1. Basis of Presentation and Summary of Significant Accounting Policies

 

Amyris, Inc. (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.

 

The accompanying unaudited condensed consolidated financial statements of Amyris, Inc. should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2018 (the 2018 Form 10-K/A), from which the condensed consolidated balance sheet as of December 31, 2018 is derived. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

 

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 December 31, 2019, 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.

 

Upon the closing of the joint venture, each party will make an initial capital contribution to the joint venture of 2,500,000 Brazilian Real (R$2,500,000) 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 U.S.$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 U.S.$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.

 

After the formation of the joint venture, subject to certain exceptions, the parties will not conduct activities similar or identical to the joint venture except through the joint venture. In the event that certain technological and economic milestones are not met in any fiscal year beginning with the third fiscal year after formation of the joint venture and ending with the seventh fiscal year after formation of the joint venture, Raizen shall have the right to sell all of its shares in the joint venture to the Company at a price per share equal to the higher of the book value and the amount of Raizen’s investments in the joint venture, as adjusted for Raizen’s cost of capital.

 

 

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.

 

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 these condensed consolidated financial statements. As of June 30, 2019, the Company had negative working capital of $143.7 million (compared to negative working capital of $119.5 million as of December 31, 2018), and an accumulated deficit of $1.6 billion.

 

As of June 30, 2019, the Company's debt (including related party debt), net of debt discount of $13.1 million, totaled $168.7 million, of which $107.6 million is classified as current. Subsequent to June 30, 2019, the Company entered into arrangements with lenders to extend maturities and convert certain debt obligations into common stock; see Note 12, "Subsequent Events" for more information. The Company's debt service obligations through June 30, 2020 are $128.9 million, including $21.3 million of anticipated cash interest payments. 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 and cross-default clauses. A failure to comply with, or cure non-compliance events or obtain waivers for covenant violations, 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 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 the Company's outstanding indebtedness. Subsequent to June 30, 2019, on September 16, 2019, the Company failed to pay an aggregate of $63.6 million of outstanding principal and accrued interest on the Second Exchange Note (see Note 12, “Subsequent Events”), when due. Such failure triggered cross-defaults under other debt instruments of the Company with an aggregate principal amount of approximately $143.7 million, which permitted the holders of such indebtedness to accelerate the amounts owing under such instruments. The Company subsequently received waivers from holders of $143.7 million principal amount of such debt instruments. The Company does not currently have sufficient funds to repay the amounts outstanding under the Second Exchange Note. To date, negotiations with the holder of the Second Exchange Note have not been successful, and there can be no assurance that a favorable outcome for the Company will be reached. The condensed 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 the Company’s financial condition.

 

Cash and cash equivalents of $0.9 million as of June 30, 2019 are not sufficient to fund expected future negative cash flows from operations and cash debt service obligations through June 30, 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's ability to continue as a going concern will depend, in large part, on its ability to raise additional capital through equity offerings or debt financings and extend or refinance existing debt maturities by restructuring a majority of its convertible debt, which is uncertain and outside the control of the Company. Further, the Company's operating plan for the 12 months ending June 30, 2020 contemplates a significant reduction in its net operating cash outflows as compared to the year ended December 31, 2018, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) significantly increased cash inflows from grants and collaborations, and (iii) reduced production costs as a result of manufacturing and technical developments. 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 it may be required 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 the Company receives for its assets in liquidation or dissolution could be significantly lower than the value reflected in these condensed consolidated financial statements.

 

On September 16, 2019, the Company failed to pay an aggregate of $63.6 million of outstanding principal and accrued interest on the Second Exchange Note when due. The failure resulted in an event of default under the Second Exchange Note and also triggered cross-defaults under other debt instruments of the Company which permitted the holders of such indebtedness to accelerate the amounts owing under such instruments. The Company subsequently received waivers from substantially all holders of such other debt instruments to waive the right to accelerate. 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 Second Exchange Note continues to be classified as a current liability on the Company’s balance sheet. In addition, as a result of the payment default, the conversion price of the Second Exchange Note is subject to adjustment in accordance with the terms of the Second Exchange Note.

 

 

The Company does not currently have sufficient funds to repay the amounts outstanding under the Second Exchange Note. To date, negotiations with the holder of the Second Exchange Note have not been successful, and there can be no assurance that a favorable outcome for the Company will be reached. The Company has executed a term sheet with an existing investor for a term loan, the proceeds of which would be used to repay a portion of the Second Exchange Note. However, there can be no assurance that the Company will be able to obtain such financing on its expected timeline, or on acceptable terms, if at all. Even if the Company does obtain such financing, it will not have sufficient funds to repay the Second Exchange Note in full without obtaining additional financing, which the Company is attempting to source. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Significant Accounting Policies

 

Note 1, "Basis of Presentation and Summary of Significant Accounting Policies", to the audited consolidated financial statements in the 2018 Form 10-K/A includes a discussion of the significant accounting policies and estimates used in the preparation of the Company’s consolidated financial statements. There have been no material changes to the Company's significant accounting policies and estimates during the three and six months ended June 30, 2019, except for the Company's adoption of these accounting standards on January 1, 2019:

	•	Accounting Standards Codification (ASC) Topic 842 (ASC 842), Leases; and
	•	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.

 

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 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 whether 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 10, "Revenue Recognition" in Part II, Item 8 of the 2018 Form 10-K/A.

 

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 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. The Company’s renewable products are delivered to customers from the Company’s facilities with shipping terms typically specifying F.O.B. shipping point.

 

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.

 

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 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. 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 two-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 and revenue is estimated and 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 derived from the licensee’s historical sales volumes and sales prices of its products and recent commodity market pricing data and trends.

 

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 scale production of the molecules for commercialization and use in the collaborator’s products. The collaboration agreements generally include providing the Company's collaborators 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 based on 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 collaborators 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 liability arises from amounts received in advance of performing the research and development activities and is 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 collaboration 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.

 

For descriptions of the Company's other significant accounting policies, see the 2018 Form 10-K/A.

 

Accounting Standards or Updates Recently Adopted

 

In the six months ended June 30, 2019, the Company adopted these accounting standards or updates:

 

 

Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). 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 provides an additional transition method in which the lease standard is applied at the adoption date and recognized as a cumulative-effect adjustment to retained earnings without adjustment to comparative periods (collectively Topic 842). The amendment has the same effective date and transition requirements as the lease standard.

 

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 adoption of this standard had the net effect of increasing both 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.

 

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 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 is in the initial stages of evaluating the impact of the standard on its condensed consolidated financial statements.

 

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 condensed 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 condensed consolidated financial statements will be material.

 

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 condensed consolidated 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 condensed consolidated financial statements.

15

 

2. Balance Sheet Details

 

Inventories

 

(In thousands)		June 30, 2019				December 31, 2018
Raw materials		$	4,389			$	3,901
Work-in-process			1,697				539
Finished goods			7,875				5,253
Inventories		$	13,961			$	9,693

 

Deferred cost of products sold - related party

 

(In thousands)		June 30, 2019				December 31, 2018
Deferred cost of products sold - related party		$	1,489			$	489
Deferred cost of products sold, noncurrent - related party			15,894				2,828
Total		$	17,383			$	3,317

 

In November 2018, the Company amended the supply agreement with DSM to secure capacity at the Brotas 1 facility for sweetener production through 2022. See Note 10, “Revenue Recognition” in Part II, Item 8 of the 2018 Form 10-K/A 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, of which $3.3 million was recorded as deferred cost of products sold at December 31, 2018. During the six months ended June 30, 2019, the Company paid an additional $14.1 million of reservation capacity fees, which was recorded as additional deferred cost of products sold. The remaining $6.9 million 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 is expensed to cost of products sold on a units of production basis as the Company's sweetener product is sold over the five-year term of the supply agreement. Each quarter, the Company evaluates its future production volumes and adjusts the unit cost to be expensed over the remaining estimated production volume. Due to the Company's commercial launch of the product in December 2018, amortization of the deferred cost of products sold asset has been insignificant through June 30, 2019. The deferred cost of products sold asset is evaluated for recoverability at each period end.

 

Prepaid expenses and other current assets

 

(In thousands)		June 30, 2019				December 31, 2018
Prepayments, advances and deposits		$	3,147			$	5,644
Recoverable taxes from Brazilian government entities			1,787				631
Other			4,867				4,291
Total prepaid expenses and other current assets		$	9,801			$	10,566

 

Property, Plant and Equipment, Net

 

(In thousands)		June 30, 2019				December 31, 2018
Machinery and equipment		$	47,553			$	43,713
Leasehold improvements			40,817				39,922
Computers and software			10,307				9,987
Furniture and office equipment, vehicles and land			3,349				3,016
Construction in progress			2,245				1,749
			104,271				98,387
Less: accumulated depreciation and amortization			(80,011	)			(78,631	)
Property, plant and equipment, net		$	24,260			$	19,756

 

During the three and six months ended June 30, 2019 and 2018, the Company capitalized the following amounts of internal labor costs required to automate, integrate and ready certain laboratory and plant equipment for its intended use:

 

(In thousands)		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Capitalized internally-developed software		$	120			$	800			$	320			$	1,580

 

During the three and six months ended June 30, 2019 and 2018, Depreciation and amortization expense, including amortization of assets under capital leases, was as follows:

 

 

 

Leases

 

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 ROU assets under operating leases on the Company's June 30, 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 "Lease liabilities" and "Lease liabilities, net of current portion" on the Company's June 30, 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 right-of-use assets of $29.7 million and lease liabilities for operating leases of $33.6 million on January 1, 2019. Operating lease right-of-use 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 June 30, 2019, total right-of-use assets and operating lease liabilities were $25.5 million and $26.7 million, respectively. All operating lease expense is recognized on a straight-line basis over the lease term. In the three and six months ended June 30, 2019, the Company recorded $3.0 million and $5.8 million of operating lease amortization that was charged to expense, and $1.8 million and $3.6 million, respectively, of operating lease amortization for certain contract manufacturing arrangements that was capitalized to inventory.

 

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:

 

(In thousands)		Six Months Ended June 30, 2019
Cash paid for operating lease liabilities		$	10,660
Right-of-use assets obtained in exchange for new operating lease obligations(1)		$	31,293
Weighted-average remaining lease term (in years)			2.6
Weighted-average discount rate			18.0	%

(1) Includes $29.7 million for operating leases existing on January 1, 2019 and $1.6 million for operating leases that commenced during the six months ended June 30, 2019.

 

Financing Leases

 

The Company has entered into financing leases primarily for laboratory and computer equipment. Assets purchased under financing leases are included in "Property, plant and equipment, net" on the condensed 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. Property, plant and equipment, net includes $5.3 million and $5.0 million of machinery and equipment under financing leases as of June 30, 2019 and December 31, 2018, respectively. Accumulated amortization of assets under financing leases totaled $2.7 million and $2.3 million as of June 30, 2019 and December 31, 2018, respectively.

 

Maturities of Financing and Operating Leases

 

Maturities of lease liabilities as of June 30, 2019 were as follows:

 

Years ending December 31: (In thousands)		Financing Leases				Operating Leases				Total Leases
2019 (remaining six months)		$	235			$	8,027			$	8,262
2020			199				9,660				9,859
2021			1				7,227				7,228
2022			–				7,400				7,400
2023			–				3,034				3,034
Thereafter			–				–				–
Total lease payments			435				35,348				35,783
Less: amount representing interest			(14	)			(8,636	)			(8,650	)
Total lease liability		$	421			$	26,712			$	27,133
Current lease liability		$	385			$	9,533			$	9,918
Noncurrent lease liability			36				17,179				17,215
Total lease liability		$	421			$	26,712			$	27,133

 

 

Other Assets

 

(In thousands)		June 30, 2019				December 31, 2018
Contingent consideration		$	4,286			$	4,286
Deposits			297				2,465
Other			1,089				1,207
Other assets		$	5,672			$	7,958

 

Accrued and Other Current Liabilities

 

(In thousands)		June 30, 2019				December 31, 2018
Accrued interest		$	6,876			$	3,853
Payroll and related expenses			6,164				9,220
Contract termination fees			4,342				6,247
Asset retirement obligation			3,232				3,063
Tax-related liabilities			2,434				2,139
Professional services			1,302				1,173
Other			3,763				3,284
Total accrued and other current liabilities		$	28,113			$	28,979

 

Other noncurrent liabilities

 

(In thousands)		June 30, 2019				December 31, 2018
Refund liability		$	12,500			$	–
Contract liability, net of current portion (Note 9)			1,449				1,587
Contract termination fees, net of current portion			8,678				7,715
Liability for unrecognized tax benefit			6,582				6,582
Other			755				868
Deferred rent, net of current portion(1)			–				6,440
Total other noncurrent liabilities		$	29,964			$	23,192

 

⁽¹⁾     Deferred rent at December 31, 2018 was reclassified to ROU asset upon the adoption on January 1, 2019 of ASC 842, "Leases".

 

3. Fair Value Measurement

 

Liabilities Measured and Recorded at Fair Value on a Recurring Basis

 

The following tables summarize liabilities measured at fair value, and the respective fair value by input classification level within the fair value hierarchy:

 

(In thousands)		June 30, 2019																December 31, 2018
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Liabilities
6% Convertible Notes Due 2021		$	–			$	–			$	72,461			$	72,461			$	–			$	–			$	57,918			$	57,918
Freestanding derivative instruments in connection with the issuance of debt and equity instruments			–				–				–				–				–				–				42,796				42,796
Total liabilities measured and recorded at fair value		$	–			$	–			$	72,461			$	72,461			$	–			$	–			$	100,714			$	100,714

 

There were no transfers between levels during the periods presented.

 

 

6% Convertible Notes Due 2021

 

The Company issued $60.0 million of 6% Convertible Notes Due 2021 on December 10, 2018 and elected the fair value option of accounting for this instrument. At June 30, 2019, outstanding principal was $58.0 million, and the fair value was $72.5 million, which was measured at the noteholders’ put option price of 125% of outstanding principal. See Note 4, “Debt” for further information related to this debt instrument and the noteholders’ put option. For the six months ended June 30, 2019, the Company recorded a $16.6 million loss from change in fair value of debt in connection with the 6% Convertible Notes Due 2021, as follows:

 

In thousands
Fair value at December 31, 2018		$	57,918
Less: principal paid			(2,031	)
Loss on change in fair value			16,574
Fair value at June 30, 2019		$	72,461

 

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, measured at fair value using significant unobservable inputs (Level 3):

 

(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	)
Change in fair value of derivative liabilities			2,039				–				2,039
Derecognition on extinguishment			(3,798	)			–				(3,798	)
Balance at June 30, 2019		$	–			$	–			$	–

 

As of June 30, 2019, the derivative liabilities in connection with the November 2018 Securities Purchase Agreement with DSM were settled and extinguished through cash payment.

 

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, credit facilities and convertible notes are recorded at carrying value (except for the 6% Convertible Notes Due 2021, which are recorded at fair value), which is representative of fair value at the date of acquisition. For loans payable and credit facilities recorded at carrying value, the Company estimates fair value using observable market-based inputs (Level 2); for convertible notes, the Company estimates fair value based on rates currently offered for instruments with similar maturities and terms (Level 3). The carrying amount (the total amount of net debt presented on the balance sheet) of the Company's debt at June 30, 2019, excluding the 6% Convertible Notes that the Company records at fair value, was $96.3 million. The fair value of such debt at June 30, 2019 was $98.6 million 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.

19

 

4. Debt

 

Net carrying amounts of debt are as follows:

 

		June 30, 2019																December 31, 2018
(In thousands)		Principal				Unamortized Debt (Discount) Premium				Change in Fair Value				Net Balance				Principal				Unamortized Debt (Discount) Premium				Change in Fair Value				Net Balance
Convertible notes payable
6% convertible notes due 2021		$	57,969			$	–			$	14,492			$	72,461			$	60,000			$	–			$	(2,082	)		$	57,918
August 2013 financing convertible note			4,863				(90	)			–				4,773				4,415				(70	)			–				4,345
2015 Rule 144A convertible notes			–				–				–				–				37,887				(2,413	)			–				35,474
2014 Rule 144A convertible notes			–				–				–				–				24,004				(867	)			–				23,137
			62,832				(90	)			14,492				77,234				126,306				(3,350	)			(2,082	)			120,874
Related party convertible notes payable
2014 Rule 144A convertible notes			9,705				–				–				9,705				24,705				(1,038	)			–				23,667
Loans payable and credit facilities
Ginkgo note			12,000				(3,609	)			–				8,391				12,000				(4,047	)			–				7,953
Other loans payable			5,323				(973	)			–				4,350				4,910				(1,047	)			–				3,863
GACP secured term loan facility			–				–				–				–				36,000				(1,349	)			–				34,651
			17,323				(4,582	)			–				12,741				52,910				(6,443	)			–				46,467
Related party loans payable
Foris secured term loan facility			36,000				(3,054	)			–				32,946				–				–				–				–
Foris unsecured notes			16,500				–				–				16,500				–				–				–				–
DSM note			25,000				(5,382	)			–				19,618				25,000				(6,311	)			–				18,689
		$	77,500			$	(8,436	)		$	–				69,064			$	25,000			$	(6,311	)		$	–				18,689
Total debt		$	167,360			$	(13,108	)		$	14,492				168,744			$	228,921			$	(17,142	)		$	(2,082	)			209,697
Less: current portion															(107,649	)															(147,677	)
Long-term debt, net of current portion														$	61,095															$	62,020

 

The 6% convertible notes due 2021 have been classified as current in the June 30, 2019 and December 31, 2018 balance sheets, due to certain events subsequent to June 30, 2019 but prior to the issuance of the June 30, 2019 and December 31, 2018 financial statements. See Note 12, "Subsequent Events" for additional information.

 

August 2013 Financing Convertible Note

 

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 Company concluded that the term extension represented a debt modification, and the fee was accounted for as additional debt discount to be amortized over the remaining term. Effective July 15, 2019, the due date of the waiver fee was extended to October 13, 2019 and will bear interest at a rate of 1.75% per month, compounded, from July 16, 2019 to the date of payment.

 

On July 2, 2019, the Company and Wolverine entered into an exchange agreement whereby the parties agreed to extinguish the August 2013 Financing Convertible Note held by Wolverine in exchange for 1,767,632 shares of common stock and a warrant to purchase 1,080,000 shares of common stock. See Note 12, “Subsequent Events” for additional information.

 

LSA Amendment, Assignment and Waiver

 

On April 4, 2019, the Company and GACP amended the Loan and Security Agreement, dated June 29, 2018 (the LSA), to (i) effective December 31, 2018, eliminate the conditions giving rise to the early maturity date, so that loans under the GACP Term Loan Facilities would have a maturity date of July 1, 2021, (ii) remove certain Company intellectual property related to the Cannabinoid Agreement from the lien granted by the Company to GACP under the LSA, (iii) eliminate the Company’s ability to obtain the Incremental GACP Term Loan Facility, (iv) eliminate the Company’s reinvestment rights with respect to mandatory prepayments upon asset sales, (v) restrict the Company’s ability to pay interest and principal on other indebtedness without the consent of GACP, and (vi) provide that the Company must have at all times at least $15 million of unrestricted, unencumbered cash subject to a control agreement in favor of GACP.

 

 

On April 4, 2019, the Company and GACP entered into a waiver agreement, pursuant to which GACP agreed to waive breaches of certain covenants under the LSA occurring prior to, as of and after December 31, 2018 through April 8, 2019, including covenants related to quarterly minimum revenues, minimum liquidity amounts and a minimum asset coverage ratio. In connection with such waiver, the Company agreed to pay GACP fees of $0.8 million, which the Company paid in April 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 five percent of the Company’s outstanding common stock) entered into a Loan Purchase Agreement, pursuant to which Foris agreed to purchase and assume from GACP, and GACP agreed to sell and assign to Foris, the outstanding loans under the LSA and all documents and assets related thereto. In connection with such purchase and assignment, the Company agreed to repay Foris $2.2 million of the purchase price paid by Foris to GACP, which the Company accounted for as additional debt discount. The closing of the loan purchase and assignment occurred on April 16, 2019. See Note 12, Subsequent Events for more information regarding the LSA.

 

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 from the sum of (A) the greater of (x) the prime rate as reported in the Wall Street Journal or (y) 4.75% plus (B) 9% to the greater of (A) 12% or (B) the rate of interest payable with respect to any indebtedness of the Company, (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 Naxyris Loan Facility (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 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 below under “Foris Credit Agreements”), in an aggregate principal amount of $32.5 million, as well as the Company LPA 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 cancelled in connection therewith, and (vii) Foris agreed to waive certain existing defaults under the LSA. After giving effect to the LSA Amendment and Waiver, there is $71.0 million aggregate principal amount of loans outstanding under the LSA, including with respect to covenants related to quarterly minimum revenues, minimum liquidity amounts and a minimum asset coverage ratio. In connection with the entry into the LSA Amendment and Waiver, on August 14, 2019 the Company issued to Foris a warrant to purchase up to 1,438,829 shares of Common Stock at an exercise price of $2.87 per share, with an exercise term of two years from issuance. Pursuant to the terms of the warrant, Foris may not exercise the Foris 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 intends to seek at its 2019 annual meeting of stockholders.

 

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 of the April Foris Note (the April Foris Note Fee); provided, that the April Foris Note Fee will be reduced to $0.5 million if the Company repays the April Foris Note in full by July 15, 2019. The Company is accruing the fee over the term of the note. The April Foris Note is subordinated in right of payment to the $4.8 million Tranche II Note held by Wolverine (see Note 4, “Debt” above).

 

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 from and including June 11, 2019, which interest is payable on the maturity date or the earlier repayment or other satisfaction of the June Foris Note, and (ii) matures on August 28, 2019; provided, that if certain warrants held by DSM N.V. (together with its affiliates, DSM) are exercised, then the maturity date of the June Foris Note will be the business day immediately following such exercise.

 

 

The Company may at its option repay the amounts outstanding under the April Foris Note (including the April Foris Note Fee) and the June Foris Note before their respective maturity dates, in whole or in part, at a price equal to 100% of the amount being repaid plus, in the case of the June Foris Note, accrued and unpaid interest on such amount to the date of repayment.

 

On August 14, 2019, the April Foris Note, the June Foris Note and the July Foris Notes (see Note 12, Subsequent Events) 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 Note 12, Subsequent Events for more information.

 

2015 and 2014 Rule 144A Convertible Notes

 

On April 16, 2019, the Company repaid in cash the $37.9 million outstanding balance under the 2015 Rule 144A Convertible Notes.

 

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 3,479,008 shares of common stock and warrants to purchase an aggregate of 1,391,603 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 pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act of 1933, as amended (the Securities Act). See Note 6. "Stockholders’ Deficit" for more information on this conversion and new warrants.

 

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 1,122,460 shares of common stock and a warrant to purchase up to 352,638 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 pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act. See Note 6. "Stockholders’Deficit" for more information on this conversion and new warrant.

 

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 2,500,000 shares of common stock in a private exchange pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act. See Note 6. “Stockholders’ Deficit” for more information on this conversion.

 

The Company evaluated the May 2019 exchanges described above and concluded that the transactions resulted in debt extinguishment. The Company recorded a $5.9 million loss on 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 common shares issued upon conversion, $3.8 million fair value of warrants issued and $0.4 million of fees incurred, less the $29.1 million carrying value of the debt that was extinguished. The 7.1 million common shares issued upon conversion were valued at the Company's closing stock price at the date of each exchange. The fair value of the warrants was measured using the Black-Scholes option pricing model, with the following parameters: stock price $4.27 - $4.54; strike price $4.56 - $5.02; volatility 95.8%; risk-free interest rate 2.20% - 2.26%; and expected dividend yield 0%.

 

On May 15, 2019, the Company exchanged $9.7 million aggregate principal amount of the 2014 Rule 144A Convertible Notes held by Total Raffinage Chimie (Total) for a new senior convertible note with an equal principal amount and with substantially identical terms, except that the new note had a maturity date of June 14, 2019, in a private exchange pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act. 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. The Company accounted for this exchange as a debt modification; however, no additional fees were paid, and the modification had no impact on interest expense in the three months ended June 30, 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.

 

6% Convertible Notes Due 2021 Exchanges

 

On May 15, 2019 and June 24, 2019, the Company exchanged $53.3 million and $4.7 million principal amount, respectively, of the 6% Convertible Notes due 2021, including accrued and unpaid interest thereon, representing all then-outstanding 6% Convertible Notes due 2021, for new senior convertible notes with an equal principal amount and warrants to purchase up to 2,000,000 and 181,818 shares of common stock, respectively, at an exercise price of $5.12 per share, with an exercise term of two years from issuance, in private exchanges pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act. The new notes have substantially identical terms as the 6% Convertible Notes due 2021 being exchanged, except that (i) the holders agreed to waive, until July 22, 2019, certain covenants relating to the effectiveness of the registration statement covering the shares of common stock issuable upon conversion of, or otherwise pursuant to, the new notes and the filing by the Company of reports with the SEC and (ii) during the period from July 22, 2019 to July 29, 2019, inclusive, the holders have the right to require the Company to redeem the new notes, in whole or in part, at a price equal to 125% of the principal amount being redeemed. The Company considered the issuance of the warrant as compensation to the noteholders for waiving certain covenant violations during the period, and recorded a $4.4 million charge to interest expense for the fair value of the warrants. The fair value of the warrants was determined using a Black-Scholes model with the following inputs: 94% - 96% volatility, 1.72% - 2.16% risk-free interest rate, 2-year term, $3.55 - $4.39 issuance-date stock price, and 0% expected dividend yield.

 

 

The Company has elected the fair value accounting option for the 6% Convertible Notes due 2021 and has recorded the fair value of the put option as an adjustment to the carrying value of the 6% Convertible Notes due 2021. 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 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 applicable warrant. In addition, 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. See Note 12, "Subsequent Events" for more information regarding the 6% Convertible Notes due 2021.

 

Future Minimum Payments

 

Future minimum payments under the Company's debt agreements as of June 30, 2019 are as follows:

 

(In thousands)		Convertible Notes				Loans Payable and Credit Facilities				Related Party Convertible Notes				Related Party Loans Payable and Credit Facilities				Total
2019 (remaining six months)		$	81,006			$	3,748			$	9,815			$	24,674			$	119,243
2020			3,926				1,759				—				10,854				16,539
2021			2,318				1,662				—				61,260				65,240
2022			—				13,451				—				—				13,451
2023			—				399				—				—				399
Thereafter			—				2,268				—				—				2,268
Total future minimum payments			87,250				23,287				9,815				96,788				217,140
Less: amount representing interest			(9,680	)			(5,964	)			(110	)			(19,288	)			(35,042	)
Less: future conversion of accrued interest to principal			(246	)			—				—				—				(246	)
Present value of minimum debt payments			77,324				17,323				9,705				77,500				181,852
Less: current portion of debt principal and fair value adjustment			(77,324	)			(2,392	)			(9,705	)			(20,100	)			(109,521	)
Noncurrent portion of debt principal		$	—			$	14,931			$	—			$	57,400			$	72,331