VERENIUM CORP - FORM 10-Q - November 9, 2010

Attached files

file	filename
EX-31.2 - CERTIFICATION OF CFO - VERENIUM CORP	dex312.htm
EX-10.9 - JOINT INTELLECTUAL PROPERTY AGREEMENT - VERENIUM CORP	dex109.htm
EX-10.8 - BP LICENSE AGREEMENT - VERENIUM CORP	dex108.htm
EX-10.4 - VERENIUM TRANSITION SERVICES AGREEMENT - VERENIUM CORP	dex104.htm
EX-10.5 - BP TRANSITION SERVICES AGREEMENT - VERENIUM CORP	dex105.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO - VERENIUM CORP	dex321.htm
EX-10.3 - ESCROW AGREEMENT - VERENIUM CORP	dex103.htm
EX-10.7 - VERENIUM LICENSE AGREEMENT - VERENIUM CORP	dex107.htm
EX-31.1 - CERTIFICATION OF CEO - VERENIUM CORP	dex311.htm
EX-10.10 - SUBLICENSE AGREEMENT - VERENIUM CORP	dex1010.htm
EX-10.15 - INDEMNIFICATION RIGHTS AND CONTRIBUTION AGREEMENT - VERENIUM CORP	dex1015.htm
EX-10.13 - INDEMNIFICATION RIGHTS AND CONTRIBUTION AGREEMENT - VERENIUM CORP	dex1013.htm
EX-10.14 - INDEMNIFICATION RIGHTS AND CONTRIBUTION AGREEMENT - VERENIUM CORP	dex1014.htm
EX-10.11 - VERENIUM NON-COMPETITION AGREEMENT - VERENIUM CORP	dex1011.htm
EX-10.12 - BP NON-COMPETITION AGREEMENT - VERENIUM CORP	dex1012.htm
EX-10.6 - SUBLEASE AGREEMENT - BP BIOFUELS NORTH AMERICA LLC - VERENIUM CORP	dex106.htm

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, 2010

¨	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 such 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,” “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 5, 2010 was 12,602,368.

VERENIUM CORPORATION

INDEX


		Page No.
PART I — FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited):		3
	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		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32
Item 4.	Controls and Procedures		32

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		33
Item 1A.	Risk Factors		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3.	Defaults Upon Senior Securities		46
Item 4.	(Removed and Reserved)		46
Item 5.	Other Information		46
Item 6.	Exhibits		47

SIGNATURES			49

VERENIUM CORPORATION

PART I—FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

VERENIUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	88,938		$	24,844
Accounts receivable, net of allowance for doubtful accounts of $141 and $284 at September 30, 2010 and December 31, 2009		8,524			6,558
Inventories, net		4,459			2,586
Prepaid expenses and other current assets		2,970			2,500
Current assets of discontinued operations (including cash and cash equivalents of $7.2 million at December 31, 2009)		—			10,086

Total current assets		104,891			46,574
Property and equipment, net		2,161			4,169
Restricted cash		5,000			10,400
Debt issuance costs and other assets		1,072			2,020
Long term assets of discontinued operations		—			104,759

Total assets	$	113,124		$	167,922

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,108		$	4,690
Accrued expenses		7,640			5,833
Deferred revenue		1,113			1,365
Current liabilities of discontinued operations		1,845			13,278

Total current liabilities		15,706			25,166
Convertible debt, at carrying value (face value of $74.7 million at September 30, 2010 and $97.9 million at December 31, 2009)		88,969			105,756
Other long term liabilities		901			1,264
Long term liabilities of discontinued operations		1,919			5,534

Total liabilities		107,495			137,720
Stockholders’ equity:
Preferred stock—$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at September 30, 2010 and December 31, 2009		—			—
Common stock—$0.001 par value; 245,000 shares authorized at September 30, 2010 and December 31, 2009, 12,389 and 11,821 shares issued and outstanding at September 30, 2010 and December 31, 2009		12			12
Additional paid-in capital		608,292			604,571
Accumulated deficit		(602,675	)		(630,032	)

Total Verenium Corporation stockholders’ equity (deficit)		5,629			(25,449	)
Noncontrolling interests in consolidated entities attributed to discontinued operations		—			55,651

Total stockholders’ equity		5,629			30,202

Total liabilities, noncontrolling interest and stockholders’ equity	$	113,124		$	167,922

Note: The condensed consolidated balance sheet data at December 31, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Continuing Operations:
Revenue
Product	$	12,233		$	11,026		$	37,085		$	32,094
Collaborative		339			903			1,391			3,369

Total revenue		12,572			11,929			38,476			35,463

Operating expenses:
Cost of product revenue		7,833			7,278			23,179			20,483
Research and development		1,448			1,650			4,124			4,808
Selling, general and administrative		7,838			9,024			21,010			24,594

Total operating expenses		17,119			17,952			48,313			49,885

Loss from continuing operations		(4,547	)		(6,023	)		(9,837	)		(14,422	)
Other income and expenses:
Interest and other expense, net		(2,072	)		(2,567	)		(6,179	)		(8,980	)
Gain on amendment of 2008 Notes		—			3,977			—			3,977
Gain on debt extinguishment upon conversion of convertible debt		—			2,511			598			8,629
Loss on debt extinguishment		(3,384	)		—			(3,384	)		—
Gain (loss) on net change in fair value of derivative assets and liabilities		(299	)		1,712			(1,017	)		5,078

Total other income (expenses), net		(5,755	)		5,633			(9,982	)		8,704
Loss from continuing operations before income taxes		(10,302	)		(390	)		(19,819	)		(5,718	)
Income tax benefit		7,928			—			7,928			—

Net loss from continuing operations		(2,374	)		(390	)		(11,891	)		(5,718	)

Discontinued Operations:
Net income (loss) from discontinued operations, net of $56.5 million gain on divestiture of discontinued operations, net of income tax of $9.6 million for the three and nine months ended September 30, 2010		31,980			(10,607	)		9,841			(38,715	)
Less: Loss attributed to noncontrolling interests in consolidated entities – discontinued operations		10,108			8,705			25,283			25,500

Net income (loss) attributed to Verenium Corporation	$	39,714		$	(2,292	)	$	23,233		$	(18,933	)

Net income (loss) per share, basic and diluted:
Continuing operations	$	(0.19	)	$	(0.04	)	$	(0.97	)	$	(0.77	)

Discontinued operations	$	2.59		$	(1.18	)	$	0.80		$	(5.19	)

Net income (loss) attributed to Verenium Corporation	$	3.21		$	(0.25	)	$	1.90		$	(2.54	)

Shares used in calculating net income (loss) per share, basic and diluted		12,371			9,014			12,231			7,466

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
Operating activities:
Net income (loss) attributed to Verenium Corporation	$	23,233		$	(18,933	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		9,787			10,058
Reduction for doubtful accounts		(111	)		—
Share-based compensation		1,103			6,354
Gain on amendment of 2008 Notes		—			(3,977	)
Gain on extinguishment of debt upon conversion of convertible notes		(598	)		(8,629	)
Loss on extinguishment of debt		3,384			—
Loss (gain) on net change in fair value of derivative assets and liabilities		1,017			(5,078	)
Gain on sale of LC business		(56,478	)		—
Loss attributed to noncontrolling interest in consolidated entities		(25,283	)		(25,500	)
Accretion of debt discount on convertible notes		935			2,591
Non-cash asset impairment charges		1,319			—
Non-cash restructuring charges		312			397
Changes in operating assets and liabilities:
Accounts receivable		(1,883	)		(1,058	)
Inventory		(1,869	)		(792	)
Other assets		3,033			(923	)
Accounts payable and accrued expenses		392			(2,921	)
Deferred revenue		667			(1,403	)

Net cash used in operating activities		(41,040	)		(49,814	)

Investing activities:
Purchases of property, plant and equipment, net		(3,714	)		(3,089	)
Reduction of cash due to deconsolidation of Vercipia Biofuels upon adoption of new accounting standard		(7,211	)		—
Restricted cash		5,400			(360	)

Net cash used in investing activities		(5,525	)		(3,449	)

Financing activities:
“Make-whole” payments on conversion of 2008 Notes		—			140
Principal payments on debt obligations		(18	)		(1,136	)
Proceeds from sale of common stock		7			270
Proceeds from sale of LC business, net of transaction costs		95,401			—
Repurchase of convertible debt		(20,550	)		—
Distributions and proceeds from Galaxy Biofuels LLC		28,608			67,500

Net cash provided by financing activities		103,448			66,774

Net increase in cash and cash equivalents		56,883			13,511
Cash and cash equivalents at beginning of period (includes $7.2 million classified as current assets from discontinued operations as December 31, 2009)		32,055			7,458

Cash and cash equivalents at end of period	$	88,938		$	20,969

Supplemental disclosure of cash flow information:
Interest paid	$	2,411		$	4,774

Supplemental disclosure of non-cash operating and financing activities:
Conversion of convertible senior notes to common stock	$	2,200		$	43,682

See accompanying notes to condensed consolidated financial statements.

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. Since its merger in June 2007 with Celunol Corporation (“Celunol”), a cellulosic ethanol company, the Company has operated in two business segments, biofuels and specialty enzymes. On September 2, 2010, the Company completed the sale of its ligno-cellulosic business (“LC business”) to BP Biofuels North America LLC (“BP”). As part of the sale, BP acquired all of the capital stock of the Company’s wholly-owned subsidiary, Verenium Biofuels Corporation, and became the sole investor in Galaxy Biofuels LLC and Vercipia Biofuels, LLC, the two joint ventures previously formed between the Company and BP. The results of operations net of the gain on sale associated with the LC business have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009. See Note 2 for further details. Today, the Company operates in one business segment, industrial enzymes, to enable higher productivity, lower costs, and improved environmental outcomes. The Company has three main product lines: animal health and nutrition, grain processing, and oilseed processing.

Recent Developments

Asset Purchase Agreement and Related Agreements

As noted above and more fully described in Note 2, on September 2, 2010, the Company completed the sale of its LC business to BP, pursuant to the terms of an Asset Purchase Agreement dated July 14, 2010. The transaction resulted in net cash proceeds to the Company of $95.4 million (including $5 million of the purchase price placed in escrow). Pursuant to the terms of the Asset Purchase Agreement, $5 million of the $98.3 million purchase price was placed in escrow and is subject to the terms of an escrow agreement, to cover the Company’s indemnification obligations for potential breaches of representations and warranties made by the Company in the Purchase Agreement, most of which survive for a period of 18 months following the closing. The $5 million is shown as long term restricted cash on the Company’s Condensed Consolidated Balance Sheet.

As a result of the acquisition of Verenium Biofuels, BP acquired ownership of the Company’s land, pilot plant and demonstration facility located in Jennings, Louisiana, and became the sole investor in Galaxy Biofuels LLC and Vercipia Biofuels, LLC, the two joint ventures previously formed between the Company and BP.

Debt Repurchase

As more fully described in Note 3, on September 23, 2010, the Company repurchased $13 million in principal amount of its 2008 Notes, as well as $8 million in principal amount of its 2007 Notes. As part of the transaction the note holders released the Company from any and all commitments and indebtedness related to the 2008 and 2007 Notes repurchased. Immediately following the repurchase and as of September 30, 2010, no additional 2008 Notes remain outstanding and the Company had $74.7 million in principal amount of 2007 and 2009 Notes outstanding.

Basis of Presentation and Going Concern

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 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009; filed with the Securities and Exchange Commission (“SEC”) on March 16, 2010. The results of operations and assets and liabilities associated with the sale of the Company’s LC business have been restated and presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Balance Sheets for current and all prior periods presented.

The Company has incurred a net loss from continuing operations of $2.4 million and $11.9 million for the three and nine months ended September 30, 2010; and has an accumulated deficit of $602.7 million as of September 30, 2010. As more fully described in its Annual Report on Form 10-K for the year ended December 31, 2009, the Company’s independent registered public accounting firm has included an explanatory paragraph in its report on the 2009 financial statements related to the substantial doubt regarding the Company’s ability to continue as a going concern through December 31, 2010. At that time, the Company had insufficient cash and working capital to continue to fund planned operations through December 31, 2010. In connection with the sale of the LC business in September 2010, the Company received net cash proceeds of approximately $95.4 million. To date; the Company has used net proceeds of approximately $20.6 million from the transaction for debt retirement. The Company intends to use the proceeds for continued investment in product development and manufacturing improvement efforts for its enzyme business, for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement.

Basis of Consolidation

Upon the completion of the sale of the LC Business, BP acquired all of the capital stock of the Company’s wholly-owned subsidiary, Verenium Biofuels Corporation, and became the sole investor in Galaxy Biofuels LLC and Vercipia Biofuels, LLC, the two joint ventures previously formed by the Company and BP. As a result, the Company’s condensed consolidated financial statements include only the financial statements of Verenium Corporation as of September 30, 2010.

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, expenses, discontinued operations, 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.

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 Notes and 2009 Notes (see Note 3) and certain warrants have been accounted for in accordance with applicable authoritative guidance for derivative instruments which requires identification of certain embedded features to be bifurcated from debt instruments 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.

Income Taxes

Authoritative accounting guidance requires total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income and items charged directly to stockholders’ equity. This allocation is referred to as intra-period tax allocation. Since the sale of the LC business to BP was a discrete event that occurred in the third quarter of 2010, the Company recorded the total amount of estimated income tax expense for discontinued operations in the third quarter of this year. Accordingly, the Company has recorded tax expense of $9.6 million in discontinued operations in the third quarter of 2010. Further, the allocation rules require the Company to gross up this amount by the projected annual tax benefit the Company expects to record as part of the loss from continuing operations in 2010. The Company calculated this benefit by applying the Company’s estimated effective tax rate to the Company’s loss from continuing operations for the quarter. As a result, in the third quarter of 2010, the Company recorded an income tax benefit of $7.9 million.

At September 30, 2010, the Company’s Condensed Consolidated Balance Sheet includes a deferred tax liability of $1.7 million included in long term liabilities of discontinued operations. In the fourth quarter of 2010, this deferred tax liability will be reduced to zero and a benefit from continuing operations will be recorded for the $1.7 million. The income tax benefit the Company records during the fourth quarter of 2010 will reduce the Company’s overall annual income tax expense to zero.

Segment Reporting

The Company operates in one operating segment, industrial enzymes, with multiple products lines. The animal health and nutrition product lines include the Company’s Phyzyme enzyme, the grain processing product line includes the Company’s Fuelzyme, Veretase, Xylathin and Deltazym enzymes, and the oilseed processing product line includes the Company’s Purifine enzyme. The Company also generates nominal product revenue from enzymes outside its three main product lines, for use in other specialty industrial processes.

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, 2010 and December 31, 2009 (in thousands):


	September 30, 2010								December 31, 2009
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents (1)	$	88,938	$	—	$	—	$	88,938	$	32,055	$	—	$	—	$	32,055

Liabilities:
Derivative – warrants (2)		—		—		328		328		—		—		762		762
Derivative – 2008 Notes compound embedded derivative (3)(5)		—		—		—		—		—		—		1,682		1,682
Derivative – 2009 Notes Compound Embedded Derivative (4)(5)		—		—		4,730		4,730		—		—		2,298		2,298

	$	—	$	—	$	5,058	$	5,058	$	—	$	—	$	4,742	$	4,742

(1)	Included in cash and cash equivalents on the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2009, $7.2 million of cash and cash equivalents is classified as current assets of discontinued operations.

(2)

Represents warrants issued in conjunction with the Company’s 2008 Notes in February 2008 and the Company’s public offering in October 2009. The warrants issued in conjunction with the 2008 Notes had a value of $0 and $70,000 as of September 30, 2010 and December 31, 2009 and were classified in long-term liabilities as part of the convertible debt carrying value, using significant unobservable inputs (Level 3). The warrants issued in conjunction with the Company’s public offering have a value of $328,000 and $692,000 and are classified as a long-term liability at September 30, 2010 and December 31, 2009, using significant unobservable inputs (Level 3).

(3)

Represented the compound embedded derivative included in the Company’s 2008 Notes (see Note 3). The compound embedded derivative included, among other rights, the noteholders’ right to receive “make-whole” amounts. The “make-whole” provision provided that, upon any noteholder’s conversion of the 2008 Notes into common stock, the Company was 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 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 was included in long term liabilities as part of the convertible debt carrying value at December 31, 2009 on the accompanying Condensed Consolidated Balance Sheet. As further described in Note 3, all of the outstanding 2008 Notes were repurchased during the quarter.

(4)

Represents the compound embedded derivative included in the Company’s 2009 Notes (see Note 3). 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 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 as of September 30, 2010 and December 31, 2009.

(5)

The Company’s compound embedded derivatives are valued using a “lattice” model. 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 Notes 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 is $1.8 million under the 2009 Notes, assuming all of the outstanding 2009 Notes as of September 30, 2010 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 January 1, 2010 to September 30, 2010 (in thousands):


	Derivative Liability – Warrants			Derivative Liability – 2008 Notes Compound Embedded Derivative			Derivative Liability – 2009 Notes Compound Embedded Derivative			Total
Balance at January 1, 2010	$	762		$	1,682		$	2,298		$	4,742
Adjustment to fair value included in earnings (1)		155			79			(302	)		(68	)
Other adjustments (2)		—			(390	)		—			(390	)

Balance at March 31, 2010		917			1 ,371			1,996			4,284
Adjustment to fair value included in earnings (1)		(740	)		(290	)		1,816			786

Balance at June 30, 2010	$	177		$	1,081		$	3,812		$	5,070
Adjustment to fair value included in earnings (1)		151			(770	)		918			299
Extinguishment of debt(3)		—			(311	)		—			(311	)

Balance at September 30, 2010	$	328		$	—		$	4,730		$	5,058

(1)

The derivatives 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 and 2009 Notes compound embedded derivative were primarily affected by the Company’s stock price, but are also affected by the Company’s stock price volatility, expected life, interest rates, credit spread and the passage of time as it relates to the “make-whole” amount. For the three and nine months ended September 30, 2010, the net adjustment to fair value resulted in a loss of $0.3 million and $1.0 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 (see Note 3).

(2)	Represents decrease in derivative liability because of “make-whole” payments related to the conversion of $2.2 million in face value of the 2008 Notes for the three and nine months ended September 30, 2010 (see Note 3).

(3)	Represents decrease in derivative liability related to the debt repurchase of $13 million in principal amount of the 2008 Notes (see Note 3).

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, 2010, the Company had a total of $1.5 million in deferred revenue, of which $0.9 million was related to funding from collaborative partners and $0.6 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 revenue from royalties on operating profit during the quarter in which such revenue is earned, generally upon shipment by Danisco of product to their customer, based on information provided by Danisco. Revenue from royalties on operating profit 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 royalties on operating profit for product 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 one of its enzyme products. Genencor maintains all manufacturing, sales and collection risk on all inventories produced and sold from its facilities. A set royalty based on profit is paid to the Company on all sales. As such, revenue associated with product manufactured for the Company by Genencor is recognized on a net basis equal to the royalty on operating profit received from Danisco, as all the following conditions of reporting net revenue 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.

Computation of Net Income (Loss) per Share

Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The Company had approximately 12,000 and 10,000 unvested restricted shares outstanding as of September 30, 2010 and 2009. For purposes of the computation of net income (loss) per share, the unvested restricted shares are considered contingently returnable shares and are not considered outstanding common shares for purposes of computing net income (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 income (loss) per share.

Computation of net income (loss) per share for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Numerator
Net loss from continuing operations	$	(2,374	)	$	(390	)	$	(11,891	)	$	(5,718	)
Net income (loss) from discontinued operations	$	31,980		$	(10,607	)	$	9,841		$	(38,715	)
Net income (loss) attributed to Verenium Corporation	$	39,714		$	(2,292	)	$	23,233		$	(18,933	)

Denominator
Weighted average shares outstanding during the period		12,375			9,024			12,234			7,474
Less: Weighted average unvested restricted shares outstanding		(4	)		(10	)		(3	)		(8	)

Weighted average shares used in computing basic net income (loss) per share		12,371			9,014			12,231			7,466

Net income (loss) per share, basic and diluted:
Continuing operations	$	(0.19	)	$	(0.04	)	$	(0.97	)	$	(0.77	)

Discontinued operations	$	2.59		$	(1.18	)	$	0.80		$	(5.19	)

Net income (loss) attributed to Verenium Corporation	$	3.21		$	(0.25	)	$	1.90		$	(2.54	)

The Company has excluded all common stock equivalent shares issuable upon exercise or conversion of outstanding stock options, warrants and convertible debt from the calculation of diluted net income per share because all such securities are anti-dilutive for all applicable periods presented.

2. Discontinued Operations

On September 2, 2010, the Company completed the sale of its LC Business to BP pursuant to the terms of an Asset Purchase Agreement dated July 14, 2010; for a purchase price of $98.3 million, subject to adjustment as provided in the Asset Purchase Agreement. The transaction resulted in net cash proceeds to the Company of $95.4 million (including $5 million of the purchase price placed in escrow).

In the transaction, BP acquired all of the capital stock of the Company’s wholly-owned subsidiary, Verenium Biofuels, as well as certain assets of the Company, including intellectual property, used in or related to the LC business. The deal included assets and liabilities in both Verenium Corporation and Verenium Biofuels Corporation to form the LC Business. The Company has retained all assets used exclusively in its industrial enzymes business, as well as right to license certain intellectual property as described below.

As a result of the acquisition of Verenium Biofuels, BP acquired ownership of the Company’s land, pilot plant and demonstration plant located in Jennings, Louisiana, and became the sole investor in Galaxy Biofuels LLC and Vercipia Biofuels, LLC, the two joint ventures previously formed between the Company and BP.

Upon the closing of the transaction, BP assumed the lease of the Company’s research and development facilities in San Diego, California, and the parties entered into a sublease agreement dated September 2, 2010; for a portion of the San Diego facilities which the Company will continue to occupy for a period of up to two years at the discretion of the Company. The Company retains the lease to its executive offices in Cambridge, Massachusetts.

Pursuant to the terms of the Asset Purchase Agreement, $5 million of the $98.3 million purchase price was placed in escrow and is subject to the terms of an escrow agreement, to cover the Company’s indemnification obligations for potential breaches of representations and warranties made by the Company in the Asset Purchase Agreement, most of which survive for a period of 18 months following the closing. The Company is not required to make any indemnification payments until aggregate claims exceed $2 million, and then only with respect to the amount by which claims exceed that amount. The Company’s maximum indemnification liability is generally capped at $10 million with respect to most representations.

In accordance with the Asset Purchase Agreement, certain employees of the Company whose services were used in the biofuels business were transferred to BP at closing. The Company and BP entered into reciprocal Transition Services Agreements dated September 2, 2010; with respect to the provision of certain transitional support services for a period of two years following the closing. An analysis of these Transition Service Agreements was performed by the Company and determined they were not material and therefore did not represent significant continuing obligations to preclude discontinued operations treatment.

Additionally, the Company and BP entered into license agreements dated September 2, 2010; pursuant to which the Company granted BP a license to certain intellectual property retained by the Company, and BP granted a license to the Company to certain

intellectual property acquired by BP. With respect to most of such intellectual property, the licenses are nonexclusive, worldwide, perpetual, royalty-free and sublicensable, subject to certain field-of-use restrictions in the case of the license to BP. The parties also entered into a sublicense agreement dated September 2, 2010; pursuant to which the Company received a sublicense to certain intellectual property acquired by BP that is licensed from a third party, as well as a Joint Intellectual Property Agreement dated September 2, 2010; governing the joint ownership by BP and the Company of certain intellectual property in which each of BP and the Company have an equal, undivided joint ownership interest following the closing of the transaction.

Pursuant to the terms of the Asset Purchase Agreement, at closing the Company and BP also entered into non-competition agreements dated September 2, 2010; which restrict the parties’ respective activities in which they may engage for certain time periods following the closing, impose confidentiality obligations with respect to proprietary information acquired from each other, and prohibit the solicitation of the each other’s employees for a period of two years following the closing.

The Company’s continuing operations focuses on the development, manufacturing and sale of industrial enzymes within the animal health and nutrition, grain processing, and oilseed processing industries.

Revenue and expenses allocated to discontinued operations for the three and nine months ended September 30, 2010 and 2009 were limited to revenue and expenses that were directly related to the discontinued operation, the LC business, or that were eliminated as a result of the sale of the LC business. As a result, certain indirect costs that were previously allocated to our biofuels operating segment were not allocated to discontinued operations.

The results of operations from discontinued operations for the three and nine months ended September 30, 2010 and 2009 are set forth below (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
Revenue:
Grant	$	441		$	6,612		$	7,478		$	13,621
Collaborative		46			69			185			208

Total revenue		487			6,681			7,663			13,829

Operating expenses:
Research and development		10,515			14,864			37,813			45,653
Selling, general and administrative		4,822			2,424			6,839			6,891

Total operating expenses		15,337			17,288			44,652			52,544

Loss from discontinued operations		(14,850	)		(10,607	)		(36,989	)		(38,715	)
Gain on sale of LC Business		56,478			—			56,478			—
Income tax provision		(9,648	)		—			(9,648	)		—

Net income (loss) from discontinued operations	$	31,980		$	(10,607	)	$	9,841		$	(38,715	)

The Company recognized a gain of $56.5 million upon the sale of the LC Business, which is reflected in the line item “Net income(loss) from discontinued operations” on the Company’s Condensed Consolidated Statement of Operations. The gain was calculated as the difference between the consideration received plus the carrying amount of the noncontrolling interest and the net carrying amount of the purchased assets and assumed liabilities. The following sets forth the net assets and liabilities and calculation of the gain the sale as of the disposal date (in thousands):


Consideration received	$	98,300
Noncontrolling interest in Galaxy Biofuels LLC		43,588

		141,888

Carrying value of assets:
Assets		101,199
Liabilities		(15,789	)

Carrying value		85,410

Gain on sale of LC business	$	56,478

3. Convertible Debt

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


	September 30, 2010
	2009 Notes		2007 Notes		Total
Principal value	$	13,707	$	61,033	$	74,740
Debt premium, net		9,499		—		9,499
Derivative liabilities (1)		4,730		—		4,730

Total Carrying value	$	27,936	$	61,033	$	88,969


	December 31, 2009
	2009 Notes		2008 Notes			2007 Notes		Total
Principal value	$	13,707	$	15,201		$	69,033	$	97,941
Debt premium (discount), net		9,812		(6,047	)		—		3,765
Derivative liabilities (1) (2)		2,298		1,752			—		4,050

Total Carrying value	$	25,817	$	10,906		$	69,033	$	105,756

(1)

Represents the 2009 Notes’ compound embedded derivative. The Company has the intent and the ability as of September 30, 2010 to settle the warrants and 2009 Notes’ “make-whole” provisions in shares of common stock. As such, the asserted derivative liability is included in the 2009 Notes’ carrying value on its consolidated financial statements at September 30, 2010.

(2)	Represents the 2008 Notes’ compound embedded derivative and related warrants.

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 Notes and 2009 Notes. As of September 30, 2010, the Company had $61 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 $61 million in 2007 Notes is 0.8 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 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.

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.

On September 23, 2010, the Company repurchased $8 million of principal of the 2007 Notes at a value of approximately 85% of the face value. A total cash payment, principal and accrued interest, of $7.0 million was paid to this holder of the notes. As part of the transaction the note holders released the Company from any and all commitments and indebtedness related to the 2007 Notes repurchased. A gain on debt extinguishment of $1.1 million was recognized representing the difference between the carrying value of the 2007 Notes repurchased of $7.9 million and the repurchase price of $6.8 million.

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 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.

On September 23, 2010, the Company repurchased the remaining $13 million of principal of the 2008 Notes. No additional 2008 Notes remain outstanding after this transaction. A cash payment of $13.8 million, excluding accrued interest, was paid to the holders of the notes. As part of the transaction the note holders released the Company from any and all commitments and indebtedness related to the 2008 Notes repurchased. The Company determined the repurchase of the debt constitutes a debt extinguishment. As such; the Company recorded a loss on extinguishment of approximately $4.5 million representing the difference between the purchase price of $13.8 million and carrying value of $9.3 million calculated as follows as of the date of the repurchase (in thousands):


Principal	$	13,000
Debt discount		(3,944	)
Compound Embedded Derivative		311
Issuance Costs		(98	)

Carrying Value		9,269

Repurchase price		13,750

Loss on debt extinguishment	$	(4,481	)

Since inception through extinguishment on September 23, 2010, holders of the 2008 Notes have converted principal in the amount of $58.0 million into approximately 4.2 million shares of the Company’s common stock, including approximately 2.0 million shares to satisfy a portion of the related “make-whole” obligations.

For the nine months ended September 30, 2010 and 2009, the Company recorded a gain on conversion of $0.6 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 nine months ended September 30, 2010 was equal to the $2.2 million of principal less the unamortized debt discount and issuance costs, which totaled $1.7 million, as of the conversion date. During the nine months ended September 30, 2010, the Company issued a total of 0.2 million shares with a total market value as of the dates of conversion of $1.1 million to settle the 2008 Notes that were converted and related “make-whole” payments. The carrying value of the converted 2008 Notes for the nine months ended September 30, 2009 was equal to $42.7 million of principal less the unamortized debt discount and issuance costs, which totaled $31.9 million, as of the conversion date. During the nine months ended September 30, 2009, we issued a total of 3.6 million shares with a total market value as of the dates of conversion of $23.3 million to settle the 2008 Notes and “make-whole” payments.

The detachable warrants issued in connection with the 2008 Notes, were not repurchased and are still outstanding. 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 and public offering of common stock and warrants in October 2009, the number of shares issuable upon exercise of the warrants increased to approximately 1.0 million shares of the Company’s common stock and the exercise price was $36.62.

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 of 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- 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 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 of April 1, 2012, April 1, 2017 and April 1, 2022 or upon a fundamental change. The put features are contingently exercisable and the 2009 Notes were issued at a discount and therefore 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 $1.8 million if all of the outstanding 2009 Notes as of September 30, 2010 had converted on that date.

Impact of 2009 Notes Fair Value Remeasurements

The fair value of the compound embedded derivative is marked-to-market at 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.

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, credit spread and the passage of time as it relates to the “make-whole” amount. For the three and nine months ended September 30, 2010, the net change in fair value measurements impacting the 2009 Notes compound embedded derivative liability resulted in a loss of $0.9 million and $2.4 million.

Interest Expense on Convertible Debt

The Company recorded interest expense related to convertible debt as follows for the three and nine months ended September 30, 2010 and 2009 (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
5.5% coupon interest, payable in cash	$	944		$	1,230		$	2,843		$	3,953
Non-cash amortization of debt issuance costs		149			218			446			682

2007 Notes Total		1,093			1,448			3,289			4,635

8% coupon interest, payable in cash or common stock		248			407			767			2,249
Non-cash accretion of debt discount(1)		427			534			1,245			2,623
Non-cash amortization of debt issuance costs		16			51			51			225

2008 Notes Total		691			992			2,063			5,097

9% coupon interest, payable in cash or common stock		308			103			925			103
Non-cash amortization of debt premium(2)		(106	)		(32	)		(310	)		(32	)

2009 Notes Total		202			71			615			71

(1)

The initial debt discount related 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 was included in the carrying value of the 2008 Notes on the accompanying Condensed Consolidated Balance Sheets as of December 31, 2009. As described above, all of the outstanding 2008 Notes were repurchased in September 2010.

(2)

The initial debt premium relates to the 2009 Notes being recorded at the 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 the maturity date of the 2009 Notes, April 1, 2027.

4. 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, 2010			December 31, 2009
Raw materials	$	550		$	371
Work in progress		243			319
Finished goods		3,791			2,096

		4,584			2,786
Reserve		(125	)		(200	)

Net inventory	$	4,459		$	2,586

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 five years) using the straight-line method.

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


	September 30, 2010			December 31, 2009
Laboratory, machinery and equipment	$	22,246		$	22,624
Computer equipment		2,042			2,019
Furniture and fixtures		981			1,182
Leasehold improvements		570			1,748

Property and equipment, gross		25,839			27,573
Less: Accumulated depreciation and amortization		(23,678	)		(23,404	)

Property and equipment, net	$	2,161		$	4,169

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

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

Accrued expenses

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


	September 30, 2010		December 31, 2009
Employee compensation	$	2,761	$	1,015
Accrued interest on convertible notes		2,295		1,671
Professional and outside services		1,533		1,310
Royalties		619		1,499
Other		432		338

	$	7,640	$	5,833

Current liabilities of discontinued operations as of September 30, 2010 includes $1.5 million related to employee severance in connection with the sale of the LC business as well as approximately $0.3 million in restructuring charges related to the office space in Cambridge as further described in Note 7.

5. Concentration 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 61% and 66% of total revenue from continuing operations for the three months ended September 30, 2010 and 2009 and 64% and 67% for the nine months ended September 30, 2010 and 2009. Accounts receivable from this one customer comprised approximately 66% of accounts receivable at September 30, 2010 and 58% at December 31, 2009.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
North America	$	2,712	$	3,332	$	9,345	$	10,799
Europe		7,688		6,687		23,300		19,519
South America		1,690		1,675		5,035		4,458
Asia		482		235		796		687

	$	12,572	$	11,929	$	38,476	$	35,463

The Company manufactures and sells enzymes within three main product lines. The Animal Health and Nutrition product lines include the Company’s Phyzyme enzyme, the Grain Processing product line includes the Company’s Fuelzyme, Veretase, Xylathin and Deltazym enzymes, and the Oilseed Processing product line includes the Company’s Purifine enzyme. The Company also generates nominal product revenue from enzymes outside its three main product lines, for use in other specialty industrial processes.

The following table sets forth revenues by individual product line that account for 10% or greater of product revenues (in thousands):


	Three Months Ended September 30, 2010										Nine Months Ended September 30, 2010
	2010		% of Product Revenue			2009		% of Product Revenue			2010		% of Product Revenue			2009		% of Product Revenue
Revenues:
Animal health and nutrition	$	7,696		63	%	$	7,919		72	%	$	24,537		66	%	$	23,846		74	%
Grain processing		3,364		27	%		2,524		23	%		9,605		26	%		7,016		22	%
All other products		1,173		10	%		583		5	%		2,943		8	%		1,232		4	%

Total product revenue	$	12,233		100	%	$	11,026		100	%	$	37,085		100	%	$	32,094		100	%

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 Condensed Consolidated Balance Sheet totals approximately $1.4 million at September 30, 2010 and $2.4 million at December 31, 2009.

6. Share-based Compensation

The Company recognized share-based compensation expense for continuing operations of $0.3 million and $0.8 million during the three months ended September 30, 2010 and 2009, and $0.8 million and $3.9 million during the nine months ended September 30, 2010 and 2009. 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,
	2010		2009		2010		2009
Continuing Operations:
Research and development	$	4	$	34	$	7	$	157
Selling, general and administrative		260		810		817		3,792

	$	264	$	844	$	824	$	3,949


Discontinued Operations:
Research and development	$	4	$	269	$	40	$	1,916
Selling, general and administrative		56		136		239		489

	$	60	$	405	$	279	$	2,405

	$	324	$	1,249	$	1,103	$	6,354

As of September 30, 2010, there was $1.8 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s equity incentive plans. All employees with outstanding unvested options that were assumed by BP as part of the sale of the LC business were cancelled. This remaining expense is expected to be recognized over a weighted-average period of 1.8 years as follows (in thousands):


Fiscal Year 2010 ( October 1, 2010 to December 31, 2010)	$	215
Fiscal Year 2011		749
Fiscal Year 2012		638
Thereafter		154

	$	1,756

7. Restructuring

The Company’s executive offices are located in a 21,000 square foot area in a building in Cambridge, Massachusetts. The offices are leased to the Company under an operating lease with a term through December 2013. Prior to the sale of the LC business on

September 2, 2010, the office space was used by both the Company’s corporate management and by employees exclusively supporting the LC business. In connection with the sale of the LC business the Company completed on September 2, 2010, the majority of the space in the Cambridge office was vacated and is no longer used. As such, and in accordance with authoritative accounting guidance, the date the space was vacated and therefore, the cease-use date, is determined to be September 2, 2010. A liability in the amount of $0.5 million was recorded representing the present value of the remaining lease term, net of estimated sublease, for the vacated space. The liability was classified into discontinued operations on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2010 as the vacated space was previously attributed to employees focused exclusively on the LC business. Additionally, the related leasehold improvements for the vacated space of approximately $0.6 million were expensed as of the cease-use date.

8. Commitments

Letter of Credit

As part of the sale of the LC business and BP’s assumption of the Company’s San Diego facility lease, the Company is no longer required to maintain a letter of credit. As such, restricted cash of $10.7 million was released and became available for use in operations which had previously been in place pursuant to the Company’s former facility lease agreement.

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. Beginning on October 29, 2009, a number of shareholders also filed direct appeals, objecting to final approval of the settlement. 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.

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 at such time 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) or, following the 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) and asserting that CVI is entitled to additional shares based on its asserted conversion price, 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.

On October 6, 2009, in response to the Company’s exchange of approximately $30.5 million of 2007 Notes, the granting of security interest in certain assets of the Company to exchanging holders and holders of the 2008 Notes and the public offering of common stock and warrants, CVI filed a Motion to Amend First Amended Complaint (the “Motion”). CVI’s amended pleading alleges that the Company further breached the Note by both amending the terms of the 2008 Notes without CVI’s express consent and then undertaking various transactions authorized by the amendment. The amended pleading also alleges that as a result of these transactions the conversion rate should have adjusted to $4.27 per share rather than $17.89 per share. On February 25, 2010, the Court granted CVI’s Motion and CVI filed its Second Amended Complaint. Pursuant to a stipulation between the parties that was approved by the Court, the Company filed an Answer to the Second Amended Complaint and a Motion to Dismiss on March 15, 2010. The Motion to Dismiss is currently pending. Discovery closed on May 14, 2010. On June 11, 2010, both the Company and CVI filed motions for summary judgment, and, on July 1, 2010, the parties opposed each other’s motions. The Court heard oral argument on the motions for summary judgment on July 29, 2010, and both motions remain pending.

Between February 27, 2009 and January 19, 2010, CVI converted all of its 2008 Notes, approximately $14.5 million in face value, and the Company has issued approximately 1.3 million shares on a reverse-split adjusted basis, to settle these conversions and related “make-whole” obligations. Assuming the conversion prices asserted by CVI of $17.64 from February 27, 2009 through October 5, 2009 and $4.27 for conversions subsequent to October 6, 2009, 0.8 million additional shares would be issuable in connection with CVI’s conversions. 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.

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.

10. Impact of Recently Issued Accounting Standards

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 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 financial statements.

Fair Value Measurements and Disclosures

The FASB issued new guidance requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each “class” of assets and liabilities. The adoption did not have a material impact on our financial statements or our disclosures, as we did not have any transfers between Level 1 and Level 2 fair value measurements and did not have material classes of assets and liabilities that required additional disclosure.

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

•

our ability to continue as a going concern;

•

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

•

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

•

our ability to maintain good relationships with the companies with whom we contract for the manufacture of certain of our products;

•

our expected future research and development expenses, sales and marketing expenses, and 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;

•

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.

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, our ability to commercialize products directly and through our collaborators, the timing of anticipated regulatory approvals and product launches, 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

Since our merger in June 2007 with Celunol Corporation (“Celunol”), a cellulosic ethanol company, we have operated in two business segments, biofuels and specialty enzymes. On September 2, 2010, we completed the sale of our ligno-cellulosic business unit (“LC business”) to BP Biofuels North America LLC (“BP”) focusing the Company on our historical strengths in enzyme development. As part of the sale, BP acquired all of the capital stock of our wholly-owned subsidiary, Verenium Biofuels Corporation, as well as assets, including intellectual property, used in or related to the LC business. We retained all assets used exclusively in our industrial enzymes business. Today, we operate in one business segment, industrial enzymes, to enable higher productivity, lower costs, and improved environmental outcomes. We have three main product lines: animal health and nutrition, grain processing, and oilseed processing. We believe the most significant commercial opportunity for our business will be derived from continued sales, and gross product margins from our existing portfolio of enzyme products.

Our business is supported by a research and development team with expertise in gene discovery and optimization, cell engineering, bioprocess development, biochemistry and microbiology. Over the past 18 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 specialty enzymes for animal health and nutrition, grain processing, and oilseed processing. We have current collaborations and agreements with key partners such as Bunge Oils, Alfa Laval, Danisco Animal Nutrition, and WeissBioTec (formerly Add Foods), each of which complement our internal technology, product development efforts, and distribution efforts.

We own or have rights to a substantial intellectual property estate comprising more than 300 issued patents and more than 400 pending patents as of September 30, 2010. We believe that we can leverage our owned and licensed intellectual property estate to enhance and improve our technology development and commercialization efforts while maintaining protection on key intellectual property assets.

We have incurred net losses since our inception. For the three and nine months ended September 30, 2010, we had a net loss from continuing operations, of $2.4 million and $11.9 million, and as of September 30, 2010, we had an accumulated deficit of approximately $602.7 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 in the near term as a result of any combination of one or more of the following:

•

maintaining or increasing our sales and marketing infrastructure;

•

our continued investment in manufacturing facilities and/or capabilities necessary to meet anticipated demand for our products or improve manufacturing yields; and

•

continued research and development expenses for the progression of 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 the Risk Factors beginning on page 34, Liquidity and Capital Resources beginning on page 28 and Note 1 of the Notes 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 2009 financial statements related to the uncertainty in our ability to continue as a going concern through December 31, 2010. At that time, we had insufficient cash and working capital to continue to fund planned operations through December 31, 2010. In connection with the sale of our LC business in September 2010 as described below, we obtained net cash proceeds of approximately $95.4 million. To date the Company has used net proceeds of approximately $20.6 million from the transaction for debt retirement. We intend to use the net proceeds of this offering for continued investment in product development and manufacturing improvement efforts for our industrial enzyme business, for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement.

Recent Strategic Events

Asset Purchase Agreement and Related Agreements

As noted above, on September 2, 2010, we completed the sale of our LC business to BP, pursuant to the terms of an Asset Purchase Agreement dated July 14, 2010. The transaction resulted in estimated net cash proceeds to us of $95.4 million (including $5 million of the purchase price placed in escrow).

In the transaction, BP acquired all of the capital stock of our wholly-owned subsidiary, Verenium Biofuels, as well as assets of the Company, including intellectual property used in or related to the LC business. We retained all assets used exclusively in our industrial enzymes business.

The results of operations and assets and liabilities associated with the sale of our LC business have been restated and presented as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Balance Sheets for current and all prior periods presented.

Debt Repurchase

On September 23, 2010, we announced our repurchase of $13 million in principal amount of our 2008 Notes, as well as $8 million in principal amount of our 2007 Notes. As part of the transaction the noteholders released us from any and all commitments and indebtedness related to the 2008 and 2007 Notes repurchased. Immediately following the repurchase and as of September 30, 2010, no additional 2008 Notes remain outstanding and we had $74.7 million in principal amount of 2007 and 2009 Notes outstanding.

Results of Operations – Continuing Operations

Consolidated Results of Operations

Revenues

Revenues for the periods ended September 30, 2010 and 2009 are as follows (in thousands):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2010		2009		% Change			2010		2009		% Change
Revenues:
Animal health and nutrition	$	7,696	$	7,919		(3)	%	$	24,537	$	23,846		3	%
Grain processing		3,364		2,524		33	%		9,605		7,016		37	%
All other products		1,173		583		101	%		2,943		1,232		139	%

Total product		12,233		11,026		11	%		37,085		32,094		16	%
Collaborative		339		903		(62)	%		1,391		3,369		(59)	%

Total revenues	$	12,572	$	11,929		5	%	$	38,476	$	35,463		8	%

Revenues increased 5%, or $0.6 million, to $12.6 million for the three months ended September 30, 2010 and 8%, or $3.0 million, to $38.5 million for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2010, our revenue mix continued to shift to a larger percentage of product revenues, consistent with our strategy to grow product sales, and de-emphasize collaborations that are not core to our strategic market focus. Product revenues represented 97% and 96% of total revenues for the three and nine months ended September 30, 2010, as compared to 92% and 90% for the three and nine months ended September 30, 2009.

Product revenues increased $1.2 million, or 11%, for the three months ended September 30, 2010 and $5.0 million, or 16%, for the nine months ended September 30, 2010 as compared to the same periods in 2009. This increase was primarily due to an increase in revenues from our newer enzyme products in our grain processing product line, which continued to gain acceptance in the grain ethanol markets. In addition, our Purifine enzyme for the soybean oil processing market achieved moderate revenue growth over 2009, resulting from Purifine deployment by Molinos in Argentina under the supply agreement we announced in March 2010, as well as our Bunge agreements. Our Fuelzyme enzyme found within our grain processing product line also returned to revenue levels achieved in the first quarter of 2009, indicating both a recovery in the corn ethanol market as well as continued demand for this product.

Net revenues from our product line, animal health and nutrition, in the third quarter of 2010 decreased $0.2 million, or 3%, compared to the same period in 2009, and represented approximately 63% of total product revenues for the three months ended September 30, 2010 and 72% for the comparable period in 2009. Net revenues from the only animal health and nutrition product, Phyzyme, for the nine months ended September 30, 2010 increased $0.7 million, or 3%, compared to the same period in 2009, and represented approximately 66% of total product revenues for the nine months ended September 30, 2010 and 74% for the comparable period in 2009. Although we expect that Phyzyme will continue to represent a significant percentage of our total product revenues in the foreseeable future, we expect that net revenue from Phyzyme will remain flat or gradually decrease in future periods. This is largely due to our method of revenue recognition for Phyzyme product sales. 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. We recognize revenue from Phyzyme that is manufactured by Genencor in an amount equal to the royalty received from Danisco, as compared to the full value of the manufacturing costs plus the royalty on operating profit 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. We expect over time a greater proportion of our Phyzyme manufacturing will transition to Genencor resulting in lower reported Phyzyme product revenue; however, we believe this will make available existing capacity to accommodate expected growth for our other enzyme products, which we expect will generate higher gross margins than Phyzyme over time.

While we cannot be certain that demand for our enzyme products and resulting sales will continue to meet expectations, during 2010 we have seen indications of recovery from the worldwide recession, which we believe have positively impacted our revenues. In particular:

•

During 2009, we and our partner Danisco, saw 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 negatively impacted demand for feed and thus our enzyme, particularly during the first half of 2009. Nevertheless, Phyzyme sales have recovered since late 2009, as demand for poultry has begun to recover with improved economic conditions.

•

Demand for Fuelzyme was significantly impacted by challenges in the corn ethanol industry during 2009, which experienced distress due to high corn prices and low ethanol prices. During the first half of 2009, there were several well-publicized bankruptcies, including two of the largest producers of corn ethanol in the U.S. Operating rates in the industry were significantly reduced, which negatively impacted demand for enzymes in the first half of 2009. Recently, we have seen ethanol plant operating rates return to pre-2009 levels, and some idle capacity has been brought back on line, signaling a recovery in the corn ethanol industry.

•

A primary market for Purifine, used for soybean oil processing, is Latin America, which had suffered drought, political upheaval over taxes on agricultural exports, and overall challenging market conditions over the last two years. As a result, adoption of Purifine in the region was delayed, thus Purifine revenue was below expectations for 2009. Recently, however, Purifine has gained strong commercial traction, which we expect to continue in the foreseeable future. Most notably, we have seen strong demand for Purifine under our long-term contract with Molinos, operator of the world’s largest soybean processing plant in Argentina.

Collaborative revenue decreased 62%, or $0.6 million, to $0.3 million for the three months ended September 30, 2010 and 59%, or $2.0 million, to $1.4 million for the nine months ended September 30, 2010. We anticipate that collaborative revenue will continue to represent a small component of our revenue in 2010, due in large part to a decrease in revenue related to wind-down of projects with

existing strategic collaborators. 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 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, as well as regulatory approval timelines for new products.

Product Gross Profit & Margin

Product gross profit and margin for the periods ended September 30, 2010 and 2009 are as follows (in thousands):


	Three Months Ended September 30,									Nine Months Ended September 30,
	2010			2009			% Change			2010			2009			% Change
Product revenue	$	12,233		$	11,026			11	%	$	37,085		$	32,094			16	%
Cost of product revenue		7,833			7,278			8	%		23,179			20,483			13	%

Product gross profit		4,400			3,748			17	%		13,906			11,611			20	%
Product gross margin		36	%		34	%					37	%		36	%

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 increased $0.6 million, or 8%, to $7.8 million for the three months ended September 30, 2010 and increased $2.7 million, or 13%, to $23.2 million for the nine months ended September 30, 2010. The increases in cost of product revenue from the comparable periods in the prior year is primarily due to higher rental expense for incremental fermentation capacity to support the expansion of product mix combined with higher revenue.

Our cost of product revenues will generally grow in proportion to revenues, although we expect to achieve benefits from the additional investments we are making at Fermic to better accommodate our enzyme recovery capabilities. Because a large percentage of total manufacturing costs are fixed, we should realize margin improvements as product revenues increase; however, margins could be negatively impacted in the future if product revenues do not grow in line with our committed fermentation capacity at Fermic. We further expanded our fermentation capacity during the third quarter of 2010, which will increase fixed manufacturing costs by an additional $0.7 million per quarter. In addition, gross margins are dependent upon the mix of product sales as the cost of product revenue varies from product to product. We typically experience lower margins in the early stages of commercial production for our newer enzyme products like Purifine, as we optimize the manufacturing process for each particular product.

Product gross margin totaled $4.4 million, or 36% of product revenue, for the three months ended September 30, 2010, compared to $3.7 million, or 34% of product revenue, for the three months ended September 30, 2009 and $13.9 million, or 37% of product revenue, for the nine months ended September 30, 2010, compared to $11.6 million, or 36% of product revenue, for the nine months ended September 30, 2009. Gross margin percentage increased primarily due to improved fixed costs leverage on higher revenue, resulting from increased demand and expansion of product mix partially offset by unfavorable manufacturing yields.

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 sales as the cost of product 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, receive a royalty equal to 50% of Danisco’s profit from the sale of the product, 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 the royalty on operating profit 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 royalty on operating profit 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 royalty on operating profit 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, 2010 and 2009 are as follows (in thousands):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2010		2009		% Change			2010		2009		% Change
Research and development	$	1,448	$	1,650		(12	)%	$	4,124	$	4,808		(14	)%
Selling, general and administrative expenses		7,838		9,024		(13	)%		21,010		24,594		(15	)%

Total operating expenses	$	9,286	$	10,674		(13	)%	$	25,134	$	29,402		(15	)%

Operating expenses for the three months ended September 30, 2010 decreased $1.4 million, or 13%, to $9.3 million (including share-based compensation of $0.3 million) compared to $10.7 million (including share-based compensation of $0.8 million) for the three months ended September 30, 2009. Operating expenses for the nine months ended September 30, 2010 decreased $4.3 million, or 15%, to $25.1 million (including share-based compensation of $0.8 million) compared to $29.4 million (including share-based compensation of $3.9 million) for the nine months ended September 30, 2009. Excluding the impact of share-based compensation, total operating expenses decreased $0.9 million and $1.2 million for the three and nine months ended September 30, 2010 as compared to the same periods in 2009 primarily due to $2.1 million of debt issuance costs during the third quarter of 2009 related to our 2007 Notes exchange and 2008 Notes amendment, partially offset by $1.4 million bonus expense paid and expensed during the third quarter of 2010.

Research and Development

Research and development expenses consist primarily of costs associated with internal development of our technologies and our product candidates, 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, 2010, we estimate that approximately 75% and 62% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product development, and that approximately 25% and 38% were spent on research activities funded in whole or in part by our partners. For the three and nine months ended September 30, 2009, we estimate that approximately 65% and 74% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that approximately 35% and 26% were spent on research activities funded by our collaborations and grants.

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;

•

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; and

•

Funding for existing products or projects may not be available on commercially acceptable terms, or at all, which may cause us to defer or reduce our product development efforts.

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.”

Research and development expenses 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. Our research and development expenses decreased $0.2 million to $1.4 million (including share-based compensation of $4,000) for the three months ended

September 30, 2010, and decreased $0.7 million to $4.1 million (including share-based compensation of $7,000) for the nine months ended September 30, 2010 compared to $1.7 million and $4.8 million (including share-based compensation of $34,000 and $0.2 million) for the comparable periods in 2009. Excluding the impact of share-based compensation, total research and development expenses decreased $0.2 million and $0.6 million for the three and nine months ended September 30, 2010 as compared to the same period in 2009 primarily due to $0.2 million bonus expense paid and expensed during the third quarter of 2010. Due to limited capital resources, challenging economic conditions, and a focus on biofuels technology development, we have not spent significant resources on early stage product development for the past three years. Beginning in the fourth quarter 2010, additional strategic investment will be focused on the development and commercialization of our product pipeline.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.2 million, or 13%, to $7.8 million (including share-based compensation of $0.3 million) for the three months ended September 30, 2010 and decreased $3.6 million, or 15%, to $21.0 million (including share-based compensation of $0.8 million) for the nine months ended September 30, 2010. Excluding the impact of share-based compensation, selling, general and administrative expenses decreased $0.6 million for the three and nine months ended September 30, 2010 as compared to the same period in 2009. The decrease during the three and nine months ended September 30, 2010 was primarily due to $2.1 million of debt issuance costs during the third quarter of 2009 related to our 2007 Notes exchange and 2008 Notes amendment, partially offset by $1.2 million of bonus expense paid and expensed during the third quarter of 2010.

Share-Based Compensation Charges

We recognized $0.3 million and $0.8 million in share-based compensation expense for our share-based awards during the three months ended September 30, 2010 and 2009 and $0.8 million and $3.9 million during the nine months ended September 30, 2010 and 2009. Share-based compensation expense was allocated among the following expense categories (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Research and development	$	4	$	34	$	7	$	157
Selling, general and administrative		260		810		817		3,792

	$	264	$	844	$	824	$	3,949

Share-based compensation decreased $0.6 million and $3.1 million for the three and nine months ended September 30, 2010 as compared to the same periods in 2009, primarily related to the acceleration of a all non executive restricted stock awards during the third quarter of 2009, as well as the acceleration of a group of performance-based options held by certain executives during the second quarter of 2009 and the suspension of our employee stock purchase plan during the first quarter of 2009. We further note in connection with the sale of our LC business, several option cancellations occurred during the third quarter 2010 as a result of employee transfers and terminations decreasing expense, and a further decrease in expense attributed to the longer vesting periods due to our option exchange during 2009, offset by a company-wide grant made during the third quarter.

Interest and other expense, net

Interest expense was $2.1 million and $6.3 million for the three and nine months ended September 30, 2010 compared to $2.6 million and $9.1 million. The decrease in interest expense from the comparable periods in 2009 was primarily attributed to the decrease in the outstanding principal amount of the 2008 Notes from conversions and exchange of our 2007 Notes for 2009 Notes in September 2009. Total interest expense for the three and nine months ended September 30, 2010 and 2009 was comprised of the following (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
5.5% coupon interest, payable in cash	$	944		$	1,230		$	2,843		$	3,953
Non-cash amortization of debt issuance costs		149			218			446			682

2007 Notes Total		1,093			1,448			3,289			4,635

8% coupon interest, paid in cash		248			407			767			2,249
Non-cash accretion of debt discount		427			534			1,245			2,623
Non-cash amortization of debt issuance costs		16			51			51			225

2008 Notes Total		691			992			2,063			5,097

9% coupon interest, payable in cash or common stock		308			103			925			103
Non-cash amortization of debt premium		(106	)		(32	)		(310	)		(32	)

2009 Notes Total		202			71			615			71

Other		98			91			318			325
Capitalized interest		—			—			—			(1,039	)

Total interest expense	$	2,084		$	2,602		$	6,285		$	9,089

Gain on Amendment of 2008 Notes

In connection with the amendment of the 2008 Notes in September 2009, 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 on Debt Extinguishment Upon Conversion of Convertible Debt

For the nine months ended September 30, 2010 and 2009, we recorded a gain on conversion of $0.6 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 nine months ended September 30, 2010 was equal to the $2.2 million of principal less the unamortized debt discount and issuance costs, which totaled $1.7 million, as of the conversion date. During the nine months ended September 30, 2010, we issued a total of 0.2 million shares with a total market value as of the dates of conversion of $1.1 million to settle the 2008 Notes that were converted and related “make-whole” payments. The carrying value of the converted 2008 Notes for the nine months ended September 30, 2009 was equal to $42.7 million of principal less the unamortized debt discount and issuance costs, which totaled $31.9 million, as of the conversion date. During the nine months ended September 30, 2009, we issued a total of 3.6 million shares with a total market value as of the dates of conversion of $23.3 million to settle the 2008 Notes and “make-whole” payments.

Loss on Debt Extinguishment

On September 23, 2010, we repurchased $21 million in principal amount of our 2008 and 2007 Notes for a total of $20.6 million in cash, excluding accrued interest as of the closing date. The repurchase allowed us to simplify our capital structure as well as avoid any potential further dilution through conversions. The repurchase qualified for debt extinguishment accounting resulting in a loss of approximately $3.4 million for the three and nine months ended September 30, 2010 representing the difference between the purchase price of $20.6 million and carrying value of $17.2 million calculated as follows (in thousands):


	2008 Notes			2007 Notes			Total
Principal	$	13,000		$	8,000		$	21,000
Debt discount		(3,944	)		—			(3,944	)
Compound Embedded Derivative		311			—			311
Issuance Costs		(98	)		(103	)		(201	)

Carrying Value		9,269			7,897			17,166

Repurchase price		13,750			6,800			20,550

Gain (loss) on debt extinguishment	$	(4,481	)	$	1,097		$	(3,384	)

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

The fair value of the 2008 Notes’ compound embedded derivative, the 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 at 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 loss of $0.3 million and $1.0 million for the three and nine months ended September 30, 2010 compared to a net gain of $1.7 million and $5.1 million for the three and nine months ended September 30, 2009 related to the change in fair value of our recorded derivative asset and liabilities.

Net Income (Loss) from Discontinued Operations

As noted above, on September 2, 2010, we completed the sale of the LC business to BP pursuant to the terms of an Asset Purchase Agreement dated July 14, 2010 for a purchase price of $98.3 million, subject to a working capital adjustment as provided in the Purchase Agreement. The transaction resulted in net cash proceeds to the Company of $95.4 million (including $5 million of the purchase price placed in escrow). As such, the legacy LC business current and prior periods presented in this report have been reclassified to reflect the legacy LC business as discontinued operations.

For the three and nine months ended September 30, 2010, net income from discontinued operations was $32 million and $9.8 million and included a $56.5 million gain on sale of the LC business, net of tax provision of $9.6 million. For the three and nine months ended September 30, 2009, net loss from discontinued operations was $10.6 million and $38.7 million.

Income Tax Benefit

Authoritative accounting guidance requires total income tax expense or benefit to be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income and items charged directly to stockholders’ equity. This allocation is referred to as intra-period tax allocation. Since the sale of the LC business to BP was a discrete event that occurred in the third quarter of 2010, we recorded the total amount of estimated income tax expense for discontinued operations in the third quarter of this year. Accordingly, we recorded tax expense of $9.6 million in discontinued operations in the third quarter of 2010. Further, the allocation rules require us to gross up this amount by the projected annual tax benefit we expects to record as part of the loss from continuing operations in 2010. We calculated this benefit by applying our estimated effective tax rate to our loss from continuing operations for the quarter. As a result, in the third quarter of 2010, we recorded an income tax benefit of $7.9 million.

At September 30, 2010, the our Condensed Consolidated Balance Sheet includes a deferred tax liability of $1.7 million included in long term liabilities of discontinued operations. In the fourth quarter of 2010, this deferred tax liability will be reduced to zero and a benefit from continuing operations will be recorded for the $1.7 million. The income tax benefit we record during the fourth quarter of 2010 will reduce our overall annual income tax expense to zero.

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, 2010, we had an accumulated deficit of approximately $602.7 million.

Capital Requirements

As of September 30, 2010, we had available cash and cash equivalents of approximately $88.9 million. 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, and 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 operations, in October 2009 we raised approximately $12.2 million in net cash proceeds from an underwritten public offering of shares of our common stock and warrants to purchase shares of our common stock, and in September 2010 raised approximately $95.4 million net of transaction costs through the sale of our LC business.

As more fully described in Note 3 of our Condensed Consolidated Financial Statements, on or after April 5, 2012, the holders of the 2007 and 2009 Notes have the right to require us to purchase the 2007 and 2009 Notes for cash (including any accrued and unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus any accrued and unpaid interest to the redemption date.

As more fully described in our Annual Report on Form 10-K for the year ended December 31, 2009, our independent registered public accounting firm has included an explanatory paragraph in its report on our 2009 financial statements related to the substantial doubt regarding our ability to continue as a going concern through December 31, 2010. At that time, we had insufficient cash and working capital to continue to fund planned operations through December 31, 2010. In connection with the sale of our LC business in September 2010, we obtained net cash proceeds of approximately $95.4 million. To date we have used net proceeds of approximately $20.6 million from the transaction for debt retirement. We intend to use the proceeds for continued investment in product development and manufacturing improvement efforts, for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement.

Balance Sheet

Our consolidated assets have decreased by $54.8 million, to $113.1 million at September 30, 2010 from $167.9 million at December 31, 2009, attributable primarily to the sale of our LC business to BP offset by an increase in cash for the proceeds of the sale of $95.4 million, net of transaction costs.

Our consolidated liabilities have decreased by $30.2 million, to $107.5 million at September 30, 2010 from $137.7 million at December 31, 2009, primarily attributable to the sale of our LC business to BP and the debt repurchase of $21 million in principal of our 2007 and 2008 Notes.

Cash Flows Related to Operating, Investing and Financing Activities

Our operating activities used cash of $41.0 million for the nine months ended September 30, 2010. Our cash used in operating activities consisted primarily of cash used to fund our discontinued operations, efforts in cellulosic ethanol technology process development and commercialization, which was partially offset by proceeds from BP’s capital contributions to Galaxy which are included in financing activities described below.

Our investing activities used cash of $5.5 million for the nine months ended September 30, 2010. Our investing activities included the impact of deconsolidation of Vercipia’s cash and cash equivalents of $7.2 million and purchases of property, plant and equipment primarily for the optimization of the demonstration facility in Jennings, Louisiana.

Our financing activities generated net cash of $103.4 million for the nine months ended September 30, 2010, consisting primarily of net proceeds from the sale of the LC business to BP of $95.4 million, combined with pre-sale capital contributions and loan proceeds by BP into Galaxy, partially offset by debt repurchase of $20.6 million.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2010, including the principal and interest payments for our 2009 Notes and 2007 Notes, assuming such obligations are not redeemed pursuant to noteholder rights prior to maturity in April 2027 (in thousands):


			Payments due by Period
	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
Contractual Obligations
Operating lease	$	2,774	$	830	$	1,727	$	217	$	—
Manufacturing costs to Fermic (1)		41,659		16,071		25,588		—		—
License and research agreements		570		70		140		140		220
Convertible Debt:
2007 Notes (2)		118,100		3,357		6,714		6,714		101,315
2009 Notes (3)		34,679		1,234		2,467		2,467		28,511

Total Contractual Obligations	$	197,782	$	21,562	$	36,636	$	9,538	$	130,046

1	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.

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. Total obligations under the 2007 Notes include approximately $57.1 million (including $3.4 million due within one year) in interest through maturity of the 2007 Notes.

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 $21.0 million (including $1.2 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, 2010, or the average of the volume weighted stock price during a measurement period prior to the applicable interest payment date.

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 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, 2010, under this agreement we have made minimum commitments to Fermic of approximately $41.7 million over the next two and a half years. In addition, under the terms of the agreement, we are required to purchase certain equipment required for fermentation and downstream processing of the products.

During the remainder of 2010, we anticipate funding as much as $0.4 million in additional equipment costs at Fermic. Since inception through September 30, 2010, we had incurred costs of approximately $21.0 million for property and equipment related to this agreement. Our ongoing strategy is to remove our manufacturing bottlenecks in order to manufacture more product. For much of 2010, we have been limiting our marketing activities in line with our manufacturing capabilities. In order to improve our manufacturing capacity and support growth, we plan to make additional investments at Fermic over the next 12 to 18 months. These investments should improve both our yield of enzymes and the profitability of our enzymes over time.

In 2008, 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.

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, 2010. We are in process of locating a new building facility in San Diego, which will result in a new lease commitment as well as capital expenditure requirements for the build out of the building, once it is located. This is estimated to occur within the next 18 months.

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 revenue from our royalty on operating profit in product revenues on the statement of operations. We recognize royalty on operating profit during the quarter in which such revenues are earned based on calculations provided by our partner. To date, we have generated a substantial portion of our product revenues, including royalty on operating profit, through our agreements with Danisco. We may record our quarterly royalty on operating profit based on estimates from Danisco, and the final calculation of the royalty is sometimes finalized in the subsequent quarter; accordingly, we are subject to potential adjustments to our actual royalty on operating profit from quarter-to-quarter.

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 royalty on operating profit received from Danisco, as all the following indicators of net revenue reporting 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 royalty on operating profit we currently recognize for Phyzyme we manufacture.

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 the 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 that 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.

At inception, 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 accounted 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 our Consolidated Statement of Operations.

Income Taxes

Authoritative accounting guidance includes an exception to the general principle of intraperiod tax allocations. This exception requires that all items (i.e., extraordinary items, discontinued operations, and so forth, including items charged or credited directly to other comprehensive income) be considered in determining the amount of tax benefit that results from a loss from continuing operations. As a result of net book income from discontinued operations, we recorded an income tax expense from discontinued operations of $9.6 million. An income tax benefit from continuing operations of $7.9 million during the three months ended September 30, 2010 was also recorded. In the fourth quarter of 2010, the Company expects to record a benefit from continuing operations of $1.7 million, resulting in an overall annual income tax expense of zero.

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, 2010 we have not yet completed our analysis of our deferred tax assets for net operating losses and research and development credits. As such, we have removed these amounts and the offsetting valuation allowance 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, 2010 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.

Recently Issued Accounting Standards

Information with respect to recent accounting standards is included in Note 1 of the Notes to Condensed Consolidated Financial Statements.

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.

Interest Rate Exposure

As of September 30, 2010, all outstanding debt obligations of the Company are comprised of fixed rate interest and, therefore, there is minimal interest rate exposure.

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, 2010. Based on such evaluation, such officers have concluded that, as of September 30, 2010, 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 processes in place were the same for the specialty enzyme and biofuel segments, and as such, the sale of the LC business did not materially alter any controls.

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

Noteholder Lawsuit

and warrants, CVI filed a Motion to Amend First Amended Complaint (the “Motion”). CVI’s amended pleading alleges that the Company further breached the Note by both amending the terms of the 2008 Notes without CVI’s express consent and then undertaking various transactions authorized by the amendment. The amended pleading also alleges that as a result of these transactions the conversion rate should have adjusted to $4.27 per share rather than $17.89 per share. On February 25, 2010, the Court granted CVI’s Motion and CVI filed its Second Amended Complaint. Pursuant to a stipulation between the parties that was approved by the Court, the Company filed an Answer to the Second Amended Complaint and a Motion to Dismiss on March 15, 2010. The Motion to Dismiss is currently pending.

Discovery closed on May 14, 2010. On June 11, 2010, both the Company and CVI filed motions for summary judgment, and, on July 1, 2010, the parties opposed each other’s motions. The Court heard oral argument on the motions for summary judgment on July 29, 2010, and both motions remain pending.

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, 2009.

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:

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

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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;

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

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

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

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Costs of recruiting and retaining qualified personnel; and

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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, product sales, selling or financing assets, and the sale of equity or debt securities. Such funds may not be available to us or may be available on terms not satisfactory to us. Our inability to raise adequate funds to support the growth of our project portfolio will materially adversely affect our business.

If we are unable to raise more money, we will have to implement one or more of the following remedies:

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reduce our capital expenditures;

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further scale back our development of new enzyme products;

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significantly reduce our workforce;

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sell some or all of our assets;

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

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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, 2010, we had a net loss continuing operations for the three and nine months ended of $2.4 million and $11.9 million and an accumulated deficit of approximately $602.7 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 2010 will result from the same sources. 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. Over the past two years, our product revenue in absolute dollars and as a percentage of total revenues has increased significantly. Our product 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. In addition, the amounts we spend will impact our ability to become profitable and this will depend, in part, on:

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

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

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

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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.

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, 2009 contains an explanatory paragraph which states that we have incurred recurring losses from operations and, based on our operating plan and existing working capital, this raises substantial doubt about our ability to continue as a going concern. As of September 30, 2010, we have an accumulated deficit of approximately $602.7 million. Prior to the sale of our cellulosic biofuels business (the “LC Business”) to BP in September 2010, we had insufficient cash and working capital to continue to fund planned operations. In connection with the sale of our LC Business, we obtained net cash proceeds of approximately $95.4 million. We intend to use the net proceeds of this offering for continued investment in product development and production efforts in our industrial enzyme business, and for general corporate purposes, including working capital.

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 our 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 all of the potential 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:

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

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We are unable to fund our obligations under any of our other strategic partners or collaborators;

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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;

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

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

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

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

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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;

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

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

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. Our existing proprietary technologies are new and in the early stage of development. 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 14 of our own products, including our Purifine, Fuelzyme, Veretase, Xylathin, 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. Our 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 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, 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 June 30, 2010, 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 2027, or earlier if the 2007 noteholders exercise their put options on April 1, 2012, April 1, 2017, or April 1, 2022 . 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.” 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 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.

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

The conversion or exercise of some or all of the 2007 Notes and 2009 Notes and/or the warrants related to the 2008 Notes, and the issuance of shares of common stock in payment of interest or “make-whole” payments under the 2009 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 reset provision contained in the 2007 Notes. The initial conversion price of the 2009 Notes is $9.60 per share and is subject to reduction based on a reset provision contained in the 2009 Notes. These resets and other reductions in the applicable conversion prices for the 2007 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 contained a version of broad-based weighted average anti-dilution protection, subject to certain exceptions and limitations. One holder of the 2008 Notes has filed a lawsuit against us asserting a conversion price of $17.64 from February 27, 2009 through October 5, 2009 and $4.27 for conversions subsequent to October 6, 2009, rather than $25.56 (and with the recent amendment of the 2008 Notes, and recent equity financing, $17.89), 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 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 2009 Notes by issuing shares, which we intend to do to the extent permissible under the terms of the 2009 Notes, we will be issuing relatively more shares than if our stock price was at a higher level. 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 2009 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 2009 Notes may encourage short selling by market participants because the conversion of the 2007 Notes and 2009 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2009 Notes into shares of our common stock could depress the price of our common stock.

One former 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.

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, 2010, which includes the 2007 Notes and the 2009 Notes was approximately $74.7 million, representing approximately 93% of our total capitalization as of such date.

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

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

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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;

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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

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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, or otherwise continue to maintain or grow our business.

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. 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. 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.

Our building sublease in San Diego will expire within the next 24 months, and we will be required to relocate the majority of our research and development and corporate operations.

The majority of our research and development, business development and corporate operations are conducted from a single facility in San Diego, which we currently sublease from BP through August 2012. We are currently searching for an alternative facility in San Diego. We will likely need to retrofit an existing facility to accommodate our business, including the build-out of new pilot fermentation / recovery and automation labs. The cost of the facility and the equipment required for the facility could require the expenditure of significant amounts of capital, that we expect to be financed through existing cash and/or additional sources of capital. If we are unsuccessful in transitioning operations to a new facility, our business will be adversely impacted.

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, 2010, we have no commitments or agreements with respect to any material acquisitions. If we further pursue such a strategy, we could:

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

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incur substantial additional debt; or

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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.

In the past, we have disclosed material weaknesses with our financial statement close process that we have since remediated. 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 experience 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:

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

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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.

We have licensed certain intellectual property from BP, and we must rely on BP to adequately maintain and protect it.

In connection with the sale of our LC Business to BP on September 2, 2010, we transferred ownership of certain intellectual property for which BP has granted us a license for use within our enzymes business. While the provisions of the purchase agreement provide that BP maintain and protect such intellectual property, there can be no assurance that BP will continue to do so. In addition, BP may be unsuccessful in protecting the intellectual property which we have a license to, if such intellectual property rights are challenged by third parties. If either of these events were to occur, we may lose our rights to certain intellectual property, which could severely harm our business.

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, 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 enzyme projects to date have focused on non-human applications and 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.

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 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.

We face, and will continue to face, intense competition in our 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.

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 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. 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 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.

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. 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.

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;

•

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 enzyme products on a commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our 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 enzyme products, and harm our relationships with our enzyme strategic partners, collaborators, or customers.

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

We have in the past experienced inventory losses and decreased manufacturing yields related to contamination issues for our enzyme products. 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.

We are currently experiencing manufacturing constraints which may prevent us from maintaining adequate supply of inventory to meet our customers’ demands.

We are experiencing constraints within our downstream recovery capabilities at our third-party manufacturing site, Fermic. We currently do not have adequate processing equipment deployed to accommodate expected increased demand for our products. This has created inefficiencies and bottlenecks in our enzyme manufacturing process, which has compromised our manufacturing yields and has extended manufacturing cycle times at the Fermic plant. To address these shortcomings, together with Fermic, we plan to implement

several manufacturing expansion and process improvement projects, which we anticipate will require additional capital expenditures over the next 12-18 months. If such projects are delayed, or do not adequately resolves our current manufacturing limitations, we may not be able to produce sufficient quantities of our enzyme products, and our results of operations and financial condition would be adversely affected.

If 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 royalty on operating profit received from Danisco, as compared to the full value of the manufacturing costs plus the royalty on operating profit 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 would also have the right to reduce our capacity commitment to Fermic; nevertheless, we may still experience significant excess capacity at Fermic as a result. 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 enzyme products.

We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute enzyme products on a commercial scale. We will determine which 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 enzyme products that we had intended to pursue independently. We may pursue enzyme products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize more 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 enzyme products resulting from our internal product development efforts, we will continue to incur losses. Even if we successfully develop a commercial enzyme product, we may not generate significant sales and achieve profitability in our business.

We have relied, and will continue to rely, heavily on strategic partners to support our 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:

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

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

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

These arrangements with collaborative partners are, and will continue to be, critical to the success of our 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.

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:

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termination of strategic alliances and collaborations;

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

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

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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;

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our need to continuously recruit and retain qualified personnel;

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our ability to successfully satisfy all pertinent regulatory requirements;

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

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

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 8, 2010, the closing market price of our common stock has ranged from a low of $2.21 to a high of $138.95. Since the completion of our merger with Celunol on June 20, 2007, the closing market price of our common stock has ranged from $2.21 to $81.96. The closing market price of our common stock on September 30, 2010 was $3.29, and the closing price of our common stock on November 8, 2010 was $3.58. Some of the factors that may cause the market price of our common stock to fluctuate include:

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

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

•

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

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

•

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;

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general and industry-specific economic and regulatory conditions that may affect our ability to successfully develop and commercialize products;

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developments involving our 2009 Notes and 2007 Notes;

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the loss of key employees;

•

the introduction of technological innovations or other products by our competitors;

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

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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 and 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 2009 Notes or to pay interest due under the 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 23% of our outstanding common stock as of September 30, 2010. 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 5, 2010, we had 12,602,368 shares of common stock outstanding.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

(REMOVED AND RESERVED)

ITEM 5.

OTHER INFORMATION.

None.

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 (File No. 000-29173), 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 for the year ended December 31, 2006, 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 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 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 Certificate of Incorporation – 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 (File No. 000-29173), 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 (File No. 000-29173), 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 (File No. 000-29173), filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.

4.5		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		Asset Purchase Agreement, dated as of July 14, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 19, 2010, and incorporated herein by reference.

10.2		Third Extension Agreement to Joint Development and License Agreement, dated as of July 14, 2010, by and among BP Biofuels North America LLC, Verenium Biofuels Corporation and Galaxy Biofuels LLC – filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 19, 2010, and incorporated herein by reference.

10.3		Escrow Agreement, dated as of September 2, 2010, by and among Verenium Corporation, BP Biofuels North America LLC and JPMorgan Chase Bank, National Association – filed herewith.

10.4†		Verenium Transition Services Agreement, dated as of September 2, 2010, by and between Verenium Corporation and BP Biofuels North America LLC – filed herewith.


Exhibit Number		Description of Exhibit

10.5†		BP Transition Services Agreement, dated as of September 2, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed herewith.

10.6†		Sublease Agreement, dated as of September 2, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed herewith.

10.7†		Verenium License Agreement, dated as of September 2, 2010, by and between Verenium Corporation and BP Biofuels North America LLC – filed herewith.

10.8†		BP License Agreement, dated as of September 2, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed herewith.

10.9†		Joint Intellectual Property Agreement, dated as of September 2, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed herewith.

10.10		Sublicense Agreement, dated as of September 2, 2010, by and between Verenium Biofuels Corporation and Verenium Corporation – filed herewith.

10.11		Verenium Non-Competition Agreement, dated as of September 2, 2010, by and between Verenium Corporation and BP Biofuels North America LLC – filed herewith.

10.12†		BP Non-Competition Agreement, dated as of September 2, 2010, by and between BP Biofuels North America LLC and Verenium Corporation – filed herewith.

10.13		Indemnification Rights and Contribution Agreement, dated as of August 12, 2010, by and between Charles River Partnership XII, LP and Verenium Corporation – filed herewith.

10.14		Indemnification Rights and Contribution Agreement, dated as of September 17, 2010, by and among HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P., HealthCare Ventures V, L.P., HealthCare Ventures VI, L.P. and Verenium Corporation – filed herewith.

10.15		Indemnification Rights and Contribution Agreement, dated as of September 17, 2010, by and among Rho Ventures IV, L.P., Rho Ventures IV (QP), L.P., Rho Ventures IV GmbH & Co. Beteiligungs KG, Rho Management Trust I and Verenium Corporation – 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.

32.1		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.

†	Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including redacted terms, has been separately filed with the Securities and Exchange Commission.

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, 2010				/S/ JAMES E. LEVINE
				James E. Levine
				Executive Vice President and Chief Financial Officer
				(Principal Financial Officer)

VERENIUM CORP - FORM 10-Q - November 9, 2010

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