Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if smaller reporting company)

Smaller reporting company

10-Q 1 d399060d10q.htm FORM 10-Q Form 10-Q

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, 2012

¨	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.)

3550 John Hopkins Court, San Diego, CA		92121
(Address of principal executive offices)		(Zip Code)

(858) 431-8500

(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). x 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.

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

The number of shares of the registrant’s Common Stock outstanding as of November 6, 2012 was 12,782,894.

VERENIUM CORPORATION

INDEX


		Page No.
PART I — FINANCIAL INFORMATION

Item 1	Financial Statements:		3
	Condensed Consolidated Balance Sheets (unaudited)		3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)		4
	Condensed Consolidated Statements of Cash Flows (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3	Quantitative and Qualitative Disclosures about Market Risk		30
Item 4	Controls and Procedures		30

PART II — OTHER INFORMATION

Item 1	Legal Proceedings		31
Item 1A	Risk Factors		31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3	Defaults Upon Senior Securities		44
Item 4	Mine Safety Disclosures		44
Item 5	Other Information		44
Item 6	Exhibits		45

SIGNATURES			47

VERENIUM CORPORATION

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

VERENIUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)


	September 30, 2012 (unaudited)			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	13,938		$	28,759
Restricted cash		2,500			5,000
Accounts receivable, net of allowance for doubtful accounts of $0.1 million at September 30, 2012 and December 31, 2011		7,250			11,371
Inventories, net		5,017			6,323
Other current assets		2,700			2,396

Total current assets		31,405			53,849
Property and equipment, net		14,346			7,806
Restricted cash		1,600			3,200
Other long term assets		653			482

Total assets	$	48,004		$	65,337

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,517		$	8,543
Accrued expenses		4,363			6,519
Deferred revenue		1,806			4,137
Convertible debt, at carrying value		0			34,851
Current portion of long-term debt		184			0
Current liabilities of discontinued operations		218			436

Total current liabilities		11,088			54,486
Long term debt, net of current portion		2,705			0
Other long term liabilities		653			906

Total liabilities		14,446			55,392
Stockholders’ equity:
Preferred stock—$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at September 30, 2012 and December 31, 2011		0			0
Common stock—$0.001 par value; 245,000 shares authorized at September 30, 2012 and December 31, 2011; 12,774 and 12,611 shares issued and outstanding at September 30, 2012 and December 31, 2011		13			12
Additional paid-in capital		612,007			610,781
Accumulated deficit		(578,462	)		(600,848	)

Total stockholders’ equity		33,558			9,945

Total liabilities and stockholders’ equity	$	48,004		$	65,337

Note: The condensed consolidated balance sheet data at December 31, 2011 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.

VERENIUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue
Product	$	8,004		$	14,742		$	31,967		$	42,252
Contract manufacturing		1,561			0			4,047			0
Collaborative and license		697			3,674			7,174			4,694

Total revenue		10,262			18,416			43,188			46,946

Operating (income) expenses:
Cost of product and contract manufacturing revenue		6,726			8,698			23,962			26,174
Research and development		4,045			2,673			11,086			7,593
Selling, general and administrative		4,783			4,940			15,139			14,106
Gain on sale of oilseed processing business		0			0			(31,278	)		0
Restructuring charges		11			20			27			2,940

Total operating expenses		15,565			16,331			18,936			50,813

Income (loss) from operations		(5,303	)		2,085			24,252			(3,867	)
Other income and expenses:
Other income (expense), net		5			7			(325	)		50
Interest expense		(83	)		(625	)		(805	)		(2,421	)
Gain on debt extinguishment upon repurchase of convertible notes		0			4,065			0			15,349
Gain (loss) on net change in fair value of derivative assets and liabilities		0			290			(92	)		(1,005	)

Total other income (expenses), net		(78	)		3,737			(1,222	)		11,973

Net income (loss) from continuing operations before income taxes		(5,381	)		5,822			23,030			8,106
Income tax benefit (provision)		147			0			(595	)		0

Net income (loss) from continuing operations		(5,234	)		5,822			22,435			8,106
Net income (loss) from discontinued operations		(23	)		(24	)		(49	)		37

Net income (loss) attributed to Verenium Corporation	$	(5,257	)	$	5,798		$	22,386		$	8,143

Net income (loss) per share, basic:
Continuing operations	$	(0.41	)	$	0.46		$	1.77		$	0.64

Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00

Attributed to Verenium Corporation	$	(0.41	)	$	0.46		$	1.77		$	0.65

Net income (loss) per share, diluted:
Continuing operations	$	(0.41	)	$	0.46		$	1.75		$	0.64

Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00

Attributed to Verenium Corporation	$	(0.41	)	$	0.46		$	1.74		$	0.65

Shares used in calculating net income (loss) per share, basic		12,765			12,607			12,664			12,607

Shares used in calculating net income (loss) per share, diluted		12,765			12,607			13,124			12,607

Comprehensive income (loss)	$	(5,257	)	$	5,798		$	22,386		$	8,143

See accompanying notes to condensed consolidated financial statements.

VERENIUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
Operating activities:
Net income	$	22,386		$	8,143
Net loss (income) from discontinued operations		49			(37	)

Net income from continuing operations		22,435			8,106
Adjustments to reconcile net income from continuing operations to net cash used in operating activities of continuing operations:
Depreciation and amortization		1,120			1,017
Share-based compensation		746			1,058
Gain on extinguishment of debt upon repurchase of convertible debt		0			(15,349	)
Accretion (amortization) of debt net premium/discount from convertible debt		73			(140	)
Loss on net change in fair value of derivative assets and liabilities		92			1,005
Gain on sale of oilseed processing business		(31,278	)		0
Non-cash restructuring charges		17			377
Change in operating assets and liabilities:
Accounts receivable		4,121			(1,273	)
Inventories		1,306			(632	)
Other assets		(548	)		278
Accounts payable and accrued liabilities		(6,204	)		(6,017	)
Deferred revenue		(2,545	)		2,986

Net cash used in operating activities of continuing operations		(10,665	)		(8,584	)
Investing activities:
Proceeds from sale of oilseed processing business, net of transaction costs paid		31,183			0
Purchases of property and equipment, net		(7,684	)		(3,916	)
Release of restricted cash		4,100			0

Net cash provided by (used in) investing activities of continuing operations		27,599			(3,916	)
Financing activities:
Proceeds from sale of common stock		481			0
Repurchase of convertible debt		(34,851	)		(38,645	)
Proceeds from equipment loan		2,889			0

Net cash used in financing activities of continuing operations		(31,481	)		(38,645	)
Cash used in discontinued operations:
Net cash used in operating activities of discontinued operations		(274	)		(1,112	)

Net cash used in discontinued operations		(274	)		(1,112	)

Net decrease in cash and cash equivalents		(14,821	)		(52,257	)
Cash and cash equivalents at beginning of period		28,759			87,929

Cash and cash equivalents at end of period	$	13,938		$	35,672

Supplemental disclosure of cash flow information:
Interest paid	$	958		$	2,428

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. The Company is an industrial biotechnology company that develops and commercializes high performance enzymes for a broad array of industrial processes to enable higher productivity, lower costs, and improved environmental outcomes. The Company operates in one business segment with four main product lines: animal health and nutrition, grain processing, oilfield services and other industrial processes.

Recent Developments

Credit Facility

As further described in Note 11, on October 5, 2012 the Company entered into a $10 million revolving credit facility with Comerica Bank (“Comerica”). The credit facility has a maturity date of October 5, 2014. This credit facility will allow the Company to borrow up to $8.4 million against certain eligible foreign and domestic receivables and will cover an existing $1.6 million letter of credit commitment to the Company’s landlord. The credit facility also immediately frees up $1.6 million in restricted cash which had previously secured the letter of credit. Advances under the credit facility bear interest at a daily adjusting London Interbank Offered Rate (“LIBOR”) plus a margin of 4.75%.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) on March 5, 2012.

Excluding the one-time gain on sale of the oilseed processing business, the Company had a loss from operations of $7.0 million for the nine months ended September 30, 2012 and had an accumulated deficit of $578.5 million as of September 30, 2012. Based on the Company’s operating plan, which includes expanded research and development investment in pipeline products, its existing working capital may not be sufficient to meet the cash requirements to fund the Company’s planned operating expenses, capital expenditures and working capital requirements through 2013 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern through 2013. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

The Company’s plan to address the expected shortfall of working capital is to generate additional financing through any of the following: raising debt financing, including through the issuance of debt or convertible debt securities, the issuance of equity securities, corporate partnerships and collaborations, financing of assets, and incremental product sales or strategic transactions. The Company will also continue to consider other financing alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

The results of operations and assets and liabilities associated with the sale of the Company’s ligno cellulosic business (“LC business”) in September 2010 have been reclassified and presented as discontinued operations in the accompanying consolidated statements of comprehensive income (loss) and balance sheets for current and all prior periods presented. The results of operations and assets and liabilities associated with the sale of the oilseed processing business to DSM Food Specialties B.V. (“DSM”) in March 2012 are included in continuing operations in the accompanying consolidated statements of comprehensive income (loss) and balance sheets for the current period and all prior periods presented.

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 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.

Fair Value of Financial Instruments

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 applicable authoritative guidance 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, 2012 and December 31, 2011 (in thousands):


	September 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents (1)	$	18,038	$	0	$	0	$	18,038	$	36,959	$	0	$	0	$	36,959

Liabilities:
Derivative—warrants (2)		0		0		170		170		0		0		78		78
Equity:
Warrants (3)		0		0		0		0		0		0		209		209

	$	0	$	0	$	170	$	170	$	0	$	0	$	287	$	287

(1)	Included in cash and cash equivalents and restricted cash on the accompanying condensed consolidated balance sheets.

(2)

Represents warrants issued in February 2008 and October 2009, both of which qualified for liability accounting. The warrants issued in 2008 had a fair value of zero as of September 30, 2012 and December 31, 2011, using significant unobservable inputs (Level 3). The warrants issued in 2009 had a fair value of $0.2 million and $0.1 million calculated using the Black-Scholes Merton methodology, and were classified within other long term liabilities at September 30, 2012 and December 31, 2011, using significant unobservable inputs (Level 3). Inputs for the Black-Scholes Merton methodology were consistent with the inputs used for the Company’s share based compensation expense adjusted for the warrants’ expected life.

(3)

Represents warrants issued in October 2011 in conjunction with credit facilities, which qualified for equity accounting. The warrants issued had a fair value of $0.2 million as of December 31, 2011 calculated using the Black-Scholes Merton methodology, and were classified within stockholders’ equity at December 31, 2011, using significant unobservable inputs (Level 3).

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, 2012 to September 30, 2012 (in thousands):


	Derivative Liability – Warrants
Balance at January 1, 2012	$	78
Adjustment to fair value included in earnings (1)		324

Balance at March 31, 2012		402
Adjustment to fair value included in earnings (1)		(232	)

Balance at June 30, 2012	$	170

Adjustment to fair value included in earnings (1)		0

Balance at September 30, 2012	$	170

(1)

The derivatives were revalued at the end of the reporting period and the resulting difference is included in the results of operations. For the three and nine months ended September 30, 2012, the net adjustment to fair value is included in “Gain (loss) on net change in fair value of derivative assets and liabilities” on the accompanying condensed consolidated statements of comprehensive income (loss).

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, 2012, the Company had $2.2 million in current and long-term deferred revenue, of which $1.7 million related to funding from collaborative partners and $0.5 million 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 or 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 calculated as a share of profits from DuPont Nutrition Biosciences ApS (“DuPont”), a division of E. I. du Pont de Nemours and Company, during the quarter in which such revenue is earned. DuPont markets products based on the Company’s Phyzyme^® XP phytase enzyme. Revenue from royalties calculated as a share of operating profit, as defined in the agreement, is recognized generally upon shipment of Phyzyme^® XP phytase by DuPont to their customers, based on information provided by DuPont. Revenue from royalties is included in product revenue in the consolidated statements of comprehensive income (loss).

The Company records revenue equal to the full value of the manufacturing costs plus royalties for the Phyzyme^® XP phytase product it manufactures through its contract manufacturing agreement with Fermic S.A. (“Fermic”) in Mexico City. The Company has contracted with Genencor, a subsidiary of DuPont, to serve as a second-source manufacturer of the Company’s Phyzyme^® XP phytase product. 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 DuPont, 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.

Collaborative and License Revenue

The Company’s collaboration and license revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable upfront fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

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 consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.

Prior to the revised multiple element guidance adopted by the Company on January 1, 2011, upfront, nonrefundable payments for license fees, grants, and advance payments for sponsored research revenues received in excess of amounts earned were classified as deferred revenue and recognized as income over the contract or development period. If and when the Company enters into a new collaboration or materially modifies an existing collaboration, the Company will be required to apply the new multiple element guidance. Estimating the duration of the development period includes continual assessment of development stages and regulatory requirements.

Revenue Arrangements with Multiple Deliverables

The Company occasionally enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements entered into or existing agreements materially modified after December 31, 2010, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates applicable to future years. The Company establishes a valuation allowance against its net deferred tax assets to reduce them to the amount expected to be realized.

The Company assesses the recoverability of its deferred tax assets on an ongoing basis. In making this assessment the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion or all of its net deferred assets will be realized in future periods. This assessment requires significant judgment. The Company does not recognize current and future tax benefits until it is more likely than not that its tax positions will be sustained. In general, any realization of its net deferred tax assets will reduce its effective rate in future periods.

During the three and nine months ended September 30, 2012, a tax benefit of $0.1 million and a provision of $0.6 million was recorded for alternative minimum tax, or AMT, liability equal to approximately 2.67% (federal and California) of estimated year-to-date taxable income. The provision is primarily attributable to the $37 million taxable gain from the sale of the oilseed processing business to DSM. The Company currently believes it has available federal and California net operating loss carryforwards, or NOLs, to fully offset its taxable income for regular tax purposes; however, AMT still applies as a result of limitations on the ability to utilize AMT NOLs to offset AMT taxable income.

From 2008 through 2011, California tax legislation has suspended the use of NOL carryforwards. Under current tax code, California allows the utilization of NOL carryforwards to offset taxable income in 2012. If California suspends the use of NOLs in 2012, the Company could have a total 2012 tax liability of approximately $3.0 million.

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. For purposes of the computation of basic net income (loss) per share, unvested restricted shares are considered contingently returnable shares and are not considered outstanding common shares for purposes of computing basic 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 basic net income (loss) per share.

Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period increased to include dilutive potential common shares calculated using the treasury stock method for outstanding stock options and warrants and the “if converted” method for outstanding convertible debt. Under the treasury stock method, the following amounts are assumed to be used to repurchase shares: the amount that must be paid to exercise stock options and warrants; the amount of compensation expense for future services that the Company has not yet recognized for stock options; and the amount of tax benefits that will be recorded in additional paid-in capital when the expenses related to respective awards become deductible. Under the “if converted” method the convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance, if later), and interest charges applicable to the convertible debt are added back to net income and adjusted for the income tax effect. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted net income per share if the effect would be antidilutive. Convertible debt is antidilutive whenever its interest (net of tax) per common share obtainable on conversion exceeds basic net income per share.

Computation of basic net income (loss) per share for the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator
Net income (loss) from continuing operations	$	(5,234	)	$	5,822		$	22,435		$	8,106

Net income (loss) from discontinued operations	$	(23	)	$	(24	)	$	(49	)	$	37

Net income (loss) attributed to Verenium Corporation	$	(5,257	)	$	5,798		$	22,386		$	8,143


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Denominator
Weighted average shares outstanding during the period		12,765			12,612			12,664			12,612
Less: Weighted average unvested restricted shares outstanding		0			(5	)		0			(5	)

Weighted average shares used in computing basic net income (loss) per share		12,765			12,607			12,664			12,607

Net income (loss) per share, basic:
Continuing operations	$	(0.41	)	$	0.46		$	1.77		$	0.64

Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00

Attributed to Verenium Corporation	$	(0.41	)	$	0.46		$	1.77		$	0.65

In accordance with the treasury stock method, for the nine months ended September 30, 2011, convertible debt was deemed to be antidilutive as its interest per common share obtainable on conversion exceeds basic net income per share, and the average stock price was below the price of outstanding options and outstanding warrants, and so the outstanding options and warrants were deemed to be antidilutive. As such, diluted net income per share equaled basic net income per share for the nine months ended September 30, 2011. Computation of diluted net income per share for the nine months ended September 30, 2012 was as follows (in thousands):


	Nine Months Ended September 30, 2012
Numerator
Net income from continuing operations	$	22,435
Plus: Income impact of assumed conversions (Interest on convertible debt)		479

Net income from continuing operations plus assumed conversions	$	22,914

Net (loss) income from discontinued operations	$	(49	)

Net income attributed to Verenium Corporation	$	22,386
Plus: Income impact of assumed conversions (Interest on convertible debt)		479

Net income attributed to Verenium Corporation plus assumed conversions	$	22,865

Denominator
Weighted average shares used in computing basic net income per share		12,664
Plus: Effect of dilutive potential common shares from:
Stock options, awards and warrants		309
Convertible debt		151

Diluted weighted average common shares outstanding		13,124

Net income per share, diluted:
Continuing operations	$	1.75

Discontinued operations	$	0.00

Attributed to Verenium Corporation	$	1.74

For the nine months ended September 30, 2012, potentially dilutive securities covering 3.3 million shares related to warrants and 1.7 million shares related to stock options to purchase our common stock were not included in the diluted net income per share calculations because they would be antidilutive.

2. Discontinued Operations

On September 2, 2010, the Company completed the sale of its LC business to BP Biofuels North America LLC (“BP”) pursuant to an asset purchase agreement. The transaction resulted in net cash proceeds to the Company of $96.0 million (including $5.0 million of the purchase price placed in escrow). Pursuant to the terms of the asset purchase agreement, $5.0 million of the 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 liabilities and breaches of representations and warranties made by the Company in the asset purchase agreement, most of which survived for a period of 18 months following the closing, or March 2, 2012. With respect to some claims, the Company is not required to make any indemnification payments until aggregate claims exceed $2.0 million, and then only with respect to the amount by which claims exceed that amount, and the Company’s maximum indemnification liability is generally capped at $10.0 million with respect to most representations and warranties. However, some indemnification claims are not subject to the deductible amount or the cap on aggregate liability. BP has provided notice of a potential claim for indemnification by the Company pursuant to the escrow agreement in connection with a claim made by University of Florida Research Foundation, Inc. (“UFRF”), against BP relating to a license granted by UFRF to a successor of Verenium Biofuels Corporation (now known as BP Biofuels Advanced Technology, Inc.), which was acquired by BP in the 2010 transaction. BP filed an action in the United States District Court for the Northern District of Florida against UFRF on March 5, 2012, for a judgment declaring that the UFRF allegations regarding the license are without merit. Of the $5 million held in escrow, the escrow agent disbursed $2.5 million to the Company during the first quarter 2012 and the remaining $2.5 million will remain in escrow pending resolution of the UFRF claim against BP. The Company believes that the UFRF claim against BP, and the potential claim by BP against the Company for indemnity pertaining to the UFRF claim, are without merit. The remaining $2.5 million in escrow is reflected as restricted cash within current assets on the Company’s consolidated balance sheet as of September 30, 2012.

The results of operations from discontinued operations for the three and nine months ended September 30, 2012 and 2011 are set forth below (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue:
Grant	$	0		$	0		$	0		$	0
Collaborative		0			0			0			(23	)

Total revenue		0			0			0	)		(23	)

Operating expenses:
Research and development		0			(10	)		0			(29	)
Selling, general and administrative		23			34			49			(31	)

Total operating expenses		23			24			49			(60	)

Net income (loss) from discontinued operations	$	(23	)	$	(24	)	$	(49	)	$	37

3. DSM Asset Purchase Agreement

On March 23, 2012, the Company entered into an agreement with DSM for the purchase of the Company’s oilseed processing business and concurrently entered into a license agreement, a supply agreement and a transition services agreement with DSM. Under the license agreement, the Company issued a license for its alpha-amylase product and xylanase enzyme product to DSM both for use in the food and beverage markets. The Company retains the rights to use the alpha-amylase and xylanase products outside of the food and beverage markets. In turn, DSM licensed to the Company the intellectual property purchased by DSM in the transaction and the intellectual property that the Company had previously licensed to BP Biofuels North America LLC under the BP License Agreement. Further in the license agreement, the Company agreed to provide DSM with three dedicated full time equivalents (“FTE”) for new gene libraries to be developed by the Company for one year, and to deliver any new gene libraries derived from these efforts to DSM in exchange for a royalty paid by DSM to the Company on any enzyme product discovered by DSM through the use of the new gene libraries. The supply agreement requires for the continued manufacture by the Company of the purchased oilseed processing product and the licensed alpha-amylase and xylanase products for sale to DSM with minimum quantities. The Company may be obligated to share in cost overruns or increases, in whole or in part, in connection with the manufacturing. Under the transition services agreement the Company will provide services to DSM to be paid on an hourly basis as services are incurred through March 2013.

The aggregate consideration received by the Company in connection with the transactions was $37 million, including reimbursement for transaction and related expenses incurred by the Company of $2 million.

Pursuant to the terms of the purchase agreement, the Company and DSM entered into a non-competition agreement which restricts the Company’s global activities in the oilseed processing business for a period of ten years. In addition, the non-competition agreement restricts the Company from soliciting for employment or hiring any DSM employee that works in DSM’s oilseed processing operations for a period of ten years and restricts DSM from soliciting for employment or hiring any Company employee until the one year anniversary of the termination or expiration of the transition services agreement.

The Company accounted for the agreement for the sale of the oilseed business as a sale of a business. The agreements entered into concurrently with the sale of the oilseed business including the license agreement, supply agreement, and transition services agreement contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under authoritative accounting guidance. Several non-contingent deliverables were identified within the agreements. The Company identified the alpha-amylase and xylanase licenses, the gene libraries’ FTE’s, the manufacturing services and the transition services agreement as separate non-contingent deliverables within the agreement. All the deliverables were determined to have standalone value and qualify as separate units of accounting. The Company performed an analysis to determine the fair value for all elements, and have allocated the non-contingent consideration based on the relative fair value. Revenue associated with each of the undelivered elements will be recognized when the item is delivered.

As of the sale and close date of the agreements, March 23, 2012, the Company determined that the oilseed processing business and the alpha-amylase product and xylanase enzyme licenses had been fully delivered, and, as such, a net gain on sale of $31.5 million was recognized as revenue for the sale of the oilseed processing business and license revenue of $1.5 million was recognized as revenue. During the second quarter 2012, as a result of less arrangement allocation being allocated to the sale of the oilseed processing business and more allocated to undelivered elements an adjustment of $0.2 million was recorded to decrease the gain and increase deferred revenue by this amount. As the Company believes this adjustment is immaterial the full amount was recorded during the second quarter 2012. As of September 30, 2012, the Company had $0.9 million in deferred revenue attributed to DSM.

Based on proportional performance of efforts performed during the three and nine months ended September 30, 2012, a total of $0.4 million and $1.0 million was recognized as revenue for the three and nine months ended September 30, 2012 pursuant to the DSM asset purchase agreement, primarily related to the transition services agreement and gene library efforts.

The final $31.3 million gain on sale of oilseed processing business was calculated as the difference between the allocated consideration amount for the oilseed processing business and the net carrying amount of the assets and assumed liabilities transferred to DSM. The following sets forth the net assets and liabilities and calculation of the gain on sale as of the disposal date (in thousands):


Consideration received	$	37,000
Carrying value of assets:
Assets		(33	)
Liabilities		333

Carrying value		300
Transaction costs		(3,160	)
Allocated license revenue for alpha-amylase and xylanase enzyme		(1,520	)
Deferred revenue associated with undelivered elements		(1,342	)

Gain on sale of oilseed processing business	$	31,278

Due to the continuing involvement of the Company associated with the manufacturing of the products, the results of operations associated with the sale of the oilseed processing business are included in continuing operations in the accompanying consolidated statements of comprehensive income (loss) and balance sheets for the current period and all prior periods presented. Pro forma amounts of historical financials have not been included due to the immaterial nature of the adjustments to the Company’s historical financial statements.

4. Convertible Debt

On April 2, 2012, all noteholders validly tendered their 5.5% Senior Convertible Notes, or 2007 Notes, in response to the then-outstanding tender offer for the 2007 Notes, and the Company repurchased the remaining $34.9 million in principal amount of 2007 Notes outstanding for a total cash payment of $35.8 million, including accrued and unpaid interest. No further obligation remains outstanding for the 2007 Notes as of September 30, 2012.

5. Balance Sheet Details

Inventory

Inventories are recorded at standard cost on a first-in, first-out basis. Inventories consist of the following (in thousands) as of:


	September 30, 2012			December 31, 2011
Raw materials	$	217		$	353
Work in progress		371			495
Finished goods		5,091			5,699

		5,679			6,547
Reserve		(662	)		(224	)

Net inventory	$	5,017		$	6,323

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 lives 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 consists of the following (in thousands):


	September 30, 2012			December 31, 2011
Laboratory, machinery and equipment	$	28,171		$	24,927
Computer equipment		4,305			3,031
Furniture and fixtures		880			0
Construction in progress		6,364			4,106

Property and equipment, gross		39,720			32,064
Less: Accumulated depreciation and amortization		(25,374	)		(24,258	)

Property and equipment, net	$	14,346		$	7,806

Construction in progress assets related primarily to equipment associated with the build out of the Company’s pilot bioprocess development plant and automation laboratory which the Company expects to place in service during the fourth quarter. The pilot bioprocess development plant is expected to have a useful life of 10 years. The lease for the Company’s new building commenced in June 2012 and depreciation will commence upon installation of the equipment, over their appropriate asset lives.

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

In conjunction with the signing of the Company’s facility lease agreement in June 2011, an analysis of all tenant improvements completed on the new building was performed. In accordance with authoritative guidance, it was concluded that the tenant improvements being funded through tenant allowances are assets of the landlord and not the Company as all tenant improvements will remain with the building, are not specific to the Company and all construction is controlled by the landlord. As such, tenant improvements not paid directly by the Company or controlled by the Company, as well as the respective liabilities were not recorded on the Company’s consolidated financial statements.

Accrued expenses

Accrued expenses consists of the following (in thousands):


	September 30, 2012		December 31, 2011
Employee compensation	$	2,064	$	3,138
Professional and outside services costs		947		1,060
Accrued interest on debt		29		479
Royalties		592		1,202
Accrued restructuring		72		396
Accrued taxes		659		40
Other		0		204

	$	4,363	$	6,519

6. Restructuring Activities

In connection with the sale of the LC business in September 2010, the former Cambridge office space used by the former LC business employees was vacated and a restructuring liability was recorded representing the present value of the remaining lease term, net of contracted sublease. The liability was classified into discontinued operations on the Company’s condensed consolidated balance sheets.

The following table sets forth the activity in the restructuring plan related to discontinued operations (in thousands):


	Facility Consolidation Costs
Balance at January 1, 2010	$	0
Accrued and expensed		835
Adjustments and revisions		103

Balance at December 31, 2010		938
Charged against accrual		(447	)
Adjustments and revisions		(125	)

Balance at December 31, 2011		366
Charged against accrual		(94	)
Adjustments and revisions		15

Balance at March 31, 2012		287
Charged against accrual		(91	)
Adjustments and revisions		12

Balance at June 30, 2012	$	208
Charged against accrual		(73	)
Adjustments and revisions		6

Balance at September 30, 2012	$	141

Restructuring reserve liability attributed to discontinued operations included in current and long term liabilities of discontinued operations:
Current portion	$	131
Long-term portion		10

	$	141

The Company ceased operations in Cambridge, Massachusetts on March 31, 2011, and subleased its office space to a third party. The restructuring plan included charges associated with the estimated loss on sublease for the Cambridge facility as well as one-time relocation costs for the employees whose employment positions were moved to the Company’s San Diego location. The Company incurred total restructuring expense of $11,000 and $27,000 for the three and nine months ended September 30, 2012 and $20,000 and $2.9 million for the three and nine months ended September 30, 2011 and had restructuring accruals of $0.1 million and $0.4 million as of September 30, 2012 and December 31, 2011, as detailed below. The liability was classified within accrued expense for the current portion and other long term liabilities for the long term portion on the Company’s condensed consolidated balance sheets.

The following table sets forth the activity in the restructuring plan related to continuing operations (in thousands):


	Facility Consolidation Costs			Employee Separation Costs			Asset Impairment Costs			Total
Balance at January 1, 2011	$	0		$	0		$	0		$	0
Accrued and expensed		145			2,244			520			2,909
Charged against accrual		2			(2,021	)		(520	)		(2,539	)
Adjustments and revisions		34			0			0			34

Balance at December 31, 2011		181			223			0			404
Charged against accrual		(46	)		(198	)		0			(244	)
Adjustments and revisions		7			(9	)		0			(2	)

Balance at March 31, 2012		142			16			0			158
Charged against accrual		(47	)		(6	)		0			(53	)
Adjustments and revisions		8			0			0			8

Balance at June 30, 2012	$	103		$	10		$	0		$	113
Charged against accrual		(44	)		(3	)		0			(47	)
Adjustments and revisions		11			0			0			11

Balance at September 30, 2012	$	70		$	7		$	0		$	77

Restructuring reserve liability classification:
Current portion										$	72
Long-term portion											5

										$	77

7. Significant Collaborative Research and Development Agreements

Novus International, Inc

On June 23, 2011, the Company entered into a collaboration agreement with Novus International Inc. (“Novus”) to develop, manufacture and commercialize a suite of new enzyme products from the Company’s late stage product pipeline in the animal health and nutrition product line (collectively referred to as “animal feed enzymes”). During the first quarter 2012, the Company completed one of the identified deliverables in the agreement related to the delivery of one of the licenses required to produce the final end products and recognized $2.9 million related to the relative selling price of the delivered license. Collaborative revenue for the three and nine months ended September 30, 2012 related to the Novus agreement equaled $0.2 and $3.5 million, including $2.9 million related to the relative selling price of the delivered license. There was $0.3 million in deferred revenue related to the Novus agreement as of September 30, 2012.

In accordance with the agreement, the Company will receive an additional cash payment of $2.5 million upon the earlier of (i) first commercial sale or (ii) first regulatory submission. This achievement is deemed to add value to the product candidate and will be based on past performance performed by the Company, and as such the amount was concluded to be a substantive milestone to be recognized upon achievement.

8. 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, DuPont, represented 57% and 42% for the three months ended September 30, 2012 and 2011 and 52% and 45% for the three and nine months ended September 30, 2012 and 2011 of total revenue from continuing operations. Revenue from the Company’s second largest customer, DSM, represented 19% and 15% for the three and nine months ended September 30, 2012 of total revenue. Accounts receivable from these two customers comprised approximately 77% of accounts receivable at September 30, 2012 and 78% at December 31, 2011.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
North America	$	3,400	$	4,785	$	13,514	$	15,525
Europe		5,585		9,488		22,579		22,100
South America		978		3,860		6,097		8,542
Asia		299		283		998		779

	$	10,262	$	18,416	$	43,188	$	46,946

The Company manufactures and sells enzymes primarily within four main product lines. The animal health and nutrition product line primarily includes the Phyzyme^® XP phytase enzyme and from time to time toll manufacturing of other products in this market and the grain processing product line includes Fuelzyme^® alpha-amylase, Veretase^® alpha-amylase, Xylathin™ xylanase and DELTAZYM^® GA L-E5 gluco-amylase enzymes.

The following table sets forth product and contract manufacturing revenues by individual product line (in thousands):


	Three Months Ended September 30,
	2012		% of Product Revenue			2011		% of Product Revenue
Product revenues:
Animal health and nutrition	$	5,849		61	%	$	8,624		58	%
Grain processing		2,054		21	%		3,942		27	%
Oilseed processing (1)		0		0	%		1,929		13	%
All other products		101		1	%		247		2	%

Total product revenue	$	8,004		83	%	$	14,742		100	%
Contract manufacturing (1)		1,561		17	%		0		0	%

Total product and contract manufacturing revenue	$	9,565		100	%	$	14,742		100	%


	Nine Months Ended September 30,
	2012		% of Product Revenue			2011		% of Product Revenue
Product revenues:
Animal health and nutrition	$	22,521		63	%	$	24,734		59	%
Grain processing		7,895		22	%		12,371		29	%
Oilseed processing (1)		579		2	%		4,541		11	%
All other products		972		2	%		606		1	%

Total product revenue	$	31,967		89	%	$	42,252		100	%
Contract manufacturing (1)		4,047		11	%		0		0	%

Total product and contract manufacturing revenue	$	36,014		100	%	$	42,252		100	%

(1)

As the Company will continue to provide manufacturing services for the products sold and licensed to DSM, all revenue through the minimum term specified in the contract after the agreement date (March 23, 2012) is classified as contract manufacturing revenue on the Company’s condensed consolidated statements of comprehensive income (loss). All historical amounts related to Purifine and Veretase will continue to be shown as oilseed processing and grain processing product revenue.

The Company manufactures its enzyme products through a manufacturing facility in Mexico City, owned by Fermic. The carrying value of property and equipment held at Fermic reported on the Company’s consolidated balance sheets totaled approximately $1.6 million at September 30, 2012 and $1.1 million December 31, 2011.

9. Share-based Compensation

The Company recognized share-based compensation expense of $0.3 million and $0.2 million for the three months ended September 30, 2012 and 2011 and $0.7 million and $1.1 million for the nine months ended September 30, 2012 and 2011. Share-based compensation expense by category totaled the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Cost of product and contract manufacturing revenue	$	25	$	0	$	49	$	0
Research and development		65		0		116		0
Selling, general and administrative		214		188		581		475
Restructuring charges		0		0		0		583

	$	304	$	188	$	746	$	1,058

As of September 30, 2012, there was $2.1 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 became employees of DSM as part of the sale of the oilseed processing business had their unvested options cancelled. The remaining expense attributed to existing outstanding unvested options is expected to be recognized over a weighted average period of 1.7 years as follows (in thousands):


Fiscal Year 2012 (October 1, 2012 to December 31, 2012)	$	311
Fiscal Year 2013		980
Fiscal Year 2014		504
Fiscal Year 2015		216
Thereafter		85

	$	2,096

10. Commitment and Contingencies

At September 30, 2012, the Company’s minimum commitments under non-cancelable operating leases were as follows (in thousands):


	San Diego Gross Rental Payments (1)		Equipment Loan (2)		Cambridge Net Rental Payments
October 2012-September 2013	$	528	$	401	$	196
October 2013-September 2014		2,545		437		31
October 2014-September 2015		2,617		437		0
October 2015-September 2016		2,691		437		0
October 2016-September 2017		2,768		437		0
Thereafter		15,607		2,258		0

Total minimum lease payments	$	26,756	$	4,407	$	227

(1)	In addition to the tenant allowance included in the base rent, a second tenant allowance option of $1.5 million was exercised which must be paid back in monthly payments at a 9% interest rate. These payments are included in the above amounts.

(2)	Amount includes $1.5 million of interest payments.

As described in Note 2, as of September 2010, 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 occupied, rent free, through June 2012.

San Diego Lease

On June 24, 2011, the Company signed a lease agreement for 59,199 square feet of new office and laboratory space in San Diego for a term of 126 months commencing in June 2012. Upon lease commencement, rent is approximately $192,000 a month, which includes both base rent and a tenant improvement allowance. The rent will be increased by 3% on each annual anniversary of the first day of the first full month during the lease term. Further, the lease agreement allows for a “free rent” term starting with the seventh full month in the lease through the end of the sixteenth month. In addition to the tenant allowance incorporated in the lease payment, an additional tenant improvement allowance of $1.5 million is allowed, which must be paid back in monthly payments at a 9% interest rate. The lease provides the Company with two consecutive options to extend the term of the lease for five years each, which may be exercised with 12 months prior written notice. In the event the Company chooses to extend the term of the lease, the minimum monthly rent payable for the additional term will be determined according to the then-prevailing market rate.

In connection with this lease, the Company has put in place a facility for up to $3 million in secured equipment financing to help support the planned build-out of its research and bioprocess development laboratories and corporate headquarters in San Diego. The facility is intended to fund no more than 30% of the total cost of the pilot plant and research and development equipment needed for the new building. The facility is to be paid at an interest rate of 9% over a term of 126 months. As of September 30, 2012, the Company had drawn $2.9 million under this facility.

Cambridge Lease

The Company has a lease obligation for approximately 21,000 square feet of office space in a building in Cambridge, Massachusetts. The offices are leased to the Company under an operating lease with a term through December 2013. On March 31, 2011, the Company terminated its operations in Cambridge. Subsequently, the Company completed a sublease agreement in May 2011 for the full Cambridge facility, which will give the Company additional sublease income of approximately $0.7 million from October 2012 through September 2013 and $0.2 million in the remainder of 2013.

Credit Facility

On October 19, 2011, the Company entered into credit facilities with Comerica consisting of a $3.0 million domestic receivables and inventory revolving line (the “Comerica Line”) and a $10.0 million export-import receivables revolving line (the “Ex-Im line”). No amounts had ever been outstanding on the lines. In conjunction with the sale of the oilseed processing business to DSM, the Comerica line was terminated. Unamortized transactions costs of $0.3 million were expensed and are recorded in conjunction with the termination of the facility within the Other income (expense), net line item on the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September 30, 2012.

Further, in connection with the Comerica Line, the Company issued to Comerica a warrant to purchase 246,212 shares of its common stock at a price per share of $2.64. The warrant is exercisable at any time through the expiration of the warrant on October 19, 2016.

Subsequently as further described in Note 11, the Company entered into a new credit facility with Comerica.

Letter of Credit

Pursuant to the Company’s new facilities lease for office and laboratory space in San Diego, as of September 30, 2012 the Company was required to maintain a letter of credit of $1.6 million on behalf of its landlord. Due to the payoff of debt and resulting debt ratios, the letter of credit was reduced from $3.2 million to $1.6 million in August 2012, and was reflected as long term restricted cash on the Company’s consolidated balance sheets as of September 30, 2012 and December 31, 2011. Subsequently in October 2012, the remaining $1.6 million was released as part of the new credit facility. The deposit provided for by the letter of credit is held as a security for the performance of the Company’s obligations under the lease and not as an advance rental deposit. The letter of credit expires on December 31, 2012, and will be automatically extended annually without amendment through December 31, 2022. The deposit will not be increased at any time but can be reduced based on certain financial and market capitalization requirements.

Litigation

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.

11. Subsequent Event

On October 5, 2012, the Company entered into a $10 million revolving credit facility with Comerica. The credit facility has a maturity date of October 5, 2014. The credit facility is pursuant to a Loan and Security Agreement with Comerica which allows for revolving cash borrowings under a secured credit facility of up to the lesser of (i) $10 million or (ii) 80% of certain eligible domestic accounts receivable held by us that arise in the ordinary course of our business and 90% of eligible foreign accounts receivable held by the Company that arise in the ordinary course of our business, in each case, reduced by the aggregate face amount of any outstanding letters of credit and the aggregate limits and credit card processing reserves in respect of any corporate credit cards issued to the Company. Advances under the credit facility bear interest at a daily adjusting LIBOR plus a margin of 4.75%.

This credit facility will allow the Company to borrow up to $8.4 million against certain eligible foreign and domestic receivables and will cover an existing $1.6 million letter of credit commitment to the Company’s landlord. The credit facility also immediately frees up $1.6 million in restricted cash which had previously secured the letter of credit. The credit facility contains certain financial covenants that must be met on an ongoing basis.

Subject to certain exceptions, all borrowings under the credit facility are secured by substantially all of the Company’s assets, excluding the Company’s intellectual property.

The credit facility includes limitations (subject to customary baskets and exceptions) on the Company’s ability to, among other things, dispose of assets, move cash balances on deposit with Comerica to another depositary, engage in any business not related to the Company’s current business strategy, engage in certain mergers and acquisitions, incur debt, grant liens, make certain restricted payments such as dividend payments, make certain investments, enter into certain transactions with affiliates, make payments on subordinated debt, and store inventory or equipment with certain third parties, and contains usual and customary covenants for an arrangement of its type.

The events of default under the credit facility include, among other things, payment defaults, breaches of covenants, the occurrence of a material adverse change in the Company’s business, judgments against the Company, material misrepresentations by the Company and bankruptcy events. In the case of a continuing event of default, Comerica may, among other remedies, eliminate its commitment to make further credit available, declare due all unpaid principal amounts outstanding, and foreclose on all collateral to satisfy any unpaid obligations.

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 and contract manufacturing revenue, profitability and capital requirements;

•

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

•

our strategy;

•

our ability to improve manufacturing processes, reduce inventory losses and increase manufacturing yields in order to improve margins and enable us to continue to manage capacity in response to market conditions, such as the state of the corn ethanol industry;

•

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;

•

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 ability to continue to expand internationally;

•

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 and licenses granted to third parties and our ability to maintain existing or enter into new collaborative relationships with third parties;

•

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 or equity-linked securities;

•

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, our operations and ability to continue as a going concern, risks involved with our new and uncertain technologies, risks involving manufacturing constraints which may prevent us from maintaining adequate supply of inventory to meet our customers’ demands, 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 beginning on page 31.

Overview

We are an industrial biotechnology company that develops and commercializes high performance enzymes for a broad array of industrial processes to enable higher productivity, lower costs, and improved environmental outcomes. We operate in one business segment with four main product lines: animal health and nutrition, grain processing, oilfield services and other industrial processes. We believe the most significant near-term commercial opportunity for our business will be derived from continued sales and gross product margins from our existing portfolio of enzyme products; however, our long-term growth opportunities will be heavily dependent upon our continued development and commercialization of products from our pipeline.

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 nearly 20 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 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, oilfield services, and other industrial enzyme markets. We have current collaborations and agreements with key partners such as DSM Food Specialties B.V. (“DSM”), Novus International, Inc. (“Novus”), DuPont Nutrition Biosciences ApS (“DuPont”), a division of E. I. du Pont de Nemours and Company, Fermic S.A., (“Fermic’), and WeissBioTech (formerly Add Food Services GmbH), each of which complement our internal technology, product development efforts, and distribution efforts.

As of September 30, 2012, we owned 211 issued patents relating to our technologies and had 163 patents pending. Also, as of September 30, 2012, we either jointly owned or in-licensed from BP Biofuels North America LLC (“BP”) 137 patents and 145 patents pending. Our rights to sell our products and products in development are largely covered by the patents and patent applications we own, and to a lesser extent by patents and patent applications we jointly own with BP. Our rights to practice the discovery and evolution technology which we originally developed are covered by patents we in-license from BP. 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 from our continuing operations since our inception. As of September 30, 2012, we had an accumulated deficit of approximately $578.5 million. Our results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future. During the nine months ended September 30, 2012, excluding the one-time gain on sale of the oilseed processing business, we generated an operating loss of $7.0 million. We expect to incur losses in the foreseeable future, as a result of any combination of one or more of the following:

•

continued research and development expenses for the progression of internal product candidates;

•

lower gross margins as a result of the contract pricing under the DSM supply agreement;

•

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

•

maintaining or increasing our sales and marketing infrastructure; and

•

uncertainties surrounding the corn ethanol industry.

•

additional idle manufacturing capacity related to downtime to complete upgrades at our contracted manufacturing facility in Mexico City;

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.

Based on our current cash resources and 2012 operating plan, our existing cash resources may not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements through 2013 without additional sources of cash. If we are unable to raise additional capital, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations, sell some or all our assets, file for bankruptcy or cease operations. To aid in our cash resources, in October, we initiated a $10 million credit facility as discussed further below.

Recent Developments

Credit Facility

On October 5, 2012, we entered into a $10 million revolving credit facility with Comerica Bank (“Comerica”). The credit facility has a maturity date of October 5, 2014. This credit facility will allow us to borrow up to $8.4 million against certain eligible foreign and domestic receivables and will cover an existing $1.6 million letter of credit commitment to our landlord. The credit facility also immediately frees up $1.6 million in restricted cash which had previously secured the letter of credit. Advances under the credit facility bear interest at a daily adjusting LIBOR plus a margin of 4.75%.

Results of Operations – Continuing Operations

Consolidated Results of Operations

Revenues

Revenues for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		% Change			2012		2011		% Change
Revenues:
Animal health and nutrition	$	5,849	$	8,624		(32	)%	$	22,521	$	24,734		(9	)%
Grain processing		2,054		3,942		(48	)%		7,895		12,371		(36	)%
Oilseed processing		0		1,929		(100	)%		579		4,541		(87	)%
All other products		101		247		(59	)%		972		606		60	%

Total product		8,004		14,742		(46	)%		31,967		42,252		(24	)%
Contract manufacturing		1,561		0		100	%		4,047		0		100	%
Collaborative and license		697		3,674		(81	)%		7,174		4,694		53	%

Total revenues	$	10,262	$	18,416		(44	)%	$	43,188	$	46,946		(8	)%

The decreased product revenue for the three and nine months ended was primarily attributed to decreased grain processing revenue due to adverse business conditions in the corn ethanol industry, lower revenue from oilseed processing as a result of the sale to DSM in March 2012, and a decrease in animal health and nutrition due to toll manufacturing revenue included in 2011 and lower production volumes during the three months ended September 30, 2012.

In conjunction with the sale to DSM, we entered into a supply agreement to continue to produce and sell Purifine and Veretase to DSM at lower sales prices then prior periods when we sold directly to end customers. Revenue from the DSM supply agreement is reported as contract manufacturing above, while pre-DSM sale revenue for Purifine and Veretase are reflected in oilseed processing and grain processing revenue respectively.

Animal Health and Nutrition

Net revenues from the animal health and nutrition product line, primarily Phyzyme^® XP phytase, decreased 32%, or $2.8 million and 9%, or $2.2 million for the three and nine months ended September 30, 2012, as compared to the same periods in 2011. Phyzyme^® XP phytase represented approximately 61% and 63% of total product and contract manufacturing revenues for the three and nine months ended September 30, 2012 and 53% and 50% for the comparable period in 2011 due to the following:

•

A decrease in toll manufacturing of $0.8 million and $3.6 million for the three and nine months ended 2011, which is included within the animal health and nutrition 2011 revenues;

•

A decrease in production volumes during the three months ended September 30, 2012 as a result of downtime for the entire quarter for in-process upgrades to one of the fermentation vessels at Fermic; and

•

A shift in manufacturing of Phyzyme^® XP phytase to Genencor, a division of DuPont, Inc. which is part of E.I. du Pont de Nemours and Company, and our related method of revenue recognition for Phyzyme^® XP phytase product sales. We also have contracted with Genencor to serve as a second-source manufacturer of Phyzyme^® XP phytase. We recognize revenue from Phyzyme^® XP phytase manufactured at Fermic equal to the full value of the manufacturing costs plus royalties, as compared to revenue associated with product manufactured by Genencor which is recognized on a net basis equal to the royalty received from DuPont. 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^® XP phytase, it does have a negative impact on the gross product revenue we recognize for Phyzyme^® XP phytase as the volume of Phyzyme^® XP phytase manufactured by Genencor increases. During the three and nine months ended September 30, 2012, approximately 82% and 65% of PhyzymeXP^® phytase production was manufactured by Genencor as compared to approximately 52% and 66% for the comparable period in 2011. The increase in Genencor production was attributed to the downtime associated with the in-process upgrades to one of the fermentation vessels at Fermic during the quarter.

As our pipeline products enter commercialization and demand for other product lines increase, we expect over time we will transition a greater proportion of our Phyzyme^® XP phytase manufacturing to Genencor resulting in lower reported Phyzyme^® XP phytase product revenue; however, we believe this will make available existing capacity to accommodate expected growth for other enzyme products.

We expect that net revenue from Phyzyme^® XP phytase will gradually decrease due to the introduction of a competing next-generation phytase enzyme by DuPont.

Grain Processing

Grain processing sales decreased by 48%, or $1.9 million, and 36%, or $4.5 million, over the three and nine months ended September 30, 2012 as compared to the same periods in 2011, primarily attributed to a decrease in sales of Fuelzyme alpha amylase which is being impacted by adverse business conditions in the corn ethanol industry due largely to the following factors:

•

Reduced demand for gasoline and thus for ethanol have depressed ethanol prices;

•

Depressed ethanol prices combined with continued high corn prices have resulted in low to negative margins for corn ethanol producers, and they have responded by reducing operating rates or idling operations until margins improve;

As a result of these factors, we experienced increased competitive pressure and delays or extensions of trials which consequently has affected the timing of new customer adoptions. While we have gained new customers in 2012, we estimate that total ethanol production volume from our customers has declined compared to the same period in 2011.

These factors combined with rising corn prices, seasonally lower demand for gasoline, and the impact of rising gasoline prices on consumer demand, suggest the industry has entered a challenging cycle with conditions conducive to production rate cuts and plant closures which have negatively impacted our business. We therefore expect current industry conditions could significantly impact our revenue growth for this product line for at least the remainder of 2012. In addition, reduced or idle operating rates combined with higher wheat prices in Europe impacting our Xylathin™ xylanase product sales have contributed to the overall decrease.

Collaborative and license

Collaborative revenue decreased $3.0 million, or 81%, to $0.7 million for the three months ended September 30, 2012 and collaborative and license revenue increased $2.5 million, to $7.2 million for the nine months ended September 30, 2012 as compared to the same periods in 2011. The decrease for the three months ended September 30, 2012 was attributed to the following:

•

License fee payment of $3.25 million received in 2011 for a commercial enzyme candidate that Syngenta Participations AG formally licensed to a third party and assigned to us in conjunction with the separation agreement with Syngenta in 2009.

The increase for the nine months ended September 30, 2012 was attributed to the following:

•

Collaborative revenue associated with our Novus collaboration increased $3.5 million primarily due to recognition of $2.9 million related to the delivery of a specified license during the first quarter for cash received in 2011; and

•

Our collaboration agreements associated with our commercial products, including our new 2012 collaboration with Tate & Lyle Ingredients Americas LLC (“Tate & Lyle”), which generated revenue for the nine months ended September 30, 2012 of $0.5 million related to a one-time up front exclusivity payment during the first quarter 2012 for the further development of one of our alpha amylases. In conjunction with our agreement with DSM, we recognized collaborative revenue for the nine months ended September 30, 2012 of $2.5 million, including $1.5 million for the alpha amylase and xylanase licenses granted to DSM that were deemed to be delivered as of the end of the first quarter of 2012 in accordance with authoritative accounting guidance.

We expect to have collaborative and license revenue attributable to our collaborations with Novus, Tate & Lyle and DSM for the remainder of 2012 and into 2013. We 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. In addition, due to authoritative accounting guidance, cash may be received in advance of revenue recognition.

Product and Contract Manufacturing Gross Profit and Margin

Product and contract manufacturing gross profit and margin for the three and nine months ended September 30, 2012 and 2011 are as follows (in thousands):


	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			% Change			2012			2011			% Change
Product and contract manufacturing revenue	$	9,565		$	14,742			(35	)%	$	36,014		$	42,252			(15	)%
Cost of product and contract manufacturing revenue		6,726			8,698			(23	)%		23,962			26,174			(8	)%

Product and contract manufacturing gross profit	$	2,839		$	6,044			(53	)%	$	12,052		$	16,078			(25	)%
Product and contract manufacturing gross margin		30	%		41	%					33	%		38	%

Cost of product and contract manufacturing revenue includes both fixed and variable costs, including materials and supplies, labor, facilities, royalties and other overhead costs, associated with our product and contract manufacturing revenues. Excluded from cost of product and contract manufacturing 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 and contract manufacturing revenue decreased 23%, or $2.0 million, to $6.7 million for the three months ended September 30, 2012, and decreased 8%, or $2.2 million, to $24.0 million for the nine months ended September 30, 2012, as compared to the same periods in 2011, primarily due to lower overall product and contract manufacturing revenue.

Our cost of product and contract manufacturing revenues will generally grow in proportion to revenues, although we expect to achieve benefits from the additional investments we are making at Fermic to improve our enzyme manufacturing 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. In addition, gross margins are dependent upon the mix of product sales as the cost of product and contract manufacturing revenue varies from product to product. We typically experience lower margins in the early stages of commercial production for our newer enzyme products, as we optimize the manufacturing process for each particular product. Additionally, we will experience lower margins when contract manufacturing revenue comprises a larger percentage of our total product and contract revenue due to lower pricing under our supply agreement with DSM. We may be obligated to share in cost overruns or increases, in whole or in part, in connection with our manufacturing.

Product and contract manufacturing gross profit totaled $2.8 million for the three months ended September 30, 2012, and $12.1 million for the nine months ended September 30, 2012 compared to $6.0 million for the three months ended September 30, 2011 and $16.1 million for the nine months ended September 30, 2011. Gross margin decreased to 30% and 33% of product and contract manufacturing revenue for the three and nine months ended September 30, 2012, compared to 41% and 38% for the three and nine months ended September 30, 2011. The decrease in our product and contract manufacturing gross profit was due to the following factors:

•

Our grain processing gross profit has decreased based on decreased sales compared to 2011 due to challenges in the corn ethanol market.

•

Pursuant to our supply agreement with DSM, we sell Purifine and Veretase at substantially reduced rates than when we sold directly to customers in prior years, resulting in lower gross profit for these products;

•

During the third quarter of 2012, we incurred idle capacity charges related to downtime for in-process upgrades to one of the fermentation vessels at Fermic. Under current accounting rules, we are required to expense the idle capacity charges related to downtime taken for such upgrades. We expect to incur additional idle capacity charges over the next six months as we bring two additional vessels down for similar upgrades. Once fully implemented and back on line, these upgrades are intended to improve overall manufacturing quality and improve yields, and as a result reduce overall cost of goods sold; and

•

During the third quarter of 2012, we manufactured Purifine inventory pursuant to our supply agreement with DSM, certain lots of which are still undergoing quality assurance evaluation. As a result, we recorded an estimated reserve for potential inventory write-offs, pending final quality inspection of the products, and this has had a negative impact on our gross profit and related gross margin.

In addition, because Phyzyme^® XP phytase represents a significant percentage of our product and contract manufacturing revenue, our product and contract manufacturing gross profit is impacted to a great degree by the royalty achieved on sales of Phyzyme^® XP phytase. Under our manufacturing and sales agreement with DuPont, we sell our Phyzyme^® XP phytase inventory to DuPont at our cost and, under a license agreement, receive a royalty equal to 50% of DuPont’s profit from the sale of the product, as defined, when the product is sold to DuPont’s customer. As a result, our total cost of product revenue for Phyzyme^® XP phytase is incurred as we ship product to DuPont, and the royalty calculated as a share of profits, as defined by our agreement, is recognized in the period in which the product is sold to DuPont’s customer as reported to us by DuPont. We may record our quarterly royalty based on estimates from DuPont, 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 from quarter-to-quarter. These adjustments, while typically considered immaterial in absolute dollars, could have a significant impact on our reported product and contract manufacturing gross profit from quarter-to-quarter.

In addition, our supply agreement with DuPont for Phyzyme^® XP phytase contains provisions which allow DuPont, with six months’ advance notice, to assume manufacturing rights for Phyzyme^® XP phytase. If DuPont decides 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 are unable to absorb this excess capacity with other products in the event that DuPont assumes all or a portion of Phyzyme^® XP phytase manufacturing rights, this may have a negative impact on our revenues and our product gross profit.

Research and Development

Our research and development expenses for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		% Change			2012		2011		% Change
Commercial products	$	647	$	686		(6	)%	$	2,330	$	1,918		21	%
New product development		2,429		1,648		47	%		6,376		4,871		31	%
Contract research and development		290		0		100	%		605		0		100	%
Other		679		339		100	%		1,775		804		121	%

Research and development	$	4,045	$	2,673		51	%	$	11,086	$	7,593		46	%

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 under our collaboration agreements.

Our research and development expenses increased 51%, or $1.4 million to $4.0 million for the three months ended September 30, 2012, and 46%, or $3.5 million to $11.1 million for the nine months ended September 30, 2012, primarily due to our increased research and development efforts consistent with our shift in focus to higher investment in pipeline technologies as well as higher allocated corporate overhead due to higher facility related costs associated with our new lease. We expect these expenses to continue to increase in 2012 as we expand our pipeline products and further advance enzyme product candidates through the development pipeline and commercialization efforts. The increase in other research and development over the comparable periods in the prior year is primarily due to activities associated with the move to our new building during the three and nine months ended September 30, 2012.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Commercial products		16	%		26	%		21	%		25	%
New product development		60	%		62	%		58	%		64	%
Contract research and development		7	%		0	%		5	%		0	%
Other		17	%		12	%		16	%		11	%

Research and development		100	%		100	%		100	%		100	%

For both the three and nine months ended September 30, 2012, we estimate that approximately 76% and 73% of our research and development personnel costs, based upon hours incurred, were incurred for internally funded product development, and the remaining approximately 24% and 27% of such costs were incurred on research activities funded in whole or in part by our partners. For the three and nine months ended September 30, 2011, we estimate that approximately 71% and 82% of our research and development personnel costs, based upon hours incurred, were incurred for internally funded product and technology development, and the remaining approximately 29% and 18% of such costs were incurred on research activities funded by our collaborations. We will continue to pursue opportunities with strategic partners who can share our development costs, accelerate commercialization of, as well as enable us to expand commercial reach for, our pipeline products.

We determine which products and technologies to pursue independently based on various criteria, including: market opportunity, 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 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 the section of this report entitled Risk Factors.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):


	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		% Change			2012		2011		% Change
Selling, general and administrative	$	4,783	$	4,940		(3	%)	$	15,139	$	14,106		7	%

Selling, general and administrative expenses decreased 3%, or $0.2 million, to $4.8 million (including share-based compensation of $0.2 million) for the three months ended September 30, 2012 and increased $1.0 million, or 7%, to $15.1 million (including share-based compensation of $0.6 million) for the nine months ended September 30, 2012 compared to $4.9 million (including share-based compensation of $0.2 million) for the three months ended September 30, 2011 and $14.1 million (including share-based compensation of $0.5 million) for the nine months ended September 30, 2011. The decrease for the three months ended September 30, 2012 compared to the comparable period in the prior year is attributed to a decrease in costs associated with our Purifine product line which was sold to DSM in March 2012, offset by a full quarter of allocated facility rent expense associated with our new San Diego building lease. The increase for the nine months ended September 30, 2012 compared to the comparable period in the prior year is attributed to reimbursement of $1.1 million legal fees during the first quarter of 2011 associated with the settlement of a noteholder lawsuit, which was recorded as an offset to operating expenses. Without this 2011 offset, selling, general and administrative expenses decreased $0.2 million for the nine months ended September 30, 2012. Despite increased costs for transaction costs associated with various financing alternatives we were pursuing during the first quarter of 2012 and four months of facility related expenses, overall ongoing general and administrative expenses have slightly decreased over the prior year.

Gain on Sale of Oilseed Processing Business

On March 23, 2012, we entered into an asset purchase agreement with DSM for the purchase of our oilseed processing business and concurrently entered into a license agreement, a supply agreement and a transition service agreement with DSM. The aggregate consideration received was $37 million. The gain on sale was calculated as the difference between the allocated consideration amount for the oilseed processing business, in accordance with authoritative accounting guidance, of $31.3 million and the net carrying amount of the purchased assets and liabilities and transaction costs.

Restructuring Charges

Effective March 31, 2011, we closed our office in Cambridge to better align us with the evolving needs of the business. As of September 30, 2012, a liability of $0.1 million remained for the restructuring relating to our Cambridge building lease.

Other income (expense), net

In conjunction with the closing of the DSM agreement, the original Comerica credit line was closed. As a result, we expensed $0.3 million of the unamortized transaction costs for the nine months ended September 30, 2012.

Share-Based Compensation Charges

We recognized $0.3 million and $0.7 million during the three and nine months ended September 30, 2012 in share-based compensation expense compared to $0.2 million and $1.1 million during the three and nine months ended September 30, 2011. Share-based compensation expense was allocated among the following expense categories (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Cost of product revenue	$	25	$	0	$	49	$	0
Research and development		65		0		116		0
Selling, general and administrative		214		188		581		475
Restructuring charges		0		0		0		583

	$	304	$	188	$	746	$	1,058

Share-based compensation increased 62%, or $0.1 million and decreased 29%, or $0.3 million for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011. The decrease during the nine months ended September 30, 2012 is due to restructuring share based compensation in 2011 pertaining to the separation of two executives in conjunction with the closure of the Cambridge office. Pursuant to their employment agreements, an additional 24 months of option vesting was accelerated for these employees as of their respective separation dates. This additional stock option expense attributable to the acceleration was classified into restructuring expense on our consolidated financial statements.

Interest expense

Interest expense was $0.1 million and $0.8 million for the three and nine months ended September 30, 2012 and $0.6 million and $2.4 million for the three and nine months ended September 30, 2011. This decrease in interest expense from 2011 was primarily attributed to the decrease in the outstanding convertible notes principal from repurchases and debt payout.

Gain on Debt Extinguishment upon repurchase of convertible notes

During the three and nine months ended 2011, we repurchased $9.3 million and $39.9 million in principal amount of our 2009 and 2007 Notes, leaving an aggregate of $34.9 million, respectively, in principal amount outstanding as of September 30, 2011. A gain on debt extinguishment of $4.1 million and $15.3 million was recognized representing the difference between the carrying value of the notes repurchased of $13.0 million and $54.0 million for the three and nine months ended September 30, 2011 and the repurchase price of $8.9 million and $38.6 million calculated as follows for the three and nine months ended September 30, 2011 (in thousands):


	Three Months Ended September 30, 2011								Nine Months Ended September 30, 2011
	2009 Notes		2007 Notes			Total			2009 Notes		2007 Notes			Total
Principal	$	4,081	$	5,250		$	9,331		$	13,707	$	26,182		$	39,889
Debt premium, net		2,717		0			2,717			9,253		0			9,253
Compound embedded derivative		978		0			978			5,072		0			5,072
Issuance costs		0		(30	)		(30	)		0		(220	)		(220	)

Carrying value		7,776		5,220			12,996			28,032		25,962			53,994

Repurchase price		4,219		4,712			8,931			14,038		24,607			38,645

Gain on debt extinguishment	$	3,557	$	508		$	4,065		$	13,994	$	1,355		$	15,349

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

The fair value of certain warrants and the convertible hedge transaction in connection with our 2008 Notes and the 2009 Notes’ compound embedded derivative were 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 Statements of Comprehensive Income (Loss) as “Gain (loss) on net change in fair value of derivative assets and liabilities.” We recorded a net gain of zero and $0.3 million for the three months ended September 30, 2012 and 2011 and net loss of $0.1 million and $1.0 million for the nine months ended September 30, 2012 and 2011 related to the change in fair value of our recorded derivative asset and liabilities. As of September 30, 2012, the outstanding derivative liability relates to certain warrants outstanding.

Income Tax Benefit (Provision)

During the three and nine months ended September 30, 2012, a tax benefit of $0.1 million and a provision of $0.6 million was recorded for alternative minimum tax, or AMT, liability equal to approximately 2.67% (federal and California) of estimated year-to-date taxable income. The provision is primarily attributable to the $37 million taxable gain from the sale of the oilseed processing business to DSM. We currently believe we have available federal and California net operating loss carryforwards, or NOLs, to offset 100% of the taxable income for regular tax purposes; however, AMT still applies as a result of limitations on the ability to utilize AMT NOLs to offset AMT taxable income.

From 2008 through 2011, California tax legislation has suspended the use of NOL carryforwards. Under the current tax code, California allows the utilization of NOL carryforwards to offset taxable income in 2012. If California suspends the use of NOLs in 2012, we could have a total 2012 tax liability of approximately $3.0 million.

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, asset sales and licensing and product sales. As of September 30, 2012, we had an accumulated deficit of approximately $578.5 million.

During the nine months ended September 30, 2012, we sold our oilseed processing business and additional assets to DSM for $37.0 million in proceeds. The proceeds were used to pay off our 2007 Notes on April 2, 2012 in an aggregate principal amount of $34.9 million plus accrued and unpaid interest.

Capital Requirements

As of September 30, 2012, we had available cash and cash equivalents of approximately $13.9 million, and restricted cash of $4.1 million. Our restricted cash as of September 30, 2012 consists of $2.5 million, which is held in escrow to cover indemnification obligations pursuant to the terms of the sale of our LC business to BP, and $1.6 million held as a security for the performance of our obligations under our facility lease. Subsequently in October 2012, the $1.6 million was released as part of our new credit facility, further reducing total restricted cash to $2.5 million. Pursuant to the terms of the sale of the LC business to BP in 2010, originally $5.0 million of the restricted cash is held in escrow and is subject to the terms of an escrow agreement to cover our indemnification obligations for potential liabilities and breaches of representations and warranties made by us, most of which survive for a period of 18 months following the closing. BP has provided notice of a potential claim for indemnification by us pursuant to the escrow agreement in connection with a claim made by University of Florida Research Foundation, Inc. (“UFRF”), against BP relating to a license granted by UFRF to a successor of Verenium Biofuels Corporation (now known as BP Biofuels Advanced Technology, Inc.), which was acquired by BP in the 2010 transaction. BP filed an action in the United States District Court for the Northern District of Florida against UFRF on March 5, 2012, for a judgment declaring that the UFRF allegations regarding the license are without merit. Of the total $5 million held in escrow, the escrow agent disbursed $2.5 million to us during the first quarter 2012 and the remaining $2.5 million will remain in escrow pending resolution of the UFRF claim against BP. We believe that the UFRF claim against BP, and the potential claim by BP against us for indemnity pertaining to the UFRF claim, are without merit.

During the three months ended September 30, 2012 and in connection with our facility lease, we made draws against our equipment loan for $2.9 million to help support the planned build-out of our research and bioprocess development laboratories and corporate headquarters in San Diego. The loan is intended to fund no more than 30% of the total cost of the pilot plant and research and development equipment needed for our new building. The facility is to be paid at an interest rate of 9% over a term of 126 months.

During the nine months ended September 30, 2012, a tax provision of $0.6 million was recorded for alternative minimum tax, or AMT, liability equal to approximately 2.67% (federal and California) of estimated year-to-date taxable income. The provision is primarily attributable to the $37 million taxable gain from the sale of the oilseed processing business to DSM. We currently believe we have available federal and California net operating loss carryforwards, or NOLs, to offset 100% of the taxable income for regular tax purposes; however, AMT still applies as a result of limitations on the ability to utilize AMT NOLs to offset AMT taxable income. From 2008 through 2011, California tax legislation has suspended the use of NOL carryforwards. Under the current tax code, California allows the utilization of NOL carryforwards to offset taxable income in 2012. If California suspends the use of NOLs in 2012, we could have a total 2012 tax liability of approximately $3.0 million.

Our independent registered public accounting firm has included an explanatory paragraph in its report on our 2011 consolidated financial statements related to the substantial doubt in our ability to continue as a going concern.

Balance Sheet

Our consolidated assets have decreased by $17.3 million to $48.0 million at September 30, 2012 from $65.3 million at December 31, 2011. This decrease is primarily attributed to the decrease in cash due to payoff of our convertible debt of $35.8 million including accrued interest from the $37 million of proceeds from the sale of our oilseed processing business and continued general operating cash burn.

Our consolidated liabilities have decreased by $41.0 million to $14.4 million at September 30, 2012 from $55.4 million at December 31, 2011. The decrease is primarily attributable to the payoff of our convertible debt of $34.9 million, decrease in deferred revenue related to the revenue recognition of the Novus license that was delivered during the first quarter and an overall decrease in accounts payable and accrued liabilities.

Cash Flows Related to Operating, Investing and Financing Activities

For the nine months ended September 30, 2012 we used $10.7 million to fund our operations compared to $8.6 million for the nine months ended September 30, 2011. Although we had net income from continuing operations for the nine months ended September 30, 2012 of $22.4 million, $31.3 million of such amount was related to gain on the sale of the oilseed processing business. The remaining change in operating cash flows for the nine months ended September 30, 2012 primarily reflects a decrease in accounts receivable and accounts payable and accrued liabilities due to timing of cash receipts and payments and a decrease in deferred revenue for the recognition of the Novus upfront fee.

Our investing activities for continuing operations provided net cash of $27.6 million for the nine months ended September 30, 2012 consisting of the net proceeds from the DSM transaction for the sale of our oilseed processing business offset by purchases of property and equipment primarily for our new building as well as the release of the $4.1 million in restricted cash from BP and our landlord. We expect total capital expenditures for the year to be $7 million to $9 million.

Our financing activities for continuing operations used cash of $31.5 million for the nine months ended September 30, 2012 due to the payment in full of our convertible debt slightly offset by $2.9 million of proceeds from our new equipment loan.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2012 (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—San Diego (1)	$	26,756	$	528	$	5,162	$	5,459	$	15,607
Operating lease—Cambridge, net (2)		227		196		31		0		0
Manufacturing costs to Fermic (3)		43,906		18,907		24,999		0		0
License and research agreements		430		70		140		120		100
Equipment loan (4)		4,407		401		874		874		2,258

Total Contractual Obligations	$	75,726	$	20,102	$	31,206	$	6,453	$	17,965

(1)

On June 24, 2011, we signed a lease agreement for 59,199 square feet for new office and laboratory space in San Diego for a term of 126 months from the first day of the first full month after the commencement date. The agreement includes the build out of the space and had a commencement date in June 2012. Rent is approximately $192,000 per month, which includes both base rent and a tenant improvement allowance. The rent will be increased by 3% on each anniversary of the first day of the first full month following the commencement date during the lease term. In addition to the tenant allowance included in the base rent, a second tenant allowance option in the amount of $1.5 million was exercised which must be paid back in monthly payments over the lease term of 126 months at a 9% interest rate, and is included in the above amounts. The lease agreement provides for abatement of base rent including tenant allowances so long as no default has occurred, starting with the seventh full month of the lease term through the end of the sixteenth month of the lease term.

(2)

We lease approximately 21,000 square feet of office space in a building in Cambridge, Massachusetts. The offices are leased to us under an operating lease with a term through December 2013. On December 14, 2010, we publicly announced that we were focusing all of our operations in San Diego and closed our office in Cambridge to better align us with the evolving needs of the business and the market. The closure was effective on March 31, 2011. We completed a sublease agreement in May 2011 for the full Cambridge facility, which will give us additional sublease income of approximately $0.7 million from October 2012 through September 2013 and $0.2 million from October 2013 through December 2013, the end of the lease term.

(3)

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. Under the terms of the agreement, we can cancel the committed purchases with 30 months’ notice. This commitment represents 30 months of rent at current committed capacity, which is the maximum capacity allowed under the agreement.

(4)	Amount includes total interest of $1.5 million.

Manufacturing and Supply Agreements

We have a manufacturing agreement with Fermic to provide us with the capacity to produce commercial quantities of enzyme products, pursuant to which we pay Fermic a fixed monthly rent for minimum committed manufacturing capacity. Under the terms of the agreement, we can cancel the committed purchases with 30 months’ notice. As of September 30, 2012, under this agreement our minimum commitments to Fermic were approximately $43.9 million over the next 30 months.

In addition, under the terms of the agreement, we fund, in whole or in part, capital expenditures for certain equipment required for fermentation and downstream processing of our enzyme products. Since inception through September 30, 2012, we have incurred

costs of approximately $23.2 million for property and equipment related to this agreement. Our ongoing strategy is to remove our manufacturing bottlenecks, increase manufacturing efficiencies, and remove manufacturing variability, in order to manufacture more product and reduce our average production cost per unit. In order to improve our manufacturing capabilities, support growth, and reduce our average unit cost, we plan to make up to $5 million of additional capital investments at Fermic over the next twelve months. These investments should improve both our manufacturing yields and the profitability of our enzymes over time.

In 2008, we contracted with Genencor, which was at that time a subsidiary of DuPont, to serve as a second-source manufacturer for Phyzyme^® XP phytase. Our supply agreement with DuPont for Phyzyme^® XP phytase contains provisions which allow DuPont, with six months’ advance notice, to assume the right to manufacture Phyzyme^® XP phytase. If DuPont 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 DuPont assumed the right to manufacture Phyzyme^® XP phytase 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

As of September 30, 2012, we did not have any off-balance sheet arrangements that have or are reseasonably expected to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 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.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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, 2012, our outstanding debt was based on fixed rates, and, therefore, we did not have any 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.

Additionally, under our manufacturing and sales agreement with DuPont, we sell our Phyzyme^® XP phytase inventory to DuPont at our cost and, under a license agreement, receive a royalty equal to 50% of DuPont’s profit from the sale of the product, as defined, when the product is sold to DuPont’s customer. This profit share is denominated in other than U.S. dollars and is converted to U.S. dollars upon payment. Consequently, our reported revenue may be affected by fluctuations in currency exchange rates.

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 Securities and Exchange Act of 1934, or Exchange Act, reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission (“SEC”), 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, 2012. Based on such evaluation, such officers have concluded that, as of September 30, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.

Under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of any change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially effect, our internal control over financial reporting. That evaluation did not identify any changes in our internal control 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 control over financial reporting.

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

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

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, 2011.

Risks Applicable to Our Business Generally

*	The report of our independent registered public accounting firm included in our Annual Report on Form 10-K filed on March 5, 2012 contains a paragraph expressing substantial doubt about our ability to continue as a going concern.

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2011 contains an explanatory paragraph which states that we have incurred recurring operating losses, have an accumulated deficit of $600.8 million as of December 31, 2011, and, based on our operating plan and existing working capital deficit, this raises substantial doubt about our ability to continue as a going concern. Although we experienced operating income for the nine months ended September 30, 2012 that was attributed to our gain on sale of our oilseed processing business, we expect to incur losses in the foreseeable future, as a result of any combination of one or more of the following:

•

continued research and development expenses for the progression of internal product candidates;

•

lower gross margins as a result of the contract pricing under the DSM supply agreement;

•

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

•

maintaining or increasing our sales and marketing infrastructure; and

•

uncertainties surrounding the corn ethanol industry.

•

additional idle manufacturing capacity related to downtime to complete upgrades at our contracted manufacturing facility in Mexico City;

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

We have typically incurred net losses from our continuing operations since our inception. As of September 30, 2012, we had an accumulated deficit of approximately $578.5 million. We expect to continue to incur additional losses for the foreseeable future.

Product revenues currently account for the majority of our annual revenues, and we expect that a significant portion of our revenue for 2012 will continue to 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, which could negatively affect our operating margins and profitability. In addition, the amounts we spend will impact our ability to become profitable and this will depend, in part, on:

•

the time and expense to complete the build out of our pilot bioprocess development plant, rent, operate and maintain our new facility in San Diego;

•

the time and expense to complete improvements to our manufacturing capabilities at Fermic;

•

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

•

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

•

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

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

*	We have a fixed manufacturing capacity commitment to our third party manufacturer, Fermic, and may not be able to adequately manage capacity needs with demand. Our inability to do so could result in idle capacity, which could harm our business.

We rely on our third party manufacturer, Fermic, to manufacture our products and have committed to a fixed amount of manufacturing capacity. Because our manufacturing costs are largely fixed, if we are unable to maintain or increase demand for our current and future products, we may experience periods of idle capacity, during which we would pay our fixed rent costs to Fermic whether or not we utilize the fermentation capacity under contract. We are also obligated to pay our fixed rent costs to Fermic during the implementation of improvements to our manufacturing processes, which may require us to incur downtime to one or more of our fermentation vessels for an extended period of time. For example, during the entire three months ended September 30, 2012, we incurred idle capacity charges related to downtime for in-process upgrades to one of our fermentation vessels. In any case, idle capacity has had and may in the future have a negative impact on our product gross profit, our results of operations and financial condition.

*	If demand for our products increases we may not be able to supply our customers with sufficient quantities of product, which could harm our business.

We have in the past, and may experience in the future, manufacturing constraints, inventory losses and decreased manufacturing yields, which have prevented us from maintaining adequate supply of inventory to meet our customers’ demands. We may also experience further manufacturing constraints in connection with process improvements or manufacturing expansion and projects we, together with Fermic, have implemented and will continue to implement. For example, during the entire three months ended September 30, 2012, we incurred constrained capacity related to downtime for in-process upgrades to one of our fermentation vessels. If such projects, which are intended to increase manufacturing yields and efficiency, are delayed, or do not adequately resolve 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.

*	Failure to manufacture sufficient quantities of Purfine and Veretase or control costs of doing so, under our contract manufacting relationship with DSM, will adversely affect our results of operations.

In conjunction with our agreement with DSM for the purchase of our oilseed processing business, we concurrently entered into a supply agreement obligating us to manufacture minimum quantities of Purifine and Veretase for DSM. During the quarters following the transaction with DSM, we experienced increases in costs in connection with the manufacture of Purifine. We may be obligated to share in such cost overruns or increases, in whole or in part, in connection with our manufacturing for DSM. In addition, to the extent that we are unable to meet quality specifications associated with manufacturing these products, we may be obligated to incur the additional costs for replacement batches to DSM.

We have experienced inventory losses and decreased manufacturing yields related to our manufacturing processes in the past for our enzyme products, and may continue to experience such losses, which could negatively impact our product gross margins.

We have experienced inventory losses and decreased manufacturing yields related to contamination issues of our enzyme products. While we continue to address contamination issues and, in the past, 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 sales would suffer and our results of operations and financial condition would be adversely affected.

*	If we increase contract manufacturing of our Phyzyme^® XP phytase at Genencor and decrease its manufacture at Fermic, our gross product revenues will be adversely impacted.

During the three and nine months ended September 30, 2012, approximately 82% and 65% of Phyzyme XP^® phytase production was manufactured by Genencor. Due to capacity constraints at Fermic in 2008, we were not able to supply adequate quantities of Phyzyme^® XP phytase necessary to meet the increased demand from DuPont. As a result, we contracted with Genencor, a subsidiary of DuPont, to serve as a second-source manufacturer for Phyzyme^® XP phytase. Pursuant to current accounting rules, revenue from Phyzyme^® XP phytase that is supplied to us by Genencor is recognized in an amount equal to the royalty calculated as a percentage of operating profit received from DuPont, as compared to the full value of the manufacturing costs plus the royalty we currently recognize for Phyzyme^® XP phytase 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^® XP phytase, it does have a negative impact on the gross product revenue we recognize for Phyzyme^® XP phytase as the volume of Phyzyme^® XP phytase manufactured by Genencor increases.

*	If we are unable to access the capacity to manufacture products in development 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 and development enzymes. Additionally, one of our third party manufacturers, Fermic, is located in Mexico, and is our sole-source supplier for most of our commercial enzyme products. Any difficulties or interruptions of service with our third party manufacturers such as Fermic 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.

If DuPont exercises its right to assume manufacturing rights of Phyzyme^® XP phytase, we may experience significant excess capacity at Fermic which could adversely affect our financial condition.

In addition, our supply agreement with DuPont for Phyzyme^® XP phytase contains provisions which allow DuPont, with six months’ advance notice, to assume manufacturing rights of Phyzyme^® XP phytase. If DuPont 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 affected.

*	We continue to rely heavily on product revenues from Phyzyme. Any unexpected decline in demand for this product will harm our operating results.

Net revenues from Phyzyme^® XP phytase represented approximately 61% and 63% of total product and contract manufacturing revenues for both the three and nine months ended September 30, 2012. Although we expect that net revenue as a percentage of product revenue from Phyzyme^® XP phytase will increase in future periods, we expect that net revenue from Phyzyme^® XP phytase will remain flat or gradually decrease due largely to the following factors:

•

Introduction of competing next-generation phytase enzymes, including a competing next-generation phytase enzyme by DuPont, which could adversely impact end user sales of Phyzyme^® XP; and

•

A shift in manufacturing of Phyzyme^® XP phytase to Genencor, a division of DuPont, and our related method of revenue recognition for Phyzyme^® XP phytase product sales. We recognize revenue from Phyzyme^® XP phytase manufactured at Fermic equal to the full value of the manufacturing costs plus royalties, as compared to revenue associated with product manufactured by Genencor which is recognized on a net basis equal to the royalty received from DuPont. 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^® XP phytase, it does have a negative impact on the gross product revenue we recognize for Phyzyme^® XP phytase as the volume of Phyzyme^® XP phytase manufactured by Genencor increases. During the three and nine months ended September 30, 2012, approximately 82% and 65% of PhyzymeXP^® phytase production was manufactured by Genencor.

Significant fluctuations in commodity availability and price, or a change in the use of production facilities that use our enzymes, could have a negative effect on demand for our enzymes.

Our product lines may be directly or indirectly dependent upon the pricing of commodities and, therefore, may be subject to changes in availability and price of such commodities such as corn, wheat and ethanol in our grain processing product line; and poultry and phosphorous in our animal nutrition and health product line. Competitive conditions, governmental restrictions, natural disasters and other events could limit the production of our customers’ products that use our enzymes. As a result, the price and availability of the raw materials used, or the end products which our enzymes are used to produce, may fluctuate substantially, and could significantly impact both the demand for, and average sales price of, our enzymes. Such fluctuations may result in reduced volumes of our enzymes being used, or may result in our enzymes not being used at all. Any change in the use of production facilities that currently use our enzymes to manufacture products could significantly impact the demand for, and average sales price of, our enzymes.

Any of these factors may materially and adversely affect our business, financial conditions and results of operations.

Because a significant portion of our revenue comes from a few large customers, any decrease in sales to these customers could harm our operating results.

Our revenue and profitability are highly dependent on our relationships with a limited number of customers. For the three and nine months ended September 30, 2012, our three largest customers accounted for approximately 78% and 75% of product and contract manufacturing revenue. We are likely to continue to experience a high degree of customer concentration. The loss or a significant reduction of business from any of our major customers would adversely affect our results of operations.

*	We may not be successful maintaining or increasing demand for our existing and future products for the grain processing industry.

Demand for our grain processing product line has been impacted by adverse business conditions in the corn ethanol industry due largely to the following factors:

•

Reduced demand for gasoline and thus for ethanol have depressed ethanol prices;

•

Depressed ethanol prices combined with continued high corn prices these factors have resulted in low to negative margins for corn ethanol producers, and they have responded by reducing operating rates or idling operations until margins improve; and

•

Reducing operating rates or idling operations combined with higher wheat prices in Europe impacting our Xylathin™ xylanase product sales have resulted in the overall decrease, partially offset by higher U.S. sales.

Although we continue to increase our market share in the United States, current industry conditions will significantly impact our revenue growth for this product line for at least the remainder of 2012. In addition, the market for our Fuelzyme product is highly competitive, and dominated by two major suppliers with more than a 75% market share who have greater resources and experience than we do in serving this market. As a result of these factors, we experienced increased competitive pressure and delays or extensions of trials which consequently has affected the timing of new customer adoptions. While we have gained new customers in 2012, we estimate that total ethanol production volume from our customers has declined compared to the same period in 2011. These factors combined with seasonally lower demand for gasoline, and the impact of rising gasoline prices on consumer demand, suggest the industry has entered a challenging cycle with conditions conducive to production rate cuts and plant closures which have negatively impact our business. If we are unsuccessful in maintaining increasing demand for our products that serve the grain processing industry due to these or other factors, the growth of our business and our future profitability will be negatively impacted.

We may not be successful marketing and selling our existing and future products into the oilfield services industry.

To date, we have generated only minimal sales from our Pyrolase product and we have only recently begun to actively market our Pyrolase and Vereflow enzyme products into the oilfield services industry. These products, as well as future products under development, are targeted for use in hydraulic fracturing. This is a volatile industry, highly impacted by environmental regulation, subject to variations in demand and prices for oil and natural gas, and highly dependent upon capital spending to support drilling activity. In addition, enzyme usage has not been widely adopted throughout the industry. If we are unsuccessful in increasing demand for our products that serve the hydraulic fracturing industry due to these or other factors, the growth of our business and our future profitability will be negatively impacted.

The existing global economic and financial market environment has had and may continue to have a negative effect on our business and operations.

The existing global economic and financial market environment has caused, among other things, lower consumer and business spending, lower consumer net worth, a general tightening in the credit markets, and lower levels of liquidity, all of which has had and may continue to have a negative effect on our business, results of operations, financial condition and liquidity. Many of our customers have been severely affected by the current economic turmoil. Current or potential customers may no longer be in business, may be unable to fund purchases or determine to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins, and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet consumer demand or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations, difficulties if we overstrained our resources, and our long-term

business approach that necessitates we remain in position to respond when market conditions improve. The timing and nature of a sustained recovery in the credit and financial markets remains uncertain, and there can be no assurance that market conditions will significantly improve in the near future or that our results will not continue to be materially and adversely affected.

Such conditions make it very difficult to forecast operating results, make business decisions and identify and address material business risks.

*	The financial instability of our customers has caused and may continue to cause an adverse affect on our business and may result in reduced sales, profits and cash flows.

We sell our products to a limited number of customers, and we are likely to continue to experience a high degree of customer concentration in the future. Therefore, the loss or a significant reduction of business from any of our major customers has and may continue to adversely affect our results of operations. For example, if the general market conditions for corn ethanol were to continue to deteriorate, including as a result of over supply and reduced demand, our Fuelzyme^® alpha-amylase customers will continue to be adversely affected, which could continue to cause us to curtail business with that customer or the customer to reduce its business with us and cancel orders, which would adversely affect our business and result in reduced sales, profits and cash flows.

Additionally, we extend credit to our customers based on an evaluation of each customer’s financial condition, usually without requiring collateral. While customer credit losses have historically been within our expectations and reserves, we cannot assure you that this will continue. 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 enzyme manufacturing operations are subject to a number of risks that could adversely affect our business.

We manufacture a majority of our commercial enzyme products through a manufacturing facility in Mexico City owned by Fermic. As a result, we are subject to the general risks of doing business in countries outside the U.S., particularly in Mexico, including, without limitation, work stoppages, transportation delays and interruptions, earthquakes and other acts of nature, political instability, organized criminal activity and violence, 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. There can be no assurance that these factors will not adversely affect our ability to manufacture our products in international markets, obtain products from foreign suppliers or control costs of our products, or otherwise adversely affect our business, financial condition or results of operations.

We have limited experience and resources 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 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.

Since we do not currently possess the resources necessary to independently fund the development and commercialization of all 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 (for example, DuPont will introduce a competing next-generation phytase enzyme) 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 have relied, and will continue to rely, heavily on strategic partners to support our business.

Historically, we have relied upon a number of strategic partners, including current partners like, Novus, DuPont, WeissBioTech GmbH (formerly Add Food Services GmbH), and Fermic to enhance and support our development and commercialization efforts for our industrial enzymes.

Historically, DuPont has accounted for a significant percentage of our product revenue. However, DuPont is under no obligation to continue to market Phyzyme^® XP phytase and may introduce competing or replacement products at any time. DuPont represented approximately 61% and 63% of total product and contract manufacturing revenues for both the three and nine months ended September 30, 2012. Under our agreement with DuPont, we receive a royalty equal to 50% of DuPont’s operating profit from their sales of Phyzyme^® XP phytase, as defined. We record our quarterly royalty defined by our agreement based on information reported to us by DuPont. We have limited visibility into DuPont’s sales or operating profits related to Phyzyme^® XP phytase. During the three and nine months ended September 30, 2012, we experienced a decrease in the royalty as compared to the prior year and may continue to experience future declines that would negatively impact our product revenue and gross profit.

Our arrangements with existing and future collaborative partners are, and will continue to be, critical to the success of our business. We cannot guarantee that any new 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. For example, our strategic collaboration with Novus to develop and commercialize new enzyme products is dependent on Novus’ ability to successfully develop and commercialize products from our product pipeline, and they may not have the resources or expertise to do so, which could delay or prevent the commercialization of our products, which 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.

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. While we have certain rights to take action to maintain or protect such intellectual property, in the event that BP determines not to, we may be unsuccessful in protecting the intellectual property if 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. Similarly, we license additional intellectual property that we use to manufacture our products and otherwise use in our business. In the event that the licensors of this technology do not adequate protect it, our ability to use that technology will also be restricted, resulting in harm to our business.

In addition, BP’s rights to use the intellectual property that we have licensed are limited only by the non-competition agreements entered in connection with the sale of our LC business, which agreements have an expiration of a total of five years. Following expiration of these agreements, BP will have the right to use without limitation the same intellectual property that we have used and still use to develop our products. Should BP elect to compete with us following such expiration, such competition could harm our business.

*	Funds held in escrow in connection with the sale of the LC business to BP may not be released when expected.

Pursuant to the terms of the sale of the LC business to BP in 2010, $5 million of the purchase price was placed in escrow and is subject to the terms of an escrow agreement, to cover our indemnification obligations for potential liabilities and breaches of representations and warranties made by us, most of which survive for a period of 18 months following the closing. BP has provided notice of a potential claim for indemnification by us pursuant to the escrow agreement in connection with a claim made by University of Florida Research Foundation, Inc. (“UFRF”), against BP relating to a license granted by UFRF to a successor of Verenium Biofuels Corporation (now known as BP Biofuels Advanced Technology, Inc.), which was acquired by BP in the 2010 transaction. BP filed an action in the United States District Court for the Northern District of Florida against UFRF on March 5, 2012, for a judgment declaring that the UFRF allegations regarding the license are without merit. Of the $5 million held in escrow, the escrow agent disbursed $2.5 million to us during the first quarter 2012 and the remaining $2.5 million will remain in escrow pending resolution of the UFRF claim against BP. We believe that the UFRF claim against BP, and the potential claim by BP against us for indemnity pertaining to the UFRF claim, are without merit. We cannot be certain of the timing of resolution of the UFRF claim, or whether the UFRF claim against BP, and the BP claim against us for indemnity pertaining to the UFRF claim, will be resolved in a manner that results in release to us of all or any of the amount held in escrow.

We should be viewed as an early stage company with limited experience bringing products to the marketplace.

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 an early stage of development and commercialization. We may not be successful in the continued commercialization of existing products or in the commercial development of new products, 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 15 of our own products, including our Fuelzyme^® alpha-amylase, Xylathin™ xylanase, and Luminase^® PB-100 enzymes. In addition, five of our collaborative partners, Invitrogen Corporation, DuPont Nutrition Biosciences ApS (“DuPont”), a division of E. I. du Pont de Nemours and Company, Givaudan Flavors Corporation, Cargill Health and Food Technologies, 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 may 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.

If the 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 and credit 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 additional 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. In addition, we may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner. Moreover, we may discover deficiencies in existing systems and controls. The failure to successfully meet any of these challenges would have a material adverse impact on our financial condition and results of operations.

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 in the commercial enzymes industry may decline if we do not adequately protect our proprietary technologies.

Our success depends in part on our ability to obtain patents and maintain adequate protection of intellectual property rights to our technologies and products in the United States and foreign countries. If unauthorized parties successfully copy or otherwise obtain and use our products or technology the value of our owned and in-licensed technology could decline. Monitoring and preventing unauthorized use of our intellectual property is difficult, time-consuming and expensive, and we cannot be certain that the steps we have taken or will take in the future 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 or at all. If competitors are able to use our technology, our ability to compete effectively could be significantly harmed. Although we seek 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 greatly harm our business and results of operations.

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. Although we have and intend to continue to apply for patent protection of our technologies, processes and products, even the resulting patents, if issued, may be challenged, invalidated, or circumvented by third parties. We cannot assure you that patent applications or patents have not been filed or issued that could block our ability to obtain patents or to operate our business as currently planned. In addition, if third parties develop technologies that are similar to or duplicate our technologies, there can be no guarantee that our existing intellectual property protections will prevent such third parties from using such similar or duplicative technologies to compete with us. There may be patents in some countries that, if valid, may block our ability to commercialize processes or products in those countries. There also may be claims in patent applications in some countries that, if granted and valid, may block our ability to commercialize our processes or products in those countries. In such any event there can be no assurance that we will be able to secure the rights under such patents to commercialize our processes and products on reasonable terms or at all. Third parties may challenge our intellectual property rights, which, if successful could prevent us from selling products or significantly increase our costs to sell our products and we may be prevented from competing in our industry.

Disputes concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and extremely costly and could delay or prevent us from achieving profitability.

Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any license or other agreements that we have entered into with regard to our technology or business.

We are not currently a party to any litigation, interference, opposition, protest, reexamination, reissue or any other potentially adverse governmental, ex parte or inter-party proceeding with regard to our owned or in-licensed patents or other intellectual property rights. However, the biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties. Third parties may also challenge the validity of any of our issued patents. Similarly, we may initiate proceedings to enforce our patent rights and prevent others from infringing our or our licensed intellectual property rights. In any of these circumstances, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful. In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, divert management’s attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us.

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 and could have a significant adverse effect on our business, financial condition and results of operations.

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:

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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;

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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

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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 development, 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 or the EPA,. 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. 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 studies 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 delay or possibly prevent a product from being commercialized. Even after investing significant time and expenditures, our collaborators may not obtain a timely regulatory approval for products that incorporate our technologies or inventions. 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.

*	New yet to be implemented portions of and new regulations yet to be written under the Food Safety Modernization Act may affect or cause us to alter the way we manufacture products in ways we cannot predict, and compliance may be costly and/or interrupt our ability to manufacture products.

The Food Safety Modernization Act (FSMA), which was signed into law in January 2011, has significantly modified the Food, Drug, and Cosmetic Act. Many provisions of FSMA have yet to be implemented and implementation will require new rule making by the FDA in the form of additional regulations. Such rule-making could, among other things, require Verenium to significantly amend certain operational policies and procedures. Unforeseen issues and requirements may arise as the FDA promulgates new regulations provided for by FSMA, and there likely will be additional costs of compliance associated with these new requirements. Once FSMA is fully implemented, the FDA may audit or review Verenium’s activities and require that we take additional action and/or make modifications to our current practices and policies. If we are unable to fully comply with such new requirements, it could lead to sanctions and/ or complete or partial loss of our ability to manufacture products, which would have an adverse impact on our business.

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, Dyadic, Codexis and Direvo have alternative evolution technologies; Novozymes A/S and Genencor International Inc. are involved in development, expression, 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 area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our collaborative partners in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

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;

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the availability and cost of credit;

•

volatility in stock and credit markets;

•

energy costs;

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fluctuations in currency exchange rates;

•

the risk of global conflict;

•

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

•

public health issues.

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

Risks Related to Owning Our Common Stock

We are subject to anti-takeover provisions in our certificate of incorporation, bylaws, and Delaware law 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. These provisions in our charter documents and under Delaware law 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 for our existing products;

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

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quicker than expected decline in our Phyzyme^® XP phytase product;

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continued downturn in the corn ethanol market; and

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slower than anticipated adoption in our oilfield services product line.

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

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

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

The market price of our common stock has in the past been and is likely to continue to be subject to significant fluctuations. Between January 1, 2006 and November 6, 2012, the closing market price of our common stock has ranged from a low of $1.42 to a high of $138.95. Since the completion of our merger with Celunol Corp. on June 20, 2007, the closing market price of our common stock has ranged from $1.42 to $81.96. The closing market price of our common stock on September 30, 2012 was $3.25, and the closing price of our common stock on November 6, 2012 was $2.49. 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;

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our ability to negotiate and enter into definitive agreements related to any financing transaction;

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future sales of our common stock or debt or convertible debt securities or other capital-raising activities, and the terms of those issuances of securities;

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future royalties from product sales, if any, by our collaborative partners, and the extent of demand for, and sales of, our products;

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

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contamination or capacity issues at our contracted manufacturing facility in Mexico City;

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

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

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limitation on our ability to engage in certain business activities as a result of our transaction with BP and DSM;

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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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the loss of key employees;

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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 stockholders;

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

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issuance of shares by us, and sales in the public market of the shares issued, upon exercise of our outstanding warrants; and

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period-to-period fluctuations in our financial results.

Moreover, the stock markets in general have experienced 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 19% of our outstanding common stock as of September 30, 2012. 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 September 30, 2012, we had 12,774, 310 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.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

(a)


Exhibit Number		Description of Exhibit

2.1		Asset Purchase Agreement, dated as of July 14, 2010, by and between BP Biofuels North America LLC and the Company—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 July 19, 2010, and incorporated herein by reference.

2.2†		Asset Purchase Agreement, dated as of March 23, 2012, by and between DSM Food Specialties B.V. and the Company—filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (File No. 000-29173), filed with the Securities and Exchange Commission on May 15, 2012, and incorporated herein by reference.

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 (File No. 000-29173), 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 (File No. 000-29173), 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 (File No. 000-29173), 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 (File No. 000-29173), 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 Amended and Restated Bylaws—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 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 on January 20, 2000, and incorporated herein by reference.

4.2		Form of Warrant issued to Comerica Bank—filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011(File No. 000-29173), filed with the Securities and Exchange Commission on March 5, 2012, and incorporated herein by reference.

10.1		Loan and Security Agreement, dated October 5, 2012, by and between Comerica Bank and the Company—filed herewith.

10.2†		First Amendment to Lease, dated August 6, 2012, by and between ARE-John Hopkins Court, LLC, and the Company—filed herewith.

10.3†		Second Amendment to Lease dated September 7, 2012 by and between ARE-John Hopkins Court, LLC, and the Company—filed herewith.

10.4†		Third Amendment to Lease dated October 17, 2012 by and between ARE-John Hopkins Court, LLC, and the Company—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.


Exhibit Number		Description of Exhibit

101		The following financial statements and footnotes from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Condensed Consolidated Financial Statements.

†		Certain confidential portions of this Exhibit have been omitted pursuant to a request for confidential treatment. Omitted portions have been filed separately 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.