Verenium 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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 000-29173

VERENIUM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	22-3297375
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

55 Cambridge Parkway, Cambridge, MA	02142
(Address of principal executive offices)	(Zip Code)

(617) 674-5300

(Registrant’s telephone number, including area code)

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.    x  Yes    ¨  No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  x	Non-accelerated filer  ¨	Smaller reporting company  ¨
		(do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s Common Stock outstanding as of November 6, 2009 was 11,715,228.

VERENIUM CORPORATION

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4.	Controls and Procedures	50
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	76
Item 4.	Submission of Matters to a Vote of Security Holders	77
Item 5.	Other Information	77
Item 6.	Exhibits	78
SIGNATURES		80

2

VERENIUM CORPORATION

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

VERENIUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	September 30, 2009			December 31, 2008
	(Unaudited)			(Adjusted – see Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	20,969		$	7,458
Accounts receivable, net of allowance for doubtful accounts of $1,631 at September 30, 2009 and $1,760 at December 31, 2008		9,109			8,051
Inventories, net		3,224			2,432
Prepaid expenses and other current assets		4,629			2,938
Total current assets		37,931			20,879
Property, plant and equipment, net		110,302			117,271
Restricted cash		10,400			10,040
Debt issuance costs and other assets		2,834			5,433
Total assets	$	161,467		$	153,623
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	8,588		$	15,921
Accrued expenses		20,731			16,130
Deferred revenue (including $1,428 from a related party at December 31, 2008)		1,994			3,397
Derivative liability—warrants		—			359
8% Senior Convertible Notes due April 1, 2012, compound embedded derivative		—			7,769
Equipment loans payable, current portion		36			1,068
Total current liabilities		31,349			44,644
5.5% Convertible Senior Notes due April 1, 2027 (“2007 Notes”), at face value		69,033			100,500
8% Senior Convertible Notes due April 1, 2012 (“2008 Notes”), at carrying value (principal amount of $16,201 and $58,883 at September 30, 2009 and December 31, 2008)		11,839			29,891
9% Convertible Senior Secured Notes due April 1, 2027 (“2009 Notes”), at carrying value (principal amount of $13,707 at September 30, 2009)		25,438			—
Restructuring reserve, less current portion		4,824			5,175
Other long term liabilities		915			1,105
Total liabilities		143,398			181,315
Stockholders’ equity (deficit):
Preferred stock—$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at September 30, 2009 and December 31, 2008		—			—
Common stock—$0.001 par value; 250,000 shares authorized, 9,428 and 5,648 shares issued and outstanding at September 30, 2009 and December 31, 2008		9			6
Additional paid-in capital		591,134			573,863
Cumulative effect of adjustment related to the adoption of new convertible debt authoritative guidance		5,420			—
Accumulated deficit		(632,494	)		(613,561	)
Total Verenium Corporation stockholders’ deficit		(35,931	)		(39,692	)
Noncontrolling interests in consolidated entities		54,000			12,000
Total stockholders’ equity (deficit)		18,069			(27,692	)
Total liabilities, noncontrolling interest and stockholders’ equity (deficit)	$	161,467		$	153,623

See accompanying notes to condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
				(Adjusted – see Note 1)						(Adjusted – see Note 1)
Revenue (including related-party revenue of $1,987 and $9,713 for the three and nine months ended September 30, 2008)
Product	$	11,026		$	12,377		$	32,094		$	36,953
Grant		6,612			1,171			13,644			2,717
Collaborative		972			2,828			3,554			10,244
Total revenue		18,610			16,376			49,292			49,914
Operating expenses:
Cost of product revenue (including related-party cost of product revenue of $0 and $189 for the three and nine months ended September 30, 2008)		7,278			9,569			20,483			27,022
Research and development		16,514			15,267			50,461			45,048
Selling, general and administrative		11,448			13,720			31,485			32,468
Goodwill impairment charge		—			106,134			—			106,134
Total operating expenses		35,240			144,690			102,429			210,672
Loss from operations		(16,630	)		(128,314	)		(53,137	)		(160,758	)
Interest income and other expense, net		35			173			109			844
Interest expense		(2,602	)		(2,508	)		(9,089	)		(7,262	)
Loss on exchange of 2007 Notes		—			—			—			(3,599	)
Gain on amendment of 2008 Notes		3,977			—			3,977			—
Gain (loss) on debt extinguishment upon conversion of convertible debt		2,511			(63	)		8,629			(147	)
Gain (loss) on net change in fair value of derivative assets and liabilities		1,712			(428	)		5,078			1,282
Net loss	$	(10,997	)	$	(131,140	)	$	(44,433	)	$	(169,640	)
Less: Loss attributed to noncontrolling interests in consolidated entities		8,705			5,000			25,500			5,000
Net loss attributed to Verenium Corporation	$	(2,292	)	$	(126,140	)	$	(18,933	)	$	(164,640	)
Basic and diluted net loss per share	$	(0.25	)	$	(22.98	)	$	(2.54	)	$	(31.28	)
Weighted average shares used in computing basic and diluted net loss per share		9,014			5,490			7,466			5,263

See accompanying notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2009			2008
				(Adjusted – see Note 1)
Operating activities:
Net loss	$	(18,933	)	$	(164,640	)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment		—			106,134
Depreciation and amortization		10,058			6,921
Non-cash share-based compensation		6,354			9,430
Loss on exchange of 2007 Notes		—			3,599
Gain on amendment of 2008 Notes		(3,977	)		—
Gain (loss) on debt extinguishment upon conversion of convertible debt		(8,629	)		147
Gain on net change in fair value of derivative assets and liabilities		(5,078	)		(1,282	)
Loss attributed to noncontrolling interest in consolidated entities		(25,500	)		(5,000	)
Accretion of discount on convertible debt, included in interest expense		2,591			2,796
Non-cash restructuring charges		397			—
Changes in operating assets and liabilities:
Accounts receivable		(1,058	)		(527	)
Inventory		(792	)		3,590
Other assets		(923	)		(1,691	)
Accounts payable and accrued expenses		(2,223	)		(3,587	)
Restructuring reserve		(698	)		(1,183	)
Deferred revenue		(1,403	)		(53	)
Net cash used in operating activities		(49,814	)		(45,346	)
Investing activities:
Purchases of short-term investments		—			(131,877	)
Sales and maturities of short-term investments		—			137,969
Purchases of property, plant and equipment, net		(3,089	)		(46,294	)
Restricted cash		(360	)		(10,040	)
Net cash used in investing activities		(3,449	)		(50,242	)
Financing activities:
Proceeds from issuance of convertible debt, net of issuance costs		—			50,365
Net cash paid for convertible hedge transaction		—			(6,194	)
Conversions of 2008 Notes, including settlement of make-whole obligation		140			(2,116	)
Principal payments on equipment loans payable		(1,136	)		(2,135	)
Proceeds from sale of common stock		270			1,438
Proceeds from capital contributions to consolidated entities		67,500			24,500
Net cash provided by financing activities		66,774			65,858
Net increase (decrease) in cash and cash equivalents		13,511			(29,730	)
Cash and cash equivalents at beginning of period		7,458			48,743
Cash and cash equivalents at end of period	$	20,969		$	19,013
Supplemental disclosure of cash flow information:
Interest paid	$	4,774		$	3,810
Supplemental disclosure of non-cash operating and financing activities:
Conversion of 2007 Notes to common stock	$	1,000		$	—
Conversion of 2008 Notes to common stock	$	42,682		$	11,917

See accompanying notes to condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

The Company

Verenium Corporation (“Verenium” or the “Company”), was incorporated in Delaware in 1992. The Company operates in two business segments, biofuels and specialty enzymes. Its biofuels business segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. Its specialty enzymes business segment develops customized enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

Recent Developments

Convertible Debt Amendments

As more fully described inNote 2, on July 1, 2009, the Company entered into agreements to amend the remaining $29.5 million outstanding of its 2008 Notes. The amendments became effective on July 6, 2009.

As more fully described inNote 2, on September 1, 2009 and September 25, 2009, pursuant to privately negotiated exchange agreements with certain holders of its 2007 Notes, the Company exchanged approximately $30.5 million in aggregate principal amount of the 2007 Notes for approximately $13.7 million in aggregate principal amount of new 2009 Notes.

Reverse Stock Split

As more fully described inNote 11, on September 9, 2009, the Company effected a reverse stock split of the outstanding shares of its common stock, with a par value of $0.001 per share, on the basis of one (1) new share of common stock for each 12 shares of common stock then outstanding. Share and per share amounts have been retroactively adjusted to reflect the impact of the reverse split for all periods presented.

Public Offering of Common Stock and Warrants

As more fully described inNote 12, on October 6, 2009, the Company issued 2,250,000 shares of its common stock and warrants to purchase an additional 900,000 shares of common stock in an underwritten public offering at a price of $6.00 per unit, raising net cash proceeds of approximately $12.3 million.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited financial statements and footnotes thereto, as adjusted, contained in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on September 21, 2009.

The Company has incurred a net loss of $18.9 million for the nine months ended September 30, 2009 and has an accumulated deficit of $632.5 million as of September 30, 2009. Based on the Company’s current operating plan, which includes payments to be received by the Company or its consolidated entities from BP Biofuels North America LLC (“BP”) relating to the first and second phases of the strategic partnership, as well as proceeds from the Company’s recent equity financing, its existing working capital may not be sufficient to meet the cash requirements to fund the Company’s planned operating expenses, capital expenditures, required and potential payments under the 2007 Notes, the 2008 Notes, and the 2009 Notes, and working capital requirements through 2010 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

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During 2010, the Company plans to address the expected shortfall of working capital through one or a combination of actions, including, but not limited to, securing additional corporate partnerships and collaborations, federal, state and local grant funding, selling and financing of assets, incremental product sales, and the sale of additional debt or equity securities. If the Company is unsuccessful in raising additional capital from any of these sources, it will defer, reduce, or eliminate certain planned expenditures. The Company will continue to consider other financing alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

If the Company cannot obtain sufficient additional financing in the short-term, it may be forced to restructure or significantly curtail its operations, file for bankruptcy or cease operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be forced to take any such actions.

The Company has evaluated subsequent events through November 9, 2009, which is the date these financial statements were issued.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Verenium Biofuels Corporation, as well as its jointly owned subsidiaries Galaxy Biofuels LLC (“Galaxy”), and Vercipia Biofuels LLC (formerly Highlands Ethanol LLC) (“Vercipia”), both determined to be variable interest entities of which the Company is the primary beneficiary as defined by authoritative guidance. As of September 30, 2009, Vercipia had total assets of $8.1 million included in the Company’s condensed consolidated financial statements of which $6.4 million was cash and cash equivalents to be used solely for this entity and is included in the Company’s consolidated cash and cash equivalents. In accordance with authoritative guidance, Galaxy assets were contributed and continue to be held at a zero carrying value.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, the Company evaluates these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, its convertible senior notes and income taxes. These estimates are based on historical experience, on information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Convertible Debt Instruments

On January 1, 2009, the Company adopted new authoritative guidance, which clarifies the accounting for convertible debt instruments. The adoption of the new guidance affects the accounting for our 2008 Notes. The Company now accounts separately for the liability and equity components of the convertible debt in a manner that reflects the Company’s nonconvertible debt (unsecured debt) borrowing rate when interest expense is recognized. The authoritative guidance requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in the Condensed Consolidated Statement of Operations. On September 21, 2009, the Company filed a Current Report of Form 8-K to reflect the adjustments and reclassifications with respect to the financial information contained in the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2008 filed on March 16, 2009 and April 30, 2009 required in connection with the retrospective application of authoritative guidance.

New authoritative accounting guidance required retroactive application to the terms of instruments as they existed for all periods presented. The following table sets forth the effect of the retrospective application on certain previously reported line items (in thousands, except per share data):

Condensed Consolidated Statements of Operations:

	For the Three Months Ended September 30, 2008									For the Nine Months Ended September 30, 2008
	Originally Reported			Effect of Change			As Adjusted			Originally Reported			Effect of Change			As Adjusted
Interest expense (1)	$	(9,673	)	$	7,165		$	(2,508	)	$	(15,742	)	$	8,480		$	(7,262	)
Loss on debt extinguishment (2)		—			(63	)		(63	)		—			(147	)		(147	)
Net loss		(133,242	)		7,102			(126,140	)		(172,973	)		8,333			(164,640	)
Basic and diluted net loss per share		(24.27	)		1.29			(22.98	)		(32.87	)		1.59			(31.28	)

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(1) Represents the decrease in non-cash interest expense of $7.1 million and $7.2 million for the three and nine months ended September 30, 2008 primarily due to the change in accounting for conversions. During 2008, in accordance with authoritative guidance at that time, unamortized debt discounts and debt issuance costs upon conversion were written off to interest expense. Under the new authoritative guidance, conversions are accounted for as gains or losses on debt extinguishment which is accounted for as the difference between the fair value of the debt liability and the carrying value on conversion (principal less unamortized discounts and debt issuance costs). Additionally, non-cash interest expense decreased $1.1 million for the nine months ended September 30, 2008 as result of the increase in capitalized interest for the demonstration-scale facility due to the increase in the effective interest rate of the 2008 Notes.

(2) Represents the recognition of loss upon conversion of $9.5 million and $11.9 million of principal during the three and nine months ended September 30, 2008. Loss on debt extinguishment is accounted for as the difference between the fair value of the debt liability and the carrying value on the conversion date.

Consolidated Balance Sheet:

	December 31, 2008
	Originally Reported			Effect of Change			As Adjusted
Property, plant and equipment, net (3)	$	115,711		$	1,560		$	117,271
Debt issuance costs and other assets (4)		6,688			(1,255	)		5,433
Convertible senior notes, at par value, net of discounts (5)		129,092			1,299			130,391
Additional paid-in capital (6)		583,958			(10,095	)		573,863
Accumulated deficit (7)		(622,613	)		9,052			(613,561	)

(3) Represents increase in capitalized interest for the demonstration-scale facility as a result of the increase in the effective interest rate of the 2008 Notes.

(4) Represents the reclassification of debt issuance costs of $2.1 million related to the equity component (conversion option) to additional paid-in capital in stockholders’ equity, partially offset by a decrease in amortization and write-off of debt discount to interest expense upon conversions aggregating approximately $12.1 million in face value due to lower issuance costs related to the debt component.

(5) Represents the increase in carrying value of the 2008 Notes to reflect the fair value of the debt liability at issuance.

(6) Represents the adjustment to record the equity component debt discount, offset by the repurchase of the equity component upon conversions and issuance costs related to the equity component.

(7) Represents the decrease in non-cash interest expense partially offset by the loss on debt extinguishment described above.

Additionally, on January 1, 2009, the Company adopted authoritative guidance which provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of this guidance required the Company to perform additional analysis on both its freestanding equity derivatives and embedded equity derivative features. The adoption of the guidance revised the Company’s accounting for the 2008 Notes conversion rights, resulting in the Company recording a derivative liability of $13.1 million representing the fair value of the conversion rights as of January 1, 2009. The recording of the derivative liability resulted in the reclassification of the equity component previously included in stockholders’ equity. Further, the Company recognized the cumulative effect of the change in accounting principle as an adjustment to the opening balance of accumulated deficit.

The cumulative adjustment to accumulated deficit related to the 2008 Notes was $5.4 million, which represents the gains on remeasurement that would have been recognized if the new authoritative guidance had been applied from the issuance date on February 27, 2008.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

Derivative Financial Instruments

The Company’s 2008 and 2009 Notes (seeNote 2) have been accounted for in accordance with applicable authoritative guidance for derivative instruments which requires certain embedded features to be bifurcated from the debt instrument and accounted for as derivative assets or liabilities. The derivative assets and liabilities are initially recorded at fair value and then at each reporting date, the change in fair value is recorded in the statement of operations.

8

Fair Value Measurements

Effective January 1, 2009, the Company adopted authoritative guidance for fair value measurements and the fair value option for financial assets and financial liabilities. The Company did not record an adjustment to accumulated deficit as a result of the adoption of the guidance for fair value measurements, and the adoption did not have a material effect on the Company’s results of operations. The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at fair value with changes in fair value recognized in earnings. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

	September 30, 2009								December 31, 2008
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents (1)	$	20,969	$	—	$	—	$	20,969	$	7,458	$	—	$	—	$	7,458
Derivative – convertible hedge, net (2)		—		—		7		7		—		—		163		163
	$	20,969	$	—	$	7	$	20,976	$	7,458	$	—	$	163	$	7,621
Liabilities:
Derivative – warrants (3)	$	—	$	—	$	91	$	91	$	—	$	—	$	359	$	359
Derivative – 2008 Notes compound embedded derivative (4)(6)		—		—		2,446		2,446		—		—		7,769		7,769
Derivative – 2009 Notes Compound Embedded Derivative (5)(6)		—		—		1,816		1,816		—		—		—		—
	$	—	$	—	$	4,353	$	4,353	$	—	$	—	$	8,128	$	8,128

(1) Included in cash and cash equivalents on the accompanying Condensed Consolidated Balance Sheet.

(2) Represents the net fair value of the purchased call option and written call option entered into in connection with the issuance of the Company’s 2008 Notes (seeNote 2). Classified as a net asset, using significant unobservable inputs (Level 3).

(3) Represents warrants issued in conjunction with the Company’s 2008 Notes (seeNote 2). Classified as a current liability at December 31, 2008 and in long-term liabilities as part of the 2008 Notes carrying value at September 30, 2009, using significant unobservable inputs (Level 3).

(4) Represents the compound embedded derivative included in the Company’s 2008 Notes (seeNote 2). The compound embedded derivative includes, among other rights, the noteholders’ right to receive “make-whole” amounts. The “make-whole” provision provides that, upon any noteholder’s conversion of the 2008 Notes for common stock, the Company is obligated to pay such holder an amount in cash or, subject to certain limitations, shares of common stock equal in value to the interest foregone over

9

the life of the 2008 Notes as a result of such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate, and, if applicable, valuing the shares of stock at a 5% discount to the applicable stock price at the time of conversion. The compound embedded derivative is included in current liabilities as of December 31, 2008 and long term liabilities as part of the 2008 Notes carrying value at September 30, 2009 on the accompanying Condensed Consolidated Balance Sheet.

(5) Represents the compound embedded derivative included in the Company’s 2009 Notes (seeNote 2). The compound embedded derivative includes, among other rights, the noteholders right to receive “make-whole” amounts. The “make-whole” provision provides that, upon any noteholder’s conversion of the 2009 Notes for common stock, the Company is obligated to pay such holder an amount in cash or, subject to certain limitations, shares of common stock equal to the remaining scheduled interest payments attributable to such 2009 Notes from the applicable last interest payment date through the earlier of (i) the date that is two-and-one-half years after the conversion date and (ii) April 5, 2012, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate, and, if applicable, valuing the shares of stock at the greater of $9.60 or the applicable stock price at the time of conversion. The embedded derivative is included in long term liabilities as part of the 2009 Notes carrying value on the accompanying Condensed Consolidated Balance Sheet.

(6) The Company’s “lattice” valuation models assume the noteholders’ exercise patterns will follow risk-neutral conversion behavior throughout the term of the instruments consistent with maximizing the expected present value of the 2008 and 2009 Notes (collectively, the “Notes”). Because the maximizing condition reflects the expected present value of the Notes as a whole and not the “make-whole” amount, the fair value of the “make-whole” provisions do not reflect the maximum potential obligation due under such provisions. As such, the potential “make-whole” obligation was $3.5 million under the 2008 Notes and $3.0 million under the 2009 Notes, assuming all of the outstanding Notes as of September 30, 2009 converted at that time.

The following table presents a reconciliation of the assets and liabilities measured at fair value on a quarterly basis using significant unobservable inputs (Level 3) from December 31, 2008 to September 30, 2009 (in thousands):

	Derivative Liability- Warrants			Derivative Liability - - 2008 Notes Compound Embedded Derivative			Derivative Liability - - 2009 Notes “Make-Whole” Provision			Derivative Asset – Convertible Hedge Transaction
Balance at January 1, 2009	$	359		$	7,769		$	—		$	163
Adjustment to fair value included in earnings (1)		(341	)		(13,128	)		—			(160	)
Other adjustments (2)		—			10,642			—			—
Balance at March 31, 2009	$	18		$	5,283		$	—		$	3
Adjustment to fair value included in earnings (1)		206			9,785			—			48
Other adjustments (3)		—			(4,425	)		—			—
Balance at June 30, 2009	$	224		$	10,643		$	—		$	51
Issuance of derivative instruments (4)		—			—			2,016			—
Adjustment to fair value included in earnings (1)		(133	)		(1,423	)		(200	)		(44	)
Adjustment related to amendment of 2008 Notes included in earnings (5)		—			(3,977	)		—			—
Other adjustments (6)		—			(2,797	)		—			—
Balance at September 30, 2009	$	91		$	2,446		$	1,816		$	7

(1) The 2008 Notes detachable warrants, compound embedded derivative, convertible hedge transaction and 2009 Notes compound embedded derivative are revalued at the end of each reporting period and the resulting difference is included in the results of operations. The fair value of the 2008 Notes compound embedded derivative, detachable warrants, convertible hedge transaction and 2009 Notes compound embedded derivative are primarily affected by the Company’s stock price, but are also affected by the Company’s stock price volatility, expected life, interest rates and the passage of time as it relates to the “make-whole” amount. For the nine months ended September 30, 2009, the net adjustment to fair value resulted in a gain of $5.1 million and is included in “gain (loss) on net change in fair value of derivative assets and liabilities” on the accompanying Condensed Consolidated Statement of Operations (seeNote 2).

(2) Represents increase in derivative liability of $13.1 million related to the 2008 Notes’ conversion rights to be recorded as a derivative liability, partially offset by “make-whole” payments related to the conversion of $10.1 million in face value of the 2008 Notes(see Note 2).

(3) Represents decrease in derivative liability for “make-whole” payments related to the conversion of $19.3 million in face value of the 2008 Notes.(see Note 2)

(4) Represents the recognition of compound embedded derivative related to the 2009 Notes exchange in September 2009.(see Note 2)

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(5) Represents the decrease in fair value of the 2008 Notes compound embedded derivative as a result of the amendment in July 2009.(see Note 2)

(6) Represents decrease in derivative liability for “make-whole” payments related to the conversion of $13.3 million in face value of the 2008 Notes.(see Note 2)

Revenue Recognition

The Company recognizes revenue when the following criteria have been met: i) persuasive evidence of an arrangement exists; ii) services have been rendered or product has been delivered; iii) price to the customer is fixed and determinable; and iv) collection of the underlying receivable is reasonably assured.

Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of September 30, 2009, the Company had $2.0 million in deferred revenue, of which $1.5 million was related to funding from collaborative partners and $0.5 million was related to product sales.

Product Revenue

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed and determinable at the time of sale; (ii) the distributor’s obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

The Company recognizes product profit-sharing revenue during the quarter in which such revenue is earned, generally upon shipment by Danisco of product to their customer, based on information provided by the Company’s profit-sharing partner. Profit-sharing revenue is included in product revenue in the Condensed Consolidated Statement of Operations.

The Company records revenue equal to the full value of the manufacturing costs plus profit share for Phyzyme it manufactures through its contract manufacturing agreement with Fermic S.A. in Mexico City. The Company has contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. Revenue associated with product manufactured for the Company by Genencor is recognized on a net basis equal to the net profit share received from Danisco, as all the following conditions of reporting net are met: i) the third party is the obligor; ii) the amount earned is fixed; and iii) the third party maintains inventory risk.

Grant Revenue

The Company recognizes revenue from grants as related costs are incurred, as long as such costs are within the funding limits specified by the underlying grant agreements.

Collaborative Revenue

The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours estimated under the contract.

The Company recognizes fees received to initiate research projects over the life of the project. The Company recognizes fees received for exclusivity in a field over the period of exclusivity.

The Company recognizes milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the Company’s past research and development services, as well as its ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that the Company customarily charges for similar research and development services.

Revenue Arrangements with Multiple Deliverables

The Company sometimes enters into revenue arrangements that contain multiple deliverables. In these cases, the Company recognizes revenue from each element of the arrangement as long as separate value for each element can be determined, the Company has completed its obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

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Variable Interest Entities

As more fully described inNote 7, the Company and BP have entered into a strategic collaboration which includes two special purpose entities, Galaxy and Vercipia, both of which are jointly owned by BP and the Company.

The Company has determined that both Galaxy and Vercipia qualify as variable interest entities and that Verenium is the primary beneficiary of both entities. Because the Company is the primary beneficiary, Galaxy and Vercipia are therefore subject to consolidation by the Company. As a result, BP’s capital contributions are recorded as “Noncontrolling interests in consolidated entities” on the Company’s Condensed Consolidated Balance Sheet. The Company consolidates the operating results of Galaxy and Vercipia, and records an adjustment to the “Noncontrolling interests in consolidated entities” for BP’s share of profits and/or losses in these entities.

On January 1, 2009, the Company adopted recently issued authoritative guidance which recharacterizes the accounting and reporting for minority interests as noncontrolling interests and classifies them as a component of stockholders’ equity. The Company reclassified the noncontrolling interests as stockholders’ equity, including the net loss attributable to noncontrolling interests as part of the Company’s consolidated net loss and provided additional disclosures as part of the Company’s financial statements. The Company implemented the presentation and disclosure requirements of this new standard retrospectively to all periods presented.

The following table presents the changes in stockholders’ equity attributed to noncontrolling interests in consolidated entities for the three and nine months ended September 30, 2009 (in thousands):

Balance at January 1, 2009	$	12,000
Net loss		(7,870	)
Capital contributions		26,500
Balance at March 31, 2009		30,630
Net loss		(8,925	)
Capital contributions		14,500
Balance at June 30, 2009		36,205
Net loss		(8,705	)
Capital contributions		26,500
Balance at September 30, 2009	$	54,000

As of September 30, 2009, the Company had total assets of $8.1 million pertaining to Vercipia included in the Company’s Condensed Consolidated Balance Sheets. Galaxy assets were contributed and continue to be held at a zero carrying value.

Computation of Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. The Company had 10,000 and 21,000 unvested restricted shares outstanding as of September 30, 2009 and 2008. Additionally, pursuant to the merger agreement with Celunol, 125,000 shares of the Company’s common stock issued to former Celunol stockholders were placed in an escrow account until June 20, 2008 to satisfy the indemnification obligation of Celunol for breaches of the representations and warranties contained in the merger agreement or any legal proceedings related thereto. On June 20, 2008, these shares were released to the former Celunol stockholders.

For purposes of the computation of net loss per share, the unvested restricted shares and the shares held in escrow are considered contingently returnable shares and are not considered outstanding common shares for purposes of computing net loss per share until all necessary conditions are met that no longer cause the shares to be contingently returnable. The impact of these contingently returnable shares on weighted average shares outstanding has been excluded for purposes of computing net loss per share.

Computation of net loss per share for the three and nine months ended September 30, 2009 and 2008 was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Weighted average shares outstanding during the period	9,024		5,511		7,474		5,363
Less: Weighted average contingently returnable shares outstanding	(10	)	(21	)	(8	)	(100	)
Weighted average shares used in computing basic and diluted net loss per share	9,014		5,490		7,466		5,263

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Net loss	$	(2,292	)	$	(126,140	)	$	(18,933	)	$	(164,640	)
Net loss per share, basic and diluted	$	(0.25	)	$	(22.98	)	$	(2.54	)	$	(31.28	)

2. Convertible Debt

Carrying value of the Company’s convertible debt is set forth below (in thousands):

	September 30, 2009							December 31, 2008
	2009 Notes		2008 Notes			2007 Notes		2009 Notes		2008 Notes			2007 Notes
Principal value	$	13,707	$	16,201		$	69,033	$	—	$	58,883		$	100,500
Debt premium (discount)		9,915		(6,899	)		—		—		(28,992	)		—
Derivative liabilities (1)		1,816		2,537			—		—		8,128			—
Total carrying value		25,438		11,839			69,033		—		38,019			100,500
Less: Current portion (representing the fair value of the 2008 Notes compound embedded derivative and warrants being accounted for as derivative liabilities) (1)		—		—			—		—		(8,128	)		—
Carrying value, noncurrent portion	$	25,438	$	11,839		$	69,033	$	—	$	29,891		$	100,500

(1) Represents the 2008 Notes detachable warrants, compound embedded derivative and 2009 Notes compound embedded derivative. As a result of the amendment of the 2008 Notes, the Company has the intent and the ability to settle the warrants, 2008 conversion rights and “make-whole” provisions in shares of common stock as of September 30, 2009. As such, the asserted derivative liability was reclassed to a long-term liability and is included in the 2008 Notes carrying value on its condensed consolidated financial statements at September 30, 2009. As more fully described below under the sub-heading“2008 Notes”and “2009 Notes,”the Company’s total potential obligation under the “make-whole” provisions of the 2008 Notes and 2009 Notes as of September 30, 2009 was $3.5 million and $3.0 million, assuming that all holders of the 2008 Notes and 2009 Notes converted at that time. All or a portion of this “make-whole” payment could be paid in common shares, subject to the satisfaction of certain conditions.

2007 Notes

In March and April 2007, the Company completed an offering of $120 million aggregate principal amount of 2007 Notes in a private placement. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of the common stock issuable upon conversion of the 2007 Notes. As more fully described below, $18.5 million and $30.5 million in face value of the 2007 Notes were exchanged in February 2008 and September 2009, respectively, for new debt pursuant to the Company’s issuance of its 2008 and 2009 Notes. As of September 30, 2009, the Company had $69 million in face value outstanding under the 2007 Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at the option of the holders at any time prior to maturity, redemption or repurchase into shares of the Company’s common stock at a conversion rate of 13.02 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain circumstances), which represents a conversion price of $76.80 per share. The total common shares that would be issued assuming conversion of the entire $69 million in 2007 Notes is 0.9 million shares.

On or after April 5, 2012, the Company may, at its option, redeem the 2007 Notes, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the 2007 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require the Company to purchase all or a portion of their 2007 Notes at a purchase price in cash equal to 100% of the principal amount of the 2007 Notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require the Company to repurchase all or a portion of their 2007 Notes upon a “fundamental change” at a repurchase price in cash equal to 100% of the principal amount of 2007 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date. Pursuant to the terms of the 2007 Notes, a “fundamental change” is broadly defined as 1) a change in control, or 2) a termination of trading of the Company’s common stock.

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In connection with the 2007 Notes offering, the Company paid $5.2 million in financing charges, which is reflected in other long-term assets on the accompanying Condensed Consolidated Balance Sheets, and is being amortized to interest expense over the initial five-year term of the 2007 Notes using the effective interest method.

2008 Notes

On February 27, 2008, the Company completed a private placement of the 2008 Notes and warrants to purchase shares of Verenium common stock. Concurrent with entering into the purchase agreement for the 2008 Notes, the Company also entered into senior notes exchange agreements with certain existing holders of the 2007 Notes pursuant to which such noteholders exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008 Notes issued in exchange for the 2007 Notes, the Company issued $71.0 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 0.7 million shares of common stock. As of September 30, 2009, the outstanding principal balance on the 2008 Notes was $16.2 million.

On July 1, 2009, the Company entered into amendment agreements with required holders (as defined below) of its 2008 Notes to modify certain terms of all of the 2008 Notes. The amendments became effective on July 6, 2009. Pursuant to their original terms, the 2008 Notes may be amended and restated with the written consent of the holders representing at least 66.67% of the 2008 Notes outstanding (the “Required Holders”). As of July 1, 2009, there was approximately $29.5 million aggregate principal amount of the 2008 Notes outstanding. The Company entered into the amendment agreements with holders of approximately $25.6 million, or 86.8%, of the 2008 Notes.

In connection with the amendment, the conversion price for the 2008 Notes was reduced from $25.56 to $20.88 and the anti-dilution protection included in the 2008 Notes was changed from full ratchet anti-dilution protection to, in most cases, a version of broad-based weighted average anti-dilution protection, subject to certain limitations. The 2008 Notes are subject to automatic conversion at the Company’s option if the Company’s closing stock price exceeds $41.76 (formerly $98.16 prior to the amendment) per share over a 30-trading day period ending prior to the date the Company provides notice of the automatic conversion to investors, the average daily trading volume of the Company’s stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are met. In connection with the amendment, the Company paid $1.5 million in advisory fees which is included in selling, general and administrative expense on the accompanying Condensed Consolidated Statement of Operations.

As disclosed inNote 9, one holder of 2008 Notes that currently holds approximately $3.2 million in aggregate principal amount is a party to a pending lawsuit against the Company, whereby that holder also seeks declaratory judgment that its 2008 Notes may not be amended by the Required Holders without that holder’s consent. This holder has not signed the amendment agreement as of November 9, 2009.

Periodic interest payments on the 2008 Notes are approximately $0.3 million every three months, assuming an outstanding balance of $16.2 million, payable on January 1, April 1, July 1 and October 1, of each year. Subject to the satisfaction of certain conditions, the Company may pay interest amounts with shares of common stock at a 5% discount to the applicable stock price at the time of the interest payment.

The 2008 Notes contain several embedded features, which are required to be bifurcated and accounted separately as derivative liabilities in accordance with authoritative guidance. These embedded features are described in two categories: 1) detachable warrants; and 2) a compound embedded derivative, as set forth below.

Detachable Warrants. In connection with the 2008 Notes, the Company issued warrants to purchase up to approximately 666,000 shares of the Company’s common stock. The warrants are exercisable at an initial exercise price of $53.28 per share. The exercise price and the number of shares of the Company’s common stock issuable upon exercise of the warrants are subject to weighted average anti-dilution protection. As a result of anti-dilution provisions triggered by the 2009 Notes exchange in September 2009, the warrants increased to purchase approximately 748,000 shares of the Company’s common stock at an exercise price of $47.38.

Compound embedded derivative. The compound embedded derivative includes certain features of the 2008 Notes, with its major components consisting of: 1) the base conversion rights, including a version of broad-based weighted average anti-dilution provisions, subject to certain limitations; 2) rights upon an event of default or change in control; and, 3) the “make-whole” provision.

Broad-based weighted average anti-dilution protection, subject to certain limitation. In the event that the Company subsequently issues options (excluding options issued under an approved stock plan by the Board of Directors) or convertible securities or other equity or equity-linked securities at a price-per-share which is below the current conversion price of the 2008 Notes, the holders of the 2008 Notes will be entitled to antidilution protection, such that the conversion price will re-set to a price-per share equal to the product of the conversion price in effect and the weighted average impact of the issuance.

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Rights upon an event of default or change in control. If the Company were to trigger an event of default, as defined, holders of the 2008 Notes may require the Company to redeem all or portion of the 2008 Notes at a premium to their face value. In the event of a change of control, as defined, the conversion rate may be subject to adjustment, or the holders may require the Company to redeem all or a portion of the 2008 Notes at a premium to their face value.

“Make-whole” provision. The 2008 Notes also include a “make-whole” provision whereby, upon any holder’s conversion of the 2008 Notes for common stock, the Company is obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that the Company may, subject to the satisfaction of certain conditions, pay interest or “make-whole” amounts with shares of its common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion.

In addition, concurrent with the issuance of the 2008 Notes, the Company entered into a convertible hedge transaction with a counterparty, which is intended to reduce the potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two separate call options. Under the first call option, on April 1, 2012 (or earlier upon conversion of the 2008 Notes), the Company is entitled to purchase approximately 1.1 million shares of the Company’s common stock from the counterparty at a price per share equal to the initial conversion price of $49.08 (or a proportion of such number of shares based on the proportion of the 2008 Notes being converted). Under the second call option, on three exercise dates staggered in six month intervals beginning on October 1, 2013, the counterparty is entitled to purchase an aggregate of approximately 1.1 million shares of the Company’s common stock at a price per share of $61.92. The cash cost of the convertible hedge transaction was approximately $6.2 million. The convertible hedge transaction must also be separately valued and accounted for as a derivative under authoritative guidance.

Valuation of Debt Liability and Embedded Features of the 2008 Notes

2008 Notes Debt Liability and Equity Component

Prior to the adoption of recent authoritative guidance, the value assigned to the debt host was based on the residual value of the debt proceeds after allocating the fair value of the compound embedded derivative and detachable warrants. As a result of the adoption, as described underNote 1, the Company was required to separately account for the debt and equity components of the 2008 Notes in a manner that reflects the Company’s nonconvertible debt (unsecured debt) borrowing rate.

The recent authoritative guidance requires that the carrying amount of the liability component be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. As a result, the Company determined that its effective interest rate was 32.6% and, in the absence of comparable market data, determined that, given the features of the 2008 Notes, this derived effective interest rate was a fair approximation of a market rate of interest for a similar instrument. As a result, the 32.6% rate was applied to the 2008 Notes and coupon interest to calculate the fair value of the liability component. The difference between the cash proceeds associated with the convertible debt and the estimated fair value of the liability component is recorded as an equity component.

2008 Notes Detachable Warrants

At inception, as originally reported and as adjusted for the adoption of recent accounting guidance, the fair value of the detachable warrants of $4.7 million was separated from the debt liability and recorded as derivative liabilities which resulted in a reduction of the initial notional carrying amount of the 2008 Notes, and as unamortized discount, which is being accreted over the term of the 2008 Notes using the effective interest method.

15

At inception, the derivative liability attributed to the warrants could require cash settlement within one year from the balance sheet date since the warrants became exercisable in August 2008. Based upon this, the Company reported the derivative liability related to the warrants as a current liability on its Condensed Consolidated Balance Sheet. As a result of the amendment of the 2008 Notes, the Company has the intent and the ability to settle the warrants in shares of common stock as of September 30, 2009. As such, the asserted derivative liability was reclassed to a long-term liability and is included in the 2008 Notes carrying value on its Condensed Consolidated Balance Sheet at September 30, 2009. The derivative liability is marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the Condensed Consolidated Statement of Operations. The fair value of the warrants was determined using the Black-Scholes Merton methodology.

2008 Notes Compound Embedded Derivative

At inception, as originally reported and as adjusted for the adoption of recent accounting guidance, the fair value of the compound embedded derivative of $31.1 million was separated from the debt liability and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the 2008 Notes, and as unamortized discount, which is being accreted over the term of the 2008 Notes using the effective interest method.

At inception, the derivative liability arising from the compound embedded derivative could require cash settlement within one year of any balance sheet date under certain conditions outside of the Company’s control, including, but not limited to, payments in connection with a conversion at the option of the noteholder. Furthermore, the amount of the “make-whole” payment upon conversion is not indexed to the Company’s stock, and therefore would not qualify as an equity instrument. Based upon this, the Company initially recorded a derivative liability related to the holders’ rights to a “make-whole” payment upon conversion, the portion of the embedded conversion rights that may be settled in cash due to the certain Nasdaq limits, and a derivative liability related to certain other rights. The Company recorded this compound embedded derivative liability as a component of the current portion of convertible debt on its Condensed Consolidated Balance Sheets. On June 4, 2008, in connection with shareholder approval of issuance of shares in excess of certain Nasdaq limits that required shareholder approval before shares in excess of such limits could be issued, $14.7 million of the compound embedded derivative value was reclassified into stockholders’ equity.

However, on January 1, 2009, upon adoption of new authoritative guidance, as described underNote 1, the entire conversion rights were required to be accounted for as a derivative liability. As a result, the fair value of the conversion rights on January 1, 2009 of $13.1 million was reclassified from stockholders’ equity into current liabilities. As a result of the amendment of the 2008 Notes, the Company has the intent and the ability to settle the warrants, 2008 conversion rights and “make-whole” provisions in shares of common stock as of September 30, 2009. As such, the asserted derivative liability was reclassed to a long-term liability and is included in the 2008 Notes carrying value on its Condensed Consolidated Balance Sheet at September 30, 2009. The compound embedded derivative liability, consisting of the “make-whole” and the conversion rights, will be marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the Condensed Consolidated Statement of Operations. The fair value of the compound embedded derivative was determined using a “lattice” valuation methodology.

The Company’s lattice valuation model assumes the noteholders’ exercise patterns will follow risk-neutral conversion behavior throughout the term of the instrument consistent with maximizing the expected present value of the 2008 Notes. Because the maximizing condition reflects the expected present value of the 2008 Notes as a whole and not the “make-whole” amount, the fair value of the compound embedded derivative does not reflect the maximum potential obligation due under the “make-whole” provision. As such, the potential “make-whole” obligation is $3.5 million if all of the outstanding 2008 Notes as of September 30, 2009 converted on that date.

Valuation of Convertible Hedge Transaction

The Company recorded a derivative asset of $6.2 million, representing the net cash paid by the Company to the counterparty of the two separate call options that comprise the convertible hedge transaction. The convertible hedge transaction does not qualify for equity classification under authoritative guidance, as there are potential circumstances, though remote, where cash settlement may be required. As such, the net fair value of the convertible hedge transaction has been reported as a noncurrent derivative asset on the Condensed Consolidated Balance Sheets and is marked-to-market at the end of each reporting period, with any change in value reported as a non- operating expense or income in the Condensed Consolidated Statement of Operations. The Company has determined that the initial cash paid for each of the two separate call options that comprise the convertible hedge transaction approximated fair value. The fair values of the two call options subsequent to the initial issuance date have been determined using the Black-Scholes Merton methodology.

Impact of 2008 Notes Fair Value Remeasurements

The fair value of the compound embedded derivative, warrants, and the two separate call options that comprise the convertible hedge transaction are recorded as a derivative asset or liability and marked-to-market each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of Operations as non-operating expense or income. Upon conversion or exercise of a derivative instrument, the instrument will be marked to fair value at the conversion date and then that fair value will be reclassified to equity if settled in the Company’s common stock.

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The fair value of the compound embedded derivative, detachable warrants and convertible hedge transaction are primarily affected by the Company’s stock price, but are also affected by the Company’s stock price volatility, expected life, interest rates and the passage of time as it relates to the “make-whole” amount. For the nine months ended September 30, 2009, the net change in fair value measurements impacting all 2008 Notes derivative assets and liabilities resulted in a gain of $4.9 million.

Loss on Exchange of 2007 Notes

In connection with the issuance of the 2008 Notes, the Company exchanged $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and related warrants. Pursuant to authoritative guidance, an exchange of debt instruments with substantially different terms is a debt extinguishment and requires the recognition of a gain or loss on exchange. The Company determined that the exchange qualified as a debt extinguishment, and recorded a loss on the exchange of $3.6 million, equal to the difference between the carrying value of the 2007 Notes and the fair value of the 2008 Notes and warrants issued.

The fair value of the 2008 Notes issued in the exchange was determined using a “lattice” model, consistent with the methodology used to derive the fair value of the compound embedded derivative.

Gain on Amendment of 2008 Notes

As amended, the conversion price of the 2008 Notes was reduced from $25.56 to $20.88 and the anti-dilution protection included in the 2008 Notes was changed from full ratchet anti-dilution protection to, in most cases, a version of broad-based weighted average anti-dilution protection, subject to certain limitations. Pursuant to authoritative guidance, the Company determined that the amendment qualified as a liability extinguishment, and recorded a gain on the amendment of $4.0 million, equal to the difference between the fair value of the 2008 Notes compound embedded derivative before and after the amendment.

The fair value of the 2008 Notes compound embedded derivative was determined using a “lattice” model.

Conversion of 2008 Notes

Since inception through September 30, 2009, holders of the 2008 Notes have converted principal in the amount of $54.8 million into approximately 3.9 million shares of the Company’s common stock, including approximately 1.9 million shares to satisfy a portion of the related “make-whole” obligations.

During the three and nine months ended September 30, 2009, the Company recorded a gain on conversion of $2.5 million and $8.6 million, calculated as the difference between the carrying value of the converted 2008 Notes and the fair value of the shares of common stock delivered to the noteholders upon conversion. The carrying value of the converted 2008 Notes for the three and nine months ended September 30, 2009 was equal to the $13.3 million and $42.7 million of principal less the unamortized debt discount and issuance costs, which totaled $10.0 million and $31.9 million, as of the conversion date. During the three and nine months ended September 30, 2009, the Company issued a total of 1.0 million and 3.6 million shares with a total market value as of the dates of conversion of $7.5 million and $23.3 million to settle the 2008 Notes that were converted and related “make-whole” payments.

Subsequent to September 30, 2009, there have been no additional conversions of principal.

2009 Notes

On September 1, 2009 and September 25, 2009, the Company completed privately negotiated exchanges with certain existing holders of its 2007 Notes. Pursuant to the exchange agreements, certain existing holders of the 2007 Notes agreed to exchange $30.5 million in aggregate principal for the 2007 Notes, for $13.7 million in aggregate principal amount of the 2009 Notes.

The 2009 Notes are secured by a first priority lien (subject to certain exceptions and permitted liens) on certain of the Company’s assets including, subject to certain limitations, present and future receivables, inventory, general intangibles, equipment, investment property, stock of subsidiaries, and certain other assets and proceeds relating thereto. The collateral securing 2009 Notes is subject to certain carve-outs, including without limitation, cash and cash equivalents and intellectual property.

The 2009 Notes bear interest at 9% per year, payable in cash, or at the option of the Company, in shares of common stock or a combination thereof, semi-annually, and are convertible at the option of the holders any time prior to maturity, redemption or repurchase into shares of the Company’s common stock at a conversion rate of 104.17 shares per $1,000 principal amount of 2009 Notes (subject to adjustment in certain circumstances), which represents a conversion price of $9.60 per share, provided that upon conversion the holders make certain certifications. A holder that surrenders 2009 Notes for conversion in connection with a “make-

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whole fundamental change” that occurs before April 5, 2012 may in certain circumstances be entitled to an increased conversion rate. In no event will the conversion price of the 2009 Notes be less than $7.32 per share. The total common shares that would be issued assuming conversion of the entire $13.7 million in 2009 Notes is 1.4 million shares, excluding common shares to be issued for potential “make-whole” payments.

If the Company’s closing stock price exceeds $19.20 (which represents 200% of the conversion price in effect) per share for at least 20-trading days over a 30-trading day period, the Company may, at its option, elect to terminate the right of the holders to convert their 2009 Notes.

On or after April 5, 2012, the Company may, at its option, redeem the 2009 Notes, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the 2009 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require the Company to purchase all or a portion of their 2009 Notes at a purchase price in cash equal to 100% of the principal amount of the 2009 Notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require the Company to repurchase all or a portion of their 2009 Notes upon a “fundamental change” at a repurchase price in cash equal to 100% of the principal amount of 2009 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date. Pursuant to the terms of the 2009 Notes, a “fundamental change” is broadly defined as 1) a change in control, or 2) a termination of trading of the Company’s common stock.

Periodic interest payments on the 2009 Notes are approximately $0.6 million every six months, assuming an outstanding balance of $13.7 million, payable on April 1 and October 1, of each year, with the first payment due April 1, 2010. Subject to the satisfaction of certain conditions, the Company may pay interest with shares of common stock at a 5% discount to the applicable stock price at the time of the interest payment.

The 2009 Notes also include a “make-whole” provision whereby, upon any holder’s conversion of the 2009 Notes for common stock, the Company is obligated to pay such holder an amount equal to the remaining scheduled interest payments attributable to such 2009 Notes from the applicable last interest payment date through the earlier of (i) the date that is two-and-one-half years after the conversion date and (ii) April 5, 2012, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2009 Notes provide that the Company may, subject to the satisfaction of certain conditions, pay “make-whole” amounts with shares of its common stock valued at the greater of (i) the conversion price then in effect or (ii) the 10 day volume weighted average price for the 10-days immediately preceding the conversion notice.

In connection with the 2009 Notes offering, the Company paid $0.6 million in financing charges, which was expensed to selling, general and administrative on the accompanying Condensed Consolidated Statement of Operations.

Valuation of Compound Embedded Derivative of the 2009 Notes

The compound embedded derivative includes the “make-whole” provision and the put features of the 2009 Notes. The “make-whole” payment upon conversion is not indexed to the Company’s stock, and therefore would not qualify as an equity instrument. The put features of the 2009 Notes allow for the holders to require the Company to purchase the Notes at 100% principal on each April 1, 2012, 2017, and 2022 or upon a fundamental change. The put features are contingently exercisable and the 2009 Notes were issued at a discount, as such, the authoritative guidance requires the put features to be bifurcated and accounted for as a derivative liability. Based upon this, the Company recorded a derivative liability of $2.0 million equal to the fair value of the “make-whole” provision and put features. The compound embedded derivative liability was separated from the debt liability and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the 2009 Notes, and as unamortized discount, which is being accreted through April 1, 2012, the first date the holders can require the Company to purchase the 2009 Notes using the effective interest method. The Company recorded this derivative liability as a component of the 2009 Notes carrying value on its Condensed Consolidated Balance Sheet. The compound embedded derivative liability will be marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the Condensed Consolidated Statement of Operations. The fair value of the compound embedded derivative was determined using a “lattice” valuation methodology.

The Company’s lattice valuation model assumes the noteholders’ exercise patterns will follow risk-neutral conversion behavior throughout the term of the instrument consistent with maximizing the expected present value of the 2009 Notes. Because the maximizing condition reflects the expected present value of the 2009 Notes as a whole and not the “make-whole” amount, the fair value of the “make-whole” derivative does not reflect the maximum potential obligation due under the “make-whole” provision. As such, the potential “make-whole” obligation would have been $3.0 million if all of the outstanding 2009 Notes as of September 30, 2009 had converted on that date.

Impact of 2009 Notes Fair Value Remeasurements

The fair value of the compound embedded derivative is marked-to-market each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of Operations as non-operating expense or income. Upon conversion or exercise of a derivative instrument, the instrument will be marked to fair value at the conversion date and then that fair value will be reclassified to equity if settled in the Company’s common stock.

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The fair value of the compound embedded derivative is primarily affected by the Company’s stock price, but is also affected by the Company’s stock price volatility, expected life, interest rates and the passage of time as it relates to the “make-whole” amount. For the nine months ended September 30, 2009, the net change in fair value measurements impacting the 2009 Notes compound embedded derivative liability resulted in a gain of $0.2 million.

Exchange of 2007 Notes

In connection with the issuance of the 2009 Notes, the Company exchanged $30.5 million in aggregate principal amount of the 2007 Notes for approximately $13.7 million in aggregate principal amount of the 2009 Notes. Pursuant to authoritative guidance, it was determined that the noteholders of the 2007 Notes exchanged granted a concession to the Company primarily as a result of the reduction in principal of 2009 Notes issued as part of the exchange. As a result, the Company, in accordance with authoritative guidance, accounted for the exchange as a troubled debt restructuring and recorded the 2009 Notes at the 2007 Notes carrying value. This resulted in a debt premium of $16.1 million, of which $12.0 million will be amortized through the April 1, 2027 maturity of the 2009 Notes, as an offset to interest expense, and $4.1 million was recorded as additional paid in capital. The carrying value of the 2007 Notes was equal to the $30.5 million of principal less the unamortized issuance costs, which totaled $29.8 million, as of the exchange date.

Interest Expense on Convertible Debt

The Company recorded interest expense related to convertible debt, as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
5.5% coupon interest, payable in cash	$	1,230		$	1,396	$	3,953		$	4,347
Non-cash amortization of debt issuance costs		218			222		682			687
2007 Notes Total		1,448			1,618		4,635			5,034
8% coupon interest, payable in cash or common stock		407			1,301		2,249			3,233
Non-cash accretion of debt discount (1)		534			1,176		2,623			2,796
Non-cash amortization of debt issuance costs		51			132		225			306
2008 Notes Total		992			2,609		5,097			6,335
9% coupon interest, payable in cash or common stock		103			—		103			—
Non-cash amortization of debt premium (2)		(32	)		—		(32	)		—
2009 Notes Total		71			—		71			—

(1) The initial debt discount relates to the 2008 Notes compound embedded derivative, detachable warrants, and the equity component related to the conversion rights not included in the compound embedded derivative at issuance. The unamortized value of the debt discount is included in the carrying value of the 2008 Notes on the accompanying Condensed Consolidated Balance Sheets and is being amortized into interest expense over the term of the 2008 Notes, or approximately four years.

(2) The initial debt premium relates to the 2009 Notes being recorded at 2007 Notes carrying value in accordance with authoritative guidance partially offset by the debt discount recorded for the compound embedded derivative. The unamortized value of the debt premium is included in the carrying value of the 2009 Notes on the accompanying Condensed Consolidated Balance Sheets and is being amortized into interest expense through maturity of the 2009 Notes, April 1, 2027.

3. Balance Sheet Details

Inventory

Inventory is recorded at standard cost on a first-in, first-out (FIFO) basis. Inventory consists of the following (in thousands) as of:

	September 30, 2009			December 31, 2008
Raw materials	$	500		$	607
Work in progress		366			241
Finished goods		2,658			1,824
		3,524			2,672
Reserve		(300	)		(240	)
Net inventory	$	3,224		$	2,432

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The Company reviews inventory periodically and reduces the carrying value of items considered to be slow moving or obsolete to their estimated net realizable value. The Company considers several factors in estimating the net realizable value, including shelf life of raw materials, demand for its enzyme products and historical write-offs.

Property and equipment

Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally three to ten years) using the straight-line method.

Property and equipment consist of the following (in thousands) as of:

	September 30, 2009			December 31, 2008
Laboratory, machinery and equipment	$	50,387		$	50,477
Computer equipment		13,037			12,838
Furniture and fixtures		6,325			6,325
Leasehold improvements		9,236			9,194
Land		1,560			1,560
Pilot facility		18,739			18,904
Demonstration facility		94,062			90,996
Property and equipment, gross		193,346			190,294
Less: Accumulated depreciation and amortization		(83,044	)		(73,023	)
Property and equipment, net	$	110,302		$	117,271

Included in the costs of its demonstration facility as of September 30, 2009 and December 31, 2008 is $7.8 million and $6.8 million in capitalized interest, which was determined by applying the Company’s effective interest rate to the average amount of accumulated expenditures for its demonstration facility. The demonstration facility was placed in service in February 2009, and as such, the Company ceased capitalizing interest on that date.

Depreciation of property and equipment is provided on the straight-line method over estimated useful lives as follows:

Laboratory equipment	3-5 years
Computer equipment	3 years
Furniture and fixtures	5 years
Machinery and equipment	3-5 years
Office equipment	3 years
Software	3 years
Pilot facility	10 years
Demonstration facility	10 years

Leasehold improvements are amortized using the shorter of the estimated useful life or remaining lease term.

Depreciation related to the pilot and demonstration facilities begins in the period that such assets are placed in service. The pilot facility was placed in service in January 2007, and is being depreciated over a 10-year life. Subsequent modifications to the pilot facility which do not extend its useful life but meet the criteria for capitalization are considered immediately placed in service when incurred, and depreciated over the remainder of the pilot facility’s useful life. The demonstration facility was placed in service in February 2009. During the three and nine months ended September 30, 2009, the demonstration facility is being depreciated using an estimated 10-year life. The Company is in the process of performing an evaluation to determine the final useful lives for the demonstration-scale facility and each of its components.

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Accrued expenses

Accrued liabilities consist of the following (in thousands) as of:

	September 30, 2009		December 31, 2008
Employee compensation	$	6,355	$	6,050
Accrued taxes		4,664		2,851
Professional and outside services		3,024		2,608
Accrued interest on convertible notes		2,325		1,382
Royalties		1,137		1,233
Restructuring reserve, current portion		967		917
Other		2,259		1,089
	$	20,731	$	16,130

4. Segment Information and Concentration of Business Risk

Segment Information

The Company operates in two segments identified as biofuels and specialty enzymes. The biofuels segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

Management assesses performance and allocates resources based on discrete financial information for the biofuels and specialty enzymes business segments. For the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment, performance is assessed based on total revenues, product revenues, product gross margin, total operating expenses and capital expenditures. For the three and nine months ended September 30, 2009, the specialty enzyme segment comprised 100% of product revenues, and cost of product revenues. Operating expenses for each segment include direct and allocated research and development and selling, general and administrative expenses. In management’s evaluation of performance, certain corporate operating expenses are excluded from the business segments such as: non-cash share-based compensation, restructuring charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to either business segment. In addition, management evaluates segment performance based upon capital expenditures and other assets that are specifically identified to the business segment and excludes certain corporate assets that can be attributed to, or utilized by, both business segments. Expenses and assets shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment. Further, expenses allocated to each of the two segments may not be indicative of the expenses of each operating segment if such segment operated on a stand-alone basis.

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Selected operating results for each of the Company’s business segments are set forth below (in thousands):

	Three Months Ended September 30, 2009											Three Months Ended September 30, 2008
	Biofuels			Specialty Enzymes		Corporate			Total			Biofuels			Specialty Enzymes			Corporate			Total
Product revenue	$	—		$	11,026	$	—		$	11,026		$	—		$	12,377		$	—		$	12,377
Collaborative and grant revenue		6,309			1,275		—			7,584			420			3,579			—			3,999
Total revenues	$	6,309		$	12,301	$	—		$	18,610		$	420		$	15,956		$	—		$	16,376
Product gross profit	$	—		$	3,748	$	—		$	3,748		$	—		$	2,808		$	—		$	2,808
Operating expenses (excluding cost of goods sold) *	$	18,080		$	3,028	$	6,854		$	27,962		$	11,490		$	9,120		$	114,511		$	135,121
Total operating loss	$	(11,771	)	$	1,995	$	(6,854	)	$	(16,630	)	$	(11,070	)	$	(2,733	)	$	(114,511	)	$	(128,314	)
Loss attributed to noncontrolling interests in consolidated entities	$	8,705		$	—	$	—		$	8,705		$	5,000		$	—		$	—		$	5,000
Operating income (loss) attributed to Verenium	$	(3,066	)	$	1,995	$	(6,854	)	$	(7,925	)	$	(6,070	)	$	(2,733	)	$	(114,511	)	$	(123,314	)
	Nine Months Ended September 30, 2009											Nine Months Ended September 30, 2008
	Biofuels			Specialty Enzymes		Corporate			Total			Biofuels			Specialty Enzymes			Corporate			Total
Product revenue	$	—		$	32,094	$	—		$	32,094		$	—		$	36,953		$	—		$	36,953
Collaborative and grant revenue		6,548			10,650		—			17,198			844			12,117			—			12,961
Total revenues	$	6,548		$	42,744	$	—		$	49,292		$	844		$	49,070		$	—		$	49,914
Product gross profit	$	—		$	11,611	$	—		$	11,611		$	—		$	9,931		$	—		$	9,931
Operating expenses (excluding cost of goods sold) *	$	51,620		$	12,519	$	17,807		$	81,946		$	30,784		$	25,979		$	126,887		$	183,650
Total operating loss	$	(45,072	)	$	9,742	$	(17,807	)	$	(53,137	)	$	(29,940	)	$	(3,931	)	$	(126,887	)	$	(160,758	)
Loss attributed to noncontrolling interests in consolidated entities	$	25,500		$	—	$	—		$	25,500		$	5,000		$	—		$	—		$	5,000
Operating income (loss) attributed to Verenium	$	(19,572	)	$	9,742	$	(17,807	)	$	(27,637	)	$	(24,940	)	$	(3,931	)	$	(126,887	)	$	(155,758	)
Capital expenditures	$	3,089		$	—	$	—		$	3,089		$	42,311		$	2,082		$	1,901		$	46,294

* Corporate operating expenses include approximately $106.1 million in a non-cash goodwill impairment charge in 2008.

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Identifiable assets by operating segment are set forth below (in thousands):

	As of September 30, 2009
	Biofuels		Specialty Enzymes		Corporate		Total
Property, plant and equipment, net	$	104,897	$	2,763	$	2,642	$	110,302
Cash and other assets (1)		8,674		21,967		20,524		51,165
Total identifiable assets	$	113,571	$	24,730	$	23,166	$	161,467

(1) As of September 30, 2009, Biofuels cash and other assets includes $6.4 million of Vercipia cash and cash equivalents which is limited to Vercipia operations.

	As of December 31, 2008
	Biofuels		Specialty Enzymes		Corporate		Total
Property, plant and equipment, net	$	109,030	$	3,502	$	4,739	$	117,271
Cash and other assets		702		21,142		14,508		36,352
Total identifiable assets	$	109,732	$	24,644	$	19,247	$	153,623

Concentrations of Business Risk

A relatively small number of customers and collaboration partners historically have accounted for a significant percentage of the Company’s revenue. Revenue from the Company’s largest customer, Danisco Animal Nutrition, represented 43% and 60% of total revenue for the three months ended September 30, 2009 and 2008 and 48% and 56% for the nine months ended September 30, 2009 and 2008. Accounts receivable from this one customer comprised approximately 45% of accounts receivable at September 30, 2009 and 68% at December 31, 2008.

Revenue by geographic area was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
North America	$	10,221	$	4,600	$	24,693	$	14,451
Europe		6,687		8,363		19,519		24,705
South America		1,466		3,035		4,392		9,760
Asia		236		378		688		998
	$	18,610	$	16,376	$	49,292	$	49,914

For the nine months ended September 30, 2009 and 2008, 67% and 83% of the Company’s product revenue has come from one focus area, animal nutrition and health.

The Company manufactures most of its enzyme products through a manufacturing facility in Mexico City, owned by Fermic S.A., or Fermic. The carrying value of assets held at Fermic reported on the Company’s Consolidated Balance Sheets at September 30, 2009 totaled approximately $2.8 million.

5. Share-based Compensation

The Company recognized share-based compensation expense of $1.2 million and $3.2 million during the three months ended September 30, 2009 and 2008, and $6.4 million and $9.4 million during the nine months ended September 30, 2009 and 2008. These charges had no impact on the Company’s reported cash flows. Share-based compensation expense by category totaled the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Research and development	$	303	$	1,019	$	2,073	$	3,491
Selling, general and administrative		946		2,228		4,281		5,939
	$	1,249	$	3,247	$	6,354	$	9,430

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As of September 30, 2009, there was $3.8 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s equity incentive plans, including the impact of options and restricted shares assumed in the Company’s merger with Celunol Corp. This expense is expected to be recognized over a weighted-average period of 2.1 years as follows (in thousands):

Fiscal Year 2009 (October 1, 2009 to December 31, 2009)	$	645
Fiscal Year 2010		1,823
Fiscal Year 2011		873
Fiscal Year 2012		320
Thereafter		180
	$	3,841

6. Restructuring Charges

In connection with the January 2006 decision to reorganize and refocus the Company’s resources, management commenced several cost containment measures, including a reduction in workforce of 83 employees and the consolidation of its facilities. Pursuant to authoritative guidance requiring accrual of all exit related costs, the Company recorded net charges of $12.0 million in 2006 related to these activities. The following table sets forth the activity in the restructuring reserves through September 30, 2009 (in thousands):

Balance at January 1, 2006	$	—
Accrued and expensed through December 31, 2008		11,023
Charged against accrual through December 31, 2008		(7,964	)
Adjustments and revisions through December 31, 2008		3,033
Balance at January 1, 2009		6,092
Charged against accrual		(258	)
Adjustments and revisions		90
Balance at March 31, 2009		5,924
Charged against accrual		(219	)
Adjustments and revisions		190
Balance at June 30, 2009		5,895
Charged against accrual		(221	)
Adjustments and revisions		117
Balance at September 30, 2009	$	5,791

The facility consolidation costs are based on estimates, representing the discounted cash flow of lease payments (net of anticipated sublease income) on the vacated space through its contractual lease term in 2016.

Pursuant to authoritative guidance, the Company is required to re-assess these estimates on a periodic basis. Accordingly, the Company may revise these estimates in future periods, which could give rise to additional charges or adjustments. For the three and nine months ended September 30, 2009, the restructuring reserve was adjusted by $0.1 million and $0.4 million representing the net present value adjustment for the period, for a total gross obligation of $8.2 million, net of sublease income, as of September 30, 2009.

For the three and nine months ended September 30, 2009 and 2008, the adjustments and revisions related to restructuring activities were immaterial, and are included in “Selling, general and administrative expenses” on the Company’s Condensed Consolidated Statement of Operations.

7. Related-Party Transactions

Syngenta AG

The Company has had ongoing research collaboration with Syngenta since 1999 and in January 2007 the Company announced a new 10-year research and development partnership with Syngenta, which previously owned more than 10% of the Company’s common stock. As of September 30, 2009, Syngenta no longer is a related party of the Company.

The Company recognized revenue from Syngenta and its affiliates of $2.0 million and $9.7 million for the three and nine months ended September 30, 2008. Deferred revenue associated with Syngenta was $1.4 million at December 31, 2008.

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As more fully described inNote 12,on October 28, 2009, the Company entered into an agreement with Syngenta in connection with the completion of previously defined programs under their joint research collaboration.

BP Biofuels North America LLC

The Company has a strategic partnership with BP, which through September 30, 2009 has provided approximately $92 million in funding. BP is committed to additional funding of $20.5 million through January 2010, subject to the Company’s performance under its existing joint ventures, Galaxy Biofuels LLC and Vercipia Biofuels. The Company has determined that these joint ventures are subject to consolidation by the Company, in accordance with current authoritative guidance.

Galaxy Biofuels LLC

Effective August 1, 2008, the Company entered into a Joint Development and License Agreement (“JDA”) with BP focused on the development and commercialization of cellulosic ethanol technologies. As part of the transaction, Galaxy Biofuels LLC, a special purpose entity, was formed, equally owned by the Company and BP. Pursuant to the JDA, the Company granted to Galaxy a worldwide, royalty-free license and sublicense to the Company’s existing background technology related to the production of cellulosic ethanol, which will continue to be owned by the Company. Galaxy owns new intellectual property relating to cellulosic ethanol production developed through the joint development program under the JDA and is responsible for administering the licensing of the technology package resulting from the joint development program. Future profits and losses related to the licensing of these technologies will be shared equally by the Company and BP.

The financial terms of the JDA include a transaction fee of $45 million paid to the Company by BP on behalf of Galaxy, in exchange for broad access to the Company’s cellulosic ethanol technology platform, production facilities, and employee scientific knowledge and expertise. The transaction fee has been paid in full and in accordance with the terms of the JDA as follows: $24.5 million was paid within ten days of the closing; $6.5 million was paid on January 2, 2009; and $14.0 million was paid on July 1, 2009.

The Company and BP are conducting joint development efforts within the cellulosic ethanol field under the JDA, the initial term of which is 18 months. Pursuant to the JDA, BP committed to pay the Company $45 million in non refundable joint development fees to co-fund the Company’s various scientific and technical initiatives within the field. The joint development fees represent approximately 50% of the estimated costs of these initiatives through January 2010, and are payable as follows: $15 million was paid on January 2, 2009, and $2.5 million per month is payable from February 2009 through and including January 2010.

The Company is responsible for the performance of substantially all of the activities under the joint development program. If the Company is not successful in achieving the objectives of the joint development program, BP may terminate the joint development program, and the Company would no longer be entitled to receive any payments from BP for the performance of the joint development program.

The transaction fees and joint development fees are accounted for as follows:

• The license to technology granted by the Company and ongoing joint development performed by the Company are accounted for as capital contributions to Galaxy;

• Transaction fees and joint development fees paid by BP are accounted for as capital contributions to Galaxy, which are subsequently distributed to the Company as a reduction to the Company’s capital account;

• Ongoing joint development fees are accounted for as a monthly expense of Galaxy.

As a result, the Company’s Condensed Consolidated Balance Sheets include a line item called “Noncontrolling interests in consolidated entities,” which reflects BP’s ownership of Galaxy’s equity. This line item is adjusted by BP’s 50% share of Galaxy’s profits and losses, and increased by cash distributions made by BP to the Company on behalf of Galaxy. BP’s share of Galaxy’s losses is reflected in the Condensed Consolidated Statement of Operations as “Loss attributed to noncontrolling interests in consolidated entities.” Since inception, Galaxy has incurred approximately $70 million in losses through September 30, 2009, 50% of which have been allocated to BP. The Company anticipates Galaxy will continue to incur losses related to ongoing joint development through at least the initial 18 months of the strategic partnership.

Vercipia Biofuels

On February 18, 2009, the Company announced the second phase of its strategic partnership with BP through the formation of a joint venture to focus on the commercial development of facilities for the production of cellulosic ethanol from non-food feedstocks. The joint venture company, Vercipia is owned equally by the Company and BP. Vercipia will act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under the Galaxy joint development program. Vercipia will be led and supported by a team comprised of employees from both BP and the Company and will be governed with equal representation from both parent companies. This collaboration is intended to develop one of the nation’s first commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida and to create future opportunities for commercial implementation of cellulosic ethanol technologies.

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The Company originally formed the Vercipia entity in October 2007 as a wholly-owned subsidiary of Verenium Corporation. The entity was fully consolidated by the Company as a subsidiary for the years ended December 31, 2007 and 2008. BP’s consideration was used to acquire a 50% ownership interest in the existing entity. The Company has determined the joint venture is a variable interest entity, and that the Company is the primary beneficiary which requires consolidation of the entity.

In return for its 50% interest in Vercipia, BP agreed to pay Vercipia $22.5 million in an initial cash commitment and the Company agreed to contribute development assets related to its Highlands County, Florida development project and another commercial project site in early stages of development in the Gulf Coast region. BP’s contribution is payable in four installments: $7.0 million was paid on April 1, 2009, $5.0 was paid on July 1, 2009, $3.0 million was paid on October 1, 2009, and $7.5 million is due January 4, 2010. As of September 30, 2009, $6.8 million of the Company’s consolidated cash and cash equivalents is limited for use in Vercipia operations.

Vercipia will initially focus on developing and securing financing for a commercial-scale cellulosic ethanol facility in Highlands County, Florida and expects to break ground on that site in 2010. The estimated construction cost for this facility, which is expected to produce 36 million gallons-per-year, is estimated to be approximately $300 million. Production from this plant is expected to begin in 2012.

All intercompany amounts have been properly eliminated upon consolidation, and the noncontrolling interest is presented in accordance with authoritative guidance, on the Company’s Condensed Consolidated Balance Sheet and Statement of Operations.

8. Commitments

Letter of Credit

Pursuant to its facilities leases for office and laboratory space in San Diego, the Company is required to maintain a letter of credit on behalf of its landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on a minimum level of working capital and market capitalization.

As of September 30, 2009, the Company had a letter of credit in place pursuant to this agreement for approximately $10.4 million, representing approximately 24 months current rent, per the lease agreement. The letter of credit is issued under the Company’s existing bank agreement. The Company is required by the Bank to secure this obligation with cash, which is reflected as restricted cash on the Company’s Condensed Consolidated Balance Sheets as of September 30, 2009. Any increases to the letter of credit resulting from increases in rent or changes in working capital or market capitalization are effective upon notice to the Company by the landlord.

9. Contingencies

Class Action Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action lawsuit filed in December 2002 in a U.S. federal district court (the “Court”). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an Initial Public Offering (“IPO”) of their common stock in 2000 and the late 1990s (the “IPO Cases”). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Court’s earlier decision certifying as class actions the six IPO Cases designated as “focus cases.” The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of the plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to dismiss the claims against them in November 2007 and an opposition to plaintiffs’ motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certification motion. On February 25, 2009, liaison counsel for plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. On April 2, 2009, the parties submitted a tentative settlement agreement to the court and moved for preliminary approval thereof. On June 11, 2009, the Court granted preliminary approval of the tentative settlement and ordered that notice of the settlement to be published and mailed. The District Court held a final fairness hearing on September 10, 2009. On October 6, 2009, the District Court certified the settlement class in each IPO Case and granted final approval to the settlement. On or about October 23, 2009, three shareholders filed a Petition for Permission To Appeal Class Certification Order, objecting to the District Court’s final approval order and, in particular, asserting that the District Court’s certification of the settlement classes violates the Second Circuit’s earlier class certification decisions in the IPO Cases. Similar petitions, as well as one or more direct appeals, may be filed by other shareholders. If permission to appeal is denied, or if the settlement is affirmed on appeal, the settlement will result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the Company’s pro rata share of the settlement fund will be fully funded by insurance.

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The Company is covered by a claims-made liability insurance policy which it believes will satisfy any potential liability of the Company under this settlement. Due to the inherent uncertainties of litigation, and because the objecting shareholders are seeking to challenge the settlement on appeal, the ultimate outcome of this matter cannot be predicted.

Noteholder Lawsuit

On April 30, 2009, Capital Ventures International (“CVI”), a holder of the 2008 Notes, filed a lawsuit against the Company in the United States District Court for the Southern District of New York alleging that the Company breached the terms of the 2008 Notes by processing certain conversion notices submitted to the Company by CVI at $2.13 per share (now $25.56 per share on a reverse split-adjusted basis) and, with the recent amendment of the 2008 Notes, $1.74 per share (now $20.88 on a reverse-split adjusted basis) rather than $1.47 per share (now $17.64 per share on a reverse-split adjusted basis) asserting that CVI is entitled to additional shares based on the applicable conversions, as well as damages, and requesting a declaratory judgment that $1.47 per share (now $17.64 per share on a reverse-split adjusted basis) is the conversion price for the 2008 Notes. On June 3, 2009, CVI amended its complaint to also request a declaratory judgment that the Company cannot amend the 2008 Notes, pursuant to their terms, without the consent of each affected noteholder, including CVI. The Company filed its answer to CVI’s amended complaint on June 30, 2009, denying all material allegations of the complaint, as amended. An initial pre-trial conference was held on August 11, 2009 and the case is presently in the discovery phase.

On October 6, 2009, in response to the Company’s exchange of approximately $30.5 million of 2007 Notes and the granting of security interest in certain assets of the Company to exchanging holders and holders of the 2008 Notes, CVI filed a Motion to Amend First Amended Complaint (the “Motion”). CVI’s proposed amended pleading alleges that the Company further breached the Note by both amending the terms of the Notes without CVI’s express consent and then undertaking various transactions authorized by the amendment. The amended pleading also alleges that the conversion rate has once again inappropriately been changed as a result of the transactions. The Company opposed the Motion on October 21, 2009, on the ground of futility, arguing that the amendment was proper under the plain language of the Notes. A status conference was held on November 5, 2009, and the Motion remains pending.

Between February 27, 2009 through November 9, 2009, the holder has converted approximately $11.25 million in face value, and the Company has issued approximately 11.3 million shares, or 0.9 million on a reverse-split adjusted basis, to settle these conversions and related “make-whole” obligations at $25.56 or, following the recent amendment of the 2008 Notes, $20.88 per share. Assuming a conversion price of $17.64, 1.7 million additional shares, or 0.2 million on a reverse-split adjusted basis, would be issuable in connection with these conversions. If the Company were to be found to have not satisfied its obligations under the 2008 Notes, because the Company processed the applicable conversion notices at the wrong conversion price, the Company could, among other negative consequences, be required to redeem the 2008 Notes in whole or in part. The Company does not believe that this lawsuit will have a material impact on its financial statements. The Company believes any contingent liabilities related to these claims are not probable or estimable and therefore no amounts have been accrued for these matters.

Royalty Lawsuit

On August 31, 2009, the Company initiated an arbitration proceeding against Asahi Glass Co., Ltd. (“Asahi”) in the ICC International Court of Arbitration. The arbitration relates to a license agreement with Asahi whereby the Company obtained the right to use Asahi technology in connection with the manufacture of a product sold by the Company. In the arbitration, the Company seeks determinations that historical royalty payments made to Asahi were properly calculated and paid, reflecting all amounts properly subject to royalty obligations, and that Asahi has wrongfully interfered with advantageous business relations of the Company, as well as reimbursement of its damages, costs and expenses. In response to the Company’s Request for Arbitration, Asahi has claimed entitlement to additional royalties, breach of contract, patent infringement, misappropriation of trade secrets, breach of a covenant of good faith and fair dealing, and, if the Company is not found to have breached any of its obligations, seeks to set aside the contract. The Company believes it has valid defenses to Asahi’s claims, and intends to pursue those defenses, as well as its pending claims against Asahi, vigorously.

In addition to the matters noted above, from time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless, that the Company’s consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

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10. Recent Accounting Pronouncements

Accounting Standards Codification

The Financial Accounting Standards Board (“FASB”) established theFASB Accounting Standards Codification™ (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements issued for interim and annual periods ending after September 15, 2009. The Codification has changed the manner in which U.S. GAAP guidance is referenced, but did not have an impact on our consolidated financial position, results of operations or cash flows.

Business Combinations

On January 1, 2009, the Company adopted the revised FASB authoritative guidance for business combinations, which establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of the revised guidance were applied in valuing the assets in the Vercipia joint venture. Pursuant to the provisions, as the Company is consolidating the entity as prescribed by the variable interest authoritative guidance, the assets contributed are carried on the Company’s balance sheet at their respective carrying values. Accordingly, the adoption of the revised business combination guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB amended authoritative guidance which addresses the initial recognition, measurement and subsequent accounting for assets and liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the fair value as of the acquisition date cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. This guidance also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or liabilities be developed depending on their nature. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after 2010. The Company does not anticipate the adoption of this guidance to have a material impact on its future consolidated financial statements, absent any material business combinations.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued authoritative guidance for Noncontrolling Interests in Consolidated Financial Statements. For consolidated subsidiaries that are less than wholly owned, the third party holdings of equity interests are referred to as noncontrolling interests. The portion of net loss attributable to noncontrolling interests for such subsidiaries is presented as net loss applicable to noncontrolling interest on the consolidated statement of operation, and the portion of stockholders’ equity of such subsidiaries is presented as noncontrolling interest on the consolidated balance sheet. Effective January 1, 2009, the Company adopted this guidance. The adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows. However, it did impact the presentation and disclosure of noncontrolling interests in the Company’s consolidated financial statements and notes to the consolidated financial statements. As a result of the retrospective presentation and disclosure requirements, the Company was required to reflect the change in presentation and disclosure for the period ending March 31, 2009 and all periods presented in future filings.

Accounting for Convertible Debt Instruments

On January 1, 2009, the Company adopted the cash conversion subsections of new authoritative literature, which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The cash conversion subsections require issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The cash conversion subsections require bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of operations.

The cash conversion subsections require retrospective application to the terms of instruments as they existed for all periods presented. The adoption of the cash conversion subsections affects the accounting for our 2008 Notes.

Fair Value Accounting

On February 6, 2008, the FASB issued guidance for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in issued financial statements on a recurring basis. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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In April 2009, the FASB amended existing guidance on determining whether an impairment for investments in debt securities is other than temporary. The Company adopted the revised guidance on a prospective basis beginning April 1, 2009. The application of the revised guidance did not have an impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued authoritative guidance that provides clarification for circumstances in which a quoted price in an active market for an identical liability is not available. The guidance is intended to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. The guidance is effective for the first interim reporting period beginning after issuance. The Company does not anticipate the adoption of this guidance to have a material impact on the Company’s future consolidated financial statements.

Subsequent Events

In June 2009, the Company adopted a new accounting pronouncement which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. In accordance with the new guidance, the Company evaluated subsequent events after the balance sheet date of September 30, 3009 through November 9, 2009. The Company applied the provisions to determine the accounting and disclosure required for the subsequent event detailed inNote 12 below.

Joint Venture Accounting

In June 2009, a new accounting pronouncement was issued, which changes the approach to determine the primary beneficiary of a variable interest entity (“VIE”) and requires companies to more frequently assess whether they must consolidate VIEs. This new standard is effective for the Company beginning on January 1, 2010. The Company is currently assessing the impact of this new guidance on its consolidated financial statements.

Revenue Recognition

In October 2009, the FASB issued authoritative guidance for arrangements with multiple deliverables. The guidance will allow companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics. The guidance also removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance. The new guidance requires expanded qualitative and quantitative disclosures and is effective for fiscal years beginning on or after June 15, 2010. Early adoption of the guidance is permitted. The Company is currently evaluating the impact of adopting this guidance on the Company’s future consolidated financial statements.

11. Reverse Stock Split

On September 9, 2009, the Company filed an amendment to its Certificate of Incorporation (i) establishing a 1-for-12 reverse split of common stock, and (ii) reducing the number of our outstanding shares of common stock to 9,427,851. Every 12 shares of (old) common stock which were held as of September 9, 2009, the effective date, were converted into one share of (new) common stock. Share and per share amounts have been retroactively adjusted to reflect the impact of the reverse split for all periods presented.

12. Subsequent Events

Public Offering of Common Stock and Warrants

On October 6, 2009, the Company issued 2,250,000 shares of its common stock and warrants to purchase an additional 900,000 shares of common stock in an underwritten public offering at a price of $6.00 per unit. Each unit consists of one share of common stock and a warrant to purchase 0.40 of a share of common stock. The shares of common stock and warrants are immediately separable and will be issued separately. The warrants have a five-year term and an exercise price of $7.59. Net proceeds after underwriting discounts and commissions and estimated expenses, were approximately $12.3 million. The offering closed on October 9, 2009.

Tender Offer

In May 2009, the Company’s Board of Directors authorized a stock option exchange program to allow eligible employees the opportunity to exchange certain options granted under the Company’s equity incentive plans. The Company’s shareholders approved the stock option exchange program at the 2009 Annual Meeting of Shareholders on September 1, 2009, and on October 13, 2009, the Company issued a Tender Offer to all holders of eligible options. Pursuant to the Tender Offer, options to purchase common stock that have an exercise price greater than $5.01 per share are eligible for replacement options with lower exercise prices. Fifty percent

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of all exchanged options will be subject to two additional years added to the existing vesting terms. The Tender Offer is expected to expire on November 12, 2009, at which time, the exchange will be accounted for as a modification to the existing options in accordance with authoritative guidance. The incremental value to the option holders created as a result of the modification will be recognized as additional compensation expense. Assuming all eligible options are exchanged, this amount is estimated to be approximately $1.8 million and will be recognized over the modified vesting period.

Completion of Syngenta Research Collaboration

On October 28, 2009, the Company entered into an agreement with Syngenta in connection with the completion of previously defined programs under their joint research collaboration. Pursuant to the agreement, the Company gained additional exclusive rights to an array of proprietary biomolecules expressed microbially, as well as non-exclusive rights to the same biomolecules expressed through other non-plant means. As a result of this transaction, the Company will receive license fees, including royalties, for a commercial enzyme candidate that Syngenta formerly licensed to a third party. In addition, the Company obtained broad rights to several late-stage enzyme development candidates.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Except for the historical information contained herein, the following discussion, as well as the other sections of this report, contain forward-looking statements that involve risks and uncertainties. These statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement.

Forward-looking statements applicable to our business generally include statements related to:

• our estimates regarding market sizes and opportunities, as well as our future revenue, product revenue, profitability and capital requirements;

• the length of time that we will be able to fund our operations with existing cash and cash commitments and from other sources or potential sources of financing;

• our expected cash needs, our ability to manage our cash and expenses and our ability to access future financing;

• the expected benefits of our strategic partnership with BP Biofuels North America LLC (“BP”);

• our ability to continue as a going concern;

• our expected future research and development expenses, sales and marketing expenses, and selling, general and administrative expenses;

• the effects of governmental regulation and programs on our business and financial results;

• our plans regarding future research, product development, business development, commercialization, growth, independent project development, collaboration, licensing, intellectual property, regulatory and financing activities;

• our products and product candidates under development;

• investments in our core technologies and in our internal product candidates;

• the opportunities in our target markets and our ability to exploit them;

• our plans for managing the growth of our business;

• the benefits to be derived from our current and future strategic alliances;

• our anticipated revenues from collaborative agreements, grants and licenses granted to third parties and our ability to maintain our collaborative relationships with third parties;

• our ability to repay our outstanding debt (including in connection with any “make-whole” payments that may be due upon conversion of our 8% Senior Convertible Notes due April 1, 2012 (“2008 Notes”) and 9% Convertible Senior Secured Notes due April 1, 2027 (“2009 Notes”));

• the impact of dilution to our shareholders and a decline in our share price and our market capitalization from future issuances of shares of our common stock (including in connection with conversion of our convertible notes);

• our exposure to market risk;

• the impact of litigation matters on our operations and financial results; and

• the effect of critical accounting policies on our financial results.

Forward looking statements applicable to our biofuels business include statements related to:

• potential growth in the use of ethanol, including cellulosic ethanol, the economic prospects for the ethanol industry and cellulosic ethanol and the advantages of cellulosic ethanol versus ethanol and other fuel sources;

• the continued development of our pilot facility;

• the optimization of our demonstration-scale facility and our plans to prove the economic and commercial viability of our cellulosic ethanol production process in 2010;

• our expectation that production from the commercial-scale cellulosic ethanol facility that Vercipia Biofuels LLC (formerly Highlands Ethanol LLC) (“Vercipia”) is developing in Highlands, Florida will begin in 2012 and that we will break ground for that facility in 2010, and that the estimated construction cost for that facility will be approximately $300 million;

• the financing, development and construction of commercial-scale cellulosic ethanol facilities;

• our ability to use multiple non-food feedstocks to produce cellulosic ethanol;

• our expectation regarding funding amounts from the U.S. Department of Energy; and

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• the implied value of our biofuels business model.

Forward looking statements applicable to our specialty enzymes business include statements related to:

• our ability to increase or maintain our product revenue and improve or maintain product gross margins; and

• our ability to maintain good relationships with the companies with whom we contract for the manufacture of certain of the products in our specialty enzymes business.

Factors that could cause or contribute to differences include, but are not limited to, risks related to our ability to fund our operations and continue as a going concern, risks involved with our new and uncertain technologies, risks associated with our dependence on patents and proprietary rights, risks associated with our protection and enforcement of our patents and proprietary rights, our dependence on existing collaborations, our ability to enter into and/or maintain collaboration and joint venture agreements, including our strategic partnership with BP, our ability to commercialize products directly and through our collaborators, the timing of anticipated regulatory approvals and product launches, the timing of conversion of the 2008 and 2009 Notes, if any, and our ability to make any required cash “make-whole” payments due upon such conversion at that time and other risks associated with the 2008 and 2009 Notes as set forth in the section of this report entitled “Risk Factors,” and the development or availability of competitive products or technologies, as well as other risks and uncertainties set forth below and in the section of this report entitled “Risk Factors.”

Overview

We operate in two business segments, biofuels and specialty enzymes. Our biofuels business segment operates through our wholly-owned subsidiary, Verenium Biofuels Corporation and jointly-owned subsidiaries with BP, Galaxy Biofuels LLC (“Galaxy”), and Vercipia, and is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol produced from cellulosic biomass. We believe the most significant commercial opportunity for our biofuels business segment will be derived from the large-scale commercial production of cellulosic ethanol derived from multiple non-food biomass feedstocks, with our initial focus on energy canes and grasses. Our specialty enzymes segment develops high-performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes. We believe the most significant commercial opportunity for our specialty enzymes business segment will be derived from continued sales, and gross product margins from our existing portfolio of enzyme products.

Our biofuels and specialty enzymes businesses are both supported by a research and development team with expertise in gene discovery and optimization, cell engineering, bioprocess development, biochemistry and microbiology. Over the past 16 years, our research and development team has developed a proprietary technology platform that has enabled us to apply advancements in science to discovering and developing unique solutions in complex industrial or commercial applications. We have dedicated substantial resources to the development of our proprietary technologies, which include capabilities for sample collection from the world’s microbial populations, generation of DNA libraries, screening of these libraries using ultra high-throughput methods capable of analyzing more than one billion genes per day, and optimization based on our gene evolution technologies. We have continued to shift more of our resources from technology development to commercialization efforts for our existing and future technologies and products. While our technologies have the potential to serve many large markets, our primary areas of focus for product development are (i) integrated solutions for the production of advanced biofuels, such as cellulosic ethanol, and (ii) specialty enzymes for alternative fuels, specialty industrial processes, and animal nutrition and health. We have current collaborations and agreements with market leaders, such as BP, Bunge Oils, and Cargill Health and Food Technologies, each of which complement our internal technology and product development efforts.

We expect to continue to invest in these commercialization efforts, primarily in the area of biofuels. We believe this will not only benefit our mission to advance the commercialization of cellulosic ethanol within our biofuels business unit, but will also enable us to create additional enzyme market opportunities that are focused on external applications for the broader biofuels industry.

We have a substantial intellectual property estate comprising more than 260 issued patents and more than 383 pending patents as of September 30, 2009. We believe that we can leverage our intellectual property estate to enhance and improve our technology development and commercialization efforts across both business units while maintaining protection on key intellectual property assets.

Excluding our non-cash gains in the first quarter of 2009 attributed to our 2008 Notes, we have incurred net losses since our inception. For the nine months ended September 30, 2009, we had a net loss of $18.9 million, and as of September 30, 2009, we had an accumulated deficit of $632.5 million. Our results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future. We expect to incur losses into the foreseeable future as a result of any combination of one or more of the following:

• anticipated additional investments to implement our biofuels commercialization strategy, including capital expenditures related to optimization of our demonstration facility, and capital or operating costs we may incur for land acquisition, feedstock development, and design and engineering for our first commercial plants through our joint ventures with BP;

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• maintaining our sales and marketing infrastructure to support our specialty enzyme business;

• our continued investment in manufacturing facilities necessary to meet anticipated demand for our products; and

• continued research and development expenses for our internal product candidates.

Results of operations for any period may be unrelated to results of operations for any other period. In addition, we believe that our historical results are not a good indicator of our future operating results.

As more fully described in theLiquidity and Capital Resourcessection beginning on page 43, Risk Factorsbeginning on page 52 andNote 1 of theNotes to Condensed Consolidated Financial Statements beginning on page 6 of this report, our independent registered public accounting firm has included an explanatory paragraph in its report on our 2008 financial statements related to the substantial doubt in our ability to continue as a going concern. While we believe that we will be successful in raising or generating additional cash through a combination of corporate partnerships and collaborations, federal, state and local grant funding, selling or financing assets, incremental product sales and the additional sale of equity or debt securities, if we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures, restructure or significantly curtail our operations, file for bankruptcy or cease operations.

Recent Strategic Events

2008 Notes Amendment

On July 1, 2009, we entered into amendment agreements with required holders (as defined below) of our 2008 Notes to modify certain terms of the 2008 Notes. The amendments became effective on July 6, 2009. Pursuant to the terms of the 2008 Notes, the 2008 Notes may be amended and restated with the written consent of the holders representing at least 66.67% of the 2008 Notes outstanding (the “Required Holders”). As of July 1, 2009, there was approximately $29.5 million aggregate principal amount of the 2008 Notes outstanding. We entered into the amendment agreements with all but one of the noteholders, which include the holders of approximately $25.6 million or 86.8% of the 2008 Notes.

The amendment agreements provide for the following:

• lowering the conversion price from $25.56 to $20.88;

• lowering the price at which the 2008 Notes are subject to automatic conversion at the Company’s option and subject to the satisfaction of certain conditions from $98.16 to $41.76;

• clarifications for the provisions that provide for interest and make-whole payments to be made in shares of our common stock, subject to certain restrictions;

• modification of the anti-dilution protections from full ratchet to, in most cases, a version of broad-based weighted average, subject to certain limitations; and

• modification of certain covenants intended to provide us with greater flexibility to engage in certain financing and other strategic transactions, including the ability to incur indebtedness or liens, engage in restructuring transactions involving our 2007 Notes and engage in certain asset sales; and

• a relinquishment by the holders of the 2008 Notes who signed amendment agreements of certain rights and potential rights related to conversions of 2008 Notes and payments made by us with respect thereto prior to July 1, 2009.

As disclosed inNote 9of theNotes to Condensed Consolidated Financial Statements, one holder of 2008 Notes that currently holds approximately $3.2 million in aggregate principal amount is a party to a pending lawsuit against us, whereby that holder also seeks declaratory judgment that its 2008 Notes may not be amended by the Required Holders without that holder’s consent.

2009 Notes

On September 1, 2009 and September 25, 2009, we completed privately negotiated exchanges with certain existing holders of our 2007 Notes. Pursuant to the exchange agreements, certain existing holders of the 2007 Notes agreed to exchange $30.5 million in aggregate principal for the 2007 Notes, for $13.7 million in aggregate principal amount of 2009 Notes.

The 2009 Notes are secured by a first priority lien (subject to certain exceptions and permitted liens) on certain of our assets including, present and future receivables, inventory, general intangibles, equipment, investment property, stock of subsidiaries, and certain other assets and proceeds relating thereto. The collateral securing 2009 Notes is subject to certain carve-outs, cash and cash equivalents and intellectual property.

The 2009 Notes bear interest at 9% per year, payable in cash semi-annually, and commencing on October 1, 2009, are convertible at the option of the holders any time prior to maturity, redemption or repurchase into shares of our common stock at a conversion rate of 104.17 shares per $1,000 principal amount of 2009 Notes (subject to adjustment in certain circumstances), which represents a conversion price of $9.60 per share, provided that upon conversion the holders make certain certifications. A holder that

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surrenders 2009 Notes for conversion in connection with a “make-whole fundamental change” that occurs before April 5, 2012 may in certain circumstances be entitled to an increased conversion rate. In no event will the conversion price of the 2009 Notes be less than the $7.32 per share. The total common shares that would be issued assuming conversion of the entire $13.7 million in 2009 Notes is 1.4 million shares, excluding common shares to be issued for potential “make-whole” payments.

Public Offering of Common Stock and Warrants

On October 6, 2009, we issued 2,250,000 shares of our common stock and warrants to purchase an additional 900,000 shares of common stock in an underwritten public offering at a price of $6.00 per unit. Each unit consists of one share of common stock and a warrant to purchase 0.40 of a share of common stock. The shares of common stock and warrants are immediately separable and will be issued separately. The warrants have a five-year term and an exercise price of $7.59. Net proceeds after underwriting discounts and commissions and expenses, were approximately $12.3 million.

Completion of Syngenta Research Collaboration

On October 28, 2009, we entered into an agreement with Syngenta in connection with the completion of previously defined programs under our joint research collaboration. We have executed an agreement whereby we gained additional exclusive rights to an array of proprietary biomolecules expressed microbially, as well as non-exclusive rights to the same biomolecules expressed through non-plant means such as algae. As a result of this transaction we will receive license fees, including royalties, for a commercial enzyme candidate that Syngenta formerly licensed to another party. In addition, we obtained broad rights to several late-stage enzyme development candidates.

Results of Operations

Selected Segment Financial Data

Our business consists of two business units, which we refer to as our biofuels segment and our specialty enzymes segment. The biofuels segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

We assess performance and allocate resources based on discrete financial information for the biofuels and specialty enzymes segments. For the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment performance is assessed based on total revenues, product revenues, product gross profit, total operating expenses and capital expenditures. For the three and nine months ended September 30, 2009, the specialty enzyme segment comprised 100% of our product revenue and cost of product revenue. Our operating expenses for each segment include direct and allocated research and development and selling, general and administrative expenses. In management’s evaluation of performance, certain corporate operating expenses are excluded from the business segments such as: non-cash share-based compensation, restructuring charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to either business segment. In addition, we evaluate segment performance based upon capital expenditures and other assets that are specifically identified to the business segment, excluding certain corporate assets such as cash, short-term investments, and other assets that can be attributed to, or utilized by, both business segments. Expenses and assets shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment. Further, expenses allocated to each of the two segments may not be indicative of the expenses of each operating segment if such segments operated on a stand-alone basis.

Selected operating results for the three and nine months ended September 30, 2009 and 2008, and identifiable assets as of September 30, 2009 and December 31, 2008 for each of our business segments is set forth below (in thousands):

	Three Months Ended September 30, 2009								Three Months Ended September 30, 2008
	Biofuels		Specialty Enzymes		Corporate		Total		Biofuels		Specialty Enzymes		Corporate		Total
Product revenue	$	—	$	11,026	$	—	$	11,026	$	—	$	12,377	$	—	$	12,377
Collaborative and grant revenue		6,309		1,275		—		7,584		420		3,579		—		3,999
Total revenues	$	6,309	$	12,301	$	—	$	18,610	$	420	$	15,956	$	—	$	16,376
Product gross profit	$	—	$	3,748	$	—	$	3,748	$	—	$	2,808	$	—	$	2,808
Operating expenses (excluding cost of goods sold) *	$	18,080	$	3,028	$	6,854	$	27,962	$	11,490	$	9,120	$	114,511	$	135,121

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	Three Months Ended September 30, 2009											Three Months Ended September 30, 2008
	Biofuels			Specialty Enzymes		Corporate			Total			Biofuels			Specialty Enzymes			Corporate			Total
Total operating loss	$	(11,771	)	$	1,995	$	(6,854	)	$	(16,630	)	$	(11,070	)	$	(2,733	)	$	(114,511	)	$	(128,314	)
Loss attributed to noncontrolling interests in consolidated entities	$	8,705		$	—	$	—		$	8,705		$	5,000		$	—		$	—		$	5,000
Operating income (loss) attributed to Verenium	$	(3,066	)	$	1,995	$	(6,854	)	$	(7,925	)	$	(6,070	)	$	(2,733	)	$	(114,511	)	$	(123,314	)
	Nine Months Ended September 30, 2009											Nine Months Ended September 30, 2008
	Biofuels			Specialty Enzymes		Corporate			Total			Biofuels			Specialty Enzymes			Corporate			Total
Product revenue	$	—		$	32,094	$	—		$	32,094		$	—		$	36,953		$	—		$	36,953
Collaborative and grant revenue		6,548			10,650		—			17,198			844			12,117			—			12,961
Total revenues	$	6,548		$	42,744	$	—		$	49,292		$	844		$	49,070		$	—		$	49,914
Product gross profit	$	—		$	11,611	$	—		$	11,611		$	—		$	9,931		$	—		$	9,931
Operating expenses (excluding cost of goods sold) *	$	51,620		$	12,519	$	17,807		$	81,946		$	30,784		$	25,979		$	126,887		$	183,650
Total operating loss	$	(45,072	)	$	9,742	$	(17,807	)	$	(53,137	)	$	(29,940	)	$	(3,931	)	$	(126,887	)	$	(160,758	)
Loss attributed to noncontrolling interests in consolidated entities	$	25,500		$	—	$	—		$	25,500		$	5,000		$	—		$	—		$	5,000
Operating income (loss) attributed to Verenium	$	(19,572	)	$	9,742	$	(17,807	)	$	(27,637	)	$	(24,940	)	$	(3,931	)	$	(126,887	)	$	(155,758	)
Capital expenditures	$	3,089		$	—	$	—		$	3,089		$	42,311		$	2,082		$	1,901		$	46,294

* Corporate operating expenses include approximately $106.1 million in a non-cash goodwill impairment charge in 2008.

Identifiable assets by operating segment are set forth below (in thousands):

	As of September 30, 2009
	Biofuels		Specialty Enzymes		Corporate		Total
Property, plant and equipment, net	$	104,897	$	2,763	$	2,642	$	110,302
Cash and other assets (1)		8,674		21,967		20,524		51,165
Total identifiable assets	$	113,571	$	24,730	$	23,166	$	161,467

(1) As of September 30, 2009, Biofuels cash and other assets includes $6.4 million of Vercipia cash and cash equivalents which is limited to Vercipia operations.

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	As of December 31, 2008
	Biofuels		Specialty Enzymes		Corporate		Total
Property, plant and equipment, net	$	109,030	$	3,502	$	4,739	$	117,271
Cash and other assets		702		21,142		14,508		36,352
Total identifiable assets	$	109,732	$	24,644	$	19,247	$	153,623

Consolidated Results of Operations

Revenues

Revenues for the periods ended September 30, 2009 and 2008 are as follows (in thousands):

	Three Months Ended September 30,				% Change		Nine Months Ended September 30,				% Change
	2009		2008				2009		2008
Revenues:
Phyzyme phytase	$	7,919	$	9,902	(20	)%	$	23,846	$	27,819	(14	)%
All other products		3,107		2,475	26	%		8,248		9,134	(10	)%
Total product		11,026		12,377	(11	)%		32,094		36,953	(13	)%
Collaborative		972		2,828	(66	)%		3,554		10,244	(65	)%
Grant		6,612		1,171	465	%		13,644		2,717	402	%
Total revenues	$	18,610	$	16,376	14	%	$	49,292	$	49,914	(1	)%

Revenues increased 14%, or $2.2 million, to $18.6 million for the three months ended September 30, 2009 and decreased 1%, or $0.6 million, to $49.3 million for the nine months ended September 30, 2009. For the three and nine months ended September 30, 2009, our revenue mix continued to shift to a larger percentage of product and grant revenues, consistent with our strategy to grow product sales and biofuels projects, and de-emphasize collaborations that are not core to our strategic market focus. Product and grant revenues represented 95% and 93% of total revenues for the three and nine months ended September 30, 2009, as compared to 83% and 79% for the three and nine months ended September 30, 2008.

Product revenues decreased $1.4 million, or 11%, for the three months ended September 30, 2009 and $4.9 million, or 13%, for the nine months ended September 30, 2009 as compared to the same periods in 2008. This decrease is attributed primarily to the following factors:

• While gross shipments of Phyzyme for the three and six months ended September 30, 2009 remained at levels comparable to 2008, our reported net Phyzyme revenue was lower than our reported net revenue in the same periods of the prior year. This is attributed to a larger percentage of Phyzyme sales manufactured by Genencor, a subsidiary of Danisco, for which we recognize only the profit share component of Phyzyme sales, in accordance with current accounting rules. Due to capacity constraints during late 2008, we contracted with Genencor to serve as a second-source manufacturer of Phyzyme. Pursuant to current accounting rules, we recognize revenue from Phyzyme that is manufactured by Genencor in an amount equal to the net profit share received from Danisco, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic.

• We discontinued two of our product lines, Bayovac-SRS and Quantum, during early 2008.

Revenues from Phyzyme represented approximately 72% and 74% of total product revenues for the three and nine months ended September 30, 2009 as compared to 80% and 75% for the three and nine months ended September 30, 2008. We expect that Phyzyme will continue to represent a significant percentage of our total product revenues in the foreseeable future.

Given the worldwide recession, we cannot be certain that demand for our enzyme products and resulting sales will meet expectations. In particular:

• Following a year of substantial growth in revenues and related market share of our Phyzyme enzyme, we and our partner, Danisco, have seen a softening in the phytase animal feed market attributed to a recessionary decline in consumer consumption of protein and financial distress in the poultry industry, which have negatively impact demand for feed and thus our enzyme.

• Demand for Fuelzyme has continued to be impacted by challenges in the corn ethanol industry, which has seen significant distress over the last year due to high corn prices and low ethanol prices. There have been several well-publicized bankruptcies, including two of the largest producers of corn ethanol in the U.S. operating rates in the industry are significantly reduced, which negatively impacts demand for enzymes.

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• One of our prime initial targets for Purifine is the soybean oil processing market in Latin America, which has suffered drought, political upheaval over taxes on soybeans, and overall challenging market conditions since early 2008. As a result, adoption of Purifine in the region has been delayed, thus Purifine revenue is below expectations. Though we anticipate a ramp-up in Purifine revenues, it will be slower than initially expected.

We experienced a decline in our product revenue during the three and nine months ended September 30, 2009 compared to 2008 due in part to all of these factors.

Grant revenue increased 465%, or $5.4 million, to $6.6 million for the three months ended September 30, 2009 and 402%, or $10.9 million, to $13.6 million for the nine months ended September 30, 2009. The increase in grant revenue was primarily attributable to various new grants awarded during late 2008 and early 2009 from the Department of Energy to further optimize our demonstration-scale facility. We continue to pursue additional opportunities to secure federal, state or local agency funding to support our biofuels initiatives. As of September 30, 2009, we have committed funding from various governmental agencies totaling $21.3 million through 2012, and expect to continue to see an increase in grant revenue during 2009 as compared to 2008.

Collaborative revenue decreased 66%, or $1.9 million, to $1.0 million for the three months ended September 30, 2009 and 65%, or $6.7 million, to $3.6 million for the nine months ended September 30, 2009. We have continued to de-emphasize collaborations that are not core to our current focus in favor of greater emphasis on sales of products and biofuels projects. We anticipate that collaborative revenue will continue to decrease in 2009 as compared to 2008, due in large part to this de-emphasis of non-strategic collaborations and decrease in revenue related to the expected wind-down of projects with existing strategic collaborators such as Syngenta, and BASF. For example, under the terms of our 10-year agreement with Syngenta, our two-year funding period totaling $8 million per year expired on December 31, 2008.

On October 28, 2009, we completed previously defined programs under our joint research collaboration with Syngenta. In connection with the completion of those programs, the parties have executed an agreement whereby we gained additional exclusive rights to an array of proprietary biomolecules expressed microbially, as well as non-exclusive rights to the same biomolecules expressed through non-plant means such as algae, further bolstering its strong specialty enzymes product pipeline.

We will continue to pursue opportunities to expand, renew, or enter into new collaborations that we believe fit our strategic focus and represent product commercialization opportunities in the future; however, there can be no assurance that we will be successful in renewing or expanding existing collaborations, or securing new collaboration partners.

Our revenues have historically fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the adoption rates of our new and existing commercial products, timing and composition of funding under existing and future collaboration agreements, timing and amount of funding under government grants, as well as regulatory approval timelines for new products. We anticipate that our revenue mix will continue to shift toward a higher percentage of product and grant revenue.

Product Gross Margin

Product gross margin for the periods ended September 30, 2009 and 2008 are as follows (in thousands):

	Three Months Ended September 30,				% Change		Nine Months Ended September 30,				% Change
	2009		2008				2009		2008
Product revenue	$	11,026	$	12,377	(11	)%	$	32,094	$	36,953	(13	)%
Cost of product revenue		7,278		9,569	(24	)%		20,483		27,022	(24	)%
Product gross margin		3,748		2,808	34	%		11,611		9,931	17	%

Cost of product revenue includes both fixed and variable costs, including materials and supplies, labor, facilities, royalties and other overhead costs, associated with our product revenues. Excluded from cost of product revenue are costs associated with the scale-up of manufacturing processes for new products that have not reached commercial-scale production volumes, which we include in our research and development expenses. Cost of product revenue decreased $2.3 million, or 24%, to $7.3 million for the three months ended September 30, 2009 and decreased $6.5 million, or 24%, to $20.5 million for the nine months ended September 30, 2009. This decrease resulted primarily from the change in production for our Phyzyme product revenue and related cost manufactured by Genencor as described below and lower capacity utilization at Fermic as a result of the decrease in product revenue described above.

We manufacture most of our enzyme products through a manufacturing facility in Mexico City, owned by Fermic S.A., or Fermic. We also have contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. As discussed above, we recognize revenue from Phyzyme that is manufactured by Genencor in an amount equal to the net profit share received from Danisco, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment has little or no negative impact on the gross margin in absolute dollars we recognize for every sale of Phyzyme, it does have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.

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Product gross margin totaled $3.7 million, or 34% of product revenue for the three months ended September 30, 2009 compared to $2.8 million, or 23% of product revenue for the three months ended September 30, 2008, and $11.6 million, or 36% of product revenue, for the nine months ended September 30, 2009 compared to $9.9 million, or 27% of product revenue for the comparable period in 2008. Gross margin percentage improvement for the three and nine months ended September 30, 2009 reflects various factors, specifically:

• Due to our manufacturing arrangement with Genencor to serve as a second-source manufacturer for Phyzyme as previously described, we record revenue and costs related to Phyzyme that Genencor manufactures on a net basis versus a gross basis. This had no impact on the absolute value of our gross margin, but resulted in an increase to the gross margin percentage reported for the nine months ended September 30, 2009.

• During the nine months ended September 30, 2008, gross margin percentage was lower due to (i) inventory losses related to contamination issues in our Phyzyme enzyme manufacturing process; and (ii) incremental zero-margin freight revenue and related costs incurred to meet customer ship dates. Both of these factors negatively impacted gross profit and resulted in a lower gross margin in 2008.

For the reasons described above, we believe that product gross margin dollars is a better indication of performance than product gross margin percentage.

Because a large percentage of our manufacturing costs are fixed, our gross margin may be negatively impacted in the future if our product revenues decrease or if they do not grow in line with our increase in minimum capacity requirements at Fermic. Our gross margins are also dependent upon the mix of product-related sales as the cost of product-related revenue varies from product to product.

In addition, because Phyzyme represents a significant percentage of our product revenue, our product gross margin is impacted to a great degree by the gross margin achieved on sales of Phyzyme. Under our manufacturing and sales agreement with Danisco, we sell our Phyzyme inventory to Danisco at our cost and then, under a license agreement, share 50% of Danisco’s profit, as defined, when the product is sold to Danisco’s customer. As a result, our total cost of product revenue for Phyzyme is incurred as we ship product to Danisco, and profit share revenue is recognized in the period in which the product is sold to Danisco’s customer as reported to us by Danisco. We may record our quarterly profit share revenue based on estimates from Danisco, and the final calculation of profit share is sometimes finalized in the subsequent quarter; accordingly, we are subject to potential adjustments to our actual profit share revenue from quarter-to-quarter. These adjustments, while typically considered immaterial in absolute dollars, could have a significant impact on our reported product gross margin from quarter-to-quarter.

In addition, our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume manufacturing rights for Phyzyme. If Danisco decides to exercise this right, we will likely experience excess capacity at Fermic. If we are unable to absorb this excess capacity with other products in the event that Danisco assumes all or a portion of Phyzyme manufacturing rights, this may have a negative impact on our revenues and our product gross margin.

Operating Expenses

Research and development and selling, general and administrative expenses for the periods ended September 30, 2009 and 2008 are as follows (in thousands):

	Three Months Ended September 30,				% Change		Nine Months Ended September 30,				% Change
	2009		2008				2009		2008
Research and development	$	16,514	$	15,267	8	%	$	50,461	$	45,048	12	%
Selling, general and administrative expenses	$	11,448	$	13,720	(17	)%	$	31,485	$	32,468	(3	)%

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Our operating expenses excluding cost of product revenue for the three and nine months ended September 30, 2009 decreased 4% due to the decrease in consulting and advisory expenses related to the first phase of our collaboration with BP and Galaxy and increased 6% compared to the prior comparable period in 2008, related primarily to the acceleration of biofuels development efforts for our first commercial plant , which BP partially funds through our Vercipia joint venture, offset by cost minimization efforts during 2009.

Research and Development

Research and development expenses consist primarily of costs associated with development of our technologies and our product candidates, including costs associated with our pilot and demonstration–scale cellulosic ethanol facilities, manufacturing scale-up and bioprocess development for our current products, and costs associated with research activities performed on behalf of our collaborators.

For the three and nine months ended September 30, 2009, we estimate that approximately 48% and 42% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that approximately 52% and 58% were spent on research activities funded in whole or in part by our collaborators. For the three and nine months ended September 30, 2008, we estimate that approximately 73% and 72% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that approximately 27% and 28% were spent on research activities funded by our collaborations and grants. The increase in percentage of time spent on funded product and technology development from the prior year is primarily attributed to our focus on cellulosic ethanol process development, which is partially funded by BP through our Galaxy joint venture.

We have a limited history of developing commercial products and technologies. We determine which products and technologies to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization. Successful products and technologies require significant development and investment prior to regulatory approval and commercialization. As a result of the significant risks and uncertainties involved in developing and commercializing such products, we are unable to estimate the nature, timing, and cost of the efforts necessary to complete each of our major projects. These risks and uncertainties include, but are not limited to, the following:

• Our products and technologies may require more resources than we anticipate if we are technically unsuccessful in initial development or commercialization efforts;

• The outcome of research is unknown until each stage of testing is completed, up through and including trials and regulatory approvals, if needed;

• It can take many years from the initial decision to perform research through development until products and technologies, if any, are ultimately marketed; and

• We have product candidates and technologies in various stages of development related to collaborations and grants as well as internally developed products and technologies. At any time, we may modify our strategy and pursue additional collaborations for the development and commercialization of some products and technologies that we had intended to pursue independently. For example, in 2008 we entered into a joint collaboration with BP to co-fund the advancement and validation of our cellulosic ethanol process technology, which had previously been largely self-funded.

Any one of these risks and uncertainties could have a significant impact on the nature, timing, and costs to complete our product and technology development efforts. Accordingly, we are unable to predict which potential commercialization candidates we may proceed with, the time and costs to complete development, and ultimately whether we will have any products or technologies approved by the appropriate regulatory bodies. The various risks associated with our research and development activities are discussed more fully in this report under“Risk Factors.”

Our research and development expenses increased $1.2 million to $16.5 million (including share-based compensation of $0.3 million) for the three months ended September 30, 2009, and increased $5.4 million to $50.5 million (including share-based compensation of $2.1 million) for the nine months ended September 30, 2009 compared to $15.3 million and $45.0 million (including share-based compensation of $1.0 million and $3.5 million) for the comparable periods in 2008. Our research and development expenses by operating segment for the three and nine months ended September 30, 2009 and 2008 were as follows (in thousands):

	Three Months Ended September 30,				% Change		Nine Months Ended September 30,				% Change
	2009		2008				2009		2008
Biofuels	$	15,232	$	8,978	70	%	$	45,392	$	24,277	87	%
Specialty Enzymes		1,282		6,289	(80	)%		5,069		20,771	(76	)%
	$	16,514	$	15,267	8	%	$	50,461	$	45,048	12	%

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Biofuels Research and Development

Research and development expenses related to our biofuels business include costs related to our ongoing development and validation of our cellulosic ethanol process technology, including, but not limited to, enzyme discovery and development and bioprocess development designed to improve ethanol yields and reduce cost-per-gallon, feedstock testing and validation at the laboratory, pilot- and demonstration-plant scale, as well as costs related to commissioning, optimization and operation of our demonstration-scale facility in Jennings, Louisiana. During 2008, costs related to our ligno-cellulosic programs which were partially funded by Syngenta, were included in Specialty Enzymes research and development. In 2009, we have categorized these costs in our Biofuels segment.

Our biofuels research and development expenses increased $6.3 million and $21.1 million for the three and nine months ended September 30, 2009 from $9.0 million and $24.3 million for the comparable periods in 2008. This increase is related to acceleration of our biofuels technology development efforts during 2008, which has continued in 2009, particularly related to our demonstration-scale facility commissioning and optimization at our site in Jennings, Louisiana, which BP has substantially funded through our Galaxy joint venture, as well as our commercialization efforts through the Vercipia entity. As described in more detail below, our gross research and development costs related to Galaxy and Vercipia are included in “Research and development” on our Condensed Consolidated Statements of Operations, with BP’s cost reimbursement to us included in “Loss attributed to noncontrolling interests in consolidated entities.”

We consider our current cellulosic ethanol technology under development to be our “Generation 1” or “Gen 1” technology. To date, we have demonstrated that our Gen 1 technology can produce cellulosic ethanol at a small scale in the laboratory, pilot plant, and demonstration-scale facility, but at yields and cost that are not yet commercially viable. We will require continued and substantial investment to further develop our Gen 1 technology, and continue to believe that Gen 1 will produce a viable technology that could be deployed on a commercial scale as early as 2012. Our first commercial plant is scheduled to break ground in 2010.

Specialty Enzymes Research and Development

Research and development expenses related to our specialty enzyme business include costs related to ongoing bioprocess development and manufacturing process yield improvements, funded support for research collaborations and to a lesser extent, early stage product development.

Due to limited capital resources and challenging economic conditions, we are not spending significant resources on early stage specialty enzyme product development during 2009 without additional investment from strategic partners.

Our specialty enzymes research and development expenses decreased $5.0 million and $15.7 million for the three and nine months ended September 30, 2009. This decrease is related primarily to our shift in focus to biofuels process development and, to a lesser extent, the de-emphasis of early stage product development for our specialty enzyme business segment and collaboration and grant work not core to our current focus.

Selling, General and Administrative Expenses (in thousands)

	Three Months Ended September 30,				% Change		Nine Months Ended September 30,				% Change
	2009		2008				2009		2008
Selling, general and administrative	$	11,448	$	13,720	(17	)%	$	31,485	$	32,468	(3	)%

Selling, general and administrative expenses decreased $2.3 million, or 17%, to $11.5 million (including share-based compensation of $0.9 million) for the three months ended September 30, 2009 and decreased $1.0 million, or 3%, to $31.5 million (including share-based compensation of $4.3 million) for the nine months ended September 30, 2009. Excluding the impact of share-based compensation, selling, general and administrative expenses decreased $1.0 million and increased $0.7 million for the three and nine months ended September 30, 2009 as compared to the same period in 2008. The decrease during the three months ended September 30, 2009 compared to the same period in the prior year was primarily due to the decrease in consulting and advisory expenses related to the first phase of our collaboration with BP, Galaxy, in August 2008, partially offset by the biofuels development efforts for our first commercial plant, which BP partially funds through our Vercipia joint venture, offset by cost minimization efforts in 2009.

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Share-Based Compensation Charges

We recognized $1.2 million, or $0.14 per share, and $6.4 million, or $0.85 per share, in share-based compensation expense for our share-based awards during the three months and nine months ended September 30, 2009 and $3.2 million, or $0.59 per share, and $9.4 million, or $1.79 per share, during the three months and nine months ended September 30, 2008. These charges had no impact on our reported cash flows. Share-based compensation expense was allocated among the following expense categories (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Research and development	$	303	$	1,019	$	2,073	$	3,491
Selling, general and administrative		946		2,228		4,281		5,939
	$	1,249	$	3,247	$	6,354	$	9,430

During the third quarter of 2009, the Board of Directors approved to accelerate the vesting of all non-officer employee Restricted Stock Awards outstanding. This resulted in additional compensation expense during the quarter of approximately $0.3 million.

Our net share-based compensation charges decreased primarily because of the suspension of our employee stock purchase plan during the first quarter of 2009 and an overall decrease in equity awards granted since our merger with Celunol Corp in 2007.

Goodwill Impairment

During the third quarter of 2008, we determined that the market value of our common stock and convertible debt was not adequate at September 30, 2008 to support the carrying value of our goodwill resulting from the June 2007 merger between Diversa and Celunol. As a result, pursuant to authoritative accounting guidance, we recorded a non-cash charge of $106.1 million during the quarter ended September 30, 2008, representing full impairment of the carrying value of our goodwill. We believe that this impairment is reflective primarily of current market conditions, and is not indicative of a change in our business or implied value of our underlying biofuels business model aimed toward the commercialization of cellulosic ethanol.

Interest and expense, net

Interest income on cash and cash equivalents decreased to less than $0.1 million for the three and nine months ended September 30, 2009 compared to $0.2 million and $0.8 million for the three and nine months ended September 30, 2008. The decrease was attributed to lower average cash and investment balances.

Interest expense was $2.6 million for the three months ended September 30, 2009 compared to $2.5 million for the three months ended September 30, 2008, net of $1.8 million in capitalized interest for the demonstration facility. Our demonstration-scale facility was placed in service in February 2009, and as such, we ceased capitalizing interest on that date. Interest expense was $9.1 million, net of $1.0 million in capitalized interest for the demonstration facility, for the nine months ended September 30, 2009 compared to $7.3 million for the nine months ended September 30, 2008, net of $4.3 million in capitalized interest for the demonstration facility. The increase in interest expense from the comparable periods in 2008 was primarily attributed to the decrease in capitalized interest partially offset by the decrease in 2008 Notes principal outstanding from conversions. We recorded aggregate interest expense related to the 2008 Notes of $1.0 million and $5.1 million for the three and nine months ended September 30, 2009 compared to $2.6 million and $6.3 million for the three and nine months ended September 30, 2008. Total interest expense comprised of the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
5.5% coupon interest, payable in cash	$	1,230		$	1,396		$	3,953		$	4,347
Non-cash amortization of debt issuance costs		218			222			682			687
2007 Notes Total		1,448			1,618			4,635			5,034
8% coupon interest, payable in cash or common stock		407			1,301			2,249			3,233
Non-cash accretion of debt discount		534			1,176			2,623			2,796
Non-cash amortization of debt issuance costs		51			132			225			306
2008 Notes Total		992			2,609			5,097			6,335
9% coupon interest, payable in cash or common stock		103			—			103			—
Non-cash amortization of debt premium		(32	)		—			(32	)		—
2009 Notes Total		71			—			71			—
Equipment financing		3			32			26			129
Other		88			14			299			77
Capitalized interest		—			(1,765	)		(1,039	)		(4,313	)
Total interest expense	$	2,602		$	2,508		$	9,089		$	7,262

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Loss on Exchange of Convertible Notes

In connection with the issuance of the 2008 Notes, we exchanged $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes. Pursuant to authoritative guidance, we recorded a non-cash loss on the exchange of $3.6 million, equal to the difference between the carrying value of the 2007 Notes and the fair value of the 2008 Notes and warrants issued.

Gain on Amendment of 2008 Notes

In connection with the amendment of the 2008 Notes, the 2008 Notes conversion price was reduced from $25.56 to $20.88 and the anti-dilution protection included in the 2008 Notes was changed from full ratchet anti-dilution protection to, in most cases, a version of broad-based weighted average anti-dilution protection, subject to certain limitations. Pursuant to authoritative guidance, we determined that the amendment qualified as a liability extinguishment, and recorded a gain on the amendment of $4.0 million, equal to the difference between the fair value of the 2008 Notes compound embedded derivative before and after the amendment.

Gain (Loss) on Net Change in Fair Value of Derivative Assets and Liabilities

The fair value of the 2008 Notes compound embedded derivative, warrants, the convertible hedge transaction in connection with our 2008 Notes and 2009 Notes compound embedded derivative are recorded as a derivative asset or liability and marked-to-market each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of Operations as “Gain (loss) on net change in fair value of derivative assets and liabilities.” We recorded a net gain of $1.7 million and $5.1 million for the three and nine months ended September 30, 2009 compared to a net loss of $0.4 million and a net gain of $1.3 million for the three and nine months ended September 30, 2008 related to the change in fair value of our recorded derivative asset and liabilities.

Gain (loss) on Debt Extinguishment Upon Conversion of Convertible Debt

During the three and nine months ended September 30, 2009, we recorded a gain on debt extinguishment of $2.5 million and $8.6 million, calculated as the difference between the carrying value of the converted 2008 Notes and the fair value of the shares of common stock delivered to the noteholders upon conversion. The carrying value of the converted 2008 Notes for the three and nine months ended September 30, 2009 was equal to the $13.3 million and $42.7 million of principal less the unamortized debt discount and issuance costs, which totaled $10.0 million and $31.9 million, as of the conversion date. During the three and nine months ended September 30, 2009, we issued a total of 1.0 million and 3.6 million shares with a total market value as of the dates of conversion of $7.5 million and $23.3 million to settle the 2008 Notes and “make-whole” payments.

Loss Attributed to Noncontrolling Interests in Consolidated Entities

In connection with the initial phase of our strategic partnership with BP, we formed Galaxy as a special purpose entity. We are considered the primary beneficiary of Galaxy and consolidate its financial results. Pursuant to current accounting rules, the transaction fees and joint development fees are accounted for as follows:

• The license to technology we granted to Galaxy and ongoing joint development work we perform for Galaxy are accounted for as capital contributions to Galaxy;

• Transaction fees and joint development fees paid by BP are accounted for as capital contributions to Galaxy, which are subsequently distributed to us as a reduction to our capital account;

• Ongoing joint development fees are accounted for as a monthly expense of Galaxy.

In connection with the second phase of our strategic partnership with BP, we hold a 50% interest in Vercipia, a special purpose entity. We are considered the primary beneficiary of Vercipia and consolidate its financial results. Pursuant to current accounting rules, the ongoing joint development is considered a monthly expense of Vercipia. All contributions are contributed directly into Vercipia.

As a result, our consolidated financial statements include a line item called “Noncontrolling interests in consolidated entities.” On our Condensed Consolidated Balance Sheets, this line reflects BP’s ownership of Galaxy’s and Vercipia’s equity. This line item is reduced by BP’s 50% share of Galaxy’s and Vercipia’s losses, and increased by cash contributions made by BP. BP’s share of losses is reflected in our Condensed Consolidated Statements of Operations as “Loss attributed to noncontrolling interests in consolidated entities.” Galaxy and Vercipia have incurred losses through September 30, 2009, 50% of which have been allocated to BP, and we anticipate these entities will continue to incur losses related to ongoing joint development through at least the initial joint development program and construction processes.

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Liquidity and Capital Resources

Since inception, we have financed our business primarily through the sale of common and preferred stock, funding from strategic partners and government grants, the issuance of convertible debt, and product sales. As of September 30, 2009 our strategic partners, most recently including BP, have provided us with more than $365 million in funding since inception, including $21.4 million from various government agencies, and are committed to additional funding of approximately $29 million through 2012, subject to our performance under existing agreements, excluding milestone payments, license and commercialization fees, and royalties or profit sharing. Our committed funding includes $10.5 million from our Vercipia joint venture with BP, announced in February 2009, $3.0 million of which was paid on October 1, 2009. Vercipia operates as a separate commercial entity, with the $10.5 million BP funding used solely for this entity.

Our future committed funding is subject to our performance under existing agreements, and is concentrated within a limited number of collaborators. Our failure to successfully maintain our relationships with these collaborators could have a material adverse impact on our operating results and financial condition.

Capital Requirements

As of September 30, 2009, we had available cash and cash equivalents of approximately $21.0 million, including approximately $6.4 million which relates to Vercipia and is to be used solely for its operations. Historically, we have funded our capital requirements through available cash, issuances of debt and equity, product, collaboration and grant revenue, capital leases and equipment financing line of credit agreements. Since March 2007, we have raised approximately $158.8 million in net cash proceeds from convertible debt issuances to fund our cellulosic ethanol pilot and demonstration-scale facilities and other working capital requirements. As of September 30, 2009, we had an accumulated deficit of $632.5 million.

We will require additional capital to fund our operations. Our independent registered public accounting firm has included an explanatory paragraph in its report on our 2008 financial statements related to the substantial doubt in our ability to continue as a going concern. Our cash at September 30, 2009, along with anticipated cash from grants, revenue, our commitment from BP and other sources may not be sufficient to meet cash requirements to fund our operating expenses, capital expenditures, required and potential payments under our 2007 Notes, 2008 Notes and 2009 Notes, and working capital requirements through 2010 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures.

We are dependent upon BP’s financial and technical contributions our joint ventures in order to realize the benefits of the strategic partnership with BP. The efforts under the first phase of our partnership have been co-funded by BP under an 18-month initial agreement that expires on January 31, 2010. We and BP are currently in discussions to extend this partnership beyond its initial 18-month term. If BP were to discontinue its participation, we would need to continue the efforts on our own or identify and enter into arrangements with one or more other partners. If we were to have to fund all of the technology development efforts, we would need to raise additional funds to do so, which may be difficult in the current financing environment. Alternatively, it may be difficult for us to find a different partner that is a good strategic fit and to enter into a new strategic relationship on terms that are favorable to us.

We will also need to raise sufficient capital to fund the construction of our first commercial cellulosic ethanol plant to be located in Highlands County, Florida. We recently entered into a joint venture with BP intended to advance the design and engineering of the commercial facility, and we expect to break ground on this facility in 2010. We estimate that the total costs of construction for this first commercial plant will be approximately $300 million, which we anticipate will be funded from a combination of non-recourse debt and equity capital. We and BP recently filed a joint application for a Department of Energy (“DOE”) loan guarantee program. On June 25, 2009, we announced our application had been selected by the DOE to enter the due diligence phase of its Title XVII Loan Guarantee Program. If awarded, funding from this program could cover as much as 80% of the total cost of construction of the project, although we expect this program would fund 60% to 70% of the cost of construction, if awarded. We expect the remaining 30% to 40% to be funded by equal project equity investments from BP and us. This may require us to raise project financing of up to $60 million in addition to the cash required to fund our ongoing operations.

We believe that we will be successful in generating additional cash to fund our operations through a combination of additional corporate partnerships and collaborations, federal, state and local grant funding, incremental product sales, selling or financing assets, and, if necessary and available, the sale of equity or debt securities. If we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures.

There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are not able to defer, reduce or eliminate our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may need to restructure or significantly curtail our operations, divest all or a portion of our business, file for bankruptcy or cease operations.

2007 Convertible Notes Offering

In March and April 2007 we completed an offering of $120 million aggregate principal amount of the 2007 Notes in a private placement, generating net cash proceeds to us of approximately $114.8 million. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of the common stock issuable upon conversion of the 2007 Notes. As more fully described below, $18.5 million and $28.5 million in face value of the 2007 Notes were exchanged for new debt pursuant to the issuance of our 2008 Notes in February 2008 and 2009 Notes in September 2009. As of September 30, 2009, we had $69.0 million in face value outstanding under the 2007 Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at the option of the holders at any time prior to maturity, redemption or repurchase into shares of our common stock at a conversion rate of 13.02 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain circumstances), which represents a conversion price of $76.80 per share. In connection with the 2007 Notes offering, we paid $5.2 million in financing charges, which is reflected in other long term assets on the accompanying Condensed Consolidated Balance Sheets, and is being amortized to interest expense over the initial five-year term of the 2007 Notes using the effective interest method.

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2008 Convertible Notes Offering

On February 27, 2008, we completed a private placement of our 2008 Notes and warrants to purchase our common stock. Concurrent with entering into the purchase agreement, we also entered into senior notes exchange agreements with certain existing holders of our 2007 Notes pursuant to which such noteholders exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008 Notes issued in exchange for the 2007 Notes, we issued $71 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 0.7 million shares of our common stock. Gross proceeds from new investments were approximately $54 million and net proceeds from new investments, after giving effect to payment of certain transaction-related expenses and the cash cost of the convertible hedge transaction described below, were approximately $44 million. On July 1, 2009, we entered into agreements to amend the 2008 Notes, which amendment became effective on July 6, 2009.

In connection with the amendment, the conversion price for the 2008 Notes was reduced from $25.56 to $20.88 and the anti-dilution protection included in the 2008 Notes was changed from full ratchet anti-dilution protection to, in most cases, a version of broad-based weighted average anti-dilution protection, subject to certain limitations. In addition, the 2008 Notes are subject to automatic conversion at our option if our closing stock price exceeds $41.76 (formerly $98.16 prior to the amendment) per share over a 30-trading day period ending prior to the date we provide notice of the automatic conversion to investors, the average daily trading volume of our stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are met.

We are required to pay interest on the 2008 Notes at the rate of 8% per year, and the 2008 Notes also include a “make-whole” provision whereby, upon any holder’s conversion of the 2008 Notes for common stock, we are obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that we may pay interest or “make-whole” amounts with shares of our common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion, subject to the satisfaction of certain conditions. As of September 30, 2009, our potential maximum remaining “make-whole” obligation assuming conversion of 100% of the 2008 Notes on that date was approximately $3.5 million.

Since inception through September 30, 2009, holders of the 2008 Notes had converted principal in the amount of $54.8 million into approximately 3.9 million shares of our stock, including approximately 1.9 million shares to satisfy a portion of the related “make-whole” obligations.

During 2008, we used the net proceeds from the sale of our 2008 Notes and warrants for general corporate and working capital purposes, including the completion of construction and commissioning of our cellulosic ethanol demonstration facility.

2009 Convertible Notes Exchange

On August 28, 2009 and September 23, 2009, we completed privately negotiated exchanges with certain existing holders of our 2007 Notes. Pursuant to the exchange agreements, certain existing holders of the 2007 Notes agreed to exchange $30.5 million in aggregate principal for the 2007 Notes, for $13.7 million in aggregate principal amount of 2009 Notes.

The 2009 Notes are secured by a first priority lien (subject to certain exceptions and permitted liens) on certain of our assets including, subject to certain limitations, present and future receivables, inventory, general intangibles, equipment, investment property, stock of subsidiaries, and certain other assets and proceeds relating thereto. The collateral securing 2009 Notes is subject to certain carve-outs, including without limitation, cash and cash equivalents and intellectual property.

The 2009 Notes bear interest at 9% per year, payable in cash semi-annually, and commencing on October 1, 2009 are convertible at the option of the holders any time prior to maturity, redemption or repurchase into shares of our common stock at a conversion rate of 104.17 shares per $1,000 principal amount of 2009 Notes (subject to adjustment in certain circumstances), which represents a conversion price of $9.60 per share, provided that upon conversion the holders make certain certifications. A holder that surrenders 2009 Notes for conversion in connection with a “make-whole fundamental change” that occurs before April 5, 2012 may in certain circumstances be entitled to an increased conversion rate. In no event will the conversion price of the 2009 Notes be less than $7.32 per share. The total common shares that would be issued assuming conversion of the entire $13.7 million in 2009 Notes is 1.4 million shares.

On or after April 5, 2012, we may, at our option, redeem the 2009 Notes, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the 2009 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require us to purchase all or a portion of their 2009 Notes at a purchase price in cash equal to 100% of the principal amount of the 2009 Notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require us to repurchase all or a portion of their 2009 Notes upon a “fundamental change” at a

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repurchase price in cash equal to 100% of the principal amount of 2009 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date. Pursuant to the terms of the 2009 Notes, a “fundamental change” is broadly defined as 1) a change in control, or 2) a termination of trading of our common stock.

Periodic interest payments on the 2009 Notes are approximately $0.6 million every six months, assuming an outstanding balance of $13.7 million, payable on April 1 and October 1, of each year, with the first payment due April 1, 2010. Subject to the satisfaction of certain conditions, we may pay interest amounts with shares of common stock at a 5% discount to the applicable stock price at the time of the interest payment.

The following table summarizes our principal and interest obligations for the 2007, 2008 and 2009 Notes as of September 30, 2009, assuming such obligations are not converted prior to maturity (in thousands):

			Payments due by Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
2007 Notes (1)	$	137,376	$	3,797	$	7,594	$	7,594	$	118,391
2008 Notes (2)		19,765		1,296		18,469		—		—
2009 Notes (3)		35,295		617		2,467		2,467		29,744
Total Principal and Interest Obligations	$	192,436	$	5,710	$	28,530	$	10,061	$	148,135

(1) The holders of the 2007 Notes have the right to require us to purchase the 2007 Notes for cash (including any accrued and unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022.

(2) Total obligations under the 2008 Notes include approximately $3.6 million (including $1.3 million due within one year) in interest through maturity of the 2008 Notes. Interest payments on the 2008 Notes may be made, at our option and subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at a 5% discount to the average of the volume weighted stock price during a measurement period prior to the applicable interest payment date.

(3) The holders of the 2009 Notes have the right to require us to purchase the 2009 Notes for cash (including any accrued and unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022. Total obligations under the 2009 Notes include approximately $21.6 million (including $0.6 million due within one year) in interest through maturity of the 2009 Notes. Interest payments on the 2009 Notes may be made, at our option and subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at the greater of the applicable conversion price in effect, which was $9.60 as of September 30, 2009, or the average of the volume weighted stock price during a measurement period prior to the applicable interest payment date.

Balance Sheet

Our consolidated assets have increased by $7.8 million, to $161.5 million at September 30, 2009 from $153.6 million at December 31, 2008, attributable primarily to the increase in cash from payments received under our collaboration with BP.

Our consolidated liabilities have decreased by $37.9 million, to $143.4 million at September 30, 2009 from $181.3 million at December 31, 2008, primarily attributable to a decrease in our carrying value of debt, due to additional conversions of the 2008 Notes during 2009, which resulted in the issuance of 3.6 million shares of our common stock.

Cash Flows Related to Operating, Investing and Financing Activities

Our operating activities used cash of $49.8 million for the nine months ended September 30, 2009. Our cash used in operating activities consisted primarily of cash used to manufacture inventory for our specialty enzyme business, and to fund our efforts in cellulosic ethanol technology process development and commercialization, which was partially offset by proceeds from BP’s capital contributions to Galaxy and Vercipia which are included in financing activities described below.

Our investing activities used cash of $3.4 million for the nine months ended September 30, 2009. Our investing activities included purchases of property, plant and equipment primarily for the start-up and commissioning of our demonstration-scale facility.

During 2007, 2008, and 2009, we (including expenditures by Celunol Corp., with which we merged in June 2007) have spent in excess of $100 million in capital expenditures for further modifications and improvements to our pilot facility and the construction, start-up, commissioning and optimization of our demonstration-scale cellulosic ethanol facility in Jennings, Louisiana. In early 2009, we achieved a key development milestone when our 1.4 million gallon per year demonstration-scale cellulosic ethanol facility in Jennings, Louisiana was commissioned. We produced our first gallons of cellulosic ethanol out of the plant. Work to optimize the facility and make process improvements has commenced as we seek to ensure reliable and cost-effective operation. We will require additional capital and operating expenditures to complete the optimization of our demonstration-scale facility throughout 2009. We do not have fixed-priced arrangements with our major engineering and construction firms; as such, most of our engineering and construction costs related to our demonstration-facility are incurred and paid on a time and materials basis. During 2007 and 2008, we incurred significant costs in excess of our projected expenditures for the improvements to our pilot plant and construction of our demonstration-scale facility.

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Our financing activities generated net cash of $66.8 million for the nine months ended September 30, 2009, consisting primarily of capital contributions by BP into Galaxy and Vercipia, our two consolidated variable interest entities.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2009, excluding the principal and interest payments for our 2008 Notes and 2007 Notes shown above (in thousands):

				Payments due by Period
	Total			Less than 1 Year			1 - 3 Years			3 - 5 Years			More than 5 Years
Contractual Obligations
Verenium:
Operating leases gross	$	42,534		$	6,008		$	12,778		$	12,945		$	10,803
Sublease income (1)		(5,731	)		(979	)		(2,064	)		(2,213	)		(475	)
Operating leases, net		36,803			5,029			10,714			10,732			10,328
Manufacturing costs to Fermic (2)		38,138			14,815			23,323			—			—
License and research agreements		2,361			295			590			571			905
Vercipia (3):
Operating leases		155,831			2,223			5,123			6,095			142,390
Total Contractual Obligations	$	233,133		$	22,362		$	39,750		$	17,398		$	153,623

1 Sublease rental income is expected to be received through February 2015, pursuant to a facilities sublease agreement we entered into during the fourth quarter of 2007.

2 Pursuant to our manufacturing agreement with Fermic, we are obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our projected manufacturing volume increases.

3 Vercipia is 50% owned with two operating lease agreements for 16,200 net plantable acres in Florida and 142.2 acres of improved and irrigated farmland being used by Vercipia as a seed farm, intended for the growth of energy cane to be used as agricultural bio-mass for our first cellulosic ethanol plant.

Manufacturing and Supply Agreements

During 2002, we entered into a manufacturing agreement with Fermic to provide us with the capacity to produce commercial quantities of certain enzyme products. Based on actual and projected increased product requirements, the agreement was amended in 2006 to provide for additional capacity to be installed over the next two years. Under the terms of the agreement, we can cancel the committed purchases with thirty months’ notice provided that the term of the agreement, including the termination notice period, aggregates four years. Pursuant to our agreement with Fermic, we are also obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our projected manufacturing volume increases. As of September 30, 2009, under this agreement we have made minimum commitments to Fermic of approximately $38.1 million, over the next three years.

During 2009, we anticipate funding as much as $0.6 million in additional equipment costs related to our manufacturing agreement with Fermic. As we continue to develop our commercial manufacturing platforms, we may decide to purchase additional capital equipment under this agreement. Since inception through September 30, 2009, we had incurred costs of approximately $20.7 million for property and equipment related to this agreement.

Due to capacity constraints at Fermic in 2008, we were not able to supply adequate quantities of Phyzyme necessary to meet the demand from Danisco. As a result, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for Phyzyme. Our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume the right to manufacture Phyzyme. If Danisco were to exercise this right, we may experience excess capacity at Fermic. If Danisco assumed the right to manufacture Phyzyme and we were unable to absorb or otherwise reduce the excess capacity at Fermic with other products, our results of operations and financial condition would be adversely affected.

Letter of Credit

Pursuant to our facilities leases for our office and laboratory space in San Diego, we are required to maintain a letter of credit on behalf of our landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on minimum required

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working capital and market capitalization. As of September 30, 2009, we had a letter of credit in place pursuant to this agreement for approximately $10.4 million, representing the $100,000 minimum and approximately 24 months’ current rent. The letter of credit is issued under a loan and security agreement with a commercial bank. We are required by the bank to secure this obligation with cash, which is reflected as restricted cash on our Condensed Consolidated Balance Sheets as of September 30, 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that would give rise to additional material contractual obligations as of September 30, 2009.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, convertible senior notes, and income taxes. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We follow the provisions as set forth by authoritative accounting guidance.

We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue under current accounting rules. In those instances where we have billed our customers or received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our balance sheet.

We generate revenue from research collaborations generally through funded research, up-front fees to initiate research projects, fees for exclusivity in a field, and milestones. We recognize revenue from research funding on a “proportional performance” basis, as research hours are incurred under each agreement. We recognize fees to initiate research over the life of the project. We recognize revenue from exclusivity fees over the period of exclusivity. Our collaborations often include contractual milestones. When we achieve these milestones, we are entitled to payment, as defined by the underlying agreements. We recognize revenue for milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) our past research and development services, as well as our ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that the we customarily charge for similar research and development services.

We recognize revenue from grants as related costs are incurred, as long as such costs are within the funding limits specified by the underlying grant agreements.

We recognize revenue related to the sale of our inventory as we ship or deliver products, provided all other revenue recognition criteria have been met. We recognize revenue from products sold through distributors or other third-party arrangements upon shipment of the products, if the distributor has a right of return, provided that (a) the price is substantially fixed and determinable at the time of sale; (b) the distributor’s obligation to pay us is not contingent upon resale of the products; (c) title and risk of loss passes to the distributor at time of shipment; (d) the distributor has economic substance apart from that provided by us; (e) we have no significant obligation to the distributor to bring about resale of the products; and (f) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met. We include our profit-sharing revenues in product revenues on the statement of operations. We recognize profit-sharing revenues during the quarter in which such profit sharing revenues are earned based on calculations provided by our profit-sharing partner. To date, we have generated a substantial portion of our product revenues, including profit-sharing revenues, through our agreements with Danisco.

We have contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. Under current accounting guidance, product manufactured for us by Genencor is recognized on a net basis equal to the net profit share received from Danisco, as all the following indicators of reporting net are met: i) the third party is the obligor; ii) the amount earned is fixed; and iii) the third party maintains inventory risk, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture.

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We sometimes enter into revenue arrangements that include the delivery of more than one product or service. In these cases, we recognize revenue from each element of the arrangement as long as we are able to determine a separate value for each element, we have completed our obligation to deliver or perform on that element and we are reasonably assured of collecting the resulting receivable.

Share-based Compensation

Effective January 1, 2006, we calculate the fair value of all share-based payments to employees and non-employee directors, including grants of stock options, non-restricted and restricted shares, and awards issued under the employee stock purchase plan, and amortize these fair values to share-based compensation in the income statement over the respective vesting periods of the underlying awards.

Share-based compensation related to stock options includes the amortization of the fair value of options at the date of grant determined using Black-Scholes Merton (“BSM”) valuation model. We amortize the fair value of options to expense over the vesting periods of the underlying options.

Share-based compensation related to awards issued under our employee stock purchase plan, or ESPP, after December 31, 2005 are based on calculations of fair value under the BSM valuation model which are similar to how stock option valuations are made. We amortize the fair value of ESPP awards to expense over the vesting periods of the underlying awards.

We estimate the fair value of stock option awards and awards under the ESPP on the date of grant using assumptions about volatility, expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock and an analysis of our peers. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time awards are granted, based on maturities which approximate the expected life of the options. The expected life of the options granted is estimated using the historical exercise behavior of employees and an analysis of our peers. The expected dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion.

We estimate the fair value of non-restricted and restricted stock awards based upon the closing market price of our common stock at the date of grant. We charge the fair value of non-restricted awards to share-based compensation upon grant. We amortize the fair value of restricted awards to share-based compensation expense over the vesting period of the underlying awards.

Convertible Debt and Derivative Accounting

We adopted new guidance as issued on January 1, 2009 which significantly impacted the accounting for our 2008 Notes by requiring us to account separately for the liability and equity components of the convertible debt. The liability component is measured so the effective interest expense associated with the convertible debt reflects the issuer’s borrowing rate at the date of issuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the convertible debt and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the convertible debt.

Determining the fair value of the liability component requires the use of accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the liability component and, in effect, the associated interest expense. According to the guidance, the carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. If no similar liabilities exist, estimates of fair value are primarily determined using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities.

We perform an assessment of all embedded features of a debt instrument to determine if 1) such features should be bifurcated and separately accounted for, and, 2) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liability. The fair value of the embedded feature is measured initially, included as a liability on the balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the statement of operations. We monitor, on an ongoing basis, whether events or circumstances could give rise to a change in our classification of embedded features.

We account for the conversion of our 2008 Notes in accordance with authoritative accounting guidance, which states that upon conversion the difference between the carrying value of the converted 2008 Notes and the fair value of the common stock delivered to the noteholders is recorded as a gain (loss) on debt extinguishment in the statement of operations.

Variable Interest Entities

We have implemented the provisions of authoritative accounting guidance, which addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest.

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We have entered into a strategic collaboration with BP which includes two special purpose entities, Galaxy and Vercipia, both of which are jointly owned by BP and us.

We have determined that both Galaxy and Vercipia qualify as variable interest entities and that we are the primary beneficiary of both entities. Because we are the primary beneficiary, Galaxy and Vercipia are therefore subject to consolidation by us. As a result, BP’s capital contributions are recorded as noncontrolling interests in consolidated entities on our Condensed Consolidated Balance Sheets. We consolidate the operating results of Galaxy and Vercipia, and record an adjustment to the noncontrolling interests in consolidated entities for BP’s share of profits and/or losses in these entities.

Long-Lived Assets

We review long-lived assets, including leasehold improvements, property and equipment, and acquired intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. This requires us to estimate future cash flows related to these assets. Actual results could differ from those estimates, which may affect the carrying amount of assets and the related amortization expense.

Income Taxes

Effective in 2007, we account for income taxes pursuant to authoritative accounting guidance,which prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax return. We do not recognize an uncertain tax position as a deferred tax asset if it has less than a 50% likelihood of being sustained.

We adopted the updated authoritative guidance on January 1, 2007, and commenced analyzing filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As a result of adoption, we have recorded no additional tax liability. As of September 30, 2009 we have not yet completed our analysis of our deferred tax assets. As such, we have removed these amounts and the offsetting valuation allowance has been removed from our deferred tax assets. We are in the process of completing a Section 382 analysis regarding the limitation of the net operating loss and research and development credits.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Our deferred tax assets at September 30, 2009 were fully offset by a valuation allowance.

Inventories

We value inventory at the lower of cost (first in, first out) or market value and, if necessary, reduce the value by an estimated allowance for excess and obsolete inventories. The determination of the need for an allowance is based on our review of inventories on hand compared to estimated future usage and sales, as well as judgments, quality control testing data, and assumptions about the likelihood of obsolescence.

Capitalized Interest

We capitalize interest on capital projects, namely our cellulosic ethanol demonstration facility, commencing with the first expenditure for the project and continuing until the project is substantially complete and placed in service. We amortize the capitalized interest to depreciation expense using the straight-line method over the same lives as the related assets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our exposure to market risk is limited to interest rate risk and, to a lesser extent, foreign currency risk. Our exposure as of the end of the latest fiscal year is described in Part II, Item 7A of our annual report on Form 10-K for the year ended December 31, 2008.

Interest Rate Exposure

As of September 30, 2009, we had outstanding debt obligations at face value of $98.9 million, including $69.0 million of 2007 Notes, $16.2 million of 2008 Notes, and $13.7 million of our 2009 Notes. As of September 30, 2009, the fair value of our 2007 Notes was approximately $26.0 million, the fair value of our 2008 Notes was approximately $9.8 million, and the fair value of our 2009 Notes was approximately $10.8 million.

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Foreign Currency Exposure

We engage third parties, including Fermic, our contract manufacturing partner in Mexico City, to provide various services. From time to time certain of these services result in obligations that are denominated in other than U.S. dollars. Foreign currency risk is minimized because the amount of such obligations is not material.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009. Based on such evaluation, such officers have concluded that, as of September 30, 2009, our disclosure controls and procedures were effective.

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management continues to improve the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting and intends to continue to implement improvements in its internal control over financial reporting and hire additional finance and accounting personnel as necessary to prevent or detect deficiencies, and to timely address any deficiencies that we may identify in the future.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Class Action Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action lawsuit filed in December 2002 in a U.S. federal district court (the “Court”). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an Initial Public Offering (“IPO”) of their common stock in 2000 and the late 1990s (the “IPO Cases”). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Court’s earlier decision certifying as class actions the six IPO Cases designated as “focus cases.” The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of the plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to dismiss the claims against them in November 2007 and an opposition to plaintiffs’ motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certification motion. On February 25, 2009, liaison counsel for plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. On April 2, 2009, the parties submitted a tentative settlement agreement to the court and moved for preliminary approval thereof. On June 11, 2009, the Court granted preliminary approval of the tentative settlement and ordered that notice of the settlement to be published and mailed. The District Court held a final fairness hearing on September 10, 2009. On October 6, 2009, the District Court certified the settlement class in each IPO Case and granted final approval to the settlement. On or about October 23, 2009, three shareholders filed a Petition for Permission To Appeal Class Certification Order, objecting to the District Court’s final approval order and, in particular, asserting that the District Court’s certification of the settlement classes violates the Second Circuit’s earlier class certification decisions in the IPO Cases. Similar petitions, as well as one or more direct appeals, may be filed by other shareholders. If permission to appeal is denied, or if the settlement is affirmed on appeal, the settlement will result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the Company’s pro rata share of the settlement fund will be fully funded by insurance.

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The Company is covered by a claims-made liability insurance policy which it believes will satisfy any potential liability of the Company under this settlement. Due to the inherent uncertainties of litigation, and because the objecting shareholders are seeking to challenge the settlement on appeal, the ultimate outcome of this matter cannot be predicted.

Noteholder Lawsuit

On April 30, 2009, Capital Ventures International (“CVI”), a holder of the 2008 Notes, filed a lawsuit against the Company in the United States District Court for the Southern District of New York alleging that the Company breached the terms of the 2008 Notes by processing certain conversion notices submitted to the Company by CVI at $2.13 per share (now $25.56 per share on a reverse split-adjusted basis) and, with the recent amendment of the 2008 Notes, $1.74 per share (now $20.88 on a reverse-split adjusted basis) rather than $1.47 per share (now $17.64 per share on a reverse-split adjusted basis) asserting that CVI is entitled to additional shares based on the applicable conversions, as well as damages, and requesting a declaratory judgment that $1.47 per share (now $17.64 per share on a reverse-split adjusted basis) is the conversion price for the 2008 Notes. On June 3, 2009, CVI amended its complaint to also request a declaratory judgment that the Company cannot amend the 2008 Notes, pursuant to their terms, without the consent of each affected noteholder, including CVI. The Company filed its answer to CVI’s amended complaint on June 30, 2009, denying all material allegations of the complaint, as amended. An initial pre-trial conference was held on August 11, 2009 and the case is presently in the discovery phase.

On October 6, 2009, in response to the Company’s exchange of approximately $30.5 million of 2007 Notes and the granting of security interest in certain assets of the Company to exchanging holders and holders of the 2008 Notes, CVI filed a Motion to Amend First Amended Complaint (the “Motion”). CVI’s proposed amended pleading alleges that the Company further breached the Note by both amending the terms of the Notes without CVI’s express consent and then undertaking various transactions authorized by the amendment. The amended pleading also alleges that the conversion rate has once again inappropriately been changed as a result of the transactions. The Company opposed the Motion on October 21, 2009, on the ground of futility, arguing that the amendment was proper under the plain language of the Notes. A status conference was held on November 5, 2009, and the Motion remains pending.

Between February 27, 2009 through November 9, 2009, the holder has converted approximately $11.25 million in face value, and the Company has issued approximately 11.3 million shares, or 0.9 million on a reverse-split adjusted basis, to settle these conversions and related “make-whole” obligations at $25.56 or, following the recent amendment of the 2008 Notes, $20.88 per share. Assuming a conversion price of $17.64, 1.7 million additional shares, or 0.2 million on a reverse-split adjusted basis, would be issuable in connection with these conversions. If the Company were to be found to have not satisfied its obligations under the 2008 Notes, because the Company processed the applicable conversion notices at the wrong conversion price, the Company could, among other negative consequences, be required to redeem the 2008 Notes in whole or in part. The Company does not believe that this lawsuit will have a material impact on its financial statements. The Company believes any contingent liabilities related to these claims are not probable or estimable and therefore no amounts have been accrued for these matters.

Royalty Lawsuit

On August 31, 2009, the Company initiated an arbitration proceeding against Asahi Glass Co., Ltd. (“Asahi”) in the ICC International Court of Arbitration. The arbitration relates to a license agreement with Asahi whereby the Company obtained the right to use Asahi technology in connection with the manufacture of a product sold by the Company. In the arbitration, the Company seeks determinations that historical royalty payments made to Asahi were properly calculated and paid, reflecting all amounts properly subject to royalty obligations, and that Asahi has wrongfully interfered with advantageous business relations of the Company, as well as reimbursement of its damages, costs and expenses. In response to the Company’s Request for Arbitration, Asahi has claimed entitlement to additional royalties, breach of contract, patent infringement, misappropriation of trade secrets, breach of a covenant of good faith and fair dealing, and, if the Company is not found to have breached any of its obligations, seeks to set aside the contract. The Company believes it has valid defenses to Asahi’s claims, and intends to pursue those defenses, as well as its pending claims against Asahi, vigorously.

In addition to the matters noted above, from time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless, that the Company’s consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

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ITEM 1A. RISK FACTORS

Except for the historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed in Part I, Item 2 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this quarterly report on Form 10-Q. You should consider carefully the following risk factors, together with all of the other information included in this quarterly report on Form 10-Q. Each of these risk factors could adversely affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common stock.

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously discussed in our Form 10-K for the year ended December 31, 2008.

Risks Applicable to Our Business Generally

We will need additional capital in the future. If additional capital is not available, we may have to curtail or cease operations.

We will need to raise more money to continue to fund our business. Our capital requirements will depend on several factors, including:

• Expenditures and investments to implement our biofuels business strategy, including increased capital expenditures in relation to such strategy, for example, to optimize our demonstration-scale facility, and build our commercial-scale facilities;

• The level of research and development investment required to maintain our technology leadership position;

• Our ability to enter into new agreements with collaborative partners or to extend the terms of our existing collaborative agreements, and the terms of any agreement of this type;

• The success rate of our discovery efforts associated with milestones and royalties;

• Our ability to successfully commercialize products developed independently and the demand for such products;

• The timing and willingness of strategic partners and collaborators to commercialize our products that would result in royalties;

• Costs of recruiting and retaining qualified personnel; and

• Our possible acquisition or licensing of complementary technologies or acquisition of complementary businesses.

We may seek additional funds through a combination of existing and additional corporate partnerships and collaborations, federal, state and local grant funding and loan guarantees, product sales, selling or financing assets, and the sale of equity or debt securities. In addition, we expect to attempt to raise funds in the non-recourse, project-finance capital markets to finance growth of our project portfolio. Such funds may not be available to us or may be available on terms not satisfactory to us. We currently have applications pending for federal, state and local financial incentives such as grants; however, such funds may not be available to us in adequate amounts, if at all. An inability to raise adequate funds to support the growth of our project portfolio will materially adversely affect our business.

If we cannot raise more money, we will have to implement one or more of the following remedies:

• reduce our capital expenditures;

• further scale back our development of new enzyme products;

• scale back our efforts to commercialize cellulosic ethanol;

• significantly reduce our workforce;

• sell some or all of our assets;

• seek to license to others products or technologies that we otherwise would seek to commercialize ourselves; and/or

• curtail or cease operations.

* We have a history of net losses, we expect to continue to incur net losses, and we may not achieve or maintain profitability.

As of September 30, 2009, we had a net loss for the nine months ended of $18.9 million an accumulated deficit of approximately $632.5 million. We expect to continue to incur additional losses for the foreseeable future.

Product revenues currently account for the majority of our annual revenues, and we expect that a significant portion of our revenue for 2009 will result from the same source as well as from grant revenue. Future revenue from collaborations is uncertain and will depend upon our ability to maintain our current collaborations, enter into new collaborations and to meet research, development, and commercialization objectives under new and existing agreements, and we have been de-emphasizing collaborations that are not core to our strategic market focus. Over the past two years, our product revenue in absolute dollars and as a percentage of

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total revenues has increased significantly, and our grant revenue in absolute dollars and as a percentage of total revenues has increased significantly during 2009. Our product and grant revenue may not continue to grow in either absolute dollars or as a percentage of total revenues. If product revenue increases, we would expect sales and marketing expenses to increase in support of increased volume. Additionally, as our business model develops, our general and administrative expenses might increase based on broadening our infrastructure to support continued growth in the business. In addition, the amounts we spend will impact our ability to become profitable and this will depend, in part, on:

• the progress of our research and development programs for the production of ethanol from various sources of cellulosic biomass;

• the cost of building, operating and maintaining research and production facilities;

• the number of production facilities that we ultimately attempt to develop;

• the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;

• how competing technological and market developments affect our proposed activities; and

• the cost of obtaining licenses required to use technology owned by others for proprietary products and otherwise.

We may not achieve any or all of our goals and, thus, we cannot provide assurances that we will ever be profitable on an operating basis or maintain revenues at current levels. If we fail to achieve profitability and maintain or increase revenues, the market price of our common stock will likely decrease.

Even if we generate significant additional revenue in our specialty enzymes business, we do not expect to achieve overall profitability for the foreseeable future, as we make additional investments to implement our vertical integration strategy within biofuels. In order for us to generate revenue, we must not only retain our existing collaborations and/or attract new ones and achieve milestones under them, but we must also develop products or technologies that we or our partners choose to commercialize and that are commercially successful and from which we can derive revenue through sales or royalties. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

* We continue to experience losses from operations, and we may not be able to fund our operations and continue as a going concern.

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2008 contains an explanatory paragraph which states that we have incurred recurring losses from operations and, based on our operating plan and existing working capital deficit, this raises substantial doubt about our ability to continue as a going concern. We have an accumulated deficit of $632.5 million.

We have used the proceeds received from sales of our 2007 Notes in April 2007 and 2008 Notes in February 2008 to make enhancements to our pilot facility, to complete construction and commissioning of our demonstration-scale facility in Jennings, Louisiana, to advance development of the site for our first commercial cellulosic ethanol plant, to commercialize our specialty enzymes products, to continue our research and development efforts in both specialty enzymes and biofuels, and for expenses related to the merger with Celunol, all of which have adversely affected, and will continue to adversely affect, our operating results until revenues reach levels at which we can fully support our operating and capital expenditures. We expect to use the net proceeds of our equity offering in October 2009 for general corporate purposes, which may include research and development, capital expenditures, working capital, and general and administrative expenses, and may also use a portion of the net proceeds to fund our first commercial cellulosic ethanol plant.

We will require additional capital to fund our operations, including substantial capital to fund the first commercial cellulosic ethanol plant with BP, which we estimate will cost as much as $300 million to complete. We believe that we will be successful in raising or generating additional cash to fund these requirements through a combination of additional corporate partnerships and collaborations, federal, state and local grant funding, selling and financing assets, incremental product sales, and, if necessary and available, the sale of equity or debt securities. There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures.

If we are not able to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure or significantly curtail our operations, file for bankruptcy or cease operations.

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We should be viewed as an early stage company with new and unproven technologies.

You must evaluate our business in light of the uncertainties and complexities affecting an early stage biotechnology company or cellulosic ethanol manufacturing company. Our existing proprietary technologies are new and in the early stage of development for both biofuels and specialty enzymes. We may not be successful in the commercial development of these or any further technologies, products or processes. Successful products and processes require significant development and investment, including testing, to demonstrate their cost- effectiveness prior to regulatory approval and commercialization. To date, we have commercialized 12 of our own products, all in the specialty enzymes area, including our Purifine, Fuelzyme, and Luminase enzymes. In addition, four of our collaborative partners, Invitrogen Corporation, Danisco Animal Nutrition, Givaudan Flavors Corporation, and Syngenta Animal Nutrition (formerly known as Zymetrics, Inc.), have incorporated our technologies or inventions into their own commercial products from which we have generated and/or can generate royalties. We have not yet commercialized any products or processes related to our biofuels segment. Our specialty enzyme products and technologies have only recently begun to generate significant revenues. Because of these uncertainties, our discovery process may not result in the identification of product candidates or biofuels production processes that we or our collaborative partners will successfully commercialize. If we are not able to use our technologies to discover new materials, products, or processes with significant commercial potential, or if we are unable to sell our cellulosic ethanol or an integrated solution for the production of cellulosic ethanol, we will continue to have significant losses in the future due to ongoing expenses for research, development and commercialization efforts and we may be unable to obtain additional funding to fund such efforts.

*We may not have adequate funds to pay interest on our 2007 Notes and 2009 Notes, or to purchase the 2007 Notes and 2009 Notes on required purchase dates or upon a fundamental change.

In April 2007, we completed the sale of $120 million of 2007 Notes, the terms of which include provisions whereby on each of April 1, 2012, April 1, 2017 and April 1, 2022, holders of the 2007 Notes may require us to purchase, for cash, all or a portion of their 2007 Notes at 100% of their principal amount, plus any accrued and unpaid interest up to, but excluding, that date. In September 2009, pursuant to privately negotiated exchange agreements with Verenium, certain holders of the 2007 Notes exchanged approximately $30.5 million in aggregate principal amount of 2007 Notes for approximately $13.7 million in aggregate principal amount of our 2009 Notes. As of September 30, 2009, approximately $69 million of the 2007 Notes remains outstanding. If a “fundamental change,” which is defined in the indenture related to the 2007 Notes and in the indenture related to the 2009 Notes, occurs, holders of the 2007 Notes or 2009 Notes may require us to repurchase, for cash, all or a portion of their 2007 Notes or 2009 Notes, as applicable. We may not have sufficient funds to pay the interest, purchase price or repurchase price of the 2007 Notes or 2009 Notes when due. In addition, the terms of any borrowing agreements which we may enter into from time to time may require early repayment of borrowings under circumstances similar to those constituting a “fundamental change.” For example, the holders of the 2008 Notes may require us to redeem the 2008 Notes under such circumstances. Those agreements may also make our repurchase of 2007 Notes or 2009 Notes an event of default under the agreements. If we fail to pay interest on the 2007 Notes or 2009 Notes or to purchase or repurchase the 2007 Notes or 2009 Notes when required, we will be in default under the indenture for the 2007 Notes or the indenture for the 2009 Notes, as applicable, which would also cause an event of default under the 2008 Notes and may also cause an event of default under the terms of other borrowing arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including causing us to cease operations altogether.

* We may not have adequate funds to pay interest or “make-whole” payments on our 2008 Notes, or to purchase the 2008 Notes at required times.

In February 2008, we completed a private placement of $71 million of 2008 Notes and warrants to purchase our common stock. As of September 30, 2009, approximately $16.2 million of the 2008 Notes remains outstanding. On July 1, 2008, certain terms of all of the outstanding 2008 Notes were modified pursuant to convertible note amendment agreements entered into with certain holders of the 2008 Notes.

We are required to pay interest on the 2008 Notes at the rate of 8% per year, and the 2008 Notes also include a “make-whole” provision whereby, upon any holder’s conversion of the 2008 Notes for common stock, we are obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that we may, subject to the satisfaction of certain conditions, pay interest or “make-whole” amounts with shares of our common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion. As of September 30, 2009, our potential maximum remaining “make-whole” obligation assuming conversion of 100% of the 2008 Notes on that date was approximately $3.5 million, which we may be required to settle in cash if we are unable to satisfy the conditions for paying “make-whole” amounts with shares or the noteholders do not otherwise waive these conditions. Were many holders of our 2008 Notes to convert their 2008 Notes, or if a significant amount were converted at approximately the same time, and we were at that time unable to satisfy the conditions for paying “make-whole” amounts in shares and the noteholders did not otherwise waive those conditions, our cash resources at that time could be insufficient to make the required “make-whole” payments. Also, one holder of 2008 Notes has asserted that certain “make-

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whole” payments made to it in shares should have been paid in cash, and has filed a lawsuit against us asserting a conversion price of $9.36, rather than $25.56 (and with the recent amendment of the 2008 Notes and recent equity financing, $17.4851), for a portion of its 2008 Notes for which it has submitted conversion notices. The lawsuit requests additional shares based on such conversions, damages and declaratory relief. We have disputed the assertions made by that noteholder and believe our positions are correct. However, if we were found to have been required to pay such “make-whole” payments in cash, or were found to have otherwise not satisfied our obligations under the 2008 Notes, we could, among other negative consequences, be required to redeem some or all of the 2008 Notes. The holders of the 2008 Notes may also require us to redeem their 2008 Notes in connection with certain “change of control” events, and any borrowing agreements which we may enter into from time to time may similarly require early repayment of borrowings under circumstances like those constituting a “change of control” under the terms of the 2008 Notes. For example, the holders of the 2007 Notes and 2009 Notes may require us to repurchase, for cash, all or a portion of the 2007 Notes or 2009 Notes, as applicable, in such circumstances. Those agreements may also make our repurchase of 2008 Notes an event of default under the agreements. We may not have sufficient funds to pay any required cash interest or cash “make-whole” payments or repurchase or redemption amounts of the 2008 Notes when due, or any amounts due under other borrowing agreements at the same time such amounts are due under the 2008 Notes or otherwise, and any default under the 2008 Notes or any other borrowing agreements (including the 2007 Notes and 2009 Notes) could cause events of default under our other debt obligations (including the 2009 Notes, 2008 Notes and the 2007 Notes, as applicable). Any of these events could cause the maturity of some or all of our debt obligations (including the 2009 Notes, 2008 Notes and the 2007 Notes, as applicable) to be accelerated, and could have a material adverse effect on our business, results of operations and financial condition, up to and including causing us to cease operations.

* Conversion of the 2008 Notes, the 2007 Notes and/or the 2009 Notes, exercise of related warrants, anti-dilution adjustments that may occur under the 2008 Notes and/or the related warrants, and the issuance of shares of common stock in payment of interest or “make-whole” payments under the 2008 Notes will dilute the ownership interest of existing stockholders.

The conversion or exercise of some or all of the 2007 Notes, 2009 Notes and/or the 2008 Notes and related warrants, and the issuance of shares of common stock in payment of interest or “make-whole” payments under the 2008 Notes, could significantly dilute the ownership interests of existing stockholders. In April 2008, the conversion price of the 2007 Notes decreased from $97.92 per share to $76.80 per share, based on a re-set provision contained in the 2007 Notes. In February 2009, the conversion price of the 2008 Notes decreased from $49.08 per share to $25.56 per share, based on a re-set provision contained in the 2008 Notes, in July 2009 decreased further to $20.88 per share in connection with the amendment of the 2008 Notes, and in October 2009 decreased further to $17.4851 per share in connection with our recent equity financing. The initial conversion price of the 2009 Notes is $9.60 per share and is subject to reduction based on a re-set provision contained in the 2009 Notes. These re-sets and other reductions in the applicable conversion prices for the 2007 Notes, 2008 Notes and 2009 Notes have caused, and will continue to cause, additional shares to be issued upon conversion of these instruments compared to the number of shares initially issuable upon such conversions.

The 2008 Notes also contain a version of broad-based weighted average anti-dilution protection, subject to certain exceptions and limitations, which could cause further reductions in the $17.4851 conversion price for the 2008 Notes should we engage in subsequent issuances that trigger those provisions. One holder of the 2008 Notes has filed a lawsuit against us asserting a conversion price of $9.36, rather than $25.56 (and with the recent amendment of the 2008 Notes, and recent equity financing, $17.4851), for a portion of its 2008 Notes for which it has submitted conversion notices. We have disputed this assertion and believe our position is correct. If we were required to honor those conversion notices or future conversion notices at the lower conversion price, that would cause additional shares to be issued. Additionally, the warrants related to the 2008 Notes and certain warrants held by Syngenta contain weighted average anti-dilution protection that could also cause more shares to become issuable under those warrants if we engage in subsequent issuances that trigger those provisions. In addition, given the low recent values for our stock price, to the extent we satisfy required interest or “make-whole” payments under the 2008 Notes by issuing shares, which we intend to do to the extent permissible under the terms of the 2008 Notes, including to the extent we obtain waivers from the holders to do so, we will be issuing relatively more shares than if our stock price was at a higher level. For example, in connection with the conversion of $42.7 million in aggregate principal amount of 2008 Notes that occurred between January 1, 2009 and November 9, 2009, we issued approximately 1.8 million shares in partial satisfaction of the related “make-whole” obligations. Sales in the public market of the common stock issuable upon conversion of the 2007 Notes and/or 2008 Notes or exercise of the related warrants, or issuable in payment of interest or “make-whole” payments under the 2008 Notes, have, and we expect that any future sales based on such conversions, exercises or issuances will continue to, adversely affect prevailing market prices of our common stock. In addition, the existence of the 2007 Notes and 2008 Notes may encourage short selling by market participants because the conversion of the 2007 Notes and 2008 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2008 Notes into shares of our common stock could depress the price of our common stock.

* The covenants in the 2008 Notes restrict our financial and operational flexibility.

We are subject to certain covenants under the 2008 Notes that restrict our financial and operational flexibility. For example, we are restricted from incurring additional indebtedness (other than certain project financing debt, certain unsecured subordinated indebtedness and up to $187 million principal amount of additional indebtedness. The 2008 Notes also include a version of broad-based weighted average anti-dilution protection, subject to certain exceptions and limitations, and the warrants issued in connection

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with the 2008 Notes also contain weighted-average anti-dilution protection. Any future financing by us involving the issuance of equity, or rights to acquire equity, at a price or prices below the prevailing conversion price of the 2008 Notes at the time of such financing would trigger these provisions in the 2008 Notes and the warrants, causing a further, possibly substantial, reduction in the conversion price for the 2008 Notes or the exercise price of the warrants and additional possible dilution for our shareholders, which would increase the cost and reduce the benefits to us of any such equity financing. As a result of these covenants, our ability to finance our operations through the incurrence of additional debt or the issuance of additional equity is limited. The 2008 Notes also contain other covenants that restrict our financial and operational flexibility.

*One holder of our 2008 Notes (the “Disputing Noteholder”) has filed a lawsuit against us asserting that our recent amendment of the 2008 Notes, which became effective on July 6, 2009, failed to amend such noteholder’s 2008 Note (the “Disputed Note”), and that certain actions we have taken that are permitted under the terms of the 2008 Notes, as recently amended, constitute a breach under the Disputed Note.

The Disputing Noteholder did not consent to the recent amendment of our 2008 Notes and has asserted that such amendment did not effectively amend the Disputed Note. We have disputed this assertion and believe that the recent amendment effectively amended all of the 2008 Notes, including the Disputed Note. The 2008 Notes, as recently amended, and the Disputed Note, if not amended, contain different provisions regarding the amount of indebtedness that we may incur, actions that we may take vis-à-vis the 2007 Notes, our use of cash from any sale of specified assets, and with respect to anti-dilution protection. If it is ultimately determined that the recent amendment did not amend the Disputed Note, certain actions that we have taken or that we may take that are permitted under the terms of the 2008 Notes, as recently amended, may be determined to cause a default under the Disputed Note. For example, our exchange in September 2009 of approximately $30.5 million in aggregate principal amount of our 2007 Notes for approximately $13.7 million in aggregate principal amount of our 2009 Notes was permitted under the terms of the 2008 Notes, as recently amended, but would not be permitted under the terms of the 2008 Notes that were in effect prior to the amendment. The Disputing Noteholder has asserted that the exchange of our 2007 Notes for 2009 Notes is not authorized under the Disputed Note and is invalid.

If a default were to occur under the Disputed Note, we could, among other negative consequences, be required to redeem the Disputed Note in whole or in part and we may not have sufficient funds to do so, which could have a material adverse effect on our business, results of operations and financial condition. Even if we do not default under the Disputed Note, but it is ultimately determined that the recent amendment did not amend the Disputed Note, we would be subject to stricter covenants under the Disputed Note than under the 2008 Notes, as recently amended, which would more significantly restrict our financial and operating flexibility. Furthermore, the Disputed Note contains full ratchet anti-dilution protection, while the 2008 Notes, as amended, contain in most cases a version of broad-based weighted average anti-dilution protection, subject to certain limitations. Following the recent exchange of our 2007 Notes for our 2009 Notes, the Disputing Noteholder has asserted a conversion price of $9.36, rather than $25.56 (and with the recent amendment of the 2008 Notes, and recent equity financing, $17.4851), for the Disputed Note. We dispute this assertion and believe our position is correct. If the recent amendment did not effectively amend the Disputed Note and the adjusted conversion price alleged by the Disputing Noteholder is correct (and assuming, in such case, the further reduction of the conversion price to $6.00 following the recent equity financing), the number of shares of common stock issuable upon conversion of the Disputed Note would be more than twice the number of shares that we believe are issuable upon such conversion (approximately 533,000 shares instead of approximately 183,000 shares), and would result in additional dilution for our stockholders. Additionally, any future financing by us which involves the issuance of equity, or rights to acquire equity, at a price or prices below the prevailing conversion price of the Disputed Note at the time of such financing would cause a full ratchet anti-dilution adjustment, rather than a weighted average anti-dilution adjustment as is contemplated currently, in most cases, under the 2008 Notes, as recently amended. Any such adjustment would cause a larger reduction in the conversion price for the Disputed Note and additional possible dilution for our shareholders, which would increase the cost and reduce the benefits to us of any such equity financing

*Our high level of debt limits our ability to fund general corporate requirements, limits our flexibility in responding to competitive developments, increases our vulnerability to adverse economic and industry conditions, and may harm our financial condition and results of operations.

The face value of our total consolidated long-term debt as of September 30, 2009, which includes the 2007 Notes, the 2008 Notes, and the 2009 Notes was approximately $98.9 million, representing approximately 85% of our total capitalization as of such dates.

Our level of indebtedness could have important adverse consequences on our future operations, including:

• making it more difficult for us to meet our payment and other obligations under the 2007 Notes, 2008 Notes, and 2009 Notes;

• reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

• resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which could result in all of our debt becoming immediately due and payable;

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• limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate and the general economy; and

• placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Moreover, if we fail to make any required payments under our debt, or otherwise breach the terms of our debt, all or a substantial portion of our debt could be subject to acceleration. In such a situation, it is unlikely we would be able to repay the accelerated debt, which would have a material adverse impact on our business, results of operations and financial condition, up to and including causing us to cease operations.

If the recent volatility in the United States and global equity and credit markets and the decline in the general world economy continue for an extended period of time, it may become more difficult to raise money in the public and private markets and harm our financial condition and results of operations.

The United States and global equity markets have recently been extremely volatile and unpredictable, reflecting in part a general concern regarding the global economy. This volatility in the market affects not just our stock price, but also the stock prices of our collaborators. In addition, this volatility has also affected the ability of businesses to obtain credit and to raise money in the capital markets. If we or our collaborators are unable to obtain credit or raise money in the capital markets, we may not be able to continue to fund our current research and development projects, fund our current products, raise project finance capital for the development of commercial cellulosic ethanol plants, or otherwise continue to maintain or grow our business.

We are dependent on our collaborative partners, and our failure to successfully manage our existing and future collaboration relationships could prevent us from developing and commercializing cellulosic ethanol and /or our specialty enzyme products, and achieving or sustaining profitability.

Revenue from our collaborations has decreased both as a proportion of our total revenue and in absolute dollars in recent years. Since we do not currently possess the resources necessary to independently fund the development and commercialization of cellulosic ethanol, or all of the potential specialty enzyme products that may result from our technologies, we expect to continue to pursue, and in the near-term derive additional revenue from, strategic alliance and collaboration agreements to develop and commercialize products and technologies that are core to our current market focus. We will have limited or no control over the resources that any strategic partner or collaborator may devote to our products and technologies. Any of our present or future strategic partners or collaborators may fail to perform their obligations as expected. These strategic partners or collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our strategic partners or collaborators may not develop technologies or products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of these technologies and products. If any of these events occur, or we fail to enter into or maintain strategic alliance or collaboration agreements, we may not be able to commercialize our technologies and products, grow our business, or generate sufficient revenue to support our operations.

Our present or future strategic alliance and collaboration opportunities could be harmed if:

• We do not achieve our research and development objectives under our strategic alliance and collaboration agreements;

• We are unable to fund our obligations under either of our joint ventures with BP or with any of our other strategic partners or collaborators;

• We are unable to obtain funding to build commercial cellulosic ethanol plants;

• We develop technologies or products and processes or enter into additional strategic alliances or collaborations that conflict with the business objectives of our strategic partners or collaborators;

• We disagree with our strategic partners or collaborators as to rights to intellectual property we develop, or their research programs or commercialization activities;

• Our strategic partners or collaborators experience business difficulties which eliminate or impair their ability to effectively perform under our strategic alliances or collaborations;

• We are unable to manage multiple simultaneous strategic alliances or collaborations;

• Our strategic partners or collaborators become competitors of ours or enter into agreements with our competitors;

• Our strategic partners or collaborators become less willing to expend their resources on research and development due to general market conditions or other circumstances beyond our control;

• Consolidation in our target markets limits the number of potential strategic partners or collaborators; or

• We are unable to negotiate additional agreements having terms satisfactory to us.

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We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment in us.

We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

We may encounter difficulties managing our growth, which could adversely affect our results of operations.

Our strategy includes entering into and working on simultaneous projects, frequently across multiple industries, in both our specialty enzymes and biofuels businesses. This strategy places increased demands on our limited human resources and requires us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians, scientists and other personnel, especially with respect to our vertical integration strategy within biofuels. Our ability to effectively manage our operations, growth, and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls.

If we engage in any acquisitions, we will incur a variety of costs, may dilute existing stockholders, and may not be able to successfully integrate acquired businesses.

If appropriate opportunities become available, we may consider acquiring businesses, assets, technologies, or products that we believe are a strategic fit with our business. As of September 30, 2009, we have no commitments or agreements with respect to any material acquisitions. If we further pursue such a strategy, we could:

• issue additional equity securities which would dilute current stockholders’ percentage ownership;

• incur substantial additional debt; or

• assume additional liabilities.

We may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial, and management resources, if at all. In addition, future acquisitions might negatively impact our business relations with our current and/or prospective collaborative partners and/or customers. Any of these adverse consequences could harm our business.

*Our business is subject to complex corporate governance, public disclosure, and accounting requirements that have increased both our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the SEC, and NASDAQ, have implemented requirements, standards and regulations, including expanded disclosures, accelerated reporting requirements and more complex accounting rules, and continue developing additional requirements. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from operating activities to compliance activities. We may incur additional expenses and commitment of management’s time in connection with further evaluations, either of which could materially increase our operating expenses or accordingly increase our net loss.

Because new and modified laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding financial disclosures and compliance matters and additional costs necessitated by ongoing revisions to our disclosures and governance practices. This further could lead to possible restatements, due to the complex nature of current and future standards and possible misinterpretation or misapplication of such standards.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and as a result, investors may be misled and lose confidence in our financial reporting and disclosures, and the price of our common stock may be negatively affected.

The Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal control over financial reporting. A “significant deficiency” means a deficiency or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of our financial reporting. 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 annual or interim financial statements will not be prevented or detected on a timely basis.

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In the past, we have disclosed material weaknesses with our financial statement close process that we have since remediated. Although we have made and are continuing to make improvements in our internal controls, if we discover other deficiencies or material weaknesses, it may adversely impact our ability to report accurately and in a timely manner our financial condition and results of operations in the future, which may cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock. Moreover, effective internal controls are necessary to produce accurate, reliable financial reports and to prevent fraud. If we continue to have deficiencies in our internal controls over financial reporting, these deficiencies may negatively impact our business and operations.

Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights due to becoming involved in expensive lawsuits or administrative proceedings.

Our success depends in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring and preventing unauthorized use of our intellectual property is difficult and expensive, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. Although we have adopted a strategy of seeking patent protection in the United States and in foreign countries with respect to certain of the technologies used in or relating to our products, as well as anticipated production capabilities and processes, 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 great harm to our business.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products, and business. The patent positions of companies whose businesses are based on biotechnology, including our patent position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. We intend to apply for patents relating to our technologies, processes and products as we deem appropriate. Patents, if issued, may be challenged, invalidated, or circumvented. We cannot be sure that patents have not been issued that could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or duplicate technologies developed by us. There may be patents in some countries that, if valid, may block our ability to commercialize products in these countries if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in published patent applications in some countries that, if granted and valid, may also block our ability to commercialize processes or products in these countries if we are unable to circumvent or license them. Our intellectual property rights may be challenged by others. For example, in February 2007, an interference proceeding was declared in the United States Patent and Trademark Office between a United States patent assigned to us and a pending United States patent application owned by a third party, with allowable claims directed to our GeneReassembly technology. On February 25, 2008 the Board of Patent Appeals and Interferences ruled in favor of the other party and the claims in our issued patent were cancelled. We are not currently a party to any litigation with regard to our patent position. However, the biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. When and if we become involved in litigation or interference proceedings declared by the United States Patent and Trademark Office, or oppositions or other intellectual property proceedings outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, we might have to spend significant amounts of money. Any intellectual property litigation could potentially force us to do one or more of the following:

• stop selling, incorporating or using our products that use the challenged intellectual property;

• stop production of cellulosic ethanol at our production facilities;

• obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

• redesign those products, facilities or processes that use any allegedly infringing technology, which may result in significant cost or delay to us, or which could be technically infeasible.

We are aware of a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. We cannot assure you that if we are sued on these patents we would prevail.

Should any third party have filed, or file in the future, patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding, like the one described above, could result in substantial cost to us even if the outcome is favorable. Even if successful, an interference may result in loss of claims. The litigation or proceedings could divert our management’s time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.

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Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we also rely in part on trade secret protection for our confidential and proprietary information. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of an employment or consulting arrangement with us. 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 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 may be disclosed, and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Ethical, legal, and social concerns about genetically engineered products and processes could limit or prevent the use of our products, processes, and technologies and limit our revenue.

Some of our anticipated products and processes are genetically engineered or involve the use of genetically engineered products or genetic engineering technologies. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to genetic engineering, our products and processes may not be accepted. Any of the risks discussed below could result in expenses, delays, or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:

• Public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and processes, which could influence public acceptance of our technologies, products and processes;

• Public attitudes regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights with respect to our genetic material and discourage collaborative partners from supporting, developing, or commercializing our products, processes and technologies; and

• Governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic research and derivative products, including labeling requirements.

The subject of genetically modified organisms has received negative publicity, which has aroused public debate in the United States and other countries. This adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically altered products.

Compliance with regulatory requirements and obtaining required government approvals may be time consuming and costly, and could delay our introduction of products.

All phases, especially the field testing, production, and marketing, of our current and potential products and processes are subject to significant federal, state, local, and/or foreign governmental regulation. Regulatory agencies may not allow us to produce and/or market our products in a timely manner or under technically or commercially feasible conditions, or at all, which could harm our business.

In the United States, specialty enzyme products for our target markets are regulated based on their use, by either the FDA, the EPA, or, in the case of plants and animals, the USDA. The FDA regulates drugs, food, and feed, as well as food additives, feed additives, and substances generally recognized as safe that are used in the processing of food or feed. While substantially all of our current specialty enzyme projects to date have focused on non-human applications and specialty enzyme products outside of the FDA’s review, in the future we may pursue collaborations for further research and development of drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any drug product candidates must also be approved by the regulatory agencies of foreign governments before any product can be sold in those countries. Under current FDA policy, our products, or products of our collaborative partners incorporating our technologies or inventions, to the extent that they come within the FDA’s jurisdiction, may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not meet regulatory requirements or if they are deemed to be food additives whose safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing significant time and expenditures, our collaborators may not obtain regulatory approval for any drug products that incorporate our technologies or inventions. Our collaborators have not submitted an investigational new drug application for any product candidate that incorporates our technologies or inventions, and no drug product candidate developed with our technologies has been approved for commercialization in the United States or elsewhere. The EPA regulates biologically derived chemical substances not within the FDA’s jurisdiction. An unfavorable EPA ruling could delay commercialization or require modification of the production process resulting in higher manufacturing costs, thereby making the product uneconomical. In addition, the USDA may prohibit genetically engineered plants from being grown and transported except under an exemption, or under controls so burdensome that commercialization becomes impracticable. Our future products may not be exempted by the USDA.

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In order to achieve and maintain market acceptance, our biofuels business will need to meet a significant number of environmental and other regulations and standards established by various federal, state and local regulatory agencies. As these regulations and standards evolve, and if new regulations or standards are implemented, we may be required to modify our proposed facilities and processes or develop and support new facilities or processes and this will increase our costs. Any failure to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay our production of ethanol and the provision of related services including plant operation and engineering services in support of anticipated licenses of our technology, which could harm our biofuels business. Market uncertainty regarding future policies may also affect our ability to develop new ethanol production facilities or license our technologies to third parties. Any inability to address these requirements and any regulatory changes could have a material adverse effect on our biofuels business, financial condition and operating results.

Our results of operations may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our contemplated facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Furthermore, as we operate our business, we may become liable for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for investigation, cleanup, or other costs.

In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws, or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ethanol production facilities. Present and future environmental laws and regulations, and interpretations thereof, applicable to ethanol operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial position.

We use hazardous materials in our business. Any claims relating to improper handling, storage, or disposal of these materials could be time consuming and costly and could adversely affect our business and results of operations.

Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive, and biological materials. Our operations also produce hazardous waste products. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. In addition, compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts.

Many competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.

The biotechnology industry is characterized by rapid technological change, and the area of biomolecule discovery and optimization from biodiversity is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Technological development by others may result in our products and technologies becoming obsolete.

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We face, and will continue to face, intense competition in our specialty enzymes business. There are a number of companies who compete with us in various steps throughout our technology process. For example, Codexis, Maxygen, Inc., Evotec, and Xencor have alternative evolution technologies. Integrated Genomics Inc., Myriad Genetics, Inc., and ArQule, Inc. perform screening, sequencing, and/or bioinformatics services. Novozymes A/S, Genencor International Inc., and Dyadic International are involved in development, overexpression, fermentation, and purification of enzymes. There are also a number of academic institutions involved in various phases of our technology process. Many of these competitors have significantly greater financial and human resources than we do. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors may be more effective at implementing their technologies for modifying DNA to develop commercial products.

The ethanol production and marketing industry is extremely competitive. In addition to cellulosic ethanol producers using different technology platforms, our competitors are grain ethanol producers as well as other providers of alternative and renewable fuels. Significant competitors in the grain ethanol production and marketing industry include Archer Daniels Midland Company, Cargill, Inc., VeraSun Energy Corporation, and Aventine Renewable Energy, Inc. Many companies are engaged in research and development activities in the emerging cellulosic ethanol industry, and companies with announced pilot facility and/or demonstration facility development activities in the cellulosic ethanol space include Abengoa Bioenergy Corp., BlueFire, Genencor, Iogen Corporation, Losonoco, Mascoma, Range Fuels, and Xethanol. Larger industrial companies with announced cellulosic strategies include Archer Daniels Midland, DONG Energy (Elsam), DuPont/POET (formerly known as Broin), Tate & Lyle, and Novozymes. Cellulosic gasification technologies are being pursued by companies including ClearFuels and BRI-Infinium. Some or all of these competitors or other competitors, as well as academic, research and government institutions, are developing or may develop technologies for, and are competing or may compete with us in, the production of ethanol from cellulosic biomass or other feedstocks, such as municipal or construction waste, production of cellulosic ethanol or other fuels employing different steps within the production process, such as acid hydrolysis and/or gasification, and/or the production of other alternative fuels or biofuels, such as biobutanol. Some of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to many of our significant competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and prevent us from achieving any market share, sales and/or profitability, and adversely affect our results of operations and financial position.

Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Current competitors or other companies may develop technologies and products that are more effective than ours. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technology developed by our competitors may be more effective than those developed by us.

If we lose key personnel or are unable to attract and retain additional personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

The loss of any key members of our senior management, or business development or scientific staff, or failure to attract or retain other key management, business development or scientific employees, could prevent us from developing and commercializing biofuels and cellulosic ethanol and other new products and entering into collaborations or licensing arrangements to execute on our business strategy. 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, particularly in the San Diego and New England areas, or due to competition for, or availability of, personnel with the qualifications or experience necessary for our biofuels business, particularly in the Jennings, Louisiana area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our collaborative partners in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

Several members of our senior management team are also new and have not worked together for a significant length of time and they may not be able to work together effectively to develop and implement our business strategies and achieve our business objectives. Management will need to devote significant attention and resources to preserve and strengthen relationships with employees, customers and others. If our management team is unable to develop successful business strategies, achieve our business objectives, or maintain positive relationships with employees, customers, suppliers or other key constituencies, including our strategic collaborators and partners, our ability to grow our business and successfully meet operational challenges could be impaired.

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Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions, especially in our biofuels business. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business.

We may be sued for product liability.

We may be held liable if any product or process we develop, or any product which is made or process which is performed with the use of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, or sale. We currently have limited product liability insurance covering claims up to $10 million that may not fully cover our potential liabilities. In addition, if we attempt to obtain additional product liability insurance coverage, this additional insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products or processes developed by us or our collaborative partners. If we are sued for any injury caused by our products, our liability could exceed our total assets.

Risks Specific to Our Vertically-Integrated Biofuels Business

We may not be successful in the development of individual steps in, or an integrated process for, the production of ethanol from cellulosic biomass at commercial scale in a timely or economic manner or at all.

The production of ethanol from cellulosic biomass requires multiple integrated steps, including:

• obtaining the cellulosic raw material;

• pretreatment of the biomass to make its constituent fibers accessible to enzymes;

• treatment with enzymes to produce fermentable sugars;

• fermentation by organisms to produce ethanol from the fermentable sugars;

• distillation of the ethanol to concentrate and separation of it from other materials;

• purification of the ethanol; and

• storage and distribution of the ethanol.

We are currently focused on the pilot-scale research and development of such processes in our pilot facility in Jennings, Louisiana, as well as the optimization of our demonstration-scale facility located at the same site that is intended to demonstrate the economics of cellulosic ethanol production using our proprietary processes. We have limited experience with sourcing cellulosic feedstocks and distilling ethanol produced from biomass, and we have no experience storing and/or distributing significant volumes of ethanol produced from biomass sources. To date, we have focused the majority of our research and development efforts on producing ethanol from corn stover, sugarcane bagasse, and wood. The technological and logistical challenges associated with each one of these processes are extraordinary, and we may not be able to resolve such difficulties in a timely or cost effective fashion, or at all. Even if we are successful in developing an economical commercial-scale process for converting a particular cellulosic biomass to cellulosic ethanol, we may not be able to adapt such process to other biomass raw materials.

While we have a pilot-scale cellulosic ethanol facility and have commissioned our demonstration-scale cellulosic ethanol facility to demonstrate the economics of cellulosic ethanol production using our proprietary processes, we have yet to complete the optimization of our demonstration-scale facility, nor have we begun construction of a large-scale commercial cellulosic ethanol facility. While we have estimated the construction and operating costs for our initial large-scale commercial cellulosic ethanol facilities, these assumptions may prove to be incorrect. Accordingly, we cannot be sure that we can manufacture cellulosic ethanol in an economical manner at large scale. If we fail to commence large-scale production in a timely manner or to develop large-scale manufacturing capacity and experience, or fail to manufacture cellulosic ethanol economically on a commercial scale or in commercial volumes, our commercialization of cellulosic ethanol and our business, financial condition, and results of operations will be materially adversely affected.

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We may not be able to implement our planned expansion strategy to build, own and operate commercial-scale cellulosic ethanol facilities, including as a result of our failure to successfully manage our growth, which would prevent us from achieving our goals.

Our strategy currently includes the continued development of our pilot-scale facility for process development, optimization of our demonstration-scale plant to validate the economics of our processes at commercial-scale volumes of cellulosic ethanol production, and development and construction of commercial scale plants for the production of large quantities of ethanol for commercial distribution and sale. We plan to grow our business by investing in new facilities and/or acquiring existing facilities, either independently or with potential development partners, as well as pursuing other business opportunities such as the production of other renewable fuels to the extent we deem those opportunities advisable. We believe that there is increasing competition for suitable production sites. We may not find suitable sites for construction of new facilities, suitable acquisition candidates or other suitable expansion opportunities.

We must also obtain numerous regulatory approvals and permits in order to construct and operate facilities. These requirements may not be satisfied in a timely manner or at all. Federal and state governmental requirements may substantially increase our costs, which could have a material adverse effect on our results of operations and financial position. Our expansion plans may also result in other unanticipated adverse consequences, such as the diversion of management’s attention from our existing operations and products.

Rapid growth, resulting from our operation or other involvement with cellulosic ethanol facilities or otherwise, may impose a significant burden on our administrative and operational resources. Our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians and other personnel. We may be unable to do so.

We may not find additional appropriate sites for new facilities, or development partners with whom we can implement our growth strategy, and we may not be able to finance, construct, develop or operate these new facilities successfully. We also may be unable to find suitable acquisition candidates. Accordingly, we may fail to implement our planned expansion strategy, including as a result of our failure to successfully manage our growth, and as a result, we may fail to achieve our goals.

We have experienced, and may continue to experience, significant delays or cost overruns related to our cellulosic ethanol plant projects.

We have experienced cost overruns for our demonstration-scale facility through the commissioning phase. We may continue to experience significant delays or cost overruns during the optimization phase as a result of a variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen design flaws, construction defects, or labor issues, any of which could prevent us from commencing or optimizing operations as expected at our facilities.

Our construction costs may also increase to levels that would make a new facility too expensive to complete or, for demonstration and commercial-scale plants, unprofitable to operate. Contractors, engineering firms, construction firms and equipment suppliers may lack the expertise in cellulosic ethanol, which may result in delays or cost overruns. Contractors, engineering firms, construction firms and equipment suppliers also receive requests and orders from other clients, including other ethanol companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms.

If we are unable to successfully commercialize our technology, our business may fail to generate sufficient revenue, if any, which would adversely affect our operating results.

We expect to derive a significant portion of our revenue from the commercialization of our proprietary technology for producing fuel-grade cellulosic ethanol by developing, either alone or with partners, cellulosic ethanol production plants and by licensing our proprietary technology. In order to develop a viable cellulosic ethanol business, we will need to:

• successfully complete the optimization of our demonstration facility;

• successfully design, finance and construct commercial-scale cellulosic ethanol facilities; and

• prove that we can operate commercial-scale ethanol facilities at costs that are competitive with grain-based ethanol facilities, other cellulosic ethanol technologies that may be developed and other alternative fuel technologies that may be developed.

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Currently, there are no commercial-scale cellulosic ethanol production plants in operation in the United States, and we have no previous experience developing, constructing or operating commercial-scale cellulosic ethanol production plants. We are in the optimization phase of our first demonstration-scale cellulosic ethanol facility. There can be no assurance that we will be able to develop and operate cellulosic ethanol production plants on a commercial scale, that we will be able to successfully license our technology to third parties, or that any cellulosic ethanol facilities developed by us or our licensees will be profitable.

We are dependent on BP under our joint ventures in cellulosic ethanol.

We have a strategic partnership with BP to accelerate the development and commercialization of cellulosic ethanol technology. The first phase of our partnership combines a broad technology platform and operational capabilities in an effort to advance the development of a portfolio of low-cost, environmentally-sound cellulosic ethanol production facilities in the United States, and potentially throughout the world. The second phase of our partnership is focused on the commercial deployment of our technologies into a commercial-scale cellulosic ethanol production facility. We are dependent upon BP’s financial and technical contributions under both of these joint ventures in order to realize the benefits of the strategic partnership with BP. If BP were not to engage actively in efforts to perform under our joint ventures or were to pursue alternative efforts in cellulosic ethanol, the joint ventures may not be successful and our business could be harmed. The efforts under the first phase of our partnership have been co-funded by BP under an 18-month initial agreement that expires on January 31, 2010. We and BP are currently in discussions to extend this partnership beyond its initial 18-month term. If BP were to discontinue its participation in either of these joint ventures, we would need to continue the efforts on our own or identify and enter into arrangements with one or more other partners. If we were to have to fund all of the technology development efforts, we would need to raise additional funds to do so, which would be difficult in the current financing environment. Alternatively, it may be difficult for us to find a different partner that is a good strategic fit and to enter into a new strategic relationship on terms that are favorable to us. If we could not find an alternative way to pursue our development and commercialization efforts in cellulosic ethanol, our business would be adversely affected.

Our failure to successfully develop our cellulosic ethanol processes and technology would adversely affect our ability to achieve the benefits under our strategic partnership with BP, and could prevent us from successfully developing and commercializing cellulosic ethanol and achieving or sustaining profitability.

A substantial part of our efforts in our biofuels business over the near term will be focused upon the joint development program with BP. We have agreed with BP that for a limited period, we will not use our existing technology in any other technology development program in the field of conversion of biomass to fermentable sugars for the production, or the use in production, of ethanol, with limited exceptions. The limited period may be extended if our joint development program with BP is extended. We are responsible for performance of substantially all of the activities under the joint development program. If we are not successful in achieving the objectives of the joint development program, BP may terminate the joint development program, and we will no longer be entitled to receive any payments from BP for performance of the joint development program, which would have a material adverse impact on our business, financial condition, and results of operations. The technology in the defined field that we develop in the course of the joint development program will be owned by Galaxy, a special purpose entity which is equally owned by BP and us. We will only have access to the technology owned by Galaxy through any license that Galaxy grants to us. In addition, the license to our existing technology that we granted to Galaxy in the defined field will continue in effect on a non-exclusive basis even if the joint development program terminates, unless the termination is caused by BP’s failure to make payments to us when due. If BP terminates the joint development program, we may not be successful in entering into an agreement with another strategic partner or otherwise economically exploiting our technology in the defined field, and the continuing rights of Galaxy to exploit our existing technology and technology developed during the joint development program may adversely affect our ability to do so.

If we are unable to perform our obligations under our joint development program with BP, including funding our portion of its costs, we may lose certain voting rights in the management of Galaxy, the special purpose entity formed to exploit the technology developed through our relationship with BP, and the anticipated economic benefits resulting from the joint development program may be delayed or may not occur.

We are co-funding our joint development program with BP and have an equal vote with BP in decisions regarding the management of Galaxy, including decisions regarding future funding, the commercial use of the technology package that we anticipate will result from the joint development program and the timing of monetary distributions to the owners of Galaxy. However, if we are unable to fund our portion of the joint development program costs, or are unable to fulfill certain of our other obligations under the joint development program, we may lose our ability to participate in certain aspects of the decision-making process, including decisions about how and when funding occurs. If we are unable to fulfill our funding commitments, BP may chose to fund our portion of the joint development program and to receive its contributions back before we receive any additional distributions from license fees, royalties or other revenue, which could result in the delay of distributions to us or in our receiving no distributions. A delay or failure to receive distributions could have a material adverse impact on our future revenues and could have a material adverse impact on our business, financial condition and results of operations.

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If we do not participate in projects under our commercial joint venture with BP or are unable to fund our portion of projects that we have elected to participate in under the joint venture, our interest in the joint venture may be bought out by BP or diluted, and the anticipated economic benefits to us of the joint venture may be lost or reduced.

We are participating in commercial development activities with BP under Vercipia Biofuels LLC, a joint venture owned equally by BP and us, which will act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under our joint development program with BP. This joint venture is intended to progress the development of one of the nation’s first commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida, and to create future opportunities for commercializing cellulosic ethanol technologies. If we do not continue to participate in the development of the Vercipia project by funding our portion of the costs, or if we do participate but are unable to meet our funding obligations with respect to the project, BP may chose to buy out our interest in the joint venture or may dilute our interest in the joint venture. Loss or reduction of our interest in Vercipia could have a material adverse impact on our future revenues and could have a material adverse impact on our business, financial condition and results of operations.

If we are unable to co-develop commercial plant production projects with BP under our Vercipia joint venture, we may not achieve the anticipated benefits of our relationship with BP.

There are substantial risks involved in the design, development, and construction of commercial-scale cellulosic ethanol production facilities, which is the focus of our Vercipia joint venture with BP, including, but not limited to, the following risks:

• legal and regulatory risk related to land use, permitting, and environmental regulations;

• cost overruns;

• risk that technology will not scale from a demonstration to commercial facility;

• risk that production costs will not be competitive with the price of competing fuels like gasoline or corn-based ethanol;

• inability to obtain necessary financing to fund the commercial project;

• decrease in support from the government through loss of subsidies, loss of tax credits, or a decrease in federal financial support including the risk that we may not be granted the loan guarantee from the DOE which BP and we recently applied for; and

• introduction of next-generation technologies that are superior to our cellulosic ethanol process technology.

Any one of these factors could have a material adverse impact on our and BP’s ability to complete our first planned commercial facility, which would have a material adverse impact on our business, financial condition and results of operations.

We may not realize the economic return expected from our acquired in-process research and development.

We allocated $42.4 million of the purchase price of Celunol on June 20, 2007 to acquired in-process research and development projects. Acquired in-process research and development, or IPR&D, represents the valuation of acquired, to-be-completed research projects. Prior to the merger, Celunol’s ongoing research and development initiatives primarily involved the development of its patented and proprietary biotechnology to enable production of fuel-grade ethanol from cellulosic biomass materials. As of the merger date, pursuant to authoritative guidance, these projects were not determined to have reached technological feasibility and have no alternative future use. Accordingly, the amounts allocated to those projects were expensed in our statements of operations in June 2007, the period in which the merger was consummated.

The values of the research projects, namely, our “Generation 1” or “Gen 1” technology, were determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. These cash flows were estimated by forecasting total revenue expected from these products and then deducting appropriate operating expenses, cash flow adjustments and contributory asset returns to establish a forecast of net cash flows arising from the acquired in-process technology. These cash flows were substantially reduced to take into account the time value of money and the risks associated with the inherent difficulties and uncertainties given the projected stage of development of these projects at closing. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 40% were considered appropriate for valuation of the IPR&D. We believe that these discount rates were commensurate with the projects’ stage of development and the uncertainties in the economic estimates described above.

Since our IPR&D represents costs for technology that has not yet reached technological feasibility, we have, and will continue to, require substantial investment in the future development and commercialization of our Gen 1 technology. While we expect to deploy this technology at a commercial scale as early as 2012, we can not assure you that we will ever be successful in commercializing this technology. If these projects are not successfully developed, our sales and profitability will be adversely affected in future periods.

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If we are unable to successfully operate our pilot cellulosic ethanol production facility or to successfully optimize and operate our demonstration-scale cellulosic ethanol production facility, we may be unable to proceed with the development of cellulosic facilities on a commercial-scale, which would have a material adverse effect on our business.

To date, we have not operated demonstration-scale cellulosic ethanol facilities or built or operated commercial-scale cellulosic ethanol facilities. The development of a portfolio of ethanol production facilities is dependent on the performance of our pilot facility, which we continue to upgrade, as well as our demonstration facility, which is now in the optimization phases. The operation of our pilot facility and the optimization of our demonstration facility might be subject to significant interruption and delay in case of a major accident or damage from severe weather or other natural disasters, or due to supply shortages of necessary materials and services which we, along with other participants in the ethanol industry, have experienced. For these and other reasons, the operation of our pilot facility and the optimization and operation of our demonstration facility may be subject to significant cost overruns from our budgeted amounts. If we are unable to fund these expenditures, our progress at the pilot facility and demonstration facility could be significantly delayed or curtailed until such financing is available. In addition, our demonstration facility, once operational, may not produce ethanol in sufficient quantities or the operating costs for the facility may be significantly higher than we have expected. If we are unable to produce ethanol in the demonstration facility at competitive variable and/or total costs, we may be unable to proceed with the development of commercial-scale facilities.

In order to successfully develop commercial-scale facilities, we will need to address siting, construction and other issues, and if we fail to successfully overcome these issues we will not be able to commercialize our technology.

Even if we can demonstrate that our technology can be deployed on a commercial-scale to produce cellulosic ethanol on a cost-competitive basis, in order to be successful we must develop a number of commercial-scale projects. In order to successfully develop commercial-scale projects, we must overcome a number of risks and uncertainties including the following:

• Sites. In order to develop commercial facilities, we will need to identify and obtain rights to appropriate sites. In evaluating and obtaining sites, we will need to address a number of issues, including the proximity to potential feedstocks and proximity to transportation infrastructure and end-user markets. Competition for suitable cellulosic ethanol production sites may increase as the market evolves. We may not find suitable additional sites for the construction of new facilities.

• Joint Venture Partners. In addition to identifying sites for projects we develop on our own and with BP, we may seek to develop commercial facilities through other joint venture partners. We may not find suitable joint venture partners for construction of new facilities. As the market for cellulosic ethanol projects evolves, competition may increase for potential joint venture partners with favorable sites.

• Supply of Cellulosic Feedstock. Operation of commercial facilities requires a continuous long-term supply of feedstocks that are generally located in geographic proximity to the facility. We may not be successful in obtaining long-term supply agreements, or our supply of feedstocks could be disrupted by weather, climate, natural disasters, or other factors. In addition, prices and competition for feedstocks could increase, adversely effecting our ability to operate economically or at all.

• Off-Take Arrangements. In order to successfully develop a commercial-scale facility, we will need to enter into off-take arrangements for the sale of ethanol to be produced at that facility. If we are unable to enter into appropriate off-take arrangements, we may be unable to obtain project financing for the particular facility.

• Construction. We will need to identify and retain a significant number of contractors, engineering firms, construction firms and equipment suppliers on satisfactory terms in order to be able to develop and construct multiple commercial-scale cellulosic ethanol facilities. These vendors also receive requests and orders from other companies in the ethanol and other industries and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms. If we are unable to enter into construction and supply contracts on satisfactory terms, we will not be able to obtain financing for our commercial scale projects. In addition, our construction costs may also increase to levels that would make a new facility too expensive to develop or unprofitable to operate.

• Operating Risks. If we are able to build commercial-scale ethanol facilities, our operation of these facilities may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in the ethanol industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not be adequate to fully cover the potential operational hazards described above. Any delay in development or interruption due to these potential operational risks could result in substantial losses and material adverse effects on our results of operations.

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We will rely heavily on future strategic partners to support our biofuels business.

An important component of our current business plan is to enter into strategic partnerships:

• to provide capital, equipment and facilities, including significant capital for the construction of cellulosic ethanol research and production facilities;

• to provide expertise in performing certain process development, production and logistical activities;

• to provide funding for research and development programs, process development programs and commercialization activities;

• to provide access to cellulosic feedstocks; and

• to support or provide sales, marketing and distribution services.

These arrangements with collaborative partners are, and will continue to be, critical to our success in implementing our vertical integration biofuels strategy and manufacturing and selling cellulosic ethanol profitably. We cannot guarantee that any collaborative relationship(s) will be entered into, or if entered into, will continue or be successful. Our collaborative partners could experience business difficulties which eliminate or impair their ability to effectively perform under our arrangements with them. Failure to make or maintain these arrangements or a delay or failure in a collaborative partner’s performance under any such arrangements would materially adversely affect our business and financial condition.

We cannot control our collaborative partners’ performance or the resources they devote to our programs. We may not always agree with our partners nor will we have control of our partners’ activities. The performance of our programs may be adversely affected and programs may be delayed or terminated or we may have to use funds, personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own as a result of these disagreements. Performance issues, program delays or termination or unbudgeted use of our resources may materially adversely affect our business and financial condition.

Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns the technology and other intellectual property that is developed during a collaboration or other issues arising out of the collaborative agreements. Such a dispute could delay the program on which we are working or could prevent us from obtaining the right to commercially exploit such developments. It could also result in expensive arbitration or litigation, which may not be resolved in our favor. Our collaborative partners could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us.

In order to gain broad acceptance of our technology, we may need to enter into licensing arrangements with third parties. If we fail to successfully identify and enter into licenses with qualified third parties or to successfully manage existing and future licensing relationships, we may not be able to successfully commercialize our technology.

We currently have a technology transfer agreement in place with Marubeni Corporation and Tsukishima Kikai Co., Ltd. We also expect that a significant portion of our future revenue could be derived from licensing agreements that we or our Galaxy joint venture with BP will enter into in the future. If we fail to enter into and maintain license agreements, we may not be able to gain broad acceptance for our technology, grow our business or generate sufficient revenues to support our operations. Our future license opportunities could be harmed if:

• we do not successfully operate our pilot facility or successfully optimize and operate our demonstration facility;

• we are unable to successfully develop commercial-scale facilities;

• we develop processes or enter into licenses that conflict with the business objectives of our existing licensees;

• we disagree with our licensees as to rights to intellectual property we develop or our licensees’ research programs or commercialization activities;

• we are unable to manage multiple licensee relationships;

• our licensees become our competitors or enter into agreements with our competitors;

• our licensees become less willing to expend their resources on research or development due to general market conditions or other circumstances beyond our control; or

• consolidation in our target markets limits the number of potential strategic licensees or we are unable to negotiate additional license agreements having terms satisfactory to us.

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We may not be able to develop manufacturing capacity sufficient to meet demand in an economical manner or at all.

If demand for cellulosic ethanol increases beyond the scope of our production facilities, we may incur significant expenses in the expansion and/or construction of production facilities and increases in personnel in order to increase production capacity. To finance the expansion of a commercial-scale production facility is complex and expensive. We cannot assure you that we will have the necessary funds to finance the development of production facilities, or that we will be able to develop this infrastructure in a timely or economical manner, or at all.

The feedstocks, raw materials and energy necessary to produce ethanol may be unavailable or may increase in price, adversely affecting our sales and profitability.

We intend to use various sources of cellulosic biomass, such as sugarcane bagasse, dedicated energy crops, agricultural residues (which may include corn stover), sorghum, switchgrass and wood, to make cellulosic ethanol. However, rising prices for any or all of these feedstocks would produce lower profit margins and, therefore, represent unfavorable market conditions. This is especially true since market conditions generally would not allow us to pass along increased costs to customers, because the price of ethanol is primarily determined by other factors, such as the price of oil and gasoline. Additionally, once we elect to use a particular feedstock in the ethanol production process, it may be technically or economically impractical to change to a different feedstock. At certain levels, feedstock prices may make ethanol uneconomical to use in markets where the use of fuel oxygenates is not mandated.

Weather conditions and other factors affecting crop yields, farmer planting decisions, and general economic, market and regulatory factors may influence the availability, transportation costs and price of biomass feedstocks used in our pilot facility and to be used in our demonstration- and commercial-scale production facilities. There can be no guarantee that feedstock costs to us may not increase over time. Government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply, also impact the price and transportation costs of agricultural products. The significance and relative effects of these factors on the potential cost of feedstocks are difficult to predict. Any increase in the cost of feedstocks will result in increased costs, and negative effects on our operating results. Other inputs to our cellulosic-ethanol production process will also be subject to price variation. These include chemicals, nutrients, enzymes, acid and lime, among others. Increases in the costs of these materials, or our failure to achieve reductions in the use of such materials, could increase our operating costs and have negative effects on our operating results. The gross margin of our anticipated ethanol production business depends principally on the spread between the price for ethanol and our production costs. Any increase in production costs or decrease in the demand or price of ethanol will negatively affect our business.

The production of ethanol also requires a significant amount of other raw materials and energy, primarily water, electricity and natural gas. We plan to utilize the lignin remaining after the pretreatment of cellulosic biomass as a source of energy to power our cellulosic ethanol production facilities, however we may not be successful in using lignin as a source of energy and, if so, we may have to supplement our energy use with other sources, including electricity and natural gas. The prices of electricity and supplemental fuels such as natural gas have fluctuated significantly in the past and may fluctuate significantly in the future. Local water, electricity and gas utilities may not be able to reliably supply the water, electricity and supplemental fuels that our facilities will need or may not be able to supply such resources on acceptable terms. In addition, if there is an interruption in the supply of water or energy for any reason, we may be required to halt ethanol production.

The high concentration of our efforts towards developing processes for the production of cellulosic ethanol could increase our losses, especially if demand for ethanol declines.

If we are successful in producing and marketing cellulosic ethanol, our revenue will be derived primarily from sales of ethanol. Ethanol competes with several other existing products and other alternative products could also be developed for use as fuel additives. An industry shift away from ethanol or the emergence of new competing products may reduce the demand for ethanol. A downturn in the demand for ethanol would significantly and adversely affect any sales and/or profitability.

The market price of ethanol is volatile and subject to significant fluctuations, which may cause our profitability from the production of cellulosic ethanol to fluctuate significantly.

The market price of ethanol is dependent upon many factors, including the price of gasoline, which is in turn dependent upon the price of petroleum. Petroleum prices are highly volatile and difficult to forecast due to frequent changes in global politics and the world economy. The distribution of petroleum throughout the world is affected by incidents in unstable political environments, such as Iraq, Iran, Kuwait, Saudi Arabia, Nigeria, Venezuela, the former U.S.S.R. and other countries and regions. The industrialized world depends critically upon oil from these areas, and any disruption or other reduction in oil supply can cause significant fluctuations in the prices of oil and gasoline. We cannot predict the future price of oil or gasoline and may establish unprofitable prices for the sale of ethanol due to significant fluctuations in market prices. In recent years, the prices of gasoline, petroleum and ethanol have all reached historically high levels. If the prices of gasoline and petroleum decline, we believe that the demand for and price of ethanol may be adversely affected. Fluctuations in the market price of ethanol may cause our revenue and profitability to fluctuate significantly from quarter-to-quarter and year-to-year.

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We believe that the production of ethanol is expanding rapidly. There are a number of new plants under construction and planned for construction throughout the United States. We expect existing ethanol plants to expand by increasing production capacity and actual production. Increases in the demand for ethanol may not be commensurate with increasing supplies of ethanol. Thus, increased production of ethanol may lead to lower ethanol prices. Also, the increased production of ethanol could result in increased demand for feedstocks for the production of ethanol. This could result in higher prices for feedstocks and cause higher ethanol production costs and, in the event that we are unable to pass increases in the price of feedstocks on to our customers, will result in lower profits. We cannot predict the future price of ethanol or feedstocks. Any material decline in the price of ethanol, or any material increase in the price of feedstocks, will adversely affect any sales and/or profitability.

If ethanol demand decreases, does not increase, or does not increase as much as supply, there may be excess capacity in our industry which would likely cause a decline in ethanol prices, adversely impacting our results of operations, cash flows and financial condition.

Domestic fuel ethanol production has increased steadily from 1.5 billion gallons per year in 1999 to 9.2 billion gallons per year in 2008, according to the Renewable Fuels Association. In addition, there is a significant amount of capacity being added to the fuel ethanol industry, including capacity that may be added as a result of government programs and/or incentives, and capacity added to address anticipated increases in demand. However, demand for ethanol may not increase as quickly as expected, or at all. If the ethanol industry has excess capacity, a fall in prices will likely occur which will have an adverse impact on the viability of our vertical integration strategy within biofuels, as well as our results of operations, cash flows and financial condition if we proceed to market ethanol. Demand for ethanol could be impaired due to a number of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption could occur as a result of increased gasoline or oil prices. For example, price increases could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage capabilities.

The United States ethanol industry is highly regulated by federal and state legislation and regulation and any changes in such legislation or regulation could materially adversely affect our results of operations and financial condition.

The elimination or significant reduction in the Federal Excise Tax Credit could have a material adverse effect on our results of operations.

The production of ethanol is made significantly more competitive by federal tax incentives. The Volumetric Ethanol Excise Tax Credit, or VEETC, program, which is scheduled to expire on December 31, 2010, allows gasoline distributors that blend ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell regardless of the blend rate. The current federal excise tax on gasoline is $0.184 per gallon, and is paid at the terminal by refiners and marketers. If the fuel is blended with ethanol, the blender may claim a $0.45 tax credit for each gallon of ethanol used in the mixture. In addition, Congress enacted a $1.01/gallon production tax credit (“PTC”) that is available to cellulosic biofuels producers in the Farm, Conservation and Energy Act of 2008 (“FCEA”). This credit, which is inclusive of the VEETC, is set to expire on December 31, 2012. The VEETC may not be renewed prior to its expiration in 2010, or if renewed, it may be renewed on terms significantly less favorable than current tax incentives. In addition, the blenders’ credits, as well as other federal and state programs benefiting ethanol (such as tariffs), generally are subject to United States government obligations under international trade agreements, including those under the World Trade Organization Agreement on Subsidies and Countervailing Measures, and might be the subject of challenges thereunder, in whole or in part. The elimination or significant reduction in either the VEETC or the PTC could have a material adverse effect on our results of operations.

Waivers of the Renewable Fuels Standard minimum levels of renewable fuels included in gasoline, or the lapse of the increased weight given for the use of cellulosic ethanol for compliance with the Renewable Fuels Standard, could have a material adverse effect on our results of operations.

Under the Energy Policy Act of 2005, the Department of Energy, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the Renewable Fuels Standard, or RFS, mandate with respect to one or more states if the administrator determines that implementing the requirements would severely harm the economy or the environment of a state, a region or the United States, or that there is inadequate supply to meet the requirement. Any waiver of the RFS with respect to one or more states or with respect to a particular year, or the lapse or alteration of the extra weight cellulosic ethanol is given in complying with the RFS, could adversely affect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

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While the Energy Policy Act of 2005 imposes the RFS, it does not mandate the use of ethanol and eliminates the oxygenate requirement for reformulated gasoline in the Reformulated Gasoline Program included in the Clean Air Act.

The Reformulated Gasoline, or RFG, program’s oxygenate requirements contained in the Clean Air Act was completely eliminated on May 5, 2006 by the Energy Policy Act of 2005. While the RFA expects that ethanol should account for the largest share of renewable fuels produced and consumed under the RFS, the RFS is not limited to ethanol and also includes biodiesel and any other liquid fuel produced from biomass or biogas. The elimination of the oxygenate requirement for reformulated gasoline in the RFG program included in the Clean Air Act may result in a decline in ethanol consumption in favor of other alternative fuels, which in turn could have a material adverse effect on our results of operations and financial condition.

The elimination or alteration of the mandates for ethanol use contained in the Energy Independence and Security Act of 2007 could have a material adverse effect on our results of operations.

Under the Energy Independence and Security Act of 2007, use of renewable fuels, including ethanol, in the United States is mandated to increase from 9 billion gallons in 2008 to 36 billion gallons by 2022. The Act also mandates the use of 16 billion gallons per year of cellulosic ethanol by 2022. Elimination or reduction of these mandated targets could adversely affect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

Changes in enacted federal, state or local legislation, or the enaction of new legislation, may adversely impact our business.

Federal, state and local legislators may enact legislation, or modify or amend currently enacted legislation, that could adversely affect the industries in which we currently operate. For example, several federal laws encourage the development of the ethanol and/or biofuels industry in the United States. If those laws are repealed or are not renewed, it could adversely impact the ethanol and/or biofuels industries as a whole, which would have an adverse effect on our financial results. In addition, legislation could be enacted that might not negatively impact our industry as a whole, but could negatively impact that portion of the industry in which we operate or our particular business. For example, in the future we may consider the effect of state or local incentives, such as grants or tax abatements, in formulating our internal projections and budgets and when choosing where to locate and operate commercial-scale plants for the production of cellulosic ethanol. If those incentives should be repealed or no longer become available, the profitability of any commercial-scale plants which are reliant on such incentives could be negatively affected, which in turn would negatively affect our operating results.

Certain countries can export ethanol to the United States duty-free, which may undermine the ethanol production industry in the United States.

Imported ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem tax that was designed to offset the $0.51 per gallon ethanol subsidy available under the federal excise tax incentive program for refineries that blend ethanol in their fuel. There is a special exemption from the tariff for ethanol imported from certain countries in Central America and the Caribbean islands, which is limited to a total of 7.0% of United States production per year (with additional exemptions for ethanol produced from feedstock in the Caribbean region over the 7.0% limit). We do not know the extent to which the volume of imports would increase or the effect on United States prices for ethanol if the tariff is not renewed beyond its current expiration in early 2011. In addition The North America Free Trade Agreement countries, Canada and Mexico, are exempt from duty. Imports from the exempted countries have increased in recent years and are expected to increase further as a result of new plants under development. In particular, the ethanol industry has expressed concern with respect to a new plant under development by Cargill, Inc., one of the largest ethanol producers in the United States, in El Salvador that would take the water out of Brazilian ethanol and then ship the dehydrated ethanol from El Salvador to the United States duty-free. Since production costs for ethanol in Brazil are estimated to be significantly less than what they are in the United States, the import of the Brazilian ethanol duty-free through El Salvador, or the import of ethanol duty-free from any country exempted from the tariff, may negatively impact the demand for domestic ethanol and the price at which we sell our ethanol.

Our competitive position, financial position and results of operations may be adversely affected by technological advances.

Even if we are able to execute our business plan and develop commercial-scale cellulosic ethanol production plants and successfully license our proprietary technology, the development and implementation of new technologies may result in a significant reduction in the costs of ethanol production by others. For example, any technological advances by others in the efficiency or cost to produce ethanol from corn or other biomass could have an adverse effect on our competitiveness. We cannot predict when new technologies may become available, the rate of acceptance of new technologies by our competitors or the costs associated with new technologies. In addition, advances in the development of alternatives to ethanol could significantly reduce demand for or eliminate the need for ethanol. Any advances in technology which require significant capital expenditures to remain competitive or which reduce demand or prices for ethanol would have a material adverse effect on the results of our operations and financial position.

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The termination or loss of our exclusive license from the University of Florida Research Foundation, Inc., would have a material adverse effect on our business.

We have an exclusive worldwide license to use, develop and commercially exploit the ethanol production patent estate of the University of Florida Research Foundation, Inc., or UFRFI, which consists of several patents and pending patents and other related proprietary ethanol technology, and any extensions and improvements thereof for the production of ethanol, all of which is referred to herein as the UFRFI technology. The UFRFI license agreement expires on the later of October 2015 or the expiration of the last patent related to the UFRFI licensed technology. Based on the latest to expire of the current granted United States patents, the UFRFI license agreement will extend into 2022. Pending and future patent applications related to the UFRFI licensed technology, if granted, would extend the expiration date of the UFRFI license agreement beyond 2026. Loss of the rights to the UFRFI technology licensed to us, for example, due to our inability to comply with the terms and conditions or otherwise of the UFRFI license agreement would have a material adverse effect on our business.

Growth in the sale and distribution of ethanol is dependent on the changes to and expansion of related infrastructure which may not occur on a timely basis, if at all, and our contemplated operations could be adversely affected by infrastructure disruptions.

Substantial development of infrastructure will be required by persons and entities outside our control for our contemplated licensing and cellulosic ethanol production operations, and the ethanol industry generally, to grow. Areas requiring expansion include, but are not limited to:

• the automobile industry’s manufacture of flexible fuel vehicles;

• additional rail capacity affecting distribution of ethanol;

• additional storage facilities for ethanol;

• increases in truck fleets capable of transporting ethanol within localized markets;

• expansion of refining and blending facilities to handle ethanol; and

• growth in service stations equipped to handle ethanol fuels.

Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand for our proprietary technology or the production of cellulosic ethanol, impede our delivery of cellulosic ethanol, impose additional costs on us, or otherwise have a material adverse effect on our results of operations or financial position. Our contemplated business will be dependent on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

New ethanol plants under construction or decreases in the demand for ethanol may result in excess United States production capacity.

A number of our competitors are divisions of substantially larger enterprises and have substantially greater financial resources than we have. Smaller competitors also pose a threat. Farmer-owned cooperatives and independent firms consisting of groups of individual farmers and investors have been able to compete successfully in the ethanol industry. These smaller competitors operate smaller facilities which do not affect the local price of corn grown in proximity to the facility as much as larger facilities. In addition, many of these smaller competitors are farmer-owned and often require their farmer-owners to commit to selling them a certain amount of corn as a requirement of ownership. A significant portion of production capacity in the ethanol industry consists of smaller-sized facilities. In addition, institutional investors and high net worth individuals could heavily invest in ethanol production facilities and oversupply the demand for ethanol, resulting in lower ethanol price levels that might adversely affect the results of our contemplated cellulosic ethanol production operations and financial position.

Risks Specific to Our Specialty Enzymes Business

*Macroeconomic conditions beyond our control could lead to decreases in demand for our products, reduced profitability or deterioration in the quality of our accounts receivable.

Domestic and international economic, political and social conditions are uncertain due to a variety of factors, including

• global, regional and national economic downturns;

• the availability and cost of credit;

• volatility in stock and credit markets;

• energy costs;

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• fluctuations in currency exchange rates

• the risk of global conflict;

• the risk of terrorism and war in a given country or region; and

• public health issues.

Our business depends on our customers’ demand for our products and services, the general economic health of current and prospective customers, and their desire or ability to make investments in technology. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in a way that reduces demand for our products and disrupts our manufacturing and sales plans and efforts. These global, regional or local conditions also could disrupt commerce in ways that could interrupt our supply chain and our ability to get products to our customers. These conditions may also affect our ability to conduct business as usual. Changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are typically made on unsecured credit terms that are generally consistent with the prevailing business practices in the country in which the customer is located. A deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.

*The financial instability of our customers could adversely affect our business and result in reduced sales, profits and cash flows.

We sell our products to and extend credit to our customers based on an evaluation of each customer’s financial condition, usually without requiring collateral. Our Fuelzyme customers are particularly exposed to the challenges facing the corn ethanol industry. While customer credit losses have historically been within our expectations and reserves, we cannot assure you that this will continue. The financial difficulties of a customer could cause us to curtail business with that customer or the customer to reduce its business with us and cancel orders. Our inability to collect on our trade accounts receivable from any of our major customers could adversely affect our results of operations and financial condition.

*Our international manufacturing operations are subject to the risks of doing business abroad, which could affect our ability to manufacture our products in international markets, obtain products from foreign suppliers or control the costs of our products.

We manufacture a majority of our commercial enzyme products through a manufacturing facility in Mexico City owned by Fermic S.A., or Fermic. As a result, we are subject to the general risks of doing business outside the U.S., particularly Mexico, including, without limitation, work stoppages, transportation delays and interruptions, political instability, expropriation, nationalization, foreign currency fluctuation, changing economic conditions, the imposition of tariffs, import and export controls and other non-tariff barriers, and changes in local government administration and governmental policies, and to factors such as the short-term and long-term effects of health risks like the recent outbreak of swine flu. There can be no assurance that these factors will not adversely affect our business, financial condition or results of operations.

If we are unable to access the capacity to manufacture products in sufficient quantity, we may not be able to commercialize our products or generate significant sales.

We have only limited experience in enzyme manufacturing, and we do not have our own internal capacity to manufacture specialty enzyme products on a commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our specialty enzyme products. We have arrangements with third parties that have the required manufacturing equipment and available capacity to manufacture our commercial enzymes. While we have our own pilot development facility, we continue to depend on third parties for large-scale commercial manufacturing. Additionally, one of our third party manufacturers is located in a foreign country, and is our sole-source supplier for most of our commercial enzyme products. Any difficulties or interruptions of service with our third party manufacturers or our own pilot manufacturing facility could disrupt our research and development efforts, delay our commercialization of specialty enzyme products, and harm our relationships with our specialty enzyme strategic partners, collaborators, or customers.

We have experienced inventory losses and decreased manufacturing yields related to our manufacturing processes for Phyzyme and Fuelzyme, which negatively impacted our product gross margins.

We have in the past experienced inventory losses and decreased manufacturing yields related to contamination and manufacturing issues for Phyzyme and Fuelzyme. While we believe we have adequately resolved our contamination issues and have recovered a substantial portion of such losses from our third-party manufacturer Fermic, there can be no assurance that such losses will not occur in the future or that any amount of future losses will be reimbursed by Fermic. If such contamination issues continue in future periods, or we are not able to otherwise improve our manufacturing yields, our results of operations and financial condition would be adversely affected.

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If Danisco or its subsidiary company, Genencor, assumes all or a part of our Phyzyme manufacturing, our gross product revenues will be adversely impacted and our product gross margins could decline.

Due to capacity constraints at Fermic in 2008, we were not able to supply adequate quantities of Phyzyme necessary to meet the increased demand from Danisco. As a result, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for Phyzyme. Pursuant to current accounting rules, revenue from Phyzyme that is supplied to us by Genencor is recognized in an amount equal to the net profit share received from Danisco, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment has little or no negative impact on the gross margin we recognize for every sale of Phyzyme, it does have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.

In addition, our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume manufacturing rights of Phyzyme. If Danisco were to exercise this right, we may experience significant excess capacity at our third party manufacturing facility. If we were unable to absorb this excess capacity with other products, our results of operations and financial condition would be adversely effected.

We have only limited experience in independently developing, manufacturing, marketing, selling, and distributing commercial specialty enzyme products.

We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute specialty enzyme products on a commercial scale. We will determine which specialty enzyme products to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization. At any time, we may modify our strategy and pursue collaborations for the development and commercialization of some specialty enzyme products that we had intended to pursue independently. We may pursue specialty enzyme products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize more specialty enzyme products directly, we would need to establish or obtain through outsourcing arrangements additional capability to develop, manufacture, market, sell, and distribute such products. If we are unable to successfully commercialize specialty enzyme products resulting from our internal product development efforts, we will continue to incur losses in our specialty enzymes business, as well as in our business as a whole. Even if we successfully develop a commercial specialty enzyme product, we may not generate significant sales and achieve profitability in our specialty enzymes business, or in our business as a whole.

We have relied, and will continue to rely, heavily on strategic partners to support our specialty enzymes business.

Historically, we have relied upon a number of collaborations, including those with Syngenta, Danisco, Bunge, Cargill, and BASF, to enhance and support our development and commercialization efforts for our specialty enzymes. An important component of our business plan is to enter into strategic partnerships:

• to provide capital, equipment and facilities, including significant capital to develop and expand our enzyme manufacturing capabilities;

• to provide funding for research and development programs, process development programs and commercialization activities for our specialty enzyme products; and

• to support or provide sales, marketing and distribution services for our specialty enzyme products.

These arrangements with collaborative partners are, and will continue to be, critical to the success of our specialty enzymes business. We cannot guarantee that any collaborative relationship(s) will be entered into, or if entered into, will continue or be successful. Our collaborative partners could experience business difficulties which eliminate or impair their ability to effectively perform under our arrangements with them. Failure to make or maintain these arrangements or a delay or failure in a collaborative partner’s performance under any such arrangements would materially adversely affect our business and financial condition.

We cannot control our collaborative partners’ performance or the resources they devote to our programs. We may not always agree with our partners nor will we have control of our partners’ activities. The performance of our programs may be adversely affected and programs may be delayed or terminated or we may have to use funds, personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own as a result of these disagreements. Performance issues, program delays or termination or unbudgeted use of our resources may materially adversely affect our business and financial condition.

Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns the technology and other intellectual property that is developed during a collaboration or other issues arising out of the collaborative agreements. Such a dispute could delay the program on which we are working or could prevent us from obtaining the right to commercially exploit such developments. It could also result in expensive arbitration or litigation, which may not be resolved in our favor. Our collaborative partners could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us.

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Risks Related to Owning Our Common Stock

We are subject to anti-takeover provisions in our certificate of incorporation, bylaws, and Delaware law and have adopted a shareholder rights plan that could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, we adopted a share purchase rights plan that has anti-takeover effects. The rights under the plan will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board, since the rights may be amended to permit such an acquisition or may be redeemed by us. These provisions in our charter documents, under Delaware law, and in our rights plan could discourage potential takeover attempts and could adversely affect the market price of our common stock. Because of these provisions, our common stockholders might not be able to receive a premium on their investment.

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Revenue and expenses in future periods may be greater or less than in the immediately preceding period or in the comparable period of the prior year. Some of the factors that could cause our operating results to fluctuate include:

• termination of strategic alliances and collaborations;

• the success rate of our discovery efforts associated with milestones and royalties;

• the ability and willingness of strategic partners and collaborators to commercialize, market, and sell royalty-bearing products or processes on expected timelines;

• our ability to enter into new agreements with potential strategic partners and collaborators or to extend the terms of our existing strategic alliance agreements and collaborations, and the terms of any agreement of this type;

• our need to continuously recruit and retain qualified personnel;

• our ability to successfully satisfy all pertinent regulatory requirements;

• our ability to successfully commercialize products or processes developed independently and the demand and prices for such products or processes;

• the cost and timing of optimization and operation of our cellulosic ethanol demonstration facility;

• the extent, cost and timing of any new projects for the development of commercial-scale cellulosic ethanol facilities;

• general and industry specific economic conditions, which may affect our, and our collaborative partners’, research and development expenditures; and

• increased expenses related to the implementation of our vertical integration strategy within biofuels.

A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular fiscal period.

Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline.

Our stock price has been and may continue to be particularly volatile.

The market price of our common stock has in the past been and is likely to continue to be subject to significant fluctuations. Between January 1, 2006 and November 6, 2009, the closing market price of our common stock has ranged from a low of $2.76 to a high of $138.96. Since the completion of our merger with Celunol on June 20, 2007, the closing market price of our common stock has ranged from $2.76 to $81.96. The closing market price of our common stock on September 30, 2009 was $6.84, and the closing price of our common stock on November 6, 2009 was $4.29. Some of the factors that may cause the market price of our common stock to fluctuate include:

• the entry into, or termination of, key agreements, including key collaboration agreements and licensing agreements;

• interruption or delay in the optimization and operation of our cellulosic ethanol demonstration facility;

• risks and uncertainties related to siting, permitting, construction, materials and equipment procurement, and other issues related to development of commercial-scale facilities;

• any inability to obtain additional financing on favorable terms to fund our operations and pursue our business plan;

• reductions in the price of gasoline or increases in the prices for biomass feedstocks;

• future royalties from product sales, if any, by our collaborative partners;

• future royalties and fees for use of our proprietary processes, if any, by our licensees;

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• the initiation of material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or otherwise;

• our results of operations and financial condition, including our cash reserves and cost level;

• general and industry-specific economic and regulatory conditions that may affect our ability to successfully develop and commercialize biofuels and cellulosic ethanol and other products;

• significant accidents, damage from severe weather or other natural disasters affecting our cellulosic ethanol pilot and demonstration facilities;

• developments involving our 2009 Notes, 2008 Notes and 2007 Notes;

• the loss of key employees;

• the introduction of technological innovations or alternative fuel sources or other products by our competitors;

• decreases in the market for ethanol, and cellulosic ethanol;

• sales of a substantial number of shares of our common stock by our large shareholders;

• changes in estimates or recommendations by securities analysts, if any, who cover our common stock;

• future sales of our common stock or other capital-raising activities;

• issuance of shares by us, and sales in the public market of the shares issued, upon conversion of the 2009 Notes, 2008 Notes, 2007 Notes or exercise of our outstanding warrants, including the extent to which we issue shares versus pay cash in satisfaction of any “make-whole” obligation arising upon conversion of some or all of the 2008 and 2009 Notes or to pay interest due under the 2008 and 2009 Notes; and

• period-to-period fluctuations in our financial results.

Moreover, the stock markets in general are currently experiencing substantial volatility related to general economic conditions and may continue to experience volatility for some time. The stock markets have experienced in the past substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

Our officers, directors, and stockholders with at least 10% of our stock together controlled approximately 27% of our outstanding common stock as of September 30, 2009. If these officers, directors, and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could heavily contribute to our entering into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price.

*Future sales of our common stock in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. As of November 9, 2009, we had 11,715,228 shares of common stock outstanding.

Furthermore, the anti-dilution provisions of our 2008 Notes and of the warrants issued in connection therewith would be triggered by any issuance of shares of our common stock at a price below the conversion price or exercise price, as applicable, in effect at the time of such issuance, resulting in an increase in the number of shares of common stock issuable upon conversion or exercise, as applicable, of the 2008 Notes and the warrants issued in connection therewith, causing a further dilutive effect to other stockholders.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We held our 2009 Annual Meeting of Stockholders on September 1, 2009. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, withheld or against and the number of abstentions and broker non-votes with respect to each matter. All the proposals introduced at our 2009 Annual Meeting of Stockholders were approved by our stockholders.

a) The stockholders elected the three nominees for the board of directors to hold office until the 2010 Annual Meeting of Stockholders:

	Votes
Nominee	For	Withheld
Dr. James Cavanaugh	83,025,935	4,357,820
Mr. Simon Rich	82,676,100	4,707,655
Mr. Joshua Ruch	82,091,260	5,282,495

b) The stockholders approved an amendment to our certificate of incorporation to effect a reverse stock split of Verenium’s issued and outstanding shares of common stock:

	Votes
For	Against	Abstain
77,801,653	9,212,183	369,919

There were no broker non-votes.

c) The stockholders approved the stock exchange program:

	Votes
For	Against	Abstain
45,405,302	6,059,300	289,620

There were 35,629,533 broker non-votes.

d) The stockholders ratified the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm:

	Votes
For	Against	Abstain
84,278,707	2,154,531	950,517

There were no broker non-votes.

e) The stockholders approved a possible adjournment of the annual meeting to solicit additional proxies for proposals 2 and 3:

	Votes
For	Against	Abstain
72,983,083	12,901,125	1,499,547

There were no broker non-votes.

Approximately 87,383,755 of outstanding shares entitled to vote were represented at the meeting.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

(a)

Exhibit Number	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation - filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed with the Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.
3.2	Certificate of Amendment of Restated Certificate of Incorporation - filed as an exhibit to the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 16, 2007, and incorporated herein by reference.
3.3	Certificate of Amendment of Restated Certificate of Incorporation, filed June 26, 2007 - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 26, 2007, and incorporated herein by reference.
3.4	Certificate of Amendment of Restated Certificate of Incorporation, filed March 13, 2009 - filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009, and incorporated herein by reference.
3.5	Certificate of Amendment of Restated Certification of Incorporation, filed September 9, 2009 – filed as an exhibit to the Company’s Current Report on Form 8-K, filed with Securities and Exchange Commission on September 9, 2009, and incorporated herein by reference.
3.6	Amended and Restated Bylaws - filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 000-29173), filed with the Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.
3.7	Amendment to Bylaws of Verenium Corporation - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 27, 2007, and incorporated herein by reference.
4.1	Form of Common Stock Certificate of the Company - filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 333-92853) filed with the Securities and Exchange Commission, as amended, and incorporated herein by reference.
4.2	Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 13, 2000 (including the Form of Certificate of Designation of Series A Junior Participating Preferred Stock attached thereto as Exhibit A, the Form of Right Certificate attached thereto as Exhibit B, and the Summary of Rights to Purchase Preferred Shares attached thereto as Exhibit C) - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.
4.3	Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 2, 2002 - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 4, 2002, and incorporated herein by reference.
4.4	Certificate of Designation of Series A Junior Participating Preferred Stock - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.

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4.85	Second Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of February 12, 2007 - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 12, 2007, and incorporated herein by reference.
10.1	Form of Convertible Note Amendment Agreement, dated July 1, 2009, among the Company and certain holders of the Company’s 8% Senior Convertible Notes due April 1, 2012 - - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 1, 2009, and incorporated herein by reference.
10.2	Form of Amended and Restated 8% Senior Convertible Note due April 1, 2012– filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 1, 2009, and incorporated herein by reference.
10.3	Form of Exchange Agreement, dated August 28, 2009, among the Company and certain holders of the Company’s 5.50% Convertible Senior Notes due 2027 - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 4, 2009, and incorporated herein by reference.
	Pledge and Security Agreement, dated September 1, 2009, between the Company and Wells Fargo Bank, National Association, as collateral agent - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 4, 2009, and incorporated herein by reference.
10.5	Intercreditor and Collateral Agency Agreement, dated September 1, 2009, among the Company, Wells Fargo Bank, National Association, as trustee, Wells Fargo Bank, National Association, as collateral agent, and the joined secured parties from time to time party thereto - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 4, 2009, and incorporated herein by reference.
10.6	Indenture, dated September 1, 2009, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee, including the Form of 9.00% Convertible Senior Secured Note due 2027 - filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 4, 2009, and incorporated herein by reference.
10.7	First Supplemental Indenture, dated September 25, 2009, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee – filed herewith.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - filed herewith.

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SIGNATURES

Pursuant to the requirements 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.

	VERENIUM CORPORATION
Date: November 9, 2009	/S/ JAMES E. LEVINE
	James E. Levine
	Executive Vice President and   Chief Financial Officer
	(Principal Financial Officer)

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