other investors from participating in, or cause delays in our ability to close, such a financing.
Our relationship with DSM exposes us to financial and commercial risks.
In May 2017, DSM made an investment in our company and, in connection therewith, we entered into a stockholder agreement with DSM (subsequently amended) which provides DSM with certain rights, including the right to designate two members of our board of directors as well as exclusive negotiating rights in connection with certain future commercial projects and arrangements. Subsequently, in July and September 2017, we entered into collaboration agreements (and related license agreements) with DSM to jointly develop three new molecules in the Health and Nutrition field using the Company’s technology, which the Company would produce and DSM would commercialize. In December 2017, we completed the sale of our Brotas, Brazil production facility to DSM and, in connection therewith, entered into several commercial agreements with DSM, including a supply agreement to procure a substantial portion of our product supply requirements, and borrowed $25 million from DSM. For more information regarding these and other transactions and arrangements with DSM, please see Note 4, “Debt,” Note 6, “Stockholders’ Deficit,” Note 9, “Revenue Recognition”, Note 10, “Related Party Transactions” and Note 12, “Divestiture” in Part II, Item 8 of this Annual Report on Form 10-K.
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There can be no assurance that our partnership with DSM will be successful, and the partnership may prevent us from pursuing other business opportunities in the future. If the partnership is unsuccessful, our ability to continue with our business plans could be adversely affected. In addition, negative developments in one aspect of our relationship with DSM could negatively affect other aspects of our relationship with DSM. In such event, our financial condition and business operations could be adversely affected.
In addition, DSM, due to the presence of its representatives on our board of directors, equity ownership in our company, and commercial relationships with us, may be able to control or significantly influence our management, operations and affairs, as well as matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as the disposition of our intellectual property, mergers, consolidations or the sale of all or substantially all of our assets. Due to its various relationships with the Company, DSM may have interests different than, and may not act in the best interests of, our other stockholders. Consequently, our relationship with DSM may have the effect of delaying or preventing a change of control, or a change in our management or board of directors, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, even if such actions would benefit our other stockholders.
A significant portion of our operations are centered in Brazil, and our business will be adversely affected if we do not operate effectively in that country.
For the foreseeable future, we will be subject to risks associated with the concentration of essential product sourcing and operations in Brazil. The Brazilian government has changed in the past, and may change in the future, monetary, taxation, credit, tariff, labor, export and other policies to influence the course of Brazil's economy. For example, the government's actions to control inflation have involved interest rate adjustments. We have no control over, and cannot predict what policies or actions the Brazilian government may take in the future. Our business, financial performance and prospects may be adversely affected by, among others, the following factors:
•delays or failures in securing licenses, permits or other governmental approvals necessary to build and operate facilities, use our yeast strains to produce products and export such products for sale outside Brazil;
•rapid consolidation in the sugar and ethanol industries in Brazil, which could result in a decrease in competition;
•political, economic, diplomatic or social instability in, or in the region surrounding, Brazil;
•changing interest rates;
•tax burden and policies;
•effects of changes in currency exchange rates;
•any changes in currency exchange policy that lead to the imposition of exchange controls or restrictions on remittances abroad;
•export or import restrictions that limit our ability to move our products out of Brazil or interfere with the import of essential materials into Brazil;
•changes in, or interpretations of foreign regulations that may adversely affect our ability to sell our products or repatriate profits to the United States;
•tariffs, trade protection measures and other regulatory requirements;
•compliance with United States and foreign laws that regulate the conduct of business abroad;
•compliance with privacy, anti-corruption and anti-bribery laws, including certain anti-corruption and privacy laws recently enacted in Brazil;
•an inability, or reduced ability, to protect our intellectual property in Brazil including any effect of compulsory licensing imposed by government action; and
•difficulties and costs of staffing and managing foreign operations.
We cannot predict whether the current or future Brazilian government will implement changes to existing policies on taxation, exchange controls, monetary strategy, labor relations, social security and the like, nor can we estimate the impact of any such changes on the Brazilian economy or our operations.
Brazil’s economy has recently experienced quarters of slow gross domestic product growth. Although recent data has shown signs of an economic recovery in Brazil, there is no assurance that such recovery will continue. In addition, major corruption scandals involving members of the executive, state-controlled enterprises and large private sector companies have been disclosed and are the subject of ongoing investigation by federal authorities. Although these investigations continued to evolve through 2019, their final outcome and impact on the Brazilian economy is not yet known and cannot be predicted with certainty.
We are subject to the risks of doing business globally.
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We maintain operations in foreign jurisdictions other than Brazil, and may in the future expand, or seek to expand, our operations to additional foreign jurisdictions. For example, in 2018 we announced plans to increase our commercial activities in China. Operating in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to taxation, import and export tariffs, environmental regulations, genetically modified microorganisms (GMM), land use rights, product testing requirements, intellectual property, currency controls, network security and other matters. In addition, we may not obtain or retain the requisite permits to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. Furthermore, our counterparties in China may use or disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.
In addition, a significant percentage of the production, downstream processing and sales of our products occurs outside the United States or with vendors, suppliers or customers located outside the United States. If tariffs or other restrictions are placed by the United States on foreign imports from Brazil, European or other countries where we operate or seek to operate, or any related counter-measures are taken, our business, financial condition and results of operations may be harmed. In 2018, President Trump imposed tariffs on steel and aluminum imports and additional tariffs on goods imported from certain specified countries and regions, including China and Europe, and has indicated potential future tariffs on a range of goods from certain countries and regions. In response, certain countries, including China, have imposed retaliatory tariffs on U.S. goods imported into such countries. If further tariffs are imposed on a broader range of imports, or if further retaliatory trade measures are taken by other countries in response to additional tariffs, our operating performance could be harmed. Tariffs may increase our cost of goods, which could result in lower gross margin on certain of our products. If we raise prices to account for any such increase in costs of goods, the competitiveness of the affected products could potentially be reduced. In either case, increased tariffs on imports from Brazil, European or other countries where we operate or seek to operate could materially and adversely affect our business, financial condition and results of operations. Furthermore, in retaliation for any tariffs imposed by the United States, other countries may implement tariffs on a wide range of American products, which could increase the cost of our products for non-U.S. customers located in such countries. Any increase in the cost of our products for non-U.S. customers, which represent a substantial portion of our sales, could result in a decrease in demand for our products by such customers. Trade restrictions implemented by the United States or other countries could materially and adversely affect our business, financial condition and results of operations.
Many, if not all of the above-mentioned risks also apply to our operations in other foreign jurisdictions where we operate or seek to operate. If any of these risks were to occur, our operations and business would be adversely affected.
We are subject to new U.S. foreign investment regulations which may impose additional burdens on or may limit certain investors' ability to purchase our common stock, potentially making our common stock less attractive to investors.
In October 2018, the U.S. Department of Treasury announced a pilot program to implement part of the Foreign Investment Risk Review Modernization Act (FIRRMA), effective November 10, 2018. The pilot program expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), to include certain direct or indirect foreign investments in a defined category of U.S. companies, including companies involved in critical infrastructure and critical technologies. Among other things, FIRRMA empowers CFIUS to require certain mandatory filings in connection with certain foreign investments in U.S. companies and permits CFIUS to charge filing fees related to such filings. Such filings are subject to review by CFIUS, which will have the authority to recommend that the President block or impose conditions on certain foreign investments in companies subject to CFIUS’s oversight. Any such restrictions on the ability of foreign investors to invest in our company could limit our ability to engage in strategic transactions that may benefit our stockholders, including a change of control, and may prevent our stockholders from receiving a premium for their shares of our common stock in connection with a change of control, and could also affect the price that some investors are willing to pay for our common stock.
Ethical, legal and social concerns about products using genetically modified microorganisms could limit or prevent the use of our products and technologies and could harm our business.
Our technologies and products involve the use of genetically modified microorganisms (GMMs). Public perception about the safety of, and ethical, legal or social concerns over, genetically engineered products, including GMMs, could affect public acceptance of our products. If we are not able to overcome any such concerns relating to our products, our technologies may not be accepted by our customers or end-users. In addition, the use of GMMs has in the past received negative publicity, which
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could lead to greater regulation or restrictions on imports of our products. If our technologies and products are not accepted by our customers or their end-users due to negative publicity or lack of public acceptance, our business could be significantly harmed.
Our use of genetically modified feedstocks and yeast strains to produce our products subjects us to risks of regulatory limitations and rejection of our products.
The use of GMMs, such as our yeast strains, is subject to laws and regulations in many countries, some of which are new and some of which are still evolving. In the United States, the Environmental Protection Agency (EPA), regulates the commercial use of GMMs as well as potential products produced from GMMs. Various states or local governments within the United States could choose to regulate products made with GMMs as well. While the strain of genetically modified yeast that we currently use for the development and commercial production of our target molecules, S. cerevisiae, is eligible for exemption from EPA review because it is generally recognized as safe, we must satisfy certain criteria to achieve this exemption, including but not limited to use of compliant containment structures, waste disposal and safety procedures, and we cannot be sure that we will meet such criteria in a timely manner, or at all. If exemption of S. cerevisiae is not obtained, our business may be substantially harmed. In addition to S. cerevisiae, we may seek to use different GMMs in the future that will require EPA approval. If approval of different GMMs is not secured, our ability to grow our business could be adversely affected.
In Brazil, GMMs are regulated by the National Biosafety Technical Commission (CTNBio). We have obtained approvals from CTNBio to use GMMs in a contained environment in our Brazil facilities for research and development purposes as well as at contract manufacturing facilities in Brazil for industrial-scale production of target products. In addition, we have obtained initial commercial approvals from CTNBio for five of our yeast strains, with two of these strains being approved for feed purposes. As we continue to develop new yeast strains and deploy our technology at new production facilities in Brazil, we will be required to obtain further approvals from CTNBio in order to use these strains in industrial-scale commercial production in Brazil. We may not be able to obtain such approvals on a timely basis, or at all, and if we do not, our ability to produce our products in Brazil could be impaired, which would adversely affect our results of operations and financial condition.
In addition to our production operations in the United States and Brazil, we have been party to contract manufacturing agreements with parties in other production locations around the world, including Europe. The use of GMM technology is regulated in the European Union, which has established various directives for member states regarding regulation of the use of such technology, including notification processes for contained use of such technology. We expect to encounter GMM regulations in most, if not all, of the countries in which we may seek to establish production capabilities and/or conduct sales to customers or end-use consumers, and the scope and nature of these regulations will likely be different from country to country. If we cannot meet the applicable regulatory requirements in the countries in which we produce or sell, or intend to produce or sell, products using our yeast strains, or if it takes longer than anticipated to obtain the necessary regulatory approvals, our business could be adversely affected. Furthermore, there are various governmental, non-governmental and quasi-governmental organizations that review and certify products with respect to the determination of whether products can be classified as “natural” or other similar classifications. While the certification from such governmental organizations, and verification from non-governmental and quasi-governmental organizations are generally not mandatory, some of our current or prospective customers, collaboration partners or distributors may require that we meet the standards set by such organizations as a condition precedent to purchasing or distributing our products. We cannot be certain that we will be able to satisfy the standards of such organizations, and any delay or failure to do so could harm our ability to sell or distribute some or all of our products to certain customers and prospective customers, which could have a negative impact on our business.
We may not be able to obtain regulatory approval for the sale of our renewable products.
Our renewable chemical products may be subject to government regulation in our target markets. In the United States, the EPA administers the Toxic Substances Control Act (the TSCA), which regulates the commercial registration, distribution, and use of many chemicals. Before an entity can manufacture or distribute a new chemical subject to the TSCA, it must file a Pre-Manufacture Notice, or PMN, to add the chemical to a product. The EPA has 180 days to review the filing but may request additional data, which could significantly extend the timeline for approval. As a result, we may not receive EPA approval to list future molecules on the TSCA registry as expeditiously as we would like, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH. Under this program, chemicals imported or manufactured in the European Union in certain quantities must be registered with the European Chemicals Agency, and this process could cause delays or entail significant costs. To the extent that other countries in which we are producing or selling (or seeking to produce or sell) our products, such as Brazil and various countries in Asia, rely on TSCA or REACH (or similar laws and programs) for chemical registration or regulation in their jurisdictions, delays with the United States or European authorities, or any relevant authorities in such other countries, may delay entry into these markets as well. In addition, some of
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our Biofene-derived products are sold for the cosmetics market, and some countries may impose additional regulatory requirements or permits for such uses, which could impair, delay or prevent sales of our products in those markets. Also, certain of our current or proposed products in the Flavor & Fragrance, Clean Beauty and Health & Wellness markets, including alternative sweeteners, nutraceuticals, Flavor & Fragrance ingredients, skincare ingredients and cosmetic actives, may be subject to the approval of and regulation by the FDA, the European Food Safety Authority, as well as similar agencies of states and foreign jurisdictions where these products are sold or proposed to be sold.
We expect to encounter regulations in most, if not all, of the countries in which we may seek to produce, import or sell our products (and our customers may encounter similar regulations in selling end-use products to consumers), and we cannot assure you that we (or our customers) will be able to obtain necessary approvals and third-party verifications in a timely manner or at all. If our products do not meet applicable regulatory requirements in a particular country, then we (or our customers) may not be able to commercialize our products in such country and our business will be adversely affected. In addition, any enforcement action taken by regulators against us or our products could cause us to suffer adverse publicity, which could harm our reputation and our relationship with our customers and vendors.
In addition, many of our products are intended to be a component of our collaboration partners and/or customers’ (or their customers’) end-use products. Such end-use products may be subject to various regulations, including regulations promulgated by the EPA, the FDA, or the European Food Safety Authority. If our company or our collaboration partners and customers (or their customers) are not successful in obtaining any required regulatory approval or third-party verifications for their end-use products that incorporate our products, or fail to comply with any applicable regulations for such end-use products, whether due to our products or otherwise, demand for our products may decline and our revenues will be adversely affected.
Changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on our business.
The markets where we sell our products are heavily influenced by foreign, federal, state and local government regulations and policies. Changes to existing or adoption of new foreign or domestic federal, state and local legislative initiatives that impact the production, distribution or sale of products may harm our business. The uncertainty regarding future standards and policies, including developing legislation in the Clean Beauty industry, may also affect our ability to develop our products or to license our technologies to third parties and to sell products to our end customers. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, the production of our products will depend on the availability of feedstock, especially sugarcane. Agricultural production and trade flows are subject to government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives and import and export restrictions on agricultural commodities and commodity products can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, and the availability and competitiveness of feedstocks as raw materials. Future government policies may adversely affect the supply of feedstocks, restrict our ability to use sugarcane or other feedstocks to produce our products, or encourage the use of feedstocks more advantageous to our competitors, which would put us at a commercial disadvantage and could negatively impact our future revenues and results of operations.
Our cannabinoid initiative is uncertain and may not yield commercial results and is subject to significant regulatory risks.
In 2019, we announced a new collaboration arrangement aimed at developing, producing and commercializing fermentation-derived cannabinoids. While we believe there are substantial business opportunities for us in this field, there can be no assurance that our activities will be successful, or that any research and development and product testing efforts will result in commercially saleable products, or that the market will accept or respond positively to our products.
In addition, the market for cannabinoids is heavily regulated. Synthetic cannabinoids may be viewed as qualifying as controlled substances under the federal Controlled Substances Act of 1970 (CSA), and may be subject to a high degree of regulation including, among other things, certain registration, licensing, manufacturing, security, record keeping, reporting, import, export, clinical and non-clinical studies, insurance and other requirements administered by the U.S. Drug Enforcement Administration (DEA) and/or the FDA.
Individual states and countries have also established controlled substance laws and regulations, which may differ from U.S. federal law. We or our partner may be required to obtain separate state or country registrations, permits or licenses in order to be able to develop produce, sell, store and transport cannabinoids.
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Complying with laws and regulations relating to cannabinoids is evolving, complex and expensive, and may divert management’s attention and resources from other aspects of our business. Failure to maintain compliance with such laws and regulations may result in regulatory action that could have a material adverse effect on our business, results of operations and financial condition. The DEA, FDA or state agencies may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.
We may incur significant costs to comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
We use intermediate substances, hazardous chemicals and radioactive and biological materials in our business, and such materials are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials in the United States, European Union and Brazil. Although we have implemented safety procedures for handling and disposing of these materials and related waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures and those of our contractors will prevent accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our insurance coverage. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws 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, and our liability may exceed our total assets. Liability under environmental laws can be joint and several, without regard to comparative fault, and may be punitive in nature. Furthermore, environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and otherwise harm our business.
Our proprietary rights may not adequately protect our technologies and product candidates.
Our commercial success will depend substantially on our ability to obtain patents and maintain adequate legal protection for our technologies and product candidates in the United States and other countries. As of December 31, 2019, we had 633 issued United States and foreign patents and 238 pending United States and foreign patent applications that were owned or co-owned by or licensed to us. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, filing, prosecuting, maintaining and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less extensive than those in the United States. We may also fail to apply for patents on important technologies or product candidates in a timely fashion, or at all. Our existing and future patents may not be sufficiently broad to prevent others from practicing our technologies or from designing products around our patents or otherwise developing competing products or technologies. In addition, the patent positions of companies like ours are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of patent claims has emerged to date in the United States and the landscape is expected to become even more uncertain in view of recent rule changes by the United States Patent Office, or USPTO. Additional uncertainty may result from legal decisions by the United States Federal Circuit and Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws or from legislation enacted by the U.S. Congress. The patent situation outside of the United States is also difficult to predict. As a result, the validity and enforceability of patents cannot be predicted with certainty. Moreover, we cannot be certain whether:
•we (or our licensors) were the first to make the inventions covered by each of our issued patents and pending patent applications;
•we (or our licensors) were the first to file patent applications for these inventions;
•others will independently develop similar or alternative technologies or duplicate any of our technologies;
•any of our or our licensors' patents will be valid or enforceable;
•any patents issued to us (or our licensors) will provide us with any competitive advantages, or will be challenged by third parties;
•we will be able to identify when others are infringing our (or our licensed) valid patent claims;
•we will develop additional proprietary products or technologies that are patentable; or
•the patents of others will have an adverse effect on our business.
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We do not know whether any of our pending patent applications or those pending patent applications that we license will result in the issuance of any patents. Even if patents are issued, they may not be sufficient to protect our technology or product candidates. The patents we own or license and those that may be issued in the future may be challenged, invalidated, rendered unenforceable, or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages. Moreover, third parties could practice our inventions in territories where we do not have patent protection or in territories where they could obtain a compulsory license to our technology where patented. Such third parties may then try to import products made using our inventions into the United States or other territories. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth, validity and enforceability of the claims upheld in our and other companies' patents.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents or other intellectual property rights, which could hinder us from preventing the infringement of our patents or other intellectual property rights. Proceedings to enforce our patent rights in the United States or foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert patent infringement or other claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license from third parties.
Moreover, we have granted certain of our lenders liens on substantially all of our assets, including our intellectual property, as collateral. If we default on our payment obligations under these secured loans, such lenders have the right to foreclose upon and control the disposition of our assets, including our intellectual property assets, to satisfy our payment obligations under such instruments. If such default occurs, and our intellectual property assets are sold or licensed, our business could be materially adversely affected.
Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States or may provide, today or in the future, for compulsory licenses. Moreover, in some cases our ability to determine if our intellectual property is being unlawfully used by a competitor may be limited. If competitors are able to use our technology, our ability to compete effectively could be harmed. Moreover, others may independently develop and obtain patents for technologies that are similar to, or superior to, our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause harm to our business.
We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
We rely on trade secrets to protect some of our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain and protect. Our strategy for contract manufacturing and scale-up of commercial production requires us to share confidential information with our international business partners and other parties. Our product development collaborations with third parties, including with Givaudan, Firmenich, DSM and Yifan, require us to share certain confidential information. While we use reasonable efforts to protect our trade secrets, our or our business partners' employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than United States courts to protect trade secrets. If our competitors lawfully obtain or independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them.
We require new employees and consultants to execute proprietary information and inventions agreements upon the commencement of an employment or consulting arrangement with us. We additionally require contractors, advisors, corporate collaboration partners, outside scientific collaboration partners and other third parties that may receive trade secret information to execute such agreements or confidentiality agreements. 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 inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information
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may be disclosed, or these agreements may be unenforceable or difficult to enforce. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. Additionally, trade secret law in Brazil differs from that in the United States, which requires us to take a different approach to protecting our trade secrets in Brazil. Some of these approaches to trade secret protection may be novel and untested under Brazilian law and we cannot guarantee that we would prevail if our trade secrets are contested in Brazil. If any of the above risks materializes, our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Third parties and former employees may misappropriate our trade secrets including those embodied in our yeast strains.
Third parties, including collaboration partners, contract manufacturers, other contractors and shipping agents, as well as exiting employees, often have access to our trade secrets and custody or control of our yeast strains. If our trade secrets or yeast strains were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce the yeast strains for their own commercial gain. If this were to occur, it would be difficult for us to challenge and prevent this type of use, especially in countries where we have limited intellectual property protection or that do not have robust intellectual property law regimes.
If we or one of our collaboration partners is sued for infringing intellectual property rights or other proprietary rights of third parties, litigation could be costly and time consuming and could prevent us from developing or commercializing our future products.
Our commercial success depends on our and our collaboration partners' ability to operate without infringing the patents and proprietary rights of other parties and without breaching any agreements we have entered into with regard to our technologies and product candidates. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business. Our industry spans several sectors, including biotechnology, renewable fuels, renewable specialty chemicals and other renewable molecules, and is characterized by the existence of a significant number of patents and disputes regarding patent and other intellectual property rights. Because patent applications remain unpublished and confidential for eighteen months and can take several years to issue, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or product candidates. There may be a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. The existence of third-party patent applications and patents could significantly reduce the coverage of patents owned by or licensed to us and our collaboration partners and limit our ability to obtain meaningful patent protection. If we wish to make, use, sell, offer to sell, or import the technology or compound claimed in issued and unexpired patents owned by others, we may need to obtain a license from the owner, develop or obtain alternative technologies, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that the owner asserts that we infringe its patents. If patents containing competitive or conflicting claims are issued to third parties and these claims are ultimately determined to be valid, we and our collaboration partners may be enjoined from pursing research, development, or commercialization of products, or be required to obtain licenses to these patents, or to develop or obtain alternative technologies.
If a third party asserts that we infringe upon its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:
•infringement and other intellectual property claims, which could be costly and time consuming to litigate, whether or not the claims have merit, and which could prevent or delay getting our products to market and divert management attention from our business;
•substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe a third party's patent or other proprietary rights;
•a court prohibiting us from selling or licensing our technologies or future products unless the holder licenses the patent or other proprietary rights to us, which it is not required to do;
•the International Trade Commission (ITC) prohibiting us from importing our products into the United States; and
•if a license is available from a third party, such third party may require us to pay substantial royalties or grant cross licenses to our patents or proprietary rights.
The industries in which we operate, and the biotechnology industry in particular, are characterized by frequent and extensive litigation and patent agency procedures regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. If any of our competitors have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference proceedings declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to the patents for these inventions in the United States. In addition, third parties may be able to challenge the validity of one or
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more of our patents using available post-grant procedures including oppositions and inter partes reviews (IPR). These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference or post-grant proceeding may result in loss of certain of our patent claims. Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights, or as a result of alleged infringement of the rights of others, may divert management time from focusing on business operations and could cause us to spend significant resources, all of which could harm our business and results of operations.
Many of our employees were previously employed at universities, biotechnology, specialty chemical or oil companies, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel and be enjoined from certain activities. A loss of key research personnel or their work product, especially to our competitors or potential competitors, could hamper or prevent our ability to commercialize our product candidates, which could severely harm our business. Even if we are successful in prosecuting or defending against these claims, litigation could result in substantial costs and demand on management resources.
We may need to commence litigation to enforce our intellectual property rights, which would divert resources and management's time and attention and the results of which would be uncertain.
Enforcement of claims that a third party is using our proprietary rights without permission is expensive, time consuming and uncertain. Significant litigation would result in substantial costs, even if the eventual outcome is favorable to us and would divert management's attention from our business objectives. In addition, an adverse outcome in litigation could result in a substantial loss of our proprietary rights and we may lose our ability to exclude others from practicing our technology or producing our product candidates.
The laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents by foreign holders and other intellectual property protection, particularly those relating to biotechnology and/or bioindustrial technologies. 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 patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Moreover, our efforts to protect our intellectual property rights in such countries may be inadequate.
We do not have exclusive rights to intellectual property we develop under U.S. federally funded research grants and contracts, including with DARPA and DOE, and we could ultimately share or lose the rights we do have under certain circumstances.
Some of our intellectual property rights have been or may be developed in the course of research funded by the U.S. government, including under our agreements with DARPA and DOE. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future products pursuant to the Bayh-Dole Act of 1980. Government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us, or an assignee or exclusive licensee to such inventions, to grant licenses to any of these inventions to a third party if they determine that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; (iii) government action is necessary to meet requirements for public use under federal regulations; or (iv) the right to use or sell such inventions is exclusively licensed to an entity within the U.S. and substantially manufactured outside the U.S. without the U.S. government’s prior approval. Additionally, we may be restricted from granting exclusive licenses for the right to use or sell our inventions created pursuant to such agreements unless the licensee agrees to additional restrictions (e.g., manufacturing substantially all of the invention in the U.S.). The U.S. government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title in any country in which a patent application is not filed within specified time limits. Additionally, certain inventions are subject to transfer restrictions during the term of these agreements and for a period thereafter, including sales of products or components, transfers to foreign subsidiaries for the purpose of the relevant agreements, and transfers to certain foreign third parties. If any of our intellectual property becomes subject to any of the rights or remedies available to the U.S. government or third parties pursuant to the Bayh-Dole Act of 1980, this could impair the value of our intellectual property and could adversely affect our business.
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Loss of, or inability to secure government contract revenues could impair our business.
We have contracts or subcontracts with certain governmental agencies or their contractors, including DARPA. Generally, these agreements, as they may be amended or modified from time to time, have fixed terms and may be terminated, modified or be subject to recovery of payments by the government agency under certain conditions (such as failure to comply with detailed reporting and governance processes or failure to achieve milestones). Under these agreements, we are also subject to audits, which can result in corrective action plans and penalties up to and including termination. If these governmental agencies terminate these agreements with us, it could reduce our revenues which could harm our business. Additionally, we anticipate securing additional government contracts as part of our business plan for 2020 and beyond. If we are unable to secure such government contracts, it could harm our business.
Our products subject us to product-safety risks, and we may be sued for product liability.
The design, development, production and sale of our products involve an inherent risk of product liability claims and the associated adverse publicity. Our products could be used by a wide variety of consumers with varying levels of sophistication. Although safety is a priority for us, we are not always in control of the final uses and formulations of the products we supply or their use as ingredients. Our products could have detrimental impacts or adverse impacts we cannot anticipate. Despite our efforts, negative publicity about Amyris, including product safety or similar concerns, whether real or perceived, could occur, and our products could face withdrawal, recall or other quality issues. In addition, we may be named directly in product liability suits relating to our products, even for defects resulting from errors of our commercial partners, contract manufacturers, chemical finishers, customers or end users of our products. These claims could be brought by various parties, including customers who are purchasing products directly from us or other users who purchase products from our customers. We could also be named as co-parties in product liability suits that are brought against the contract manufacturers with whom we partner to produce our products. Insurance coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms. We cannot be certain that our contract manufacturers or the sugar and ethanol producers who partner with us to produce our products will have adequate insurance coverage to cover against potential claims. Any insurance we do maintain may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, our business would be adversely impacted. In addition, insurance coverage may become more expensive, which would harm our results of operations.
We may become subject to lawsuits or indemnity claims in the ordinary course of business, which could materially and adversely affect our business and results of operations.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, indemnity claims and other legal proceedings. These actions may seek, among other things, compensation for alleged personal injury, employment discrimination, breach of contract, property damage and other losses or injunctive or declaratory relief. In the event that such actions, claims or proceedings are ultimately resolved unfavorably to us at amounts exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business and results of operations. In addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position. For more information regarding our current legal proceedings, please refer to the section entitled “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.
We may not be able to fully enforce covenants not to compete with and not to solicit our employees, and therefore we may be unable to prevent our competitors from benefiting from the expertise of such employees.
Our proprietary information and inventions agreements with our employees contain non-compete and non-solicitation provisions. These provisions prohibit our employees from competing directly with our business or proposed business or working for our competitors during their term of employment, and from directly or indirectly soliciting our employees or consultants to leave our company for any purpose. Under applicable U.S. and Brazilian law, we may be unable to enforce these provisions. If we cannot enforce these provisions with our employees, we may be unable to prevent our competitors from benefiting from the expertise of such employees. Even if these provisions are enforceable, they may not adequately protect our interests. The defection of one or more of our employees to a competitor could materially adversely affect our business, results of operations and ability to capitalize on our proprietary information.
Loss of key personnel, including key management personnel, and/or failure to attract and retain additional personnel could delay our product development programs and harm our research and development efforts and our ability to meet our business objectives.
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Our business involves complex, global operations across a variety of markets and requires a management team and employee workforce that is knowledgeable in the many areas in which we operate. As we continue to build our business, we will need to hire and retain qualified research and development, management and other personnel to succeed. The process of hiring, training and successfully integrating qualified personnel into our operations in the United States, Brazil and other countries in which we may seek to operate, can be a lengthy and expensive one. The market for qualified personnel is very competitive because of the limited number of people available who have the necessary technical skills and understanding of our technology and products. Our failure to hire and retain qualified personnel could impair our ability to meet our research and development and business objectives and adversely affect our results of operations and financial condition.
The loss of any key member of our management or key technical and operational employees, or the failure to attract or retain such employees, could prevent us from developing and commercializing our products for our target markets and executing our business strategy. In addition, we may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses. Furthermore, any reductions to our workforce as part of potential cost-saving measures, such as those discussed above with respect to our planned actions to continue as a going concern, may make it more difficult for us to attract and retain key employees. If we do not maintain 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 collaboration partners and customers in a timely fashion or to support our internal research and development programs and operations. In particular, our product and process development programs depend on our ability to attract and retain highly skilled technical and operational personnel. Competition for such personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our U.S. employees are “at-will” employees, which means that either the employee or we may terminate their employment at any time.
Our operations rely on sophisticated information technology and equipment systems, a disruption of which could harm our operations.
We rely on various information technology and equipment systems, some of which are dependent on services provided by third parties, to manage our technology platform and operations. These systems provide critical data and services for internal and external users, including research and development activities, procurement and inventory management, transaction processing, financial, commercial and operational data, partner and joint venture activities, human resources management, legal and tax compliance and other processes necessary to operate and manage our business. These systems are complex and are frequently updated as technology improves, and include software and hardware that is licensed, leased or purchased from third parties. If our information technology and equipment systems experience breaches or other failures or disruptions, our systems and the information contained therein could be compromised. While we have implemented security measures and disaster recovery plans designed to mitigate the effects of any failures or disruption of these systems, such measures may not adequately prevent adverse events such as breaches or failures from occurring or mitigate their severity if they do occur. If our information technology or equipment systems are breached, damaged or fail to function properly due to internal errors or defects, implementation or integration issues, catastrophic events or power outages, we may experience a material disruption in our ability to manage our business operations. Failure or disruption of these systems could have an adverse effect on our operating results and financial condition.
Increased information systems security threats and more sophisticated, targeted computer invasions could pose a risk to our technology platform and operations.
Increased information systems security threats, cyber- or phishing-attacks and more sophisticated, targeted computer invasions pose a risk to the security of our systems and networks, and the confidentiality, availability, and integrity of our data, operations, and communications. Cyber-attacks against our technology platform and infrastructure could result in exposure of confidential information, the modification of critical data, and/or the failure of critical operations. Likewise, improper or inadvertent employee behavior, including data privacy breaches by employees and others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we attempt to mitigate these risks by employing a number of measures, including security measures, employee training, comprehensive monitoring of our networks and systems, maintenance of backup and protective systems and incident response procedures, if these measures prove inadequate, we could be adversely affected by, among other things, loss or damage of intellectual property, proprietary and confidential information, data integrity, and communications or customer data, increased costs to prevent, respond to, or mitigate these cyber security threats and interruptions of our business operations.
Growth may place significant demands on our management and our infrastructure.
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We have experienced, and expect to continue to experience, expansion of our business as we continue to make efforts to develop and bring our products to market. We have grown from 18 employees at the end of 2005 to 561 full-time employees at December 31, 2019. Our growth and diversified operations have placed, and may continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued growth could strain our ability to:
•manage multiple research and development programs;
•operate multiple manufacturing facilities around the world;
•develop and improve our operational, financial and management controls;
•enhance our reporting systems and procedures;
•recruit, train and retain highly skilled personnel;
•develop and maintain our relationships with existing and potential business partners;
•maintain our quality standards; and
•maintain customer satisfaction.
Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operations and financial condition would be adversely impacted.
Our international operations expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.
We currently incur significant costs and expenses in Brazilian real and may in the future incur additional expenses in foreign currencies and derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. During the past few decades, the Brazilian currency in particular has faced frequent and substantial exchange rate fluctuations in relation to foreign currencies mostly because of political and economic conditions. There can be no assurance that the Brazilian real will not significantly appreciate or depreciate against the United States dollar in the future. We also bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the United States dollar compared to those foreign currencies will increase our costs as expressed in United States dollars. For example, future measures by the Central Bank of Brazil to control inflation, including interest rate adjustments, intervention in the foreign exchange market and actions to fix the value of the real, may weaken the United States dollar in Brazil. Whether in Brazil or elsewhere, we may not be able to adjust the prices of our products to offset the effects of inflation or foreign currency appreciation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.
Our U.S. GAAP operating results could fluctuate substantially due to the accounting for embedded derivatives in our convertible debt and equity instruments, and debt that we measure at fair value.
Features in several of our outstanding convertible debt and equity instruments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging (ASC 815), as embedded derivatives. ASC 815 requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The current fair value of the derivative is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative being charged to earnings (loss) in the statement of operations. We have determined that we must bifurcate and account for certain features of our convertible debt and equity instruments as embedded derivatives in accordance with ASC 815. We have recorded these embedded derivative liabilities as non-current liabilities on our consolidated balance sheet with a corresponding discount at the date of issuance that is netted against the principal amount of the applicable instrument. The derivative liabilities are remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative liabilities being recorded in other income or expenses. There is no current observable market for this type of derivative and, as such, we determine the fair value of the embedded derivatives using the binomial lattice model. The valuation model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. Changes in the inputs for these valuation models may have a significant impact on the estimated fair value of the embedded derivative liabilities. For example, an increase in our stock price would result in an increase in the estimated fair value of the embedded derivative liabilities, if in this example, each of the other elements of the valuation model remained substantially unchanged from the last measurement date. The embedded derivative liabilities may have, on a U.S. GAAP basis, a substantial effect on our balance sheet from quarter to quarter and it is difficult to predict the effect on our future U.S. GAAP financial results, since valuation of these embedded derivative liabilities are based on factors largely outside of our control and may have a negative impact on our statement of operations and balance sheet. The effects of these embedded derivatives may cause our U.S. GAAP operating results to be below expectations, which may cause our stock price to decline. See Note 3, “Fair Value Measurement”
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in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the valuation of embedded derivatives in certain of our outstanding debt and equity instruments.
In addition, we account for one of our outstanding debt instruments at fair value. That instrument is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss from change in fair value of debt recorded in other income or expense.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code (the Code), a corporation that undergoes an “ownership change”, as defined in the Code, is subject to limitations on its ability to utilize its pre-ownership change net operating loss carryforwards (NOLs) to offset future taxable income. During the three years ended December 31, 2017 and the two years ended December 31, 2019, changes in our share ownership resulted in significant reductions in our NOLs pursuant to Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code; if that occurs, our ability to utilize NOLs could be further limited. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations under Section 382 of the Code. For these reasons, we may not be able to utilize a material portion of our reported NOLs as of December 31, 2019, even if we attain profitability, which could adversely affect our results of operations.
Our headquarters and other facilities are located in active earthquake and tsunami or in active hurricane zones, and an earthquake, hurricane or other type of natural disaster affecting us or our suppliers could cause resource shortages, disrupt our business and harm our results of operations.
We conduct our primary research and development operations in the San Francisco Bay Area in an active earthquake and tsunami zone, and certain of our suppliers conduct their operations in the same region or in other locations that are susceptible to natural disasters. In addition, California and some of the locations where certain of our suppliers are located have experienced shortages of water, electric power and natural gas from time to time. The occurrence of a hurricane or associated flooding in the Wilmington, North Carolina area could cause damage to our facility located in Leland or result in localized extended outages of utilities or transportation systems. The occurrence of a natural disaster, such as an earthquake, hurricane, drought or flood, or localized extended outages of critical utilities or transportation systems, or any critical resource shortages, affecting us or our suppliers could cause a significant interruption in our business, damage or destroy our facilities, production equipment or inventory or those of our suppliers and cause us to incur significant costs or result in limitations on the availability of our raw materials, any of which could harm our business, financial condition and results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case. Our facilities undergo annual loss control audits and both our Emeryville and Leland facilities have emergency actions plans outlining emergency response practices for these and other emergency scenarios. Training on emergency response is provided to all employees at hire and annually thereafter as a refresh.
Our stock price may be volatile.
The market price of our common stock has been, and we expect it to continue to be, subject to significant volatility, and it has declined significantly from our initial public offering price. Market prices for securities of early stage companies have historically been particularly volatile. Such fluctuations could be in response to, among other things, the factors described in this “Risk Factors” section, or other factors, some of which are beyond our control, such as:
•fluctuations in our financial results or outlook or those of companies perceived to be similar to us;
•changes in estimates of our financial results or recommendations by securities analysts;
•changes in market valuations of similar companies;
•changes in the prices of commodities associated with our business such as sugar and petroleum or changes in the prices of commodities that some of our products may replace, such as oil and other petroleum sourced products;
•changes in our capital structure, such as future issuances of securities or the incurrence of debt;
•announcements by us or our competitors of significant contracts, acquisitions or strategic partnerships;
•regulatory developments in the United States, Brazil, and/or other foreign countries;
•litigation involving us, our general industry or both;
•additions or departures of key personnel;
•investors’ general perception of us; and
•changes in general economic, industry and market conditions.
Furthermore, stock markets have experienced price and volume fluctuations that have affected, and continue to affect, the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the
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operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes and international currency fluctuations, may negatively affect the market price of our common stock.
In the past, many companies that have experienced volatility and sustained declines in the market price of their stock have become subject to securities class action and derivative action litigation. We were involved in two such lawsuits that were dismissed in 2014, were involved in five such lawsuits that were dismissed in September 2017, July 2018 and September 2018, respectively, are currently involved in two such lawsuits, as described in more detail below under “Legal Proceedings,” and we may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
The concentration of our capital stock ownership with insiders will limit the ability of other stockholders to influence corporate matters and presents risks related to the operations of our significant stockholders.
As of January 31, 2020, significant stockholders held an aggregate total of 56.9% of the Company's total common shares outstanding, as follows: Foris Ventures, LLC (Foris) (33.3%), DSM (8.1%), Total (6.2%), Loyola Capital (5.2%) and Vivo Capital LLC (Vivo) (4.1%). Furthermore, each of these parties holds some or a combination of convertible preferred stock, warrants and purchase rights, pursuant to which they may acquire additional shares of our common stock and thereby increase their ownership interest in our company. Additionally, Foris is indirectly owned by John Doerr, one of our current directors, and each of DSM, Total and Vivo have the right to designate one or more directors to serve on our Board of Directors pursuant to agreements between us and such stockholders. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with stockholders with significant interests. Also, these stockholders, acting together, may be able to control or significantly influence our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of all or substantially all of our assets, and may not act in the best interests of our other stockholders. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, or a change in our management or Board of Directors, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, even if such actions would benefit our other stockholders.
In addition, certain of our significant stockholders are also our commercial partners and have various rights in connection with their security ownership in us. These stockholders may have interests that are different from those of our other stockholders, including with respect to our company’s commercial transactions. While we have a related-party transactions policy that requires certain approvals of any transaction between our company and a significant stockholder or its affiliates, there can be no assurance that our significant stockholders will act in the best interests of our other stockholders, which could harm our results of operations and cause our stock price to decline.
The market price of our common stock could be negatively affected by future sales of our common stock.
If our existing stockholders, particularly our largest stockholders, our directors, their affiliates, or our executive officers, sell a substantial number of shares of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that these stockholders might sell our common stock could also depress the market price of our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.
We have in place, or have agreed to file, registration statements for the resale of certain shares of our common stock held by, or issuable to, certain of our largest stockholders. All of our common stock sold pursuant to an offering covered by such registration statements will be freely transferable. In addition, shares of our common stock issued or issuable under our equity incentive plans have been registered on Form S-8 registration statements and may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell.
The restatement of our previously issued financial statements was time-consuming and expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations and cash flows.
On April 5, 2019, our Audit Committee, after consultation with management and KPMG LLP (KPMG), our former independent registered public accounting firm, determined that we would restate our interim condensed consolidated financial statements for the quarterly and year-to-date periods ended March 31, 2018, June 30, 2018 and September 30, 2018, included in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively. In addition, on May 14, 2019, our Board of Directors, upon the recommendation of the Audit Committee after
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consultation with senior management and KPMG, determined that we would restate our audited consolidated financial statements for the year ended December 31, 2017. The consolidated financial statements and related information included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Reports on Form 10-Q for the periods ended March 31, 2018, June 30, 2018 and September 30, 2018 and all earnings press releases and similar communications issued by us for such periods should not be relied upon and are superseded in their entirety by the Annual Report on Form 10-K/A for the year ended December 31, 2018.
Accordingly, the Annual Report on Form 10-K/A as of and for the year ended December 31, 2018 includes: (1) changes to our consolidated financial statements to reflect the restatement of our audited consolidated financial statements for the year ended December 31, 2017 and our unaudited interim condensed consolidated financial statements for the quarterly and year-to-date periods ended March 31, 2018, June 30, 2018 and September 30, 2018; (2) changes as to reflect the restatement of our unaudited quarterly and year-to-date periods ended March 31, 2017, June 30, 2017 and September 30, 2017 for additional errors identified during the re-audit of our consolidated financial statements for the year ended December 31, 2017; (3) expanded risk factor disclosures within Part I, Item 1A; and (4) additional disclosures and conclusions regarding our disclosure controls and procedures and internal control over financial reporting in Part II, Item 9A.
As a result of the restatement and associated non-reliance on previously issued financial information, we became subject to a number of additional expenses and risks, including unanticipated expenses for accounting and legal fees in connection with or related to the restatement. Likewise, the attention of our management team has been diverted by these efforts. In addition, we could also be subject to additional shareholder, governmental, regulatory or other actions or demands in connection with the restatement or other matters. Any such proceedings will, regardless of the outcome, consume a significant amount of management’s time and attention and may result in additional legal, accounting, insurance and other expenses. If we do not prevail in any such proceeding, we could be required to pay damages or settlement costs. In addition, the restatement and related matters could impair our reputation or could cause our customers, shareholders, or other counterparties to lose confidence in us. Any of these occurrences could have a material adverse effect on our business, results of operations, financial condition and stock price.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not expect to declare any cash dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, certain of our equipment leases and credit facilities currently restrict our ability to pay dividends. Consequently, investors may need to rely on sales of their shares of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Anti-takeover provisions contained in our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our Certificate of Incorporation and Bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to nominate directors and take other corporate actions. These provisions include:
•a staggered Board of Directors;
•authorizing the Board of Directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;
•authorizing the Board of Directors to amend our Bylaws, to increase the number of directors and to fill board vacancies until the end of the term of the applicable class of directors;
•prohibiting stockholder action by written consent;
•limiting the liability of, and providing indemnification to, our directors and officers;
•eliminating the ability of our stockholders to call special meetings; and
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•requiring advance notification of stockholder nominations and proposals.
Section 203 of the Delaware General Corporation Law prohibits, subject to some exceptions, “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that the stockholder became an interested stockholder. We have agreed to opt out of Section 203 through our Certificate of Incorporation, but our Certificate of Incorporation contains substantially similar protections to our company and stockholders as those afforded under Section 203, except that we have agreed with Total that it and its affiliates will not be deemed to be “interested stockholders” under such protections.
These and other provisions in our Certificate of Incorporation and our Bylaws could discourage potential takeover attempts, reduce the price that investors are willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions.
Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness.
The recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health epidemic, including COVID-19, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and the manufacture or shipment of our products and adversely impact our business, financial condition or results of operations. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
The following is a summary of our principal facilities as of December 31, 2019. We lease our principal office and research and development facilities located in Emeryville, California. We hold a 50% ownership interest in a manufacturing facility and related land located in Leland, North Carolina and lease a pilot plant and demonstration facility and related office and laboratory space located in Campinas, Brazil. Our lease agreements expire at various dates through the year 2031.
| Location | Approximate Square Feet | Operations | ||||||
| U.S. | ||||||||
| Emeryville, California | 136,000 | Executive offices; research and development, administrative and pilot plant | ||||||
| Leland, North Carolina | 19,400 | Manufacturing (joint venture with Nikko) | ||||||
| BRAZIL | ||||||||
| Campinas, Brazil | 44,000 | Pilot plant, research and development and administrative | ||||||
We believe that our current facilities are suitable and adequate to meet our needs and that suitable additional space will be available to accommodate the foreseeable expansion of our operations. Based on our anticipated volume requirements for 2020 and beyond, we will likely need to identify and secure access to additional production capacity in 2020 and beyond, which we plan to obtain by constructing new facilities and by increasing our use of contract manufacturers, including our collaboration partner, DSM. We are currently making plans to secure such additional capacity.
ITEM 3. LEGAL PROCEEDINGS
On April 3, 2019, a securities class action complaint was filed against Amyris and our CEO, John G. Melo, and former CFO (and current Chief Business Officer), Kathleen Valiasek, in the U.S. District Court for the Northern District of California. The complaint seeks unspecified damages on behalf of a purported class that would comprise all persons and entities that purchased or otherwise acquired our securities between March 15, 2018 and March 19, 2019. The complaint, which was amended by the lead plaintiff on September 13, 2019, alleges securities law violations based on statements and omissions made by the Company during such period. On October 25, 2019, the defendants filed a motion to dismiss the securities class action complaint. The hearing on such motion to dismiss was held on February 18, 2020 and we are awaiting a ruling from the Court. Subsequent to the filing of the securities class action complaint described above, on June 21, 2019 and October 1, 2019, respectively, two separate purported shareholder derivative complaints were filed in the U.S. District Court for the Northern District of California (Bonner v. Doerr, et al., and Carlson v. Doerr, et al.) based on similar allegations to those made in the securities class action complaint described above and named the Company and certain of the Company’s current and former officers and directors as defendants. The derivative lawsuits sought to recover, on the Company’s behalf, unspecified damages purportedly sustained by the Company in connection with allegedly misleading statements and omissions made in connection with the Company’s securities filings. The derivative lawsuits were dismissed on October 18, 2019 (Bonner) and December 10, 2019 (Carlson), without prejudice. We believe the securities class action complaint lacks merit, and intend to continue to defend ourselves vigorously. Given the early stage of these proceedings, it is not yet possible to reliably determine any potential liability that could result from these matters.
We may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of our business. Such matters are subject to many uncertainties and there can be no assurance that legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, results of operations, financial position or cash flows. For additional information, see "Other Matters" in Note 9, "Commitments and Contingencies" in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol AMRS.
At March 6, 2020, there were 71 holders of record (not including beneficial holders of stock held in street names) of our common stock.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We intend to retain any future earnings and do not expect to pay cash dividends in the foreseeable future.
Recent Sales of Unregistered Equity Securities and Use of Proceeds
For information regarding unregistered sales of our equity securities during the two years ended December 31, 2019, see the financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
See Note 15, “Subsequent Events” in Part II, Item 8 of this Annual Report on Form 10-K for information regarding unregistered sales of our equity securities subsequent to December 31, 2019.
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows certain information concerning our common stock reserved for issuance in connection with our 2005 Stock Option/Stock Issuance Plan, our 2010 Equity Incentive Plan and our 2010 Employee Stock Purchase Plan, all as of December 31, 2019:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options | Number of securities to be issued upon vesting of outstanding restricted stock units | Number of securities remaining available for future issuance under equity compensation plans(1)(2) | ||||||||||
| Equity compensation plans approved by security holders | 5,620,419 | $ | 10.27 | 5,782,651 | 4,079,422 | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | — | ||||||||||
| Total | 5,620,419 | $ | 10.27 | 5,782,651 | 4,079,422 | |||||||||
(1) Includes 3,815,625 shares reserved for future issuance under our 2010 Equity Incentive Plan and 263,797 shares reserved for future issuance under our 2010 Employee Stock Purchase Plan. No shares are reserved for future issuance under our 2005 Stock Option/Stock Issuance Plan other than shares issuable upon exercise of equity awards outstanding under such plan.
(2) Effective January 1, 2019, the number of shares available for future issuance under our 2010 Equity Incentive Plan increased by 5,887,133 shares pursuant to the automatic increase provision contained in the 2010 Equity Incentive Plan and the number of shares available for future issuance under our 2010 Employee Stock Purchase Plan increased by 588,713 shares, in each case pursuant to automatic increase provisions contained in the respective plans, as discussed in more detail below.
Our 2010 Equity Incentive Plan includes all shares of our common stock reserved for issuance under our 2005 Stock Option/Stock Issuance Plan immediately prior to our initial public offering that were not subject to outstanding grants as of the completion of such offering. In addition, any shares of our common stock (i) issuable upon exercise of stock options granted under our 2005 Stock Option/Stock Issuance Plan that cease to be subject to such options and (ii) issued under our 2005 Stock Option/Stock Issuance Plan that are forfeited or repurchased by us at the original issue price, will become part of our 2010 Equity Incentive Plan reserve.
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The number of shares available for grant and issuance under our 2010 Equity Incentive Plan is increased on January 1 of each year during the term of the plan by an amount equal to the lesser of (1) five percent (5%) of our shares outstanding on the immediately preceding December 31 and (2) a number of shares as may be determined by our Board of Directors or the Leadership Development and Compensation Committee in their discretion. In addition, shares will again be available for grant and issuance under our 2010 Equity Incentive Plan that are:
•subject to issuance upon exercise of an option or stock appreciation right granted under our 2010 Equity Incentive Plan and that cease to be subject to such award for any reason other than the award’s exercise;
•subject to an award granted under our 2010 Equity Incentive Plan and that are subsequently forfeited or repurchased by us at the original issue price;
•surrendered pursuant to an exchange program; or
•subject to an award granted under our 2010 Equity Incentive Plan that otherwise terminates without shares being issued.
The number of shares reserved for issuance under our 2010 Employee Stock Purchase Plan is increased on January 1 of each year during the term of the plan by an amount equal to the lesser of (1) one percent (1%) of our shares outstanding on the immediately preceding December 31 and (2) a number of shares as may be determined by our Board of Directors or the Leadership Development and Compensation Committee of the Board in their discretion, provided that the aggregate number of shares issued over the term of our 2010 Employee Stock Purchase Plan shall not exceed 1,666,666 shares.
For more information regarding our 2010 Equity Incentive Plan and 2010 Employee Stock Purchase Plan, see Note 11, “Stock-based Compensation” in Part II, Item 8 of this Annual Report on Form 10-K.
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ITEM 6. SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
As a leading industrial biotechnology company, we apply our technology platform to engineer, manufacture and sell high performance, natural, sustainably-sourced products into the Health & Wellness, Clean Beauty, and Flavor & Fragrance markets. Our proven technology platform enables us to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into large volume, high-value ingredients. Our biotechnology platform and industrial fermentation process replace existing complex and expensive manufacturing processes. We have successfully used our technology to develop and produce nine distinct molecules at commercial volumes, leading to more than 17 commercial ingredients used by thousands of leading global brands.
We believe that industrial synthetic biology represents a third industrial revolution, bringing together biology and engineering to generate new, more sustainable materials to meet the growing global demand for bio-based replacements for petroleum-based and traditional animal- or plant-derived ingredients. We continue to build demand for our current portfolio of products through an extensive sales network provided by our collaboration partners that represent leading companies for our target market sectors. We also have a small group of direct sales and distributors who support our Clean Beauty market. Via our partnership model, our partners invest in the development of each molecule to bring it from the lab to commercial-scale and use their extensive sales force to sell our ingredients and formulations to their customers as part of their core business. We capture long-term revenue both through the production and sale of the molecule to our partners and through royalty revenues from our partners' product sales to their customers.
We were founded in 2003 in the San Francisco Bay area by a group of scientists from the University of California, Berkeley. Our first major milestone came in 2005 when, through a grant from the Bill & Melinda Gates Foundation, we developed technology capable of creating microbial strains that produce artemisinic acid, which is a precursor of artemisinin, an effective anti-malarial drug. In 2008, we granted royalty-free licenses to allow Sanofi-Aventis to produce artemisinic acid using our technology. Building on our success with artemisinic acid, in 2007 we began applying our technology platform to develop, manufacture and sell sustainable alternatives to a broad range of markets.
We focused our initial development efforts primarily on the production of Biofene®, our brand of renewable farnesene, a long-chain, branched hydrocarbon molecule that we manufacture through fermentation using engineered microbes. Our farnesene derivatives are sold in hundreds of products as nutraceuticals, skincare products, fragrances, solvents, polymers, and lubricant ingredients. The commercialization of farnesene pushed us to create a more cost efficient, faster and accurate development process in the lab and drive manufacturing costs down. This investment has enabled our technology platform to rapidly develop microbial strains and commercialize target molecules. In 2014, we began manufacturing additional molecules for the Flavor & Fragrance industry; in 2015 we began investing to expand our capabilities to other small molecule chemical classes beyond terpenes via our collaboration with the Defense Advanced Research Projects Agency (DARPA); and in 2016 we expanded into proteins.
We have invested over $700 million in infrastructure and technology to create microbes that produce molecules from sugar or other feedstocks at commercial-scale. This platform has been used to design, build, optimize and upscale strains producing nine distinct molecules at commercial volumes, leading to more than 17 commercial ingredients used by thousands of leading global brands. Our time to market for molecules has decreased from seven years to less than a year for our most recent molecule, mainly due to our ability to leverage the technology platform we have built.
Our technology platform has been in active use since 2007 and has been integrated with our commercial production since 2011, creating an organism development process that we believe makes us an industry leader in the successful scale-up and commercialization of biotech-produced ingredients. The key performance characteristics of our platform that we believe differentiate us include our proprietary computational tools, strain construction tools, screening and analytics tools, and advanced lab automation and data integration. Having this fully integrated with our large-scale manufacturing process and capability enables us to always engineer with the end specification and requirements guiding our technology. Our state-of-the-
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art infrastructure includes industry-leading strain engineering and lab automation located in Emeryville, California, pilot-scale production facilities in Emeryville, California and Campinas, Brazil, a demonstration-scale facility in Campinas, Brazil and a commercial-scale production facility in Leland, North Carolina, which is owned and operated by our Aprinnova joint venture to convert our Biofene into squalane and other final products.
We are able to use a wide variety of feedstocks for production, but have focused on accessing Brazilian sugarcane for our large-scale production because of its renewability, low cost and relative price stability. We have also successfully used other feedstocks such as sugar beets, corn dextrose, sweet sorghum and cellulosic sugars at various manufacturing facilities.
Several years ago, we made the strategic decision to transition our business model from collaborating and commercializing molecules in low margin commodity markets to higher margin specialty markets. We began the transition by first commercializing and supplying farnesene-derived squalane as a cosmetic ingredient sold to formulators and distributors. We also entered into collaboration and supply agreements for the development and commercialization of molecules within the Flavor & Fragrance and Clean Beauty markets where we utilize our strain generation technology to develop molecules that meet the customer’s rigorous specifications.
During this transition, we solidified the business model of partnering with our customers to create sustainable, high performing, low-cost molecules that replace an ingredient in their supply chain, commercially scale and manufacture those molecules, and share in the profits earned by our customers once our customer sells its product into these specialty markets. These three steps constitute our grants and collaborations revenues, renewable product revenues, and royalty revenues.
During 2017, we completed several development agreements with DSM and others for new products such as Vitamin A, a human nutrition molecule and others, and in late 2018 we began commercial production and shipment of an alternative sweetener product developed from the Reb M molecule, which is a superior sweetener and sugar replacement. Our goal is to bring two to three new molecules per year to commercial production in the future.
In 2017, we monetized the use of one of our lower margin molecules, farnesene, in the Vitamin E and Lubricants specialty markets while retaining any associated royalties, and licensed farnesene to Koninklijke DSM N.V. (DSM) for use in these fields. Also in 2017, we sold to DSM our subsidiary Amyris Brasil Ltda. (Amyris Brasil), which operated our purpose-built, large-scale manufacturing facility located in Brotas, Brazil.
The Brotas facility was built to batch manufacture one commodity product at a time (originally for high-volume production of biofuels, a business Amyris has exited), which is an inefficient manufacturing process that is not suited for the high margin specialty markets in which we operate today. We currently manufacture nine specialty products and expect to increase the number of specialty products we manufacture by two to three products a year. The inefficiencies we experienced included having to idle the facility for two weeks at a time to prepare for the next product batch manufacture. These inefficiencies caused our cost of goods sold to be significantly higher. As a result, we are building a new purpose-built, large-scale specialty ingredients plant in Brazil, which we anticipate will allow for the manufacture of five products concurrently, including our alternative sweetener product, and over 10 different products annually. In September 2019, we obtained the necessary permits and broke ground on our new specialty ingredients plant and expect the facility to be fully operational in the first quarter of 2021. During construction, we are manufacturing our products at four contract manufacturing sites in Brazil, the U.S. and Spain.
Also, as part of the December 2017 sale of Brotas, we contracted with DSM for the use of Brotas to manufacture products for us to fulfill our product supply commitments to our customers until the new production facility is built and becomes operational, and in November 2018, we amended the supply agreement with DSM to secure capacity at the Brotas facility for production of our alternative sweetener product through 2022.
In May 2019 we entered into an agreement with Raizen Energia S.A. (Raizen) for the formation and operation of a joint venture relating to the production, sale and commercialization of alternative sweetener products whereby the parties would construct a manufacturing facility exclusively for sweetener molecules on land owned by Raizen and leased to the joint venture.
Also, in May 2019, we consummated a research, collaboration and license agreement with LAVVAN, Inc., a newly formed investment-backed company (Lavvan), for up to $300 million to develop, manufacture and commercialize cannabinoids. Under the Cannabinoid Agreement, we would perform research and development activities and Lavvan would be responsible for the commercialization of the cannabinoids developed under the agreement. The Cannabinoid Agreement is being principally funded on a milestone basis, with Amyris also entitled to receive certain supplementary research and development funding from Lavvan. We could receive aggregate funding of up to $300 million over the term of the Cannabinoid
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Agreement if all of the milestones are achieved. Additionally, the Cannabinoid Agreement provides for profit share to Amyris on Lavvan's gross profit margin once products are commercialized; these payments will be due for the next 20 years.
Sales and Revenue
We recognize revenue from product sales, license fees and royalties, and grants and collaborations.
We have research and development collaboration arrangements for which we receive payments from our collaboration partners, which include DARPA, DSM, Firmenich SA (Firmenich), Givaudan International SA (Givaudan), Lavvan and others. Some of our collaboration arrangements provide for advance payments to us in consideration for grants of exclusivity or research efforts that we will perform. In 2017 we signed collaboration agreements for an infant nutrition ingredient, and in 2018 and 2019 we signed a collaboration agreement for four vitamins that we expect will contribute to our collaboration revenue and ultimately product sales. Also, in 2019 we signed a collaboration agreement for up to $300 million to develop cannabinoids. Our collaboration agreements, which may require us to achieve milestones prior to receiving payments, are expected to contribute revenues from product sales and royalties if and when they are commercialized. See Note 9, “Revenue Recognition” in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
All of our non-government partnerships include commercial terms for the supply of molecules we successfully upscale and produce at commercial volumes. The first molecule to generate revenue for us outside of farnesene was a fragrance molecule launched in 2015. Since the launch, the product has continued to grow in sales year over year. In 2016, we launched our second fragrance molecule and in 2017, we launched our third fragrance molecule as well as our first cosmetic active ingredient. Our partners for these molecules are indicating continued strong growth due to their cost advantaged position, high purity and sustainable production method. We are continuing to identify new opportunities to apply our technology and deliver sustainable access to key molecules. As a result, we have a pipeline that we believe can deliver two to three new molecules each year over the coming years with a flavor ingredient, a cosmetic active ingredient and a fragrance molecule. In 2019, we commercially produced and shipped our Reb M product that is a sweetener and sugar replacement for food and beverages.
Concurrent with the December 2017 sale of Amyris Brasil and the Brotas facility, we entered into a series of commercial agreements with DSM that included (i) a license agreement to DSM of our farnesene product for DSM to use in the Vitamin E and lubricant specialty markets and (ii) a royalty agreement, pursuant to which DSM agreed to pay us specified royalties representing a portion of the profit on the sale of Vitamin E produced from farnesene sold under a supply agreement with Nenter & Co., Inc. (Nenter) which was assigned to DSM. Under the terms of the royalty agreement, DSM was obligated to pay us minimum royalties totaling $18.1 million for 2019 and 2020. In June 2018, we received the 2019 non-refundable minimum royalty payment totaling $9.3 million (net of a $0.7 million early payment discount) and in March 2019, we received the 2020 non-refundable payment totaling $7.4 million (net of a $0.7 million early payment discount). In April 2019, we assigned the right to receive such royalty payments under the Vitamin E royalty agreement to DSM for total consideration of $57 million, of which approximately $40.3 million was recognized as royalty revenue in 2019. See Note 9, “Revenue Recognition” and Note 10, "Related Party Transactions" in Part II, Item 8 of this Annual Report on Form 10-K for information regarding the accounting treatment of the assignment of Vitamin E royalty agreement and for a full listing of our agreements with DSM.
We have several other collaboration molecules in our development pipeline with partners including DSM, Givaudan, Firmenich and Lavvan that we expect will contribute revenues from product sales and royalties if and when they are commercialized.
Critical Accounting Policies and Estimates
Management's discussion and analysis of results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). We believe that the critical accounting policies described in this section are those that significantly impact our financial condition and results of operations and require the most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Because of this uncertainty, actual results may vary from these estimates.
Our most critical accounting estimates include:
•Recognition of revenue including arrangements with multiple performance obligations;
•Valuation and allocation of fair value to various elements of complex related party transactions;
•The valuation of freestanding and embedded derivatives, which impacts gains or losses on such derivatives, the carrying value of debt, interest expense and deemed dividends; and
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•The valuation of debt for which we have elected fair value accounting.
For a more detailed discussion of our critical accounting estimates and policies, see Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" in Part II, Item 8 of this 2019 Form 10-K.
Results of Operations
Revenue
| Years Ended December 31, (In thousands) | 2019 | 2018 | 2019 vs 2018 % Change | ||||||||
| Revenue: | |||||||||||
| Renewable products | $ | 59,872 | $ | 33,598 | 78 | % | |||||
| Licenses and royalties | 54,043 | 7,658 | 606 | % | |||||||
| Grants and collaborations | 38,642 | 22,348 | 73 | % | |||||||
| Total revenue | $ | 152,557 | $ | 63,604 | 140 | % | |||||
Total revenue increased by 140% to $152.6 million in 2019. Renewable products revenue increased by 78% to $59.9 million in 2019, primarily due to (i) $15.9 million of consumer products revenue in 2019 through a combination of retail and direct e-commerce sales, as compared to $4.6 million in 2018; (ii) a $4.9 million increase in product revenue from sales to Firmenich; (iii) a $3.4 million increase from sales to Givaudan; and (iv) a $2.8 million increase in squalane sales.
Licenses and royalties revenue increased by 606% to $54.0 million in 2019, primarily due to a $43.1 million increase in royalty revenues as the result of our sale and assignment of the Vitamin E Value Sharing Agreement to DSM, and a $3.3 million increase in royalties from fragrance product sales.
Grants and collaborations revenue increased by 73% to $38.6 million in 2019, primarily due to $18.3 million of revenue from Lavvan in 2019 in connection with a CBD collaboration agreement, and $5.7 million of vitamin-related collaboration revenue from Yifan, less a $4.3 million decrease in collaboration revenue from Firmenich, a $2.9 million decrease in grant revenue from DARPA and a $2.9 million decrease in collaboration revenue from Givaudan.
Our revenues are dependent on the timing and nature of arrangements entered into with our customers, which may include multiple performance obligations for which revenue accounting requires significant judgement and estimates. Based on the nature of our customer arrangements, our revenues may vary significantly from one period to the next.
Cost and Operating Expenses
| Years Ended December 31, (In thousands) | 2019 | 2018 | 2019 vs 2018 % Change | ||||||||
| Cost of products sold | $ | 76,185 | $ | 36,698 | 108 | % | |||||
| Research and development | 71,460 | 68,722 | 4 | % | |||||||
| Sales, general and administrative | 126,586 | 90,902 | 39 | % | |||||||
| Impairment of other assets | 216 | 3,865 | (94) | % | |||||||
| Total cost and operating expenses | $ | 274,447 | $ | 200,187 | 37 | % | |||||
Cost of Products Sold
Cost of products sold includes the costs of raw materials, labor and overhead, amounts paid to contract manufacturers, inventory write-downs resulting from applying lower of cost or net realizable value inventory adjustments, and costs related to production scale-up. Because of our product mix, our cost of products sold does not change proportionately with changes in renewable product revenue.
Cost of products sold increased by 108% to $76.2 million in 2019, primarily due to a 78% increase in renewable products revenue, and significant non-recurring production costs related to the launch of certain new products.
Research and Development Expenses
Research and development expenses increased by 4% to $71.5 million in 2019, primarily due to increases in laboratory supplies and employee compensation. The laboratory supplies increase was related to the procurement of additional leased
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equipment to expand research and product development. Employee compensation increased primarily as the result of competitive changes to the Company’s base salary and bonus structure for most personnel at the beginning of 2019, and higher employee benefits costs.
Sales, General and Administrative Expenses
Sales, general and administrative expenses increased by 39% to $126.6 million in 2019, primarily due to increases in employee staffing, outside services, sales and marketing spending to support the growth of our Biossance, Pipette and Purecane product lines, and significantly increased audit fees and accounting advisory services related to the 2017 annual and 2018 quarterly financial restatements performed in 2019.
Impairment of Other Assets
In 2019 and 2018, we impaired $0.2 million and $3.9 million, respectively, of contingent consideration that had been recorded in 2017 in connection with the December 2017 sale of our factory in Brasil.
Other Income (Expense), Net
| Years Ended December 31, (In thousands) | 2019 | 2018 | 2019 vs 2018 % Change | ||||||||
| Loss on divestiture | $ | — | $ | (1,778) | (100) | % | |||||
| Interest expense | (58,665) | (42,703) | 37 | % | |||||||
| Gain (loss) from change in fair value of derivative instruments | 2,777 | (30,880) | (109) | % | |||||||
| (Loss) gain from change in fair value of debt | (19,369) | 2,082 | nm | ||||||||
| Loss upon extinguishment of debt | (44,208) | (17,424) | 154 | % | |||||||
| Other expense, net | (783) | (2,949) | (73) | % | |||||||
| Total other expense, net | $ | (120,248) | $ | (93,652) | 28 | % | |||||
______________
nm = not meaningful
Total other expense, net was $120.2 million in 2019, compared to $93.7 million in 2018. The $26.6 million increase was primarily comprised of a $26.8 million increase in loss upon extinguishment of debt, a $21.5 million unfavorable swing in change in fair value of debt from a gain to a loss, and a $16.0 million increase in interest expense, partly offset by a $33.7 million favorable swing in change in fair value of derivative instruments from a loss to a gain. The increases in loss upon extinguishment of debt, loss from change in fair value of debt and interest expense were primarily related to (i) the write-off of unamortized debt discounts upon the modification of a debt instrument accounted for as an extinguishment, (ii) upfront expense recognition of the fair value of warrants issued in connection with new borrowings, refinancings and maturity date extensions with existing lenders, (iii) upfront expense recognition of debt discounts paid and end of term fees due to existing lenders in connection with additional borrowings and maturity date extensions, and (iv) penalties, waiver fees and default interest related to covenant violations, events of default under certain debt instruments and in connection with forbearance agreements. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies–Fair Value Measures” in Part II, Item 8 of this Annual Report on Form 10-K for a discussion regarding how our closing stock price at the end of the period or immediately prior to the extinguishment of an embedded derivative or debt or warrant instrument can affect the fair value of our derivative liabilities and our debt.
Income Taxes
For 2019, we recorded $0.6 million income tax expense related to accrued interest on uncertain tax positions. For 2018, we recorded $0 income tax expense as a result of recording a full valuation allowance against our net deferred tax assets due to our history of losses and the unlikelihood of timely recovery of such tax assets.
See Note 13, "Income Taxes" in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
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Liquidity and Capital Resources
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (156,933) | $ | (109,366) | ||||
| Investing activities | $ | (13,080) | $ | (12,472) | ||||
| Financing activities | $ | 124,910 | $ | 107,957 | ||||
Liquidity
We have incurred significant operating losses since our inception, and we expect to continue to incur losses and negative cash flows from operations through at least the next 12 months following the issuance of this Annual Report on Form 10-K. As of December 31, 2019, we had negative working capital of $87.5 million, an accumulated deficit of $1.8 billion, and cash and cash equivalents of $0.3 million.
As of December 31, 2019, our debt (including amounts owed to related parties), net of a $20.3 million discount and a $15.4 million fair value adjustment, totaled $261.8 million, of which $63.8 million is classified as current. However, $75.0 million of debt was converted into equity in January 2020; see Note 15, “Subsequent Events” for more information. Our debt agreements contain various covenants, including certain restrictions on our business — including restrictions on additional indebtedness, material adverse effect and cross default provision — that could cause us to be at risk of default. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make payments when required, would generally result in events of default under such instruments, which could result in the acceleration of a substantial portion of such indebtedness. Acceleration would generally also constitute an event of default under our other outstanding debt instruments, which could result in the acceleration of a substantial portion of such debt instruments. At December 31, 2019, we failed to meet certain covenants under several credit arrangements, including those associated with cross-default provisions, minimum liquidity requirements and minimum asset coverage requirements. In March 2020, these lenders provided permanent waivers to us for breaches of all past covenant violations and cross-default payment failures (discussed below), through March 13, 2020 under the respective credit agreements, and significantly reduced the minimum liquidity requirement and substantially increased the base of eligible assets to calculate the asset coverage requirement.
On January 31, 2020, we failed to pay Total Raffinage Chimie (Total), Nikko Chemicals Co. Ltd (Nikko) and certain affiliates of the Schottenfeld Group LLC (Schottenfeld) an aggregate of $22.5 million of maturing promissory notes, and previously on December 15, 2019 failed to pay Ginkgo $5.2 million of past due interest, past due partnership payments and the first installment of a waiver fee. These failures resulted in an event of default under the respective agreements and triggered cross-defaults under other debt instruments, which permitted the holders of such debt instruments to accelerate the amounts owing under such instruments. We subsequently received waivers from each of the affected cross-default debt holders to waive the right to accelerate due to the event specific cross-defaults. As a result, the indebtedness for which we have obtained such waivers continues to be classified as noncurrent on the Company’s balance sheet in accordance with such debt's terms. The indebtedness of Total and certain Ginkgo, Nikko and Schottenfeld amounts continue to be classified as current liabilities on our balance sheet to the extent that payment due dates are within one year of December 31, 2019.
Subsequent to December 31, 2019, we (i) obtained a waiver and forbearance agreement from Schottenfeld, (ii) amended the credit arrangements with Total and Nikko Notes to extend the maturity date of the original promissory notes, and (iii) entered into a waiver and amendment to the partnership agreement with Ginkgo to waive all past payment defaults under the Ginkgo Note and Ginkgo Partnership Agreement, and to extend the payment due date and modify the periodic partnership payment timing and amount. See Note 15, “Subsequent Events” for further information.
Although we obtained extensions to make these payments, we currently do not have sufficient funds to repay the amounts due under the Total, Nikko, Schottenfeld and Ginkgo credit arrangements, and while we intend to seek equity financing, the proceeds of which would be used to repay Total, Nikko, Schottenfeld and Ginkgo, there can be no assurance that we will be able to obtain such financing on our expected timeline, or on acceptable terms, if at all. Also, while we have been able to cure these defaults to date to avoid additional cross-acceleration, we may not be able to cure such a default promptly in the future. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 1, Basis of Presentation and Summary of Accounting Policies" in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Our consolidated financial statements as of and for the year ended December 31, 2019 have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Due to the factors described above, there is substantial doubt about our ability to continue as a going
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concern within one year after the date that the financial statements in this Annual Report on Form 10-K are issued. Our ability to continue as a going concern will depend, in large part, on our ability to raise additional proceeds through financings, achieve positive cash flows from operations during the next 12 months from the date of this filing, and refinance or extend other existing debt maturities occurring later in 2020, which is uncertain. The financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could have a material adverse effect on our financial condition. In addition, if we are unable to continue as a going concern, we may be unable to meet our obligations under our existing debt facilities, which could result in the acceleration of such debt payment obligations, and we may be forced to liquidate our assets. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated balance sheet.
Our operating plan for 2020 contemplates a significant reduction in our net cash outflows resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs as a result of manufacturing and engineering developments, and (iii) cash inflows from collaborations and grants. These factors are expected to improve our liquidity.
If we are unable to generate sufficient cash inflows from product sales and collaboration arrangements, and draw sufficient funds from current or pending financing arrangements, we will need to obtain additional funding from equity or other debt financings, which may not occur timely or on reasonable terms, if at all, and agree to burdensome covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights, or grant licenses on terms that are not favorable.
If we do not achieve our planned operating results, our ability to continue as a going concern will be jeopardized and we may need to take the following actions to support our liquidity needs in 2020:
•Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts;
•Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors;
•Reduce or delay uncommitted capital expenditures, including expenditures related the construction and commissioning of the new production facility in Brazil, nonessential facilities and lab equipment, and information technology projects; and
•Closely monitor our working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities.
Implementing this plan could negatively impact our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
•Achieve planned production levels;
•Develop and commercialize products within planned timelines or at planned scales; and
•Continue other core activities.
We expect to fund operations for the foreseeable future with cash currently on hand, cash inflows from collaborations, grants, product sales, licenses and royalties and equity and debt financings, to the extent necessary. Some of our research and development collaborations are subject to the risk that we may not meet milestones. Future equity and debt financings, if needed, are subject to the risk that we may not be able to secure financing in a timely manner or on reasonable terms, if at all. Our planned working capital and capital expenditure needs for 2020 are dependent on significant inflows of cash from renewable product sales, new collaborations, and licenses and royalties from existing collaboration partners.
For details, see the following Notes in Part II, Item 8 of this Annual Report on Form 10-K:
•Note 4, "Debt"
•Note 5, "Mezzanine Equity"
•Note 6, "Stockholders' Deficit"
Cash Flows during the Years Ended December 31, 2019 and 2018
Cash Flows from Operating Activities
Our primary uses of cash from operating activities are for personnel costs and costs related to the production and sales of our products, offset by cash received from sales to customers.
For the year ended December 31, 2019, net cash used in operating activities was $156.9 million, which was primarily comprised of our $242.8 million net loss and an increase of $23.8 million in working capital, partly offset by $109.6 million of
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non-cash charges. Non-cash charges were primarily comprised of a $44.2 million loss upon extinguishment of debt, a $19.4 million loss from change in fair value of debt, $12.6 million of amortization of right-of-use assets under operating leases, $12.6 million of stock-based compensation expense and $11.7 million of debt discount accretion. The increase in working capital was primarily comprised of an $18.0 million increase in inventories, a $17.1 million decrease in lease liabilities, a $13.2 million increase in deferred cost of products sold, an $8.1 million increase in prepaid expenses and other assets, and a $6.9 million decrease in contract liabilities, mostly offset by a $42.7 million combined increase in accounts payable and accrued and other liabilities.
For the year ended December 31, 2018, net cash used in operating activities was $109.4 million, which was comprised of our $230.2 million net loss, partly offset by $96.3 million of non-cash charges and a $24.6 million decrease in working capital. Non-cash charges consisted primarily of a $30.9 million loss from change in fair value of derivative instruments, $16.6 million of debt discount accretion, $9.2 million of stock-based compensation, $6.8 million of warrants fair value recorded as legal expense, and $4.9 million of depreciation and amortization. The decrease in working capital was primarily comprised of an $11.6 million increase in accounts payable, an $8.1 million decrease in unbilled receivables and a $7.4 million decrease in accounts receivable.
Cash Flows from Investing Activities
For the year ended December 31, 2019, net cash used in investing activities was $13.1 million and was comprised of property, plant and equipment purchases.
For the year ended December 31, 2018, net cash provided by investing activities was $12.5 million and was comprised of property, plant and equipment purchases.
Cash Flows from Financing Activities
For the year ended December 31, 2019, net cash provided by financing activities was $124.9 million, primarily comprised of $189.2 million of net proceeds from debt issued and $53.7 million from the exercises of warrants and sales of common stock, partly offset by $112.4 million of debt principal payments.
For the year ended December 31, 2018, net cash provided by financing activities was $108.0 million, primarily comprised of $57.8 million of proceeds from the exercise of warrants to purchase common stock and $94.4 million from debt issued, partly offset by $41.7 million of debt principal payments.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2019:
| Payable by Year Ended December 31, (In thousands) | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||
| Principal payments on debt | $ | 297,462 | $ | 74,551 | $ | 68,572 | $ | 115,538 | $ | 36,840 | $ | 307 | $ | 1,654 | |||||||||
| Interest payments on debt | 82,095 | 39,324 | 28,513 | 13,457 | 494 | 91 | 216 | ||||||||||||||||
| Financing and operating leases | 35,668 | 12,288 | 12,106 | 7,719 | 3,363 | 192 | — | ||||||||||||||||
| Manufacturing capacity reservation fee | 6,893 | 6,893 | — | — | — | — | — | ||||||||||||||||
| Partnership payment obligation | 11,112 | 5,556 | 3,175 | 2,381 | — | — | — | ||||||||||||||||
| Contract termination fee | 3,670 | 3,670 | — | — | — | — | — | ||||||||||||||||
| Total | $ | 436,900 | $ | 142,282 | $ | 112,366 | $ | 139,095 | $ | 40,697 | $ | 590 | $ | 1,870 | |||||||||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMYRIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |||||
48
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Amyris, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Amyris, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit and mezzanine equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 13, 2020 expressed an adverse opinion thereon.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit of $1.8 billion and current debt service requirements that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Changes in Accounting Principles
As discussed in Note 1to the consolidated financial statements, the Company has changed its accounting method of accounting for leases on January 1, 2019, due to the adoption of Financial Accounting Standard Board’s Accounting Standards Codification 842, Leases. . The Company also amended the classification of certain equity-linked financial instruments with down round features and the respective disclosure requirements in fiscal year 2019 due to adoption of Accounting Standards Update No. 2017-11.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provides a reasonable basis for our opinion.
/s/ Macias Gini & O'Connell LLP
We have served as the Company's auditor since 2019.
San Francisco, California
March 13, 2020
49
AMYRIS, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, (In thousands, except shares and per share amounts) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 270 | $ | 45,353 | ||||
| Restricted cash | 469 | 741 | ||||||
| Accounts receivable, net of allowance of $45 and $642, respectively | 16,322 | 16,003 | ||||||
| Accounts receivable - related party, net of allowance of $0 and $0, respectively | 3,868 | 1,349 | ||||||
| Accounts receivable, unbilled - related party | — | 8,021 | ||||||
| Contract assets | 8,485 | — | ||||||
| Inventories | 27,770 | 9,693 | ||||||
| Deferred cost of products sold - related party | 3,677 | 489 | ||||||
| Prepaid expenses and other current assets | 12,750 | 10,566 | ||||||
| Total current assets | 73,611 | 92,215 | ||||||
| Property, plant and equipment, net | 28,930 | 19,756 | ||||||
| Contract assets, noncurrent - related party | 1,203 | 1,203 | ||||||
| Deferred cost of products sold, noncurrent - related party | 12,815 | 2,828 | ||||||
| Restricted cash, noncurrent | 960 | 960 | ||||||
| Recoverable taxes from Brazilian government entities | 7,676 | 3,005 | ||||||
| Right-of-use assets under financing leases, net (Note 2) | 12,863 | — | ||||||
| Right-of-use assets under operating leases, net (Note 2) | 13,203 | — | ||||||
| Other assets | 9,705 | 7,958 | ||||||
| Total assets | $ | 160,966 | $ | 127,925 | ||||
| Liabilities, Mezzanine Equity and Stockholders' Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 51,234 | $ | 26,844 | ||||
| Accrued and other current liabilities | 36,655 | 28,979 | ||||||
| Financing lease liabilities (Note 2) | 3,465 | — | ||||||
| Operating lease liabilities (Note 2) | 4,625 | — | ||||||
| Contract liabilities | 1,353 | 8,236 | ||||||
| Debt, current portion (includes instrument measured at fair value of $24,392 and $57,918, respectively) | 45,313 | 124,010 | ||||||
| Related party debt, current portion | 18,492 | 23,667 | ||||||
| Total current liabilities | 161,137 | 211,736 | ||||||
| Long-term debt, net of current portion (includes instrument measured at fair value of $26,232 and $0, respectively) | 48,452 | 43,331 | ||||||
| Related party debt, net of current portion | 149,515 | 18,689 | ||||||
| Financing lease liabilities, net of current portion (Note 2) | 4,166 | — | ||||||
| Operating lease liabilities, net of current portion (Note 2) | 15,037 | — | ||||||
| Derivative liabilities | 9,803 | 42,796 | ||||||
| Other noncurrent liabilities | 23,024 | 23,192 | ||||||
| Total liabilities | 411,134 | 339,744 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Mezzanine equity: | ||||||||
| Contingently redeemable common stock (Note 5) | 5,000 | 5,000 | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock - $0.0001 par value, 5,000,000 shares authorized as of December 31, 2019 and 2018, and 8,280 and 14,656 shares issued and outstanding as of December 31, 2019 and 2018, respectively | — | — | ||||||
| Common stock - $0.0001 par value, 250,000,000 shares authorized as of December 31, 2019 and 2018, respectively; 117,742,677 and 76,564,829 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 12 | 8 | ||||||
| Additional paid-in capital | 1,543,668 | 1,346,996 | ||||||
| Accumulated other comprehensive loss | (43,804) | (43,343) | ||||||
| Accumulated deficit | (1,755,653) | (1,521,417) | ||||||
| Total Amyris, Inc. stockholders’ deficit | (255,777) | (217,756) | ||||||
| Noncontrolling interest | 609 | 937 | ||||||
| Total stockholders' deficit | (255,168) | (216,819) | ||||||
| Total liabilities, mezzanine equity and stockholders' deficit | $ | 160,966 | $ | 127,925 | ||||
See accompanying notes to consolidated financial statements.
50
AMYRIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, (In thousands, except shares and per share amounts) | 2019 | 2018 | ||||||
| Revenue | ||||||||
Renewable products (includes related party revenue of $56 and $360, respectively) | $ | 59,872 | $ | 33,598 | ||||
Licenses and royalties, net (includes related party revenue of $49,051 and $5,958, respectively) | 54,043 | 7,658 | ||||||
Grants and collaborations (includes related party revenue of $4,120 and $4,735 respectively) | 38,642 | 22,348 | ||||||
Total revenue (includes related party revenue of $53,227 and $11,053, respectively) | 152,557 | 63,604 | ||||||
| Cost and operating expenses | ||||||||
| Cost of products sold | 76,185 | 36,698 | ||||||
| Research and development | 71,460 | 68,722 | ||||||
| Sales, general and administrative | 126,586 | 90,902 | ||||||
| Impairment of other assets | 216 | 3,865 | ||||||
| Total cost and operating expenses | 274,447 | 200,187 | ||||||
| Loss from operations | (121,890) | (136,583) | ||||||
| Other income (expense) | ||||||||
| Loss on divestiture | — | (1,778) | ||||||
| Interest expense | (58,665) | (42,703) | ||||||
| Gain (loss) from change in fair value of derivative instruments | 2,777 | (30,880) | ||||||
| (Loss) gain from change in fair value of debt | (19,369) | 2,082 | ||||||
| Loss upon extinguishment of debt | (44,208) | (17,424) | ||||||
| Other expense, net | (783) | (2,949) | ||||||
| Total other expense, net | (120,248) | (93,652) | ||||||
| Loss before income taxes | (242,138) | (230,235) | ||||||
| Provision for income taxes | (629) | — | ||||||
| Net loss attributable to Amyris, Inc. | (242,767) | (230,235) | ||||||
| Less deemed dividend to preferred shareholder on issuance and modification of common stock warrants | (34,964) | — | ||||||
| Less deemed dividend related to proceeds discount upon conversion of Series D preferred stock | — | (6,852) | ||||||
| Add: losses allocated to participating securities | 7,380 | 13,991 | ||||||
| Net loss attributable to Amyris, Inc. common stockholders | $ | (270,351) | $ | (223,096) | ||||
| Denominator: | ||||||||
| Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, basic | 101,370,632 | 60,405,910 | ||||||
| Basic loss per share | $ | (2.67) | $ | (3.69) | ||||
| Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, diluted | 101,296,575 | 60,405,910 | ||||||
| Diluted loss per share | $ | (2.72) | $ | (3.69) | ||||
See accompanying notes to consolidated financial statements.
51
AMYRIS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Comprehensive loss: | ||||||||
| Net loss attributable to Amyris, Inc. | $ | (242,767) | $ | (230,235) | ||||
| Foreign currency translation adjustment | (461) | (1,187) | ||||||
| Comprehensive loss attributable to Amyris, Inc. | $ | (243,228) | $ | (231,422) | ||||
See accompanying notes to consolidated financial statements.
52
AMYRIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND MEZZANINE EQUITY
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except number of shares) | Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interest | Total Stockholders' Deficit | Mezzanine Equity - Common Stock | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | 22,171 | $ | — | 45,637,433 | $ | 5 | $ | 1,114,546 | $ | (42,156) | $ | (1,290,420) | $ | 937 | $ | (217,088) | $ | 5,000 | |||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle for ASC 606 (see "Significant Accounting Policies" in Note 1) | — | — | — | — | — | — | (762) | — | (762) | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | — | — | 20,891,038 | 2 | 62,152 | — | — | — | 62,154 | — | |||||||||||||||||||||||||||||||||||||||||||
| Settlement of derivatives liability upon exercise of warrants | — | — | — | — | 108,670 | — | — | — | 108,670 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement, net of issuance costs of $0 | — | — | 205,168 | — | 1,415 | — | — | — | 1,415 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement - related party, net of issuance costs of $0 | — | — | 1,643,991 | — | 6,050 | — | — | — | 6,050 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of preferred stock | (7,515) | — | 1,548,480 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on preferred stock discounts upon conversion of Series D preferred stock | — | — | — | — | 6,852 | — | — | — | 6,852 | — | |||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on preferred stock discounts upon conversion of Series D preferred stock | — | — | — | — | (6,852) | — | — | — | (6,852) | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of convertible notes | — | — | 5,674,926 | 1 | 42,368 | — | — | — | 42,369 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of debt interest payments | — | — | 238,898 | — | 1,800 | — | — | — | 1,800 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | 70,807 | — | 288 | — | — | — | 288 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon ESPP purchase | — | — | 246,230 | — | 777 | — | — | — | 777 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and payment of minimum employee taxes withheld upon net share settlement of restricted stock | — | — | 407,858 | — | (260) | — | — | — | (260) | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 9,190 | — | — | — | 9,190 | — | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (1,187) | — | — | (1,187) | — | |||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Amyris, Inc. | — | — | — | — | — | — | (230,235) | — | (230,235) | — | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2018 | 14,656 | — | 76,564,829 | $ | 8 | $ | 1,346,996 | $ | (43,343) | $ | (1,521,417) | $ | 937 | $ | (216,819) | $ | 5,000 | ||||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle for ASU 2017-11 (see "Significant Accounting Policies" in Note 1) | — | — | — | — | 32,512 | — | 8,531 | — | 41,043 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and warrants upon conversion of debt principal and accrued interest | — | — | 14,107,637 | 2 | 62,859 | — | — | — | 62,861 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement, net of issuance costs - related party | — | — | 10,478,338 | 1 | 39,499 | — | — | — | 39,500 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance and modification of common stock warrants | — | — | — | — | 34,964 | — | — | — | 34,964 | — | |||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend to preferred shareholder on issuance and modification of common stock warrants | — | — | — | — | (34,964) | — | — | — | (34,964) | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement | — | — | 3,610,944 | — | 14,221 | — | — | — | 14,221 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with related party debt issuance | — | — | — | — | 20,121 | — | — | — | 20,121 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with related party debt modification | — | — | — | — | 4,932 | — | — | — | 4,932 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants in connection with debt accounted for at fair value | — | — | — | — | 5,358 | — | — | — | 5,358 | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 12,554 | — | — | — | 12,554 | — | |||||||||||||||||||||||||||||||||||||||||||
| Fair value of pre-delivery shares issued to lenders | — | — | 7,500,000 | 1 | 4,214 | — | — | — | 4,215 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon ESPP purchase | — | — | 318,490 | — | 1,078 | — | — | — | 1,078 | — | |||||||||||||||||||||||||||||||||||||||||||
| Fair value of bifurcated embedded conversion feature in connection with debt modification | — | — | — | — | 398 | — | — | — | 398 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | 3,612 | — | 27 | — | — | — | 27 | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | — | — | 2,515,174 | — | 1 | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series B preferred shares into common shares | (6,376) | — | 1,012,071 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Distribution to non-controlling interests | — | — | — | — | — | — | — | (328) | (328) | — | |||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | (461) | — | — | (461) | — | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and payment of minimum employee taxes withheld upon net share settlement of restricted stock | — | — | 1,631,582 | — | (1,102) | — | — | — | (1,102) | — | |||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Amyris, Inc. | — | — | — | — | — | — | (242,767) | — | (242,767) | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 8,280 | — | 117,742,677 | $ | 12 | $ | 1,543,668 | $ | (43,804) | $ | (1,755,653) | $ | 609 | $ | (255,168) | $ | 5,000 | ||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
53
AMYRIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Operating activities | ||||||||
| Net loss attributable to Amyris, Inc. | $ | (242,767) | $ | (230,235) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss upon conversion or extinguishment of debt | 44,208 | 17,424 | ||||||
| Loss (gain) from change in fair value of debt | 19,369 | (2,082) | ||||||
| Amortization of right-of-use assets under operating leases | 12,597 | — | ||||||
| Stock-based compensation | 12,554 | 9,190 | ||||||
| Accretion of debt discount | 11,665 | 16,602 | ||||||
| Expense for warrants issued for covenant waivers | 5,358 | — | ||||||
| Depreciation and amortization | 4,581 | 4,921 | ||||||
| Impairment of property, plant and equipment | 1,354 | — | ||||||
| Loss in equity-method investee | 297 | — | ||||||
| Loss on disposal of property, plant and equipment | 212 | 941 | ||||||
| (Gain) loss from change in fair value of derivative instruments | (2,777) | 30,880 | ||||||
| Gain on foreign currency exchange rates | (22) | (2,223) | ||||||
| Modification of warrants recorded as legal expense | — | 6,764 | ||||||
| Issuance costs on warrant exercises for cash | — | 4,389 | ||||||
| Loss on impairment of other assets | 216 | 3,865 | ||||||
| Debt issuance costs expensed due to fair value option | — | 3,810 | ||||||
| Loss on divestiture | — | 1,778 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (2,818) | 7,448 | ||||||
| Contract assets | (8,485) | — | ||||||
| Contract assets - related party | 8,021 | 8,056 | ||||||
| Inventories | (17,989) | (4,416) | ||||||
| Deferred cost of products sold - related party | (13,175) | (3,317) | ||||||
| Prepaid expenses and other assets | (8,064) | (6,383) | ||||||
| Accounts payable | 23,748 | 11,603 | ||||||
| Accrued and other liabilities | 18,981 | 8,461 | ||||||
| Lease liabilities | (17,125) | — | ||||||
| Contract liabilities | (6,872) | 3,158 | ||||||
| Net cash used in operating activities | (156,933) | (109,366) | ||||||
| Investing activities | ||||||||
| Purchases of property, plant and equipment | (13,080) | (12,472) | ||||||
| Net cash used in investing activities | (13,080) | (12,472) | ||||||
| Financing activities | ||||||||
| Proceeds from issuance of debt, net of issuance costs | 189,175 | 94,371 | ||||||
| Proceeds from issuance of common stock in private placements, net of issuance costs - related party | 39,500 | — | ||||||
| Proceeds from issuance of common stock in private placements, net of issuance costs | 14,221 | 1,415 | ||||||
| Proceeds from ESPP purchases | 1,078 | 777 | ||||||
| Proceeds from exercises of common stock options | 27 | 288 | ||||||
| Proceeds from exercise of warrants, net of issuance costs | 1 | 57,767 | ||||||
| Principal payments on debt | (112,393) | (41,668) | ||||||
| Principal payments on financing leases | (5,268) | (981) | ||||||
| Payment of minimum employee taxes withheld upon net share settlement of restricted stock units | (1,103) | (260) | ||||||
| Capital distribution to noncontrolling interest | (328) | — | ||||||
| Debt issuance costs incurred in connection with debt instrument accounted at fair value | — | (3,752) | ||||||
| Net cash provided by financing activities | 124,910 | 107,957 | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (252) | (77) | ||||||
| Net decrease in cash, cash equivalents and restricted cash | (45,355) | (13,958) | ||||||
| Cash, cash equivalents and restricted cash at beginning of year | 47,054 | 61,012 | ||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 1,699 | $ | 47,054 | ||||
| Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets | ||||||||
| Cash and cash equivalents | $ | 270 | $ | 45,353 | ||||
| Restricted cash, current | 469 | 741 | ||||||
| Restricted cash, noncurrent | 960 | 960 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 1,699 | $ | 47,054 | ||||
54
Amyris, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 20,780 | $ | 18,524 | ||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Cumulative effect of change in accounting principle for ASU 2017-11 (Note 2) | $ | 41,043 | $ | — | ||||
| Lease liabilities recorded upon adoption of ASC 842 (Note 2) | $ | 33,552 | $ | — | ||||
| Right-of-use assets under operating leases recorded upon adoption of ASC 842 (Note 2) | $ | 29,713 | $ | — | ||||
| Cumulative effect adjustment of ASC 606 | $ | — | $ | 762 | ||||
| Accrued interest added to debt principal | $ | 7,292 | $ | 3,664 | ||||
| Acquisition of additional interest in equity-method investee in exchange for payment obligation | $ | 5,031 | $ | — | ||||
| Acquisition of property, plant and equipment under accounts payable, accrued liabilities and notes payable | $ | 2,576 | $ | — | ||||
| Acquisition of right-of-use assets under operating leases | $ | 3,551 | $ | — | ||||
| Debt fair value adjustment in connection with debt issuance | $ | 11,575 | $ | — | ||||
| Derecognition of derivative liabilities upon exercise of warrants | $ | — | $ | 108,670 | ||||
| Fair value of embedded features in connection with debt issuances and modifications | $ | 237 | $ | — | ||||
| Fair value of embedded features in connection with debt issuances and modifications - related party | $ | 1,954 | $ | — | ||||
| Fair value of pre-delivery shares in connection with debt issuance | $ | 4,215 | $ | — | ||||
| Fair value of warrants recorded as debt discount in connection with debt issuances | $ | 8,965 | $ | — | ||||
| Fair value of warrants recorded as debt discount in connection with debt issuances - related party | $ | 16,155 | $ | — | ||||
| Fair value of warrants recorded as debt discount in connection with debt modification | $ | 398 | $ | — | ||||
| Fair value of warrants recorded as debt discount in connection with debt modification - related party | $ | 2,050 | $ | — | ||||
| Financing of equipment under financing leases | $ | 7,436 | $ | 271 | ||||
| Financing of insurance premium under note payable | $ | 253 | $ | 495 | ||||
| Issuance of common stock - related party | $ | — | $ | 6,050 | ||||
| Issuance of common stock for settlement of debt principal and interest payments | $ | — | $ | 1,800 | ||||
| Issuance of common stock upon conversion of convertible notes | $ | 62,860 | $ | 24,970 | ||||
See accompanying notes to consolidated financial statements.
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Amyris, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Business Description
Amyris, Inc. and subsidiaries (collectively, Amyris or the Company) is a leading industrial biotechnology company that applies its technology platform to engineer, manufacture and sell high performance, natural, sustainably-sourced products into the Health & Wellness, Clean Beauty, and Flavor & Fragrance markets. The Company's proven technology platform enables the Company to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into large volume, high-value ingredients. The Company's biotechnology platform and industrial fermentation process replace existing complex and expensive manufacturing processes. The Company has successfully used its technology to develop and produce many distinct molecules at commercial volumes.
Going Concern
The Company has incurred significant operating losses since its inception and expects to continue to incur losses and negative cash flows from operations for at least the next 12 months following the issuance of the financial statements. As of December 31, 2019, the Company had negative working capital of $86.7 million and an accumulated deficit of $1.8 billion.
As of December 31, 2019, the Company's debt (including related party debt), net of deferred discount and issuance costs of $20.3 million and a fair value adjustment of $15.4 million, totaled $261.8 million, of which $63.8 million is classified as current. However, $75.0 million of debt was converted into equity in January 2020; see Note 15, “Subsequent Events” for more information. The Company's debt agreements contain various covenants, including certain restrictions on the Company's business that could cause the Company to be at risk of defaults, such as restrictions on additional indebtedness, material adverse effect and cross default provisions. A failure to comply with the covenants and other provisions of the Company’s debt instruments, including any failure to make a payment when required, would generally result in events of default under such instruments, which could permit acceleration of a substantial portion of such indebtedness. If such indebtedness is accelerated, it would generally also constitute an event of default under the Company’s other outstanding indebtedness, permitting acceleration of a substantial portion of such other outstanding indebtedness. At December 31, 2019, the Company failed to meet certain covenants under several credit arrangements (which are discussed in Note 4, “Debt”), including those associated with cross-default provisions, minimum liquidity and minimum asset coverage requirements. In March 2020, these lenders provided permanent waivers to the Company for breaches of all past covenant violations and cross-default payment failures (discussed below), through March 13, 2020 under the respective credit agreements, and significantly reduced the minimum liquidity requirement and substantially increased the base of eligible assets to calculate the asset coverage requirement..
On January 31, 2020, the Company failed to pay Total Raffinage Chimie (Total), Nikko Chemicals Co. Ltd (Nikko) and certain affiliates of the Schottenfeld Group LLC (Schottenfeld) an aggregate of $17.6 million of maturing promissory notes, and previously on December 15, 2019 failed to pay Ginkgo $5.2 million of past due interest, past due partnership payments and the first installment of a waiver fee. These failures resulted in an event of default under the respective agreements and also triggered cross-defaults under other debt instruments (discussed above) that permitted each of the affected cross-default debt holders of such indebtedness to accelerate the amounts owing under such instruments. The Company subsequently received waivers from each of the affected cross-default debt holders to waive the right to accelerate due to the event specific cross-defaults. As a result, the indebtedness with respect to which the Company has obtained such waivers continues to be classified as long-term on the Company’s balance sheet. The indebtedness reflected by the Total and certain Ginkgo, Nikko and Schottenfeld amounts continues to be classified as a current liability on the Company’s balance sheet as the due date for these amounts was within one year of December 31, 2019.
Subsequent to December 31, 2019, the Company (i) obtained a waiver and forbearance agreement from Schottenfeld, (ii) amended the credit arrangements with Total and Nikko Notes to extend the maturity date of the original promissory notes, and (iii) entered into a waiver and amendment to the partnership agreement with Ginkgo to waive all past payment defaults under the Ginkgo Note and Ginkgo Partnership Agreement, and to extend the payment due date and modify the periodic partnership payment timing and amount. See Note 15, “Subsequent Events” for further information.
Although the Company obtained extensions to make these payments, it currently does not have sufficient funds to repay the amounts due under the Total, Nikko, Schottenfeld and Ginkgo credit arrangements, and while the Company intends to seek equity or debt financing, the proceeds of which would be used to repay Total, Nikko, Schottenfeld and Ginkgo, there can be no assurance that the Company will be able to obtain such financing on our expected timeline, or on acceptable terms, if at all.
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Also, while the Company has been able to cure these defaults to date to avoid additional cross-acceleration, it may not be able to cure such a default promptly in the future.
Further, cash and cash equivalents of $0.3 million as of December 31, 2019 are not sufficient to fund expected future negative cash flows from operations and cash debt service obligations through March 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. In addition to repaying the Total, Nikko, Schottenfeld and Ginkgo amounts previously discussed, the Company's ability to continue as a going concern will depend, in large part, on its ability to raise additional proceeds through financings, achieve positive cash flows from operations during the 12 months from the date of this filing, and refinance or extend other existing debt maturities occurring later in 2020, all of which are uncertain and outside the control of the Company. Further, the Company's operating plan for 2020 contemplates a significant reduction in its net operating cash outflows as compared to the year ended December 31, 2019, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs as a result of manufacturing and technical developments, (iii) reduced spending in general and administrative areas, and (iv) an increase in cash inflows from collaborations and grants. If the Company is unable to complete these actions, it expects to be unable to meet its operating cash flow needs and its obligations under its existing debt facilities. This could result in an acceleration of its obligation to repay all amounts outstanding under those facilities, and the Company may be forced to obtain additional equity or debt financing, which may not occur timely or on reasonable terms, if at all, and/or liquidate its assets. In such a scenario, the value received for assets in liquidation or dissolution could be significantly lower than the value reflected in these financial statements. The Company has in the past, including in July 2019, had certain of its debt instruments accelerated for failure to make a payment when due. While we have been able to obtain permanent waivers or cure these defaults to date to avoid additional cross-acceleration, we may not be able to obtain waivers or cure such a default promptly in the future.
Basis of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States (U.S. GAAP). The consolidated financial statements include the accounts of Amyris, Inc. and its wholly-owned and partially-owned subsidiaries in which the Company has a controlling interest after elimination of all significant intercompany accounts and transactions.
Investments and joint venture arrangements are assessed to determine whether the terms provide economic or other control over the entity requiring consolidation of the entity. Entities controlled by means other than a majority voting interest are referred to as variable-interest entities (VIEs) and are consolidated when Amyris has both the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. For any investment or joint venture in which (i) the Company does not have a majority ownership interest, (ii) the Company possesses the ability to exert significant influence and (iii) the entity is not a VIE for which the Company is considered the primary beneficiary, the Company accounts for the investment or joint venture using the equity method. Equity investments in which the Company does not exert significant influence and that do not have readily determinable fair values are measured at cost, adjusted for changes from observable market transactions, less impairment (“adjusted cost basis”). The Company evaluates its investments for impairment by considering a variety of factors, including the earnings capacity of the related investments. Fair value measurements for the Company’s equity investments are classified within Level 3 of the fair value hierarchy based on the nature of the fair value inputs. Realized and unrealized gains or losses are recognized in other income or expense.
Raizen Joint Venture Agreement
On May 10, 2019, the Company and Raizen Energia S.A. (Raizen) entered into a joint venture agreement relating to the formation and operation of a joint venture relating to the production, sale and commercialization of alternative sweetener products. In connection with the formation of the joint venture, among other things, (i) the joint venture will construct a manufacturing facility on land owned by Raizen and leased to the joint venture (the Sweetener Plant), (ii) the Company will grant to the joint venture an exclusive, royalty-free, worldwide license to certain technology owned by the Company relevant to the joint venture’s business, and (iii) the Company and Raizen will enter into a shareholders agreement setting forth the rights and obligations of the parties with respect to, and the management of, the joint venture. The formation of the joint venture is subject to certain conditions, including certain regulatory approvals and the achievement of certain technological and economic milestones relating to the Company’s existing production of its alternative sweetener product. If such conditions are not satisfied by May 2020, the joint venture will automatically terminate. However, the termination date can be extended by mutual agreement of the parties. In addition, notwithstanding the satisfaction of the closing conditions, Raizen may elect not to
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consummate the formation and operation of the joint venture, in which event, the Company will retain the right to construct and operate the Sweetener Plant.
Upon the closing of the joint venture, each party will make an initial capital contribution to the joint venture of 2.5 million Brazilian Real (R$2.5 million) and the joint venture will be owned 50% by the Company and 50% by Raizen. Within 60 days of the formation, the parties will make an aggregate cash contribution to the joint venture of USD $9.0 million to purchase certain fixed assets currently owned by the Company and located at the site of the Company’s former joint venture with Sao Martinho S.A. in Pradopolis, Brazil for USD $3.0 million, as well as to pay for costs related to the removal and transportation of such assets to the site of the Sweetener Plant. In addition, within six months of the formation, the Company will contribute to the joint venture its existing supply agreements related to its alternative sweetener product, subject to certain exceptions, in exchange for shares of dividend-bearing preferred stock in the joint venture, which will be entitled, for a period of 10 years commencing from the initial date of operation of the Sweetener Plant, to certain priority fixed cumulative dividends including, in the event that certain technological and economic milestones are met in any fiscal quarter, a percentage of the operating cash flow of the joint venture in such quarter.
The Company is evaluating the accounting treatment for its future interest in the joint venture under ASC 810, Consolidations and ASC 323, Equity Method and Joint Ventures and will conclude once the corporate governance and economic participation structure is finalized and the formation of the joint venture is consummated.
Use of Estimates and Judgements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. Significant estimates and judgements used in these consolidated financial statements are discussed in the relevant accounting policies below or specifically discussed in the Notes to Consolidated Financial Statements where such transactions are disclosed.
Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
Inventories
Inventories, which consist of farnesene-derived products, flavors and fragrances ingredients and clean beauty products, are stated at the lower of actual cost or net realizable value and are categorized as finished goods, work in process or raw material inventories. The Company evaluates the recoverability of its inventories based on assumptions about expected demand and net realizable value. If the Company determines that the cost of inventories exceeds their estimated net realizable value, the Company records a write-down equal to the difference between the cost of inventories and the estimated net realizable value. If actual net realizable values are less favorable than those projected by management, additional inventory write-downs may be required that could negatively impact the Company's operating results. If actual net realizable values are more favorable, the Company may have favorable operating results when products that have been previously written down are sold in the normal course of business. The Company also evaluates the terms of its agreements with its suppliers and establishes accruals for estimated losses on adverse purchase commitments as necessary, applying the same lower of cost or net realizable value approach that is used to value inventory. Cost for farnesene-derived products and flavors and fragrances ingredients are computed on a weighted-average basis. Cost for clean beauty products are computed on a standard cost basis.
Property, Plant and Equipment, Net
Property, plant and equipment are recorded at cost. Depreciation and amortization are computed straight-line based on the estimated useful lives of the related assets, ranging from 3 to 15 years for machinery, equipment and fixtures, and 15 years for buildings. Leasehold improvements are amortized over their estimated useful lives or the period of the related lease, whichever is shorter.
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The Company expenses costs for maintenance and repairs and capitalizes major replacements, renewals and betterments. For assets retired or otherwise disposed, both cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, and gains or losses related to the disposal are recorded in the statement of operations for the period.
Impairment
Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Recoverable Taxes from Brazilian Government Entities
Recoverable taxes from Brazilian government entities represent value-added taxes paid on purchases in Brazil, which are reclaimable from the Brazilian tax authorities, net of reserves for amounts estimated not to be recoverable.
Fair Value Measurements
The carrying amounts of certain financial instruments, such as cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.
The Company measures the following financial assets and liabilities at fair value:
•Freestanding and bifurcated derivatives in connection with certain debt and equity financings; and
•Senior Convertible Notes Due 2022 and 6% Convertible Notes Due 2021 (see Note 3, "Fair Value Measurement" and Note 4, "Debt", for which the Company elected fair value accounting.
Fair value is based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgement, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
Changes to the inputs used in these valuation models can have a significant impact on the estimated fair value of the Senior Convertible Notes Due 2022, 6% Convertible Notes Due 2021 and the Company's embedded and freestanding derivatives. For example, a decrease (increase) in the estimated credit spread for the Company results in an increase (decrease) in estimated fair value. Conversely, a decrease (increase) in the stock price results in a decrease (increase) in estimated fair value.
The changes during 2019 and 2018 in the fair values of the bifurcated compound embedded derivatives are primarily related to the change in price of the Company's common stock and are reflected in the consolidated statements of operations as “Gain (loss) from change in fair value of derivative instruments”.
For debt instruments for which the Company has not elected fair value accounting, fair value is based on the present value of expected future cash flows and assumptions about the then-current market interest rates as of the reporting period and the creditworthiness of the Company. Most of the Company's debt is carried on the consolidated balance sheet on a historical cost basis net of unamortized discounts and premiums, because the Company has not elected the fair value option of accounting. However, for the Senior Convertible Notes Due 2022 and the 6% Notes Due 2021, the Company elected fair value accounting, so that balances reported for those debt instruments represent fair value as of the applicable balance sheet date; see Note 3, "Fair Value Measurement", for additional information. Changes in fair value of the Senior Convertible Notes Due 2022 and the 6% Convertible Notes Due 2021 are reflected in the consolidated statements of operations as “Gain (loss) from change in fair value of debt”.
For all debt instruments, including any for which the Company has elected fair value accounting, the Company classifies interest that has been accrued during each period as Interest expense on the consolidated statements of operations.
Derivatives
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Embedded derivatives that are required to be bifurcated from the underlying debt instrument (i.e., host) are accounted for and valued as separate financial instruments. The Company has evaluated the terms and features of its convertible notes payable and convertible preferred stock and identified compound embedded derivatives requiring bifurcation and accounting at fair value, using the valuation techniques mentioned in the Fair Value Measurements section of this Note, because the economic and contractual characteristics of the embedded derivatives met the criteria for bifurcation and separate accounting due to the instruments containing conversion options, certain “make-whole interest” provisions, down-round conversion price adjustment provisions and/or conversion rate adjustments, and mandatory redemption features that are not clearly and closely related to the debt host instrument.
Prior to the adoption of ASU 2017-11, certain previously issued warrants with a fair value of $41 million issued in conjunction with the convertible debt and equity financings were freestanding financial instruments and classified as derivative liabilities as of December 31, 2019. Upon adoption of ASU 2017-11 on January 1, 2019, these freestanding instruments met the criteria to be accounted for within equity and the $41 million derivative liability balance was reclassified to stockholders’ equity.
During the third and fourth quarter of 2019, the Company issued warrants in connection with a debt financing that met the criteria of a freestanding instrument but did not qualify for equity accounting treatment. As a result, these warrants are accounting for at fair value until settled and are classified as derivative liabilities at December 31, 2019. See Note 6 “Stockholders’ Deficit” for further information.
Noncontrolling Interest
Noncontrolling interests represent the portion of net income (loss), net assets and comprehensive income (loss) that is not allocable to the Company, in situations where the Company consolidates its equity investment in a joint venture for which there are other owners. The amount of noncontrolling interest is comprised of the amount of such interests at the date of the Company's original acquisition of an equity interest in a joint venture, plus the other shareholders' share of changes in equity since the date the Company made an investment in the joint venture.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company places its cash equivalents and investments (primarily certificates of deposits) with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents and short-term investments.
The Company performs ongoing credit evaluation of its customers, does not require collateral, and maintains allowances for potential credit losses on customer accounts when deemed necessary.
Customers representing 10% or greater of accounts receivable were as follows:
| As of December 31, | 2019 | 2018 | ||||||
| Customer A (related party) | 19% | ** | ||||||
| Customer B | 21% | 24% | ||||||
| Customer C | ** | 19% | ||||||
| Customer E | ** | 11% | ||||||
| Customer F | 10% | ** | ||||||
______________
** Less than 10%
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Customers representing 10% or greater of revenue were as follows:
| Years Ended December 31, | Year First Customer | 2019 | 2018 | ||||||||
| Customer A (related party) | 2017 | 35% | 17% | ||||||||
| Customer B | 2014 | 10% | 18% | ||||||||
| Customer C | 2014 | ** | 13% | ||||||||
| Customer D | 2014 | ** | 13% | ||||||||
| Customer G | 2019 | 12% | * | ||||||||
______________
* Not a customer
** Less than 10%
Revenue Recognition
The Company recognizes revenue from the sale of renewable products, licenses of and royalties from intellectual property, and grants and collaborative research and development services. Revenue is measured based on the consideration specified in a contract with a customer, and transaction price is allocated utilizing stand-alone selling price. Revenue is recognized when, or as, the Company satisfies a performance obligation by transferring control over a product or service to a customer. The Company generally does not incur costs to obtain new contracts. The costs to fulfill a contract are expensed as incurred.
The Company accounts for a contract when it has approval and commitment to perform from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of the consideration is probable. Changes to contracts are assessed for whether they represent a modification or should be accounted for as a new contract. The Company considers the following indicators, among others, when determining if it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If a transaction does not meet the Company's indicators of being a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
The Company’s significant contracts and contractual terms with its customers are presented in Note 9, "Revenue Recognition".
The Company recognizes revenue when control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to receive payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. For most of the Company's renewable products customers, supply agreements between the Company and each customer indicate when transfer of title occurs.
In some cases, the Company may make a payment to a customer. When that occurs, the Company evaluates whether the payment is for a distinct good or service receivable from the customer. If the fair value of the goods or services receivable is greater than or equal to the amount paid to the customer, then the entire payment is treated as a purchase. If, on the other hand, the fair value of goods or services is less than the amount paid, then the difference is treated as a reduction in transaction price of the Company's sales to the customer or a reduction of cumulative to-date revenue recognized from the customer in the period the payment is made or goods or services are received from the customer.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company's contracts may contain multiple performance obligations if a promise to transfer the individual goods or services is separately identifiable from other promises in the contracts and, therefore, is considered distinct. For contracts with multiple performance obligations, the Company determines the standalone selling price of each performance obligation and allocates the total transaction price using the relative selling price basis.
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The following is a description of the principal goods and services from which the Company generates revenue.
Renewable Product Sales
Revenues from renewable product sales are recognized as a distinct performance obligation on a gross basis as the Company is acting as a principal in these transactions, with the selling price to the customer recorded net of discounts and allowances. Revenues are recognized at a point in time when control has passed to the customer, which typically is upon the renewable products leaving the Company’s facilities with the first transportation carrier. The Company, on occasion, may recognize revenue under a bill and hold arrangement, whereby the customer requests and agrees to purchase product but requests delivery at a later date. Under these arrangements, control transfers to the customer when the product is ready for delivery, which occurs when the product is identified separately as belonging to the customer, the product is ready for shipment to the customer in its current form, and the Company does not have the ability to direct the product to a different customer. It is at this point that the Company has the right to receive payment, the customer obtains legal title, and the customer has the significant risks and rewards of ownership. The Company’s renewable product sales do not include rights of return, except for direct-to-consumer products, for which the Company estimates sales returns subsequent to sale and reduces revenue accordingly. For renewable products other than direct-to-consumer, returns are accepted only if the product does not meet product specifications and such nonconformity is communicated to the Company within a set number of days of delivery. The Company offers a -year assurance-type warranty to replace squalane products that do not meet Company-established criteria as set forth in the Company’s trade terms. An estimate of the cost to replace the squalane products sold is made based on a historical rate of experience and recognized as a liability and related expense when the renewable product sale is consummated.
Licenses and Royalties
Licensing of Intellectual Property: When the Company’s intellectual property licenses are determined to be distinct from the other performance obligations identified in the arrangement, revenue is recognized from non-refundable, up-front fees allocated to the license at a point in time when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For intellectual property licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front-fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognized.
Royalties from Licensing of Intellectual Property: The Company earns royalties from the licensing of its intellectual property whereby the licensee uses the intellectual property to produce and sell its products to its customers and the Company shares in the profits.
When the Company’s intellectual property license is the only performance obligation, or it is the predominant performance obligation in arrangements with multiple performance obligations, the Company applies the sales-based royalty exception which requires the Company to estimate the revenue that is recognized at a point in time when the licensee’s product sales occur. Estimates of sales-based royalty revenues are made using the most likely outcome method, which is the single amount in a range of possible amounts, using the best evidence available at the time, derived from the licensee’s historical sales volumes and sales prices of its products and recent commodity market pricing data and trends. Estimates are adjusted to actual or as new information becomes available.
When the Company’s intellectual property license is not the predominant performance obligation in arrangements with multiple performance obligations, the royalty represents variable consideration and is allocated to the transaction price of the predominant performance obligation which generally is the supply of renewable products to the Company's customers. Revenue is estimated and recognized at a point in time when the renewable products are delivered to the customer. Estimates of the amount of variable consideration to include in the transaction price are made using the expected value method, which is the sum of probability-weighted amounts in a range of possible amounts determined based on the cost to produce the renewable product plus a reasonable margin for the profit share. The Company only includes an amount of variable consideration in the transaction price to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Also, the transaction price is reduced for estimates of customer incentive payments payable by the Company for certain customer contracts.
Grants and Collaborative Research and Development Services
Collaborative Research and Development Services: The Company earns revenues from collaboration agreements with customers to perform research and development services to develop new molecules using the Company’s technology and to
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scale production of the molecules for commercialization and use in the collaborator’s products. The collaboration agreements generally include providing the Company's collaboration partners with research and development services and with licenses to the Company’s intellectual property to use the technology underlying the development of the molecules and to sell its products that incorporate the technology. The terms of the Company's collaboration agreements typically include one or more of the following: advance payments for the research and development services that will be performed, nonrefundable upfront license payments, milestone payments to be received upon the achievement of the milestone events defined in the agreements, and royalty payments upon the commercialization of the molecules in which the Company shares in the customer’s profits.
Collaboration agreements are evaluated at inception to determine whether the intellectual property licenses represent distinct performance obligations separate from the research and development services. If the licenses are determined to be distinct, the non-refundable upfront license fee is recognized as revenue at a point in time when the license is transferred to the licensee and the licensee is able to use and benefit from the license while the research and development service fees are recognized over time as the performance obligations are satisfied. The research and development service fees represent variable consideration. Estimates of the amount of variable consideration to include in the transaction price are made using the expected value method, which is the sum of probability-weighted amounts in a range of possible amounts. The Company only includes an amount of variable consideration in the transaction price to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Revenue is recognized over time using either an input-based measure of labor hours expended or a time-based measure of progress towards the satisfaction of the performance obligations. The measure of progress is evaluated each reporting period and, if necessary, adjustments are made to the measure of progress and the related revenue recognized.
Collaboration agreements that include milestone payments are evaluated at inception to determine whether the milestone events are considered probable of achievement, and estimates are made of the amount of the milestone payments to include in the transaction price using the most likely amount method which is the single amount in a range of possible amounts. If it is probable that a significant revenue reversal will not occur, the estimated milestone payment amount is included in the transaction price. Each reporting period, the Company re-evaluates the probability of achievement of the milestone events and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative basis, which would affect collaboration revenues in the period of adjustment. Generally, revenue is recognized using an input-based measure of progress towards the satisfaction of the performance obligations which can be labor hours expended or time-based in proportion to the estimated total project effort or total projected time to complete. The measure of progress is evaluated each reporting period and, if necessary, adjustments are made to the measure of progress and the related revenue recognized. Certain performance obligations are associated with milestones agreed between the Company and its customer. Revenue generated from the performance of services in accordance with these milestones is recognized upon confirmation from the customer that the milestone has been achieved. In these cases, amounts recognized are constrained to the amount of consideration received upon achievement of the milestone.
The Company generally invoices its collaboration partners on a monthly or quarterly basis, or upon the completion of the effort or achievement of a milestone, based on the terms of each agreement. Contract liabilities arise from amounts received in advance of performing the research and development activities and are recognized as revenue in future periods as the performance obligations are satisfied.
Grants: The Company earns revenues from grants with government agencies to, among other things, provide research and development services to develop molecules using the Company’s technology, and create research and development tools to improve the timeline and predictability for scaling molecules from proof of concept to market by reducing time and costs. Grants typically consist of research and development milestone payments to be received upon the achievement of the milestone events defined in the agreements.
The milestone payments are evaluated at inception to determine whether the milestone events are considered probable of achievement and estimates are made of the amount of the milestone payments to include in the transaction price using the most likely amount method which is the single amount in a range of possible amounts. If it is probable that a significant revenue reversal will not occur, the estimated milestone payment amount is included in the transaction price. Each reporting period, the Company re-evaluates the probability of achievement of the milestone events and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative basis, which would affect grant revenues in the period of adjustment. Revenue is recognized over time using a time-based measure of progress towards the satisfaction of the performance obligations. The measure of progress is evaluated each reporting period and, if necessary, adjustments are made to the measure of progress and the related revenue recognized.
The Company receives certain consideration from AICEP Portugal Global (AICEP), and entity funded by government of Portugal, under the Consortium Internal Regulatory Agreement and an AICEP Investment Contract (the “Agreements”) entered
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into by Amyris (the “Company”) with Universidade Católica Portuguesa (UCP) Porto Campus. The Company considered this arrangement to be a government grant and accounts for the arrangement under International Accounting Standard 20 “Accounting for Government Grants and Disclosure of Government Assistance”. Grant revenue is recognized when there is reasonable assurance that monies will be received and that conditions attached to the grant have been met.
Cost of Products Sold
Cost of products sold includes the production costs of renewable products, which include the cost of raw materials, in-house manufacturing labor and overhead, amounts paid to contract manufacturers, including amortization of tolling fees, and period costs including inventory write-downs resulting from applying lower of cost or net realizable value inventory adjustments. Cost of products sold also includes certain costs related to the scale-up of production. Shipping and handling costs charged to customers are recorded as revenues. Outbound shipping costs incurred are included in cost of products sold. Such charges were not material for any of the periods presented.
The Company recognizes deferred cost of products sold as an asset on the balance sheet when a cost is incurred in connection with a revenue performance obligation that will not be fulfilled until a future period. The Company also recorded a deferred cost of products asset in 2018 and 2019 for the fair value of amounts paid to DSM under a supply agreement for manufacturing capacity to produce its sweetener product at the Brotas facility in Brazil. The deferred cost of products sold asset is expensed to cost of products sold on a units of production basis over the -year term of the supply agreement. On a quarterly basis, the Company evaluates its future production volumes for its sweetener product and adjusts the unit cost to be expensed over the remaining estimated production volume. The Company also periodically evaluates the asset for recoverability based on changes business strategy and product demand trends over the term of the supply agreement.
Research and Development
Research and development costs are expensed as incurred and include costs associated with research performed pursuant to collaborative agreements and government grants, including internal research. Research and development costs consist of direct and indirect internal costs related to specific projects, as well as fees paid to others that conduct certain research activities on the Company’s behalf.
Debt Extinguishment
The Company accounts for the income or loss from extinguishment of debt in accordance with ASC 470, Debt, which indicates that for all extinguishments of debt, including instances where the terms of a debt instrument are modified in a manner that significantly changes the underlying cash flows, the difference between the reacquisition consideration and the net carrying amount of the debt being extinguished should be recognized as gain or loss when the debt is extinguished. Losses from debt extinguishment are shown in the consolidated statements of operations under "Other income (expense)" as "Loss upon extinguishment of debt".
Stock-based Compensation
The Company accounts for stock-based employee compensation plans under the fair value recognition and measurement provisions of U.S. GAAP. Those provisions require all stock-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured using the grant-date fair value of each award. The Company recognizes stock-based compensation expense net of expected forfeitures over each award's requisite service period, which is generally the vesting term. Expected forfeiture rates are estimated based on the Company's historical experience. Stock-based compensation plans are described more fully in Note 11, "Stock-based Compensation".
Income Taxes
The Company is subject to income taxes in the United States and foreign jurisdictions and uses estimates to determine its provisions for income taxes. The Company uses the asset and liability method of accounting for income taxes, whereby deferred tax asset 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. The Company recognizes a valuation allowance against its net deferred tax assets unless it is more likely than not that such deferred tax assets will be realized. This assessment requires judgement as to the likelihood and amounts of future taxable income by tax jurisdiction.
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The Company applies the provisions of Financial Accounting Standards Board (FASB) guidance on accounting for uncertainty in income taxes. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability, and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgement, and such judgements may change as new information becomes available.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional currencies into U.S. dollars at the rates in effect at each balance sheet date, and revenue and expense amounts are translated at average rates during each period, with resulting foreign currency translation adjustments recorded in other comprehensive loss, net of tax, in the consolidated statements of stockholders’ deficit. As of December 31, 2019 and 2018, cumulative translation adjustment, net of tax, were $43.8 million and $43.3 million, respectively.
Where the U.S. dollar is the functional currency, remeasurement adjustments are recorded in other income (expense), net in the accompanying consolidated statements of operations. Net losses resulting from foreign exchange transactions were $0.2 million and $1.6 million for the years ended December 31, 2019 and 2018, respectively and are recorded in other income (expense), net in the consolidated statements of operations.
New Accounting Standards or Updates Recently Adopted
During the year ended December 31, 2019 the Company adopted the following Accounting Standards Updates (ASUs):
Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). The standard requires the recognition of lease liabilities and right-of-use (ROU) assets on the balance sheet arising from lease transactions at the lease commencement date and the disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided entities the option to use the effective date as the date of initial application on transition to the new guidance. The Company elected this transition method, and as a result, the Company did not adjust comparative information for prior periods. The Company elected certain additional practical expedients permitted by the new guidance allowing the Company to carry forward historical accounting related to lease identification and classification for existing leases upon adoption.
The Company adopted this standard on January 1, 2019 using the modified retrospective approach and elected the package of practical expedients permitted under transition guidance, which allowed the Company to carry forward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs, where applicable. The Company did not elect the practical expedient allowing the use-of-hindsight which would require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to the Company’s current contracts. The Company elected the post-transition practical expedient to not separate lease components from non-lease components for all leases of manufacturing equipment. The Company also elected a policy of not recording leases on its condensed consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset.
The Company's adoption of this standard had the effect of increasing assets and liabilities by $25.7 million, after considering prepaid and other current and noncurrent assets previously recorded on the condensed consolidated balance sheet but did not have a material impact on the condensed consolidated statements of operations or cash flows. The most significant impact relates to (1) the recognition of new ROU assets and lease liabilities on the balance sheet for the Company's operating leases; and (2) providing significant new disclosures about the Company's leasing activities.
Upon adoption, the Company recognized operating lease liabilities of $33.6 million, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The Company also recognized ROU assets of $29.7 million, which represents the operating lease liability, adjusted for prepaid expenses and deferred rent. The difference between the operating lease ROU assets and lease liabilities reflects the net of advanced rent payments and deferred rent balances that were derecognized at the time of adoption.
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Financial Instruments with "Down Round" Features In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features. The amendments of this ASU update the classification analysis of certain equity-linked financial instruments, or embedded features, with down round features, as well as clarify existing disclosure requirements for equity-classified instruments. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The accounting standard update became effective in the first quarter of fiscal year 2019, and the Company adopted the standard using a modified retrospective approach. Since the adoption of ASU 2017-11 would have classified the warrants effected as equity at inception, the cumulative-effect adjustment should (i) record the issuance date value of the warrants as if they had been equity classified at the issuance date, (ii) reverse the effects of changes in the fair value of the warrants that had been recorded in the statement of operations of each period, and (iii) eliminate the derivative liabilities from the balance sheet. Upon adoption, the Company (i) recorded an increase of $32.5 million to additional paid-in capital, (ii) recorded a decrease to accumulated deficit of $8.5 million and (iii) decreased the warrant liability by $41.0 million.
Recent Accounting Standards or Updates Not Yet Effective
Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The accounting standard update will be effective beginning in the first quarter of fiscal year 2020, with removed and modified disclosures to be adopted on a retrospective basis, and new disclosures to be adopted on a prospective basis. The Company does not believe that the impact of the new standard on its consolidated financial statements will be material.
Collaborative Revenue Arrangements In November 2018, the FASB issued ASU 2018-18, Clarifying the Interaction between Topic 808 and Topic 606, that clarifies the interaction between the guidance for certain collaborative arrangements and Topic 606, the new revenue recognition standard. A collaborative arrangement is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. The ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The accounting standard update will be effective beginning in the first quarter of fiscal year 2020 retroactively. The Company does not believe that the impact of the new standard on its consolidated financial statements will be material.
Credit Losses In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2016-13 will become effective for the Company beginning in the first quarter of fiscal year 2020. The Company does not believe that the impact of the new standard on its consolidated financial statements will be material.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments- Credit Losses. This ASU clarifies and addresses certain items related to amendments in ASU 2016-13. This new guidance is effective for the Company beginning on January 1, 2020. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will become effective for the Company in the first quarter of fiscal year 2021 on a prospective basis. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. This new guidance is effective for the
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Company beginning on January 1, 2021. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s consolidated financial statements.
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2. Balance Sheet Details
Allowance for Doubtful Accounts
Allowance for doubtful accounts activity and balances were as follows:
| (In thousands) | Balance at Beginning of Year | Provisions | Write-offs, Net | Balance at End of Year | ||||||||||
| Allowance for doubtful accounts: | ||||||||||||||
| Year Ended December 31, 2019 | $ | 642 | $ | 110 | $ | (707) | $ | 45 | ||||||
| Year Ended December 31, 2018 | $ | 642 | $ | — | $ | — | $ | 642 | ||||||
Inventories
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Raw materials | $ | 3,255 | $ | 3,901 | ||||
| Work in process | 7,204 | 539 | ||||||
| Finished goods | 17,311 | 5,253 | ||||||
| Total inventories | $ | 27,770 | $ | 9,693 | ||||
Deferred cost of products sold — related party
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Deferred cost of products sold - related party | $ | 3,677 | $ | 489 | ||||
| Deferred cost of products sold, noncurrent - related party | 12,815 | 2,828 | ||||||
| Total | $ | 16,492 | $ | 3,317 | ||||
In November 2018, the Company amended the supply agreement with DSM to secure manufacturing capacity at the Brotas facility for sweetener production through 2022. See Note 9, “Revenue Recognition” for information regarding the November 2018 Supply Agreement Amendment. The supply agreement was included as an element of a combined transaction with DSM, which resulted in a fair value allocation of $24.4 million to the manufacturing capacity fees. See Note 3, “Fair Value Measurement” for information related to this fair value allocation. Of the $24.4 million fair value allocated to the manufacturing capacity fee, $3.3 million was recorded as deferred cost of products sold during 2018. Also, the Company paid an additional $14.1 million in manufacturing capacity fees during 2019, which were recorded as additional deferred cost of products sold. The remaining $7.0 million manufacturing capacity fees will be recorded as deferred cost of products sold in the period the additional payments are made to DSM. The manufacturing capacity deferred cost of products sold asset is expensed to cost of products sold on a units of production basis as the Company's sweetener product is sold over the -year term of the
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supply agreement. During the years ended December 31, 2019 and 2018, the Company expensed $0.9 million and $0, respectively, of the deferred cost of products sold asset.
Prepaid expenses and other current assets
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Non-inventory production supplies | $ | 5,376 | $ | 2,391 | ||||
| Prepayments, advances and deposits | 4,726 | 5,644 | ||||||
| Recoverable taxes from Brazilian government entities | 79 | 631 | ||||||
| Other | 2,569 | 1,900 | ||||||
| Total prepaid expenses and other current assets | $ | 12,750 | $ | 10,566 | ||||
Property, plant and equipment, net
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Machinery and equipment | $ | 48,041 | $ | 43,713 | ||||
| Leasehold improvements | 41,478 | 39,922 | ||||||
| Computers and software | 9,822 | 9,987 | ||||||
| Furniture and office equipment, vehicles and land | 3,510 | 3,016 | ||||||
| Construction in progress | 9,752 | 1,749 | ||||||
| Total property, plant and equipment, gross | 112,603 | 98,387 | ||||||
| Less: accumulated depreciation and amortization | (83,673) | (78,631) | ||||||
| Total property, plant and equipment, net | $ | 28,930 | $ | 19,756 | ||||
Property, plant and equipment, net at December 31, 2018 includes $5.0 million of machinery and equipment under capital lease. Accumulated amortization of assets under capital lease totaled $2.3 million as of December 31, 2018. For the year ended December 31, 2018, amortization expense in connection with capital lease assets was $0.7 million. Beginning January 1, 2019, capital lease assets are classified as right-of-use assets under financing leases, net; see "Leases" below.
Losses on disposal of property, plant and equipment were $0.2 million and $0.9 million for the years ended December 31, 2019 and 2018, respectively. Such losses or gains were included in the lines captioned "Research and development expense" and "Sales, general and administrative expense" in the consolidated statements of operations.
Leases
Prior to the modified prospective adoption of ASU 2016-02 on January 1, 2019, the Company leased certain facilities and certain laboratory equipment under operating and financing leases, respectively. The Company recognized rent expense for operating leases on a straight-line basis over the noncancelable lease term and recorded the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Where leases contained escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applied them as straight-line rent expense over the lease term. The Company had noncancelable operating lease agreements for office, research and development, and manufacturing space that expired at various dates, with the latest expiration in May 2023. Rent expense under operating leases was $5.8 million for the year ended December 31, 2018. See below for the Company’s account treatment of leases upon adoption of new leasing standard.
Operating Leases
The Company has entered into operating leases primarily for administrative offices, laboratory equipment and other facilities. The operating leases have remaining terms that range from 1 year to 5 years, and often include one or more options to renew. These renewal terms can extend the lease term from 1 to 5 years and are included in the lease term when it is reasonably certain that the Company will exercise the option. The operating leases are classified as Right-of-use assets under operating leases, net (ROU assets) on the Company's December 31, 2019 consolidated balance sheet, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make operating lease payments is included in
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"Operating lease liabilities" and "Operating lease liabilities, net of current portion" on the Company's December 31, 2019 consolidated balance sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized ROU assets of $29.7 million and operating lease liabilities of $33.6 million on January 1, 2019. Operating lease ROU assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of December 31, 2019, total ROU assets and operating lease liabilities were $13.2 million and $19.7 million, respectively. All operating lease expense is recognized on a straight-line basis over the lease term. In the year ended December 31, 2019, the Company recorded $16.4 million of operating lease amortization that was charged to expense, of which $7.0 million was recorded to cost of products sold.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The Company has certain contracts for real estate and marketing which may contain lease and non-lease components which it has elected to treat as a single lease component.
Information related to the Company's right-of-use assets and related lease liabilities were as follows:
| Year Ended December 31, 2019 | |||||
| Cash paid for operating lease liabilities, in thousands | $ | 17,809 | |||
Right-of-use assets obtained in exchange for new operating lease obligations(1) | $ | 33,264 | |||
| Weighted-average remaining lease term | 3.35 | ||||
| Weighted-average discount rate | 18.1 | % | |||
(1) Includes $29.7 million for operating leases existing on January 1, 2019 and $3.6 million for operating leases that commenced during the year ended December 31, 2019. Also, the Company renegotiated one of its operating leases during 2019, which resulted in a new financing lease. Approximately $7.7 million of Right-of-use assets under operating leases, net were reclassified to Right-of-use assets under financing leases, net related to this operating lease modification.
Financing Leases
The Company has entered into financing leases primarily for laboratory and computer equipment. Assets purchased under financing leases are included in Right-of-use assets under financing leases, net on the consolidated balance sheets. For financing leases, the associated assets are depreciated or amortized over the shorter of the relevant useful life of each asset or the lease term. At December 31, 2019, accumulated amortization of assets under financing lease was $1.7 million.
Maturities of Financing and Operating Leases
Maturities of lease liabilities as of December 31, 2019 were as follows:
| Years Ending December 31 (In thousands) | Financing Leases | Operating Leases | Total Lease Obligations | ||||||||
| 2020 | $ | 4,490 | $ | 7,798 | $ | 12,288 | |||||
| 2021 | 4,565 | 7,541 | 12,106 | ||||||||
| 2022 | — | 7,719 | 7,719 | ||||||||
| 2023 | — | 3,363 | 3,363 | ||||||||
| 2024 | — | 192 | 192 | ||||||||
| Thereafter | — | — | — | ||||||||
| Total future minimum payments | 9,055 | 26,613 | 35,668 | ||||||||
| Less: amount representing interest | (1,424) | (6,951) | (8,375) | ||||||||
| Present value of minimum lease payments | 7,631 | 19,662 | 27,293 | ||||||||
| Less: current portion | (3,465) | (4,625) | (8,090) | ||||||||
| Long-term portion | $ | 4,166 | $ | 15,037 | $ | 19,203 | |||||
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Other assets
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Equity-method investment | $ | 4,734 | $ | — | ||||
| Contingent consideration | 3,303 | 4,286 | ||||||
| Deposits | 295 | 2,465 | ||||||
| Other | 1,373 | 1,207 | ||||||
| Total other assets | $ | 9,705 | $ | 7,958 | ||||
In September 2019, the Company was notified by DSM that certain contingent consideration payable to the Company upon the realization of certain NOL tax benefits transferred to DSM with the sale of the Brotas facility in December 2017 would not be realized due to changes in DSM’s Brazilian legal entity structure. The Company considered this information in conjunction with the probability and timing of DSM’s realization of the underlying NOL tax benefits and determined that a portion of the contingent consideration receivable was not recoverable as of December 31, 2018 and recorded a $3.9 million impairment in the statement of operations as Impairment of other assets. The Company reassessed the recoverability of this receivable at December 31, 2019 based on projected utilization of the underlying tax credits by DSM and recorded an additional impairment of $0.2 million for the year ended December 31, 2019.
In October 2019, the Company agreed to purchase the ownership interest previously held by Cosan in Novvi LLC, a joint venture among the Company, Cosan and certain other members, for $10.8 million (Purchase Price). The Company is obligated to pay the Purchase Price through the assignment of certain preferred dividends to be distributed by the proposed joint venture between the Company and Raizen Energia S.A., provided that, if the joint venture is not formed by October 2021, the Purchase Price shall be paid in full by October 31, 2022. The Company measured and recorded the fair value of the investment based on the present value of the unsecured $10.8 million obligation, which was deemed to be more readily determinable than the fair value of the Novvi partnership interest. In accordance with equity-method accounting, the Company records its share of Novvi's earnings or losses for each accounting period and adjusts the investment balance accordingly. However, the Company is not obligated to fund Novvi's potential future losses, so the Company will not record equity-method losses that would result in the investment in Novvi falling to below zero and becoming a liability. For additional information regarding the Company's accounting for equity-method investments, see Note 1, "Basis of Presentation and Summary of Significant Accounting Policies".
Accrued and other current liabilities
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Accrued interest | $ | 8,209 | $ | 3,853 | ||||
| Payroll and related expenses | 7,296 | 9,220 | ||||||
| Contract termination fees | 5,347 | 4,092 | ||||||
| Ginkgo partnership payments obligation | 4,319 | 2,155 | ||||||
Asset retirement obligation(1) | 3,184 | 3,063 | ||||||
| Professional services | 2,968 | 1,173 | ||||||
| Tax-related liabilities | 1,685 | 2,139 | ||||||
| Other | 3,647 | 3,284 | ||||||
| Total accrued and other current liabilities | $ | 36,655 | $ | 28,979 | ||||
______________
(1) The asset retirement obligation represents liabilities incurred but not yet discharged in connection with our 2013 abandonment of a partially constructed facility in Pradópolis, Brazil.
Other noncurrent liabilities
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| December 31, (In thousands) | 2019 | 2018 | ||||||
| Liability for unrecognized tax benefit | $ | 7,204 | $ | 6,582 | ||||
| Liability in connection with acquisition of equity-method investment | 5,249 | — | ||||||
| Ginkgo partnership payments, net of current portion (See Note 4) | 4,492 | 6,185 | ||||||
| Refund liability | 3,750 | — | ||||||
Contract liabilities, net of current portion(1) | 1,449 | 1,587 | ||||||
| Deferred rent, net of current portion | — | 6,440 | ||||||
| Contract termination fees, net of current portion | — | 1,530 | ||||||
| Capital leases, net of current portion | — | 195 | ||||||
| Other | 880 | 673 | ||||||
| Total other noncurrent liabilities | $ | 23,024 | $ | 23,192 | ||||
______________
(1) Contract liabilities, net of current portion at December 31, 2019 and 2018 includes $1,204 at each date in connection with DSM, which is a related party.
In relation to the refund liability item above, in April 2019, the Company assigned the Value Sharing Agreement to DSM. See Note 9, "Revenue Recognition and Contract Assets and Liabilities" for further information. The assignment was accounted for as a contract modification under ASC 606 that resulted in variable consideration of $12.5 million in the form of a stand-ready obligation to refund some or all of the $12.5 million consideration if certain criteria are not met by December 2021. The Company periodically updates its estimate of amounts to be retained and reduces the refund liability and records additional license and royalty revenue as the criteria are met. The Company recorded an additional $8.8 million of license and royalty revenue during the year ended December 31, 2019 related to a change in the estimated refund liability, which reduced the balance to $3.8 million.
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3. Fair Value Measurement
Assets and liabilities are measured and reported at fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. An asset's or liability's classification level is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are valued and disclosed in one of the following three levels of the valuation hierarchy:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
As of December 31, 2019 and 2018, the Company’s financial liabilities measured and recorded at fair value on a recurring basis were classified within the fair value hierarchy as follows:
| December 31, (In thousands) | 2019 | 2018 | |||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Senior Convertible Notes Due 2022 | $ | — | $ | — | $ | 50,624 | 50,624 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| 6% Convertible Notes Due 2021 | — | — | — | — | — | — | 57,918 | 57,918 | |||||||||||||||||||||
| Embedded derivatives bifurcated from debt instruments | — | — | 2,832 | 2,832 | — | — | — | — | |||||||||||||||||||||
| Freestanding derivative instruments issued in connection with other debt and equity instruments | — | — | 6,971 | 6,971 | — | — | 42,796 | 42,796 | |||||||||||||||||||||
| Total liabilities measured and recorded at fair value | $ | — | $ | — | $ | 60,427 | $ | 60,427 | $ | — | $ | — | $ | 100,714 | $ | 100,714 | |||||||||||||
The Company did not hold any financial assets to be measured and recorded at fair value on a recurring basis as of December 31, 2019 and 2018. Also, there were no transfers between the levels during 2019 or 2018.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgements and consider factors specific to the asset or liability. The method of determining the fair value of compound embedded derivative liabilities is described subsequently in this note. Market risk associated with compound embedded derivative liabilities relates to the potential reduction in fair value and negative impact to future earnings from a decrease in interest rates.
At December 31, 2019 and December 31, 2018, the carrying value of certain financial instruments, such as cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and other current accrued liabilities, approximate fair value due to their relatively short maturities and low market interest rates, if applicable.
Changes in fair value of derivative liabilities are presented as gains or losses in the consolidated statements of operations in the line captioned "Gain (loss) from change in fair value of derivative instruments".
Changes in the fair value of debt that is accounted for at fair value are presented as gains or losses in the consolidated statements of operations in the line captioned "Gain (loss) from change in fair value of debt".
Senior Convertible Notes Due 2022
On November 15, 2019, the Company issued $66.0 million of Senior Convertible Notes Due 2022 and elected the fair value option of accounting for this debt instrument (see Note 4, "Debt" for details). At December 31, 2019, the contractual outstanding principal of the Senior Convertible Notes Due 2022 was $66.0 million and the fair value was $50.6 million. The Company measured the fair value using a binomial lattice model (which is discussed in further detail below) with the following inputs: (i) 233% discount yield, (ii) 45% equity volatility, (iii) 25% / 75% probability of principal repayment in cash or stock, respectively and (iv) 5% probability of change in control. The Company assumed that if a change of control event were to occur, it would occur at the end of the calendar year.
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In connection with the issuance of the Senior Convertible Notes Due 2022, the Company was required to pre-deliver 7.5 million shares of common stock (the Pre-Delivery Shares) to the note holders, which are freely tradeable, validly issued, fully paid, nonassessable and free from all preemptive or similar rights or liens, for the note holders to sell, trade or hold, subject to certain limitations, for as long as the Senior Convertible Notes Due 2022 are outstanding. However, the Company may elect or be required to apply the value of the pre-delivered shares to satisfy periodic principal and interest payments or other repayment events. Within ten business days following redemption or repayment of in full the Senior Convertible Notes Due 2022 and the satisfaction or discharge by the Company of all outstanding Company obligations under the Senior Convertible Notes Due 2022, the noteholders shall deliver 7.5 million shares of the Company’s common stock to the Company, less any shares used to satisfy any accrued interest or principal amortization payments under such notes.
The Company concluded the Pre-Delivery Shares provision meets the criteria of freestanding instrument that is legally detachable and separately exercisable from the Senior Convertible Notes Due 2022 and should be classified in equity as the common shares issued are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the Pre-Delivery Shares within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the shares to be reclassified to an asset or liability. The Company measured the issue date fair value of the Pre-Delivery Shares under an expected borrowing cost approach using a 9.75% annual borrowing rate over a 19-month estimated repayment term for the Senior Convertible Notes Due 2022. The resulting $4.2 million fair value was recorded in equity as additional paid in capital with an offset to the fair value of the Senior Convertible Notes Due 2022. See Note 6, “Stockholders’ Deficit” for further information regarding the issuance of the common stock.
For the year ended December 31, 2019, the Company recorded a $3.8 million gain from change in fair value of debt in connection with the initial issuance and subsequent fair value remeasurement of the Senior Convertible Notes Due 2022, as follows:
| In thousands | |||||
| Fair value at November 14, 2019 | $ | 54,425 | |||
| Less: Gain from change in fair value | (3,801) | ||||
| Fair value at December 31, 2019 | $ | 50,624 | |||
A binomial lattice model was used to determine if the Senior Convertible Notes Due 2022 would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the convertible note will be converted early if the conversion value is greater than the holding value and (ii) the convertible note will be called if the holding value is greater than both (a) redemption price and (b) the conversion value at the time. If the convertible note is called, the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the convertible note. Using this lattice method, the Company valued the Senior Convertible Notes Due 2022 using the "with-and-without method", where the fair value of the Senior Convertible Notes Due 2022 including the embedded and freestanding features is defined as the "with", and the fair value of the Senior Convertible Notes Due 2022 excluding the embedded and freestanding features is defined as the "without". This method estimates the fair value of the Senior Convertible Notes Due 2022 by looking at the difference in the values of Senior Convertible Notes Due 2022 with the embedded and freestanding derivatives and the fair value of Senior Convertible Notes Due 2022 without the embedded and freestanding features. The lattice model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. The Company remeasures the fair value of the debt instrument and records the change as a gain or loss from change in fair value of debt in the statement of operations for each reporting period.
6% Convertible Notes Due 2021
On December 10, 2018, the Company issued $60.0 million of 6% Convertible Notes Due 2021 (see Note 4, "Debt" for details) and elected the fair value option of accounting for this debt instrument. The notes were extinguished in November 2019. The Company recorded a $23.2 million loss from change in fair value of debt in the year ended December 31, 2019 prior to extinguishing the debt.
Derivative Liabilities Recognized in Connection with the Issuance of Debt and Equity Instruments
The following table provides a reconciliation of the beginning and ending balances for the Company's derivative liabilities recognized in connection with the issuance of debt and equity instruments – either freestanding or compound embedded – measured at fair value using significant unobservable inputs (Level 3):
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| (In thousands) | Equity-related Derivative Liability | Debt-related Derivative Liability | Total Derivative Liability | ||||||||
| Balance at December 31, 2018 | $ | 41,272 | $ | 1,524 | $ | 42,796 | |||||
| Derecognition upon adoption of ASU 2017-11 | (39,513) | (1,524) | (41,037) | ||||||||
| Fair value of derivative liabilities issued during the period | — | 15,158 | 15,158 | ||||||||
| Change in fair value of derivative liabilities | 2,039 | (4,816) | (2,777) | ||||||||
| Derecognition on extinguishment | (3,798) | (539) | (4,337) | ||||||||
| Balance at December 31, 2019 | $ | — | $ | 9,803 | $ | 9,803 | |||||
As of December 31, 2019, the $3.8 million derivative liability recorded in connection with the November 2018 Securities Purchase Agreement with DSM was settled and extinguished through a cash payment in April 2019.
During the second half of 2019, the Company issued four debt instruments with an embedded mandatory redemption feature and two freestanding liability classified warrants with conversion rate adjustment and antidilution provisions. See Note 4, “Debt” for a description of the transactions and the initial accounting treatment for these debt related derivatives. There is no current observable market for these types of derivatives and the Company determined the fair value of the embedded mandatory redemption feature using a probability weighted discounted cash flow model measuring the fair value of the debt instrument both with and without the embedded feature, which is discussed in more detail below; and the freestanding liability warrants using a Black-Scholes-Merton option pricing model, which is also discussed in more detail below.
The collective fair value of the four embedded derivatives totaled $2.5 million at issuance date and were recorded as a derivative liability and a debt discount against the underlying debt instruments. In the fourth quarter of 2019, the Company modified certain key terms in two of the four underlying debt instruments, resulting in a debt extinguishment of the two instruments. Consequently, the collective fair value of the two embedded derivative liabilities totaling $0.5 million were written off against the loss on debt extinguishment and the $0.7 million collective fair value of the two new embedded mandatory redemption features were recorded as derivative liabilities at the date of debt modification. The collective fair value of the four embedded derivative liabilities totaled $2.8 million at December 31, 2019.
The freestanding liability warrants issued on September 10, 2019 and November 14, 2019 had an initial fair value of $7.9 million and $4.0 million, respectively and were recorded as a derivative liability and a debt discount. The warrants will be remeasured each reporting period until settled or extinguished with subsequent changes in fair value recorded through the statement of operations as a gain or loss on change in fair value of derivative liabilities. At December 31, 2019 the warrants derivative had a fair value of $6.9 million. For the year ended December 31, 2019, the Company recorded a $4.8 million gain from change in fair value of debt-related embedded derivative liabilities.
Valuation Methodology and Approach to Measuring the Derivative Liabilities
The liabilities associated with the Company’s freestanding and compound embedded derivatives outstanding at December 31, 2019 and 2018 represent the fair value of freestanding equity instruments, mandatory redemption features embedded in certain debt instruments and antidilution provisions in some of the Company's debt warrant instruments. See Note 4, "Debt", and Note 6, "Stockholders' Deficit" for further information regarding these host instruments. There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the freestanding instrument or embedded derivatives using the Black-Scholes-Merton option pricing model, a probability weighted discounted cash flow analysis, or a Monte Carlo simulation.
The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of its liability classified warrants issued in 2019. Input assumptions for these freestanding instruments are as follows:
| Input assumptions for liability classified warrants: | Range | ||||
| Fair value of common stock on issue date | $3.09 – $4.76 | ||||
| Expected volatility | 94% - 105% | ||||
| Risk-free interest rate | 1.58% - 1.67% | ||||
| Dividend yield | 0.0 | % | |||
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The Company uses a probability weighted discounted cash flow model to measure the fair value of the mandatory redemption features embedded in the four debt instruments issued in the second half of 2019. The model is designed to measure and determine if the debt instruments would be called or held at each decision point. Within the model, the following assumption is made: the underlying debt instrument will be called early if the change in control redemption value is greater than the holding value. If the underlying debt instrument is called, the holder will maximize their value by finding the optimal decision between (i) redeeming at the redemption price and (ii) holding the instrument until maturity. Using this assumption, the Company valued the embedded derivatives on a "with-and-without method", where the fair value of each underlying debt instrument including the embedded derivative is defined as the "with", and the fair value of each underlying debt instrument excluding the embedded derivatives is defined as the "without". This method estimates the fair value of the embedded derivatives by comparing the fair value differential between the with and without mandatory redemption feature. The model incorporates the mandatory redemption price, time to maturity, risk-free interest rate, estimated credit spread and estimated probability of a change in control default event.
The Company used a Monte Carlo simulation valuation model to determine the fair value of the May 2017 and August 2017 Cash and Dilution Warrants through December 31, 2018. Upon adoption of ASU 2017-11 on January 1, 2019, the fair value of these warrants was reclassified to equity as they no longer met the criteria for derivative liability accounting. Monte Carlo simulation combines a random number generator based on a probability distribution and additional inputs of volatility, time to expiration to generate a stock price and other uncertainties. The generated stock price at the time of expiration is then used to calculate the value of the option. The model then calculates results tens of thousands of times, each time using a different set of random values from the probability functions. The resulting Monte Carlo simulation valuation is based on the average of all the calculated results.
The market-based assumptions and estimates used in valuing the compound embedded and freestanding derivative liabilities include amounts in the following ranges/amounts:
| December 31, | 2019 | 2018 | ||||||
| Risk-free interest rate | 1.6% - 1.7% | 2.5% - 3.0% | ||||||
| Risk-adjusted discount yield | 20.0% - 27.0% | 17.2% - 27.3% | ||||||
| Stock price volatility | 45% | 45.0% - 85.0% | ||||||
| Probability of change in control | 5.0% | 0.0% | ||||||
| Stock price | $3.09 | $3.34 | ||||||
| Credit spread | 18.4% - 25.4% | 14.6% - 24.9% | ||||||
| Estimated conversion dates | 2022 - 2023 | 2019 - 2025 | ||||||
Changes in valuation assumptions can have a significant impact on the valuation of the embedded and freestanding derivative liabilities and debt that the Company elects to account for at fair value. For example, all other things being equal, a decrease/increase in the Company’s stock price, probability of change of control, credit spread, term to maturity/conversion or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk adjusted yields or risk-free interest rates increases/decreases the valuation of the liabilities. Certain of the convertible notes, shares of convertible preferred stock and warrants also include conversion or exercise price adjustment features and, for example, certain issuances of common stock by the Company at prices lower than the current conversion or exercise price result in a reduction of the conversion price of such notes or convertible preferred stock, or a reduction in the exercise price of, or an increase in the number of shares subject to, such warrants, which increases the value of the embedded and freestanding derivative liabilities and debt measured at fair value; see Note 4, "Debt" for details.
Assets and Liabilities Recorded at Carrying Value
Financial Assets and Liabilities
The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities and low market interest rates, if applicable. Loans payable and credit facilities are recorded at carrying value, which is representative of fair value at the date of acquisition. The Company estimates the fair value of these instruments using observable market-based inputs (Level 2). The carrying amount (the total amount of net debt presented on the balance sheet) of the Company's debt at December 31, 2019 and at December 31, 2018, excluding the debt instruments recorded at fair value, was $195.8 million and $151.8 million, respectively. The fair value of such debt at December 31, 2019 and at December 31, 2018 was $194.8 million and $149.3 million,
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respectively, and was determined by (i) discounting expected cash flows using current market discount rates estimated for certain of the debt instruments and (ii) using third-party fair value estimates for the remaining debt instruments.
Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
On November 19, 2018, the Company amended its supply agreement with DSM, as discussed in Note 9, “Revenue Recognition” to secure production capacity at the Brotas facility in exchange for future cash payments totaling $22.7 million, the issuance of 1,643,991 shares common stock valued at $6.1 million on the date of issuance and a further cash payment for the difference between the fair value of the common stock and $7.3 million on March 29, 2019. In addition, the Company modified certain warrants held by DSM which resulted in the transfer of $2.9 million of value to DSM and paid $1.8 million to settle certain obligations to DSM related to the 2017 sale of the Brotas facility. The Company also entered into other transactions contemporaneously with the amended supply agreement as discussed in Note 10, “Related Party Transactions”. This series of transactions with DSM in November 2018 was accounted for as a combined transaction in which the Company determined and allocated the fair value of the consideration to each element. The fair value of the consideration transferred to DSM under the combined arrangement totaled $33.3 million and was allocated as follows (in thousands):
| Element | Fair Value Allocation | ||||
| Manufacturing capacity reservation fee | $ | 24,395 | |||
| Legal settlement and consent waiver | 6,764 | ||||
| Working capital adjustment | 2,145 | ||||
| Total fair value of consideration transferred | $ | 33,304 | |||
The fair value of these elements is based on Level 3 inputs, which considered the lowest level of input that is significant to the fair value measurement of these elements. To determine the fair value of the manufacturing capacity reservation fee, the Company used a discounted cash flow model under a cost savings valuation approach based on a competing manufacturing quote for similar capacity, location and timing. The Company used a discount rate of 22.5% and a tax rate of 0% to discount the gross cash flows. The fair value of the legal settlement for failure to obtain consent from DSM prior to executing the August 2018 Vivo Warrant transaction was determined by calculating the difference between the fair values of the warrants held by Vivo prior to and after the August 2018 Vivo Warrant transaction using a combination of a Monte Carlo simulation and the Black-Scholes-Merton option pricing model. The fair value of the working capital adjustment was determined to equal the difference between the preliminary estimate for working capital upon closing the Brotas facility sale and the final working capital amounts transferred.
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4. Debt
| 2019 | 2018 | ||||||||||||||||||||||||||||
| December 31, (In thousands) | Principal | Unaccreted Debt (Discount) Premium | Fair Value Adjustment | Net | Principal | Unaccreted Debt (Discount) Premium | Fair Value Adjustment | Net | |||||||||||||||||||||
| Convertible notes payable | |||||||||||||||||||||||||||||
| Senior convertible notes due 2022 | $ | 66,000 | $ | — | $ | (15,376) | $ | 50,624 | $ | — | $ | — | $ | — | $ | — | |||||||||||||
| 6% convertible notes due 2021 | — | — | — | — | 60,000 | — | (2,082) | 57,918 | |||||||||||||||||||||
| 2015 Rule 144A convertible notes | — | — | — | — | 37,887 | (2,413) | — | 35,474 | |||||||||||||||||||||
| 2014 Rule 144A convertible notes | — | — | — | — | 24,004 | (867) | — | 23,137 | |||||||||||||||||||||
| August 2013 financing convertible notes | — | — | — | — | 4,415 | (70) | — | 4,345 | |||||||||||||||||||||
| 66,000 | — | (15,376) | 50,624 | 126,306 | (3,350) | (2,082) | 120,874 | ||||||||||||||||||||||
| Related party convertible notes payable | |||||||||||||||||||||||||||||
| 2014 Rule 144A convertible notes | 10,178 | — | — | 10,178 | 24,705 | (1,038) | — | 23,667 | |||||||||||||||||||||
| 10,178 | — | — | 10,178 | 24,705 | (1,038) | — | 23,667 | ||||||||||||||||||||||
| Loans payable and credit facilities | |||||||||||||||||||||||||||||
| Schottenfeld notes | 20,350 | (1,315) | — | 19,035 | — | — | — | — | |||||||||||||||||||||
| Nikko notes | 14,318 | (901) | — | 13,417 | 4,598 | (1,047) | — | 3,551 | |||||||||||||||||||||
| Ginkgo note | 12,000 | (3,139) | — | 8,861 | 12,000 | (4,047) | — | 7,953 | |||||||||||||||||||||
| Other loans payable | 1,828 | — | — | 1,828 | 312 | — | — | 312 | |||||||||||||||||||||
| GACP term loan facility | — | — | — | — | 36,000 | (1,349) | — | 34,651 | |||||||||||||||||||||
| 48,496 | (5,355) | — | 43,141 | 52,910 | (6,443) | — | 46,467 | ||||||||||||||||||||||
| Related party loans payable | |||||||||||||||||||||||||||||
| Foris notes | 115,351 | (9,516) | — | 105,835 | — | — | — | — | |||||||||||||||||||||
| DSM notes | 33,000 | (4,621) | — | 28,379 | 25,000 | (6,311) | — | 18,689 | |||||||||||||||||||||
| Naxyris note | 24,437 | (822) | — | 23,615 | — | — | — | — | |||||||||||||||||||||
| 172,788 | (14,959) | — | 157,829 | 25,000 | (6,311) | — | 18,689 | ||||||||||||||||||||||
| Total debt | $ | 297,462 | $ | (20,314) | $ | (15,376) | 261,772 | $ | 228,921 | $ | (17,142) | $ | (2,082) | 209,697 | |||||||||||||||
| Less: current portion | (63,805) | (147,677) | |||||||||||||||||||||||||||
| Long-term debt, net of current portion | $ | 197,967 | $ | 62,020 | |||||||||||||||||||||||||
Future minimum payments under the debt agreements as of December 31, 2019 are as follows:
| Years ending December 31 (In thousands) | Convertible Notes | Loans Payable and Credit Facilities | Related Party Convertible Notes | Related Party Loans Payable and Credit Facilities | Total | ||||||||||||
| 2020 | $ | 43,384 | $ | 26,324 | $ | 10,437 | $ | 33,730 | $ | 113,875 | |||||||
| 2021 | 40,177 | 3,342 | — | 53,566 | 97,085 | ||||||||||||
| 2022 | — | 15,177 | — | 113,818 | 128,995 | ||||||||||||
| 2023 | — | 13,011 | — | 24,323 | 37,334 | ||||||||||||
| 2024 | — | 398 | — | — | 398 | ||||||||||||
| Thereafter | — | 1,870 | — | — | 1,870 | ||||||||||||
| Total future minimum payments | 83,561 | 60,122 | 10,437 | 225,437 | 379,557 | ||||||||||||
Less: amount representing interest(1) | (17,561) | (11,626) | (259) | (52,649) | (82,095) | ||||||||||||
| Less: future conversion of accrued interest to principal | — | — | — | — | — | ||||||||||||
| Present value of minimum debt payments | 66,000 | 48,496 | 10,178 | 172,788 | 297,462 | ||||||||||||
| Less: current portion of debt principal | (31,800) | (21,193) | (10,178) | (11,380) | (74,551) | ||||||||||||
| Noncurrent portion of debt principal | $ | 34,200 | $ | 27,303 | $ | — | $ | 161,408 | $ | 222,911 | |||||||
______________
(1) Excluding net debt discount of $20.3 million that will be amortized to interest expense over the term of the debt.
August 2013 Financing Convertible Note
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On January 14, 2019, Wolverine Flagship Fund Trading Limited (Wolverine) agreed to waive payment of the August 2013 Financing Convertible Note held by Wolverine at its January 15, 2019 maturity until July 15, 2019 in exchange for a fee, payable on or prior to July 15, 2019, of $0.6 million. The due date of the waiver fee was extended to October 13, 2019 and was subsequently paid on October 29, 2019. The Company concluded that the maturity date extension represented a debt modification, and the fee was accounted for as additional debt discount to be amortized over the remaining term.
On July 8, 2019, $5.1 million principal balance of the convertible note and unpaid interest was exchanged for 1.8 million shares of common stock with a total fair value of $5.9 million or $3.30 per share and a warrant to purchase 1.1 million shares of common stock with a fair value of $1.9 million. The Company recorded a $2.7 million loss on debt extinguishment for the difference between the carrying value of the debt and the sum of the fair values of the common stock and warrant. See Note 6, “Stockholders’ Deficit” for additional information regarding the fair value measurement of the common stock and warrant issued in connection with this exchange.
2015 Rule 144A Convertible Notes Extinguishment
On April 16, 2019, the Company repaid in cash the $37.9 million outstanding principal, as well as accrued and unpaid interest, under its 9.50% Convertible Senior Notes due 2019 (the 2015 Rule 144A Convertible Notes). This repayment did not result in an extinguishment gain or loss.
2014 Rule 144A Convertible Notes
In May 2019, the Company exchanged a portion of its 6.50% Convertible Senior Notes (the 2014 Rule 144A Convertible Notes), representing $38.2 million aggregate principal amount of 2014 Rule 144A Convertible Notes, for shares of common stock, warrants to purchase common stock and a new senior convertible note as described below and repaid the remaining $10.5 million of the 2014 Rule 144A Convertible Notes in cash at maturity.
Notes Conversion into Common Stock
On May 10, 2019, the Company exchanged $13.5 million aggregate principal amount of 2014 Rule 144A Convertible Notes held by certain non-affiliated investors, including accrued and unpaid interest thereon, for an aggregate of 3.5 million shares of common stock and warrants to purchase an aggregate of 1.4 million shares of common stock at an exercise price of $5.02 per share, with an exercise term of two years from issuance, in a private exchange.
On May 14, 2019, the Company exchanged $5.0 million aggregate principal amount of 2014 Rule 144A Convertible Notes held by Foris, including accrued and unpaid interest thereon, for 1.1 million shares of common stock and a warrant to purchase up to 0.4 million shares of common stock at an exercise price of $4.56 per share, with an exercise term of two years from issuance, in a private exchange. On August 28, 2019, the Company and Foris agreed to reduce the exercise price of such warrant from $4.56 per share to $3.90 per share in connection with the “August 2019 Foris Credit Agreements” below. Also, see Note 6, “Stockholders’ Deficit” for additional information and Note 15, “Subsequent Events” for information regarding the amendment and exercise of the warrants on January 31, 2020.
On May 15, 2019, the Company exchanged $10.0 million aggregate principal amount of 2014 Rule 144A Convertible Notes held by Maxwell (Mauritius) Pte Ltd for 2.5 million shares of common stock in a private exchange.
The Company evaluated the May 2019 note conversions into common stock discussed above and concluded that the transactions resulted in a debt extinguishment. The Company recorded a $5.9 million loss on debt extinguishment of the 2014 144A Convertible Notes in the three months ended June 30, 2019. The loss represented the difference between the $30.8 million fair value of 7.1 million common shares issued upon exchange, $3.8 million fair value of warrants issued to purchase 1.7 million shares of common stock and $0.4 million of fees incurred, less the $29.1 million carrying value of the debt that was extinguished. See Note 6. "Stockholders’ Deficit" for further information regarding the fair value measurement of the common stock and warrants issued in connection with the May 2019 note conversions discussed above.
Total Note Exchange and Extensions
On May 15, 2019, the Company exchanged $9.7 million aggregate principal amount of 2014 Rule 144A Convertible Notes due May 15, 2019 held by Total Raffinage Chimie (Total) for a new senior convertible note (the New Note) with an equal principal amount and with substantially identical terms, except that the New Note had a maturity date of June 14, 2019.
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Effective June 14, 2019, the Company and Total agreed to extend the maturity date of the New Note from June 14, 2019 to July 18, 2019. Effective July 18, 2019, the Company and Total agreed to (i) further extend the maturity date of the New Note from July 18, 2019 to August 28, 2019 and (ii) increase the interest rate on the New Note to 10.5% per annum, beginning July 18, 2019. Effective August 28, 2019, the Company and Total agreed to (i) further extend the maturity date of the New Note from August 28, 2019 to October 28, 2019 and (ii) increase the interest rate on the New Note to 12% per annum, beginning August 28, 2019. On October 31, 2019, the Company and Total agreed, effective as of October 28, 2019, to (i) extend the maturity date of the New Note from October 28, 2019 to December 16, 2019 and (ii) capitalize all interest accruing under the New Note from May 15, 2019 through and including November 14, 2019, in the amount of $0.5 million, which interest would be added to the principal of the New Note, which would begin accruing interest on such new principal amount on November 15, 2019. Effective December 16, 2019, the Company and Total agreed to extend the maturity date of the New Note from December 16, 2019 to January 31, 2020. See Note 15, “Subsequent Events” for further information regarding the Company’s failure to repay the $10.2 million New Note by January 31, 2020.
The Company accounted for the note exchange and series of extensions with Total as a debt modification; however, no additional fees were paid in connection with the exchange and extensions, and consequently there was no impact on the carrying value of the debt as of December 31, 2019.
Foris Debt Transactions—Related Party
The Company has loans payable to Foris Ventures, LLC (Foris) with a total principal balance of $115.4 million at December 31, 2019. Foris is an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder, and an owner of greater than five percent of the Company’s outstanding common stock. The notes payable to Foris are comprised of the following (amounts in thousands):
| Description | Date Issued | Original Loan Amount | Balance at December 31, 2019 | Interest Rate per Annum | Maturity Date | ||||||||||||
| Foris $19 Million Note | August 28, 2019 | $ | 19,000 | $ | 19,000 | 12.0% | January 1, 2023 | ||||||||||
| Foris LSA | April 15, 2019 | 36,000 | 96,351 | 12.5% | For $81.0 million borrowed prior to November 27, 2019, the maturity date is July 1, 2022; for $10.0 million borrowed November 27, 2019, the maturity date is March 31, 2023. | ||||||||||||
| $ | 55,000 | $ | 115,351 | ||||||||||||||
Foris Credit Agreements
On April 8, 2019, the Company and Foris entered into a credit agreement to make available to the Company an unsecured credit facility in an aggregate principal amount of $8.0 million (the April Foris Credit Agreement), which the Company borrowed in full on April 8, 2019 and issued to Foris a promissory note in the principal amount of $8.0 million (the April Foris Note). The April Foris Note has a maturity date of October 14, 2019, which has no stated interest rate. The Company agreed to pay Foris a fee of $1.0 million, payable on or prior to the maturity date; provided, that the fee will be reduced to $0.5 million if the Company repays the April Foris Note in full by July 15, 2019. The Company accrues this fee as interest expense over the -month term of the note.
On June 11, 2019, the Company and Foris entered into a credit agreement to make available to the Company an unsecured credit facility in an aggregate principal amount of $8.5 million, which the Company borrowed in full on June 11, 2019 and issued to Foris a promissory note in the principal amount of $8.5 million (the June Foris Note). The June Foris Note (i) accrues interest at a rate of 12.5% per annum and is payable on the maturity date or the earlier repayment or other satisfaction of the June Foris Note, and (ii) matured on August 28, 2019.
On July 10, 2019, the Company and Foris entered into a credit agreement to make available to the Company an unsecured credit facility in an aggregate principal amount of $16.0 million (the July Foris Credit Agreement), of which the Company borrowed $8.0 million on July 10, 2019 and $8.0 million on July 26, 2019 and issued to Foris promissory notes, each in the principal amount of $8.0 million, on such dates (the July Foris Notes). The July Foris Notes (i) accrue interest at a rate of 12.5% per annum, which is payable on the maturity date or the earlier repayment or other satisfaction of the applicable July Foris Note, and (ii) mature on December 31, 2019.
In connection with the entry into the July Foris Credit Agreement, the Company and Foris amended the warrant issued to Foris on August 17, 2018 to reduce the exercise price of such warrant from $7.52 per share to $2.87 per share. The warrant modification resulted in $4.0 million of incremental value which was accounted for as a debt discount to the $16 million July
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Foris Notes. See Note 6, “Stockholders’ Deficit” for additional information regarding the fair value measurement of the modified warrant.
On August 14, 2019, the April Foris Note, the June Foris Note and the July Foris Notes were added to the loans under the LSA, made subject to the LSA and secured by the security interest in the collateral granted to Foris under the LSA, and such notes were cancelled in connection therewith. See "LSA Assignment, Amendments and Waiver" below for further information.
Foris LSA Assignment, Amendments and Waivers
On April 4, 2019, the Company and GACP Finance Co., LLC (GACP) amended the Loan and Security Agreement, dated June 29, 2018 (as amended, the LSA), to remove, add and modify certain restrictions, covenants and other provisions and to waive breaches of certain covenants under the LSA occurring prior to, as of and after December 31, 2018 through April 8, 2019. In connection with such waiver, the Company agreed to pay GACP fees of $0.8 million, which the Company paid in April 2019. This waiver fee was recorded as interest expense in the statement of operations in the nine months ended September 30, 2019.
On April 15, 2019, the Company, GACP and Foris Ventures, LLC (Foris), an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder, and an owner of greater than 5% of the Company’s outstanding common stock) entered into a Loan Purchase Agreement, pursuant to which Foris agreed to purchase and assume from GACP, the outstanding principal balance under the LSA, which totaled $36.0 million and all documents and assets related thereto. In connection with such purchase and assignment, the Company agreed to repay Foris $2.5 million of the purchase price and accrued interest paid by Foris to GACP (the LSA Obligation). The closing of the loan purchase and assignment occurred on April 16, 2019.
On August 14, 2019, the Company and Foris entered into an Amendment No. 5 and Waiver to the LSA (the LSA Amendment and Waiver), pursuant to which (i) the maturity date of the loans under the LSA was extended from July 1, 2021 to July 1, 2022, (ii) the interest rate for the loans under the LSA was modified to the greater of (A) 12% or (B) the rate of interest payable with respect to any indebtedness of the Company, including, but not limited to, the rate of interest charged pursuant to the Naxyris Loan Agreement, provided, that for such purpose, the rate of interest charged pursuant to the Naxyris Loan Agreement shall be the rate of interest payable by the Borrower pursuant to the Naxyris Loan Agreement, minus 25 basis points (iii) the amortization of the loans under the LSA was delayed until December 16, 2019, (iv) certain accrued and future interest and agency fee payments under the LSA were delayed until December 16, 2019, (v) certain covenants under the LSA, including related definitions, were amended to provide the Company with greater operational and financial flexibility, including, without limitation, to permit the incurrence of the indebtedness under the August 2019 Naxyris Loan (as described below) and the granting of liens with respect thereto, subject to the terms of an intercreditor agreement between Foris and Naxyris S.A. (Naxyris) governing the respective rights of the parties with respect to, among other things, the assets securing the Naxyris Loan Agreement (as defined below) and the LSA (the Intercreditor Agreement), (vi) certain outstanding unsecured promissory notes issued by the Company to Foris on April 8, 2019, June 11, 2019, July 10, 2019 and July 26, 2019 (as described in the “Foris Credit Agreements” section above), in an aggregate principal amount of $32.5 million, as well as the $2.5 million LSA Obligation, were added to the loans under the LSA, made subject to the LSA and secured by the security interest in the collateral granted to Foris under the LSA, and such promissory notes and contractual obligation were canceled in connection therewith, and (vii) Foris agreed to waive certain existing defaults under the LSA, including with respect to covenants related to cross-defaults, minimum liquidity and minimum asset coverage requirements. After giving effect to the LSA Amendment and Waiver, there was $71.0 million aggregate principal amount of loans outstanding under the LSA.
The Company also issued to Foris a warrant (the LSA Warrant) on August 14, 2019 to purchase up to 1.4 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. The warrant had a fair value of $2.9 million, which was measured using the Black-Scholes-Merton option pricing model. See Note 6, “Stockholders’ Deficit” for further information regarding the fair value measurement and issuance of this warrant.
Due to multiple changes in key provisions of the LSA from April 15, 2019 through August 14, 2019, the Company analyzed the before and after cash flows from the prior twelve months of modifications resulting from the increased principal balance, decreased interest rate, extended maturity date, waiver of default interest and the fair value of the new LSA Warrant provided to Foris in order to determine if these changes result in a modification or extinguishment of the original LSA. Based on the combined before and after cash flows of the five separate note balances making up the new principal balance of the LSA and the fair value of the LSA warrant, the change in cash flows was not significantly different. Consequently, the LSA Amendment and Waiver was accounting for as a debt modification with the $2.9 million fair value of the LSA Warrant
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recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the LSA.
Foris LSA Amendments, Additional Loan and Warrant Issuance
On October 10, 2019, the Company and Foris entered into Amendment No. 6 to the LSA (the October 2019 LSA Amendment), pursuant to which the maximum loan commitment of Foris under the LSA was increased by $10.0 million. On October 11, 2019, the Company borrowed an additional $10.0 million from Foris under the LSA (the October 2019 LSA Loan), which is subject to the terms and provisions of the LSA, including the lien on substantially all the assets of the Company. After giving effect to the LSA Loan, there was $81.0 million aggregate principal amount of loans outstanding under the LSA. Also, in connection with the October 2019 LSA Amendment, the Company issued a warrant (the October 2019 Foris LSA Warrant) to purchase up to 2.0 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. The warrant had a fair value of $4.1 million which was measured using the Black-Scholes-Merton option pricing model. See Note 6, “Stockholders’ Deficit” for further information regarding the fair value measurement and issuance of this warrant.
On October 28, 2019, the Company and Foris entered into an amended and restated LSA (the A&R LSA), pursuant to which, among other things, certain covenants and related definitions were amended to permit the incurrence of the indebtedness under the October 2019 Naxyris Loan (as defined below), subject to the terms of an amended and restated intercreditor agreement, dated October 28, 2019, between Foris and Naxyris governing the respective rights of the parties with respect to, among other things, the assets securing the A&R Naxyris LSA (as defined below) and the A&R LSA, and additional covenants were added relating to, among other things, maintenance of intellectual property, compliance with laws, delivery of reports and repayment of indebtedness.
On November 27, 2019, the Company borrowed an additional $10.0 million from Foris under the A&R LSA dated October 28, 2019. The new loan has identical terms to the previous loans under the LSA except that the maturity date is March 31, 2023 (as opposed to July 1, 2022 for the other loans under the LSA). In connection with the new loan, the Company issued a warrant to purchase up to 1,000,000 shares of common stock at an exercise price of $3.87 per share, exercisable for a period of two years from issuance (the November 2019 Foris Warrant). The warrant had a fair value of $2.1 million which was measured using the Black-Scholes-Merton option pricing model. See Note 6, “Stockholders’ Deficit” for further information regarding the fair value measurement and issuance of this warrant. After giving effect to the LSA Loan, there was $91.0 million aggregate principal amount of loans outstanding under the A&R LSA.
Due to multiple changes in key provisions of the LSA through November 27, 2019, the Company analyzed the before and after cash flows from the prior twelve months of modifications resulting from the increased principal balance, decreased interest rate, extended maturity date, waiver of default interest and the fair value of the new LSA Warrant, the October 2019 Foris Warrant and the November 2019 Foris Warrant provided to Foris in order to determine if these changes result in a modification or extinguishment of the original LSA. Based on the combined before and after cash flows of the various note balances making up the new principal balance of the LSA and the fair value of the three warrants, the Company determined that the change in cash flows through and including the October 2019 LSA Amendment were significantly different. Consequently, the October 2019 LSA Amendment was accounting for as a debt extinguishment and a new debt issuance. The Company recorded a $12.8 million loss on extinguishment comprised of (i) $8.7 million unamortized debt discount and (ii) the $4.1 million fair value of the October 2019 Foris LSA Warrant (a non-cash fee paid to the lender).
However, the change in cash flows from the October 2019 LSA Amendment to the November 27, 2019 borrowing under the A&R LSA were not significantly different. As a result, the A&R LSA was accounting for as a debt modification. The Company recorded a new $3.5 million debt discount, comprised of (i) $2.1 million fair value of the November 2019 Warrant, recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the A&R LSA, and (ii) $1.4 million fair value of a bifurcated embedded mandatory redemption feature, recorded as a derivative liability and as a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the A&R LSA. See Note 3, “Fair Value Measurement” for further information on the valuation and subsequent fair value accounting for the bifurcated embedded derivative.
August 2019 Foris Credit Agreements
On August 28, 2019, the Company and Foris entered into a credit agreement for an unsecured credit facility in an aggregate principal amount of $19.0 million (the August 2019 Foris Credit Agreement), which the Company borrowed in full on August 28, 2019 (the Foris $19 Million Note). The Foris $19 Million Note (i) accrues interest at a rate of 12% per annum, which is payable quarterly in arrears on each March 31, June 30, September 30 and December 31, beginning December 31,
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2019, and (ii) matures on January 1, 2023. The Company may at its option repay the amounts outstanding under the Foris $19 Million Note before the maturity date, in whole or in part, at a price equal to 100% of the amount being repaid plus accrued and unpaid interest on such amount to the date of repayment.
The Foris $19 Million Note also contained a mandatory redemption feature that was not clearly and closely related to the debt host instrument, and thus, required bifurcation and separate accounting as a derivative liability. The embedded feature had an initial fair value of $0.5 million and was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the Foris $19 Million Note. See Note 3, “Fair Value Measurement” for information regarding the fair value measurement and subsequent accounting for the embedded mandatory redemption feature.
In connection with the entry into the August 2019 Foris Credit Agreement, the Company issued to Foris a warrant (the August 2019 Foris Warrant) to purchase up to 4.9 million shares of Common Stock at an exercise price of $3.90 per share, with an exercise term of two years from issuance. See Note 6, “Stockholders’ Deficit” for information regarding the fair value measurement and issuance of this warrant. The warrant had a $8.7 million fair value and a $5.2 million relative fair value after allocating the Foris $19 Million Note proceeds to the $0.5 million fair value of the embedded mandatory redemption feature contained in the Foris $19 Million Note, and allocating on a residual basis, to the relative fair values of the Foris $19 Million Note and the August 2019 Foris Warrant. The $5.2 million relative fair value of the August 2019 Foris Warrant was recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the term of the Foris $19 Million Note.
Also, on August 28, 2019 in connection with the entry into the August 2019 Foris Credit Agreement, the Company and Foris amended the warrant to purchase up to 3.9 million shares of common stock issued to Foris on April 26, 2019 to reduce the exercise price from $5.12 per share to $3.90 per share, and amended the warrant to purchase up to 0.4 million shares of common stock issued to Foris on May 14, 2019 to reduce the exercise price from $4.56 per share to $3.90 per share. The warrant modifications resulted in $1.1 million of incremental value that was recorded as an increase to additional paid in capital and a debt discount to be amortized to interest expense under the effective interest method over the term of the Foris $19 Million Note. See Note 6, “Stockholders’ Deficit” for additional information regarding the fair value measurement of these warrant modifications.
In addition to the $5.2 million relative fair value of the August 2019 Foris Warrant, the $0.5 million fair value of the embedded mandatory redemption feature, and $1.1 million incremental value related to the warrant modifications, the Company incurred $0.1 million of legal fees in connection the issuing the Foris $19 Million Note. These amounts totaled $6.8 million and were recorded as a debt discount to be amortized as interest expense under the effective interest method over the term of the Foris $19 Million Note. This note was repaid in full in January 2020; see "Warrant Exercise, Common Stock Purchase and Debt Equitization by Foris – Related Party" in Note 15, "Subsequent Events" for additional information.
Naxyris LSA
On August 14, 2019, the Company, certain of the Company’s subsidiaries (the Subsidiary Guarantors) and, as lender, Naxyris, an existing stockholder of the Company and an investment vehicle owned by Naxos Capital Partners SCA Sicar, which is affiliated with NAXOS S.A.R.L. (Switzerland), for which director Carole Piwnica serves as director, entered into a Loan and Security Agreement (the Naxyris Loan Agreement) to make available to the Company a secured term loan facility in an aggregate principal amount of up to $10.4 million (the August 2019 Naxyris Loan), which the Company borrowed in full on August 14, 2019. In connection with the funding of the August 2019 Naxyris Loan, the Company paid Naxyris an upfront fee of $0.4 million.
Loans under the August 2019 Naxyris Loan have a maturity date of July 1, 2022 and accrue interest at a rate per annum equal to the greater of (i) 12% or (ii) the rate of interest payable with respect to any indebtedness of the Company plus 25 basis points, which interest will be payable monthly in arrears, provided that all interest accruing from and after August 14, 2019 through December 1, 2019 shall be due and payable on December 15, 2019.
The obligations of the Company under the Naxyris Loan Agreement are (i) guaranteed by the Subsidiary Guarantors and (ii) secured by a perfected security interest in substantially all of the assets of the Company and the Subsidiary Guarantors (the Collateral), junior in payment priority to Foris subject to certain limitations and exceptions, as well as the terms of the Intercreditor Agreement.
Mandatory prepayments of the outstanding amounts under the August 2019 Naxyris Loan will be required upon the occurrence of certain events, including asset sales, a change in control, and the incurrence of additional indebtedness, subject
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to certain exceptions and reinvestment rights. Outstanding amounts under the August 2019 Naxyris Loan must also be prepaid to the extent that the borrowing base exceeds the outstanding principal amount of the loans under the August 2019 Naxyris Loan. In addition, the Company may at its option prepay the outstanding principal amount of the loans under the August 2019 Naxyris Loan in full before the maturity date. Any prepayment of the loans under the August 2019 Naxyris Loan prior to the maturity date, whether pursuant to a mandatory or optional prepayment, is subject to a prepayment charge equal to one year’s interest at the then-current interest rate for the August 2019 Naxyris Loan. Upon any repayment of the loans under the August 2019 Naxyris Loan, whether on the maturity date or earlier pursuant to an optional or mandatory prepayment, the Company will pay Naxyris an end of term fee based on a percentage of the aggregate amount borrowed. In addition, (i) the Company will be required to pay a fee equal to 6% of any amount the Company fails to pay within three business days of its due date and (ii) any interest that is not paid when due will be added to principal and will accrue compound interest at the applicable rate.
The August 2019 Naxyris Loan contains customary affirmative and negative covenants and financial covenants, including covenants related to minimum revenue, minimum liquidity and minimum asset coverage requirements.
The August 2019 Naxyris Loan also contained a mandatory redemption feature that was not clearly and closely related to the debt host instrument, and thus, required bifurcation and separate accounting as a derivative liability. The embedded feature had an initial fair value of $0.3 million and was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the August 2019 Naxyris Loan. See Note 3, “Fair Value Measurement” for information regarding the fair value measurement and subsequent accounting for the embedded mandatory redemption feature.
In connection with the entry into the August 2019 Naxyris Loan, on August 14, 2019 the Company issued to Naxyris a warrant (the Naxyris LSA Warrant) to purchase up to 2.0 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. See Note 6, “Stockholders’ Deficit” for information regarding the fair value measurement and issuance of this warrant. The warrant had a $4.0 million fair value and a $3.0 million relative fair value after allocating the August 2019 Naxyris Loan proceeds to the $0.3 million fair value of the embedded mandatory redemption feature contained in the August 2019 Naxyris Loan, and allocating on a residual basis, to the relative fair values of the August 2019 Naxyris Loan and the Naxyris LSA Warrant. The $3.0 million relative fair value of the Naxyris LSA Warrant was recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the term of the August 2019 Naxyris Loan.
In addition to the $3.0 million relative fair value of the Naxyris LSA Warrant and the $0.3 million fair value of the embedded mandatory redemption feature, the August 2019 Naxyris Loan contained $0.4 million original issue discount, $0.5 million mandatory end of term fee and $0.3 million of issuances costs, all totaling $4.5 million. All such amounts were recorded as a debt discount to be amortized to interest expense over the term of the August 2019 Naxyris Loan.
Naxyris LSA Amendment
On October 28, 2019, the Company, the Subsidiary Guarantors and Naxyris amended and restated the Naxyris Loan Agreement (the A&R Naxyris LSA), pursuant to which the maximum loan commitment of Naxyris under the Naxyris Loan Agreement was increased by $10.4 million. On October 29, 2019, the Company borrowed an additional $10.4 million (the October 2019 Naxyris Loan) from Naxyris under the A&R Naxyris LSA, which is subject to the terms and provisions of the A&R Naxyris LSA, including the lien on substantially all of the assets of the Company and the Subsidiary Guarantors. Also, under the terms of A&R Naxyris LSA, the Company owes a 5% end of term fee on the October 2019 Naxyris Loan amount and a $2.0 million term loan fee, both of which are due at July 1, 2022 maturity or upon full repayment of the amounts borrowed under the A&R Naxyris LSA. Also, the Company paid Naxyris an upfront fee of $0.4 million at the funding date of the October 2019 Naxyris Loan. After giving effect to the October 2019 Naxyris Loan amount, there is $24.4 million aggregate principal amount of loans outstanding under the A&R Naxyris LSA.
Also, in connection with the entry into the A&R Naxyris LSA, on October 28, 2019 the Company issued to Naxyris a warrant to purchase up to 2.0 million shares of common stock, at an exercise price of $3.87 per share, with an exercise term of two years from issuance (the October 2019 Naxyris Warrant). The warrant had a $3.6 million fair value and a $2.8 million relative fair value after allocating the October 2019 Naxyris Loan proceeds to the $0.5 million fair value of the embedded mandatory redemption feature contained in the October 2019 Naxyris Loan, and allocating on a residual basis, to the relative fair values of the October 2019 Naxyris Loan and the October 2019 Naxyris Warrant. The $2.8 million relative fair value of the October 2019 Naxyris Warrant was recorded as an increase to additional paid in capital and as a loss on debt extinguishment (as discussed below).
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Due to changes in key terms of the Naxyris Loan Agreement through the addition of the October 2019 Naxyris Loan, the Company analyzed the before and after cash flows under the August 2019 Naxyris Loan and October 2019 Naxyris Loan in order to determine if these changes result in a modification or extinguishment of the original Naxyris Loan Agreement. Based on the combined before and after cash flows related to the increased principal balance, increased end of term fees and the fair value of new warrants provided to Naxyris, the Company determined that the change in cash flows were significantly different. Consequently, the October 2019 Naxyris Loan was accounting for as a debt extinguishment and new debt issuance. The Company recorded a $9.7 million loss on extinguishment comprised of (i) $4.0 million of unamortized debt discount, net of the $0.3 million fair value of the bifurcated embedded mandatory redemption feature, (ii) $2.9 million of original issue discount and end of term fees and (iii) the $2.8 million fair value of the October 2019 Naxyris Warrant (a non-cash fee paid to the lender).
The October 2019 Naxyris Loan contained a mandatory redemption feature that was not clearly and closely related to the debt host instrument, and thus, required bifurcation and separate accounting as a derivative liability. The embedded feature had an initial fair value of $0.5 million and was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the new debt issuance. See Note 3, “Fair Value Measurement” for information regarding the fair value measurement and subsequent accounting for the embedded mandatory redemption feature. The Company also capitalized $0.4 million of legal fees related to the October 2019 Naxyris Loan as a debt discount.
Schottenfeld September 2019 Credit Agreements
On September 10, 2019, the Company entered into separate credit agreements (the Investor Credit Agreements) with each of Schottenfeld Opportunities Fund II, L.P., Phase Five Partners, LP and Koyote Trading, LLC (the Investors or Schottenfeld Holdings Group LLC) to make available to the Company unsecured credit facilities in an aggregate principal amount of $12.5 million, which the Company borrowed in full on September 10, 2019 and issued to the Investors separate promissory notes in the aggregate principal amount of $12.5 million (the Investor Notes). Each Investor Note (i) accrues interest at a rate of 12% per annum, which is payable quarterly in arrears on each March 31, June 30, September 30 and December 31, beginning December 31, 2019, and (ii) matures on January 1, 2023. The Company may at its option repay the amounts outstanding under the Investor Notes before the maturity date, in whole or in part, at a price equal to 100% of the amount being repaid plus accrued and unpaid interest on such amount to the date of repayment.
The Investor Notes also contained a mandatory redemption feature that was not clearly and closely related to the debt host instrument, and thus, required bifurcation and separate accounting as a derivative liability. The embedded feature had an initial fair value of $0.3 million and was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the Investor Notes. See Note 3, “Fair Value Measurement” for information regarding the fair value measurement and subsequent accounting for the embedded mandatory redemption feature.
In connection with the September 10, 2019 Investor Credit Agreements, the Company issued to the Investors warrants (the September 2019 Investor Warrants) to purchase up to an aggregate of 3.2 million shares of common stock at an exercise price of $3.90 per share, with an exercise term of two years from issuance. The September 2019 Investor Warrants had a $7.9 million fair value which was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the Investor Notes. See Note 3, “Fair Value Measures” for information regarding the fair value measurement and accounting of these liability warrants.
Schottenfeld November 2019 Credit and Security Agreement
On November 14, 2019, the Company entered into a credit and security agreement (the Schottenfeld CSA) with Schottenfeld Opportunities Fund II, L.P. and Phase Five Partners, LP (two investors affiliated with Schottenfeld Group Holdings LLC) to borrow an additional $7.9 million, resulting in net proceeds to the Company of $7.5 million after deduction of a 5% original issue discount, and to grant the Investor Notes a security interest in the collateral granted to the Investors under the Schottenfeld CSA (as described below). The loans accrue interest at 12% per annum, mature on the earlier to occur of (i) the closing of a $50 million or greater financing and (ii) January 15, 2020, and are secured by a perfected security interest in substantially all of the assets of the Company and the Subsidiary Guarantors, junior in payment priority to Foris and Naxyris subject to the Subordination Agreement among Foris, Naxyris and the Investors. In connection therewith, the Company issued to such investors warrants to purchase an aggregate of 2.0 million shares of common stock at an exercise price of $3.87 per share, with an exercise term of 2 years from issuance (the November 2019 Schottenfeld CSA Warrants). In connection with the warrant issuance, the Company will be required to pay the November 2019 Schottenfeld CSA Warrants holders and the September 2019 Investor Warrants holders a fee if the Company issues equity securities in connection with the $50 million or greater financing provision that have an issue, conversion or exercise price of less than $3.90 or $3.87 per share, respectively. In such case, the fee will be the difference between the exercise price of such warrants (i.e., $3.90 or
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$3.87) and the issue, conversion or exercise price of the equity securities issued in the $50 million or greater financing, times the total number of warrants issued to such investors in November 2019 and September 2019. See Note 15, “Subsequent Events” for further information regarding the Company’s failure to repay the $7.9 million loan by January 15, 2020.
The November 2019 Schottenfeld CSA Warrants had a $4.0 million fair value which was recorded as a derivative liability and a loss on debt extinguishment (as discussed below). See Note 3, “Fair Value Measures” for information regarding the fair value measurement and accounting of these liability warrants. Also, the Schottenfeld CSA also contained a mandatory redemption feature that was not clearly and closely related to the debt host instrument, and thus, required bifurcation and separate accounting as a derivative liability. The embedded feature had an initial fair value of $0.2 million and was recorded as a derivative liability and a debt discount to be amortized to interest expense under the effective interest method over the term of the Schottenfeld CSA (as discussed below). See Note 3, “Fair Value Measurement” for information regarding the fair value measurement and subsequent accounting for the embedded mandatory redemption feature.
Due to multiple changes in key provisions of Investor Credit Agreements and the Schottenfeld CSA, the Company analyzed the before and after cash flows resulting from the increased principal balance and the fair value of the new November 2019 Schottenfeld CSA Warrants to determine whether these changes result in a modification or extinguishment of the original Schottenfeld and Phase Five notes. Based on the combined before and after cash flows of each note, the change in cash flows was significantly different. Consequently, the Schottenfeld CSA was accounted for as a debt extinguishment and a new debt issuance. The Company recorded an $11.2 million loss upon extinguishment of debt, which was comprised of $6.8 million of unaccreted discount and the balance of the derivative liability recorded in connection with the previous debt instrument, the $4.0 million fair value of the November 2019 Schottenfeld CSA Warrant (as a non-cash fee paid to the lender), and a $0.4 million original issue discount that was netted against the Schottenfeld CSA loan proceeds.
In recording the new debt issuance, the Company also capitalized $0.2 million of legal fees related to the Schottenfeld CSA and the initial fair value of the mandatory redemption feature of $0.2 million was as a debt discount to be amortized to interest expense under the effective interest method over the term of the new debt issuance.
DSM Credit Agreements—Related Party
DSM $25 Million Note
In December 2017, the Company and DSM entered into a credit agreement (the DSM Credit Agreement) to make available to the Company an unsecured credit facility of $25.0 million. On December 28, 2017, the Company borrowed $25.0 million under the DSM Credit Agreement, representing the entire amount available thereunder, and issued a promissory note to DSM in an equal principal amount (the DSM Note). The Company used the proceeds of the amounts borrowed under the DSM Credit Agreement to repay all outstanding principal under a promissory note in the principal amount of $25.0 million issued to Guanfu Holding Co., Ltd. in December 2016 (the Guanfu Note). Given multiple elements in the arrangements with DSM, the Company fair valued the DSM Note to determine the arrangement consideration that should be allocated to the DSM Note. The fair value of the DSM Note was discounted using a Company specific weighted average cost of capital rate that resulted in a debt discount of $8.0 million. The debt discount is being amortized over the loan term using the effective interest method.
The DSM Note (i) is an unsecured obligation of the Company, (ii) matures on December 31, 2021 and (iii) accrues interest from and including December 28, 2017 at 10% per annum, payable quarterly. The DSM Note may be prepaid in full or in part at any time without penalty or premium. The DSM Credit Agreement and the DSM Note contain customary terms, covenants and restrictions, including certain events of default after which the DSM Note may become due and payable immediately.
DSM $8 Million Note
On September 17, 2019, the Company and DSM entered into a credit agreement (the 2019 DSM Credit Agreement) to make available to the Company a secured credit facility in an aggregate principal amount of $8.0 million, to be issued in separate installments of $3.0 million, $3.0 million and $2.0 million, respectively, with each installment being subject to certain closing conditions, including the payment of certain existing obligations of the Company to DSM. On September 17, 2019, the Company borrowed the first installment of $3.0 million under the 2019 DSM Credit Agreement, all of which proceeds were used to pay certain existing obligations of the Company to DSM, and issued to DSM a promissory note in the principal amount of $3.0 million. On September 19, 2019, the Company borrowed the second installment of $3.0 million under the 2019 DSM Credit Agreement, all of which proceeds were used to pay certain existing obligations of the Company to DSM, and issued to DSM a promissory note in the principal amount of $3.0 million. On September 23, 2019, the Company borrowed the final
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installment of $2.0 million under the 2019 DSM Credit Agreement, $1.5 million of which proceeds were used to pay certain existing obligations of the Company to DSM, and issued to DSM a promissory note in the principal amount of $2.0 million. The promissory notes issued under the 2019 DSM Credit Agreement (i) mature on August 7, 2022, (ii) accrue interest at a rate of 12.5% per annum from and including the applicable date of issuance, which interest is payable quarterly in arrears on each January 1, April 1, July 1 and October 1, beginning January 1, 2020, and (iii) are secured by a first-priority lien on certain Company intellectual property licensed to DSM. The Company may at its option repay the amounts outstanding under the 2019 DSM Credit Agreement before the maturity date, in whole or in part, at a price equal to 100% of the amount being repaid plus accrued and unpaid interest on such amount to the date of repayment. In addition, the Company is required to repay the amounts outstanding under the 2019 DSM Credit Agreement (i) in an amount equal to the gross cash proceeds, if any, received by the Company upon the exercise by DSM of any of the common stock purchase warrants issued by the Company to DSM on May 11, 2017 or August 7, 2017 (see Note 6, “Stockholders’ Deficit”) and (ii) in full upon the request of DSM at any time following the receipt by the Company of at least $50.0 million of gross cash proceeds from one or more sales of equity securities of the Company on or prior to June 30, 2020. In connection with issuance of the 2019 DSM Credit Agreement, the Company incurred $0.3 million of legal fees which were recorded as a debt discount to be amortized as interest expense under the effective interest method over the term of the 2019 DSM Credit Agreement.
Ginkgo Note, Partnership Agreement and Note Amendment
In November 2017, the Company and Ginkgo Bioworks, Inc. (Ginkgo) entered into a partnership agreement (Ginkgo Partnership Agreement) to replace and supersede the 2016 Ginkgo Collaboration Agreement. Under the Ginkgo Partnership Agreement, the Company and Ginkgo agreed:
•to issue the $12 million November 2017 Ginkgo Note (as defined below), which effectively guarantees Ginkgo $12 million minimum future royalties under the profit margin sharing provisions noted below;
•to pay Ginkgo quarterly fees of $0.8 million (Partnership Payments) for a total of $12.7 million, beginning on December 31, 2018 and ending on September 30, 2022;
•to share profit margins from sales of a certain product to be developed under the Ginkgo Partnership Agreement on a 50/50 basis, subject to certain conditions, provided that net profits will be payable to Ginkgo for any quarterly period to the extent that such net profits exceed the sum of (a) quarterly interest payments due under the November 2017 Ginkgo Note and (b) Partnership Payments due in such quarter;
•to continue to collaborate on limited research and development; and
•to provide each other licenses (with royalties) to specified intellectual property for limited purposes.
The Ginkgo Partnership Agreement provides for an initial term of two years and will automatically renew for successive -year terms thereafter unless otherwise terminated. The Company does not expect to recognize any future revenue under this arrangement.
The Company recorded the $6.1 million present value of the $12.7 million partnership payments in other liabilities (see Note 2, "Balance Sheet Details"), with the remaining $6.6 million recorded as a debt discount to be recognized as interest expense under the effective interest method over the -year payment term. The Company also concluded the partnership payment obligation under the Ginkgo Partnership Agreement represents consideration payable to a former customer; and consequently, the present value of the partnership payments should be recorded as a reduction of cumulative revenue recognized to date from Ginkgo in the period the partnership agreement was executed. The Company reached a similar conclusion regarding the $12.0 million Ginkgo Note described below. In total, the Company recorded a $13.1 million reduction in licenses and royalties revenue and $13.1 million in notes payable and other liabilities as of and for the year ended December 31, 2017 upon execution of the Ginkgo Partnership Agreement.
In November 2017, the Company issued an unsecured promissory note in the principal amount of $12.0 million to Ginkgo (the November 2017 Ginkgo Note) in connection with the termination of the Ginkgo Collaboration Agreement and the execution of the Ginkgo Partnership Agreement. The November 2017 Ginkgo Note accrues interest at 10.5% per annum, payable monthly, and has a maturity date of October 19, 2022. The November 2017 Ginkgo Note may be prepaid in full without penalty or premium at any time, provided that certain payments have been made under the Company’s partnership agreement with Ginkgo. The November 2017 Ginkgo Note also contains customary terms, covenants and restrictions, including certain events of default after which the note may become due and payable immediately. The Company recorded the $7.0 million present value of the November 2017 Ginkgo Note as a note payable liability, and the remaining $5.0 million was recorded as a debt discount which is being accreted to interest expense over the loan term using the effective interest method.
On September 29, 2019, in connection with Ginkgo granting certain waivers under the November 2017 Ginkgo Note and the Ginkgo Partnership Agreement, (i) the Company and Ginkgo amended the November 2017 Ginkgo Note to increase the
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interest rate from 10.5% per annum to 12% per annum, beginning October 1, 2019, (ii) Ginkgo agreed to waive default interest, defer past due interest and partnership payments under the November 2017 Ginkgo Note and Ginkgo Partnership Agreement until December 15 and (iii) the Company agreed to pay a cash waiver fee of $1.3 million, payable in installments of $0.5 million on December 15, 2019 and $0.8 million on March 31, 2020. The Company accounted for this amendment as a modification and accrued the $1.3 million waiver fee in other current liabilities and a charge to interest expense during the year ended December 31, 2019. See Note 15, “Subsequent Events” for further information regarding the Company’s failure to pay the $5.2 million past due interest, default interest on past due amounts, partnership payments and the $0.5 million waiver fee installment on December 15, 2019.
6% Convertible Notes Due 2021
In December 2018, the Company issued $60.0 million in aggregate principal amount of senior convertible notes (the 6% Convertible Notes Due 2021) for $56.2 million of net proceeds, after deducting offering expenses and placement agent and advisory fees.
The Company elected to account for the 6% Convertible Notes Due 2021 at fair value as of the issuance date. Management believes that the fair value option better reflects the underlying economics of the 6% Convertible Notes Due 2021, which contain multiple embedded derivatives. Under the fair value election, changes in fair value are reported in the consolidated statements of operations as "(Loss) gain from change in fair value of debt" in each reporting period subsequent to the issuance of the 6% Convertible Notes Due 2021.
In May, June and July 2019, the Company exchanged the 6% Convertible Notes Due 2021 for new senior convertible notes and warrants to purchase common stock. Since the Company elected the fair value accounting option for the 6% Convertible Notes and records all changes in fair value through (Loss) gain from change in fair value of debt in the consolidated statement of operations, this series of exchanges was not required to be evaluated for modification or extinguishment accounting treatment. However, the Company considered the issuance of the warrant in connection with these exchanges as compensation to the noteholders for waiving certain covenant violations during the period, and recorded a $5.3 million increase to additional paid in capital and a charge to interest expense for the fair value of the equity-classified May 15, 2019, June 24, 2019 and July 24, 2019 warrants. See Note 6, “Stockholders’ Deficit” for information regarding the fair value measurement and issuance of this warrant.
On November 8, 2019, the Company entered into a Securities Exchange Agreement with certain private investors (the Investors), pursuant to which the Investors purchased the 6% Convertible Notes Due 2021 from the original holder and subsequently exchanged the 6% Convertible Notes Due 2021 with the Company for new 5% Senior Convertible Notes (the Senior Convertible Notes Due 2022) having an aggregate principal amount of $66.0 million. See the Senior Convertible Notes Due 2022 section below for further information on the exchange.
The Company evaluated the Investor’s purchase of the 6% Convertible Notes Due 2021 from the original holder and subsequent exchange with the Company for the Senior Convertible Notes Due 2022 and determined the purchase and exchange met the criteria for extinguishment accounting. The Company recorded a $1.9 million loss of debt extinguishment as of December 31, 2019, determined as follows:
| In thousands | |||||
| Fair value at December 31, 2018 | $ | 57,918 | |||
| Less: principal paid in cash during 2019 | (13,395) | ||||
| Less: principal converted to common stock during 2019 | (15,000) | ||||
| Loss on change in fair value during 2019 | 18,303 | ||||
| Accrued interest | 3,168 | ||||
| Carrying value of registration rights liability | 5,757 | ||||
| Net carrying value at extinguishment | 56,751 | ||||
| Total reacquisition price | 58,640 | ||||
| Loss on debt extinguishment | $ | 1,889 | |||
Senior Convertible Notes Due 2022
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As discussed above under the 6% Convertible Notes Due 2021 section, on November 8, 2019, the Company entered into a securities exchange agreement with certain private investors (the Investors). The Investors completed the purchase of the Second Exchange Note from the current holder, and on November 15, 2019 the Company exchanged the 6% Convertible Notes Due 2021 held by the Investors for the Senior Convertible Notes Due 2022.
The Senior Convertible Notes Due 2022 are general unsecured obligations of the Company and will mature on September 30, 2022 unless earlier converted or redeemed.
The Senior Convertible Notes Due 2022 are payable in fixed monthly installments of $3.0 million from February 1, 2020 through July 1, 2020 and then $3.4 million monthly thereafter in either cash or, at the Company’s option, subject to the satisfaction of certain equity conditions, in shares of common stock at a discount to the then-current market price, subject to a price floor. The holders have the right, upon notice to the Company, to defer all or any portion of any installment amount to a future installment date. Each installment payment will reduce the principal amount under the Senior Convertible Notes Due 2022 by 90% of the amount of such installment payment.
The Senior Convertible Notes Due 2022 accrue interest at a rate of 5% per annum, and is payable on each installment date. Interest on the Senior Convertible Notes Due 2022 may be paid in either cash or, at the Company’s option, subject to the satisfaction of the equity conditions, shares of common stock at the installment conversion price. Upon the occurrence and during the continuation of an event of default, interest on the Senior Convertible Notes Due 2022 will accrue at a rate of 15% per annum.
The Company may at its option redeem the Senior Convertible Notes Due 2022, in full, at a price equal to 115% of the greater of (A) the principal amount of the Senior Convertible Notes Due 2022 being redeemed and (B) the intrinsic value of the shares of common stock underlying the principal amount of the Senior Convertible Notes Due 2022 being redeemed. In addition, the Company is required to (i) redeem the Senior Convertible Notes Due 2022 in an aggregate amount of $10.0 million following the receipt by the Company of at least $75.0 million of aggregate net cash proceeds from one or more financing transactions, at a price equal to 110% of the amount being redeemed and (ii) redeem the Senior Convertible Notes Due 2022 in an aggregate amount of $10.0 million on December 31, 2019, at a price equal to 110% of the amount being redeemed, in each case unless such redemption is deferred by the holder, and (iii) raise aggregate net cash proceeds of $30 million by December 31, 2019 and an additional $75 million by March 15, 2020 from one or more financing transactions by January 31, 2020. See Note 15, “Subsequent Events” for further information regarding the Company’s failure to redeem $10 million of the Senior Convertible Notes Due 2022 and raise aggregate cash proceeds of $30 million on or by December 31, 2019 and a description of an amendment to certain other redemption provisions in the Senior Convertible Notes Due 2022.
The Senior Convertible Notes Due 2022 are convertible from time to time, at the election of the holders, into shares of common stock at an initial conversion price of $5.00 per share. The conversion price is subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
The Senior Convertible Notes Due 2022 contain customary terms and covenants, including (i) a restriction on the Company’s ability to incur additional indebtedness, (ii) covenants related to minimum revenue, minimum liquidity, financing activity and the conversion or exchange of existing indebtedness into equity, (iii) certain events of default, after which the holders may (A) require the Company to redeem all or any portion of their Senior Convertible Notes Due 2022 in cash at a price equal to 115% of the amount being redeemed and (B) convert all or any portion of their Senior Convertible Notes Due 2022 at a discount to the Installment conversion price and (iv) certain other events, after which the holders may convert all or any portion of their Senior Convertible Notes Due 2022 at a discount to the conversion price. See Note 15, “Subsequent Events” for further information regarding the amendment to certain conversion provisions in the Senior Convertible Notes Due 2022.
Notwithstanding the foregoing, the holders do not have the right to convert any portion of a New Note, and the Company does not have the option to pay any amount under the Senior Convertible Notes Due 2022 in shares of common stock, if (a) the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion or payment, as applicable (the Ownership Limitation) or (b) the aggregate number of shares issued with respect to the Senior Convertible Notes Due 2022 (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed the limitation imposed by Nasdaq Listing Standard Rule 5635(d) (the Exchange Cap), unless Stockholder Approval (as defined below) has been obtained. In the event that (i) the Company is prohibited from issuing any shares of common stock under the Senior Convertible Notes Due 2022 as a result of the Ownership Limitation (other than in connection with a conversion of Senior Convertible Notes Due 2022), the related principal amount of the Senior Convertible Notes Due 2022 shall be deferred to a future installment date as determined by the holder, and (ii) after January 31, 2020, the Company is prohibited from issuing
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any shares of common stock under the Senior Convertible Notes Due 2022 as a result of the Exchange Cap, the Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Exchange Cap.
Pursuant to the Senior Convertible Notes Due 2022, the Company agreed to use commercially reasonable efforts to obtain from the Company’s stockholders the approval contemplated by Nasdaq Listing Standard Rule 5635(d) with respect to the issuance of shares of common stock upon conversion of, or otherwise pursuant to, the Senior Convertible Notes Due 2022 in excess of the limitation imposed by such rule, including without limitation the issuance of shares of common stock upon conversion of, or otherwise pursuant to, the Senior Convertible Notes Due 2022 in excess of the Exchange Cap (the Stockholder Approval), at an annual or special meeting of stockholders to be held on or prior to January 31, 2020. Pursuant to the Senior Convertible Notes Due 2022, if the Company does not obtain the Stockholder Approval by January 31, 2020, the Company will use best efforts to obtain the Stockholder Approval thereafter. See Note 15, “Subsequent Events” for further information regarding the amendment, forbearance and waiver to certain provisions in the Senior Convertible Notes Due 2022, including the deadline for the Company to seek the Stockholder Approval.
The Company has elected to account for the Senior Convertible Notes Due 2022 at fair value, as of the issuance date. Management believes that the fair value option better reflects the underlying economics of the Senior Convertible Notes Due 2022, which contain multiple embedded derivatives. Under the fair value election, changes in fair value will be reported in the consolidated statements of operations as "Gain (loss) from change in fair value of debt" in each reporting period subsequent to the issuance of the Senior Convertible Notes Due 2022. For the year ended December 31, 2019, the Company recorded a gain of $3.8 million, which is shown as Fair Value Adjustment in the table at the beginning of this Note 4. See Note 3, "Fair Value Measurement" for information about the assumptions that the Company used to measure the fair value of the Senior Convertible Notes Due 2022.
Nikko Loan Agreements and Notes
The loans payable to Nikko Chemicals Co., Ltd. at December 31, 2019 are comprised of the following (amounts in thousands):
| Description | Date Issued | Original Loan Amount | Balance at December 31, 2019 | Interest Rate per Annum | Maturity Date | ||||||||||||
| Nikko $5.0M Note | July 29, 2019 | $ | 5,000 | $ | 5,000 | 5.00% | December 18, 2020 | ||||||||||
| Nikko $4.5M Note | December 19, 2019 | 4,500 | 4,500 | 2.75% | January 31, 2020 | ||||||||||||
| Nikko $3.9M Note | December 19, 2016 | 3,900 | 2,862 | 5.00% | December 1, 2029 | ||||||||||||
| Nikko $1.5M Note B | August 3, 2017 | 1,500 | 900 | 2.75% | August 1, 2020 | ||||||||||||
| Nikko $450K Note | December 9, 2019 | 450 | 450 | 2.75% | March 31, 2020 | ||||||||||||
| Nikko $350K Note | November 20, 2019 | 350 | 350 | 2.75% | January 31, 2020 | ||||||||||||
| Nikko $200K Capex Loan | February 1, 2019 | 200 | 171 | 5.00% | January 1, 2026 | ||||||||||||
| Nikko $500K Note | October 31, 2019 | 500 | 84 | 2.75% | January 10, 2020 | ||||||||||||
| $ | 16,400 | $ | 14,317 | ||||||||||||||
Nikko Loan Agreements
On July 29, 2019, the Company and Nikko entered into a loan agreement (the Nikko Loan Agreement) to make available to the Company secured loans in an aggregate principal amount of $5.0 million, to be issued in separate installments of $3.0 million and $2.0 million, respectively. On July 30, 2019, the Company borrowed the first installment of $3.0 million under the Nikko Loan Agreement and received net cash proceeds of $2.8 million, with the remaining $0.2 million being withheld by Nikko as prepayment of the interest payable on such loan through the maturity date. On August 8, 2019, the Company borrowed the remaining $2.0 million available under the Nikko Loan Agreement and received net cash proceeds of $1.9 million, with the remaining $0.1 million being withheld by Nikko as prepayment of the interest payable on such loan through the maturity date. The loans (i) mature on December 18, 2020, (ii) accrue interest at a rate of 5% per annum from and including the applicable loan date through the maturity date, which interest is required to be prepaid in full on the date of the applicable loan, and (iii) are secured by a first-priority lien on 12.8% of the Aprinnova JV interests owned by the Company.
On December 19, 2019, the Company borrowed $4.5 million from Nikko under a second secured loan agreement. The loan (i) matures on January 31, 2020, (ii) accrues interest at a rate of 2.75% per annum, and (iii) is secured by a first-priority lien on 27.2% of the Aprinnova JV interests owned by the Company. See Note 15, “Subsequent Events” for further information regarding the Company’s failure to pay the $4.5 million loan on January 31, 2020.
Nikko Notes
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Facility Note: In December 2016, in connection with the Company's formation of its cosmetics joint venture (the Aprinnova JV) with Nikko Chemicals Co., Ltd. (Nikko), Nikko made a loan to the Company in the principal amount of $3.9 million and the Company issued a promissory note (the Nikko Note) to Nikko in an equal principal amount. The proceeds of the Nikko Note were used to satisfy the Company's remaining liabilities related to the Company's purchase of a manufacturing facility in Leland, North Carolina and related assets in December 2016, including liabilities under a promissory note in the principal amount of $3.5 million issued in connection therewith. The Nikko Note (i) accrues interest at 5% per year, (ii) has a term of 13 years, (iii) is payable in equal monthly installments of principal and interest beginning on January 1, 2017 and (iv) is secured by a first-priority lien on 10% of the Aprinnova JV interests owned by the Company. In addition, the Company is required to repay the Nikko Note with any profits distributed to the Company by the Aprinnova JV, beginning with the distributions for the fourth fiscal year of the Aprinnova JV, until the Nikko Note is fully repaid. The Nikko Note may be prepaid in full or in part at any time without penalty or premium. The Nikko Note contains customary terms and provisions, including certain events of default after which the Nikko Note may become due and payable immediately.
Aprinnova JV Working Capital Notes: In February 2017, in connection with the formation of the Aprinnova JV in December 2016, Nikko made a working capital loan to the Aprinnova JV in the principal amount of $1.5 million (the First Aprinnova Note). The First Aprinnova Note was fully repaid in January 2018. In August 2017, Nikko made a second working capital loan to the Aprinnova JV in the principal amount of $1.5 million (the Second Aprinnova Note). The Second Aprinnova Note was payable in full on August 1, 2019, with interest payable quarterly. Both notes accrue interest at 2.75% per annum. Effective July 31, 2019, the Company repaid $500,000 and agreed with Nikko to extend the term of the Second Aprinnova Note to August 1, 2020. Under the terms of the extension, the Company is required to make four quarterly principal payments of $100,000 each beginning November 1, 2019 through May 1, 2020 and a final payment of $700,000 at August 1, 2020 maturity.
Aprinnova JV Palladium Notes: In October, November and December 2019, Nikko advanced Aprinnova JV a total of $1.3 million under three separate promissory notes to purchase a palladium catalyst used in the manufacturing process at the Leland facility. These short-term notes accrue interest at 2.75% per annum and mature between January 10, 2020 and March 31, 2020. As of February 28, 2020, the total $1.3 million of note balances has been fully repaid in cash and are no longer outstanding.
Aprinnova JV CapEx Note: On February 1, 2019, the Aprinnova JV and Nikko agreed to fund Nikko’s $0.2 million share of the joint venture’s 2018 capital expenditures through an unsecured -year promissory note (the 2018 CapEx Note). The 2018 CapEx note (i) requires quarterly principal payments of $7,200 beginning April 1, 2019, (ii) accrues 5% simple interest per annum, and (iii) matures on January 1, 2026.
Letters of Credit
In June 2012, the Company entered into a letter of credit agreement for $1.0 million under which it provided a letter of credit to the landlord for its headquarters in Emeryville, California in order to cover the security deposit on the lease. This letter of credit is secured by a certificate of deposit. Accordingly, the Company has $1.0 million of restricted cash, noncurrent in connection with this arrangement as of December 31, 2019 and 2018.
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5. Mezzanine Equity
Mezzanine equity at December 31, 2019 and 2018 is comprised of proceeds from common shares sold on May 10, 2016 to the Bill & Melinda Gates Foundation (the Gates Foundation). On April 8, 2016, the Company entered into a Securities Purchase Agreement with the Gates Foundation, pursuant to which the Company agreed to sell and issue 292,398 shares of its common stock to the Gates Foundation in a private placement at a purchase price per share of $17.10, the average of the daily closing price per share of the Company’s common stock on the Nasdaq Stock Market for the twenty consecutive trading days ending on April 7, 2016, for aggregate proceeds to the Company of approximately $5.0 million (the Gates Foundation Investment). The Securities Purchase Agreement includes customary representations, warranties and covenants of the parties.
In connection with the entry into the Securities Purchase Agreement, on April 8, 2016, the Company and the Gates Foundation entered into a Charitable Purposes Letter Agreement, pursuant to which the Company agreed to expend an aggregate amount not less than the amount of the Gates Foundation Investment to develop a yeast strain that produces artemisinic acid and/or amorphadiene at a low cost and to supply such artemisinic acid and amorphadiene to companies qualified to convert artemisinic acid and amorphadiene to artemisinin for inclusion in artemisinin combination therapies used to treat malaria commencing in 2017. The Company is currently conducting the project. If the Company defaults in its obligation to use the proceeds from the Gates Foundation Investment as set forth above or defaults under certain other commitments in the Charitable Purposes Letter Agreement, the Gates Foundation will have the right to request that the Company redeem, or facilitate the purchase by a third party of, the Gates Foundation Investment shares then held by the Gates Foundation at a price per share equal to the greater of (i) the closing price of the Company’s common stock on the trading day prior to the redemption or purchase, as applicable, or (ii) an amount equal to $17.10 plus a compounded annual return of 10%. As of December 31, 2019, the Company's remaining research and development obligation under this arrangement was $0.4 million.
6. Stockholders’ Deficit
Shares Issuable under Convertible Notes and Convertible Preferred Stock
In connection with various debt transactions (see Note 4, "Debt"), the Company issued certain convertible notes and preferred shares that are convertible into shares of common stock as follows as of December 31, 2019, at any time at the election of each debtholder:
| Number of Shares Instrument Is Convertible into as of December 31, 2019 | |||||
| Senior convertible notes due 2022 | 13,200,000 | ||||
| 2014 Rule 144A convertible notes | 181,238 | ||||
| Series D preferred stock (8,280 shares outstanding at December 31, 2019) | 1,943,661 | ||||
| 15,324,899 | |||||
2014 Rule 144A Convertible Notes Exchanges
On May 10, 2019, the Company exchanged $13.5 million aggregate principal amount of the 2014 Rule 144A Convertible Notes held by certain non-affiliated investors, including accrued and unpaid interest thereon, for an aggregate of 3.5 million shares of common stock and warrants to purchase an aggregate of 1.4 million shares of common stock at an exercise price of $5.02 per share, with an exercise term of two years from issuance, in a private exchange.
On May 14, 2019, the Company exchanged $5.0 million aggregate principal amount of the 2014 Rule 144A Convertible Notes held by Foris, including accrued and unpaid interest thereon, for 1.1 million shares of common stock and a warrant to purchase up to 0.4 million shares of common stock at an exercise price of $4.56 per share, with an exercise term of two years from issuance, in a private exchange. On August 28, 2019, the Company and Foris agreed to reduce the exercise price of such warrant from $4.56 per share to $3.90 per share. See “August 2019 Foris Warrant Issuance” below for additional information and Note 15, “Subsequent Events” for information regarding the amendment and exercise of the warrants on January 31, 2020.
On May 15, 2019, the Company exchanged $10.0 million aggregate principal amount of the 2014 Rule 144A Convertible Notes held by Maxwell (Mauritius) Pte Ltd for 2.5 million shares of common stock in a private exchange.
The Company issued 7.1 million shares of common stock with a fair value totaling $30.8 million based on the Company's closing stock price at the date of each exchange upon exchange of the 2014 Rule 144A Convertible Notes described above. The Company also issued warrants (collectively, the May 2019 6.50% Note Exchange warrant) to purchase a total of 1.7 million
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shares of common stock with a fair value of $3.8 million. The Company concluded the warrants are freestanding instruments that are legally detachable and separately exercisable from the convertible notes and will be classified in equity as the warrants are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrants within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrants were measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $4.27 - $4.54, strike price $4.56 - $5.02, volatility 96%, risk-free interest rate 2.20% - 2.26%, and expected dividend yield 0%. The warrant had a fair value of $5.9 million that was recorded as a loss of debt extinguishment. See Note 4, "Debt" for information about the accounting treatment for this debt exchange and related fair value of the warrant.
The exercise price of the warrants issued in the foregoing exchanges is subject to standard adjustments but does not contain any anti-dilution protection, and the warrants only permit “cashless” or “net” exercise after the -month anniversary of the exercisability of the applicable warrant, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the applicable warrant. In addition, (i) the exercisability of the warrant issued to Foris is subject to stockholder approval in accordance with Nasdaq rules and regulations, which the Company is seeking at its 2019 annual meeting of stockholders, and (ii) each other warrant provides that the Company may not affect any exercise of such warrant to the extent that, after giving effect to such exercise, the applicable holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding after giving effect to such exercise.
August 2013 Financing Convertible Note Conversion into Equity
On July 8, 2019, Wolverine exchanged $5.1 million principal and accrued and unpaid interest related to its August 2013 Financing Convertible Note for 1.8 million shares of common stock and a warrant (the July 2019 Wolverine Warrant) to purchase 1.1 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. The common stock had a fair value of $5.9 million or $3.30 per share and the warrant had a fair value of $1.9 million. The Company concluded the warrant is a freestanding instrument that is legally detachable and separately exercisable from the convertible note and will be classified in equity, as the warrant is both indexed to the Company’s own stock and meets the equity classification criteria. As such, the Company will account for the fair value of the warrant within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrant to be reclassified to an asset or liability. The fair value of the warrant was measured using the Black-Scholes-Merton option pricing model, with the following parameters: stock price $3.33, strike price $2.87, volatility 94%, risk-free interest rate 1.88%, and expected dividend yield 0%. The resulting $1.9 million fair value was recorded as a loss of debt extinguishment. See Note 4, “Debt” for additional information regarding the loss on debt extinguishment.
Pre-Delivery Shares Issued with Senior Convertible Notes Due 2022
In connection with the issuance of the Senior Convertible Notes Due 2022 on November 15, 2019, the Company issued 7.5 million shares of common stock (the Pre-Delivery Shares) to the note holders which are freely tradeable, validly issued, fully paid, nonassessable and free from all preemptive or similar rights or liens, for the note holders to sell, trade or hold, subject to certain limitations, for as long as the Senior Convertible Notes Due 2022 are outstanding. The issuance of these shares resulted in no cash proceeds to the Company. However, the Company may elect or be required to apply some or all of the value of the pre-delivered shares to satisfy periodic principal and interest payments or other repayment events. If the Pre-Delivery Shares are used in satisfaction of a payment(s) due under the Senior Convertible Notes Due 2022, the Company must provide additional shares of common stock to the note holders in order to maintain a 7.5 million share balance on deposit with the holder. The Holder will not (A) loan any Pre-Delivery shares to any third party, (B) prior to February 1, 2020 sell or otherwise transfer or dispose of any Pre-Delivery Shares to any unaffiliated third party and (C) on or after February 1, 2020 sell or otherwise transfer or dispose of any Pre-Delivery Shares to any unaffiliated third party if the amount of such sales, transfers or dispositions on any day would exceed 10% of the composite trading volume (as reported on Bloomberg) of the Common Stock on such day. Within ten business days following redemption or repayment of in full the Senior Convertible Notes Due 2022 and the satisfaction or discharge by the Company of all outstanding Company obligations hereunder, the Holder shall deliver 7.5 million shares of the Company’s common stock to the Company.
The Company concluded the Pre-Delivery Shares provision is a freestanding instrument that is legally detachable and separately exercisable from the Senior Convertible Notes Due 2022 and will be classified in equity as the common shares issued is both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the Pre-Delivery Shares within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the shares to be reclassified to an asset or liability. The Company measured the issue date fair value of the Pre-Delivery Shares under an expected borrowing cost approach using a 9.75% annual
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borrowing rate over an 18-month estimated repayment term for the Senior Convertible Notes Due 2022. The resulting $4.2 million fair value was recorded in equity as additional paid in capital with an offset to the fair value of the Senior Convertible Notes Due 2022. See Note 3, “Fair Value Measurements” for further information regarding the fair value measurement and accounting for this freestanding instrument.
Series B Preferred Stock Beneficial Ownership Limitation
On October 24, 2019, the Company filed a certificate of amendment (the Certificate of Amendment) to the Certificate of Designation (the Certificate of Designation) relating to the Company’s Series B 17.38% Convertible Preferred Stock, par value $0.0001 per share (the Series B Preferred Stock), with the Secretary of State of Delaware. The Company had originally filed the Certificate of Designation on May 8, 2017, pursuant to which the conversion of the Series B Preferred Stock was subject to a beneficial ownership limitation of 4.99%, or such other percentage as determined by the holder, not to exceed 9.99% of the number of shares of the Company’s common stock outstanding after giving effect to such conversion (the Beneficial Ownership Limitation). In addition, pursuant to the Certificate of Designation, each share of Series B Preferred Stock automatically converted on October 9, 2017, subject to the Beneficial Ownership Limitation.
Pursuant to the Certificate of Amendment, the Beneficial Ownership Limitation was eliminated, permitting the conversion of any outstanding shares of Series B Preferred Stock, the conversion of which was previously prevented by the Beneficial Ownership Limitation. As such, on October 24, 2019, the remaining 6,376.28 shares of Series B Preferred Stock, which were all held by Foris, automatically converted into 1.0 million shares of the Company’s common stock.
April 2019 Private Placements
On April 16, 2019, the Company sold and issued to Foris 6.7 million shares of common stock at a price of $2.87 per share, for aggregate proceeds to the Company of $20.0 million (the Foris Investment), as well as a warrant (the April 2019 Foris Warrant) to purchase up to 5.4 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance, in a private placement, for aggregate cash proceeds to the Company of $20.0 million. The Company evaluated the warrants for derivative liability treatment and concluded that the instruments met the indexation criteria to be accounted for in equity.
On April 26, 2019, the Company sold and issued (i) 2.8 million shares of common stock at a price of $5.12 per share, as well as a warrant (the April 2019 PIPE Warrants) to purchase up to 4.0 million shares of common stock at an exercise price of $5.12 per share, with an exercise term of two years from issuance, to Foris and (ii) an aggregate of 2.0 million shares of common stock at a price of $4.02 per share, as well as warrants (the April 2019 PIPE Warrants) to purchase up to an aggregate of 1.6 million shares of common stock at an exercise price of $5.02 per share, with an exercise term of two years from issuance, to certain other non-affiliated investors, in each case in private, for aggregate cash proceeds to the Company of $15.0 million from Foris and $8.2 million from non-affiliated investors, for a total of $23.2 million. The Company evaluated the warrants for derivative liability treatment and concluded that the instruments met the indexation criteria to be accounted for in equity.
On April 29, 2019, the Company sold and issued (i) 0.9 million shares of common stock at a price of $4.76 per share, as well as warrants (the April 2019 PIPE Warrants) to purchase up to an aggregate of 1.2 million shares of common stock at an exercise price of $4.76 per share, with an exercise term of two years from issuance, to affiliates of Vivo Capital LLC (Vivo), an entity affiliated with director Frank Kung and which owns greater than five percent of our outstanding common stock and has the right to designate one member of the Company’s Board of Directors) and (ii) an aggregate of 0.3 million shares of common stock at a price of $4.02 per share, as well as warrants (the April 2019 PIPE Warrants) to purchase up to an aggregate of 0.3 million shares of common stock at an exercise price of $5.02 per share, with an exercise term of two years from issuance, to certain other non-affiliated investors, in each case in private placements, for aggregate cash proceeds to the Company of $4.5 million from Vivo and $1.3 million from non-affiliated investors, for a total of $5.8 million. The Company evaluated the warrants for derivative liability treatment and concluded that the instruments met the indexation criteria to be accounted for in equity.
On May 3, 2019, the Company sold and issued 1.2 million shares of common stock at a price of $4.02 per share, as well as a warrant (the April 2019 PIPE Warrants) to purchase up to 1.0 million shares of common stock at an exercise price of $5.02 per share, with an exercise term of two years from issuance, to a non-affiliated investor in a private placement, for aggregate cash proceeds to the Company of $5.0 million. The Company evaluated the warrants for derivative liability treatment and concluded that the instruments met the indexation criteria to be accounted for in equity.
The exercise price of the warrants issued in the foregoing private placements is subject to standard adjustments but does not contain any anti-dilution protection, and the warrants only permit “cashless” or “net” exercise after the -month
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anniversary of issuance of the applicable warrant, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the applicable warrant. In addition, in connection with the foregoing private placements, the Company agreed not to effect any exercise or conversion of any Company security, and the investors agreed not to exercise or convert any portion of any Company security, to the extent that after giving effect to such exercise or conversion, the applicable investor, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of common stock outstanding immediately after giving effect to such exercise or conversion, and the warrant contained a similar limitation. The Company obtained stockholder approval for Foris to exceed such limitation in accordance with Nasdaq rules and regulations at its annual meeting of stockholders on November 19, 2019.
See Note 15, “Subsequent Events” for information regarding the amendment and exercise of certain April 2019 PIPE Warrants on January 31, 2020.
November 2018 DSM Securities Purchase Agreement – Related Party
On November 20, 2018, the Company issued 1,643,991 shares of common stock (the DSM Shares) at $3.68 per share to DSM in a private placement pursuant to a securities purchase agreement, dated November 19, 2018, between the Company and DSM (the DSM SPA), in consideration of certain agreements of DSM set forth in the Supply Agreement Amendment described in Note 9, "Revenue Recognition". The Company also agreed to pay DSM the difference between the DSM SPA purchase price of $4.41 and the closing share price of the Company's common stock on March 28, 2019, multiplied by 1,643,991 million. At inception, the Company recorded a $1.2 million derivative liability for the difference between $4.41 and the Company’s closing stock price on November 20, 2018. At December 31, 2018 fair value based on the Company’s closing stock price was $1.8 million, resulting in a $0.6 million loss from change in fair value of derivative instruments for the year ended December 31, 2018. At March 28, 2019, the Company's stock price was $2.10, and the Company owed DSM $3.8 million in connection with this agreement. Pursuant to the DSM SPA, the Company agreed to file a registration statement providing for the resale by DSM of the DSM Shares and to use commercially reasonable efforts to (i) cause such registration statement to become effective within 181 days following the date of the DSM SPA and (ii) keep such registration statement effective until DSM does not own any DSM Shares or the DSM Shares are eligible for resale under Rule 144 without regard to volume limitations. See Note 10, "Related Party Transactions" for additional information about the accounting for this transaction and other November 2018 transactions with DSM. In April 2019, in connection with the assignment by the Company of its rights under the Value Sharing Agreement (see Note 9, "Revenue Recognition"), the Company satisfied its obligation under the Supply Agreement Amendment relating to the difference between $4.41 and the price of the Company’s common stock on March 28, 2019.
Warrants
The Company issues warrants in certain debt and equity transactions in order to facilitate raising equity capital or reduce borrowing costs. In connection with various debt and equity transactions (see Note 4, "Debt" and below), the Company has issued warrants exercisable for shares of common stock. The following table summarizes warrant activity for the year ended December 31, 2019:
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| Transaction | Year Issued | Expiration Date | Number Outstanding as of December 31, 2018 | Additional Warrants Issued | Exercises | Expiration | Exercise Price per Share of Warrants Exercised | Number Outstanding as of December 31, 2019 | Exercise Price per Share as of December 31, 2019 | ||||||||||||||||||||
| Foris LSA warrants | 2019 | August 14, 2021 | — | 3,438,829 | — | — | $ | — | 3,438,829 | $2.87 | |||||||||||||||||||
| November 2019 Foris warrant | 2019 | November 27, 2021 | — | 1,000,000 | — | — | $ | — | 1,000,000 | $3.87 | |||||||||||||||||||
| August 2019 Foris warrant | 2019 | August 28, 2021 | — | 4,871,795 | — | — | $ | — | 4,871,795 | $3.90 | |||||||||||||||||||
| April 2019 PIPE warrants | 2019 | April 6, 2021, April 29, 2021 and May 3, 2021 | — | 8,084,770 | — | — | $ | — | 8,084,770 | $3.90/$4.76/$5.02 | |||||||||||||||||||
| April 2019 Foris warrant | 2019 | April 16, 2021 | — | 5,424,804 | — | — | $ | — | 5,424,804 | $2.87 | |||||||||||||||||||
| September and November 2019 Investor Credit Agreement warrants | 2019 | September 10, 2021 and November 14, 2021 | — | 5,233,551 | — | — | $ | — | 5,233,551 | $3.87/$3.90 | |||||||||||||||||||
| Naxyris LSA warrants | 2019 | October 28, 2021 | — | 2,000,000 | — | — | $ | — | 2,000,000 | $2.87 | |||||||||||||||||||
| October 2019 Naxyris warrant | 2019 | October 28, 2021 | — | 2,000,000 | — | — | $ | — | 2,000,000 | $3.87 | |||||||||||||||||||
| May-June 2019 6% Note Exchange warrants | 2019 | May 15, 2021 and June 24, 2021 | — | 2,181,818 | — | — | $ | — | 2,181,818 | $2.87/$5.12 | |||||||||||||||||||
| May 2019 6.50% Note Exchange warrants | 2019 | May 10, 2021 and May 14, 2021 | — | 1,744,241 | — | — | $ | — | 1,744,241 | $3.90/$5.02 | |||||||||||||||||||
| July 2019 Wolverine warrant | 2019 | July 8, 2021 | — | 1,080,000 | — | — | $ | — | 1,080,000 | $2.87 | |||||||||||||||||||
| August 2018 warrant exercise agreements | 2018 | May 17, 2020 and May 20, 2020 | 12,097,164 | — | — | — | $ | — | 12,097,164 | $2.87/$7.52 | |||||||||||||||||||
| April 2018 warrant exercise agreements | 2018 | July 12, 2019 | 3,616,174 | — | — | (3,616,174) | $ | — | — | $ | — | ||||||||||||||||||
| May 2017 cash warrants | 2017 | July 10, 2022 | 6,244,820 | — | (166,664) | — | $ | 2.87000 | 6,078,156 | $2.87 | |||||||||||||||||||
| August 2017 cash warrants | 2017 | August 7, 2022 | 3,968,116 | — | — | — | $ | 0.00015 | 3,968,116 | $2.87 | |||||||||||||||||||
| May 2017 dilution warrants | 2017 | July 10, 2022 | 47,978 | 4,795,924 | (1,758,009) | — | $ | 0.00015 | 3,085,893 | $0.0015 | |||||||||||||||||||
| August 2017 dilution warrants | 2017 | May 23, 2023 | — | 3,028,983 | — | — | $ | — | 3,028,983 | $0.0001 | |||||||||||||||||||
| February 2016 related party private placement | 2016 | February 12, 2021 | 171,429 | — | — | — | $ | — | 171,429 | $0.15 | |||||||||||||||||||
| July 2015 related party debt exchange | 2015 | July 29, 2020 and July 29, 2025 | 133,334 | — | — | — | $ | — | 133,334 | $0.15 | |||||||||||||||||||
| July 2015 private placement | 2015 | July 29, 2020 | 81,197 | — | (8,547) | — | $ | 0.15000 | 72,650 | $0.15 | |||||||||||||||||||
| July 2015 related party debt exchange | 2015 | July 29, 2020 | 58,690 | — | — | — | $ | — | 58,690 | $0.15 | |||||||||||||||||||
| July 2015 related party debt exchange | 2015 | July 29, 2020 | 471,204 | 245,558 | (716,762) | — | $ | 0.15000 | — | $ | — | ||||||||||||||||||
| Other | 2011 | December 23, 2021 | 1,406 | — | — | — | $ | — | 1,406 | $160.05 | |||||||||||||||||||
| 26,891,512 | 45,130,273 | (2,649,982) | (3,616,174) | $ | 0.22166 | 65,755,629 | |||||||||||||||||||||||
For information regarding warrants issued or exercised subsequent to December 31, 2019, see Note 15, “Subsequent Events”.
Due to certain down-round adjustments to other equity-related instruments during the year ended December 31, 2019, approximately 8.1 million shares became available under the May 2017 and August 2017 dilution warrants and the Temasek Funding Warrant (July 2015 related party debt exchange warrant in the table above). Approximately 2.6 million shares were exercised under the May 2017 cash and dilution warrants and the Temasek Funding Warrant during the year ended December 31, 2019 and resulted in zero proceeds to the Company. Also, a portion of the warrant exercises occurring during 2019 was net share settled, and as a result only 2.5 million shares were legally issued upon exercise of warrants during the year ended December 31, 2019.
Warrant Issuances, Exercises and Modifications in the Year Ended December 31, 2019
July 2019 Foris Credit Agreement Warrant Modification
In connection with the entry into the July Foris Credit Agreement on July 10, 2019 (see Note 4, “Debt”), the Company and Foris amended a warrant to purchase up to 4.9 million shares of common stock issued to Foris on August 17, 2018 to reduce the exercise price of such warrant from $7.52 per share to $2.87 per share. The warrant modification was measured on a before and after modification basis using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.21, strike price $2.87, volatility 124%, risk-free interest rate 1.82%, term 0.9 years, and expected dividend yield 0%. The warrant had an incremental fair value of $4.0 million, which was accounted for as an increase to additional paid in capital and a debt discount to the $16 million July Foris Notes. See Note 4, “Debt” for additional information regarding the debt discount recorded in connection with the modification of the warrant.
6% Convertible Note Exchange Warrants and Modification
In connection with the May 15, 2019 and June 24, 2019 6% Convertible Note Exchanges (see Note 4, “Debt”), the Company issued warrants (the May-June 2019 6% Note Exchange Warrants) to purchase up to 2.0 million and 0.2 million shares of common stock, respectively, at an exercise price of $5.12 per share, with an exercise term of two years from issuance.
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The exercise price of the warrant is subject to standard adjustments but does not contain any anti-dilution protection, and the warrant only permit “cashless” or “net” exercise after the six-month anniversary of issuance, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the warrant. The holders may not exercise the warrants, and the Company may not affect any exercise of the warrants, to the extent that, after giving effect to such exercise, the applicable holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding after giving effect to such exercise.
The Company concluded the warrants are freestanding instruments that are legally detachable and separately exercisable from the convertible notes and should be classified in equity as the warrants are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrants within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The fair value of the warrants totaled $4.4 million and were measured using the Black-Scholes-Merton option pricing model with the following parameters: 94% - 96% volatility, 1.72% - 2.16% risk-free interest rate, $3.55 - $4.39 issuance-date stock price, term 2.0 years, and 0% expected dividend yield. The Company concluded that the $4.4 million fair value of the equity-classified May 15, 2019 and June 24, 2019 warrants should be recorded as an increase to additional paid in capital and a charge to interest expense in the statement of operations at the date of issuance. See Note 4, “Debt” for additional information regarding the accounting for the fair value of these warrants.
Further, on July 24, 2019, Company exchanged the May 15, 2019 warrant to purchase up to 2.0 million shares of common stock, for a new warrant to purchase up to 2.0 million shares of common stock at an exercise price of $2.87 per share, with an exercise term of two years from May 15, 2019. The exchange warrant has substantially identical terms as the original warrant issued on May 15, 2019, except that the exercise price was reduced from $5.12 to $2.87 per share. The warrant modification was measured on a before and after modification basis using the Black-Scholes-Merton option pricing model with the following parameters: strike price $2.87, volatility 93%, risk-free interest rate 1.86%, term 1.8 years, and expected dividend yield 0%; and resulted in $0.9 million of incremental fair value. The Company concluded that the increase in the fair value of the exchange warrant should be recorded as an increase to additional paid in capital and a charge to interest expense in the statement of operations at the date of modification. See Note 4, “Debt” for additional information regarding the charge to interest expense in connection with the fair value of this warrant.
Foris LSA Warrant Issuances
In connection with the entry into the LSA Amendment and Waiver (see Note 4, “Debt”), on August 14, 2019 the Company issued to Foris a warrant (the Foris LSA Warrant) to purchase up to 1.4 million shares of Common Stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. The exercise price of the warrant is subject to standard adjustments but does not contain any anti-dilution protection, and the warrant only permit “cashless” or “net” exercise after the -month anniversary of issuance, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the warrant. Pursuant to the terms of the warrant, Foris may not exercise the LSA Warrant to the extent that, after giving effect to such exercise, Foris, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of common stock outstanding after giving effect to such exercise, unless the Company has obtained stockholder approval to exceed such limit in accordance with Nasdaq rules and regulations, which the Company obtained at its 2019 annual meeting of stockholders on November 19, 2019.
The Company concluded the warrant is a freestanding instrument that is legally detachable and separately exercisable from the LSA Amendment and Waiver and will be classified in equity as the warrant is both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrant within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrant was measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.59, strike price $2.87, volatility 94%, risk-free interest rate 1.58%, term 2.0 years, and expected dividend yield 0%. The warrant had a fair value of $2.9 million which was recorded as an increase to additional paid in capital and as a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the LSA. See Note 4, “Debt” for further information regarding the accounting treatment for the fair value of this warrant.
In connection with October 2019 LSA Amendment (see Note 4, “Debt”), on October 10, 2019, the Company issued a warrant (the October 2019 Foris LSA Warrant) to purchase 2.0 million shares of common stock, at an exercise price of $2.87 per share, with an exercise term of two years from issuance. Also, in connection with additional borrowings under the October 28, 2019 A&R LSA, on November 27, 2019, the Company issued a warrant (the November 2019 Foris Warrant) to purchase 1.0 million shares of common stock, at an exercise price of $3.87 per share, with an exercise term of two years from issuance. The exercise price of the warrants are subject to standard adjustments but do not contain any anti-dilution protection, and the
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warrants only permit “cashless” or “net” exercise after the -month anniversary of issuance, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the warrants. In addition, Foris may not exercise the warrants to the extent that, after giving effect to such exercise, Foris, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of common stock outstanding after giving effect to such exercise, unless the Company has obtained stockholder approval to exceed such limit in accordance with Nasdaq rules and regulations, which the Company obtained at its 2019 annual meeting of stockholders on November 19, 2019.
The Company concluded the warrants are freestanding instruments that are legally detachable and separately exercisable from the October 2019 LSA Amendment and A&R LSA and will be classified in equity as the warrants are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrants within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrants were measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.65 and $4.00, strike price $2.87 and $3.87, volatility 94%, risk-free interest rate 1.63% and expected dividend yield 0%. The October 2019 Foris LSA Warrant had a fair value of $4.1 million and was recorded as an increase to additional paid in capital and as a loss on debt extinguishment as a non-cash fee paid to the lender. The November 2019 Foris Warrant had a fair value of $2.1 million and was recorded as an increase to additional paid in capital and additional debt discount to be amortized over the remaining term of the A&R LSA. See Note 4, “Debt” for further information regarding the accounting treatment for the fair value of each warrant. See Note 15, “Subsequent Events” for information regarding the amendment and exercise of the October 2019 Foris LSA Warrant on January 31, 2020.
Naxyris LSA Warrant Issuances
In connection with the entry into the Naxyris Loan Agreement (see Note 4, “Debt”), on August 14, 2019 the Company issued to Naxyris a warrant (the Naxyris LSA Warrant) to purchase up to 2.0 million shares of the Company’s common stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. The exercise price of the warrant is subject to standard adjustments and permits “cashless” or “net” exercise any time after issuance.
The Company concluded the warrant is a freestanding instrument that is legally detachable and separately exercisable from the Naxyris Loan Facility and will be classified in equity as the warrant is both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrant within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrant was measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.59, strike price $2.87, volatility 94%, risk-free interest rate 1.58%, term 2.0 years, and expected dividend yield 0%. The warrant had a $4.0 million fair value and a $3.0 million relative fair value after allocating the Naxyris Loan Facility proceeds to the fair value of an embedded mandatory redemption feature contained in the Naxyris Loan Facility. The $3.0 million relative fair value of the Naxyris LSA Warrant was recorded as an increase to additional paid in capital and a debt discount to be amortized to interest expense under the effective interest method over the remaining term of the LSA. See Note 4, “Debt” for further information regarding the accounting treatment for the relative fair value of this warrant.
Also, in connection with the entry into the A&R Naxyris LSA, on October 28, 2019 the Company issued to Naxyris a warrant (the October 2019 Naxyris Warrant) to purchase up to 2.0 million shares of common stock, at an exercise price of $3.87 per share, with an exercise term of two years from issuance. The exercise price of the warrant is subject to standard adjustments and permits “cashless” or “net” exercise any time after issuance.
The Company concluded the warrant is a freestanding instrument that is legally detachable and separately exercisable from the Naxyris Loan Facility and will be classified in equity as the warrant is both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrant within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrant was measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.69, strike price $3.87, volatility 94%, risk-free interest rate 1.64%, term 2.0 years, and expected dividend yield 0%. The warrant had a $3.6 million fair value and a $2.8 million relative fair value after allocating the October 2019 Naxyris Loan proceeds to the fair value of the embedded mandatory redemption feature contained in the October 2019 Naxyris Loan. The $2.8 million relative fair value of the October 2019 Naxyris Warrant was recorded as an increase to additional paid in capital and as a loss on debt extinguishment as a non-cash fee paid to the lender. See Note 4, “Debt” for further information regarding the accounting treatment for the relative fair value of this warrant.
August 2019 Foris Warrant Issuance
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In connection with the entry into the August 2019 Foris Credit Agreement (see Note 4, “Debt”), on August 28, 2019 the Company issued to Foris a warrant (the August 2019 Foris Warrant) to purchase up to 4.9 million shares of Common Stock at an exercise price of $3.90 per share, with an exercise term of two years from issuance. The exercise price of the warrant is subject to standard adjustments but does not contain any anti-dilution protection, and the warrant only permits “cashless” or “net” exercise after the -month anniversary of issuance, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the warrant. In addition, Foris may not exercise the warrant to the extent that, after giving effect to such exercise, Foris, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of common stock outstanding after giving effect to such exercise, unless the Company has obtained stockholder approval to exceed such limit in accordance with Nasdaq rules and regulations, which the Company obtained at its 2019 annual meeting of stockholders on November 19, 2019.
The Company concluded the warrant is a freestanding instrument that is legally detachable and separately exercisable from the Foris $19 Million Note and will be classified in equity as the warrant is both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company will account for the fair value of the warrant within equity and will not subsequently remeasure to fair value at each reporting period, unless new events trigger a requirement for the warrants to be reclassified to an asset or liability. The warrant was measured using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.67, strike price $3.90, volatility 94%, risk-free interest rate 1.50%, term 2.0 years, and expected dividend yield 0%. The warrant had a $8.7 million fair value and a $5.2 million relative fair value after allocating the Foris $19 Million Note proceeds to the fair value of an embedded mandatory redemption feature contained in the Foris $19 Million Note. See Note 4, “Debt” for further information regarding the accounting treatment for the relative fair value of this warrant.
Also, on August 28, 2019 in connection with the entry into the August 2019 Foris Credit Agreement, the Company and Foris amended the warrant to purchase up to 3.9 million shares of common stock issued to Foris on April 26, 2019 to reduce the exercise price of such warrant from $5.12 per share to $3.90 per share, and amended the warrant to purchase up to 0.4 million shares of common stock issued to Foris on May 14, 2019 to reduce the exercise price of such warrant from $4.56 per share to $3.90 per share (see above under “Private Placements” for more information regarding these warrants). The warrant modifications were measured on a before and after modification basis using the Black-Scholes-Merton option pricing model with the following parameters: stock price $3.67, strike price $3.90, volatility 98% - 100%, risk-free interest rate 1.50%, term 1.7 years, and expected dividend yield 0%, resulting in $1.1 million of incremental fair value, which was accounted for as an increase to additional paid in capital and a debt discount to the Foris $19 Million Note. See Note 4, “Debt” for additional information regarding the debt discount recorded in connection with the modification of these warrants. See Note 15, “Subsequent Events” for information regarding the amendment and exercise of the August 2019 Foris Warrant on January 31, 2020.
September and November 2019 Investor Credit Agreements Warrants Issuances
In connection with the entry into the Investor Credit Agreements (see Note 4, “Debt”), on September 10, 2019, the Company issued to the Investors warrants (the Investor Warrants) to purchase up to an aggregate of 3.2 million shares of common stock at an exercise price of $3.90 per share, with an exercise term of two years from issuance. The exercise price of the warrants is subject to standard adjustments but does not contain any anti-dilution protection, and the warrants only permit “cashless” or “net” exercise after the -month anniversary of issuance of the applicable warrant, and only to the extent that there is not an effective registration statement covering the resale of the shares of common stock underlying the applicable warrant. In addition, no Investor may exercise its warrant to the extent that, after giving effect to such exercise, such Investor, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of common stock outstanding after giving effect to such exercise. In addition, the Company agreed to file a registration statement providing for the resale by the Investors of the shares of common stock underlying the warrants with the SEC within 60 days following the date of the issuance of the warrants and to use commercially reasonable efforts to (i) cause such registration statement to become effective within 120 days following the date of the issuance of the warrants and (ii) keep such registration statement effective until the Investors no longer beneficially own any such shares of common stock or such shares of common stock are eligible for resale under Rule 144 under the Securities Act without regard to volume limitations. If the Company fails to file the registration statement by the filing deadline or the registration statement is not declared effective by the effectiveness deadline, or the Company fails to maintain the effectiveness of the registration statement as required by the warrants, then the exercise price of the warrants will be reduced by 10%, and by an additional 5% if such failure continues for longer than 90 days, subject to an exercise price floor of $3.31 per share, provided that upon the cure by the Company of such failure, the exercise price of the warrants will revert to $3.90 per share.
In connection with the November 2019 Schottenfeld CSA, on November 14, 2019, the Company warrants (the November 2019 Schottenfeld CSA Warrants) to purchase an aggregate of 2.0 million shares of common stock at an exercise price of $3.87 per share, with an exercise term of 2 years from issuance. In connection with the warrant issuance, the Company will be
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required to pay the November 2019 Schottenfeld CSA Warrants holders and the Investor Warrants holders a fee if the Company issues equity securities in connection with the $50 million or greater financing provision that have an issue, conversion or exercise price of less than $3.90 or $3.87 per share, respectively. In such case, the fee will be the difference between the exercise price of such warrants (i.e., $3.90 or $3.87) and the issue, conversion or exercise price of the equity securities issued in the $50 million or greater financing, times the total number of warrants issued to such investors in November 2019 and September 2019. See Note 15, “Subsequent Events” for information regarding the amendment of the Investor Warrants and the November 2019 Schottenfeld CSA Warrants on February 28, 2020.
The Company concluded the Investor Warrants and the November 2019 Schottenfeld CSA Warrants are freestanding instruments that are legally detachable and separately exercisable from the underlying debt host instruments and should be classified and accounted for as a liability as the warrants contain certain price and share count adjustment protection, and other modification protection provisions that cause the warrants to fail the fixed-for-fixed criterion, and thus, are not considered indexed to the Company’s stock. Accordingly, the Company has accounted for the Investor Warrants and November 2019 Schottenfeld CSA Warrants as a liability and will subsequently remeasure to fair value at each reporting period with changes in fair value recorded in the statement of operations. The warrants were measured using the Black-Scholes-Merton option pricing model with the following parameters as of the September 10, 2019 and November 14, 2019 issuance dates: stock price $4.56 and $3.89, strike price $3.90 and $3.87, volatility 94% and 95%, risk-free interest rate 1.67% and 1.58%, term 2 years, and expected dividend yield 0%. The warrants had an initial fair value of $7.9 million and $4.0 million, respectively and were recorded as derivative liabilities with an offset to either debt discount or loss on debt extinguishment (as a non-cash fee paid to the lender). See Note 3, “Fair Value Measurements” for information regarding the subsequent fair value measurement for this liability classified warrant and see Note 4, “Debt” for further information regarding the initial accounting treatment of the offsetting debt discount or loss on debt extinguishment.
Standstill Agreement
In connection with the September 10, 2019 entry into the Investor Credit Agreements discussed in Note 4, “Debt” and the issuance of the Investor Warrants discussed in the "September and November 2019 Investor Credit Agreements Warrants Issuances " section above, the Company and the Investors entered into a Standstill Agreement (the Investor Standstill Agreement), pursuant to which the Investors agreed that, until the earliest to occur of (i) the Investors no longer beneficially owning any shares underlying the warrants, (ii) the Company entering into a definitive agreement involving the direct or indirect acquisition of all or a majority of the Company’s equity securities or all or substantially all of the Company’s assets or (iii) a person or group, with the prior approval of the Company’s Board of Directors (the Board), commencing a tender offer for all or a majority of the Company's equity securities, neither the Investors nor any of their respective affiliates (together, the Investor Group) will (without the prior written consent of the Board), among other things, (a) acquire any loans, debt securities, equity securities, or assets of the Company or any of its subsidiaries, or rights or options with respect thereto, except that the Investor Group shall be permitted to (y) purchase the shares underlying the warrants pursuant to the exercise of the warrants and (z) acquire beneficial ownership of up to 6.99% of the Company's common stock, or (b) make any proposal, public announcement, solicitation or offer with respect to, or otherwise solicit, seek or offer to effect, or instigate, encourage, or assist any third party with respect to: (1) any business combination, merger, tender offer, exchange offer, or similar transaction involving the Company or any of its subsidiaries; (2) any restructuring, recapitalization, liquidation, or similar transaction involving the Company or any of its subsidiaries; (3) any acquisition of any of the Company’s loans, debt securities, equity securities or assets, or rights or options with respect thereto; or (4) any proposal to seek representation on the Board or otherwise seek to control or influence the management, Board, or policies of the Company, in each case subject to certain exceptions.
May 2017 Warrants
In May 2017, the Company issued 14,768,380 shares of common stock in the aggregate to certain investors (collectively, the May 2017 Cash Warrants). The exercise price of the May 2017 Cash Warrants is subject to standard adjustments as well as full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the -year period following the issuance of such warrants at a per share price less than the then-current exercise price of the May 2017 Cash Warrants, subject to certain exceptions. As of December 31, 2019, the exercise prices of the May 2017 Cash Warrants were $2.87 per share, and 6,078,156 of May 2017 Cash Warrants were unexercised.
In addition to the May 2017 Cash Warrants, the Company issued to each investor a warrant, with an exercise price of $0.0015 per share (collectively, the May 2017 Dilution Warrants), to purchase a number of shares of common stock sufficient to provide the investor with full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the May 2017 Dilution Period at a per share price less than $2.87. As of December 31, 2019, the May 2017 Dilution Warrants were exercisable for an aggregate of 3,085,893 shares.
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The May 2017 Warrants each have a term of five years from the date such warrants initially became exercisable on July 10, 2017. The May 2017 Cash Warrants are freestanding financial instruments and upon adoption of ASU 2017-11 on January 1, 2019 are no longer accounted for as derivative liabilities, but are classified in equity as the warrants are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company reclassified the derivative balance at December 31, 2018 to equity at the January 1, 2019 adoption date.
August 2017 DSM Offering – Related Party
On August 7, 2017, the Company issued and sold the following securities to DSM in a private placement (August 2017 DSM Offering):
•25,000 shares of Series B Preferred Stock (August 2017 DSM Series B Preferred Stock) at a price of $1,000 per share;
•a warrant to purchase 3,968,116 shares of common stock at an initial exercise price of $6.30 per share expiring in five years (August 2017 DSM Cash Warrant); and
•the August 2017 DSM Dilution Warrant (as described below).
Net proceeds to the Company were $25.9 million after payment of offering expenses and the allocation of total fair value received to the elements in the arrangement.
The exercise price of the August 2017 DSM Cash Warrant is subject to standard adjustments as well as full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the -year period following August 7, 2017 (DSM Dilution Period) at a per share price less than the then-current exercise price of the August 2017 DSM Cash Warrant, subject to certain exceptions. As of December 31, 2019, the exercise price of the August 2017 DSM Cash Warrant was $2.87 per share, and 3,968,116 of May 2017 Cash Warrants were unexercised. The August 2017 DSM Dilution Warrants are freestanding financial instruments and upon adoption of ASU 2017-11 on January 1, 2019 are no longer accounted for as derivative liabilities, but are classified in equity as the warrants are both indexed to the Company’s own stock and meet the equity classification criteria. As such, the Company reclassified the derivative balance at December 31, 2018 to equity at the January 1, 2019 adoption date.
The August 2017 DSM Dilution Warrant allows DSM to purchase a number of shares of common stock sufficient to provide DSM with full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the DSM Dilution Period at a per share price less than $2.87. The August 2017 DSM Dilution Warrant expires five years from the date it is initially exercisable.
In connection with the August 2017 DSM Offering, the Company and DSM also entered into an amendment to the stockholder agreement dated May 11, 2017 (DSM Stockholder Agreement) between the Company and DSM (Amended and Restated DSM Stockholder Agreement). Under the DSM Stockholder Agreement, DSM was granted the right to designate one director selected by DSM, subject to certain restrictions and a minimum beneficial ownership level of 4.5%, to the Board. Furthermore, DSM has the right to purchase additional shares of capital stock of the Company in connection with a sale of equity or equity-linked securities by the Company in a capital raising transaction for cash, subject to certain exceptions, to maintain its proportionate ownership percentage in the Company. Pursuant to the DSM Stockholder Agreement, DSM agreed not to sell or transfer any of the Series B Preferred Stock or warrants purchased by DSM, or any shares of common stock issuable upon conversion or exercise thereof, other than to its affiliates, without the consent of the Company through May 2018 and to any competitor of the Company thereafter. DSM also agreed that, subject to certain exceptions, until three months after there is no DSM director on the Board, DSM will not, without the prior consent of the Board, acquire common stock or rights to acquire common stock that would result in DSM beneficially owning more than 33% of the Company’s outstanding voting securities at the time of acquisition. The Amended and Restated DSM Stockholder Agreement provides that (i) DSM has the right to designate a second director to the Board, subject to certain restrictions and a minimum beneficial ownership level of 10%, and (ii) the shares of common stock issuable upon conversion or exercise of the securities purchased by DSM in the August 2017 DSM Offering are (a) entitled to the registration rights provided for in the DSM Stockholder Agreement and (b) subject to the transfer restrictions set forth in the DSM Stockholder Agreement.
August 2017 Vivo Offering – Related Party
On August 3, 2017, the Company issued and sold 12,958 shares of Series D Preferred Stock at a price of $1,000 per share along with other securities to Vivo in a private placement (August 2017 Vivo Offering), resulting in net proceeds to the Company of $24.8 million after payment of offering expenses. In the third quarter of 2018 Vivo converted 4,678 shares of August 2017 Offerings Series D Preferred Stock and the Company recognized a $6.8 million deemed dividend for the
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unamortized discounts created from the allocation of proceeds, as a reduction to Additional Paid in Capital and increasing net loss attributable to Amyris, Inc. common stockholders. At December 31, 2019 and 2018, 8,280 shares of Series D Preferred Stock were outstanding. The conversion of the Series D Preferred Stock is subject to a beneficial ownership limitation of 9.99% (August 2017 Vivo Offering Beneficial Ownership Limitation), which limitation may be waived by the holders on 61 days’ prior notice.
Each share of Series D Preferred Stock has a stated value of $1,000 and, subject to the August 2017 Vivo Offering Beneficial Ownership Limitation, is convertible at any time, at the option of the holders, into common stock at a conversion price of $4.26 per share. The Series D Conversion Rate is subject to adjustment in the event of any dividends or distributions of the common stock, or any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
Prior to declaring any dividend or other distribution of its assets to holders of common stock, the Company shall first declare a dividend per share on the Series D Preferred Stock equal to $0.0001 per share. In addition, the Series D Preferred Stock will be entitled to participate with the common stock on an as-converted basis with respect to any dividends or other distributions to holders of common stock. There were no dividends declared as of December 31, 2019 or 2018.
Unless and until converted into common stock in accordance with its terms, the Series D Preferred Stock has no voting rights, other than as required by law or with respect to matters specifically affecting the Series D Preferred Stock. The Series D Preferred Stock is classified as permanent equity, as the Company controls all actions or events required to settle the optional conversion feature in shares.
In the event of a Fundamental Transaction, the holders of the Series D Preferred Stock will have the right to receive the consideration receivable as a result of such Fundamental Transaction by a holder of the number of shares of common stock for which the Series D Preferred Stock is convertible immediately prior to such Fundamental Transaction (without regard to whether such Series D Preferred Stock is convertible at such time), which amount shall be paid pari passu with all holders of common stock. A Fundamental Transaction is defined in the Certificate of Designation of Preferences, Rights and Limitations relating to the Series D Preferred Stock as any of the following: (i) merger with or consolidation into another legal entity; (ii) sale, lease, license, assignment, transfer or other disposition of all or substantially all of the Company’s assets in one or a series of related transactions; (iii) purchase offer, tender offer or exchange offer of the Company’s common stock pursuant to which holders of the Company’s common stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding common stock; (iv) reclassification, reorganization or recapitalization of the Company’s stock; or (v) stock or share purchase agreement that results in another party acquiring more than 50% of the Company’s outstanding shares of common stock.
Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series D Preferred Stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the Series D Preferred Stock were fully converted to common stock immediately prior to such liquidation, dissolution or winding-up (without regard to whether such Series D Preferred Stock is convertible at such time), which amount shall be paid pari passu with all holders of common stock.
In connection with the August 2017 Vivo Offering, the Company and Vivo also entered into a Stockholder Agreement (Vivo Stockholder Agreement) setting forth certain rights and obligations of Vivo and the Company. Pursuant to the Vivo Stockholder Agreement, Vivo will have the right, subject to certain restrictions and a minimum beneficial ownership level of 4.5%, to (i) designate one director selected by Vivo to the Board and (ii) appoint a representative to attend all Board meetings in a nonvoting observer capacity and to receive copies of all materials provided to directors, subject to certain exceptions. Furthermore, Vivo will have the right to purchase additional shares of capital stock of the Company in connection with a sale of equity or equity-linked securities by the Company in a capital raising transaction for cash, subject to certain exceptions, to maintain its proportionate ownership percentage in the Company. Vivo agreed not to sell or transfer any of the shares of common stock, Series D Preferred Stock or warrants purchased by Vivo in the August 2017 Vivo Offering, or any shares of common stock issuable upon conversion or exercise thereof, other than to its affiliates, without the consent of the Company through August 2018 and to any competitor of the Company thereafter. Vivo also agreed that, subject to certain exceptions, until the later of (i) three years from the closing of the August 2017 Vivo Offering and (ii) three months after there is no Vivo director on the Board, Vivo will not, without the prior consent of the Board, acquire common stock or rights to acquire common stock that would result in Vivo beneficially owning more than 33% of the Company’s outstanding voting securities at the time of acquisition. Under the Vivo Stockholder Agreement, the Company agreed to use its commercially reasonable efforts to register, via one or more registration statements filed with the SEC under the Securities Act, the shares of common stock purchased in the August 2017 Vivo Offering as well as the shares of common stock issuable upon conversion or exercise of the Series D Preferred Stock and warrants purchased by Vivo in the August 2017 Vivo Offering.
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For information regarding issuances of equity securities subsequent to December 31, 2019, see Note 15, “Subsequent Events”.
Right of First Investment to Certain Investors
In connection with investments in the Company has granted certain investors, including Vivo and DSM, a right of first investment if the Company proposes to sell securities in certain financing transactions. With these rights, such investors may subscribe for a portion of any such new financing and require the Company to comply with certain notice periods, which could discourage other investors from participating in, or cause delays in its ability to close, such a financing.
7. Net Loss per Share Attributable to Common Stockholders
The Company computes net loss per share in accordance with ASC 260, “Earnings per Share.” Basic net loss per share of common stock is computed by dividing the Company’s net loss attributable to Amyris, Inc. common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock is computed by giving effect to all potentially dilutive securities, including stock options, restricted stock units, convertible preferred stock, convertible promissory notes and common stock warrants, using the treasury stock method or the as converted method, as applicable. For the year ended December 31, 2018, basic net loss per share was the same as diluted net loss per share because the inclusion of all potentially dilutive securities outstanding was anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss were the same for those years.
The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The two-class method also requires losses for the period to be allocated between common stock and participating securities based on their respective rights if the participating security contractually participates in losses. The Company’s convertible preferred stock are participating securities as they contractually entitle the holders of such shares to participate in dividends and contractually require the holders of such shares to participate in the Company’s losses.
The following table presents the calculation of basic and diluted net loss per share of common stock attributable to Amyris, Inc. common stockholders:
| Years Ended December 31, (In thousands, except shares and per share amounts) | 2019 | 2018 | ||||||
| Numerator: | ||||||||
| Net loss attributable to Amyris, Inc. | $ | (242,767) | $ | (230,235) | ||||
| Less deemed dividend to preferred shareholder on issuance and modification of common stock warrants | (34,964) | — | ||||||
| Less deemed dividend related to proceeds discount upon conversion of Series D preferred stock | — | (6,852) | ||||||
| Add: losses allocated to participating securities | 7,380 | 13,991 | ||||||
| Net loss attributable to Amyris, Inc. common stockholders, basic | (270,351) | (223,096) | ||||||
| Adjustment to losses allocated to participating securities | 137 | — | ||||||
| Gain from change in fair value of derivative instruments | (4,963) | — | ||||||
| Net loss attributable to Amyris, Inc. common stockholders, diluted | $ | (275,177) | $ | (223,096) | ||||
| Denominator: | ||||||||
| Weighted-average shares of common stock outstanding used in computing net loss per share of common stock, basic | 101,370,632 | 60,405,910 | ||||||
| Basic loss per share | $ | (2.67) | $ | (3.69) | ||||
| Weighted-average shares of common stock outstanding | 101,370,632 | 60,405,910 | ||||||
| Effect of dilutive common stock warrants | (74,057) | — | ||||||
| Weighted-average common stock equivalents used in computing net income (loss) per share of common stock, diluted | 101,296,575 | 60,405,910 | ||||||
| Diluted loss per share | $ | (2.72) | $ | (3.69) | ||||
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive:
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| Years Ended December 31, | 2019 | 2018 | ||||||
| Period-end common stock warrants | 59,204,650 | 25,986,370 | ||||||
Convertible promissory notes(1) | 13,381,238 | 13,703,162 | ||||||
| Period-end stock options to purchase common stock | 5,620,419 | 5,392,269 | ||||||
| Period-end restricted stock units | 5,782,651 | 5,294,848 | ||||||
| Period-end preferred shares on an as-converted basis | 1,943,661 | 2,955,732 | ||||||
| Total potentially dilutive securities excluded from computation of diluted net loss per share | 85,932,619 | 53,332,381 | ||||||
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(1) The potentially dilutive effect of convertible promissory notes was computed based on conversion ratios in effect at the respective year-end. A portion of the convertible promissory notes issued carries a provision for a reduction in conversion price under certain circumstances, which could potentially increase the dilutive shares outstanding. Another portion of the convertible promissory notes issued carries a provision for an increase in the conversion rate under certain circumstances, which could also potentially increase the dilutive shares outstanding.
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8. Commitments and Contingencies
Guarantor Arrangements
The Company has agreements whereby it indemnifies its executive officers and directors for certain events or occurrences while the executive officer or director is serving in his or her official capacity. The indemnification period remains enforceable for the executive officer's or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future payments. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of December 31, 2019 and 2018.
The Foris LSA debt facility (see Note 4, "Debt") is collateralized by first-priority liens on substantially all of the Company's assets, including Company intellectual property, other than certain Company intellectual property licensed to DSM and the Company's shares of Aprinnova. Certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Foris LSA.
The obligations of the Company under the Naxyris note (see Note 4, "Debt") are (i) guaranteed by the Subsidiary Guarantors and (ii) secured by a perfected security interest in substantially all of the assets of the Company and the Subsidiary Guarantors (the Collateral), junior in payment priority to Foris subject to certain limitations and exceptions, as well as the terms of the Intercreditor Agreement.
The Nikko debt instruments are collateralized as follows:
•Nikko $3.9 million note: first-priority lien on 10.0% of the Aprinnova JV interests owned by the Company
•Nikko $5.0 million note: first-priority lien on 12.8% of shares of Aprinnova
•Nikko $4.5 million note: first-priority lien on 27.2% of shares of Aprinnova
The promissory notes issued under the 2019 DSM Credit Agreement (see Note 4, "Debt") are secured by a first-priority lien on certain Company intellectual property licensed to DSM.
The obligations of the Company under the Investor Notes and the Schottenfeld CSA (see Note 4, "Debt" and Note 15, “Subsequent Events”) are secured by a perfected security interest in substantially all of the assets of the Company and the Subsidiary Guarantors, junior in payment priority to Foris and Naxyris subject to the Subordination Agreement among Foris, Naxyris and the Investors.
Other Matters
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but will only be recorded when one or more future events occur or fail to occur. The Company's management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgement. In assessing loss contingencies related to legal proceedings that are pending against and by the Company or unasserted claims that may result in such proceedings, the Company's management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be reasonably estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
On April 3, 2019, a securities class action complaint was filed against Amyris and our CEO, John G. Melo, and former CFO (and current Chief Business Officer), Kathleen Valiasek, in the U.S. District Court for the Northern District of California. The complaint seeks unspecified damages on behalf of a purported class that would comprise all persons and entities that purchased or otherwise acquired our securities between March 15, 2018 and March 19, 2019. The complaint, which was amended by the lead plaintiff on September 13, 2019, alleges securities law violations based on statements and omissions made by the Company during such period. On October 25, 2019, the defendants filed a motion to dismiss the securities class action
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complaint. The hearing on such motion to dismiss was held on February 18, 2020 and we are awaiting a ruling from the Court. Subsequent to the filing of the securities class action complaint described above, on June 21, 2019 and October 1, 2019, respectively, two separate purported shareholder derivative complaints were filed in the U.S. District Court for the Northern District of California (Bonner v. Doerr, et al., and Carlson v. Doerr, et al.) based on similar allegations to those made in the securities class action complaint described above and named the Company and certain of the Company’s current and former officers and directors as defendants. The derivative lawsuits sought to recover, on the Company’s behalf, unspecified damages purportedly sustained by the Company in connection with allegedly misleading statements and omissions made in connection with the Company’s securities filings. The derivative lawsuits were dismissed on October 18, 2019 (Bonner) and December 10, 2019 (Carlson), without prejudice. We believe the securities class action complaint lacks merit, and intend to continue to defend ourselves vigorously. Given the early stage of these proceedings, it is not yet possible to reliably determine any potential liability that could result from these matters.
The Company is subject to disputes and claims that arise or have arisen in the ordinary course of business and that have not resulted in legal proceedings or have not been fully adjudicated. Such matters that may arise in the ordinary course of business are subject to many uncertainties and outcomes are not predictable with reasonable assurance and therefore an estimate of all the reasonably possible losses cannot be determined at this time. Therefore, if one or more of these legal disputes or claims resulted in settlements or legal proceedings that were resolved against the Company for amounts in excess of management’s expectations, the Company’s consolidated financial statements for the relevant reporting period could be materially adversely affected.
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9. Revenue Recognition
Disaggregation of Revenue
The following tables present revenue by primary geographical market, based on the location of the customer, as well as by major product and service:
| 2019 | 2018 | ||||||||||||||||||||||||||||
| Years Ended December 31, (In thousands) | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | |||||||||||||||||||||
| Europe | $ | 10,092 | $ | 54,043 | $ | 6,674 | $ | 70,809 | $ | 7,576 | $ | 7,658 | $ | 14,172 | $ | 29,406 | |||||||||||||
| United States | 34,295 | — | 24,376 | 58,671 | 16,292 | — | 9,948 | 26,240 | |||||||||||||||||||||
| Asia | 11,503 | — | 7,477 | 18,980 | 8,664 | — | (2,333) | 6,331 | |||||||||||||||||||||
| Brazil | 3,612 | — | 115 | 3,727 | 381 | — | 561 | 942 | |||||||||||||||||||||
| Other | 370 | — | — | 370 | 685 | — | — | 685 | |||||||||||||||||||||
| $ | 59,872 | $ | 54,043 | $ | 38,642 | $ | 152,557 | $ | 33,598 | $ | 7,658 | $ | 22,348 | $ | 63,604 | ||||||||||||||
Significant Revenue Agreements
For the years ended December 31, 2019 and 2018, the Company recognized revenue in connection with significant revenue agreements and from all other customers as follows:
| 2019 | 2018 | ||||||||||||||||||||||||||||
| Years Ended December 31, (In thousands) | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | |||||||||||||||||||||
| Revenue from significant revenue agreements with: | |||||||||||||||||||||||||||||
| DSM (related party) | $ | 10 | $ | 49,051 | $ | 4,120 | $ | 53,181 | $ | 18 | $ | 5,958 | $ | 4,735 | $ | 10,711 | |||||||||||||
| Firmenich | 8,591 | 4,992 | 1,413 | 14,996 | 3,727 | 1,700 | 5,717 | 11,144 | |||||||||||||||||||||
| Lavvan | — | — | 18,342 | 18,342 | — | — | — | — | |||||||||||||||||||||
| Givaudan | 7,477 | — | 1,500 | 8,977 | 4,078 | — | 4,358 | 8,436 | |||||||||||||||||||||
| DARPA | — | — | 5,504 | 5,504 | — | — | 8,436 | 8,436 | |||||||||||||||||||||
| Subtotal revenue from significant revenue agreements | 16,078 | 54,043 | 30,879 | 101,000 | 7,823 | 7,658 | 23,246 | 38,727 | |||||||||||||||||||||
| Revenue from all other customers | 43,794 | — | 7,763 | 51,557 | 25,775 | — | (898) | 24,877 | |||||||||||||||||||||
| Total revenue from all customers | $ | 59,872 | $ | 54,043 | $ | 38,642 | $ | 152,557 | $ | 33,598 | $ | 7,658 | $ | 22,348 | $ | 63,604 | |||||||||||||
Cannabinoid Agreement
On May 2, 2019, the Company consummated a research, collaboration and license agreement (the Cannabinoid Agreement) with LAVVAN, Inc., a newly formed investment-backed company (Lavvan), for up to $300 million to develop, manufacture and commercialize cannabinoids, subject to certain closing conditions. Under the agreement, the Company would perform research and development activities and Lavvan would be responsible for the manufacturing and commercialization of the cannabinoids developed under the agreement. The Cannabinoid Agreement is being principally funded on a milestone basis, with the Company also entitled to receive certain supplementary research and development funding from Lavvan. The Company could receive aggregate funding of up to $300 million over the term of the Cannabinoid Agreement if all of the milestones are achieved. Additionally, the Cannabinoid Agreement provides for profit share to the Company on Lavvan's gross profit margin once products are commercialized; these payments will be due for the next 20 years. On May 2, 2019, the parties consummated the transactions contemplated by the Cannabinoid Agreement, including the formation of a special purpose entity to hold certain intellectual property created during the collaboration (the Cannabinoid Collaboration IP), the licensing of certain Company intellectual property to Lavvan, the licensing of the Cannabinoid Collaboration IP to the Company and Lavvan, and the granting by the Company to Lavvan of a lien on the Company background intellectual property being licensed to Lavvan under the Cannabinoid Agreement, which lien would be subordinated to the lien on such intellectual property under the Foris LSA (see Note 4, “Debt”).
The Cannabinoid Agreement is accounted for as a revenue contract under ASC 606, with the total transaction price estimated and updated on a quarterly basis, subject to the variable consideration constraint guidance in ASC 606 using the most likely outcome method to estimate the variable consideration associated with the identified performance obligations. The Company concluded the agreement contained a single performance obligation of research and development services provided
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continuously over time. The Company estimated the total unconstrained transaction price to be $145 million, based on a high probability of achieving certain underlying milestones. As of December 31, 2019, the Company has constrained $181.0 million of variable consideration related to milestones that have not met the criteria under ASC 606 necessary to be included in the transaction price. The Company concluded that the performance obligation is delivered over time and that revenue recognition is based on an input measure of progress of hours incurred compared to total estimated hours to be incurred (i.e., proportional performance). Estimates of variable consideration are updated quarterly, with cumulative adjustments to revenue recorded as necessary. The Company recognized $18.3 million of collaboration revenue under the Cannabinoid Agreement for the year ended December 31, 2019 based on proportional performance delivered to date. At December 31, 2019, $8.3 million of the collaboration revenues recognized in the year ended December 31, 2019 were recorded as a contract asset. See the "Contract Assets and Liabilities" section below for further information regarding this contract asset.
Firmenich Agreements
In July 2017, the Company and Firmenich entered into the Firmenich Collaboration Agreement Agreement (for the development and commercialization of multiple renewable flavors and fragrances molecules), pursuant to which the parties agreed to exclude certain molecules from the scope of the agreement and to amend certain terms connected with the supply and use of such molecules when commercially produced. In addition, the parties agreed to (i) fix at a 70/30 basis (70% for Firmenich) the ratio at which the parties will share profit margins from sales of two molecules; (ii) set at a 70/30 basis (70% for Firmenich) the ratio at which the parties will share profit margins from sales of a distinct form of compound until Firmenich receives $15.0 million more than the Company in the aggregate from such sales, after which time the parties will share the profit margins 50/50 and (iii) a maximum Company cost of a compound where a specified purchase volume is satisfied, and alternative production and margin share arrangements in the event such Company cost cap is not achieved.
In August 2018, the Company and Firmenich entered into the Firmenich Amended and Restated Supply Agreement, which incorporates all previous amendments and new changes and supersedes the September 2014 supply agreement. With this Amended and Restated Supply Agreement, the parties agreed on the molecules to be supplied under the agreement and the commercial specifications of these products, and made some adjustments to the pricing of the molecules.
Pursuant to the Firmenich Collaboration Agreement, the Company agreed to pay a one-time success bonus to Firmenich of up to $2.5 million if certain commercialization targets are met. Such targets have not yet been met as of December 31, 2019. The one-time success bonus will expire upon termination of the Firmenich Collaboration Agreement, which has an initial term of 10 years and will automatically renew at the end of such term (and at the end of any extension) for an additional 3-year term unless otherwise terminated. At December 31, 2019, the Company had a $0.7 million liability associated with this one-time success bonus that has been recorded as a reduction to the associated collaboration revenue.
Givaudan Agreements
In September 2018, Amyris and Givaudan, entered into a Collaboration Agreement for the development and commercialization of molecules for use and sale in the cosmetics and flavors markets (collectively the “Collaboration Markets”). Under Collaboration Agreement, the parties will collaborate to develop, produce and commercialize. Under the agreement, the Company granted Givaudan exclusive access to specified intellectual property for the development and commercialization of such molecules in the Collaboration Markets in exchange for research and development funding. Funding, including payment terms, will be based on milestones and milestone-based payments, to be mutually agreed upon by the parties on a project by project basis. The Company is currently working on development and commercialization of two significant molecules. The Company also manufactures and supplies a certain compound that was developed by the Company under a prior (expired) collaboration agreement with Givaudan. The supply agreement was entered into in September 2018 and has a -year term with successive -year renewals until terminated by either party.
Following the research and development phase of a project, if Givaudan elects to proceed with commercialization, a supply agreement will be negotiated for each compound. The significant terms for each supply agreement are set forth in the Collaboration Agreement including the price at which the molecules are to be supplied. The price for each compound will be negotiated and agreed upon by both parties at a future time. Under the Collaboration Agreement, following commercial development of the agreed upon compound, the Company will manufacture the compound and Givaudan will perform any required downstream polishing, distribution, sales and marketing. The collaboration work and supply of the molecules is exclusively limited to the Cosmetics Actives Market and the Flavors Market.
DSM July and September 2017 Collaboration and Licensing Agreements
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In July and September 2017, the Company entered into three separate collaboration agreements with DSM (DSM Collaboration Agreements) to jointly develop three new molecules in the Health & Wellness (DSM Ingredients) market using the Company’s technology, which the Company would produce and DSM would commercialize. Pursuant to the DSM Collaboration Agreements, DSM will, subject to certain conditions, provide funding for the development of the DSM Ingredients and, upon commercialization, the parties would enter into supply agreements whereby DSM would purchase the applicable DSM Ingredients from the Company at prices agreed by the parties. The development services will be directed by a joint steering committee with equal representation by DSM and the Company. In addition, the parties will share profit margin from DSM’s sales of products that incorporate the DSM Ingredients subject to the DSM Collaboration Agreements.
In connection with the entry into the DSM Collaboration Agreements, the Company and DSM also entered into certain license arrangements (DSM License Agreements) providing DSM with certain rights to use the technology underlying the development of the DSM Ingredients to produce and sell products incorporating the DSM Ingredients. Under the DSM License Agreements, DSM paid the Company $9.0 million for a worldwide, exclusive, perpetual, royalty-free license to produce and sell products incorporating one of the DSM Ingredients in the Health & Wellness field.
December 2017 DSM Agreements
In December 2017, the Company entered into a series of agreements with DSM (December 2017 DSM Agreements) which are described below. The December 2017 DSM Agreements were evaluated as a combined transaction for accounting purposes in conjunction with the sales of the Brotas 1 facility discussed more fully in Note 10, "Related Party Transactions" and Note 12, "Divestiture".
DSM November 2017 Intellectual Property License Agreement
In November 2017, in connection with the Company's divestiture of its Brotas, Brazil production facility (see Note 12, "Divestiture"), the Company and DSM entered into a license agreement covering certain intellectual property of the Company useful in the performance of certain commercial supply agreements assigned by the Company to DSM relating to products currently manufactured at the Brotas facility (DSM November 2017 Intellectual Property License Agreement). In December 2017, DSM paid the Company an upfront license fee of $27.5 million. In accounting for the Divestiture with DSM, a multiple-element arrangement, the license of intellectual property to DSM was identified as revenue deliverable with standalone value and qualified as a separate unit of accounting. The Company performed an analysis to determine the fair value for of the license, and allocated the non-contingent consideration based on the relative fair value. The Company determined that the license had been fully delivered, and, as such, license revenue of $54.6 million was recognized for the period ended December 31. 2017.
On November 19, 2018, the Company and DSM entered into a letter agreement (November 2018 DSM Letter Agreement), pursuant to which the Company agreed (i) to cause the removal of certain existing liens on intellectual property owned by the Company and licensed to DSM and (ii) if such liens were not removed prior to December 15, 2018, to issue to DSM shares of the Company’s common stock with a value equal to $5.0 million. On December 14, 2018, the Company entered into an amendment to the GACP Term Loan Facility to remove such lien, and the November 2018 DSM Letter Agreement was thereby terminated.
DSM Value Sharing Agreement
In December 2017, in conjunction with the Company's divestiture of its Brotas, Brazil production facility (see Note 12, "Divestiture" and Note 10, "Related Party Transactions"), the Company and DSM entered into a value sharing agreement (Value Sharing Agreement), pursuant to which DSM agreed to make certain royalty payments to the Company representing a portion of the profit on the sale of products produced using farnesene purchased under the Nenter Supply Agreement realized by Nenter and paid to DSM in accordance with the Nenter Supply Agreement. In addition, pursuant to the Value Sharing Agreement, DSM agreed to guarantee certain minimum annual royalty payments totaling $33.1 million over the first three calendar years of the Value Sharing Agreement, subject to future offsets in the event that the royalty payments to which the Company would otherwise have been entitled under the Value Sharing Agreement for such years fall below certain milestones. The nonrefundable minimum annual royalty payments were determined to be fixed and determinable and were included as part of the total arrangement consideration subject to allocation in the December 2017 multiple-element divestiture transaction with DSM. At closing, DSM paid the Company a nonrefundable royalty payment of $15.0 million under the Value Sharing Agreement and paid two additional future nonrefundable minimum annual royalty payments totaling $18.1 million related to 2019 and 2020 royalties. In June 2018, the Company received the 2019 non-refundable minimum royalty payment of $9.3 million (net of a $0.7 million early payment discount) and in March 2019, the Company received the 2020 payment of
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$7.4 million (net of a $0.7 million early payment discount). During 2018, the Company and DSM amended the Value Sharing Agreement to (i) provide for the use of estimates in calculating quarterly royalty payments (subject to true-up), (ii) modify how the guaranteed minimum annual royalty payment for 2018 will be offset against value payments accruing during 2018 and (iii) accelerate the minimum annual royalty payment for 2019 from December 31, 2018 to June 30, 2018 in exchange for a fee of $750,000. For the year ended December 31, 2018, the Company recognized $7.9 million of revenue in connection with the DSM Value Sharing Agreement.
In April 2019, the Company assigned to DSM, and DSM assumed, all of the Company’s rights and obligations under the December 2017 DSM Value Sharing Agreement, as amended, for aggregate consideration to the Company of $57.0 million, which included $7.4 million received on March 29, 2019 for the third and final annual royalty payment due under the original agreement. On April 16, 2019, the Company received net cash of $21.7 million, with the remaining $27.9 million used by the Company to offset past due trade payables (including interest) under the 2017 Supply Agreement (discussed below), the obligation under the November 2018 Securities Purchase Agreement, and manufacturing capacity fees under the provisions of Amendment No. 1 to the 2017 Supply Agreement (see Note 10, "Related Party Transactions" for a description of these agreements).
The original Value Sharing Agreement was accounted for as a single performance obligation in connection with a license with fixed and determinable consideration and variable consideration that was accounted for pursuant to the sales-based royalty scope exception. The April 16, 2019 assignment of the December 2017 DSM Value Sharing Agreement was accounted for as a contract modification under ASC 606, resulting in additional fixed and determinable consideration of $37.1 million and variable consideration of $12.5 million in the form of a stand-ready obligation to refund some or all of the $12.5 million consideration if certain criteria outlined in the assignment agreement are not met by December 2021. The Company periodically updates its estimate of amounts to be retained and reduces the refund liability and records additional license and royalty revenue as the criteria are met. The effect of the contract modification on the transaction price, and on the Company’s measure of progress toward complete satisfaction of the performance obligation was recognized as an adjustment to revenue at the date of the contract modification on a cumulative catch-up basis. As a result, the Company recognized $37.1 million of license and royalty in the second quarter of 2019, due to fully satisfying the performance obligation at the modification date.The Company also recognized an additional $3.6 million of previously deferred royalty revenue under the December 2017 DSM Value Sharing Agreement, as the remaining underlying performance obligation was fully satisfied through the April 16, 2019 assignment of the agreement to DSM. The Company recorded an additional $8.8 million of license and royalty revenue in the fourth quarter of 2019 related to a change in the estimated refund liability.
DSM Performance Agreement
In December 2017, in connection with the Company's divestiture of its Brotas, Brazil production facility (see Note 12, "Divestiture"), the Company and DSM entered into a performance agreement (Performance Agreement), pursuant to which the Company will provide certain research and development services to DSM relating to the development of the technology underlying the farnesene-related products to be manufactured at the Brotas facility in exchange for related funding, including certain bonus payments in the event that specific performance metrics are achieved. The Company will record the bonus payments as earned revenue upon the transfer of the developed technology to DSM. If the Company does not meet the established metrics under the Performance Agreement, the Company will be required to pay $1.8 million to DSM. The Performance Agreement will expire in December 2020, subject to the right of each of the parties to terminate for uncured material breach by the other party or in the event the other party is subject to bankruptcy proceedings, liquidation, dissolution or similar proceedings or other specified events.
DSM December 2017 Supply Agreement and November 2018 Supply Agreement Amendment
On November 19, 2018, the Company and DSM entered into an amendment (Supply Agreement Amendment) to the supply agreement, dated December 28, 2017 (Supply Agreement), by and between the Company and DSM. Under the Supply Agreement, DSM agreed to manufacture and supply to the Company certain products useful in the Company’s business, at prices and on production and delivery terms and specifications set forth in the Supply Agreement, which prices are based upon DSM’s manufacturing cost plus an agreed margin. The Supply Agreement originally provided that it would expire (i) with respect to non-farnesene related products, on the date that the Company’s planned new specialty ingredients manufacturing facility in Brazil is fully operational and meets its production targets, but in any event no later than December 31, 2021 and (ii) with respect to farnesene related products, on December 28, 2037, subject in each case to earlier termination in certain circumstances. Pursuant to the Supply Agreement Amendment, (i) the outside expiration date of the Supply Agreement with respect to non-farnesene related products was extended to December 31, 2022, with specified pricing terms added for products manufactured during 2022, (ii) DSM committed to produce certain non-farnesene related products for the Company for two months of each calendar year during the term of the Supply Agreement and (iii) the Company agreed to (A) pay DSM a cash
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fee totaling $15.5 million, payable in installments during 2018 and 2019, (B) issue 1,643,991 shares of the Company's common stock to DSM, and (C) pay DSM a cash fee of $7.3 million, payable on or before March 29, 2019, plus, if the closing price of the Common Stock on the trading day immediately preceding the date of such payment is less than $4.41 per share, an amount equal to such deficiency multiplied by 1,643,991.
In addition, on April 16, 2019 the Company and DSM entered into amendments to the 2017 Supply Agreement and the 2017 Performance Agreement, as well as the Quota Purchase Agreement relating to the December 2017 sale of Amyris Brasil to DSM (see Note 12, “Divestiture”), pursuant to which (i) DSM agreed to reduce certain manufacturing costs and fees paid by the Company related to the production of farnesene under the Supply Agreement through 2021, as well as remove the priority of certain customers over the Company with respect to production capacity at the Brotas, Brazil facility, (ii) the Company agreed to provide DSM rights to conduct certain process and downstream recovery improvements under the Performance Agreement at facilities other than the Brotas, Brazil facility in exchange for DSM providing the Company with a license to such improvements and (iii) the Company released DSM from its obligation to provide manufacturing and support services under the Quota Purchase Agreement in connection with the Company’s planned new manufacturing facility, which is no longer to be located at the Brotas, Brazil location.
DARPA Technology Investment Agreement
In September 2015, the Company entered into a technology investment agreement (TIA) with The Defense Advanced Research Projects Agency (DARPA), under which the Company, with the assistance of specialized subcontractors, is working to create new research and development tools and technologies for strain engineering and scale-up activities. The agreement is being funded by DARPA on a milestone basis. Under the TIA, the Company and its subcontractors could collectively receive DARPA funding of up to $35.0 million over the program’s year term if all of the program’s milestones are achieved. In conjunction with DARPA’s funding, the Company and its subcontractors are obligated to collectively contribute approximately $15.5 million toward the program over its year term (primarily by providing specified labor and/or purchasing certain equipment). For the DARPA agreement, the Company recognizes revenue using an output-based measure of progress of the milestones completed relative to remaining milestones, once acknowledged by DARPA.
Contract Assets and Liabilities
When a contract results in revenue being recognized in excess of the amount the Company has invoiced or has the right to invoice to the customer, a contract asset is recognized. Contract assets are transferred to accounts receivable, net when the rights to the consideration become unconditional.
Contract liabilities consist of payments received from customers, or such consideration that is contractually due, in advance of providing the product or performing services such that control has not passed to the customer.
Trade receivables related to revenue from contracts with customers are included in accounts receivable on the consolidated balance sheets, net of the allowance for doubtful accounts. Trade receivables are recorded at the point of renewable product sale or in accordance with the contractual payment terms for licenses and royalties, and grants and collaborative research and development services for the amount payable by the customer to the Company for sale of goods or the performance of services, and for which the Company has the unconditional right to receive payment.
Contract Balances
The following table provides information about accounts receivable and contract liabilities from contracts with customers:
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Accounts receivable, net | $ | 16,322 | $ | 16,003 | ||||
| Accounts receivable - related party, net | $ | 3,868 | $ | 1,349 | ||||
| Accounts receivable, unbilled - related party | $ | — | $ | 8,021 | ||||
| Contract assets | $ | 8,485 | $ | — | ||||
| Contract assets, noncurrent - related party | $ | 1,203 | $ | 1,203 | ||||
| Contract liabilities | $ | 1,353 | $ | 8,236 | ||||
Contract liabilities, noncurrent(1) | $ | 1,449 | $ | 1,587 | ||||
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(1)The balances in contract liabilities, noncurrent are included in other noncurrent liabilities on the consolidated balance sheets.
Unbilled receivables relate to the Company’s right to consideration from DSM for (i) minimum future royalties and (ii) a material right arising from a customer option for a future transfer of technology. The Company’s right to cash receipt for these minimum royalty amounts occurs on or before December 31, 2019, and the right to cash receipt for the customer option occurs on or before December 31, 2020.
Contract liabilities, current decreased by $6.9 million at December 31, 2019 resulting from collaboration and royalty amounts recognized as revenue during the year ended December 31, 2019 that was included in contract liabilities at the beginning of the period.
Remaining Performance Obligations
The following table provides information regarding the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) based on the Company's existing agreements with customers as of December 31, 2019.
| (In thousands) | As of December 31, 2019 | ||||
| 2020 | $ | 56,719 | |||
| 2021 | 52,313 | ||||
| 2022 | 30,483 | ||||
| 2023 and thereafter | — | ||||
| Total from all customers | $ | 139,515 | |||
In accordance with the disclosure provisions of ASC 606, the table above excludes estimated future revenues for performance obligations that are part of a contract that has an original expected duration of one year or less or a performance obligation with variable consideration that is recognized using the sales-based royalty exception for licenses of intellectual property. Additionally, $181.0 million of estimated future revenue is excluded from the table above, as that amount represents constrained variable consideration.
10. Related Party Transactions
Related Party Equity
See Note 6, "Stockholders' Deficit" for details of these related party equity transactions:
•November 2018 DSM Securities Purchase Agreement
•August 2017 DSM Offering
Related Party Debt
See Note 4, "Debt" for details of these related party debt transactions:
•DSM Note (also see Note 12, "Divestiture")
•2014 Rule 144A Convertible Notes
•August 2013 Financing Convertible Notes
•Foris LSA
•Foris $19 million Note
•Naxyris LSA
Related party debt was as follows:
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| 2019 | 2018 | ||||||||||||||||||||||
| December 31, (in thousands) | Principal | Unaccreted Debt Discount | Net | Principal | Unaccreted Debt Discount | Net | |||||||||||||||||
| DSM notes | $ | 33,000 | $ | (4,621) | $ | 28,379 | $ | 25,000 | $ | (6,311) | $ | 18,689 | |||||||||||
| Foris | |||||||||||||||||||||||
| Foris notes | 115,351 | (9,516) | 105,835 | — | — | — | |||||||||||||||||
| 2014 Rule 144A convertible notes | — | — | — | 5,000 | (181) | 4,819 | |||||||||||||||||
| 115,351 | (9,516) | 105,835 | 5,000 | (181) | 4,819 | ||||||||||||||||||
| Naxyris note | 24,437 | (822) | 23,615 | — | — | — | |||||||||||||||||
| Temasek 2014 Rule 144A convertible note | — | — | — | 10,000 | (435) | 9,565 | |||||||||||||||||
| Total 2014 Rule 144A convertible note | 10,178 | — | 10,178 | 9,705 | (422) | 9,283 | |||||||||||||||||
| $ | 182,966 | $ | (14,959) | $ | 168,007 | $ | 49,705 | $ | (7,349) | $ | 42,356 | ||||||||||||
The fair value of the derivative liabilities related to the related party Foris $19 million note, Foris LSA and Naxyris note as of December 31, 2019 and 2018 was $2.6 million and $0.0 million, respectively. The Company recognized losses from change in the fair value of these and previous debt-related derivative liabilities of $0.1 million and $8.5 million for the years ended December 31, 2019 and 2018, respectively; see Note 3, "Fair Value Measurement".
At December 31, 2018, Temasek was no longer a related party. However, the Company and Temasek were related parties when they entered into the 2014 Rule 144A convertible notes transaction, for which terms remained unchanged since the borrowing date.
Related Party Revenue
The Company recognized revenue from related parties and from all other customers as follows:
| 2019 | 2018 | ||||||||||||||||||||||||||||
| Years Ended December 31, (In thousands) | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | Renewable Products | Licenses and Royalties | Grants and Collaborations | TOTAL | |||||||||||||||||||||
| Revenue from related parties: | |||||||||||||||||||||||||||||
| DSM | $ | 10 | $ | 49,051 | $ | 4,120 | $ | 53,181 | $ | 18 | $ | 5,958 | $ | 4,735 | $ | 10,711 | |||||||||||||
| Total | 46 | — | — | 46 | 342 | — | — | 342 | |||||||||||||||||||||
| Novvi | — | — | — | — | — | — | — | — | |||||||||||||||||||||
| Subtotal revenue from related parties | 56 | 49,051 | 4,120 | 53,227 | 360 | 5,958 | 4,735 | 11,053 | |||||||||||||||||||||
| Revenue from all other customers | 59,816 | 4,992 | 34,522 | 99,330 | 33,238 | 1,700 | 17,613 | 52,551 | |||||||||||||||||||||
| Total revenue from all customers | $ | 59,872 | $ | 54,043 | $ | 38,642 | $ | 152,557 | $ | 33,598 | $ | 7,658 | $ | 22,348 | $ | 63,604 | |||||||||||||
See Note 9, "Revenue Recognition" for details of the Company's revenue agreements with DSM.
Related Party Accounts Receivable
Related party accounts receivable was as follows:
| December 31, (In thousands) | 2019 | 2018 | ||||||
| DSM | $ | 3,868 | $ | 1,071 | ||||
| Novvi | — | 188 | ||||||
| Total | — | 90 | ||||||
| Related party accounts receivable, net | $ | 3,868 | $ | 1,349 | ||||
In addition to the amounts shown above, there were the following amounts on the consolidated balance sheet at December 31, 2019 and December 31, 2018, respectively:
•$0 and $8.0 million of unbilled receivables from DSM, in Accounts receivable, unbilled - related party;
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•$1.2 million of unbilled receivables from DSM in Contract assets, noncurrent - related party; and
•$3.3 million and $4.3 million of contingent consideration receivable from DSM in Other assets.
Related Party Accounts Payable and Accrued Liabilities
Amounts due to DSM were as follows:
•Accounts payable and accrued and other current liabilities of $14.0 million and $2.1 million at December 31, 2019 and 2018, respectively; and
•Other noncurrent liabilities of $3.8 million and $3.6 million at December 31, 2019 and 2018, respectively.
Related Party DSM Transactions
The Company is party to the following significant agreements (and related amendments) with related party DSM:
| Related to | Agreement | For Additional Information, See the Note Indicated | ||||||
| Debt | DSM Credit Agreement | 4. Debt | ||||||
| Debt | 2019 DSM Credit Agreement | 4. Debt | ||||||
| Divestiture | November 2017 Quota Purchase Agreement | 12. Divestiture | ||||||
| Divestiture | December 2017 DSM Transition Services Agreement | 12. Divestiture | ||||||
| Equity | August 2017 DSM Offering | 6. Stockholders' Deficit | ||||||
| Equity | November 2018 DSM Securities Purchase Agreement | 6. Stockholders' Deficit | ||||||
| Revenue | July and September 2017 Collaboration and Licensing Agreements | 9. Revenue Recognition | ||||||
| Revenue | December 2017 DSM Supply Agreement | 9. Revenue Recognition | ||||||
| Revenue | December 2017 DSM Value Sharing Agreement, as amended | 9. Revenue Recognition | ||||||
| Revenue | December 2017 DSM Performance Agreement | 9. Revenue Recognition | ||||||
| Revenue | November 2017 Intellectual Property License Agreement | 9. Revenue Recognition | ||||||
| Revenue | November 2018 Supply Agreement Amendment | 9. Revenue Recognition | ||||||
Concurrent with the sale of Amyris Brasil in December 2017, the Company and DSM entered into a series of commercial agreements including (i) a license agreement to DSM of its farnesene product for DSM to use in the Vitamin E and lubricant markets; (ii) a royalty agreement that DSM will pay the Company specified royalties representing a portion of the profit on the sale of Vitamin E produced from farnesene under the Nenter Supply Agreement assigned to DSM; (iii) a performance agreement, which provides an option for DSM to elect a technology transfer upon the achievement of certain development milestones associated with the optimization of farnesene strains; and (iv) a transition services agreement for the Company to provide finance, legal, logistics, and human resource services to support the Brotas facility under DSM ownership for a six-month period with a DSM option to extend for six additional months. See Note 12, “Divestiture” for further information regarding the sale of Amyris Brasil and the related commercial agreements. In addition, the Company entered into a credit agreement with DSM under which the Company borrowed $25 million; see Note 4, "Debt" for additional information.
In November 2018, the Company amended the supply agreement with DSM to secure capacity at the Brotas 1 facility for production of its alternative sweetener product through 2022. See Note 9, “Revenue Recognition” for information regarding the November 2018 Supply Agreement Amendment and the November 2018 DSM Securities Purchase Agreement. The Company also entered into other transactions with DSM in November 2018 which resulted in the Company (i) evaluating this series of November 2018 transactions and considering other certain transactions with DSM in 2018 as a combined arrangement, and (ii) determining and allocating the fair value to each element. The other transactions entered into concurrently with the November 2018 Supply Agreement Amendment and November 2018 DSM Securities Purchase Agreement included an agreement to finalize the working capital adjustments related to the Brotas 1 facility sale in December 2017 and an amendment to reduce the exercise price of the Cash Warrant issued to DSM in the August 2017 DSM Offering and to provide a waiver for any potential claims arising from failure to obtain consent prior to amending the exercise price of the August 2017 Vivo Cash Warrant in the August 2017 Warrant transaction.
The contractual consideration transferred to DSM under the combined arrangement was $34.7 million. The Company performed an analysis to determine the fair value of the elements and allocated the resulting $33.3 million total fair value as follows: (i) $24.4 million to the manufacturing capacity, (ii) $6.8 million to the legal settlement and related consent waiver and (iii) $2.1 million to the working capital adjustment. See Note 3, “Fair Value Measurement” for information related to this fair
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value allocation. The $1.4 million excess consideration transferred above the combined arrangement’s fair value was recorded as a reduction of royalty revenues in the year ended December 31, 2018. Of the $24.4 million fair value allocated to the manufacturing capacity, $3.3 million was recorded as deferred cost of products sold during 2018. Also, the Company paid an additional $14.1 million in manufacturing capacity fees during 2019, which were recorded as additional deferred cost of products sold. The remaining $7.0 million manufacturing capacity fees will be recorded as deferred cost of products sold in the period the additional payments are made to DSM. The deferred cost of products sold asset will be expensed on a units of production basis as products are sold over the -year term of the supply agreement. On a quarterly basis, the Company evaluates its future production volumes for its sweetener product and adjusts the unit cost to be expensed over the remaining estimated production volume. The $6.8 million of fair value allocated to the legal settlement and related consent waiver was recorded as legal settlement expense for the year ended December 31, 2018. The $2.1 million of fair value allocated to the working capital adjustment was recorded as a loss on divestiture for the year ended December 31, 2018. The contractual consideration transferred to DSM exceeded the fair value of the elements received by $1.4 million and this excess was recorded as a reduction of licenses and royalties revenues in the three months ended December 31, 2018.
Related Party Joint Venture
In December 2016, the Company, Nikko Chemicals Co., Ltd. an existing commercial partner of the Company, and Nippon Surfactant Industries Co., Ltd., an affiliate of Nikko (collectively, Nikko) entered into a joint venture (the Aprinnova JV Agreement) pursuant to which the Company contributed certain assets, including certain intellectual property and other commercial assets relating to its business-to-business cosmetic ingredients business (the Aprinnova JV Business), as well as its Leland production facility. The Company also agreed to provide the Aprinnova JV with exclusive (to the extent not already granted to a third party), royalty-free licenses to certain of the Company's intellectual property necessary to make and sell products associated with the Aprinnova JV Business (the Aprinnova JV Products). Nikko purchased their 50% interest in the Aprinnova JV in exchange for the following payments to the Company: (i) an initial payment of $10.0 million and (ii) the profits, if any, distributed to Nikko in cash as members of the Aprinnova JV during the three-year period from 2017 to 2019, up to a maximum of $10.0 million.
The Aprinnova JV operates in accordance with the Aprinnova Operating Agreement under which the Aprinnova JV is managed by a Board of Directors consisting of four directors: two appointed by the Company and two appointed by Nikko. In addition, Nikko has the right to designate the Chief Executive Officer of the Aprinnova JV from among the directors and the Company has the right to designate the Chief Financial Officer. The Company determined that it has the power to direct the activities of the Aprinnova JV that most significantly impact its economic performance because of its (i) significant control and ongoing involvement in operational decision making, (ii) guarantee of production costs for certain Aprinnova JV products, as discussed below, and (iii) control over key supply agreements, operational and administrative personnel and other production inputs. The Company has concluded that the Aprinnova JV is a variable-interest entity (VIE) under the provisions of ASC 810, Consolidation, and that the Company has a controlling financial interest and is the VIE's primary beneficiary. As a result, the Company accounts for its investment in the Aprinnova JV on a consolidation basis in accordance with ASC 810.
Under the Aprinnova Operating Agreement, profits from the operations of the Aprinnova JV, if any, are distributed as follows: (i) first, to the Company and Nikko (the Members) in proportion to their respective unreturned capital contribution balances, until each Member’s unreturned capital contribution balance equals zero and (ii) second, to the Members in proportion to their respective interests. In addition, any future capital contributions will be made by the Company and Nikko on an equal (50%/50%) basis each time, unless otherwise mutually agreed. For the year ended December 31, 2019, a $0.3 million distribution was made to Nikko and was recorded as a decrease in noncontrolling interest.
Pursuant to the Aprinnova JV Agreement, the Company and Nikko agreed to make initial working capital loans to the Aprinnova JV in the amounts of $0.5 million and $1.5 million, respectively, and again in 2019 with additional loans of $0.2 million each. Also in 2019, Nikko provided the Aprinnova JV with $1.2 million of short-term loans to purchase certain manufacturing supplies. These loans are described in more detail in Note 4, “Debt”. In addition, the Company agreed to guarantee a maximum production cost for squalane and hemisqualane to be produced by the Aprinnova JV and to bear any cost of production above such guaranteed costs.
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In connection with the contribution of the Leland Facility by the Company to the Aprinnova JV, at the closing of the formation of the Aprinnova JV, Nikko made a loan to the Company in the principal amount of $3.9 million, and the Company in consideration therefore issued a promissory note to Nikko in an equal principal amount, as described in more detail in Note 4, “Debt” under “Nikko Note.”
The following presents the carrying amounts of the Aprinnova JV’s assets and liabilities included in the accompanying consolidated balance sheets. Assets presented below are restricted for settlement of the Aprinnova JV's obligations and all liabilities presented below can only be settled using the Aprinnova JV resources.
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Assets | $ | 17,390 | $ | 12,904 | ||||
| Liabilities | $ | 3,690 | $ | 2,364 | ||||
The Aprinnova JV's assets and liabilities are primarily comprised of inventory, property, plant and equipment, accounts payable and debt, which are classified in the same categories in the Company's consolidated balance sheets.
Office Sublease
The Company subleases certain office space to Novvi, for which the Company charged Novvi $0.6 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively.
See Note 15, “Subsequent Events” for information regarding related party transactions subsequent to December 31, 2019.
11. Stock-based Compensation
Stock-based Compensation Expense Related to All Plans
Stock-based compensation expense related to all employee stock compensation plans, including options, restricted stock units and ESPP, was as follows:
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Research and development | $ | 2,900 | $ | 1,797 | ||||
| Sales, general and administrative | 9,654 | 7,393 | ||||||
| Total stock-based compensation expense | $ | 12,554 | $ | 9,190 | ||||
Plans
2010 Equity Incentive Plan
The Company's 2010 Equity Incentive Plan (2010 Equity Plan) became effective on September 27, 2010 and will terminate in 2020. The 2010 Equity Plan provides for the granting of common stock options, restricted stock awards, stock bonuses, stock appreciation rights, restricted stock units (RSUs) and performance awards. It allows for time-based or performance-based vesting for the awards. Options granted under the 2010 Equity Plan may be either incentive stock options (ISOs) or non-statutory stock options (NSOs). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, non-employee directors and consultants. The Company will be able to issue no more than 2,000,000 shares pursuant to the grant of ISOs under the 2010 Equity Plan. Options under the 2010 Equity Plan may be granted for periods of up to years. All options issued to date have had a -year life. Under the plan, the exercise price of any ISOs and NSOs may not be less than 100% of the fair market value of the shares on the date of grant. The exercise price of any ISOs and NSOs granted to a 10% stockholder may not be less than 110% of the fair value of the underlying stock on the date of grant. The options and RSUs granted to-date generally vest over to years.
As of December 31, 2019 and 2018, options were outstanding to purchase 5,589,315 and 5,339,214 shares, respectively, of the Company's common stock granted under the 2010 Equity Plan, with weighted-average exercise prices per share of $8.89 and $9.62, respectively. In addition, as of December 31, 2019 and 2018, restricted stock units representing the right to receive 5,782,651 and 5,294,803 shares, respectively, of the Company's common stock granted under the 2010 Equity Plan were
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outstanding. As of December 31, 2019 and 2018, 3,815,625 and 2,359,750 shares, respectively, of the Company’s common stock remained available for future awards that may be granted under the 2010 Equity Plan.
The number of shares reserved for issuance under the 2010 Equity Plan increases automatically on January 1 of each year starting with January 1, 2011, by a number of shares equal to 5% of the Company’s total outstanding shares as of the immediately preceding December 31. However, the Company’s Board of Directors or the Leadership Development and Compensation Committee of the Board of Directors retains the discretion to reduce the amount of the increase in any particular year.
In May 2018, shareholders approved amendments to the 2010 Equity Plan to (i) increase the number of shares of common stock available for grant and issuance thereunder by 9.0 million shares and (ii) increase the annual per-participant award limit thereunder to 4.0 million shares. Subsequent to the amendments, the total number of shares available for grant was 9,280,000, not including the annual evergreen increases.
2005 Stock Option/Stock Issuance Plan
In 2005, the Company established its 2005 Stock Option/Stock Issuance Plan (2005 Plan) which provided for the granting of common stock options, restricted stock units, restricted stock and stock purchase rights awards to employees and consultants of the Company. The 2005 Plan allowed for time-based or performance-based vesting for the awards. Options granted under the 2005 Plan were ISOs or NSOs. ISOs were granted only to Company employees (including officers and directors who are also employees). NSOs were granted to Company employees, non-employee directors, and consultants.
All options issued under the 2005 Plan had a -year life. The exercise prices of ISOs and NSOs granted under the 2005 Plan were not less than 100% of the estimated fair value of the shares on the date of grant, as determined by the Board of Directors. The exercise price of an ISO and NSO granted to a 10% stockholder could not be less than 110% of the estimated fair value of the underlying stock on the date of grant as determined by the Board. The options generally vested over 5 years.
As of December 31, 2019 and 2018, options to purchase 31,104 and 52,389 shares, respectively, of the Company’s common stock granted under the 2005 Plan remained outstanding, and as a result of the adoption of the 2010 Equity Plan discussed above, zero shares of the Company’s common stock remained available for future awards issuance under the 2005 Plan. The options outstanding under the 2005 Plan as of December 31, 2019 and 2018 had a weighted-average exercise price per share of $259.19 and $185.93, respectively.
2010 Employee Stock Purchase Plan
The 2010 Employee Stock Purchase Plan (2010 ESPP) became effective on September 27, 2010. The 2010 ESPP is designed to enable eligible employees to purchase shares of the Company’s common stock at a discount. Offering periods under the 2010 ESPP generally commence on each May 16 and November 16, with each offering period lasting for year and consisting of two -month purchase periods. The purchase price for shares of common stock under the 2010 ESPP is the lesser of 85% of the fair market value of the Company’s common stock on the first day of the applicable offering period or the last day of each purchase period. During the life of the 2010 ESPP, the number of shares reserved for issuance increases automatically on January 1 of each year, starting with January 1, 2011, by a number of shares equal to 1% of the Company’s total outstanding shares as of the immediately preceding December 31. However, the Company’s Board of Directors or the Leadership Development and Compensation Committee of the Board of Directors retains the discretion to reduce the amount of the increase in any particular year. In May 2018, shareholders approved an amendment to the 2010 ESPP to increase the maximum number of shares of common stock that may be issued over the term of the ESPP by 1 million shares. No more than 1,666,666 shares of the Company’s common stock may be issued under the 2010 ESPP and no other shares may be added to this plan without the approval of the Company’s stockholders.
2018 CEO Performance-based Stock Options
In May 2018, the Company granted its chief executive officer performance-based stock options (PSOs) to purchase 3,250,000 shares. PSOs are equity awards with the final number of PSOs that may vest determined based on the Company’s performance against pre-established EBITDA milestones and Amyris stock price milestones. The EBITDA milestones are measured from the grant date through December 31, 2021, and the stock price milestones are measured from the grant date through December 31, 2022. The PSOs vest in four tranches contingent upon the achievement of both the EBITDA milestones and stock price milestones for each respective tranche, and the chief executive officer’s continued employment with the Company. Over the measurement periods, the number of PSOs that may be issued and the related stock-based compensation expense that is recognized is adjusted upward or downward based upon the probability of achieving the EBITDA milestones.
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Depending on the probability of achieving the EBITDA milestones and stock price milestones and certification of achievement of those milestones for each vesting tranche by the Company’s Board of Directors or Compensation Committee, the PSOs issued could be from zero to 3,250,000 stock options, with an exercise price of $5.08 per share.
Stock-based compensation expense for this award is recognized using a graded-vesting approach over the service period beginning at the grant date through December 31, 2022, as the Company’s management has determined that certain EBITDA milestones are probable of achievement over the next four years as of December 31, 2019, The Company utilized a Monte Carlo simulation to estimate the grant date fair value of each tranche of the award which totaled $5.1 million. For the years ended December 31, 2019 and 2018, the Company recognized $0 and $0.7 million, respectively, of compensation expense for this award. The assumptions used to estimate the fair value of this award with performance and market vesting conditions were as follows:
| Stock Option Award with Performance and Market Vesting Conditions: | |||||
| Fair value of the Company’s common stock on grant date | $ | 5.08 | |||
| Expected volatility | 70 | % | |||
| Risk-free interest rate | 2.75 | % | |||
| Dividend yield | 0.0 | % | |||
Stock Option Activity
Stock option activity is summarized as follows:
| Year ended December 31, | 2019 | 2018 | ||||||
| Options granted | 530,140 | 4,337,119 | ||||||
| Weighted-average grant-date fair value per share | $ | 3.83 | $ | 5.18 | ||||
| Compensation expense related to stock options (in millions) | $ | 2.0 | $ | 2.6 | ||||
| Unrecognized compensation costs as of December 31 (in millions) | $ | 4.5 | $ | 8.5 | ||||
The Company expects to recognize the December 31, 2019 balance of unrecognized costs over a weighted-average period of 3.8 years. Future option grants will increase the amount of compensation expense to be recorded in these periods.
Stock-based compensation expense for stock options and employee stock purchase plan rights is estimated at the grant date and offering date, respectively, based on the fair-value using the Black-Scholes-Merton option pricing model. The fair value of employee stock options is amortized on a ratable basis over the requisite service period of the awards. The fair value of employee stock options and employee stock purchase plan rights was estimated using the following weighted-average assumptions:
| Years Ended December 31, | 2019 | 2018 | ||||||
| Expected dividend yield | —% | —% | ||||||
| Risk-free interest rate | 1.8% | 2.8% | ||||||
| Expected term (in years) | 6.9 | 6.9 | ||||||
| Expected volatility | 84% | 80% | ||||||
The expected life of options is based primarily on historical share option exercise experience of the employees for options granted by the Company. All options are treated as a single group in the determination of expected life, as the Company does not currently expect substantially different exercise or post-vesting termination behavior among the employee population. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant. Expected volatility is based on the historical volatility of the Company's common stock. The Company has no history or expectation of paying dividends on common stock.
Stock-based compensation expense associated with options is based on awards ultimately expected to vest. At the time of an option grant, the Company estimates the expected future rate of forfeitures based on historical experience. These estimates are revised, if necessary, in subsequent periods if actual forfeiture rates differ from those estimates. If the actual forfeiture rate
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is lower than estimated the Company will record additional expense and if the actual forfeiture is higher than estimated the Company will record a recovery of prior expense.
The Company’s stock option activity and related information for the year ended December 31, 2019 was as follows:
| Number of Stock Options | Weighted- average Exercise Price | Weighted-average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||
| Outstanding - December 31, 2018 | 5,390,270 | $ | 11.55 | 8.5 | $ | 29 | ||||||||
| Options granted | 530,140 | $ | 3.83 | |||||||||||
| Options exercised | (7,445) | $ | 3.60 | |||||||||||
| Options forfeited or expired | (292,546) | $ | 17.18 | |||||||||||
| Outstanding - December 31, 2019 | 5,620,419 | $ | 10.27 | 7.8 | $ | 24 | ||||||||
| Vested or expected to vest after December 31, 2019 | 5,037,260 | $ | 10.88 | 7.7 | $ | 23 | ||||||||
| Exercisable at December 31, 2019 | 1,314,113 | $ | 27.46 | 6.1 | $ | 10 | ||||||||
The aggregate intrinsic value of options exercised under all option plans was $0 and $0.2 million for the years ended December 31, 2019 and 2018, respectively, determined as of the date of option exercise.
Restricted Stock Units Activity and Expense
During the years ended December 31, 2019 and 2018, 2,996,660 and 5,452,664 RSUs, respectively, were granted with weighted-average service-inception date fair value per unit of $3.96 and $5.36, respectively. The Company recognized RSU-related stock-based compensation expense of $10.2 million and $6.4 million, respectively, for the years ended December 31, 2019 and 2018. As of December 31, 2019 and 2018, unrecognized RSU-related compensation costs totaled $22.3 million and $23.8 million, respectively.
Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant.
The Company’s RSU and restricted stock activity and related information for the year ended December 31, 2019 was as follows:
| Number of Restricted Stock Units | Weighted-average Grant-date Fair Value | Weighted-average Remaining Contractual Life (in years) | |||||||||
| Outstanding - December 31, 2018 | 5,294,803 | $ | 5.50 | 1.4 | |||||||
| Awarded | 2,996,660 | $ | 3.96 | ||||||||
| Vested | (1,891,931) | $ | 5.51 | ||||||||
| Forfeited | (616,881) | $ | 4.84 | ||||||||
| Outstanding - December 31, 2019 | 5,782,651 | $ | 4.77 | 1.7 | |||||||
| Vested or expected to vest after December 31, 2019 | 5,338,558 | $ | 4.78 | 1.6 | |||||||
ESPP Activity and Expense
During the years ended December 31, 2019 and 2018, 318,490 and 246,230 shares, respectively, of the Company's common stock were purchased under the 2010 ESPP. At December 31, 2019 and 2018, 263,797 and 199,463 shares, respectively, of the Company’s common stock remained reserved for issuance under the 2010 ESPP.
During the years ended December 31, 2019 and 2018, the Company also recognized ESPP-related stock-based compensation expense of $0.4 million and $0.2 million, respectively.
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12. Divestiture
On December 28, 2017, the Company completed the sale of its subsidiary Amyris Brasil Ltda. (Amyris Brasil), which operated the Company’s production facility located in Brotas, Brazil, to DSM and concurrently entered into a series of commercial agreements and a credit agreement with DSM. At closing, the Company received $33.0 million in contractual cash consideration for the capital stock of Amyris Brasil, which was subject to certain post-closing working capital adjustments; and reimbursements contingent upon DSM’s utilization of certain Brazilian tax benefits it acquired with its purchase of Amyris Brasil. The Company used $12.6 million of the cash proceeds received to repay certain indebtedness of Amyris Brasil. The total fair value of the contractual consideration received by the Company for Amyris Brasil was $56.9 million and resulted in a pretax gain of $5.7 million from continuing operations. In November 2018, the Company paid DSM $1.8 million related to the final post-closing working capital adjustment. In connection with the payment, $1.8 million was recorded as a loss on divestiture in the 2018 consolidated statement of operations, in the line captioned "(Loss) gain on divestiture".
Concurrent with the sale of Amyris Brasil, the Company and DSM entered into a series of commercial agreements including (i) a license agreement to DSM of its farnesene product for DSM to use in the Vitamin E and lubricant markets; (ii) a royalty agreement, pursuant to which DSM agreed to pay the Company specified royalties representing a portion of the profit on the sale of Vitamin E produced from farnesene sold under the Nenter Supply Agreement assigned to DSM; (iii) a performance agreement for the Company to perform research and development to optimize farnesene for production and sale of farnesene products; and (iv) a transition services agreement for the Company to provide finance, legal, logistics, and human resource services to support the Brotas facility under DSM ownership for a six-month period with a DSM option to extend for six additional months (see Note 9, “Revenue Recognition” for additional information). At closing, DSM paid the Company a $27.5 million nonrefundable license fee and a $15.0 million nonrefundable royalty payment, and agreed to pay two additional future nonrefundable minimum annual royalty payments totaling $18.1 million for 2019 and 2020 royalties. These future payments were determined to be fixed and determinable with a fair value of $17.8 million and were included as part of the total consideration subject to allocation in the December 2017 multiple-element divestiture transaction with DSM. In June 2018, the Company received the 2019 non-refundable minimum royalty payment of $9.3 million (net of a $0.7 million early payment discount) and in March 2019, the Company received the 2020 payment of $7.4 million (net of a $0.7 million early payment discount). See Note 9, “Revenue Recognition” and Note 10, "Related Party Transactions" for a full listing and details of agreements entered into with DSM. Additionally, the Company and DSM entered into a $25.0 million credit agreement that the Company used to repay all outstanding amounts under the Guanfu Note; see Note 4, “Debt” for additional information.
The Company accounted for the sale of Amyris Brasil as a sale of a business for proceeds of $54.8 million. The agreements entered into concurrently with the sale of Amyris Brasil including the license agreement, royalty agreement, performance agreement, transition services agreement, and credit agreement contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under U.S. GAAP. The Company performed an analysis to determine the fair value for all elements in the agreements with DSM and separated the elements between the non-revenue and revenue elements. After allocating the total fair value of the non-revenue elements from the fixed and determinable consideration received, the Company allocated the remaining fixed and determinable consideration to the revenue elements based on relative fair value. As such, the Company recognized $54.7 million of license revenue and $2.1 million of deferred revenue related to the performance option and transition services agreements with DSM as of December 31, 2017.
13. Income Taxes
The components of loss before income taxes are as follows:
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| United States | $ | (227,614) | $ | (218,109) | ||||
| Foreign | (14,524) | (12,125) | ||||||
| Loss before income taxes | $ | (242,138) | $ | (230,234) | ||||
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The components of the provision for income taxes are as follows:
| Years Ended December 31, (In thousands) | 2019 | 2018 | ||||||
| Current: | ||||||||
| Federal | $ | 621 | $ | — | ||||
| State | — | — | ||||||
| Foreign | 8 | — | ||||||
| Total current provision | 629 | — | ||||||
| Deferred: | ||||||||
| Federal | — | — | ||||||
| State | — | — | ||||||
| Foreign | — | — | ||||||
| Total deferred benefit | — | — | ||||||
| Total provision for income taxes | $ | 629 | $ | — | ||||
A reconciliation between the statutory federal income tax and the Company’s effective tax rates as a percentage of loss before income taxes is as follows:
| Years Ended December 31, | 2019 | 2018 | ||||||
| Statutory tax rate | (21.0) | % | (21.0) | % | ||||
| Federal R&D credit | (0.7) | % | (0.6) | % | ||||
| Derivative liability | 4.7 | % | 4.3 | % | ||||
| Nondeductible interest | 1.0 | % | 1.0 | % | ||||
| Other | 2.4 | % | (0.1) | % | ||||
| Foreign losses | 0.9 | % | 0.9 | % | ||||
| Change in valuation allowance | 13.0 | % | 15.5 | % | ||||
| Effective income tax rate | 0.3 | % | — | % | ||||
Temporary differences and carryforwards that gave rise to significant portions of deferred taxes are as follows:
| December 31, (In thousands) | 2019 | 2018 | ||||||
| Net operating loss carryforwards | $ | 88,513 | $ | 57,921 | ||||
| Property, plant and equipment | 8,239 | 9,269 | ||||||
| Research and development credits | 15,002 | 12,046 | ||||||
| Foreign tax credit | — | — | ||||||
| Accruals and reserves | 13,934 | 8,526 | ||||||
| Stock-based compensation | 6,164 | 6,496 | ||||||
| Disallowed interest carryforward | 7,072 | 2,359 | ||||||
| Capitalized research and development costs | 21,723 | 27,888 | ||||||
| Intangible and others | 2,503 | 3,114 | ||||||
| Equity investments | 304 | 156 | ||||||
| Total deferred tax assets | 163,454 | 127,775 | ||||||
| Operating leases right-of-use assets | (2,643) | — | ||||||
| Debt discount and derivatives | (7,176) | (3,750) | ||||||
| Total deferred tax liabilities | (9,819) | (3,750) | ||||||
| Net deferred tax assets prior to valuation allowance | 153,635 | 124,025 | ||||||
| Less: valuation allowance | (153,635) | (124,025) | ||||||
| Net deferred tax assets | $ | — | $ | — | ||||
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Activity in the deferred tax assets valuation allowance is summarized as follows:
| (In thousands) | Balance at Beginning of Year | Additions | Reductions / Charges | Balance at End of Year | ||||||||||
| Deferred tax assets valuation allowance: | ||||||||||||||
| Year ended December 31, 2019 | $ | 124,025 | $ | 29,610 | $ | — | $ | 153,635 | ||||||
| Year ended December 31, 2018 | $ | 81,086 | $ | 42,939 | $ | — | $ | 124,025 | ||||||
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based on the weight of available evidence, especially the uncertainties surrounding the realization of deferred tax assets through future taxable income, the Company believes that it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets as of December 31, 2019 and 2018. The valuation allowance increased by $42.9 million during the year ended December 31, 2018 and increased by $29.6 million during the year ended December 31, 2019.
As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $411.3 million and state net operating loss carryforwards $158.1 million, available to reduce future taxable income, if any. The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382 (IRC Section 382). Events that may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. During the year ended December 31, 2019, the Company experienced a cumulative ownership change of greater than 50%. As such, net operating losses generated prior to that change are subject to an annual limitation on their use. Due to the limitations imposed, the Company wrote-off $396.5 million of federal NOL carryover and $90.6 million of state NOL carryover that is expected to expire before it can be utilized. Additionally, the Company wrote-off $14.4 million of its historical federal research and development credit carryovers as a result of the limitations. As of December 31, 2019, the Company had foreign net operating loss carryovers of approximately $22.0 million.
As of December 31, 2019, the Company had federal research and development credit carryforwards of $3.3 million and California research and development credit carryforwards of $15.2 million.
If not utilized, the federal net operating loss carryforward will begin expiring in 2034, and the California net operating loss carryforward will begin expiring in 2031. The federal research and development credit carryforwards will expire starting in 2037 if not utilized. The California research and development credit carryforwards can be carried forward indefinitely.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| (In thousands) | |||||
| Balance at December 31, 2017 | $ | 28,833 | |||
| Increases in tax positions for prior period | 55 | ||||
| Increases in tax positions during current period | 1,239 | ||||
| Balance at December 31, 2018 | 30,127 | ||||
| Increases in tax positions for prior period | — | ||||
| Increases in tax positions during current period | 1,411 | ||||
| Balance at December 31, 2019 | $ | 31,538 | |||
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes. The Company accrued $0.6 million and $0 for interest as of December 31, 2019 and 2018, respectively.
None of the unrecognized tax benefits, if recognized, would affect the effective income tax rate for any of the above years due to the valuation allowance that currently offsets deferred tax assets. The Company does not anticipate that the total amount of unrecognized income tax benefits will significantly increase or decrease in the next 12 months.
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The Company’s primary tax jurisdiction is the United States. For United States federal and state tax purposes, returns for tax years 2006 and forward remain open and subject to tax examination by the appropriate federal or state taxing authorities. Brazil tax years 2011 and forward remain open and subject to examination.
As of December 31, 2019, the U.S. Internal Revenue Service (the IRS) has completed its audit of the Company for tax year 2008 and concluded that there were no adjustments resulting from the audit. While the statutes are closed for tax year 2008, the U.S. federal tax carryforwards (net operating losses and tax credits) may be adjusted by the IRS in the year in which the carryforward is utilized.
14. Geographical Information
The chief operating decision maker is the Company's Chief Executive Officer, who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis. There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results, and planning for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable segment and operating segment structure.
Revenue
Revenue by geography, based on each customer's location, is shown in Note 9, "Revenue Recognition".
Property, Plant and Equipment
| December 31, (In thousands) | 2019 | 2018 | ||||||
| United States | $ | 13,799 | $ | 10,404 | ||||
| Brazil | 14,277 | 6,447 | ||||||
| Europe | 854 | 198 | ||||||
| $ | 28,930 | $ | 17,049 | |||||
15. Subsequent Events
Warrants Exercises for Cash
On January 13, 2020 Foris Ventures, LLC (Foris), an entity affiliated with director John Doerr and which beneficially owns greater than 5% of the Company’s outstanding common stock, delivered to the Company an irrevocable notice of cash exercise with respect to a warrant to purchase 4,877,386 shares of the Company’s common stock at an exercise price of $2.87 per share, pursuant to a warrant issued by the Company on August 17, 2018. On January 14, 2020, the Company received approximately $14.0 million from Foris in connection with the warrant exercise representing 4,877,386 shares of common stock.
On March 11, 2020 Foris provided to the Company a notice of cash exercise to purchase 5,226,481 shares of the Company’s common stock at an exercise price of $2.87 per share, pursuant to the PIPE Rights (discussed in the January 2020 Private Placement section below) issued by the Company on January 31, 2020. On March 12, 2020, the Company received approximately $15.0 million from Foris in connection with the PIPE Rights exercise.
Exchange of Senior Convertible Notes Due 2022
On January 14, 2020, the Company completed the exchange, pursuant to separate exchange agreements (the Exchange Agreements) with certain private investors (the Holders), of the Company’s Senior Convertible Notes Due 2022 (or the Prior Notes) for (i) new senior convertible notes in an aggregate principal amount of $51 million (the New Notes or New Senior Convertible Notes due 2022), (ii) an aggregate of 2,742,160 shares of Common Stock (the Exchange Shares), (iii) rights (the Rights) to acquire up to an aggregate of 2,484,321 shares of Common Stock, (iv) warrants (the Warrants) to purchase up to an aggregate of 3,000,000 shares of Common Stock (the Warrant Shares) at an exercise price of $3.25 per share, with an exercise term of two years from issuance, (v) accrued and unpaid interest on the Senior Convertible Notes Due 2022 (payable on or prior to January 31, 2020) and (vi) cash fees in an aggregate amount of $1.0 million (payable on or prior to January 31, 2020).
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The New Notes have substantially similar terms as the Prior Notes, except that (i) the Company would not be required to redeem the New Notes in an aggregate principal amount of $10 million on December 31, 2019, (ii) the Company would only be required to redeem the New Notes in an aggregate amount of $10 million following the receipt by the Company of at least $80 million of aggregate net cash proceeds from one or more financing transactions, and at a price of 107% of the amount being redeemed, (iii) the financing activity requirement was reduced such that the Company would only be required to raise aggregate net cash proceeds of $50 million from one or more financing transactions by January 31, 2020, (iv) the Company would have until January 31, 2020 to comply with certain covenants related to the repayment, conversion or exchange into equity or amendment of certain outstanding indebtedness of the Company, and (v) the deadline for the Company to seek the Stockholder Approval would be extended from January 31, 2020 to March 15, 2020.
On February 18, 2020, the Company and the Holders entered into separate waiver and forbearance agreements, (the W&F Agreements), pursuant to which the Holders agreed to, for 60 days following the date of the W&F Agreement, except in case of early termination of the W&F Agreement or, solely with respect to the Stockholder Approval if the other defaults described below have been cured on or prior to the date that is 60 days following the date of the W&F Agreement, until May 31, 2020 (the W&F Period), and in each case subject to certain conditions to effectiveness contained in the W&F Agreement, (i) forbear from exercising certain of their rights and remedies with respect to certain defaults by the Company, including, but not limited to, the Company's failure, on or before January 31, 2020, (A) to receive aggregated net cash proceeds of not less than $50 million from one or more financing transactions, (B) to repay in full or convert into equity all indebtedness outstanding under the Schottenfeld September Credit Agreement and the Schottenfeld November Credit and Security Agreement or amend all such indebtedness outstanding to fit within the definition of permitted indebtedness of the New Notes, and certain other events of default, and (ii) waive any event of default for (A) violations of the minimum liquidity covenant since December 31, 2019 and (B) failure to obtain the Stockholder Approval prior to March 15, 2020.
In addition, pursuant to the W&F Agreements, the Company and the Holders agreed that (i) the New Note amortization payment due on March 1, 2020 (the Amortization Payment) shall be in the aggregate amount of $10.0 million (split proportionally among the Holders) and that the Company shall elect to pay such amortization payment in shares of Common Stock in accordance with the terms of the New Note, provided however, that: (A) the Amortization Stock Payment Price (as defined in the New Note) shall be $3.00, (B) the Amortization Share Payment Period (as defined in the New Note) with respect to the Amortization Payment will end on April 30, 2020 rather than March 31, 2020; and (C) in the event that Holder does not elect to receive the full Amortization Share Amount (as defined in the New Note) during such Amortization Share Payment Period, then the Amortization Payment shall be automatically reduced by the portion of such Amortization Payment not received by the Holder, (ii) there shall be no amortization payment due on April 1, 2020, and (iii) the amortization payment due on May 1, 2020 shall be in the aggregate amount of $8.9 million (split proportionally among the Holders).
On February 24, 2020, a Holder of the Rights notified the Company about the exercise of the Rights for the issuance of an aggregate of 2,484,321 shares of common stock, which were issued by the Company according to the terms of the Senior Convertible Notes Due 2022.
January 2020 Warrant Amendments and Exercises, Debt Equitization and PIPE
As described below in further detail, on January 31, 2020, the Company completed a series of transactions that resulted in the Company (i) receiving $28.3 million in cash, (ii) reducing its aggregate debt principal by $60.0 million and accrued interest by approximately $10.0 million, (iii) issuing an aggregate of (A) 25,326,095 shares of common stock as a result of the exercise of outstanding warrants, and (B) 13,989,973 new shares of common stock in private placements, and (iv) issuing rights to purchase an aggregate of 18,649,961 shares of common stock, at an exercise price of $2.87 per share, for an exercise term of 12 months.
Warrant Amendments
On January 31, 2020, the Company entered into separate warrant amendment agreements (the Warrant Amendments) with Foris and certain other holders (the Warrant Holders) of the Company’s outstanding warrants to purchase shares of the Company’s common stock, pursuant to which the exercise price of certain warrants (the Amended Warrants) held by the Warrant Holders totaling 1.2 million shares and Foris totaling 10.2 million shares was reduced to $2.87 per share upon the exercise of the Amended Warrant.
Warrant Exercises by Certain Holders
In connection with the entry into the Warrant Amendments, on January 31, 2020 the Warrant Holders delivered to the Company irrevocable notices of cash exercise with respect to their Amended Warrants, representing an aggregate of 1,160,929 shares of Common Stock (the Warrant Amendment Shares), and the Company issued to the Holders rights to purchase an aggregate of 1,160,929 shares of Common Stock, at an exercise price of $2.87 per share, for an exercise term of twelve months
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from the January 31, 2020 issuance (the Rights). The Company received net proceeds of $3.3 million from the exercise of the Amended Warrants and issued to the Holders the Warrant Amendment Shares.
Warrant Exercise, Common Stock Purchase and Debt Equitization by Foris – Related Party
On January 31, 2020, the Company and Foris entered into a warrant exercise agreement (the Exercise Agreement) pursuant to which (i) Foris (A) exercised all of its then outstanding common stock purchase warrants (the Foris Warrants), totaling 19,287,780 shares of Common Stock (the Foris Warrant Shares), at a weighted average exercise price of approximately $2.84 per share (following the Warrant Amendments noted above) for an aggregate exercise price of $54.8 million (the Exercise Price), and (B) purchased 5,279,171 shares of Common Stock (the Foris Shares), at $2.87 per share for a total purchase price of $15.2 million (Purchase Price), (ii) Foris paid the Exercise Price and the Purchase Price through the cancellation of $70 million of principal and accrued interest owed by the Company to Foris under the Foris $19 million Note and the Foris LSA (as discussed in Note 4, "Debt") and (iii) the Company issued to Foris the Foris Shares and an additional right to purchase 8,778,230 shares of Common Stock at a purchase price of $2.87 per share, for a period of 12 months from the Exercise Agreement.
January 2020 Private Placement
On January 31, 2020 the Company entered into separate Security Purchase Agreements (the Purchase Agreements) with certain accredited investors (the Investors), including Foris, for the issuance and sale of an aggregate of 8,710,802 shares of Common Stock (the PIPE Shares) and rights to purchase an aggregate of 8,710,802 shares of Common Stock (the PIPE Rights) at a purchase price of $2.87 per share, for a period of 12 months for an aggregate purchase price of $25 million.
Evergreen Shares for 2010 Equity Incentive Plan and 2010 Employee Stock Purchase Plan
In February 2020, the Company's Board of Directors (the Board) approved increases to the number of shares available for issuance under the Company's 2010 Equity Incentive Plan (the Equity Plan) and 2010 Employee Stock Purchase Plan (the Purchase Plan). These shares in connection with the Equity Plan represented an automatic annual increase in the number of shares available for grant and issuance under the Equity Plan of 5,887,133 shares and under the Purchase Plan of 588,713 shares. These increases correspond to approximately 5.0% and 0.5%, respectively, of the total outstanding shares of the Company’s common stock as of December 31, 2019. These automatic increases are effective as of January 1, 2020.
Schottenfeld Forbearance Agreement
The Company and Schottenfeld Opportunities Fund II, L.P. (Schottenfeld) and certain of its affiliates (collectively, the Lenders) are parties (i) to certain Credit Agreements, each dated September 10, 2019 (collectively, the September Credit Agreements) and (ii) to a Credit and Security Agreement, dated November 14, 2019 (the CSA, and collectively with the September Credit Agreements, the Credit Agreements), pursuant to which the Company issued to the Lenders certain notes (the September Notes and the November Notes, respectively, and collectively, the Schottenfeld Notes) and warrants (the September Warrants and the November Warrants, respectively, and collectively, the Shottenfeld Warrants) to purchase shares (the Warrant Shares) of the Company’s common stock. See Not 4, “Debt” for further information.
On February 28, 2020, the Company entered into a forbearance agreement with the Lenders, pursuant to which the Lenders would forbear, for 60 days from the date of the Forbearance Agreement, unless terminated earlier (the Forbearance Period), to exercise certain rights under the Credit Agreement as a result of the Company’s defaults under the Credit Agreements and related Schottenfeld Notes, including the failure of the Company to (i) to pay all principal and accrued interest on the November Notes at the maturity date, (ii) the failure to pay on or before December 31, 2019, all accrued and unpaid interest through December 31, 2019 on the September Notes, and (iii) the failure, on or before December 15, 2019, to convert or exchange at least $60 million, but not less than 100%, of certain junior outstanding indebtedness into equity in the Company, and certain other events of default. Under the forbearance agreement the Company agreed to (i) pay a late fee of 5% on any obligations under the November Notes not paid in full on or before the last day of the Forbearance Period; (ii) pay on or prior to the earliest to occur of April 19, 2020 or the last day of the Forbearance Period, (A) all interest due pursuant to the November Notes and the September Notes, plus all interest accruing on such unpaid interest, plus all interest accrued on account of the November Notes and the September Notes from the date of the Forbearance Agreement through the date of such payment, and (B) a forbearance fee in the amount of $150,000; (iii) pay, upon signature of the Forbearance Agreement, $150,000 as a partial payment of the interest that has accrued pursuant to the November Notes and the September Notes as of the date of the Forbearance Agreement; (iv) amended the Schottenfeld Warrants to (A) reduce the exercise price of each Schottenfeld Warrant to $2.87 per share, and (B) with respect to the November Warrants, extend the deadline to register the Warrant Shares for resale by the holders thereof.
Ginkgo Waiver Agreement
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On March 11, 2020, the Company and Ginkgo Bioworks, Inc. (Ginkgo) entered into a Waiver Agreement and Amendment to Partnership Agreement (the Ginkgo Waiver), pursuant to the terms of (i) the Ginkgo promissory note dated October 20, 2017, issued by the Company to Ginkgo (as amended, the Ginkgo Note), (ii) the Ginkgo Partnership Agreement, dated October 20, 2017, by and between the Company and Ginkgo, and (iii) the Waiver Agreement and Amendment to Ginkgo Note, dated September 29, 2019, by and between the Company and Ginkgo.
Ginkgo agreed to (i) waive the Company’s failure (a) to pay past due interest and partnership payments, including interest thereon of $6.7 million, and (b) to comply with a reporting covenant prior to March 31, 2020, (iii) to make a prior waiver fee payment of $0.5 million on December 15, 2019, (ii) waive any cross defaults due to events of default under other debt obligations by the Company, and (iii) amend payments on the Ginkgo Partnership Agreement beginning on March 31, 2020 to a monthly payment of $0.5 million through and including October 31, 2021.
Total Note Extension Agreement
On March 11, 2020, the Company and Total Raffinage Chimie (Total) entered into a Senior Convertible Note Maturity Extension Agreement that resulted in the reissuance of the December 20, 2019 promissory note under which the Company owed Total $10.2 million plus accrued interest. Under the terms of the Senior Convertible Note Maturity Extension Agreement, the Company paid Total $1.5 million to satisfy all accrued but unpaid interest and to reduce the principal balance of the reissued note by $1.1 million. The reissued note has (i) a maturity date of March 31, 2020, (ii) a $9.1 million principal amount due, (iii) accrues interest at a rate of 12.0% per annum maturity date and (iv) terms substantially identical to the December 20, 2019 promissory note.
Nikko Amendment to Loan Agreement
On March 12, 2020, the Company and Nikko Chemicals Co. Ltd. (Nikko), entered into an amendment to the Loan Agreement dated December 19, 2019, under which the Company borrowed $4.5 million from Nikko (the Nikko Loan). Under the terms of the amendment, the Company paid Nikko $0.5 million to reduce the principal balance of the Loan Agreement to $4.0 million, the maturity date of the amended Loan Agreement was extended to March 31, 2020, with an increase in the interest rate to 8.0% per annum, and other terms substantially identical to the December 19, 2019 Nikko Loan.
Selected Quarterly Financial Data
Not applicable for smaller reporting companies.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer (CEO) and interim chief financial officer (CFO) and, as appropriate, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Annual Report on Form 10-K, we carried out an evaluation under the supervision of and with the participation of management, including our CEO and CFO, as of December 31, 2019, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our CEO and CFO concluded that as of December 31, 2019, our disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting described below.
To address the material weakness described below, management performed additional analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, management believes that the consolidated financial statements and disclosures included in this Annual Report on Form 10-K fairly present,
126
in all material respects, in accordance with U.S. GAAP, our financial position, results of operations and cash flows for the periods presented.
(b)Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed by and under the supervision of our CEO and CFO and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management, under the supervision of our CEO and CFO, and oversight of the board of directors, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the criteria set forth in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Based on this assessment, management has identified the following control deficiency as follows:
•The Company did not have an effective internal and external information and communication process to ensure that relevant and reliable information was communicated timely across the organization, to enable financial personnel to effectively carry out their financial reporting and internal control roles and responsibilities.
As a consequence of the ineffective communication components, the Company did not design, implement, and maintain effective control activities at the transaction level over debt-related liability accounts to mitigate the risk of material misstatement in financial reporting, specifically:
•The Company did not design and operate effective controls over significant non-routine transactions related to certain debt-related contractual obligations.
The control deficiency creates a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that this control deficiency is a material weakness and our internal control over financial reporting is not effective as of December 31, 2019.
The Company’s independent registered public accounting firm, Macias, Gini & O’Connell, LLP, who audited the consolidated financial statements included in this annual report, has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, as shown below. Macias, Gini & O’Connell, LLP's report on the consolidated financial statements appears under Part II, Item 8 of this Annual Report on Form 10-K.
(c)Changes in Internal Control over Financial Reporting
Except for the material weakness discussed above in this Item 9A that were identified in the fourth quarter (and that arose in an earlier period), there were no changes in our internal control over financial reporting during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d)Remediation Plan
127
Management has begun implementing a plan to assess risks of material misstatement over financial reporting, including the enhancement of internal control activities. The plan will be accomplished by the execution of the following:
•Management will enhance internal communication processes through the formalization of internal control documentation.
We believe these activities will remediate the control deficiency identified above and strengthen our internal control over financial reporting. Management, with the oversight of the Audit Committee, has dedicated incremental resources to successfully implement and test effectiveness of the enhanced controls throughout 2020.
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. We cannot be certain, however, that we will effectively remediate such material weakness or when we will do so, nor can we be certain of whether additional actions will be required or the costs of any such actions. In designing and evaluating disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgement in evaluating the benefits of possible controls and procedures relative to their cost.
128
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Amyris, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Amyris, Inc. and Subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the company after the date of management’s assessment.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2019 and 2018 and the related consolidated statement of operations, comprehensive loss, stockholders’ deficit and mezzanine equity and cash flow for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 13, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness has been identified and an identification of the material weakness described in management’s assessment in Item 9A. The material weakness related to information and communication, as to the lack of processes to ensure that relevant and reliable information was communicated timely across the organization, to enable financial personnel to effectively carry out their financial reporting and internal control roles and responsibilities.
This material weakness contributed to the Company not retaining the required documentation to demonstrate the consistent and timely operation of the controls at a sufficient level of precision to prevent and detect potential misstatements and did not design and operate effective controls over complex, significant, non-routine transactions related to certain debt-related contractual obligations. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated March 13, 2020 on those financial statements.
129
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with both generally accepted accounting principles and regulatory reporting instructions. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with both generally accepted accounting principles and regulatory reporting instructions, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Macias Gini & O’Connell LLP
San Francisco, California
March 13, 2020
ITEM 9B. OTHER INFORMATION
None.
130
PART III
Certain information required by Part III is omitted from this Form 10-K because the registrant will file with the U.S. Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A of the Exchange Act in connection with the solicitation of proxies for the Company’s 2020 Annual Meeting of Stockholders (the 2020 Proxy Statement) within 120 days after the end of the fiscal year covered by this Form 10-K, and certain information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this Item 10 is incorporated by reference to the 2020 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item 11 is incorporated by reference to the 2020 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this Item 12 is incorporated by reference to the 2020 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item 13 is incorporated by reference to the 2020 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required under this Item 14 is incorporated by reference to the 2020 Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
We have filed the following documents as part of this Annual Report on Form 10-K:
1.Financial Statements: See "Index to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
2.Financial Statement Schedule:
a.Allowance for doubtful accounts: see Note 2, "Balance Sheet Details" in Part II, Item 8 of this Annual Report on Form 10-K.
b.Deferred tax assets valuation allowance: see Note 13, "Income Taxes" in Part II, Item 8 of this Annual Report on Form 10-K.
3.Exhibits: See "Index to Exhibits" below.
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INDEX TO EXHIBITS
| Exhibit | |||||
| No. | Description | ||||
2.01 a | |||||
| 2.02 | |||||
| 2.03 | |||||
2.04 b | |||||
| 3.01 | |||||
| 3.02 | |||||
| 3.03 | |||||
| 3.04 | |||||
| 3.05 | |||||
| 3.06 | |||||
| 3.07 | |||||
| 3.08 | |||||
| 3.09 | |||||
| 3.10 | |||||
| 3.11 | |||||
| 3.12 | |||||
| 4.01 | |||||
| 4.02 | |||||
| 4.03 | |||||
| 4.04 | |||||
| 4.05 | |||||
4.06 a | |||||
| 4.07 | |||||
4.08 a | |||||
| 4.09 | |||||
| 4.10 | |||||
4.11 c | |||||
| 4.12 | |||||
133
| 4.13 | |||||
| 4.14 | |||||
| 4.15 | |||||
| 4.16 | |||||
| 4.17 | |||||
| 4.18 | |||||
4.19 d | |||||
| 4.20 | |||||
| 4.21 | |||||
| 4.22 | |||||
| 4.23 | |||||
| 4.24 | |||||
| 4.25 | |||||
| 4.26 | |||||
| 4.27 | |||||
| 4.28 | |||||
| 4.29 | |||||
| 4.30 | |||||
| 4.31 | |||||
| 4.32 | |||||
| 4.33 | |||||
| 4.34 | |||||
| 4.35 | |||||
4.36 a | |||||
4.37 a | |||||
| 4.38 | |||||
| 4.39 | |||||
| 4.40 | |||||
| 4.41 | |||||
| 4.42 | |||||
| 4.43 | |||||
| 4.44 | |||||
| 4.45 | |||||
| 4.46 | |||||
| 4.47 | |||||
| 4.48 | |||||
| 4.49 | |||||
| 4.50 | Form of Registration Rights Agreement, dated December 10, 2018, among registrant and the investors party thereto (found at Exhibit B, herein) | ||||
| 4.51 | |||||
| 4.52 | |||||
| 4.53 | |||||
| 4.54 | |||||
| 4.55 | |||||
| 4.56 | |||||
| 4.57 | |||||
| 4.58 | |||||
| 4.59 | |||||
| 4.60 | Form of Senior Convertible Note issued May 15, 2019 by registrant to CVI Investments, Inc. (found at Exhibit A, herein) | ||||
| 4.61 | Form of Common Stock Purchase Warrant issued May 15, 2019 by registrant to CVI Investments, Inc. (found at Exhibit B, herein) | ||||
| 4.62 | |||||
| 4.63 | |||||
| 4.64 | |||||
| 4.65 | Form of Senior Convertible Note issued June 24, 2019 by registrant to B. Riley FBR, Inc. (found at Exhibit A, herein) | ||||
| 4.66 | Form of Common Stock Purchase Warrant issued June 24, 2019 by registrant to B. Riley FBR, Inc. (found at Exhibit B, herein) | ||||
| 4.67 | Form of Common Stock Purchase Warrant issued July 8, 2019 by registrant to Wolverine Flagship Fund Trading Limited (found at Exhibit A, herein) | ||||
| 4.68 | |||||
| 4.69 | |||||
| 4.70 | |||||
| 4.71 | Form of Senior Convertible Note issued July 24, 2019 by registrant to CVI Investments, Inc. (found at Exhibit A, herein) | ||||
| 4.72 | Form of Common Stock Purchase Warrant issued July 24, 2019 by registrant to CVI Investments, Inc. (found at Exhibit B, herein) | ||||
| 4.73 | |||||
| 4.74 | |||||
| 4.75 | |||||
| 4.76 | |||||
| 4.77 | |||||
| 4.78 | |||||
| 4.79 | |||||
| 4.80 | |||||
| 4.81 | Form of Promissory Note issued September 10, 2019 by registrant to certain accredited investors (found at Exhibit A, herein) | ||||
| 4.82 | |||||
| 4.83 | |||||
| 4.84 | Form of Senior Convertible Note issued November 14, 2019 by registrant to certain accredited investors (found at Exhibit A, herein) | ||||
| 4.85 | |||||
| 4.86 | |||||
| 4.87 | |||||
| 4.88 | |||||
| 4.89 | |||||
| 4.90 | |||||
| 10.01 | |||||
| 10.02 | |||||
| 10.03 | |||||
| 10.04 | |||||
| 10.05 | |||||
| 10.06 | |||||
| 10.07 | |||||
| 10.08 | |||||
| 10.09 | |||||
| 10.10 | |||||
| 10.11 | |||||
| 10.12 | |||||
| 10.13 | |||||
| 10.14 | |||||
| 10.15 | |||||
| 10.16 | |||||
| 10.17 | |||||
10.18 ae | |||||
10.19 ae | |||||
10.20 e | |||||
10.21 e | |||||
10.22 e | |||||
10.23 e | |||||
10.24 e | |||||
10.25 e | |||||
10.26 e | |||||
10.27 e | |||||
10.28 a | |||||
| 10.29 | |||||
10.30 a | |||||
10.31 a | |||||
| 10.32 | |||||
| 10.33 | |||||
| 10.34 | |||||
| 10.35 | |||||
| 10.36 | |||||
| 10.37 | |||||
| 10.38 b | |||||
| 10.39 b | |||||
| 10.40 | |||||
| 10.41 | |||||
| 10.42 | |||||
| 10.43 | |||||
| 10.44 | |||||
| 10.45 | |||||
| 10.46 | |||||
| 10.47 | |||||
| 10.48 | |||||
| 10.49 | |||||
| 10.50 | |||||
| 10.51 | |||||
| 10.52 | |||||
| 10.53 | |||||
| 10.54 | |||||
| 10.55 | |||||
| 10.56 | |||||
| 10.57 | |||||
| 10.58 | |||||
| 10.59 | |||||
| 10.60 | |||||
| 10.61 | |||||
| 10.62 | |||||
| 10.63 | |||||
| 10.64 | |||||
| 10.65 | |||||
| 10.66 | |||||
| 10.67 | |||||
10.68 f | |||||
10.69 f | |||||
10.70 f | |||||
10.71 f | |||||
10.72 f | |||||
10.73 f | |||||
10.74 f | |||||
10.75 f | |||||
10.76 f | |||||
10.77 f | |||||
10.78 f | |||||
10.79 f | |||||
10.80 f | |||||
10.81 f | |||||
10.82 f | |||||
10.83 f | |||||
10.84 f | |||||
10.85 f | |||||
10.86 f | |||||
10.87 f | |||||
10.88 f | |||||
10.89 f | |||||
10.90 f | |||||
| 21.01 | |||||
| 23.01 | |||||
| 24.01 | |||||
| 31.01 | |||||
| 31.02 | |||||
32.01 g | |||||
32.02 g | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| a | Portions of this exhibit, which have been granted confidential treatment by the Securities and Exchange Commission, have been omitted. | ||||
| b | Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K promulgated under the Exchange Act. | ||||
| c | Registrant issued substantially identical warrants to the purchasers under that certain Securities Purchase Agreement entered into on July 24, 2015. Registrant has filed the warrant issued to Total Energies Nouvelles Activites USA and has included with such exhibit a schedule (Schedule A to Exhibit 4.11) identifying each of the warrants and setting forth the material details in which the other warrants differ from the filed warrant (i.e., the names of the purchasers, the certificate numbers and the respective numbers of shares underlying the warrants). | ||||
| d | Substantially identical warrants were issued to three separate investors. Registrant has filed the warrant issued to Foris Ventures, LLC, which is substantially identical in all material respects to all of such warrants except as to the parties thereto, the issue date and the number of underlying shares. | ||||
| e | Translation to English from Portuguese in accordance with Rule 12b-12(d) of the regulations promulgated by the Securities and Exchange Commission under the Exchange Act. | ||||
| f | Indicates management contract or compensatory plan or arrangement. | ||||
| g | This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. | ||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMYRIS, INC. | |||||
By: | /s/ John G. Melo | ||||
John G. Melo | |||||
President and Chief Executive Officer | |||||
| March 13, 2020 | |||||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John G. Melo and Jonathan Wolter, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant, in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
/s/ John G. Melo John G. Melo | Director, President and Chief Executive Officer (Principal Executive Officer) | March 13, 2020 | ||||||||||||
/s/ Jonathan Wolter Jonathan Wolter | Interim Chief Financial Officer (Principal Financial Officer) | March 13, 2020 | ||||||||||||
/s/ Anthony Hughes Anthony Hughes | Chief Accounting Officer (Principal Accounting Officer) | March 13, 2020 | ||||||||||||
/s/ John Doerr John Doerr | Director | March 13, 2020 | ||||||||||||
/s/ Geoffrey Duyk Geoffrey Duyk | Director | March 13, 2020 | ||||||||||||
/s/ Philip Eykerman Philip Eykerman | Director | March 13, 2020 | ||||||||||||
/s/ Christoph Goppelsroeder Christoph Goppelsroeder | Director | March 13, 2020 | ||||||||||||
/s/ Frank Kung Frank Kung | Director | March 13, 2020 | ||||||||||||
/s/ James McCann James McCann | Director | March 13, 2020 | ||||||||||||
/s/ Steve Mills Steve Mills | Director | March 13, 2020 | ||||||||||||
/s/ Carole Piwnica Carole Piwnica | Director | March 13, 2020 | ||||||||||||
/s/ Lisa Qi Lisa Qi | Director | March 13, 2020 | ||||||||||||
/s/ R. Neil Williams R. Neil Williams | Director | March 13, 2020 | ||||||||||||
/s/ Patrick Yang Patrick Yang | Director | March 13, 2020 | ||||||||||||