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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

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

 

**For the fiscal year ended December 31, 2009**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from               to               **

 

**CommissionFile Number 000-50791**

** **

**SENOMYX,INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **33-0843840**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **4767  Nexus Centre Drive  San Diego, California**              | ** ** | **92121**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

**(858) 646-8300**

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title  of Each Class**                 | ** ** | **Name  of Exchange on Which Registered** |
|------------------------------------------|------------|-------------------------------------------|
| Common Stock, par value $0.001 per share |       | The NASDAQ Stock  Market LLC              |

 

Securities registered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o  No x

 

Indicate by check if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

 

Indicate by check mark whetherthe registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large  accelerated filer o                |   | Accelerated  filer o                  |
|------------------------------------------------|--------|--------------------------------------------|
|                                           |   |                                       |
| Non-accelerated  filer x                  |   | Smaller reporting company o |
| (Do not check if  a smaller reporting company) |   |                                       |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes  o  No  x

 

        As of June 30, 2009, the aggregate market value of thevoting stock held by non–affiliates of the registrant, computed by reference tothe last sale price of such stock as of such date on the NASDAQ Stock MarketLLC, was approximately $46,738,000. Excludes an aggregate of 8,767,333 sharesof common stock held by officers and directors and by each person known by theregistrant to own 5% or more of the outstanding common stock as ofJune 30, 2009. Exclusion of shares held by any of these persons should notbe construed to indicate that such person possesses the power, direct orindirect, to direct or cause the direction of the management or policies of theregistrant, or that such person is controlled by or under common control withthe registrant.

 

As of January 31,2010, there were 31,111,074 shares of the registrant’s common stockoutstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the registrant’s definitive ProxyStatement for the 2010 Annual Meeting of Stockholders, to be filed with theSecurities and Exchange Commission pursuant to Regulation 14A not later than120 days after the end of the fiscal year covered by this Form 10-K, areincorporated by reference in Part III, Items 10-14 of this Form 10-K.

 

 

 

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**SENOMYX, INC.**

 

**AnnualReport on Form 10-K**

**Forthe Fiscal Year Ended December 31, 2009**

 

**TABLE OF CONTENTS**

 
| ** **    | ** **                                                                                                          | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                                                | 3        |
| Item 1.       | Business                                                                                                            | 3        |
| Item 1A.      | Risk Factors                                                                                                        | 23       |
| Item 1B.      | Unresolved Staff  Comments                                                                                          | 37       |
| Item 2.       | Properties                                                                                                          | 37       |
| Item 3.       | Legal Proceedings                                                                                                   | 37       |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                                                | 37       |
| PART II  |                                                                                                                | 38       |
| Item 5.       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 38       |
| Item 6.       | Selected Financial  Data                                                                                            | 40       |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 41       |
| Item 7A. | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 53       |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        | 54       |
| Item 9.       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               | 79       |
| Item 9A.      | Controls and  Procedures                                                                                            | 79       |
| Item 9B.      | Other Information                                                                                                   | 80       |
| PART III |                                                                                                                | 81       |
| Item 10.      | Directors,  Executive Officers and Corporate Governance                                                             | 81       |
| Item 11.      | Executive  Compensation                                                                                             | 81       |
| Item 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 81       |
| Item 13.      | Certain  Relationships and Related Transactions, and Director Independence                                          | 81       |
| Item 14. | Principal  Accountant Fees and Services                                                                             | 81       |
| PART IV  |                                                                                                                | 82       |
| Item 15.      | Exhibits and  Financial Statement Schedules                                                                         | 82       |
|          |                                                                                                                |     |
| Signatures    | 86                                                                                                                  |

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

** **

*This annual report on Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements included or incorporated byreference in this annual report on Form 10-K other than statements ofhistorical fact, are forward-looking statements. You can identify these andother forward-looking statements by the use of words such as “may,” “will,” “could,”“anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of suchterms, or other comparable terminology. Forward-looking statements also includethe assumptions underlying or relating to such statements.*

 

*Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of various factors, including those set forth below under the caption “RiskFactors” in Part I Item 1A and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Part II Item 7 of  this annual report on Form 10-K andelsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speak only as of the date on which theyare made and we undertake no obligation to update such statements to reflectevents that occur or circumstances that exist after the date on which they aremade except as required by law.*

 

**PART I**

** **

**Item1.    *Business***

 

**Overview**

 

We are a leading company focused on using proprietarytaste receptor-based assays and screening technologies to discover and developnovel flavors, flavor enhancers and bitter blockers, which we refer to asflavor ingredients, for the packaged food, beverage and ingredient supplyindustries. We believe our flavor ingredients will enable packaged food,beverage and ingredient supply companies to improve the nutritional profile oftheir products while maintaining or enhancing taste and, in certain cases,generating cost of goods savings.**We license ourflavor ingredients to our collaborators on an exclusive or co-exclusive basis,which we believe will provide these companies with a competitive advantage. Wecurrently have product discovery and development agreements with several of theworld’s leading packaged food, beverage and ingredient companies, includingAjinomoto Co., Inc., or Ajinomoto, Campbell Soup Company, or Campbell, The Coca-Cola Company, or Coca-Cola,Firmenich SA, or Firmenich, Nestlé SA, or Nestlé, and Solae LLC, or Solae. Weanticipate that we will derive all of our revenues from existing and futureproduct discovery and development agreements. Depending upon the collaboration,our collaboration agreements provide for upfront fees, research and developmentfunding, reimbursement of certain regulatory costs, milestone payments basedupon our achievement of research or development goals and, in the event ofcommercialization, commercial milestones, minimum periodic royalties androyalties on sales of products incorporating our flavor ingredients.

 

Flavor ingredients are substances that impart ormodulate tastes or aromas in foods and beverages. Individuals experience thesensation of taste when flavor ingredients in food and beverage productsinteract with taste receptors in the mouth. A taste receptor functions eitherby physically binding to a flavor ingredient in a process analogous to the waya key fits into a lock or by acting as a channel to allow ions to flow directlyinto a taste cell. As a result of these interactions, signals are sent to thebrain where a specific taste sensation is registered. There are currently fiverecognized primary senses of taste: umami, which is the savory taste ofglutamate, sweet, salt, bitter and sour. In addition, there are secondary tastesensations, such as cool, hot and fat.

 

We are currently pursuing the discovery anddevelopment of flavor ingredients through five programs focused on savory,sweet, salt, bitter and cooling taste areas. The goals of our savory program are to enhance the taste of naturallyoccurring glutamate and enable the reduction or elimination of added monosodiumglutamate, or MSG, and to enhance the savory taste of foods by combiningSenomyx’s savory flavors with other ingredients to create unique new flavors.The goals of our sweet enhancer program are to enhance the taste of natural andartificial sweeteners and enable a significant reduction in added 

 

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sweeteners. The goals of our salt program are toenhance the taste of salt and enable a significant reduction in added salt. Thegoals of our bitter taste modulation program are to reduce or block bittertaste and to improve the overall taste characteristics of packaged foods,beverages, over the counter, or OTC, health care products and pharmaceuticalproducts. The goal of our cool flavor program is to discover novel coolingcompounds for a variety of applications.

 

Our internet address is www.senomyx.com. We post linkson our website to the following filings as soon as reasonably practicable afterthey are electronically filed with or furnished to the Securities and ExchangeCommission, or SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any amendment to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended. All such filings are available through ourwebsite free of charge. Our filings may also be read and copied at the SEC’sPublic Reference Room at 100 F Street, NE Washington, DC 20549.Information on the operation of the Public Reference Room may be obtainedby calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internetwebsite that contains reports, proxy and information statements, and otherinformation regarding issuers that file electronically with the SEC. Theaddress of that site is www.sec.gov.

 

**Industry Background**

 

***PackagedFood and Beverage Industry***

*** ***

Packaged food and beverage products include carbonatedand non-carbonated beverages, frozen foods, snack foods, ice cream, pasta,canned soup, pet food and numerous other products. According to recent datafrom Euromonitor International, an independent research organization, worldwidesales of packaged food and beverage products in 2008 were approximately $1.7trillion, of which approximately $309.1 billion was generated in the UnitedStates. These figures represent growth rates of approximately 5% and 3%,respectively, over 2003 amounts.  Basedon these estimates, of the worldwide total, sales of packaged foods were approximately$1.3 trillion and sales of non-alcoholic beverages were approximately $392.3billion.  Based on recent data fromEuromonitor, Information Resources, Inc., a provider of enterprise marketinformation solutions and services, and reports from our collaborators, weestimate that our collaborators’ combined worldwide sales in 2008 of theirproducts that fall within their exclusive or co-exclusive product fields wereapproximately $60.3 billion. Our current collaboration agreements provide thatwe will receive royalties of up to 4% on our collaborators’ sales of retail andfood service products, and in some cases higher on our collaborators’ sales ofingredient supplies containing our flavor ingredients.  The actual royalties vary by agreement anddepend upon a number of factors including, for example, the product field, costof goods savings, degree of flavor enhancement and sales volume of collaboratorproducts incorporating our flavor ingredients. We do not anticipate that our collaborators will incorporate our flavoringredients into all of their products within their exclusive or co-exclusiveproduct fields.

 

Each of our flavor ingredients addresses large,potentially overlapping markets. The following table sets forth the fourprimary taste areas on which we are focused and, for each taste area, providesexamples of product categories that could incorporate ingredients in thosetaste areas, estimated worldwide sales and our estimates of the worldwide salesfor food and beverage products of our existing collaborators in their exclusiveor co-exclusive product fields.

 

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| **Taste Area** | ** ** | **Example Product Categories**                                                                                                                                                         | ** ** | **2008 Estimated  Worldwide Sales(1)** | ** **  | **2008 Estimated  Revenues Of  Existing  Collaborators  In Exclusive  Product Fields(2)** | ** ** |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-------------------------------------------------------------------------------------------|------------|
|           |       |                                                                                                                                                                                   |       |                                   |        |                                                                                      |       |
| Savory         |       | Ready meals, sauces, spreads, frozen foods, beverages, meal  replacements, soups, pastas, dried foods, snack foods, processed meats,  processed cheeses and cracker products           |       | $                                      | 477 billion |                                                                                      | $          | 17.5 billion |   |
|           |       |                                                                                                                                                                                   |       |                                   |        |                                                                                      |       |
| Sweet          |       | Confectionaries, cereal, ice cream, beverages, yogurt, dessert,  spreads and bakery products                                                                                           |       | $                                      | 612 billion |                                                                                      | $          | 22.4 billion |   |
|           |       |                                                                                                                                                                                   |       |                                   |        |                                                                                      |       |
| Salt           |       | Product categories are the same as those set forth for savory taste  area plus canned foods and bakery products                                                                        |       | $                                      | 485 billion |                                                                                      | $          | 9.9 billion |   |
|           |       |                                                                                                                                                                                   |       |                                   |        |                                                                                      |       |
| Bitter         |       | Products which contain bitter tastants, including confectionary,  beverages, ice cream, ready meals, canned foods and soups, and products which  utilize certain artificial sweeteners |       | $                                      | 600 billion |                                                                                      | $          | 10.5 billion |   |

 

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| (1)    | According to recent Euromonitor data for packaged food and beverages,  excluding pharmaceutical and OTC health care applications. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                              |
| (2)    | Based on recent data from Euromonitor, Information Resources and  reports from our collaborators.                                 |

 

Accordingto Hill Consulting Group’s 2006 “Cooling Agents” report, annual sales ofcurrent cooling compounds are in the range of $400 million, and we estimate theopportunity for flavor systems incorporating improved cooling agents may bethree to four times that size.

 

***Flavorand Ingredient Supply Industry***

*** ***

Flavors and ingredient supplies are used in a varietyof packaged food, beverage and ingredient products throughout the world.Flavors and ingredient supplies can originate from either naturally occurringor chemically synthesized compounds. Flavors include compounds that impart ataste such as strawberry, vanilla or cool while ingredient supplies includefood additives such as MSG and hydrolyzed soy protein.  Flavor ingredients may be sold as part of aflavor system or in combination with another ingredient to packaged food andbeverage companies, or to companies that make pharmaceutical or OTC healthcareproducts. A flavor system can be a combination or variety of flavors andingredients, such as strawberry flavor and sweeteners.  Flavor systems can also come in several formssuch as powder or liquid, and may be specially processed to increase thefunctionality of the flavor.

 

While some packaged food, beverage and ingredientcompanies have their own internal research and development programs, most havetraditionally relied on purchases of flavor ingredients from third parties.Historically, flavor ingredients have been sold on a commodity basis byindependent manufacturers who make their products broadly available to packagedfood, beverage and ingredient companies on a non-exclusive basis. This haslimited the ability of packaged food, beverage and ingredient companies to useflavor ingredients to differentiate their brands from competitors.

 

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Traditionally, flavor and ingredient supply companieshave discovered new flavor ingredients primarily using inefficient,non-automated and labor-intensive trial and error processes involving a limitednumber of trained taste testers. Using this approach, taste testers mustphysically taste each potential flavor ingredient to assess the tastecharacteristics of the compound. Taste testers can assess only a limited numberof potential flavor ingredients at one time due to the sensory fatigue thatresults from repeated tasting. As a result, only a small fraction of theavailable universe of ingredients can be tested economically.

 

Flavorsand ingredient supplies are regulated in the United States under provisions ofthe Food, Drug and Cosmetic Act, or FD&C Act, administered by the Food andDrug Administration, or FDA.  Flavoringredients sold in countries and regions outside the United States are alsosubject to regulations imposed by national governments or regional regulatoryauthorities, as is the case in the European Union.  For further discussion of the regulatoryregime for flavor and ingredient supplies, please see the “Regulatory” sectionbelow.

 

***FlavorIngredients as a Source of Competitive Advantage***

*** ***

The packaged food, beverage and ingredient industriesare comprised of a number of large and highly competitive market segments.Small market share gains in specific large market segments can translate intosignificant additional revenue for packaged food, beverage and ingredientcompanies. For example, according to recent Euromonitor data, estimated 2008worldwide sales of soft drinks were approximately $333.3 billion. Thus, anincrease of a tenth of a percentage point in overall worldwide market sharewould result in additional revenue of approximately $333.3 million.

 

As a result of these market opportunities, packagedfood, beverage and ingredient companies are constantly seeking ways todifferentiate their products, demand for which can be greatly affected by verysmall actual or perceived improvements in flavor or health profiles. Flavor ingredientscan potentially provide an important way to differentiate a particular productthrough enhanced taste, improvements in nutritional profile or labeling, flavoringredient exclusivity and cost of goods savings.

 

·                     *Taste.* Product taste is a critical competitive factor for packaged food,beverage and ingredient companies. These companies seek to use flavoringredients to improve or maintain taste while improving the nutritionalprofile of packaged food, beverage and ingredient products or reducing ingredientcosts.

 

·                  *Health Benefits.* Packaged food, beverage and ingredient companies are exploring ways toimprove overall nutritional quality of their products. It is widely acceptedthat poor diet contributes to adverse health conditions such as cardiovasculardisease, diabetes and obesity. To address these concerns, many companies haveintroduced reduced calorie, reduced sodium and reduced fat content products tothe market. Flavor ingredients with specific desired characteristics provide aninnovative way to reduce the levels of ingredients that may contribute to theseconcerns without compromising desirable taste attributes.

 

·                  *Flavor IngredientExclusivity.*  Failure of packaged food, beverage andingredient companies to differentiate their brands from their competition,including private label products, may result in significant loss of marketshare, price pressure and erosion of profit margins. Packaged food, beverageand ingredient companies spend millions of dollars creating brands and brandimages to compete with other products. Many of these competitive productscontain the same or similar flavor ingredients. The limited availability ofproprietary flavor ingredients makes it difficult for manufacturers todifferentiate their products based on flavor ingredients.

 

·                  *Cost of Goods Savings.* The packaged food, beverage and ingredient industries purchase enormousquantities of raw materials to produce their products.  According to the Food and AgricultureDivision of the United Nations and LMC International, an economic and businessconsultancy providing economic research and consultancy services, estimatedworldwide sugar production in 2008 was over 167 million metric tons, andconsumption was over 148 million metric tons. The market value of processed sugar produced worldwide is therefore inexcess of $125 billion on an annual basis, based on spot prices in January 2010.  Similarly, according to Ajinomoto’s FY2009Market and Other Information report and Pearson Sales

 

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Company, worldwide demand for MSG was approximately 2.1 million metrictons in 2008 which would have had a cost of $4.2 billion using January 2010spot prices. According to LMC International, worldwide demand for high-fructosecorn syrup for 2009 was approximately 12.6 million metric tons which would havehad a cost of approximately $6.7 billion using January 2010 spot prices.  Flavor ingredients can potentially facilitatea reduction in the quantity of these ingredients used in packaged food,beverage and ingredient products, which could result in significant decreasesin costs and associated increases in profit margins.

 

**Our Solution**

 

We use our proprietary taste receptor-based assays andscreening technologies to discover and develop novel flavor ingredients. Wehave developed proprietary taste receptor-based assays that incorporate humantaste receptors. We use these assays in our high-throughput screening systemsto rapidly and efficiently screen our compound libraries and identify largenumbers of novel potential flavor ingredients. We believe our approach improvesthe likelihood that ingredients with the desired characteristics can bediscovered and then optimized into novel flavor ingredients.

 

We believe our approach will result in the discoveryand development of flavor ingredients that will address the following keychallenges faced by the packaged food, beverage and ingredient industries:

 

·                  *Maintaining andImproving Taste.*  We are developing flavor ingredients toenable our current and future collaborators to improve or maintain taste whileimproving the nutritional profile of packaged food, beverage and ingredientproducts or reducing ingredient costs.

 

·                  *Reducing Sugar,Artificial Sweeteners, Salt and MSG in Packaged Food, Beverage and IngredientProducts. *We are developing flavor ingredients toenable our current and future collaborators to significantly reduce the levelsof sugar, artificial sweeteners, salt and MSG in packaged food, beverage andingredient products while maintaining or improving taste. We believe reducingthe levels of such ingredients will improve the nutritional profile and/ortaste of packaged food, beverage and ingredient products.

 

·                  *Blocking UndesirableTastes.*  We are discovering flavor ingredients that webelieve will be useful in blocking bitter and other unwanted tastes associatedwith certain packaged food and beverage products.  Our technology may also be useful to improvethe taste of products outside of food and beverages, such as OTC health careproducts and pharmaceutical products.

 

·                  *Overcoming Deficiencies inCertain Flavor Ingredients.*We are discovering flavor ingredients with lower costsand improved properties over existing ingredients, including flavor andphysical properties.

 

·                  *Identifying NaturalIngredients.*  We have the technology to screen libraries ofnatural samples isolated from plants and other natural sources to discover newnatural ingredients.

 

·                  *Obtaining Exclusive orCo-Exclusive Use of Proprietary Flavor Ingredients. *We are able to offer our current and futurecollaborators exclusive or co-exclusive use of our proprietary flavoringredients in defined packaged food, beverage and ingredient product categories.We believe this approach will assist our collaborators in differentiating theirproducts from those of their competitors.

 

·                  *Reducing Cost ofGoods. *We believe our proprietary flavor ingredients willenable our current and future collaborators to reduce overall raw materialingredient costs in certain cases, particularly for those products containinghigh levels of natural and artificial sweeteners and MSG.

 

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**Our Strategy**

 

Our goal is to become the leader in discovering,developing and commercializing new and improved flavor ingredients for our fivekey programs. Key elements of our strategy include:

 

·                  *Collaborating WithLeading Packaged Food, Beverage and Ingredient Companies. *We are collaborating with leading packaged food,beverage and ingredient companies to develop and commercialize our productcandidates. Our collaborators are responsible for marketing, selling anddistributing their products incorporating our flavor ingredients. In addition,our collaborators are responsible for all manufacturing costs of our flavoringredients.  As a result, we expect to commercializeour flavor ingredients without incurring significant sales, marketing,manufacturing and distribution costs. We currently have collaborationagreements with Ajinomoto, Campbell, Coca-Cola, Firmenich, Nestlé and Solae.

 

·                  *Developing FlavorIngredients that are Eligible for Flavor and Extract Manufacturers Association,or FEMA, GRAS Determination. *Our primary focus is on the developmentof flavor ingredients that will qualify for a FEMA GRAS determination.  Six ingredients developed as part of oursavory and sweet programs have received FEMA GRAS determination.  Upon theGRAS determination, our collaborators can begin to test market andcommercialize products incorporating our flavor ingredients in many keymarkets. In the event that a particular flavor ingredient is not eligible forFEMA GRAS determination, we may dedicate our development efforts to alternativeingredients.

 

·                  *Pursuing AdditionalCollaborations and Market Opportunities. *We seek toestablish additional collaborations with leading packaged food, beverage andingredient companies to use flavor ingredients developed through our existingprograms for exclusive or co-exclusive use within new packaged food, beverageand ingredient product fields. We intend to receive from future collaboratorsup-front fees, research and development funding, milestone payments, minimumperiodic royalties and royalties on future sales of products incorporatingthese flavor ingredients. In addition, we plan to target fields in which ourcollaborators can incorporate more than one of our flavor ingredients into aparticular product or flavor system.

 

·                  *Maintaining andExpanding Our Technology Position. *We believe our proprietary tastereceptor-based technologies, including our receptor discovery, assaydevelopment and high-throughput screening technologies and natural andsynthetic compound libraries provide us and our collaborators with significantcompetitive advantages. We intend to continue to develop and acquireproprietary technologies and related intellectual property rights to expand andenhance our ability to discover and develop new proprietary flavor ingredients.

 

**Our Discovery and DevelopmentProcess**

 

The following diagram summarizes our discovery anddevelopment process.

 

 

The key elements of our Discovery and Developmentprocess are:

 

·                  *Identification ofRelevant Human Taste Receptors and Proprietary Taste Receptor-Based AssayDevelopment. *The first steps in our discovery anddevelopment process are to identify the relevant human taste receptors and todevelop proprietary assays based on the identified receptors. Our assays aretests that measure interactions between the taste receptors and potentialflavor ingredients. To date we have developed assays to test for compounds thatinteract with receptors associated with savory, sweet, salt, bitter and coolingtastes.

 

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·                  *High-ThroughputScreening and Identification of Potential Ingredients. *The next step in our discovery and development processis to use our proprietary taste receptor-based assays to identify ingredientsthat bind to human taste receptors, known as hits. We use automatedhigh-throughput screening to evaluate rapidly our libraries of diversesynthetic and natural samples.  A panelof taste testers then evaluates the taste effect of the most potent hits. Basedon this evaluation, we designate hits that exhibit a positive taste effect asproof-of-concept compounds. We then select the most promising of thoseproof-of-concept compounds, which we call lead compounds, for optimization.

 

·                  *Optimization of LeadCompounds and Selection of Product Candidates. *The nextstep in our discovery and development process is to chemically enhance, oroptimize, our lead compounds to allow lower amounts of the compound to be usedin the finished product or improve the enhancement effect to meet the tasteattribute goals of our collaborators. Optimization may also be required toenhance the safety profile or to improve the physical properties of a compoundso that it is stable under manufacturing, storage and food preparationconditions. We refer to optimized compounds that provide desirable tasteattributes in packaged food, beverage and ingredient product prototypes asproduct candidates.  When screeningnatural libraries, optimization involves selecting the appropriate source anddeveloping the most efficient process to obtain the active compound.

 

·                  *Safety Studies andRegulatory Approval of Product Candidates. *The nextstep in our discovery and development process is to select one or more productcandidates for commercialization. We then evaluate the selected productcandidate for safety, including preliminary in-vitro evaluation and additionalin-vivo studies to confirm an acceptable safety profile. Following thisevaluation, we submit the safety data along with the physical and chemicalproperties of the product candidate and a description of manufacturing andconditions of intended use to FEMA for review. The FEMA review is conducted by an Expert Panel identified and convenedby FEMA.  If the Expert Panel determinesthe product candidate to be GRAS, the conclusions of the Expert Panel areprovided directly to the FDA and published in the journal Food Technology.  The FEMA GRAS status allows the ingredientsto be commercialized in the United States and several other countries andregions.  FEMA GRAS status alsofacilitates regulatory determinations in a number of additional countries.

 

Six ingredients developed as part of our savory and sweet programs havereceived FEMA GRAS determination.  The process from selection fordevelopment until receipt of that determination has ranged from 12 to 16months.  Costs associated with the FEMA GRAS process, including contractsafety studies and preparation of the application, were less than $1 million.  We expect that most of the flavor ingredientswe develop in the future will require a similar amount of time and cost.  However, the length of time and cost may varydepending on the properties of the flavor ingredient.  In addition, regulatory approval of theflavor ingredients in other jurisdictions may require that we conductadditional studies or incur additional expenses.

 

·                  *Commercial Developmentand Sales by Partners. *Following regulatory approval in a givencountry, foods and beverages containing our proprietary flavor ingredients canbe commercialized immediately.  Our collaborators have ultimateresponsibility for commercialization of Senomyx flavor ingredients in their endproduct offerings.  Prior to commercialization collaborators complete extensiveproduct formulation work on targeted products.  Our collaborators mayvalidate final formulations for these products through in-house sensoryevaluation as well as external in-market taste tests by consumers.  Uponconfirming consumer acceptance of these products, the collaborators completeactivities such as production of the Senomyx flavor ingredients and thedevelopment of packaging and sales samples and materials, enabling the actualmarket launches of the products.

 

**Our Discovery and DevelopmentPrograms**

 

We are currently pursuing the discovery anddevelopment of flavor ingredients through five programs focused on savory,sweet, salt, bitter and cooling taste areas.

 

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***SavoryEnhancer Program***

*** ***

The goals of our savory program are to enhance thetaste of naturally occurring glutamate and enable the reduction or eliminationof added MSG and a related food additive, inosine monophosphate, or IMP, and toenhance the savory taste of foods by combining Senomyx’s savory flavors withother ingredients to create unique new flavors. Using SavoryScreenHT, ourhigh-throughput savory receptor-based assay system, we identified two productcandidates, S336 and S807, that enhance the savory taste of glutamate.  S336 is approximately three times more potentthan S807 in taste tests and exhibits greater water solubility compared toS807, which is more fat soluble. Other characteristics, such as heat stabilityand ease of manufacturing by a simple synthesis process, are similar for thetwo ingredients. We completed the safety assessment studies for S336 and S807and submitted applications for GRAS determination to FEMA in December 2004.  In March 2005, the FEMA Expert Paneldetermined that S336 and S807 were GRAS. In addition, two other flavor enhancers, S263 and S976, which arerelated to S336, were also determined by FEMA to be GRAS.  A more detailed description of the FEMA GRASprocess is provided in *Item 1*, *Business — Regulatory Process*.  During 2007, the Chinese Ministry of Healthgranted official regulatory approval in China for our savory flavoringredients.  Also in 2007, our savoryflavor ingredients received a positive review by the Joint FAO/WHO ExpertCommittee on Food Additives, or JECFA. The JECFA determination facilitates the acceptance or approval offlavors for use in food in many countries throughout the world.

 

*Commercializationby Collaborators*

 

Initial market launch byNestlé of products including our savory enhancers occurred in June 2007. Nestlé’s launch strategy is focused on countries where regulatory approval isin place, and targets products that contain high levels of MSG.  Productshave been launched throughout 2007, 2008 and 2009 in the Pacific Rim, LatinAmerica and Africa.  Additionally, Nestléhas been conducting product development and consumer testing with both new andreformulated established products in larger countries that are high-volumeusers of MSG.  We anticipate that Nestléwill initiate commercialization of additional products containing our savoryflavor ingredients in 2010.

 

A second collaborator forthe savory enhancer program is currently commercializing products containingour savory enhancers in the field of ingredient mixes in one of their licensedgeographies.  We anticipate market launchof products containing our savory enhancers in 2010.

 

Concurrently, we are working to obtain globalregulatory approvals in support of new business development activities andcommercialization strategies for subsequent product launches of our savoryflavor enhancers in additional countries.

 

***SweetEnhancer Program***

*** ***

The goals of our sweetenhancer program are to enhance the taste of natural and artificial sweetenersand enable a significant reduction in added sweeteners. Senomyx has identifiedS2383, a novel enhancer of the high-intensity sweetener sucralose, and S6973, anew sucrose, or plain sugar, enhancer. Taste tests demonstrated that S2383 enabled up to a 75% reduction ofsucralose in product prototypes such as beverages, yogurt and baked goods, yetmaintained the same sweet intensity without any off-tastes.  In November 2008 we announced receipt ofFEMA GRAS status for S2383.  Also in November 2008,we and Firmenich announced a new collaboration under which Firmenich hasexclusive rights to commercialize S2383 as a standalone ingredient or as partof an ingredient mixture in virtually all countries.  Firmenich is completing pre-commercializationwork for S2383.  We anticipate launch ofproducts containing S2383 during 2010.

 

The sucrose enhancerS6973 allowed an approximately 50% reduction of sucrose in taste tests withbaked goods, cereals, gum, condiments and relishes, confectioneries andfrostings, frozen dairy offerings, fruit ices, gelatins and puddings, hard andsoft candy, jams and jellies, milk products, and sauces.  In addition to this significant degree ofenhancement, S6973 has key beneficial taste characteristics that allowed thetaste of sucrose to be unaffected in these tests.  In August 2009, we and Firmenichannounced a

 

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new collaboration underwhich Firmenich has exclusive rights to commercialize selected Senomyx sweetenhancers, including S6973, worldwide in virtually all food product categoriesnot currently licensed to other companies. In October 2009 we announced receipt of FEMA GRAS status forS6973.  In January 2010, Firmenichelected to proceed with commercial development of S6973.  In conjunction with the decision, Senomyxwill receive an $8 million license fee installment payment from Firmenich duringthe first quarter of 2010.

 

Additional work isongoing to identify enhancers of fructose and other natural and artificialsweeteners and to identify other enhancers of sucrose with other desirablephysical properties.

 

***SaltEnhancer Program***

*** ***

The goal of the SaltEnhancer Program is to identify flavor ingredients that allow a significantreduction of sodium in foods and beverages yet maintain the salty tastedesirable to consumers.  We are  conducting taste tests with enhancers of bothsodium chloride (table salt) and potassium chloride that are active in ourproprietary assays based on SNMX-29, a protein we believe is involved withhuman salt taste perception.  In additionto these activities, we are using various chemistry and biology approaches toexplore the role of SNMX-29 and other proteins that may contribute to theperception of salt taste, with the objective of demonstrating a tasteproof-of-concept.

 

***BitterBlocker Program***

*** ***

Thegoals of our bitter blocker program are to identify compounds that modulate oreliminate the bitter taste and to improve the overall taste characteristics ofcertain packaged food, beverage and ingredient products, OTC health careproducts and pharmaceutical products. This involves the identification of taste receptors that respond tobitter ingredients known to be present in a variety of food and beverageingredients, followed by the use of these receptors to discover bitter tasteblockers.  We have identified blockersfor 18 of the 22 different bitter receptors that we believe are the primarymeans by which humans sense bitter tastes, and we are currently screening tofind blockers for the remaining receptors. We have identified blockers that block the bitter taste of multipleproduct prototypes.  One of theseblockers, S6821, has been advanced into final development activities intendedto support regulatory filings.  Anotherpromising bitter blocker, S0812, has demonstrated the ability to block thebitterness of a variety of products and has completed successful initial safetystudies.  Senomyx is continuing toevaluate S0812 and other bitter blockers for further development. We havecollaborations in place to identify compounds to reduce the bitterness ofproducts marketed by our two collaborators for the bitter blocker program.

 

***CoolingFlavor Program***

*** ***

The goal of our cool flavor program is to identifynovel cooling flavors that do not have the limitations of currently availableagents.  In 2009, we identifiedingredients from six different compound classes that have demonstrated a tasteproof-of-concept.  We are currentlyconducting preliminary taste tests on a subset of these ingredients to identifyone or more lead candidates for further optimization.

 

**Product Discovery and DevelopmentCollaborations**

 

We pursue collaborations with leaders in the packagedfood, beverage and ingredient supply markets. Under each of our current productdiscovery and development collaboration agreements, we have agreed to conductresearch and develop flavor ingredients in one or more specified taste areas,such as savory, sweet, salt, bitter or cool. Each of these collaborations isfocused on one or more specific product fields, such as non-alcoholicbeverages, wet soups or frozen foods. We currently have product discovery anddevelopment collaboration agreements with Ajinomoto, Campbell, Coca-Cola,Firmenich, Nestlé and Solae.  We alsohave an additional commercialization and license agreement with Firmenichregarding our S2383 sucralose enhancer.

 

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All of our current collaboration agreements providefor royalty payments in the event the collaborator commercializes a productincorporating our flavor ingredients. The specific type of royalty and method for calculating royalty paymentsvaries by agreement.  Most of our currentcollaboration agreements provide for research and development funding,milestone payments upon achievement of pre-defined research or developmenttargets and cost reimbursement.  Certainof our current collaboration agreements also provide for upfront fees andminimum periodic royalties.  The researchand development funding under each of these agreements is typically paidaccording to a fixed payment schedule, but may vary from period to period uponmutual agreement of the parties. Each of these collaborations provides us witha portion of the funding we require to pursue the discovery and development offlavor ingredients for the applicable program. Under each of these agreements,we are primarily responsible for the discovery and development phases and anyassociated expenses, while our collaborator is primarily responsible forselecting the consumer products that may incorporate our flavor ingredients.Our collaborator is also responsible for manufacturing, marketing, selling anddistributing any of these consumer products, and any associated expenses. Undermost of our agreements, we are primarily responsible for the regulatory approvalphase and a portion of the associated expenses. We believe our collaborations will allow us to benefit from ourcollaborators’ well-established brand recognition, global market presence,established sales and distribution channels and other industry-specificexpertise. Each of our collaborations is governed by a joint steeringcommittee, consisting of an equal number of representatives of the collaboratorand us. The steering committees provide strategic direction and establishperformance criteria for the research, development and commercialization of ourflavor ingredients. All decisions of the steering committees must be unanimous.

 

Our product discovery and development collaborationagreements provide that we will conduct research and development on flavoringredients for use within clearly defined packaged food, beverage andingredient product fields on an exclusive or co-exclusive basis for thecollaborator during the collaborative period specified in each of theagreements.  Our current productdiscovery and development collaborators are not prohibited from entering intoresearch and development collaboration agreements with third parties in anyproduct field. Under the terms of each agreement, we will retain rights toflavor ingredients that we discover during the collaboration for use with thecollaborator, or for our use or with other collaborators outside of the definedproduct field. We will also generally retain rights to any flavor ingredientsthat we discover after the respective collaborative period, although in someinstances we have agreed to limited periods where we would not launch competingproducts or collaborate with a collaborator’s competitor. In addition to theproduct discovery and development agreements, we have a commercialization andlicense agreement with Firmenich regarding our S2383 sucralose enhancer, whichhas already received GRAS status.  In thecase of certain of our agreements, if the collaborator terminates the agreementor fails after a reasonable time following regulatory approval or GRASdetermination to incorporate one or more of our flavor ingredients into aproduct, it will no longer be entitled to use, and we will have the right tolicense the flavor ingredients to other packaged food, beverage and ingredient companiesfor use in any product field covered in the agreement.

 

Each of our agreements terminates when we are nolonger entitled to royalty payments under the agreement. In addition, eachagreement may be terminated earlier by mutual agreement or by either party inthe event of a breach by the other party of its obligations under theagreement.  Our agreement with Ajinomotoprovides for research and development funding through March 2010 and givesAjinomoto the right to terminate the agreement without cause provided that itpay additional specified research funding if it terminates the agreement priorto March 23, 2010.  We do notanticipate that we will receive research and development funding from Ajinomotoafter March 23, 2010.  However, wewill continue to be eligible to receive milestones, cost reimbursement androyalty payments under the commercial phase of the agreement.  Our agreement, as amended, with Campbellprovides for research and development funding until March 2010 and givesCampbell the right to terminate the agreement earlier without cause, providedthat it pay a specified termination fee if it terminates the agreement prior toMarch 28, 2010. Our agreement with Coca-Cola provides for research anddevelopment funding until April 2010 and gives Coca-Cola the right toconclude the collaborative program earlier for any reason upon payment to us ofan early conclusion fee.  Our initialagreement with Firmenich permits Firmenich to terminate the agreement withoutcause upon 90 days written notice on any anniversary of the effective date ofthe agreement provided that it pay additional specified research funding if itterminates prior to December 14, 2010. Our second agreement with Firmenich, relating to S2383, permitsFirmenich to terminate the agreement without cause upon 90 days written noticeon any anniversary of the effective date of the agreement.  Our most recent agreement with Firmenich,relating to other sweet enhancer flavors, permits Firmenich to terminate

 

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the agreement without cause on or after July 28,2011 upon 90 days’ written notice.  Ourinitial agreement with Nestlé (as amended in April 2005 and April 2008)provides for research and development funding through April 2010.  Our most recent agreement (as amended) withNestlé regarding the discovery and commercialization of novel flavoringredients in the coffee and coffee whitener fields provides for research anddevelopment funding through July 2010 and gives Nestlé the right toterminate the agreement earlier without cause, provided that it pay additionalspecified research funding if it terminates the agreement prior to July 26,2010.  Our agreement with Solae provides for research and developmentfunding through April 2010, and gives Solae the right to terminate theagreement without cause upon 90 days’ prior notice provided it pay additionalspecified research funding if it terminates the agreement prior to April 23,2010.

 

***Ajinomoto***

*** ***

In March 2006,we entered into a collaborative research, development, commercialization andlicense agreement with Ajinomoto for the discovery and commercialization ofnovel flavor ingredients on an exclusive basis in the soup, sauce and culinaryaids, and noodle product categories, and on a co-exclusive basis in thebouillon product category within Japan and other Asian markets.  Under the terms of the initial collaboration,Ajinomoto agreed to pay us an upfront license fee and research and developmentfunding for up to three years.  In addition, we are eligible to receivemilestone payments upon achievement of specific product discovery anddevelopment goals and reimbursement for certain patent costs.  In April 2007, we amended the agreementto expand Ajinomoto’s rights into North America.  Under the terms of the April amendment,Ajinomoto agreed to pay us an upfront license fee and we are eligible toreceive an additional milestone payment upon achievement of a specificgoal.  In August 2007, we furtheramended the agreement to expand Ajinomoto’s rights into additional productcategories and geographies that were not previously licensed by us.  Under the terms of the August amendment,Ajinomoto has agreed to pay us an upfront license fee.  Through December 31, 2009, we havereceived $17.5 million in upfront fees and research and development funding,one milestone payment of $500,000 and cost reimbursements of $480,000.  If all milestones are achieved, and includingthe $18.5 million in upfront fees, research and development funding, milestonepayments and cost reimbursements made through December 31, 2009, we may beentitled to up to $19.8 million in upfront fees, research and developmentfunding, milestone payments and cost reimbursements.  In addition to the upfront fees, research anddevelopment funding and milestone payment, we have received minimum periodicroyalty payments from Ajinomoto.  Theseminimum periodic royalty payments are non-refundable.  Under the terms of the contract, Ajinomotowill provide us a sales report and we will record any additional calculatedroyalties as royalties from product sales. There is no guarantee that we will receive any further milestonepayments or royalties under these collaborations.

 

***CampbellSoup Company***

*** ***

In March 2001, we entered into a collaborationagreement with Campbell, a global manufacturer and marketer of consumer foodproducts, to work for a three-year collaborative period to discover specifiedflavors and flavor enhancers in the packaged food, beverage and ingredientproduct fields of soups, including frozen soups. We later amended the agreementto add the product field of specified savory beverages in consideration foradditional research and development payments and potential milestone androyalty payments.  In February 2006,we extended the collaborative period until the earlier of March 2009 orsubmission for a GRAS determination, subject to earlier termination underspecified circumstances.  In March 2009,we extended the collaborative period again for an additional year until March 2010,with three annual options of one year each that could further extend thecollaboration.

 

Under the terms of the collaboration, Campbell hasagreed to pay to us certain research and development funding. We are alsoeligible to receive a milestone payment upon our achievement of a specificproduct development goal. Through December 31, 2009, we have received$11.2 million in research and development funding. If all milestones areachieved, and including the $11.2 million in research and development fundingpaid through December 31, 2009, we may be entitled to up to $12.2 millionin research and development funding and milestone payments. In addition, in theevent of commercialization, we are entitled to receive royalties on future netsales of products containing a discovered flavor or flavor enhancer from thedate of introduction of each product in each country until 17

 

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years thereafter or until the expiration of relevantpatents in such country, whichever is earlier. We cannot assure you thatCampbell will elect to extend the collaborative period beyond March 2010or that we will receive any future milestone payments or royalties under thiscollaboration.

 

***TheCoca-Cola Company***

*** ***

In April 2002, we entered into a collaborationagreement with Coca-Cola, the world’s largest beverage company, to work for athree-year collaborative period with Coca-Cola for the discovery anddevelopment of specified new flavors and flavor enhancers in the product fieldof soft drinks and other non-alcoholic beverages. In addition, we will workwith Coca-Cola on a co-exclusive basis for the discovery and development offlavor enhancers in a specified food, beverage and ingredient product field. InApril 2004, we amended the agreement to extend the collaborative perioduntil April 2008, and in April 2008, we amended the agreement tofurther extend the collaborative period until April 2010.

 

Under the agreement, Coca-Cola has agreed to paycertain research and development funding over the collaborative period. We arealso eligible to receive milestone payments upon our achievement of specificproduct discovery and development goals. Through December 31, 2009, wehave received $15.5 million in research and development funding and onemilestone payment of $500,000. If all milestones are achieved, and includingthe $16.0 million in research and development funding and milestone paymentpaid through December 31, 2009, we may be entitled to up to $18.8 million.In addition, in the event of commercialization, we are entitled to receiveroyalties on future sales of products containing a discovered flavor or flavorenhancer until the expiration of relevant patents. We cannot assure you that wewill agree with Coca-Cola to extend the collaborative period under thisagreement beyond April 2010 or that we will receive any future milestonepayments or royalties under this collaboration.

 

***Firmenich***

*** ***

***In December 2007, we entered into acollaboration agreement with Firmenich, a global leader in providing foodingredients and flavor systems to major consumer companies for use in theirbrands, to work for a three-year collaborative period to discover and developnovel compounds that may be used by Firmenich on an exclusive basis worldwideas ingredients that impart a cool taste in flavor systems.***

*** ***

***Under the agreement, Firmenich has agreedto pay research fees and specified payments upon the achievement ofmilestones.  Upon commercialization, wewill be entitled to royalties.  Through December 31,2009, we have received $2.0 million in research funding and $100,000 in costreimbursement.  If all milestones areachieved and including the $2.1 million in research funding and costreimbursement paid through December 31, 2009, we may be entitled to up to$4.0 million.  In addition, in the eventof regulatory approval of a discovered compound, we are entitled to minimumperiodic royalties and in the event of commercialization, we are entitled toreceive royalties on future sales of products containing a discovered flavor orflavor enhancer until the expiration of relevant patents. We cannot assure youthat we will agree with Firmenich to extend the collaborative period under thisagreement beyond December 2010 or that we will receive any futuremilestone payments or royalties under this collaboration.***

*** ***

In November 2008,we entered into a second collaboration agreement with Firmenich for S2383, ournovel enhancer of the high-intensity sweetener sucralose.  Under the agreement, Firmenich has agreed topay to us royalty payments based on sales of S2383 when it is sold on either astand-alone basis or within a flavor system. As of December 31, 2009, we have not received any payments underthis collaboration.

 

In July 2009,we entered into a third collaboration agreement with Firmenich to work for aminimum  two-year collaborative period todiscover novel flavor ingredients intended to provide a sweet enhancement tasteeffect of sucrose, fructose, or various forms of rebaudioside.  The agreement includes three consecutiveoptions of one year each that could further extend the collaborative research fundingperiod.  Under the agreement, Firmenichagreed to pay a license fee in three installments, research and developmentfees and specified payments upon the achievement of milestones.  Through December 31, 2009, we havereceived $12.9 million in upfront fees and research and developmentpayments.   In January 2010,Firmenich elected to proceed with commercial development of S6973.  In conjunction with the decision,

 

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we will receive the final license fee installmentpayment in the amount of $8 million from Firmenich during the first quarter of2010.  If all milestones are achieved andall extension options are exercised, and including the $12.9 million in upfrontfees and research and development funding paid through December 31, 2009,we may be entitled to up to $34.5 million. Upon commercialization, we will be entitled to royalties.

 

***NestléSA***

*** ***

In April 2002, we entered into an initialcollaboration agreement with Nestlé, the world’s largest food company, to workfor a three-year collaborative period to discover specified flavors and flavorenhancers in the food and beverage product fields of dehydrated and culinaryfood, frozen food and wet soup.  In April 2005,we amended the agreement to provide for a three-year extension of thecollaborative research phase.  In March 2006,we further amended the agreement to include commercialization of novel flavorsand flavor enhancers in the pet food category on a worldwide, co-exclusivebasis.  In addition to the expansion, theNestlé agreement has been amended to allow us to reacquire rights to certain ofour flavor ingredients in certain geographic regions. As a result of thisamendment, Nestlé now has rights to flavor ingredients in Europe, Asia, Israel,Oceania, Africa, the Middle East and Latin America in specified productcategories within the dehydrated and culinary food, frozen food, and/or wetsoup product categories, as well as worldwide rights for the pet food category,while we have reacquired certain rights in North America and other geographicregions in specified product categories. In April 2008, we further amended the agreement to extend thecollaborative period for an additional two years, through April 2010.  In September 2008, we further amendedthe agreement to provide for a specified escalating payment arrangement in lieuof a sales-based royalty for a limited period of time.

 

Under the terms of the collaboration agreement, Nestléhas agreed to pay to us certain research and development funding over eightyears, subject to earlier termination under specified circumstances. We arealso eligible to receive milestone payments upon our achievement by certain datesof specific product discovery and development goals. Through December 31,2009, we have received $13.9 million in research and development funding,reimbursement of certain regulatory expenses of $339,000 and four milestonepayments of $375,000 each. If all milestones are achieved, and including the$15.7 million in research and development funding, reimbursement of certainregulatory expenses and milestones paid through December 31, 2009, we maybe entitled to up to $17.5 million under the initial collaboration.  In addition, we have received royaltypayments and minimum periodic royalty payments from Nestlé.  The minimum periodic royalty payments arenon-refundable.  We cannot assure youthat we will agree with Nestlé to extend the collaborative period under thisagreement beyond April 2010 or that we will receive any further milestonepayments under this collaboration.

 

In October 2004, we entered into a second productdiscovery and development collaboration agreement with Nestlé to work for afive-year collaborative period focusing on the discovery and commercializationof specified novel flavor ingredients in the coffee and coffee whitenersfield.  Under the terms of the agreement,Nestlé has agreed to pay us certain research and development funding over fiveyears, subject to extension or earlier termination under specifiedcircumstances.  This collaborative periodhas been subsequently amended to agree that the discovery phase of theagreement concluded in January 2009 and the program advanced into thedevelopment phase with Nestlé paying funding through July 2010, one yearearlier than anticipated, subject to further extension or earlier terminationunder specified circumstances.  We arealso eligible to receive milestone payments upon achievement of specificproduct discovery and development goals. Through December 31, 2009, we have received $9.7 million inresearch and development funding, one milestone of $350,000 and one milestoneof $500,000.  If all milestones areachieved, and including the $10.6 million in research and development fundingand milestones paid through December 31, 2009, we may be entitled to up to$12.1 million under the second collaboration. In addition, in the event of commercialization, we are entitled toreceive royalties on future net sales of products containing a discoveredflavor ingredient from the date of introduction of each product in each countryuntil the expiration of relevant patents. We cannot assure you that we willreceive any milestone payments or royalties under this collaboration.

 

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***Solae,LLC***

*** ***

In April 2007, we entered into a collaborationagreement with Solae, the leading supplier of soy protein for food-basedproducts, for the discovery and exclusive worldwide commercialization of novelflavor ingredients for soy proteins. Under the terms of the agreement, Solae has agreed to pay us researchfees for up to three years, ending April 2010.  We are also eligible to receive milestonepayments upon achievement of specific product discovery and developmentgoals.  In September 2008, weamended the agreement to increase the level of research support for the period September 2008through February 2009.  In April 2009,we amended the agreement to increase the level of research support for theperiod April 2009 through September 2009.  Through December 31, 2009, we havereceived $3.6 million in research and development funding and one milestonepayment of $250,000. If all milestones are achieved, and including the $3.9million in research and development funding and milestone paid through December 31,2009, we may be entitled to up to $6.4 million under the collaboration agreement.In addition, in the event of commercialization, we are entitled to receiveroyalty payments based on sales of products containing flavor ingredientsdeveloped under the agreement.  We cannotassure you that we will agree with Solae to extend the collaborative periodunder which we would receive additional research funding under this agreementbeyond April 2010 or that we will receive any milestone payments orroyalties under this collaboration.

 

**Our Technology**

 

We have discovered or in-licensed many of the keyreceptors that mediate taste in mammals. Having isolated human taste receptors,we have created proprietary taste receptor-based assay systems that provide abiochemical or electronic readout when a test compound affects the receptor. Toenable faster compound discovery, we integrated our proprietary tastereceptor-based screening assays into a robot-controlled automated system thatuses plates containing an array of individual wells, each of which can screen adifferent compound. Our receptor-based discovery and development process hasenabled us to improve our ability to find novel flavor ingredients over thetraditional use of simple taste tests.

 

***Receptor Discovery and AssayDevelopment Technology***

 

There are currently five recognized primary senses oftaste: umami (which is the savory taste of glutamate), sweet, salt, bitter andsour. In addition, there are secondary taste sensations such as cool, hot andfat.  Scientists generally believe thateach of these taste sensations is recognized by a distinct taste receptor orfamily of taste receptors in the mouth or on the tongue. A taste receptorfunctions either by physically binding to a flavor ingredient in a processanalogous to the way a key fits into a lock or by acting as a channel to allow ionsto flow directly into a taste cell. The brain recognizes tastes by determiningwhich of the numerous receptors in the mouth have been contacted by a givenflavor ingredient. Savory, sweet and bitter taste ingredients bind to tastereceptors specific to each taste on the surface of taste bud cells. Incontrast, the taste of salt and the sour taste are thought to be recognized bytaste channels that allow the passage of particular ions into the taste budcells.  The tastes of cooling and heatingare mediated by receptors found in certain nerves.

 

The current status in the development of proprietarytaste receptor-based assay systems for human taste receptors is as follows:

 

·                  *Savory Receptor. *Glutamate is a natural component of foods, includingtomatoes, mushrooms, parmesan cheese, and meats. It is often added to foods inthe form of MSG to provide a savory flavor. The human savory receptor iscomposed of two proteins called hT1R1 and hT1R3. The T1R proteins are membersof the G protein-coupled receptor, or GPCR, family and are expressed on thesurface of certain taste bud cells. We created SavoryScreenHT, a proprietaryhigh-throughput savory taste receptor-based assay system and demonstrated thatit responded to MSG and inosine monophosphate, or IMP. Using this technology,we identified a number of savory enhancers, including S807, S336, S263 andS976, which were determined to be GRAS in March 2005.

 

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·                  *Sweet Receptor. *The human sweet receptor is composed of two proteinscalled hT1R2 and hT1R3. The hT1R3 protein is shared in common with the savoryreceptor. Like the savory receptor, the sweet receptor is also a member of theGPCR family and is expressed on the surface of certain taste bud cells. Wecreated SweetScreenHT, a proprietary high-throughput sweet taste receptor-basedassay system, and demonstrated that it responded to many differentsweet-tasting compounds including carbohydrate sweeteners and artificialsweeteners.  We have screened over300,000 compounds in SweetScreenHT and identified novel compounds that enhancethe sweet taste of sucralose and sucrose. Our sucralose enhancer, S2383, wasdetermined to be GRAS in November 2008. Our sucrose enhancer, S6973, wasdetermined to be GRAS in October 2009.

 

**·**                  *Bitter Receptors*. There are 25 bitter receptors in humans.  These are also members of the GPCR proteinfamily.  Work from model systems showedthat the 25 bitter receptors are likely present together in the same tastecell.  The bitter receptors are believedto have evolved as a defense mechanism to warn of and prevent the ingestion ofpoisonous substances.  It is thought thateach bitter receptor recognizes a different set of bitter-tastingcompounds.  We believe that 22 of thesereceptors are the primary means by which we sense bitter tastes.  Using our receptor-based assays andoptimization processes, we have identified blockers for 18 different bitterreceptors and we are currently screening to find blockers for the remainingreceptors.  We are using this approach inour efforts to reduce the bitterness of products marketed by our twocollaborators for the bitter blocker program. In the first collaboration, during 2008 we identified S6821 and otherbitter blockers that met the criteria for reducing the bitterness of severalvariations of one collaborator’s product, as well as additional productprototypes.  During 2009, we completedinitial safety studies for S6821, and, based on the successful results of theinitial safety analyses, S6821 has been advanced into final safety studies.  Our second collaboration, which is with Solae,involves the discovery and development of new bitter blockers that modulate andcontrol bitterness in certain soy-based products.  During 2009, we achieved a tasteproof-of-concept with promising blockers that reduced soy bitterness in tastetests.

** **

·                  *Salt Receptor.* The primary receptor or receptors responsible for salttaste perception in humans have not been definitively identified in thescientific literature. During 2007, we identified and evaluated approximately15,000 proteins found in taste buds and established detailed criteria todetermine which of these functions as a receptor that responds to sodiumchloride (table salt).  During 2008, we reported the discovery of SNMX-29,a protein we believe is involved with human salt taste perception.  During2008, we developed new screening assays based on SNMX-29, and initiatedscreening of our libraries.  During 2008and 2009, we identified over 250 enhancers of both sodium chloride andpotassium chloride that are active in the assays.  Enhancers that were active in the assays arebeing evaluated.  In addition to theseactivities, we are using various chemistry and biology approaches to explorethe role that SNMX-29 and other proteins may play in the perception of saltytaste, with the objective of identifying a taste proof-of-concept enhancer.

 

·                  *Cool Receptor. *The protein TRPM8 is an ionchannel that is activated by both cool temperature and cooling agents such asmenthol and WS-3. We developed the CoolScreenHT assay, a high-throughputscreening assay using the human TRPM8 protein, and we validated the assay usinga set of known cooling agents.  During2009, we identified ingredients from six different chemical classes that havedemonstrated a taste proof-of-concept.  Weare currently conducting preliminary taste tests on a subset of these ingredientsfor the purpose of identifying lead candidates for further optimization.

 

***Screening Technologies and Compound Libraries***

 

We have developed or acquired access to expansivelibraries of potential flavor ingredients currently comprised of approximately500,000 natural samples and synthetic compounds. We intend to continue toacquire or develop additional compounds and natural samples to add to ourlibraries.  We have designed and selectedour libraries to comprise compounds that we believe are likely to lead to safeand economical for use in packaged food and beverage products. We are using ourBitterScreenHT, CoolScreenHT and

 

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SweetScreenHT assay systems to screen the compounds inour libraries for their effects on specific taste receptors. These systems usemany of the same technologies that pharmaceutical companies use to discovermedicines. Our assay systems are much more sensitive than the human tongue, andcan therefore be used to discover novel flavor ingredients that could not beidentified using taste tests.  We alsouse these systems to assist us in optimizing our lead compounds by rapidly anditeratively testing the potency of the flavor ingredients generated in theoptimization process as the lead compound progresses to become a productcandidate.

 

**Regulatory Process**

 

Flavoring substances, including flavor ingredientsintended for use in foods and beverages in the United States, are regulatedunder provisions of the FD&C Act administered by the FDA. Flavoringredients sold in countries and regions outside of the United States are alsosubject to regulations imposed by national governments or regional regulatoryauthorities, as is the case in the European Union.  These regulations are subject to frequentrevisions and interpretation.

 

***Regulationof Flavor Ingredients in the United States***

*** ***

In the United States, flavor ingredients are regulatedby the FDA as approved food additives, or as GRAS ingredients under theFD&C Act. The Food Additive Amendments of 1958 prompted the flavor industryto establish in 1960 the FEMA Expert Panel. FEMA has administered the GRAS program for flavors on behalf of theindustry for over 50 years.  Severalcountries outside of the United States, including Canada, Brazil, Argentina andthe Philippines, allow flavor use in food based on FEMA GRAS recognition.  Several other countries either add new FEMAGRAS compounds to their positive lists of approved flavoring agents or add thenew FEMA GRAS lists to their flavor regulations by specific reference.  Other possible routes to approval of aflavor-modifying compound are a GRAS self-determination (independent of FEMA)with or without FDA notification, or a food additive petition to the FDA. Ourgoal is that the flavor ingredients we may discover will be subject to one ofthe regulatory review processes described below.

 

***GRAS ReviewProcess.***    Flavor ingredients that qualify for the GRASreview process are generally intended to be consumed in small quantities andhave data supporting their safety under conditions of intended use. An ExpertPanel, convened to undertake a GRAS review, determines whether an ingredient isgenerally recognized as safe under the conditions of its intended use. Theseexperts are qualified by scientific training and experience to evaluate thesafety of certain new ingredients used in food and may declare them as havingbeen adequately shown through scientific procedures to be generally recognizedas safe under the conditions of their intended use. Under the GRAS process,manufacturers are required to obtain safety data from the scientific literatureor through the conduct of safety studies, determine the estimated daily intakeof the flavor ingredient per person and submit a report to the GRAS reviewpanel describing the physical, chemical, safety, and metabolic properties ofthe flavor ingredient. The entire GRAS determination process, including thesafety and metabolic studies, application preparation and GRAS panel review,can take up to two years or longer. However, if there are prior safety data onthe ingredient or an ingredient with a related structure, then fewer safetystudies may be required for the GRAS review and the GRAS review process can beconsiderably shorter than two years.

 

The most common types of GRAS review are:

 

·                  *FEMA Expert Panel. *The FEMA Expert Panel is an independent panel ofexperts for which FEMA provides administrative assistance.  The FEMA Expert Panel, which may be used byFEMA members and certain other parties, meets up to three times per year. Theconclusions of the Expert Panel regarding a flavor or flavor enhancer areprovided directly to the FDA and published in the journal Food Technology. Toour knowledge, the FDA has not challenged the FEMA Expert Panel’s conclusionthat the use of a flavoring substance is GRAS. Six of our enhancers have beendetermined to be GRAS by the FEMA Expert Panel.

 

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·                  *Specifically ConvenedIndependent Panel. *An independent, qualified panel ofexperts in pertinent scientific disciplines may be formed by the manufacturerto evaluate the safety of a specific compound for GRAS status. This process isknown as a “self determination of GRAS status.” The basis for the GRAS self determination is not required to besubmitted to the FDA.  However, the FDAmay request information on ingredients that have been self determined to beGRAS, or the information may be provided voluntarily.

 

***Food Additive Petition Process.***   Food ingredients for which the GRAS process is not available may beevaluated as food additives. Food additives require FDA approval prior to usein foods. An ingredient may be ineligible for GRAS determination, and may beconsidered a food additive, because there is insufficient general knowledge orfor a variety of other reasons, including conditions of intended use resultingin high dietary exposure or the ingredient’s safety profile. If the ingredientis considered a food additive, a food additive petition must be filed andapproved by the FDA. Food additive petitions contain information on thechemical nature of the ingredient, the manufacturing process, information onuse in food, estimates of human exposure from use of the compound in food andall known information related to the safety of the ingredient.  The FDAreviews the petition content, requests additional information if necessary,publishes a proposed rule for use in food, reviews comments on theproposed rule and publishes a final rule, if the use is determined to beacceptable.  The safety data requirementsfor food additives are the same as for GRAS substances.  We estimate that a food additive petitioncould cost up to $7 million and may take up to four years to complete.  Furthermore, additional studies adding cost andtime to approval may be required depending on the results of the initial safetystudies.  Examples of ingredients thathave gone through a food additive petition process include the artificialsweeteners aspartame, acesulfame K and sucralose. It may be necessary for anyhigh potency sweeteners that we discover or develop to follow this regulatoryroute.

 

***Regulation of Flavor Ingredients outside of the UnitedStates.***    Outside of the United States, flavorapprovals vary by country.  There is,however, some commonality in approach in many countries.  As explained above, several countries eitheraccept FEMA GRAS recognition as the basis for approval or GRAS recognitionfacilitates country approval.  Manycountries, particularly developing countries in Latin America and Africa,accept favorable review by the WHO/FAO Joint Expert Committee on FoodAdditives, or JECFA, as the basis for approval or to facilitate approval.  FEMA automatically submits new GRASingredients to the Codex Alimentarius through the FDA for JECFA review.   Most other countries have their own uniqueapproval processes.  The European Union,or EU, has established EU-wide regulations for flavor ingredient use based onsafety evaluations by the European Food Safety Authority, or EFSA, and riskmanagement (i.e. regulation development) by the Directorate General for Health.  A number of countries in eastern Europe or inAfrica accept EU approval as the basis for approved use.  China, Japan and Russia also have independentregulatory review processes for flavors.

 

**License Arrangements**

 

We have licensed rights from several companies andacademic institutions, including the following:

 

***University ofCalifornia***

 

In March 2000, weentered into a license agreement with the University of California under whichwe obtained exclusive rights to certain technologies held by the University ofCalifornia that are involved in the biology of taste, including specifiedreceptors in two taste receptor families, T1Rs and T2Rs. The license may beconverted to a non-exclusive license, or terminated, by the University ofCalifornia if we fail to meet specified milestones relating to the discovery ofspecified products and the sale of specified products and services. Ourexclusive rights are also subject to rights granted by the University ofCaliforniato theUnited States Government and a private medical foundation. In October 2006,we entered into an amended and restated agreement with the University ofCalifornia to include certain additional related technologies.  In November 2009 we further amended thisagreement to add additional technologies that were previously the subject of anexclusive letter of intent.  Theagreement, as originally drafted and as amended and restated, required alicense issue fee, payable in installments through 2005, and calls for annualmaintenance fees commencing in 2006 or royalties or service revenues on salesof any products developed using technologies licensed under the agreement.Royalties will accrue in each country for as long as there exists a validpatent claim covering a product developed under the agreement.  The agreement

 

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will remain in effect until the expiration of the lastto expire patent licensed under the agreement. We may terminate the agreementat any time, without cause, upon notice to the University of California. TheUniversity of California may terminate the agreement upon a breach of ourobligations under the agreement.

 

**Competition**

 

Our goal is to be the leader in discovering novelflavor ingredients for use in a wide range of packaged food, beverage andingredient products. Other companies are possibly pursuing similar technologiesand the commercialization of products and services relevant to flavoringredients. Although we are not aware of any other companies that have thescope of proprietary technologies and processes that we have developed in ourfield, there are a number of competitors who possess capabilities relevant tothe flavor ingredient field.

 

In particular, we face substantial competition fromcompanies pursuing the commercialization of products and services relevant totaste using more traditional methods for the discovery of flavor ingredients,or for the reduction of salt, sugar, MSG or bitter taste. These competitorsinclude leading flavor companies, such as Firmenich, Givaudan SA, InternationalFlavors & Fragrances Inc., Symrise and Takasago. These companiesprovide flavors and other products, such as oils, extracts and distillates, toconsumer products companies for use in a wide variety of products includingfoods, beverages, confectionaries, dairy products and pharmaceuticals.  Competitors currently developing or marketingmenthol or cooling agents include Jindal Drugs, Mentha & Allied, SharpMenthol, Symrise, Takasago and Millenium Specialty Chemicals.  Wecurrently compete and will continue to compete in the future with thesecompanies in collaborating with and selling flavor products and technologies tomanufacturers of packaged food, beverage and ingredient products. Many of thesecompanies have substantially greater capital resources, research anddevelopment resources and experience, manufacturing capabilities, regulatoryexpertise, sales and marketing resources, established relationships withconsumer products companies and production facilities.

 

We may in the future face competition from lifesciences and other technology companies and other commercial enterprises. Theseentities engage as we do in biotechnology, biology or chemistry and could applythis technology to the discovery and development of flavor ingredients. We areaware of one other company, Redpoint Bio, that is involved in research onsweetness potentiators.  Products developedas a result of our competitors’ existing or future collaborations may competewith our flavor ingredients.

 

Universities and public and private researchinstitutions are also potential competitors. While these organizationsprimarily have educational objectives, they may develop proprietarytechnologies related to the sense of taste or secure patent protection that wemay need for the development of our technologies and products. We may attemptto license these proprietary technologies, but these licenses may not beavailable to us on acceptable terms, if at all.

 

Methods for reducing sodium include the use ofpotassium chloride in combination with flavors and masking agents.  Although savory flavor enhancers, such asIMP, are commercially available, they are not very potent, are not patentprotected and are sold as a commodity. The blocking of bitter taste istypically accomplished by attempting to mask the bitter taste with a sweeteneror another flavor ingredient.  AlthoughAMP has received GRAS determination, we do not believe this compound has beenwidely adopted into packaged food, beverage and ingredient products.  Existing cooling agents, such as menthol andWS-3, are currently in use.   However,our competitors, either alone or with their collaborative partners, may succeedin developing technologies or discovering flavor ingredients that are similaror preferable in the areas of, among others, effectiveness, safety, cost andease of commercialization, and our competitors may obtain intellectual propertyprotection or commercialize such products sooner than we do. Developments byothers may render our product candidates or our technologies obsolete. Inaddition, our current product discovery and development collaborators are notprohibited from entering into research and development agreements with thirdparties in any particular field.

 

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**Patents and Proprietary Rights**

 

We will be able to protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietary rightsare described by valid and enforceable patents or are effectively maintained astrade secrets. Accordingly, we are pursuing and will continue to pursue patentprotection for our proprietary technologies. As of December 31, 2009 weare the owner or the exclusive licensee of 93 issued United States patents, 107pending United States patent applications, 85 issued foreign patents and 215pending foreign applications covering various aspects of our proprietarytechnology. Our issued patents have terms that expire in 2014 through 2027.

 

Our policy is to file patent applications and toprotect technologies, inventions and improvements to inventions that arecommercially important to the development of our business. For example, we mayseek patent protection for receptors and nucleic acid sequences encodingreceptors that are involved in taste and the use of such receptors to identifyingredients that modulate taste. We also rely on trademarks to protect ourproprietary technology. Generally, United States patents have a term of 17years from the date of issue or 20 years from the earliest claimed prioritydate, whichever is later, for patents issued from applications filed with theUnited States Patent and Trademark Office prior to June 8, 1995 or 20years from the application filing date or earlier claimed priority date in thecase of patents issued from applications filed on or after June 8, 1995.Patents in most other countries have a term of 20 years from the date of filingthe patent application. Our success depends significantly upon our ability todevelop ingredients and technologies that are protected by our intellectualproperty and that do not infringe any competitor patents. We intend to continueto file patent applications as we discover and develop new flavor ingredientsand technologies.

 

Seeking and obtaining patents may provide some degreeof protection for our intellectual property. However, our patent positions arehighly uncertain and may involve complex legal and factual questions. Noconsistent standard regarding the allowability and enforceability of claims inmany of the pending patent applications has emerged to date. As a result, wecannot predict the breadth of claims that will ultimately be allowed in ourpatent applications, if any, including those we in-licensed or how we may beable to enforce our patent claims against our competitors. In addition, we maynot have been the first to file patent applications for or to invent inventionsrelating to the technologies upon which we rely, which would preclude us fromobtaining issued patents on the relevant inventions. We are aware of othercompanies and academic institutions which have been performing research andhave applied for patents in the area of mammalian taste. In particular, other companiesand academic institutions and inventor applicants  have announced that they have identifiedtaste receptors, published data on taste receptor sequence information or havefiled patent applications on receptors and their use, including Ajinomoto, theCalifornia Institute of Technology, Dendreon, Duke University, the GermanInstitute of Human Nutrition, Givaudan SA, Monell Chemical Senses, Mount SinaiSchool of Medicine, Novartis, Pfizer, Redpoint Bio, The Scripps ResearchInstitute, Sloan Kettering, the University of California, Virginia CommonwealthUniversity and Wiessenbach. If any of these companies or academic institutionsor inventor applicants are successful in obtaining broad patent claims, suchpatents could potentially block our ability to use various aspects of ourdiscovery and development process and might prevent us from developing orcommercializing newly discovered flavor ingredients or otherwise conducting ourbusiness.

 

We also rely in part on trade secret protection forour confidential and proprietary information and process. Our policy is toexecute confidentiality agreements with our employees and consultants upon thecommencement of an employment or consulting relationship. These agreementsgenerally require that all confidential information developed by the individualor made known to the individual by us during the course of their employmentshall be our exclusive property. However, there can be no assurance that wewill be able to effectively enforce these agreements or that the subjectproprietary information will not be disclosed.

 

We are not a party to any litigation, opposition,interference, or other potentially adverse ex parte or inter-party governmentalor non-governmental proceeding with regard to our patent and trademarkpositions. However, if we become involved in litigation, interferenceproceedings, oppositions or other intellectual property proceedings, forexample as a result of an alleged infringement, or a third-party 

 

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alleging an earlier date of invention, we may have tospend significant amounts of money and time and, in the event of an adverseruling, we could be subject to liability for damages, invalidation of ourintellectual property and injunctive relief that could prevent us from usingtechnologies or developing products, any of which could have a significantadverse effect on our business financial condition and results of operation. Inaddition, any claims relating to the infringement of third-party proprietaryrights, or earlier date of invention, even if not meritorious, could result incostly litigation, lengthy governmental proceedings, divert management’sattention and resources and require us to enter royalty or license agreementswhich are not advantageous if available at all.

 

**Salesand Marketing**

 

While we do not currently intend to establish internalsales and marketing capabilities, we are developing the capability to enable usto work closely with our collaborators and their suppliers in the incorporationof our flavor ingredients into their products. Under our current collaboration agreements, our collaborators areresponsible for sales, marketing, and distribution of any packaged food orbeverage product incorporating our flavor ingredients. As a result, we expectto commercialize our flavor ingredients without incurring significant sales,marketing and distribution costs. Our current collaborators, Ajinomoto,Campbell, Coca-Cola, Firmenich, Nestlé and Solae, are recognized leaders in thesales, marketing and distribution of packaged food, beverage and ingredientproducts.

 

**Manufacturing**

 

We intend to utilize third parties to manufacture ourflavor ingredients. Under the majority of our existing product discovery anddevelopment collaborations, our collaborator may, in its sole discretion,manufacture itself or through a third party manufacturer the flavor ingredientsit licenses from us. The remaining collaborations require the collaborator toidentify with us a mutually agreed upon third party to manufacture the flavoringredients it licenses from us.  In someof these agreements, we maintain either the first right of negotiation or anoption to manufacture based on provisions within the agreement.

 

There are a number of reliable third party contractmanufacturers available to produce our flavor ingredients.  We do not anticipate any capacity issuesbecause of our low volume requirements and the number of reliable and availablemanufacturers.

 

**Employees**

 

As of December 31, 2009, we had 108 full-timeemployees, including 28 with Ph.D. degrees. Of our full-time workforce, 79employees are engaged in research and development and 29 are engaged in businessdevelopment, finance and administration. We also retain outside consultants.None of our employees are covered by collective bargaining arrangements, andour management considers its relationships with our employees to be good.

 

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**Item1A.  Risk Factors**

 

*You should consider carefully thefollowing information about the risks described below, together with the otherinformation contained in this annual report on Form 10-K and in our otherpublic filings, in evaluating our business. If any of the following risksactually occurs, our business, financial condition, results of operations andfuture growth prospects would likely be materially and adverselyaffected.  In these circumstances, the market price of our common stockwould likely decline.*

 

**Risks Related To Our Business**

 

***We are dependent on our product discovery and developmentcollaborators for all of our revenue and we are dependent on our current andany future product discovery and development collaborators to develop andcommercialize any flavor ingredients we may discover.***

 

A keyelement of our strategy is to commercialize our flavor ingredients through productdiscovery and development collaborations. To date, substantially all of ourrevenue has been derived solely from research and development payments, licensefees, milestone payments and cost reimbursement payments received under ourcollaborations. Substantially all of our revenue in the foreseeable future willresult from these types of payments from these collaborations until such time,if ever, that we earn material royalties on future sales of consumer productsincorporating our flavor ingredients.

 

Ouragreement, as amended, with Campbell provides for research and developmentfunding until March 2010 and gives Campbell the right to terminate theagreement earlier without cause, provided that it pay a specified terminationfee if it terminates the agreement prior to March 28, 2010. Our agreementwith Coca-Cola provides for research and development funding until April 2010and gives Coca-Cola the right to conclude the collaborative program earlier forany reason upon payment to us of an early conclusion fee.  Our initial agreement with Nestlé (as amendedin April 2005 and April 2008) provides for research and developmentfunding through April 2010.  Ourmost recent agreement, as amended, with Nestlé regarding the discovery andcommercialization of novel flavor ingredients in the coffee and coffee whitenerfields provides for research and development funding through July 2010 andgives Nestlé the right to terminate the agreement earlier without cause,provided that under certain circumstances it pay additional specified researchfunding if it terminates the agreement prior to July 26, 2010.  Ouragreement with Ajinomoto provides for research and development funding through March 2010and we do not anticipate that the research and development funding will beextended.  However, the royalty andmilestone obligations specified in the agreement will continue beyond March 2010.  Our agreement with Solae provides forresearch and development funding through April 2010, and gives Solae theright to terminate the agreement without cause upon 90 days’ prior noticeprovided it pay additional specified research funding if it terminates theagreement prior to April 23, 2010. Our initial agreement with Firmenich permits Firmenich to terminate theagreement without cause upon 90 days written notice on any anniversary of theeffective date of the agreement provided that it pay additional specifiedresearch funding if it terminates prior to December 14, 2010.    Our second agreement with Firmenich permitsFirmenich to terminate the agreement without cause upon 90 days written noticeon any anniversary of the effective date. Our most recent agreement with Firmenich permits Firmenich to terminatethe agreement without cause on or after July 28, 2011 upon 90 days writtennotice.  If any or all of our materialagreements with our collaborators expire or are terminated, our revenue couldsignificantly decline and if all of our agreements expire or are terminated,our revenue would be substantially eliminated, which would have a materialadverse effect on our business, financial condition and results of operations.Our collaborators may amend or not renew their agreements with us or, if theydo, they may not be on terms that are as favorable to us as our currentagreements.  For example, our discoveryand development collaboration with Cadbury concluded on January 14, 2010,and our second agreement with Nestlé was amended to reduce the remainingcollaborative period by one year and to reduce Nestlé’s funding obligationsover the remaining collaborative period to reflect a commensurate reduction inour internal research and development resources dedicated to the Nestlécollaboration.

 

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Ourcurrent collaboration agreements provide that we will receive royalties of upto 4% on our collaborators’ sales of retail and food service products, and insome cases higher on our collaborators’ sales of ingredient supplies containingour flavor ingredients.  The actualroyalties payable vary by agreement and depend on a number of factorsincluding, for example, the product field, cost of goods savings, degree offlavor enhancement and sales volume of collaborator products incorporating ourflavor ingredients.  It is possible thatour collaborators will not incorporate our flavor ingredients into any or allof their products within their exclusive or co-exclusive product fields on atimely basis or at all.

 

We aredependent on our current and any other possible future collaborators tocommercialize any flavor ingredients that we successfully develop and toprovide the sales, marketing and distribution capabilities required for thesuccess of our business. We have limited or no control over the amount andtiming of resources that our current or any future collaborators may devote toour programs or potential products. Our collaborators may decide not to devotethe necessary resources to the commercialization of our flavor ingredients, ormay pursue a competitor’s product if our flavor ingredients do not have thecharacteristics desired by the collaborator. These characteristics include,among other things, enhancement properties, stability under various manufacturingand use conditions, solubility, taste, cost and an adequate safety profile. Ifthese collaborators fail to conduct their commercialization, sales andmarketing or distribution activities successfully and in a timely manner, wewill earn little or no royalty revenues from our flavor ingredients and we willnot be able to achieve our objectives or build a sustainable or profitablebusiness.

 

Ourpresent and any future product discovery and development collaborationopportunities could be harmed if:

 

·                  our existing or any future collaborators terminate their collaborationagreements with us prior to the expiration of the agreements;

·                  we do not achieve our research and development objectives under ourcollaboration agreements prior to the termination of the collaboration periods;

·                  we disagree with our collaborators as to the parties’ respectivelicensing rights to our flavor ingredients, methods or other intellectualproperty we develop;

·                  we are unable to manage multiple simultaneous collaborations;

·                  collaborators are not willing to pay us meaningful royalties for salesof products incorporating our flavor ingredients;

·                  potential collaborators fail to spend their resources on research anddevelopment or commercialization of our flavor ingredients due to generalmarket conditions or for any other reason; or

·                  consolidation in our target markets limits the number of potentialcollaborators.

 

***Our business and operating results may be adversely affectedby unfavorable economic and market conditions.***

 

Ourbusiness depends on our ability to maintain and enter into new collaborativeresearch, development and commercialization agreements with leading food,beverage and ingredient companies. Our arrangements typically require ourcollaborators to make a significant commitment of capital and other resources.In most instances these investments are discretionary on the part of ourcollaborators. The recent deterioration of economic conditions may reduce theamount of discretionary investment that our current and prospectivecollaborators may be willing to make in our programs. In some instances theresult may be that companies elect to defer or delay entering into acollaborative agreement with us, or existing collaborators may amend, terminateor not renew an existing program when it expires. Therefore, weak economicconditions, or a reduction in research and development funding, even ifeconomic conditions improve, would likely adversely impact our business,operating results and financial condition in a number of ways, including longerbusiness development cycles, unfavorable financial or other commercial terms,and longer development timelines.

 

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***We may not be able to negotiate additional collaborationagreements having terms satisfactory to us or at all.***

 

We maynot be able to enter into additional product discovery and developmentcollaborations due to the exclusive nature of our current product discovery anddevelopment collaborations. Each of our current collaboration agreementsprovides that we will conduct research and development on flavor ingredientsfor use within one or more defined food, beverage and ingredient product fieldson an exclusive or co-exclusive basis for the respective collaborator duringthe collaborative period specified in the agreement. In the case of exclusiveagreements, or co-exclusive agreements where all fields and geographies aregranted, we will not be able to enter into additional collaborations with anyother food, beverage and ingredient company covering the same product fieldduring the applicable collaborative period. In addition, our collaborators’competitors may not wish to do business with us at all due to our relationshipwith our collaborators. In addition, if we do not achieve our research anddevelopment objectives under our existing collaboration agreements prior to theexpiration of the collaborative period, our collaborators may elect not torenew these agreements on terms that are acceptable to us.  If we are unable to enter into additionalproduct discovery and development collaborations on satisfactory terms, ourability to sustain or expand our business will be significantly diminished.

 

***We may not be successful in developing flavor ingredientsuseful for formulation into products.***

 

Inorder to develop flavor ingredients, we must have first identified the correcthuman taste receptor for the taste of interest and develop high-throughputassays to test for compounds that affect the taste of interest. If we are notable to identify the correct human taste receptor for the taste of interest,our assays may not successfully identify compounds that affect the taste ofinterest. For example, in the event that SNMX-29 is not a human salt-tastereceptor and if our ongoing research to explore the role other proteins mayplay in the perception of salt taste does not identify an alternative humansalt taste receptor target, we may not be able to develop an effective salttaste enhancer.   In addition, we may not be successful in the developmentof a high-throughput assay to each human taste receptor of interest to us.Even if we succeed in the identification of a human taste receptor of interestto us and develop an appropriate high-throughput assay, we may not succeed indeveloping flavor ingredients with the appropriate attributes required for usein successful commercial products. Successful flavor ingredients require, amongother things, appropriate biological activity, including the correct tasteproperty for the product application, an acceptable safety profile, includinglack of toxicity or allergenicity, and appropriate physical or chemicalproperties, including relative levels of solubility, stability, volatility andresistance to heat. Our development programs are intended to evaluate thesecharacteristics of novel flavor ingredients. Therefore, until we complete ourdevelopment of a given novel flavor ingredient we will not be able to determinewhether that flavor ingredient will possess all of the appropriate attributesnecessary for commercialization. Successful flavor ingredients must also becost-efficient for our collaborators, which includes, among other things, thecost to manufacture a flavor ingredient at commercial scale as well as othercosts associated with the reformulation of products that include our flavoringredients. We have only limited experience in evaluating these costs and wemay not be able to accurately predict whether our flavor ingredients will becost-efficient for our current collaborators or potential future collaborators.We may not be able to develop flavor ingredients that meet all of thesecriteria and possess the appropriate attributes necessary for commercialization.  It is possible that flavor ingredients thatinitially appear to meet these criteria are later found to fail these criteriaor other criteria that we later deem important. In that case, we may not commercialize such an ingredient when anticipated,or at all, or the potential commercial utility for such an ingredient may bemore limited than we expected.

 

***If we or our collaborators are unable to obtain and maintainthe************GRAS determination or other regulatoryapproval required before certain of our flavor ingredients can be incorporatedinto products that are sold, we would be unable to commercialize our flavoringredients and our business would be adversely affected.***

 

In March 2005,we obtained a FEMA GRASdetermination for four of our savory flavor ingredients.  In November 2008, we obtained a FEMAGRAS determination for one of our sucralose-enhancing flavor ingredients.  In October 2009, we obtained a FEMA GRASdetermination for our lead sucrose-enhancing 

 

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flavor ingredient. Apart from these flavor ingredients, we do not have GRAS determinationor other regulatory approval for any other flavor ingredient at this time. Inthe United States, the development, sale and incorporation of our flavoringredients into products are subject to regulation by the Food and DrugAdministration, or FDA, and in some instances other government bodies.Obtaining and maintaining a GRAS determination or other regulatory approval canbe costly and take many years.

 

Dependingon the amount or intended use of a particular flavor ingredient added to aproduct and the number of product categories in which the flavor ingredient willbe incorporated, specific safety assessment protocols and regulatory processesmust be satisfied before we or our collaborators can commercially market andsell products containing any flavor ingredients that we may discover. A keyelement of our strategy is to develop flavor ingredients that may be subject toreview under the FEMA GRAS process.  Inour experiences with the savory, sucralose and sucrose programs, safetystudies, preparation and FEMA GRAS review has ranged from 12 to 16 months andcost less than $1 million.  Thisexperience may not be representative of the timing and cost for current andfuture programs.  This approach is lessexpensive than the alternative of filing a food additive petition with the FDA,approval of which can take up to four years. The FEMA GRAS process may takelonger than 12 to 16 months and cost more than $1 million depending on theproperties of the flavor ingredient, and if we elect to perform additionalsafety studies or if additional safety studies are requested by the FEMA ExpertPanel or one of our collaborators or are necessary to explain unexpected safetystudy findings. There is a risk that one or more of our product candidates forwhich we seek FEMA GRAS determination may not qualify for a FEMA GRAS determinationfor specific categories or at all. This may occur for a variety of reasons,including the flavor ingredient’s intended use, the amount of the flavoringredient intended to be added to foods and beverages, the number of productcategories in which the flavor ingredient will be incorporated, whether theflavor ingredient imparts sweetness, the safety profile of the flavoringredient and the FEMA Expert Panel’s interpretation of the safety data. Evenif we obtain a GRAS determination with respect to a flavor ingredient, the FDAhas the ability to challenge such determination or one or more of ourcollaborators may insist on additional studies, which could materiallyadversely affect our ability to market products on schedule or at all. In theevent that a particular flavor ingredient does not qualify for FEMA GRASdetermination or if one or more of our collaborators requires additionalstudies, we could be required to pursue a lengthy FDA approval process ordedicate our development efforts to alternative ingredients, which wouldfurther delay commercialization. In addition, laws, regulations or FDA practicegoverning the regulatory approval process, the availability of the GRASdetermination process or the manufacture or labeling of such products, may changein a manner that could adversely affect our ability to commercialize productson schedule or at all.

 

Salesof our flavor ingredients outside of the United States will be subject toforeign regulatory requirements, which are subject to change and inherentuncertainty. In most cases, whether or not a GRAS determination has beenobtained, approval of a product by the comparable regulatory authorities offoreign countries must still be obtained prior to manufacturing or marketingthe product in those countries. A GRAS determination in the United States or inany other jurisdiction does not ensure approval in other jurisdictions becausethe requirements from jurisdiction to jurisdiction may vary widely and maychange over time. Because of the inherent uncertainty associated with theregulatory approval process outside the United States, predicting the outcomeor timing of review of any of our submissions to foreign regulatoryauthorities, present or in the future, is difficult.  Accordingly, our estimates and forecasts forthose submissions and potential approvals may not be accurate.  The process of obtaining foreign approvalscould result in significant delays, difficulties and costs for us and requireadditional safety studies and additional expenses. If we experience delays orif we fail to comply with these regulatory requirements or to obtain andmaintain required approvals, our ability to generate revenue will bediminished.

 

We andour collaborators may not be successful in overcoming these regulatory hurdles,which could result in product launch delays, unanticipated expenses,termination of collaborations and flavor ingredients not being approved forincorporation into consumer products. In addition, even after regulatoryapproval of our ingredients, we may become aware of new information thatsuggests our ingredients are unsuitable for consumer use, in which case ourregulatory approvals may be revoked or we may elect to voluntarily cease thecommercialization of those ingredients. These consequences would have a material adverse effect on our businessfinancial condition and results of operations.

 

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***Even if we or our collaborators receive regulatory approvaland incorporate our flavor ingredients into products, those products may neverbe commercially successful.***

 

Evenif we discover and develop flavor ingredients that obtain the necessary GRASdetermination or other regulatory approval, our success depends to asignificant degree upon the commercial success of food, beverage and ingredientproducts incorporating those flavor ingredients. If these products fail toachieve or subsequently maintain market acceptance or commercial viability, ourbusiness would be significantly harmed because our royalty revenue is dependentupon consumer sales of these products. In addition, we could be unable tomaintain our existing collaborations or attract new product discovery anddevelopment collaborators. Many factors may affect our collaborators’willingness to launch new or reformulated products incorporating our flavoringredients and the market acceptance and commercial success of any potentialproducts incorporating flavor ingredients, including:

 

·                  health concerns, whether actual or perceived, or unfavorable publicityregarding our flavor ingredients or those of our competitors;

·                  the timing of market entry as compared to competitive products;

·                  whether our collaborators devote sufficient financial and otherresources to promote our flavor ingredients;

·                  the pricing of products that contain our flavor ingredients relative toother competing products;

·                  the costs and market risks of reformulating existing products;

·                  the rate of adoption of products by our collaborators and othercompanies in the flavor industry; and

·                  any product labeling that may be required by the FDA or other UnitedStates or foreign regulatory agencies for products incorporating our flavoringredients.

 

***We have a history of operating losses and we may not achieveor maintain profitability.***

 

Wehave not been profitable and have generated substantial operating losses sincewe were incorporated in September 1998. We incurred net losses ofapproximately $26.2 million for the year ended December 31, 2009. Asof December 31, 2009, we had an accumulated deficit of approximately$202.2 million. We expect to incur additional losses for at least the next twoyears. The extent of our future losses will depend, in part, on the rate ofincrease in our operating expenses and the rate of growth, if any, in ourrevenue from our existing and any future product discovery and developmentcollaborations as well as from other sources that may become available to us inthe future and on the level of our expenses. To date, substantially all of ourrevenue has come from research and development funding, upfront fees, costreimbursement and milestone payments under our product discovery anddevelopment collaborations. In order for us to generate further royalty revenueand become profitable, we must successfully retain our existing productdiscovery and development collaborations and our collaborators must furthercommercialize products incorporating one or more of our flavor ingredients,from which we can derive additional royalty revenues. Our ability to generateroyalty revenue is uncertain and will depend upon our ability to meetparticular research, development and commercialization objectives.

 

***We expect that our results of operations will fluctuate fromperiod to period, and this fluctuation could cause our stock price to decline.***

 

Ouroperating results have fluctuated in the past and are likely to varysignificantly in the future based upon a number of factors, many of which wehave little or no control over. We operate in a highly dynamic industry andfuture results could be subject to significant fluctuations. These fluctuationscould cause us to fail to meet or exceed our published guidance or financialexpectations of securities analysts or investors, which could cause our stockprice to decline rapidly and significantly. Revenue and expenses in futureperiods may be greater or less than revenue and expenses in the immediatelypreceding period or in the comparable period of the prior year. Therefore, period-to-periodcomparisons of our operating results are not necessarily a good indication ofour future performance. Some of the factors that could cause our operatingresults to fluctuate include:

 

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·                  termination, expiration or amendment of any of our product discoveryand development collaboration agreements;

·                  our ability to discover and develop flavor ingredients or the abilityof our product discovery and development collaborators to incorporate them intofood, beverage and ingredient products;

·                  our receipt of milestone payments in any particular period;

·                  the ability and willingness of collaborators to commercialize productsincorporating our flavor ingredients on expected timelines, or at all;

·                  our ability to enter into new product discovery and developmentcollaborations and technology collaborations or to extend the terms of ourexisting collaboration agreements and our payment obligations, expected revenueand other terms of any other agreements of this type;

·                  our ability, or our collaborators’ ability, to successfully satisfy allpertinent regulatory requirements;

·                  the demand for our collaborators’ products containing our flavoringredients; and

·                  general and industry specific economic conditions, including thecurrent economic and credit crisis, which may affect our collaborators’research and development expenditures and commercialization efforts.

 

***We may seek additional capital to fund our operations.***

 

If weare unable to successfully commercialize our flavor ingredients, maintain ourexisting product discovery and development collaborations or enter into newcollaborations, we will likely need to obtain additional capital, reduce ourongoing expenses or change our strategy to continue our operations. Inaddition, our business and operations may change in a manner that would consumeavailable resources at a greater rate than anticipated, or we may decide thatfor other reasons it is in our best interests to seek additional capital. Insuch an event, we may need to raise substantial additional capital to, amongother things:

 

·                  fund research, discovery or developmentprograms;

·                  advance product candidates into andthrough the safety evaluation and regulatory approval process; and

·                  acquire rights to products or productcandidates, technologies or businesses.

 

If wepursue additional capital to continue our operations, we cannot assure you thatadditional financing will be available on terms acceptable to us, or atall.  If adequate funds are not availableor are not available on acceptable terms, our ability to fund our operations,take advantage of opportunities, identify and develop flavor ingredients, developtechnologies or otherwise respond to competitive pressures could besignificantly limited. In addition, if financing is not available, we may needto alter our strategy, reduce our ongoing expenses or cease operations. Inaddition, issuances of debt or additional equity could impact the rights of theholders of our common stock, may dilute our stockholders’ ownership and mayimpose restrictions on our operations. These restrictions could includelimitations on additional borrowing, specific restrictions on the use of ourassets as well as prohibitions on our ability to create liens, pay dividends,redeem our stock or make investments.

 

***If we elect to modify our business operations in order toreduce our expenses, our research, discovery and development programs could benegatively impacted.***

 

If we modify our businessoperations to meaningfully reduce our expenses we may not be able to fund ourcurrent research, discovery and development programs at the levels we requirein order to achieve our corporate goals or we may need to suspend ordiscontinue one or more programs altogether. A reduction in funding in the nearterm may be accomplished through a number of measures, including reduction invariable internal or external costs or by deferring certain expenses untila later date. Any meaningful funding reduction scenario will likely result in adelay in any affected programs, and may also negatively impact our existingcollaborations and harm our ability to attract new collaborators for those andother programs. In addition, a suspension or discontinuation of a program mayresult in an indefinite and significant delay of any affected program, and wemay incur significant inefficiencies if we later elect to resume any suchprogram.

 

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***If we lose our key personnel or are unable to attract andretain qualified personnel, it could adversely affect our business.***

 

Our success depends to asignificant degree upon the continued contributions of our executive officers,management and scientific staff.  Theloss of the services of one or more of our executive officers or key members ofour management or scientific staff could negatively impact the relationships wehave with our collaborators. In addition, we may be delayed or unable todevelop new product candidates, commercialize our existing product candidatesor achieve our other business objectives as a result of any future loss of ourother executive officers or key members of our management or scientific staff,which could cause our stock price to decline.  We have entered intoemployment letter agreements with each of our executive officers.  All of our employees are at-will employees,which means that either we or the employee may terminate their employment atany time. We currently have no key person insurance.

 

Inaddition, our discovery and development programs depend on our ability toattract and retain highly skilled scientists, including molecular biologists,biochemists, chemists and engineers. We may not be able to attract or retainqualified employees in the future due to the intense competition for qualifiedpersonnel among technology-based businesses, particularly in the San Diegoarea. We also face competition from universities and public and privateresearch institutions in recruiting and retaining highly qualified scientificand management personnel. If we are not able to attract and retain thenecessary personnel to accomplish our business objectives, we may experienceconstraints that will adversely affect our ability to meet the demands of ourcurrent or any future product discovery and development collaborators in atimely fashion or to support our independent discovery and developmentprograms.

 

***We may encounter difficulties managing our growth, whichcould adversely affect our business.***

 

Ourstrategy includes entering into and working on simultaneous flavor ingredientdiscovery and development programs across multiple markets. Although over thepast year the number of our full-time employees has decreased, we may choose toincrease headcount in the future in order to meet our strategic objectives. Ifour growth resumes, it will continue to place a strain on us, our managementand our resources. Our ability to effectively manage our operations, growth andvarious projects requires us to continue to improve our operational, financialand management controls, reporting systems and procedures and to attract andretain sufficient numbers of talented employees. We may not be able tosuccessfully implement these tasks on a larger scale and, accordingly, we maynot achieve our research, development and commercialization goals.  If we fail to improve our operational,financial and management information systems, or fail to effectively monitor ormanage our new and future employees or our growth, our business would suffersignificantly. In addition, no assurance can be made that we will be able tomaintain adequate facilities to house our staff, conduct our research orachieve our business objectives.

 

***We rely on thirdparties to manufacture our flavor ingredients on a commercial scale.***

 

We donot have experience in manufacturing, nor do we have the resources orfacilities to manufacture, flavor ingredients on a commercial scale. Therefore,the commercialization of our flavor ingredients depends in part on our or ourcollaborators’ ability to manufacture, or to contract with third-partymanufacturers of our flavor ingredients, on a large scale, at a competitivecost, with the specified quality and in accordance with relevant food, beverageand ingredient regulatory requirements. Any such collaborators or third-partymanufacturers may encounter manufacturing difficulties at any time that couldresult in delays in the commercialization of potential flavor ingredients. Ourinability to find capable manufacturing capacity or to enter into agreements onacceptable terms with third-party manufacturers could delay commercializationof any products we may develop and may harm our relationships with our existingand any future product discovery and development collaborators and ourcustomers. Moreover, if our collaborators are required to change from onethird-party manufacturer to another for any reason, the commercialization ofour products may be delayed further. In addition, if any manufacturer of ourflavor ingredients fail to comply with the FDA’s good manufacturing practiceregulations or similar regulations in other countries, then we may be subjectto adverse regulatory action including product recalls, warning letters andwithdrawal of our products, or our collaborators’ or customers’ products, fromthe market.

 

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Further,because our flavor ingredients are regulated as food products under the Food,Drug and Cosmetic, or FD&C, Act, we and the third parties with which we collaborateor contract to manufacture, process, pack, import or otherwise handle ourproducts or our product ingredients, may be required to comply with certainregistration, prior notice submission, recordkeeping and other regulatoryrequirements. Failure of any party in the chain of distribution to comply withany applicable requirements under the FD&C Act or the FDA’s implementingregulations, or similar regulations in other countries, may adversely affectthe manufacture and/or distribution of our products in commerce.

 

***If we acquire products, technologies or other businesses, wewill incur a variety of costs, may have integration difficulties and mayexperience numerous other risks that could adversely affect our business.***

 

Ifappropriate opportunities become available, we may consider acquiringbusinesses, technologies or products that we believe are a strategic fit withour business. We currently have no commitments or agreements with respect to,and are not actively seeking, any material acquisitions. We have limitedexperience in identifying acquisition targets, successfully acquiring them andintegrating them into our current infrastructure. We may not be able tosuccessfully integrate any businesses, products, technologies or personnel thatwe might acquire in the future without a significant expenditure of operating,financial and management resources, if at all. In addition, future acquisitionsmight be funded by issuances of additional debt or equity, which could impactyour rights as a holder of our common stock and may dilute your ownershippercentage. Any of the foregoing could have a significant adverse effect on ourbusiness, financial condition and results of operations.

 

**Risks Related To Our Industry**

 

***Our ability to compete in the flavor ingredient market maydecline if we do not adequately protect our proprietary technologies.***

 

Oursuccess depends in part on our ability to obtain and maintain intellectualproperty that protects our technologies and flavor ingredients. Patentpositions may be highly uncertain and may involve complex legal and factualquestions, including the ability to establish patentability of sequencesrelating to taste receptors, proteins, chemical synthesis techniques, compoundsand methods for using them to modulate taste for which we seek patentprotection. No consistent standard regarding the allowability or enforceabilityof claims in many of our pending patent applications has emerged to date. As aresult, we cannot predict the breadth of claims that will ultimately be allowedin our patent applications, if any, including those we have in-licensed or theextent to which we may enforce these claims against our competitors. The degreeof future protection for our proprietary rights is therefore highly uncertainand we cannot assure you that:

 

·                  we were the first to file patent applications or to invent the subjectmatter claimed in patent applications relating to the technologies upon whichwe rely;

·                  others will not independently develop similar or alternativetechnologies or duplicate any of our technologies;

·                  others did not publicly disclose our claimed technology before weconceived the subject matter included in any of our patent applications;

·                  any of our patent applications will result in issued patents;

·                  any of our patent applications will not result in interferences ordisputes with third parties regarding priority of invention;

·                  any patents that have issued or may be issued to us, our collaboratorsor our licensors will provide a basis for commercially viable products or willprovide us with any competitive advantages or will not be challenged by thirdparties;

·                  we will develop additional proprietary technologies that arepatentable;

 

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·                  the patents of others will not have an adverse effect on our ability todo business; or

·                  new proprietary technologies from third parties, including existinglicensors, will be available for licensing to us on reasonable commercialterms, if at all.

 

Inaddition, patent law outside the United States is uncertain and in manycountries intellectual property laws are undergoing review and revision. Thelaws of some countries do not protect intellectual property rights to the sameextent as domestic laws. It may be necessary or useful for us to participate inopposition proceedings to determine the validity of our competitors’ patents,litigation to enforce our or our licensed intellectual property against othersor to defend the validity of any of our or our licensors’ future patents, whichcould result in substantial costs and would divert our efforts and attentionfrom other aspects of our business.  Wecannot be certain of the outcome of any such proceedings or litigation.

 

Technologieslicensed to us by others, or in-licensed technologies, are important to ourbusiness. In particular, we depend on high-throughput screening technologiesthat we licensed from Aurora Biosciences, technology related to certain tastereceptor sequences that we license from the University of California and othersand technology related to compound libraries that we license from thirdparties. In addition, we may in the future acquire rights to additional technologiesby licensing such rights from existing licensors or from third parties. Suchin-licenses may be costly. Also, we generally do not control the patentprosecution, maintenance or enforcement of in-licensed technologies.Accordingly, we are unable to exercise the same degree of control over thisintellectual property as we do over our internally developed technologies.Moreover, some of our academic institution licensors, collaborators andscientific advisors have rights to publish data and information to which wehave rights. If we cannot maintain the confidentiality of our technologies andother confidential information in connection with our collaborations, ourability to protect our proprietary information or obtain patent protection inthe future may be impaired, which could have a significant adverse effect onour business, financial condition and results of operations.

 

***Many of the patent applications we and our licensors havefiled have not yet been substantively examined and may not result in patentsbeing issued.***

 

Manyof the patent applications filed by us and our licensors were filed recentlywith the United States Patent and Trademark Office and most have not beensubstantively examined and may not result in patents being issued. Some ofthese patent applications claim sequences that were identified from differentpublicly available sequence information sources such as the High-ThroughputGenomic Sequences division of GenBank. It is difficult to predict whether anyof our or our licensors’ applications will ultimately be found to be patentableor, if so, to predict the scope of any allowed claims. In addition, thedisclosure in our or our licensors’ patent applications, particularly inrespect of the utility of our claimed inventions, may not be sufficient to meetthe statutory requirements for patentability in all cases. Furthermore, recentchanges in rules promulgated by the European Patent Office may adverselyaffect the patentability of inventions claimed in some of our and our licensors’patent applications.  As a result, it isdifficult to predict whether any of our or our licensors’ applications will beallowed, or, if so, to predict the scope of any allowed claims or theenforceability of the patents. Even if enforceable, others may be able todesign around any patents or develop similar technologies that are not withinthe scope of such patents. Our and our licensors’ patent applications may notissue as patents that will provide us with any protection or competitiveadvantage.

 

***Disputes concerning the infringement or misappropriation ofour proprietary rights or the proprietary rights of others could be timeconsuming and extremely costly and could delay our research and developmentefforts.***

 

Ourcommercial success, if any, will be significantly harmed if we infringe thepatent rights of third parties or if we breach any license or other agreementsthat we have entered into with regard to our technology or business.  Our success will also depend, in part, on ourability to prevent others from infringing our patent rights.

 

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We areaware of other companies and academic institutions that have been performingresearch in the areas of taste modulation and flavor ingredients. Inparticular, other companies, academic institutions and inventor applicants haveannounced that they have conducted taste-receptor or ion channel research andhave published data on taste receptor sequence information and taste receptorsor filed patent applications or obtained patent protection on taste modulationor taste receptors and their uses, including Ajinomoto, California Institute ofTechnology, Cargill, Chromocell, Colorado State University, ColumbiaUniversity, Dendreon, Duke University, the German Institute of Human Nutrition,Givaudan SA, International Flavors & Fragrances Inc., JohannesGutenberg University, Kyushu University, Monell Chemical Senses Corp., MountSinai School of Medicine, the National Institutes of Health, Nestlé, Novartis,NutraSweet, Nutrinova GMBH, Pfizer, Inc., Redpoint Bio, Sloan Kettering,Symrise, Tate & Lyle, The Scripps Research Institute, Unilever, theUniversity of California, the University of Miami, the University of Tokyo, theUniversity of Wisconsin, Virginia Commonwealth University and Wissenbach. Tothe extent any of these companies, academic institutions or inventor applicantscurrently have, or obtain in the future, broad patent claims, such patentscould block our ability to use various aspects of our discovery and developmentprocess and might prevent us from developing or commercializing newlydiscovered flavor ingredients or otherwise conducting our business. TheUniversity of California, for example, claims certain patent rights relating tothe coexpression of T1R receptors that may not have been licensed to us. Whileour technology is focused on the use of human T1R receptors, we cannot assureyou that it does not infringe such patent rights.  In such event, if weare not able to amend our license with the University of California to includesuch patent rights and our technology is found to interfere with or infringesuch patent rights, our business, financial condition and results of operationscould suffer a significant adverse effect. In addition, it is possible that some of the flavor ingredients that arediscovered using our technology may not be patentable or may be covered byintellectual property of third parties.

 

We arenot currently a party to any litigation, interference, opposition, protest,reexamination, reissue or any other potentially adverse governmental, ex parteor inter-party proceeding with regard to our patent or trademarkpositions.  However, the life sciences and other technology industries arecharacterized by extensive litigation regarding patents and other intellectualproperty rights. Many life sciences and other technology companies haveemployed intellectual property litigation as a way to gain a competitiveadvantage. We may become involved in litigation, interference proceedings,oppositions, reexamination, protest or other potentially adverse intellectualproperty proceedings as a result of alleged infringement by us of the rights ofothers or as a result of priority of invention disputes with thirdparties.  Similarly, we may initiateproceedings to enforce our patent rights and prevent others from infringing ouror our licensed intellectual property rights. In any of these circumstances, we might have to spend significantamounts of money, time and effort defending our position and we may not besuccessful. In addition, any claims relating to the infringement of third-partyproprietary rights or proprietary determinations, even if not meritorious, couldresult in costly litigation, lengthy governmental proceedings, divertmanagement’s attention and resources, or require us to enter into royalty orlicense agreements that are not advantageous to us.

 

Shouldany person have filed patent applications or obtained patents that claiminventions also claimed by us, we may have to participate in an interferenceproceeding declared by the relevant patent regulatory agency to determinepriority of invention and, thus, the right to a patent for these inventions in theUnited States. Such a proceeding could result in substantial cost to us even ifthe outcome is favorable. Even if successful on priority grounds, aninterference action may result in loss of claims based on patentability groundsraised in the interference action. Litigation, interference proceedings orother proceedings could divert management’s time and efforts. Even unsuccessfulclaims could result in significant legal fees and other expenses, diversion ofmanagement’s time and disruption in our business. Uncertainties resulting frominitiation and continuation of any patent proceeding or related litigationcould harm our ability to compete and could have a significant adverse effecton our business, financial condition and results of operations.

 

An adverseruling arising out of any intellectual property dispute, including an adversedecision as to the priority of our inventions, could undercut or invalidate ourintellectual property position. An adverse ruling could also subject us tosignificant liability for damages, including possible treble damages, preventus from using technologies or developing products, or require us to negotiatelicenses to disputed rights 

 

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from third parties. Although patent and intellectualproperty disputes in the technology area are often settled through licensing orsimilar arrangements, costs associated with these arrangements may besubstantial and could include license fees and ongoing royalties. Furthermore,necessary licenses may not be available to us on satisfactory terms, if at all.Failure to obtain a license in such a case could have a significant adverseeffect on our business, financial condition and results of operations.

 

***If we are unable to protect our trade secrets and otherproprietary information, we could lose any competitive advantage we may have,which could adversely affect our business.***

 

Werely in part on trade secret protection for our confidential and proprietaryinformation, know how and processes. Our policy is to execute proprietaryinformation and invention agreements with our employees and consultants uponthe commencement of an employment or consulting relationship. These agreementsgenerally require that all confidential information developed by the individualor made known to the individual by us during the course of the individual’srelationship with us be kept confidential and not be disclosed to thirdparties. These agreements also generally provide that inventions conceived bythe individual in the course of their employment shall be our exclusiveproperty. Similarly, in the course of our collaborations or in the negotiationof potential collaborations we often disclose confidential and proprietaryinformation under written agreements that obligate those third parties to keepour information confidential and to use our confidential information only forthe purposes that we specify. There can be no assurance that we will be able toeffectively enforce these agreements or that proprietary information is ourexclusive property. There can be no assurance that the subject proprietaryinformation will not be disclosed, that others will not independently developsubstantially equivalent proprietary information and techniques or otherwisegain access to our trade secrets or that we can meaningfully protect our tradesecrets. Costly and time-consuming litigation could be necessary to enforce anddetermine the scope of our proprietary rights, and failure to obtain ormaintain trade secret protection could adversely affect our competitivebusiness position.

 

***Many potential competitors, including those who have greaterresources and experience than we do, may develop products or technologies thatmake ours obsolete or noncompetitive.***

 

Thelife sciences and other technology industries are characterized by rapidtechnological change, and the area of sensory or taste receptor research is arapidly evolving field. Our future success will depend on our ability tomaintain a competitive position with respect to technological advances.Technological developments by others may result in our flavor ingredients andtechnologies becoming obsolete.

 

Inparticular, we face substantial competition from companies pursuing thecommercialization of products and services relevant to taste using moretraditional methods for the discovery of flavor ingredients, or for thereduction of salt, sugar, monosodium glutamate, or MSG, or bitter taste. Thesecompetitors include leading flavor companies, such as Firmenich, Givaudan SA,International Flavors & Fragrances Inc., Symrise and Takasago. Thesecompanies provide flavors and other products, such as oils, extracts anddistillates, to consumer products companies for use in a wide variety ofproducts including foods, beverages, confectionaries, dairy products andpharmaceuticals. Competitors currently developing or marketing high potencysweeteners include Ajinomoto, BRAIN AG, or Biotechnology Research andInformation Network AG, Cargill, Natur Research Ingredients, Nutrasweet,Nutrinova GMBH, Symrise and Tate & Lyle. Competitors currentlydeveloping or marketing menthol or cooling agents include Jindal Drugs, Mentha &Allied, Sharp Menthol, Symrise, Takasago and Millenium SpecialtyChemicals.  We currently compete and will continue to compete in thefuture with these companies in collaborating with and selling flavor productsand technologies to manufacturers of food, beverage and ingredient products.Many of these companies have substantially greater capital resources, researchand development resources and experience, manufacturing capabilities,regulatory expertise, sales and marketing resources, established relationshipswith consumer products companies and production facilities.

 

Savoryflavor enhancers, particularly inosine monophosphate, or IMP, are commerciallyavailable, and we will compete with the companies that produce these flavors.IMP is widely available and is a generally accepted food additive by the food,beverage and ingredient industries. As a result, our existing and futurecollaborators may choose to incorporate IMP or similar savory flavor enhancersinto their food, beverage 

 

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and ingredient products instead of our savory flavoringredients.  We may compete with bitter masking or bitter blockingcompounds, such as adenosine 5’ monophosphate, or AMP.  We may also compete with known methods forreducing sodium, such as the use of potassium chloride in combination withflavors and masking agents.  In addition,we may compete with existing cooling agents, such as menthol and WS-3, that arecurrently in use.

 

We mayin the future face competition from life sciences and other technologycompanies and other commercial enterprises. These entities engage as we do inbiotechnology, biology or chemistry research and could apply this technology tothe discovery and development of flavor ingredients. We are aware of one othercompany, Redpoint Bio, that is involved in research on sweetness potentiators,salt substitutes and bitter blockers, specifically AMP. We cannot guaranteethat products developed as a result of our competitors’ existing or futurecollaborations will not compete with our flavor ingredients.

 

Universitiesand public and private research institutions are also potential competitors.While these organizations primarily have educational objectives, they maydevelop proprietary technologies related to the sense of taste or secure patentprotection that we may need for the development of our technologies andproducts. We may attempt to license these proprietary technologies, but these licensesmay not be available to us on acceptable terms, if at all.

 

Ourcompetitors, either alone or with their collaborative partners, may succeed indeveloping technologies or discovering flavor ingredients that are moreeffective, safer, more affordable or more easily commercialized than ours, andour competitors may obtain intellectual property protection or commercializeproducts sooner than we do. Developments by others may render our productcandidates or our technologies obsolete. In addition, our current productdiscovery and development collaborators are not prohibited from entering intoresearch and development collaboration agreements with third parties in anyproduct field. Our failure to compete effectively would have a significantadverse effect on our business, financial condition and results of operations.

 

***We may be sued for product liability and exposed to otherproduct safety-related risks, which could adversely affect our business andharm our reputation.***

 

Becauseour business strategy involves the development and sale by our collaborators ofcommercial products incorporating our flavor ingredients, we may be sued forproduct liability. Products incorporating our flavor ingredients are alsosubject to risks such as product contamination or spoilage, product tamperingor other adulteration.  From time to timewe receive reports of observed effects after individuals taste solutions orproducts that include novel flavor ingredients that we are testing or developing,including reports such as irritation of the mouth, tingling of the tongue, lipsor gums, and modulation or loss of taste sensation. Our practice is to trackreports of any observed effects and, in particular, to evaluate whether anyadverse effect may be related to our novel flavor ingredient or whether anothercause is determinable. In some instances, these effects may be observed only athigher levels of use or exposure, in which case we may elect to proceed withdevelopment, and subsequent commercialization, of a novel flavor ingredient atuse levels that we believe are appropriate for only a subset of all potentialapplications. Nevertheless, we may be held liable if any flavor ingredient wetest, develop or commercialize, or any product our collaborators test, developor commercialize that incorporates any of our flavor ingredients, causes injuryor illness or is found otherwise unsuitable during product testing,manufacturing, marketing, sale or consumer use. In addition, the safety studieswe must perform and the regulatory approvals we must obtain prior toincorporating our flavor ingredients into a commercial product will not protectus from any such liability.

 

Anyalleged illness or injury associated with any of our flavor ingredients,product defect, product liability judgment or product recall may negativelyimpact our financial results depending on the reaction of our collaborators,scope, competitive reaction and consumer attitudes.  Even if such an allegation or productliability claim lacks merit, cannot be substantiated, is unsuccessful or is notfully pursued, the negative publicity surrounding any assertion that our flavoringredients or products that incorporate our flavor ingredients caused illness,injury or death could adversely affect our reputation with existing andpotential collaborators and licensees and our corporate image and could cause adecline in our stock price.

 

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Ourproduct liability insurance may not fully cover our potential liabilitiesassociated with the sale of commercial products incorporating any of our flavoringredients. Inability to obtain sufficient insurance coverage to protectagainst potential product liability claims could prevent or inhibit thecommercialization of products developed by us or our product discovery anddevelopment collaborators. We may be obligated to indemnify our productdiscovery and development collaborators for product liability or other lossesthey incur as a result of our flavor ingredients. Any indemnification wereceive from such collaborators for product liability that does not arise fromour flavor ingredients may not be sufficient to satisfy our liability toinjured parties. If we are sued for any injury caused by our flavor ingredientsor products incorporating our flavor ingredients, our liability could exceedour total assets.

 

***We use hazardous materials. Any claims relating to improperhandling, storage or disposal of these materials could be time consuming andcostly.***

 

Ourdiscovery and development process requires our employees to routinely handlehazardous chemical, radioactive and biological materials. Our operations alsoproduce hazardous waste products. Federal, state and local laws and regulationsgovern the use, manufacture, storage, handling and disposal of these materials.As a result of the increase in size of our operations, we are now classified asa large quantity generator of hazardous waste. This classification may resultin increased scrutiny of our operations by the Environmental Protection Agency.Compliance with applicable environmental laws and regulations may be expensive,and current or future environmental regulations may impair our discovery and developmentefforts.

 

Inaddition, we cannot entirely eliminate the risk of accidental contamination ordischarge and any resultant injury from these materials. Our insurance policieshave limited coverage for damages or cleanup costs related to hazardous wastedisposal or contamination. We may be forced to curtail operations or be suedfor any injury or contamination that results from our use or the use by othersof these materials, and our liability may exceed our total assets.

 

**Risks Related To Our Common Stock**

 

***The price of our common stock is volatile.***

 

The market prices forsecurities of biotechnology companies historically have been highly volatile,and the market has from time to time experienced significant price and volumefluctuations that are unrelated to the operating performance of particularcompanies. Since our initial public offering in June 2004, the price ofour common stock has ranged from approximately $1 per share to approximately$23 per share. The market price of our common stock may fluctuate in responseto many factors, including:

 

·                  developments concerning our collaborative agreements;

·                  delays in commercialization of our flavor ingredients;

·                  results of safety evaluation of our flavor ingredients;

·                  developments related to the United States and international regulatoryapproval of our products;

·                  results of consumer acceptance testing of our flavor ingredients by ourcollaborators;

·                  announcements of technological innovations by us or others;

·                  the discovery of a product defect or the commencement of a productrecall;

·                  an allegation of illness or injury relating to our flavor ingredients,whether meritorious or not, or any product liability judgment;

·                  developments in patent or other proprietary rights;

·                  changes in our management, key personnel or members of our Board ofDirectors;

·                  future sales of our common stock by existing stockholders;

·                  comments by securities analysts;

·                  general market conditions, including the current economic and creditcrisis;

·                  fluctuations in our operating results;

·                  government regulation;

 

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·                  failure of any of our flavor ingredients, if approved, to achievecommercial success; and

·                  public concern as to the safety of our flavor ingredients.

 

***Anti-takeover provisions in our charter documents and underDelaware law may make an acquisition of us more complicated and the removal andreplacement of our directors and management more difficult.***

 

Provisionsof our amended and restated certificate of incorporation and bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party toacquire us, even if doing so would benefit our stockholders. These provisionsmay also make it difficult for stockholders to remove and replace our board ofdirectors and management. These provisions:

 

·                  authorize the issuance of “blank check”preferred stock by our board of directors, without stockholder approval, whichcould increase the number of outstanding shares and prevent or delay a takeoverattempt;

·                  limit who may call a special meeting ofstockholders;

·                  prohibit stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders; and

·                  establish advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings.

 

Inaddition, the requirements of Section 203 of the Delaware GeneralCorporation Law may discourage, delay or prevent a third party from acquiringus.

 

***Our shareholder rights plan may hinder or prevent change ofcontrol transactions.***

 

Ourshareholder rights plans may discourage transactions involving an actual orpotential change in our ownership.  Inaddition, our board of directors may issue shares of preferred stock withoutany further action by you.  Suchissuances may have the effect of delaying or preventing a change in ourownership.  If changes in our ownershipare discouraged, delayed or prevented, it would be more difficult for ourcurrent board of directors to be removed and replaced, even if you and otherstockholders believe such actions are in the best interests of us and ourstockholders.

 

***We have never paid cash dividends on our capital stock andwe do not anticipate paying dividends in the foreseeable future.***

 

Wehave paid no cash dividends on any of our classes of capital stock to date, andwe currently intend to retain our future earnings, if any, to fund thedevelopment and growth of our business. In addition, the terms of any futuredebt or credit facility may preclude us from paying any dividends. As a result,capital appreciation, if any, of our common stock will be your sole source ofpotential gain for the foreseeable future.

 

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**Item 1B.    *Unresolved Staff Comments***

 

None.

 

**Item2.    *Properties***

 

We currently lease approximately 65,000 square feet oflaboratory and office space at 4767 Nexus Center Drive, San Diego, California,92121.  Our lease for this facilityexpires on February 28, 2017. Our current monthly lease obligation forrent is approximately $220,000. We are responsible for expenses associated withthe use and maintenance of the building, such as utilities and common areamaintenance. These costs will vary each month, and we expect that these costswill be approximately $95,000 per month.

 

We believe that our facilities are adequate to meetour business requirements for the near-term and that additional space will beavailable on commercially reasonable terms, if required.

 

**Item3.    *Legal Proceedings***

 

We are not a party to any material legal proceedingsat this time.

 

**Item4.    *Submission ofMatters to a Vote of Security Holders***

 

No matters were submitted to a vote of our securityholders during the quarter ended December 31, 2009.

 

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**PART II**

 

**Item 5.    *Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities***

 

**Common Stock Market Price**

 

Our common stock commenced trading on the NASDAQ StockMarket on June 22, 2004 under the symbol “SNMX.” The following table setsforth the high and low sales prices per share of our common stock as traded onthe NASDAQ Stock Market for the periods indicated.

 
| **Fiscal 2009 Quarter ended** | ** ** | **March 31,  2009** | ** ** | **June 30,  2009** | ** ** | **September  30, 2009** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| High                          |       | $                        | 3.93       |                    | $          | 2.61                    |       | $                           | 4.23       |   | $ | 4.75 |   |
| Low                           |       | $                        | 1.35       |                    | $          | 1.51                    |       | $                           | 1.94       |   | $ | 3.06 |   |

 
| **Fiscal 2008 Quarter ended** | ** ** | **March 31,  2008** | ** ** | **June 30,  2008** | ** ** | **September  30, 2008** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|--------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| High                          |       | $                        | 7.95       |                    | $          | 6.86                    |       | $                           | 5.76       |   | $ | 5.03 |   |
| Low                           |       | $                        | 4.62       |                    | $          | 4.35                    |       | $                           | 3.66       |   | $ | 1.80 |   |

 

The last sale price for our common stock as reportedby the NASDAQ Stock Market on January 31, 2010 was $3.91 per share.  As of January 31, 2010, there were approximately70 shareholders of record of our common stock.

 

We have never declared or paid any cash dividends toour shareholders. We do not presently plan to pay cash dividends in theforeseeable future and intend to retain any future earnings for reinvestment inour business.

 

Information about our equity compensation plans isincluded in Item 12 of Part III of this annual report on Form 10-K.

 

**Repurchases of Equity Securities**

 

There were no repurchases of equity securities in thefourth quarter of 2009.

 

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**Performance MeasurementComparison (1)**

 

The following graph shows a comparison of thefive-year total cumulative returns of an investment of $100 in cash on December 31,2004 in (i) our common stock, (ii) the Nasdaq Composite Index, U.S.Companies and (iii) the Nasdaq Biotechnology Index.  The comparisons in the graph are required bythe SEC and are not intended to forecast or be indicative of the possiblefuture performance of our common stock. The graph assumes that all dividends have been reinvested.  (To date, we have not declared anydividends.)

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

AmongSenomyx, Inc., The NASDAQ Composite Index

AndThe NASDAQ Biotechnology Index

 

 

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*$100 invested on 12/31/04in stock or index, including reinvestment of dividends.

Fiscal year ending December31.

 

(1)   This section is not “soliciting material,”is not deemed “filed” with the SEC, is not subject to the liabilities of Section 18of the Securities Exchange Act of 1934, as amended, and is not to beincorporated by reference in any of our filings under the Securities Act of1933, as amended, or the Securities Exchange Act of 1934, as amended, whethermade before or after the date hereof and irrespective of any generalincorporation language in any such filing.

 

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**Item6.    *Selected FinancialData***

 

The Statement of Operations Data and Balance SheetData presented below should be read in conjunction with Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andItem 8, Financial Statements and Supplementary Data included in this annualreport on Form 10-K.  Amounts are inthousands, except share and per share amounts.

 
| ** **                                                   | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statements of Operations Data:**                           |       |                         |       |   |   |   |   |   |   |   |   |
| Revenues:                                                    |       |                         |       |   |   |   |   |   |   |   |   |
| Development revenue                                          |       | $                            | 14,590     |   | $ | 16,819 |   | $ | 18,197 |   | $ | 12,230 |   | $ | 9,385 |   |
| Commercial revenue                                           |       | 921                          |       | 347 |   | 23 |   | — |   | — |   |
| Total revenues                                               |       | 15,511                       |       | 17,166 |   | 18,220 |   | 12,230 |   | 9,385 |   |
| Operating expenses:                                          |       |                         |       |   |   |   |   |   |   |   |   |
| Research and development                                     |       | 28,201                       |       | 31,800 |   | 29,874 |   | 25,393 |   | 20,330 |   |
| General and administrative                                   |       | 13,682                       |       | 13,555 |   | 13,572 |   | 13,735 |   | 10,229 |   |
| Total operating expenses                                     |       | 41,883                       |       | 45,355 |   | 43,446 |   | 39,128 |   | 30,559 |   |
| Loss from operations                                         |       | (26,372                      | )          | (28,189 | ) | (25,226 | ) | (26,898 | ) | (21,174 | ) |
| Other income                                                 |       | 207                          |       | 1,255 |   | 3,395 |   | 3,841 |   | 1,344 |   |
| Net loss                                                     |       | $                            | (26,165    | ) | $ | (26,934 | ) | $ | (21,831 | ) | $ | (23,057 | ) | $ | (19,830 | ) |
|                                                         |       |                         |       |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share                         |       | $                            | (0.85      | ) | $ | (0.88 | ) | $ | (0.72 | ) | $ | (0.77 | ) | $ | (0.77 | ) |
|                                                         |       |                         |       |   |   |   |   |   |   |   |   |
| Shares used to compute basic and diluted net loss  per share |       | 30,935,090                   |       | 30,602,481 |   | 30,326,768 |   | 29,809,854 |   | 25,916,229 |   |

 

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| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Balance Sheet Data:**                                    |       |                        |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments  available-for-sale |       | $                           | 31,074     |   | $ | 40,106 |   | $ | 62,624 |   | $ | 74,104 |   | $ | 83,813 |   |
| Working capital                                            |       | 18,064                      |       | 31,869 |   | 51,977 |   | 65,455 |   | 80,178 |   |
| Total assets                                               |       | 42,454                      |       | 54,466 |   | 79,249 |   | 90,182 |   | 88,531 |   |
| Accumulated deficit                                        |       | (202,213                    | )          | (176,048 | ) | (149,114 | ) | (127,283 | ) | (104,226 | ) |
| Total stockholders’ equity                            |       | 17,507                      |       | 36,940 |   | 56,627 |   | 69,477 |   | 82,445 |   |
|                                                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item7.    *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

*The following discussion of ourfinancial condition and results of operations should be read in conjunctionwith our Financial Statements and the related Notes to Financial Statements inItem 8, “Financial Statements and Supplementary Data” in this annual report on Form 10-K.*

 

*Certain**statements contained in this annualreport on Form 10-K, including statements regarding the development,growth and expansion of our business, our intent, belief or current expectations,primarily with respect to our future operating performance, and the products weexpect to offer and other statements regarding matters that are not historicalfacts, are “forward-looking statements” within the meaning of Section 27Aof the Securities Act and Section 21E of the Securities Exchange Act of1934, as amended, and are subject to the “safe harbor” created by thesesections. Future filings with the SEC, future press releases and future oral orwritten statements made by us or with our approval, which are not statements ofhistorical fact, may also contain forward-looking statements. Because suchstatements include risks and uncertainties, many of which are beyond ourcontrol, actual results may differ materially from those expressed or impliedby such forward-looking statements. Some of the factors that could cause actualresults to differ materially from those expressed or implied by suchforward-looking statements can be found under the caption “Risk Factors” andelsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speakonly as of the date on which they are made, and we undertake no obligation toupdate such statements to reflect events that occur or circumstances that existafter the date on which they are made.*

 

**Overview and RecentDevelopments**

** **

We are a leading company focused on using proprietarytaste receptor-based assays and screening technologies to discover and developnovel flavors, flavor enhancers and taste modulators, which we refer to asflavor ingredients, for the packaged food, beverage and ingredient industries.We believe our flavor ingredients will enable packaged food, beverage andingredient companies to improve the nutritional profile of their products whilemaintaining or enhancing taste and generating cost of goods savings. We licenseour flavor ingredients to our collaborators on an exclusive or co-exclusivebasis, which we believe will provide these companies with a competitiveadvantage. We currently have product discovery and development collaborationswith several of the world’s leading packaged food, beverage and ingredientcompanies: Ajinomoto, Campbell, Coca-Cola, Firmenich, Nestlé, and Solae. Weanticipate that we will derive all of our revenues from existing and futurecollaborations. Depending upon the collaboration, our collaboration agreementsprovide for upfront fees, research and development funding, reimbursement ofcertain regulatory costs, milestone payments based upon our achievement ofresearch or development goals and, in the event of commercialization,commercial milestones, minimum periodic royalties and royalties on sales ofproducts incorporating our flavor ingredients. Senomyx’s principal currentprograms focus on the development of savory, sweet and salt flavor enhancers,bitter blockers and cooling agents.

 

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We have incurred significant losses since ourinception in 1998 and, as of December 31, 2009 our accumulated deficit was$202.2 million.  We expect to incuradditional losses over at least the next two years as we continue to developflavor ingredients.  Our results ofoperations have fluctuated from period to period and likely will continue tofluctuate substantially in the future based upon:

 

·                  termination of any of our productdiscovery and development collaboration agreements;

·                  our ability to discover and developflavor ingredients or the ability of our product discovery and developmentcollaborators to incorporate them into packaged food, beverage and ingredientproducts;

·                  our receipt of milestone payments in anyparticular period;

·                  the ability and willingness ofcollaborators to commercialize products incorporating our flavor ingredients onexpected timelines, or at all;

·                  our ability to enter into new productdiscovery and development collaborations and technology collaborations or toextend the terms of our existing collaboration agreements;

·                  our payment obligations, expected revenueand other terms of any other agreements of this type;

·                  our ability, or our collaborators’ability, to successfully satisfy all pertinent regulatory requirements;

·                  the demand for our collaborators’products containing our flavor ingredients; and

·                  general and industry specific economicconditions, including the current economic and credit crisis, which may affectour collaborators’ research and development expenditures and commercializationefforts.

 

In March 2009 weamended our Collaborative Research, Development, Commercialization and LicenseAgreement dated March 23, 2006 with Ajinomoto to extend the collaborativeperiod for an additional year, with three consecutive options of one year eachthat could further extend the collaboration. We currently anticipate that the collaborative research funding periodwill expire in March 2010.  However,we will continue to be eligible to receive milestones, cost reimbursement androyalty payments under the commercial phase of the agreement.  Until then, during the extension period, wewill continue to work with Ajinomoto on the discovery, development andcommercialization of new flavor ingredients for use in the soup, sauce andculinary aids, noodles and bouillon product categories in Asia.  Under the terms of the extension, Ajinomotohas agreed to pay us incremental research funding. The potential milestonepayments upon achievement of certain research and development goals remainunchanged.  Upon commercialization,Ajinomoto will make royalty payments based on sales of Ajinomoto’s productsthat contain Senomyx novel flavor ingredients discovered under the agreement.

 

In March 2009we amended our Collaborative Research and License Agreement dated March 28,2001 with Campbell to extend the collaborative period until March 2010,with three annual options of one year each that could further extend thecollaboration.  During the extensionperiod, we will continue to work with Campbell on the discovery andcommercialization of new ingredients that improve the taste of wet soups andsavory beverages.  Under the terms of theextension, Campbell has agreed to pay us incremental research funding. Thepotential milestone payment upon achievement of a certain research anddevelopment goal remains unchanged.  Uponcommercialization, Campbell will make royalty payments based on sales ofCampbell’s products using the new ingredients discovered under the agreement.

 

In May 2009,we amended our existing Collaborative Research and License Agreement withNestlé for the discovery and commercialization of novel flavor ingredients inthe coffee and coffee whitener fields. Under the terms of the amendment, we and Nestlé agreed that thediscovery phase of the agreement concluded in January 2009 and the programadvanced into the development phase with Nestlé paying funding through July 2010,one year earlier than anticipated. In addition, Nestlé’s funding obligationsover the remaining collaborative period have been reduced to reflect acommensurate reduction in our internal research and development resourcesdedicated to the Nestlé collaboration. In addition, we and Nestlé agreed to add a new milestone in which wecould receive a milestone payment upon achievement of specific productdevelopment goal.  In addition, under theterms of the amendment, Nestlé has the right to terminate the agreement withoutcause upon 90 days’ advance notice, provided that under 

 

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certain circumstancesNestlé must pay additional research funding if it terminates prior to the endof the collaborative period.  Thecombined total of research funding and milestone payments under the amendedagreement could exceed $12 million if all milestones are met.  Upon commercialization, we will receiveroyalty payments based on sales of products containing new flavor ingredientsdeveloped under the agreement.

 

In August 2009 weannounced that in July 2009 we entered into a Collaborative Research,Development, Commercialization and License Agreement with Firmenich for novelflavor ingredients intended to provide a sweet enhancement taste effect ofsucrose, fructose or various forms of rebaudioside, the Target Sweeteners, inselect product categories on a worldwide basis. The agreement provides Firmenichwith exclusive rights on the development and commercialization of existing andnewly discovered flavor ingredients for all forms of foods and beverages forhuman consumption, excluding gum, sugar confections and chocolate confectionsand non-alcoholic beverages. The agreement also provides Firmenich withco-exclusive rights with respect to non-alcoholic dry powdered beverages. Inaddition, we have granted Firmenich certain rights to negotiate with us foraccess to other product categories under specified conditions.

 

The agreement specifies alicense fee in the amount of $20 million, originally payable in twoinstallments of $10 million each.  Wereceived the initial license fee installment payment of $10 million fromFirmenich following execution of the agreement in August 2009.  Firmenich also agreed to fund a portion ofour ongoing research under the agreement for a minimum of two years, with threeconsecutive options of one year each that could further extend thecollaborative research funding period at consecutively higher fundingrates.  In addition, Firmenich agreed topay the Company the second $10 million license fee installment within 30 daysfollowing regulatory approval of the first flavor ingredient that Firmenichselects for development and determines to be commercially viable.

 

In October 2009, weand Firmenich amended the agreement to grant Firmenich a period of additionaltime to conclude its evaluation of S6973, our lead sucrose enhancer.  As part of that amendment, Firmenich paid usa non-refundable $2 million payment as part of the previously disclosed secondlicense fee installment. Under the terms of the amendment, Firmenich wasallowed until February 2010 to select S6973 for commercial development anddetermine that it is commercially viable. In January 2010, Firmenich selected S6973 for commercialdevelopment.  Upon this selection, theremaining $8 million portion of the second license fee installment became dueto us.  In addition to the license feeinstallment payment, we will also receive additional payments related to theachievement of one or more milestones and for reimbursement of specifiedexpenses in accordance with the terms of the agreement.  We will receive these payments in the firstquarter of 2010.

 

We are also eligible toreceive additional milestone payments upon achievement of other specified goalsand we will receive royalty payments based on any sales of products containingflavor ingredients that are licensed under the agreement. In addition, theroyalty obligation includes predetermined minimum royalties applicable tosynthetic flavor ingredients, and in the case of the commercialization ofnatural flavor ingredients the parties have agreed to a method by which minimumroyalties applicable to those ingredients would be determined based on themarket potential for a given flavor ingredient.

 

In October 2009,we announced that we had been notified by FEMA that S6973, our lead sucroseenhancer, has been determined to be GRAS under the provisions of the FD&CAct. The GRAS designation allows usage of S6973 in baked goods, cereals, gum,condiments and relishes, confectioneries and frostings, frozen dairy offerings,fruit ices, gelatins and puddings, hard and soft candy, jams and jellies, milkproducts and sauces.

 

In July 2005, we entered into a collaborationagreement with Cadbury for the discovery and commercialization of new flavoringredients in the gum confectionary area. The agreement initially provided forresearch funding payments for up to two years. We and Cadbury periodically amended the agreement to extend the researchfunding phase to January 2010.  Thisagreement expired in January 2010.

 

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**Revenue**

 

We derive revenue from our product discovery anddevelopment collaborations. To date, our revenue has come solely from upfrontfees, research and development funding, reimbursement of certain patent andregulatory costs, milestone payments and royalty payments under our productdiscovery and development collaboration agreements. As of December 31,2009, we have recognized cumulative revenue under our collaborations of $100.1million. If any of these collaborative agreements were to be terminated, thiscould have a significant effect on future revenues.

 

From our inception date to the present, research anddevelopment payments represented the primary source of our revenue. Based oncurrent collaborations, we anticipate that substantially all of our revenues inthe near future will be derived from research and development payments.  We may receive additional milestone paymentsin the future upon the achievement of certain goals set forth in ourcollaboration agreements.

 

In addition, as our collaborators launch productsincorporating our flavor ingredients, we receive minimum periodic royalties androyalty payments based upon the sales of those products, which in the futurecould be significantly larger than research and development funding ormilestone payments. In order for us to generate material royalty revenue andbecome profitable, we must retain our existing or establish new productdiscovery and development collaborations and our collaborators mustcommercialize products incorporating one or more of our flavor ingredients. Ourability to generate material royalty revenue is uncertain and will depend uponour ability to meet particular research, development and commercializationobjectives.

 

**Research and Development**

** **

Our research and development expenses consistprimarily of costs associated with our discovery and development efforts inconnection with our primary programs focused on the development of savory,sweet and salt flavor enhancers, bitter blockers and cooling agents. We trackresearch and development costs by the type of cost incurred rather than byproject. Research and development costs are comprised of salaries and otherpersonnel-related expenses, facilities and depreciation, research anddevelopment supplies, patent and licensing, outside services and non-cashstock-based compensation expenses. We charge research and development expensesto operations as incurred.

 

The research and development payments we have receivedfrom our collaboration agreements historically have not covered all of ourresearch and development expenses. We expect that our research and developmentexpenses are likely to increase in the future as a result of our existing productdiscovery and development collaborations, internal product discovery anddevelopment activities and technology development and any expansion of theseactivities.

 

At this time, due to the risks inherent in thediscovery of flavor ingredients, we are unable to estimate with any certaintythe costs we will incur in the continued development of our flavor ingredientsfor commercialization.  We anticipatethat we will make determinations regarding the research and developmentprojects to pursue and the funding of each project on an ongoing basis inresponse to the progress of each discovery and development program, as well asan ongoing assessment of its market potential. We cannot be certain when anymaterial net cash inflow from the commercialization of our flavor ingredientswill commence.

 

Our ability to complete the development of our currentproduct candidates is subject to many risks and uncertainties. These risksinclude the risks, among others, that:

 

·                  we are substantially dependent upon ourcollaborators for research and development funding;

·                  our collaborators may terminate theirrespective collaboration programs early;

·                  we may not be able to discover flavoringredients with the desired taste attributes;

·                  we may not be successful in developingflavor ingredients with attributes required for use in commercial products;

 

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·                  we may be unable to maintain FEMA GRASdetermination for our savory product candidates, our sucralose productcandidate and our sucrose product candidate; and

·                  we may be unable to obtain FEMA GRASdetermination or regulatory approval for other candidates in our otherprograms.

 

If we do not complete the development of our flavoringredients on a timely basis, our collaborators may terminate or not renew ourcollaboration agreements, we may begin receiving revenue from thecommercialization of products incorporating our flavor ingredients later thananticipated, or not at all, and it may be more difficult to enter into newcollaboration agreements. In any of these cases, we may require substantialadditional funding in order to continue development of our flavor ingredients.

 

**General andAdministrative**

** **

General and administrative expenses consist primarilyof salaries and other personnel-related expenses related to businessdevelopment, legal, financial, commercial development and other administrativefunctions and Sarbanes-Oxley compliance. General and administrative expenses also include non-cash stock-basedcompensation expenses.   We expect thatour general and administrative expenses are likely to increase in the future asa result of supporting additional commercial development activities, businessdevelopment and research and development.

 

**Results of Operations**

 

**Years Ended December 31,2009, 2008 and 2007**

 

***Revenue UnderCollaboration Agreements***

 

We recorded revenue of $15.5 million, $17.2 millionand $18.2 million during the years ended December 31, 2009, 2008 and 2007,respectively.  Research and development payments, upfront fees, milestonepayments and royalty revenues under collaborations with Ajinomoto, Cadbury,Campbell, Coca-Cola, Firmenich, Nestlé and Solae accounted for 100% of totalrevenue for the year ended December 31, 2009.  The decrease of $1.7 million from 2008 to2009 was primarily due to the difference in the revenue recognized in 2008related to the upfront payment from Ajinomoto as compared to the revenue recognizedin 2009 related to the upfront payment from Firmenich. Annual revenue in 2008included $3.6 million of revenue related to an $8.0 million upfront paymentassociated with the expansion of our collaboration with Ajinomoto in August 2007. The upfront payment was recognized ratably over the nine month periodfrom August 2007 through April 2008. Annual revenue in 2009 included$2.3 million of revenue related to $12.0 million license fee installmentpayments related to the collaboration with Firmenich. The upfront payment fromFirmenich will be recognized over the 24 month period from August 2009through July 2011.  Research anddevelopment payments, upfront fees, milestone payments and royalty revenuesunder collaborations with Ajinomoto, Cadbury, Campbell, Coca-Cola, Firmenich,Nestlé and Solae accounted for 100% of total revenue for the year ended December 31,2008.  The decrease of $1.0 million from2007 to 2008 was primarily due to the recognizing of a smaller portion of therevenue recognized related to amendments of existing collaborations in 2008 ascompared to 2007.  Research anddevelopment payments, upfront fees, milestone payments and royalty revenuesunder collaborations with Ajinomoto, Cadbury, Campbell, Coca-Cola, Firmenich,Kraft Foods, Nestlé and Solae accounted for 100% of total revenue for the yearended December 31, 2007.  For 2010,we expect to see an increase in revenues recognized under our collaborativeagreements.

 

***Research andDevelopment Expenses***

 

Our research and development expenses (includingstock-based compensation expenses charged to research and development) were$28.2 million, $31.8 million and $29.9 million for the years ended December 31,2009, 2008 and 2007, respectively.  A comparison of research anddevelopment expenses by category is as follows (in thousands):

 

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| ** **                              | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Salaries and personnel                  |       | $                                  | 11,992     |   | $ | 12,818 |   | $ | 11,535 |   |
| Facilities and depreciation             |       | 5,606                              |       | 5,835 |   | 5,721 |   |
| Research and development supplies       |       | 3,598                              |       | 4,422 |   | 5,047 |   |
| Outside services                        |       | 2,243                              |       | 2,533 |   | 1,521 |   |
| Patent and licensing                    |       | 2,212                              |       | 3,122 |   | 2,503 |   |
| Non-cash stock-based compensation       |       | 1,936                              |       | 2,312 |   | 2,588 |   |
| Miscellaneous                           |       | 614                                |       | 758 |   | 959 |   |
| Total research and development expenses |       | $                                  | 28,201     |   | $ | 31,800 |   | $ | 29,874 |   |

 

***Salaries andPersonnel.*** Our expenses for research and development personnel, including consultants,were $12.0 million, $12.8 million and $11.5 million for the years ended December 31,2009, 2008 and 2007, respectively. The decrease of $826,000 from 2008 to2009 was primarily due to a reduction in staff to support research anddevelopment activities, partially offset by the impact of annual salaryadjustments.  Our research anddevelopment staff decreased from an average of 97 for the year ended December 31,2008 to an average of 90 for the year ended December 31, 2009.   The increase of $1.3 million from 2007 to2008 was primarily due to the addition of staff to support research anddevelopment operations and to the impact of annual salary adjustments.  Our research and development staff increasedfrom an average of 88 for the year ended December 31, 2007 to an averageof 97 for the year ended December 31, 2008.  In addition, the increase in salaries andpersonnel expenses was due to the impact of annual salary adjustments.  For 2010, we expect to see salaries andpersonnel expenses to be approximately the same as in 2009.

 

***Facilities andDepreciation.***    Ourfacilities and depreciation expenses were $5.6 million, $5.8 million and $5.7million for the years ended December 31, 2009, 2008 and 2007,respectively. The decrease of $229,000 from 2008 to 2009 was primarily due todecreased depreciation expense on scientific equipment placed in service in2006 (which became fully depreciated during 2009).  The increase of $114,000 from 2007 to 2008was primarily due to increased depreciation expense due to scientific equipmentbeing placed in service in 2008, partially offset by reduced facilitiesexpense.    For 2010, we expect tocontinue to see decreases in facilities and depreciation expenses due todecreased depreciation expense on fully depreciated scientific equipment.

 

***Research andDevelopment Supplies.***  Our expenses for supplies used in research and development were$3.6 million, $4.4 million and $5.0 million for the years ended December 31,2009, 2008 and 2007, respectively.  The decrease of $824,000 was primarilydue to a decrease in expensed supplies used in high-throughput screening andother research and development activities due to progress in the scientificprograms.  The decrease of $625,000 from2007 to 2008 was primarily due to reduced compound acquisition expenses in 2008compared to 2007.  For 2010, we expect tosee research and development supplies to be approximately the same as in 2009.

 

***Outside Services.***  Our outside services expenses were$2.2 million, $2.5 million and $1.5 million for the years ended December 31,2009, 2008 and 2007, respectively.  The decrease of $290,000 from 2008 to2009 was primarily due to the successful completion of outsourced activities insupport of regulatory filings for our product candidates.  The increase of $1.0 million from 2007 to 2008was primarily due to an increase in costs for safety studies and for outsideresearch activities, partially offset by a decrease in costs for chemistryoutsourcing.  For 2010, we expect to seean increase in outside services expenses due to costs for safety studiesrelated to product candidates advancing into development.

 

***Patent andLicensing.*** Our patent and licensing expenses were $2.2 million, $3.1 million and $2.5million for the years ended December 31, 2009, 2008 and 2007,respectively.  The decrease of $910,000 from 2008 to 2009 was primarilyattributable to decreased patent legal expenses associated with timing ofpatent prosecution of our intellectual property portfolio.  The increase of $619,000 from 2007 to 2008was primarily attributable to outsourced patent filing related activitiesassociated with our expanding intellectual property portfolio.  For 2010, we expect to see an increase in ourpatent and licensing expenses as compared to 2009.

 

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***Non-cash Stock-basedCompensation.***  Our non-cash stock-based compensationexpenses were $1.9 million, $2.3 million and $2.6 million for the years ended December 31,2009, 2008 and 2007, respectively.  Thedecrease of $376,000 from 2008 to 2009 was primarily due to continuingdecreases in the valuation of options granted to employees, which results inless expense incurred.  The decrease of$276,000 from 2007 to 2008 was primarily due to decreases in compensationexpense in 2008 compared to 2007 for stock options granted to both employeesprior to 2006 and to non-employees, as the expense for these options isaccounted for on an accelerated basis, which results in more expense beingrecognized for the options earlier in the options’ vesting period.  For 2010, we expect to see a slight increasein non-cash stock-based compensation expense.

 

***General andAdministrative Expenses***

 

Our general and administrative expenses (includingnon-cash stock-based compensation expenses charged to general andadministrative) were $13.7 million, $13.6 million and $13.6 million for theyears ended December 31, 2009, 2008 and 2007, respectively.

 

The $127,000 increase in expenses from 2008 to 2009was primarily due to an increase in salaries and personnel-related expenses ofapproximately $201,000, partially offset by a reduction in outside servicesexpense of approximately $144,000.

 

The $17,000 decrease in expenses from 2007 to 2008 wasprimarily due to a decrease in non-cash, stock-based compensation expense ofapproximately $233,000, partially offset by an increase in salaries andpersonnel costs of $213,000.  Thedecrease in non-cash stock-based compensation expense of approximately $233,000was due to stock options granted to employees prior to 2006, as the expense forthese options is accounted for on an accelerated basis, which results in moreexpense being recognized for the options earlier in the options’ vestingperiod.  The increase in salaries andpersonnel costs was primarily due to the impact of salary adjustments.

 

For 2010, we expect to see a slight increase in ourgeneral and administrative expenses due to an expected slight increase innon-cash stock-based compensation expense, which is expected to be due to thegranting of options in 2010 and the recognition of a full year’s worth ofexpense for options granted in 2009.

 

***Other Income***

 

Other income was $207,000, $1.3 million and $3.4million for the years ended December 31, 2009, 2008 and 2007,respectively.  The decreases of $1.0 million from 2008 to 2009 and $2.1million from 2007 to 2008 were primarily due to lower average rates of returnon invested balances and lower invested balances in 2009 compared to 2008 and in2008 compared to 2007.

 

***Liquidityand Capital Resources***

*** ***

Since our inception, we have financed our businessprimarily through private and public placements of stock, research anddevelopment payments under our product discovery and development collaborationsand interest income.  As of December 31, 2009 we had received inexcess of $171.2 million in proceeds from the sales of common and preferredstock.  In addition, we had received $109.4 million in non-refundablelicense fees, research and development payments, cost reimbursements andmilestone payments from our collaboration agreements, and $12.2 million ininterest income.  As of December 31, 2009, over the remaining life ofour current collaboration agreements, we may receive up to an additional $19.3million in non-refundable license fees and research and development paymentsfrom our collaborators.   As of December 31, 2009, assuming allmilestones are achieved and we receive all research and development funding, wemay be entitled to up to $34.4 million.  In 2010, we anticipate receiving$12.4 million in non-refundable research and development funding and up-frontfees.  Also, we may receive royaltypayments in the event our collaborators commercialize products incorporatingour flavor ingredients.  We may notreceive these payments if the collaborations are terminated, amended or notrenewed, or if we do not 

 

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achieve the milestones set forth in the collaborationagreement.  In addition, the timing ofthe receipt of milestone payments in particular is uncertain, as we may achievemilestones significantly earlier or later than we expect.  We cannot predict at this time the level ofour collaborators’ royalty-generating sales, as these sales to date have beenbased on launches of new products without established sales histories.

 

At December 31, 2009, we had $31.1 million incash, cash equivalents and investments available-for-sale as compared to $40.1million at December 31, 2008, a decrease of $9.0 million.  Thisoverall decrease resulted primarily from the use of cash to fund ouroperations.

 

***OperatingActivities***

 

Operating activities used cash of $9.4 million for theyear ended December 31, 2009 compared to $22.0 million for the year ended December 31,2008.  Operating cash flow in 2009compared to the prior year reflects a decrease in our net loss of$769,000.  Non-cash expenses increased$408,000 to $8.3 million for the year ended December 31, 2009 from $7.9million for the year ended December 31, 2008.  The increase in non-cash expenses wasprimarily due to a decrease in the accretion of discount on available for salesecurities of $949,000, partially offset by decreases in stock-basedcompensation for employees and non-employee directors of $361,000 and indepreciation expense of $282,000. Decreases in other current assets provided cash of $76,000 and $1.1million in the years ended December 31, 2009 and 2008, respectively.  Net increases in operating liabilitiesprovided cash of $8.4 million in the year ended December 31, 2009, whilenet decreases in operating liabilities used cash of $4.1 million in the yearended December 31, 2008.  Theincrease in operating liabilities in the year ended December 31, 2009 wasprimarily due to the receipt of $12.0 million in upfront payments fromFirmenich, which are included in deferred revenue at December 31, 2009 andare being recognized as revenue through July 2011.

 

Operating activities used cash of $22.0 million forthe year ended December 31, 2008 compared to $12.4 million for the yearended December 31, 2007. Operating cash flow in 2008 compared to the prioryear reflects an increase in our net loss of $5.1 million.  Non-cash expenses increased $966,000 to $7.9million for the year ended December 31, 2008 from $6.9 million for theyear ended December 31, 2007.  Theincrease in non-cash expenses was primarily due to a decrease in the accretionof discount on available for sale securities of $927,000 and an increase indepreciation expense of $588,000.  Thesewere partially offset by a decrease in non-cash stock-based compensation fornon-employees of $552,000.  Net decreasesin other current assets provided cash of $1.1 million for the year ended December 31,2008, while net increases in other current assets used cash of $810,000 for theyear ended December 31, 2007.  Netdecreases in operating liabilities used cash of $4.1 million for the year endedDecember 31, 2008, while net increases in operating liabilities providedcash of $3.4 million for the year ended December 31, 2007.  The decrease in operating liabilities in theyear ended December 31, 2008 was primarily due to the recognition ofrevenue associated with an $8.0 million upfront payment from Ajinomoto in August 2007.  The revenue associated with this payment wasrecognized from August 2007 through April 2008.

 

***InvestingActivities***

 

Investing activities used cash of $241,000 for theyear ended December 31, 2009.  Cashused in 2009 reflects the purchase of available-for-sale securities of $25.0million and purchases of capital equipment of $380,000.  These purchases were partially offset bymaturities of available-for-sale securities of $25.1 million.

 

Investing activities provided cash of $35.1 millionfor the year ended December 31, 2008. Cash provided in 2008 reflects the maturities of available-for-salesecurities of $101.0 million.  Thesematurities were partially offset by purchases of available-for-sale securities of$63.5 million and purchases of property and equipment of $2.5 million,primarily scientific equipment.

 

Investing activities provided cash of $9.0 million forthe year ended December 31, 2007. Cash provided in 2007 reflects the maturities of available-for-salesecurities of $104.8 million.  Thesematurities were partially offset by purchases of available-for-sale securitiesof $92.6 million and purchases of property and equipment of $3.2 million fornewly hired employees and for the new facility.

 

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***FinancingActivities***

 

Financing activities provided cash of $682,000,$943,000 and $2.1 million for the years ended December 31, 2009, 2008 and2007, respectively.  Cash provided byfinancing activities in 2009 reflects the net proceeds from the sale of commonstock of $682,000, primarily from purchases from our employee stock purchaseprogram and the exercise of stock options. Cash provided by financing activities in 2008 reflects the net proceedsfrom the sale of common stock of $943,000, primarily from purchases from ouremployee stock purchase program and the exercise of stock options.  Fewer stock options were exercised in 2008 ascompared to 2007 due to the lower average stock price during the year.  Cash provided by financing activities in 2007reflects the net proceeds from the sale of common stock of $2.1 million,primarily from the exercise of stock options.

 

As of December 31,2009 future minimum payments due under our contractual obligations are asfollows (in thousands):

 
| ** **       | ** ** | **Payments Due by Period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Operating leases |       | $                          | 20,457     |   | $ | 2,632 |   | $ | 5,447 |   | $ | 5,758 |   | $ | 6,620 |   |
| License payments |       | 153                        |       | 153 |   | — |   | — |   | — |   |
| Total            |       | $                          | 20,610     |   | $ | 2,785 |   | $ | 5,447 |   | $ | 5,758 |   | $ | 6,620 |   |

 

As of December 31, 2009, we had no long-term debtobligations.

 

As of December 31, 2009, we have net openpurchase orders (defined as total open purchase orders at year end less anyaccruals or invoices charged to or amounts paid against such purchase orders)totaling approximately $103,000.  In thenext 12 months, we also plan to spend approximately $1.0 to $1.5 million oncapital expenditures.

 

Our license agreement with the University ofCalifornia calls for annual maintenance fees, which commenced in 2006, orroyalties or service revenues on sales of any products developed usingtechnologies licensed under the agreement. Royalties are calculated as a percentage of covered sales.  The agreement specifies minimum periodicroyalty payments commencing in 2014 and continuing through the expiration ofthe last to expire patent licensed under the agreement.

 

Our future capital uses and requirements depend onnumerous forward-looking factors.  These factors may include, but are notlimited to, the following:

 

·                  the rate of progress and cost of researchand development activities;

·                  our ability to establish and maintainproduct discovery and development collaborations;

·                  the terms and timing of anycollaborative, licensing and other arrangements that we may establish;

·                  the number and scope of our researchactivities;

·                  the costs of filing, prosecuting,defending and enforcing any patent claims and other intellectual propertyrights;

·                  the effect of competing technological andmarket developments; and

·                  the extent to which we acquire orin-license new products, technologies or businesses.

 

We believe our available cash, cash equivalents,investments and existing sources of funding will be sufficient to satisfy ouranticipated operating and capital requirements through at least the next 12months.

 

Until we can generate significant cash from ouroperations, we expect to continue to fund our operations with existing cashresources that were primarily generated from the proceeds of offerings of ourequity securities and research and development payments and milestone paymentsunder our product discovery and development collaborations.  From time to time we may also considerraising additional cash from the sale of equity or other securities.  As of December 31, 2009, over theremaining life of our current collaboration agreements, we expect to receive anadditional $19.3 million in non-refundable license fees 

 

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and research and development payments from ourcollaborators.    As of December 31, 2009, assuming allmilestones are achieved and we receive all research and development funding, wemay be entitled to up to $34.4 million.  In 2010, we anticipate receiving$12.4 million in non-refundable research and development funding and up-frontfees.  This does not include any additionalpayments we may receive related to the achievement of additional milestones, orto new collaborations or extensions of existing collaborations.  This does not include any additional paymentswe will receive related to royalties from the sale of products containing ourflavor ingredients.  We may not receivethe payments if the collaborations are terminated, amended or not renewed, orif we do not achieve the milestones set forth in the collaboration agreements. In addition, the timing of the receipt of milestone payments in particular isuncertain, as we may achieve milestones significantly earlier or later than wecurrently expect.  We cannot predict at this time the level of ourcollaborators’ royalty-generating sales, as these sales to date have been basedon launches of new products without established sales histories.

 

We continue to pursue additional collaborations, whichcould result in additional revenue.  We may not recognize revenues forresearch and development funding, milestones, minimum periodic royalties orroyalties if the collaborations are terminated or amended, or if we do notachieve the milestones set forth in the collaboration agreements.  Ourexpenses will vary based upon (but not limited to) the forward-looking factorslisted above.

 

***Off-BalanceSheet Arrangements***

*** ***

As of December 31, 2009 and 2008, we did not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as special purpose or structured financeentities, which would have been established for the purposes of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.  As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in theserelationships.

 

**Critical Accounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based on our financial statements, which havebeen prepared in accordance with United States generally accepted accountingprinciples, or GAAP.  The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities and expenses and related disclosure ofcontingent assets and liabilities.  On an ongoing basis, we evaluate theseestimates, including those related to revenue recognition, stock-basedcompensation, long-lived assets, accrued liabilities, and income taxes. These estimates are based on historical experience and various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for judgments about the carrying values ofassets and liabilities.  Actual results may differ from these estimatesunder different assumptions or conditions.  While our significantaccounting policies are described in more detail in Note 1 to our financialstatements, we believe the following accounting policies to be critical to thejudgments and estimates used in the preparation of our financial statements:

 

***Revenue Recognition***

 

Our revenue recognitionpolicies are in compliance with in compliance with the Revenue RecognitionTopic of the Financial Accounting Standards Board, or FASB, AccountingStandards Codification.  Some of ouragreements contain multiple elements, including technological and territoriallicenses and research and development services. In accordance with these agreements, we may be eligible for upfrontfees, research and development funding, cost reimbursements, developmentmilestones, commercial milestones, minimum periodic royalty payments androyalty payments.

 

Development revenuesinclude revenues from license fees, research and development funding,development milestones and cost reimbursement. Non-refundable license fees, if not associated with future performance,are recognized when received. Non-refundable license fees, if associated withfuture performance, are attributed to a specific program or collaboration andrecognized over the period of service for that specific program orcollaboration.  Amounts received forresearch funding are recognized as 

 

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revenues as the servicesare performed. Revenue is deferred for fees received before earned.  Revenue from development milestones isrecognized when earned, as evidenced by written acknowledgment from thecollaborator or other persuasive evidence that the milestone has been achieved,provided that (i) the milestone event is substantive and its achievabilitywas not reasonably assured at the inception of the agreement and (ii) ourperformance obligations after the milestone achievement will continue to befunded by the collaborator at a level comparable to before the milestoneachievement. If both of these criteria are not met, the milestone payment isrecognized over the remaining minimum period of our performance obligationsunder the agreement.  Revenue from costreimbursement is recognized when earned, as evidenced by written acknowledgmentfrom the collaborator or other persuasive evidence.

 

Commercial revenuesinclude revenues from commercial milestones, royalties on sales made by ourcollaborators of products incorporating our flavor ingredients and minimumperiodic royalty payments.  Revenue fromcommercial milestones is recognized over the royalty term.  Royalties on sales made by our collaboratorsof products incorporating our flavor ingredients are recognized when theroyalty report is received, which is generally one quarter in arrears.  Non-refundable minimum periodic royaltypayments are recognized as revenues over related annual royalty periods.  Annual royalty terms are specific to eachcollaboration and collaborator and can vary from year to year.  These terms vary based on factors such as thecharacteristics of the flavor ingredient and the product categories andgeographies licensed by the collaborator. Periodically, as contractually specified, our collaborators are requiredto provide a report detailing all sales of products containing our flavoringredients.  To the extent that minimumperiodic royalty payments through the end of any applicable period exceedcalculated royalties, the collaborators are required to remit to us thedifference between royalties calculated and minimum periodic royalty paymentsmade to date.  We recognize thisdifference as royalties on product sales at the time the report is received.  To the extent that minimum periodic royaltypayments made to date exceed calculated royalties, we are not required torefund the difference.  Although we donot currently have any collaborations that include refundable minimum periodicroyalty payments, in such a case, revenue would be deferred for refundableminimum periodic royalty payments received before earned.  As applicable, commercial revenues arereported net of royalties payable under our third party licensingagreements.  To date, substantially allof our commercial revenues have been related to minimum periodic royaltypayments.

 

***Stock-based Compensation Expense***

 

We grant options to purchase our common stock to ouremployees and directors under our equity incentive plan. Eligible employees canalso purchase shares of our common stock under our employee stock purchase planat the lower of: (i) 85% of the fair market value on the first day of atwo-year offering period; or (ii) 85% of the fair market value on the lastdate of each six-month purchase period within the two-year offeringperiod.  In addition, we grant options topurchase our common stock to non-employees under our equity incentive plan.

 

Employee and non-employeedirector stock-based compensation expense was $5.9 million, $6.3 million and$6.2 million for the years ended December 31, 2009, 2008 and 2007,respectively.  At December 31, 2009,total unrecognized estimated compensation expense related to non-vested stockoptions granted prior to that date was $6.9 million, which is expected to berecognized over a weighted average period of 2.0 years.  Total stock options granted to employees andnon-employee directors during the years ended December 31, 2009, 2008 and2007 represented 7.2%, 3.9% and 3.6% of outstanding shares of the end of eachfiscal year.

 

For purposes ofestimating the fair value of stock options granted during 2009 using theBlack-Scholes model, we have made a subjective estimate regarding our stockprice volatility (weighted average of 69.1%). We used an average of thehistorical volatility of our stock for the period our stock has been publiclytraded and the historical volatilities of the common stock of several publiclytraded companies management feels are comparable to us, consistent with theguidance in the Compensation — Stock Compensation Topic of the FASB AccountingStandards Codification.  If our stockprice volatility assumption were increased to 75%, the weighted averageestimated fair value of stock options granted during 2009 would increase by$0.12 per share, or 5.9%.

 

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The expected term ofoptions granted is derived from the average midpoint between vesting and thecontractual term, as described in the Compensation — Stock Compensation Topicof the FASB Accounting Standards Codification. We used this “simplified” method for determining term as we currently donot have sufficient historical exercise data to provide a reasonable basis uponwhich to estimate expected term due to the limited period of time our equityshares have been publicly traded.  Foroptions granted during 2009, we have calculated a weighted average expectedterm of 6.0 years.  If the expected termof the options granted was increased to 8.0 years, the weighted averageestimated fair value of stock options granted during 2009 would increase by$0.22 per share, or 11.0%.

 

The risk-free interestrate for the expected term of the option is based on the average U.S. Treasuryyield curve at the balance sheet date for the expected term (weighted averageof 2.0% for 2009) which, if increased to 5.0%, would increase the weightedaverage estimated fair value of stock options granted during 2009 by $0.11 pershare, or 5.5%.

 

For 2009, 2008 and 2007,we have reduced stock-based compensation expense recognized in the Statement ofOperations to reflect for estimated forfeitures.  The Compensation — Stock Compensation Topicof the FASB Accounting Standards Codification requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.  Pre-vesting forfeitures were estimated to beapproximately 6.8% for both 2009 and 2008 and 3.7% for 2007, based onhistorical experience.  To date, we havenot required any material adjustments to our expected forfeitures.

 

***Income Taxes***

 

We follow the provisionsof the Income Taxes Topic of the FASB Accounting Standards Codification, thatdefines a recognition threshold and measurement attributes for financialstatement recognition and measurement of a tax provision taken or expected tobe taken in a tax return.  The topic alsoprovides guidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. Under the topic, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.  The topic is effective forfiscal years beginning after December 15, 2006.

 

Weadopted the provisions of the topic on January 1, 2007, and we commencedanalyzing filing positions in all of the federal and state jurisdictions wherewe are required to file income tax returns, as well as all open tax years inthese jurisdictions.  As a result ofadoption, we recorded no additional tax liability.  The total amount of unrecognized tax benefitsas of January 1, 2007 was $958,000. As of December 31, 2008 we have completed our analysis of whetherthe deferred tax assets for net operating losses of $105.8 million and researchand development credits of $2.6 million generated in years prior to 2008 wouldbe subject to an annual limitation as a result of an ownership change.  Our analysis concluded that our deferred taxassets for net operating losses and research and development credits will besubject to an annual limitation.  Assuch, $3.1 million of net operating losses will expire and $760,000 of researchand development credits will expire as a result of multiple ownership changeswhich occurred.  In addition, we havedetermined that we will reserve a portion of the available research anddevelopment credit carryforward as required by the topic.

 

**New Accounting Pronouncements**

 

In October 2009, theFASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, aconsensus of the FASB Emerging Issues Task Force. This new pronouncement iseffective for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. Early adoption ispermitted in our third quarter of 2009. We are currently evaluating the impactof adoption of ASU No. 2009-13 on our financial statements.

 

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**Item7A.    *Quantitative andQualitative Disclosures About Market Risk***

 

Our primary exposure to market risk is interest incomesensitivity, which is affected by changes in the general level of United Statesinterest rates. Due to the nature of our investments, we believe that we arenot subject to any material market risk exposure. We do not have any foreigncurrency or other derivative financial instruments.

 

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**Item8.    *FinancialStatements and Supplementary Data***

 

**Index to Financial Statements**

 
| **Description**                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
|                                                     |       |     |
| Report of Independent Registered Public Accounting  Firm |       | 55       |
|                                                     |       |     |
| Balance  Sheets                                          |       | 56       |
|                                                     |       |     |
| Statements  of Operations                                |       | 57       |
|                                                     |       |     |
| Statements of Stockholders’ Equity                  |       | 58       |
|                                                     |       |     |
| Statements  of Cash Flows                                |       | 60       |
|                                                     |       |     |
| Notes  to Financial Statements                           |       | 61       |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders of Senomyx, Inc.

 

We have audited theaccompanying balance sheets of Senomyx, Inc. as of December 31, 2009and 2008, and the related statements of operations, stockholders’ equity, andcash flows for each of the three years in the period ended December 31,2009. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Senomyx, Inc. at December 31,2009 and 2008, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2009, in conformity withU.S. generally accepted accounting principles.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Senomyx Inc.’s internal control overfinancial reporting as of December 31, 2009, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 4,2010 expressed an unqualified opinion thereon.

 

 
|                  | /s/ Ernst & Young LLP |
|-----------------------|--------------------------------|
|                  |                           |
| San Diego, California |                           |
| February 4, 2010 |                           |

 

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**Senomyx, Inc.**

**BalanceSheets**

**(In thousands, except share and pershare data)**

 
| ** **                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Assets:**                                                                                                                                                               |       |                  |       |   |   |
| Current assets:                                                                                                                                                           |       |                  |       |   |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                 |       | $                     | 25,075     |   | $ | 34,006 |   |
| Investments available-for-sale                                                                                                                                            |       | 5,999                 |       | 6,100 |   |
| Other current assets                                                                                                                                                      |       | 866                   |       | 942 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total current assets                                                                                                                                                      |       | 31,940                |       | 41,048 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                               |       | 10,514                |       | 13,418 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total assets                                                                                                                                                              |       | $                     | 42,454     |   | $ | 54,466 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                             |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                     |       | $                     | 5,279      |   | $ | 5,908 |   |
| Leasehold incentive obligation                                                                                                                                            |       | 987                   |       | 987 |   |
| Deferred revenue                                                                                                                                                          |       | 7,610                 |       | 2,284 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                 |       | 13,876                |       | 9,179 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Deferred rent                                                                                                                                                             |       | 1,400                 |       | 1,272 |   |
| Leasehold incentive obligation                                                                                                                                            |       | 6,088                 |       | 7,075 |   |
| Deferred revenue                                                                                                                                                          |       | 3,583                 |       | — |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Commitments                                                                                                                                                               |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                |       |                  |       |   |   |
| Preferred stock, $0.001 par value, 7,500,000 shares  authorized; no shares issued or outstanding at December 31, 2009 and  2008                                      |       | —                |       | — |   |
| Common stock, $0.001 par value, 120,000,000 shares  authorized; 31,108,201 and 30,670,123 shares issued and outstanding at  December 31, 2009 and 2008, respectively |       | 31                    |       | 31 |   |
| Additional paid-in-capital                                                                                                                                                |       | 219,686               |       | 212,951 |   |
| Accumulated other comprehensive gain                                                                                                                                      |       | 3                     |       | 6 |   |
| Accumulated deficit                                                                                                                                                       |       | (202,213              | )          | (176,048 | ) |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total stockholders’ equity                                                                                                                                           |       | 17,507                |       | 36,940 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total liability and stockholders’ equity                                                                                                                             |       | $                     | 42,454     |   | $ | 54,466 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statementsof Operations**

**(In thousands, except share and pershare data)**

 
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                         |       |                              |       |   |   |   |   |
| Revenues:                                                    |       |                              |       |   |   |   |   |
| Development revenues                                         |       | $                                 | 14,590     |   | $ | 16,819 |   | $ | 18,197 |   |
| Commercial revenues                                          |       | 921                               |       | 347 |   | 23 |   |
|                                                         |       |                              |       |   |   |   |   |
| Total revenues                                               |       | 15,511                            |       | 17,166 |   | 18,220 |   |
|                                                         |       |                              |       |   |   |   |   |
| Operating expenses:                                          |       |                              |       |   |   |   |   |
| Research and development                                     |       | 28,201                            |       | 31,800 |   | 29,874 |   |
| General and administrative                                   |       | 13,682                            |       | 13,555 |   | 13,572 |   |
|                                                         |       |                              |       |   |   |   |   |
| Total operating expenses                                     |       | 41,883                            |       | 45,355 |   | 43,446 |   |
|                                                         |       |                              |       |   |   |   |   |
| Loss from operations                                         |       | (26,372                           | )          | (28,189 | ) | (25,226 | ) |
|                                                         |       |                              |       |   |   |   |   |
| Other income                                                 |       | 207                               |       | 1,255 |   | 3,395 |   |
|                                                         |       |                              |       |   |   |   |   |
| Net loss                                                     |       | $                                 | (26,165    | ) | $ | (26,934 | ) | $ | (21,831 | ) |
|                                                         |       |                              |       |   |   |   |   |
| Basic and diluted net loss per share                         |       | $                                 | (0.85      | ) | $ | (0.88 | ) | $ | (0.72 | ) |
|                                                         |       |                              |       |   |   |   |   |
| Shares used to compute basic and diluted net loss  per share |       | 30,935,090                        |       | 30,602,481 |   | 30,326,768 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statements of Stockholders’Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Accumulated other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|--------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **capital**                          | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **       | ** ** | ** **              | ** ** | ** **                           | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at December 31, 2006                                                      |       | 30,166,399       |       | $                       | 30         |                                 | $          | 196,748         |       | $                             | (18        | ) | $ | (127,283 | ) | $ | 69,477 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Issuance of common stock related to the exercise of  options                           |       | 230,492          |       | —                  |       | 1,285                                |       | —          |       | —                        |       | 1,285 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Issuance of common stock related to employee stock  plan purchases                     |       | 79,181           |       | —                  |       | 843                                  |       | —          |       | —                        |       | 843 |   |
| Compensation related to stock options issued to  consultants                           |       | —           |       | —                  |       | 602                                  |       | —          |       | —                        |       | 602 |   |
| Compensation related to stock options granted to  employees and non-employee directors |       | —           |       | —                  |       | 6,219                                |       | —          |       | —                        |       | 6,219 |   |
| Comprehensive loss:                                                                    |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Unrealized gain on investments                                                         |       | —           |       | —                  |       | —                               |       | 32              |       | —                        |       | 32 |   |
| Net loss                                                                               |       | —           |       | —                  |       | —                               |       | —          |       | (21,831                       | )          | (21,831 | ) |
| Comprehensive loss                                                                     |       | —           |       | —                  |       | —                               |       | —          |       | —                        |       | (21,799 | ) |
| Balance at December 31, 2007                                                      |       | 30,476,072       |       | 30                      |       | 205,697                              |       | 14              |       | (149,114                      | )          | 56,627 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Issuance of common stock related to the exercise of  options                           |       | 31,269           |       | —                  |       | 175                                  |       | —          |       | —                        |       | 175 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Issuance of common stock related to employee stock  plan purchases                     |       | 162,782          |       | 1                       |       | 767                                  |       | —          |       | —                        |       | 768 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Compensation related to stock options granted to  consultants                          |       | —           |       | —                  |       | 50                                   |       | —          |       | —                        |       | 50 |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Compensation related to stock options granted to  employees and non-employee directors |       | —           |       | —                  |       | 6,262                                |       | —          |       | —                        |       | 6,262 |   |
| Comprehensive loss:                                                                    |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
|                                                                                   |       |             |       |                    |       |                                 |       |            |       |                          |       |   |   |
| Unrealized loss on investments                                                         |       | —           |       | —                  |       | —                               |       | (8              | )          | —                        |       | (8 | ) |
| Net loss                                                                               |       | —           |       | —                  |       | —                               |       | —          |       | (26,934                       | )          | (26,934 | ) |
| Comprehensive loss                                                                     |       | —           |       | —                  |       | —                               |       | —          |       | —                        |       | (26,942 | ) |
| Balance at December 31, 2008                                                      |       | 30,670,123       |       | 31                      |       | 212,951                              |       | 6               |       | (176,048                      | )          | 36,940 |   |
|                                                                                        |            |                  |            |                         |            |                                      |            |                 |            |                               |            |  |  |  |  |  |  |  |

 

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**Senomyx, Inc.**

**Statements of Stockholders’ Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Accumulated other comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|-------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **capital**                         | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **       | ** ** | ** **              | ** ** | ** **                          | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at December 31, 2008                                                      |       | 30,670,123       |       | $                       | 31         |                                | $          | 212,951         |       | $                             | 6          |   | $ | (176,048 | ) | $ | 36,940 |   |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Issuance of common stock related to the exercise of  options                           |       | 41,431           |       | —                  |       | 69                                  |       | —          |       | —                        |       | 69 |   |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Issuance of common stock related to employee stock  plan purchases                     |       | 396,647          |       | —                  |       | 613                                 |       | —          |       | —                        |       | 613 |   |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Compensation related to stock options granted to  consultants                          |       | —           |       | —                  |       | 152                                 |       | —          |       | —                        |       | 152 |   |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Compensation related to stock options granted to  employees and non-employee directors |       | —           |       | —                  |       | 5,901                               |       | —          |       | —                        |       | 5,901 |   |
| Comprehensive loss:                                                                    |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Unrealized loss on investments                                                         |       | —           |       | —                  |       | —                              |       | (3              | )          | —                        |       | (3 | ) |
| Net loss                                                                               |       | —           |       | —                  |       | —                              |       | —          |       | (26,165                       | )          | (26,165 | ) |
| Comprehensive loss                                                                     |       | —           |       | —                  |       | —                              |       | —          |       | —                        |       | (26,168 | ) |
|                                                                                   |       |             |       |                    |       |                                |       |            |       |                          |       |   |   |
| Balance at December 31, 2009                                                      |       | 31,108,201       |       | $                       | 31         |                                | $          | 219,686         |       | $                             | 3          |   | $ | (202,213 | ) | $ | 17,507 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statementsof Cash Flows**

**(In thousands)**

 
| ** **                                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating Activities**                                                                                          |       |                              |       |   |   |   |   |
| Net loss                                                                                                          |       | $                                 | (26,165    | ) | $ | (26,934 | ) | $ | (21,831 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                      |       |                              |       |   |   |   |   |
| Depreciation                                                                                                      |       | 3,273                             |       | 3,555 |   | 2,967 |   |
| Accretion of discount on available-for-sale  securities                                                           |       | (41                               | )          | (990 | ) | (1,917 | ) |
| Amortization of leasehold incentive obligation                                                                    |       | (987                              | )          | (987 | ) | (947 | ) |
| Stock-based compensation for employees and  non-employee directors                                                |       | 5,901                             |       | 6,262 |   | 6,219 |   |
| Stock-based compensation for non-employees                                                                        |       | 152                               |       | 50 |   | 602 |   |
| Change in operating assets and liabilities:                                                                       |       |                              |       |   |   |   |   |
| Other current assets                                                                                              |       | 76                                |       | 1,148 |   | (810 | ) |
| Accounts payable and accrued expenses                                                                             |       | (618                              | )          | 155 |   | 833 |   |
| Deferred revenue                                                                                                  |       | 8,909                             |       | (4,437 | ) | 1,498 |   |
| Deferred rent                                                                                                     |       | 128                               |       | 199 |   | 860 |   |
| Leasehold incentive obligation                                                                                    |       | —                            |       | — |   | 176 |   |
| Net cash used in operating activities                                                                             |       | (9,372                            | )          | (21,979 | ) | (12,350 | ) |
|                                                                                                              |       |                              |       |   |   |   |   |
| **Investing activities**                                                                                          |       |                              |       |   |   |   |   |
| Purchases of property and equipment                                                                               |       | (380                              | )          | (2,464 | ) | (3,166 | ) |
| Purchases of available-for-sale securities                                                                        |       | (24,961                           | )          | (63,465 | ) | (92,632 | ) |
| Maturities of available-for-sale securities                                                                       |       | 25,100                            |       | 100,988 |   | 104,778 |   |
| Net cash provided by (used in) investing activities                                                               |       | (241                              | )          | 35,059 |   | 8,980 |   |
|                                                                                                              |       |                              |       |   |   |   |   |
| **Financing activities**                                                                                          |       |                              |       |   |   |   |   |
| Proceeds from issuance of common stock                                                                            |       | 682                               |       | 943 |   | 2,128 |   |
| Net cash provided by financing activities                                                                         |       | 682                               |       | 943 |   | 2,128 |   |
|                                                                                                              |       |                              |       |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                                              |       | (8,931                            | )          | 14,023 |   | (1,242 | ) |
| Cash and cash equivalents at beginning of year                                                                    |       | 34,006                            |       | 19,983 |   | 21,225 |   |
| Cash and cash equivalents at end of year                                                                          |       | $                                 | 25,075     |   | $ | 34,006 |   | $ | 19,983 |   |
|                                                                                                              |       |                              |       |   |   |   |   |
| **Supplemental schedule of non-cash investing  and financing activities:**                                   |       |                              |       |   |   |   |   |
| Purchases of property and equipment included in  accounts payable, accrued expenses and other current liabilities |       | $                                 | —     |   | $ | 11 |   | $ | 37 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Notes toFinancial Statements**

 

**1. Organization and Summary of Significant AccountingPolicies**

 

***Organization and Business***

 

Senomyx, Inc. (the “Company”) was incorporated onSeptember 16, 1998 in Delaware and commenced operations in January 1999.The Company is focused on using proprietary taste receptor-based assays andoptimization techniques to discover and develop novel flavors, flavor enhancersand bitter blockers for the packaged food, beverage and ingredient supplyindustries. The Company has product discovery and development collaborationswith several of the world’s leading packaged food, beverage and ingredientcompanies: Ajinomoto Co., Inc. (“Ajinomoto”), Campbell Soup Company (“Campbell”),The Coca-Cola Company (“Coca-Cola”), Firmenich SA (“Firmenich”), Nestlé SA (“Nestlé”)and Solae LLC (“Solae”).  The Company’scollaboration agreements provide for upfront license fees, research anddevelopment funding, reimbursement of certain regulatory and patent costs,milestone payments if the Company achieves development or commercializationgoals, minimum periodic royalties and royalties on sales of productsincorporating the Company’s flavor ingredients. The Company’s current programsfocus on the development of savory, sweet and salt flavor enhancers, bitterblockers and cooling agents.  In accordance with the Subsequent EventsTopic of the Financial Accounting Standards Board (“FASB”) Accounting StandardsCodification, the Company evaluated subsequent events after the balance sheetdate of December 31, 2009 and through the date and time its financialstatements were issued on February 4, 2010.

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith United States generally accepted accounting principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***Cash and Cash Equivalents***

 

The Company considers all highly liquid investmentswith a remaining maturity of three months or less when purchased to be cashequivalents. Cash equivalents are recorded at cost, which approximates marketvalue.

 

***Investments Available-for-Sale***

 

The Company’s surplus cash is invested in UnitedStates Treasuries with maturity dates of one year or less from the settlementdate.  The amortized cost of debtsecurities is adjusted for amortization of premiums and accretion of discountsto maturity with all amortization and accretion included in interest income.The Company’s short-term investments are classified as available-for-sale andcarried at estimated fair value, as determined by quoted market prices, withunrealized gains and losses reported in a separate component of accumulatedother comprehensive income. Realized gains and losses and declines in valuejudged to be other-than-temporary, if any, on available-for-sale securities areincluded in interest income. The cost of securities sold is based on thespecific identification method. Interest on securities classified asavailable-for-sale is included in interest income.

 

***Fair Value of Financial Instruments***

 

The carrying amount of cash and cash equivalents,investments available-for-sale, accounts payable and accrued expenses areconsidered to be representative of their respective fair value because of theshort-term nature of those items.

 

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***Concentration of Credit Risk and MajorCollaborations***

 

Financial instruments, which potentially subject theCompany to concentrations of credit risk, consist of cash, cash equivalents andinvestments available-for-sale. The Company limits its exposure to credit lossby placing its cash, cash equivalents, and investments with high credit qualityfinancial institutions in instruments with short maturities.

 

The Company derives significant portions of itsrevenues from a relatively small number of collaborators. For the year ended December 31,2009, revenues from its three largest collaborators accounted for 71% of totalrevenues.  For the year ended December 31,2008, revenues from its three largest collaborators accounted for 80% of totalrevenues.  For the year ended December 31,2007, revenues from its three largest collaborators accounted for 80% of totalrevenues.

 

***Property and Equipment***

 

Property and equipment are stated at cost lessaccumulated depreciation and are depreciated over the estimated useful lives ofthe assets (ranging from three to five years) using the straight-line method.Leasehold improvements are amortized over the estimated useful life of theasset or the lease term, whichever is shorter.

 

***Patent Costs***

 

Costs related to filing and pursuing patentapplications are expensed as incurred, as recoverability of such expendituresis uncertain.  The Company includes allpatent costs related to the filing of patents on developments in Research andDevelopment expenses.

 

***Impairment of Long-Lived Assets***

 

In accordance with the Property, Plant and EquipmentTopic of the FASB Accounting Standards Codification, if indicators ofimpairment exist, the Company assesses the recoverability of the affectedlong-lived assets by determining whether the carrying value of such assets canbe recovered through undiscounted future operating cash flows. If impairment isindicated, the Company measures the amount of such impairment by comparing thefair value to the carrying value. There have been no indicators of impairmentthrough December 31, 2009.

 

***LeaseholdIncentive Obligation***

 

In conjunction with the lease agreement covering thefacility occupied by the Company (the “Nexus Lease”), the Company received atenant improvement allowance of $155 per square foot leased, or $10.1million.  As the tenant improvements wereconstructed, the Company recorded both the covered tenant improvements (asproperty and equipment) and an offsetting leasehold incentive obligation on theCompany’s balance sheet.  Through theinitial term of the Nexus Lease, the Company records depreciation expense todepreciate the tenant improvements and records an offsetting reduction to rentexpense (to amortize the leasehold incentive obligation), in accordance withthe Leases Topic of the FASB Accounting Standards Codification.

 

***Revenue Recognition***

 

The Company’s revenuerecognition policies are in compliance with the Revenue Recognition Topic ofthe FASB Accounting Standards Codification. Some of the Company’s agreements contain multiple elements, includingtechnological and territorial licenses and research and developmentservices.  In accordance with theseagreements, the Company may be eligible for upfront fees, research anddevelopment funding, cost reimbursements, development milestones, commercialmilestones, minimum periodic royalty payments and royalty payments.

 

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Development revenuesinclude revenues from license fees, research and development funding,development milestones and cost reimbursement. Non-refundable license fees, if not associated with future Companyperformance, are recognized when received. Non-refundable license fees, ifassociated with future Company performance obligations, are attributed to aspecific program or collaboration and recognized over the period of service forthat specific program or collaboration. Amounts received for research funding are recognized as revenues as theservices are performed. Revenue is deferred for fees received beforeearned.  Revenue from developmentmilestones is recognized when earned, as evidenced by written acknowledgmentfrom the collaborator or other persuasive evidence that the milestone has beenachieved, provided that (i) the milestone event is substantive and itsachievability was not reasonably assured at the inception of the agreement and (ii) theCompany’s performance obligations after the milestone achievement will continueto be funded by the collaborator at a level comparable to before the milestoneachievement. If both of these criteria are not met, the milestone payment isrecognized over the remaining minimum period of the Company’s performanceobligations under the agreement.  Revenuefrom cost reimbursement is recognized when earned, as evidenced by writtenacknowledgment from the collaborator or other persuasive evidence.

 

Commercial revenuesinclude revenues from commercial milestones, royalties on sales made by theCompany’s collaborators of products incorporating the Company’s flavoringredients and minimum periodic royalty payments.  Royalties on sales made by the Company’scollaborators of products incorporating the Company’s flavor ingredients arerecognized when the royalty report is received, which is generally one quarterin arrears.  Non-refundable minimumperiodic royalty payments are recognized as revenues over the related annualroyalty periods.  Annual royalty termsare specific to each collaboration and collaborator and can vary from year toyear.  These terms vary based on factorssuch as the characteristics of the flavor ingredient and the product categoriesand geographies licensed by the collaborator. Periodically, as contractually specified, the Company’s collaboratorsare required to provide a report detailing all sales of products containing theCompany’s flavor ingredients.  To theextent that calculated royalties on sales of such products exceed the minimumperiodic royalty payments made to date, the collaborators are required to remitto the Company the difference between royalties calculated and minimum periodicroyalty payments made to date.  TheCompany recognizes this difference as royalties on product sales at the timethe report is received.  To the extentthat minimum periodic royalty payments through the end of any applicable periodexceed calculated royalties, the Company is not required to refund thedifference.  Although the Companycurrently does not have any collaborations that include refundable minimumperiodic royalty payments, in such a case, revenue would be deferred forrefundable minimum periodic royalty payments received before earned.  As applicable, commercial revenues arereported net of royalties payable under the Company’s third-party licensingagreements.  To date, substantially allof the Company’s commercial revenues have been related to minimum periodicroyalty payments.

 

***Research and Development***

 

Research and development costs, including thoseincurred in relation to the Company’s collaborative agreements, are expensed inthe period incurred. Research and development costs primarily consist ofsalaries and related expenses for personnel, facilities and depreciation,research and development supplies, patents and licenses and outside services.

 

***Comprehensive Income (Loss)***

 

The Comprehensive Income Topic of the FASB’sAccounting Standards Codification requires that all components of comprehensiveincome, including net income, be reported in the financial statements in theperiod in which they are recognized. Comprehensive income (loss) is defined asthe change in equity during a period from transactions and other events andcircumstances from non-owner sources. The Company’s accumulated othercomprehensive gain, as of December 31, 2009 and 2008, consisted ofunrealized gains on investments available-for-sale and is reported instockholders’ equity.

 

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***Deferred Rent***

 

Rent expense is recorded on a straight-line basis overthe initial term of any lease. The difference between rent expense accrued andamounts paid under any lease agreement is recorded as deferred rent in theaccompanying balance sheets.

 

***Stock-Based Compensation***

 

The weighted-averageestimated fair value of employee stock options granted during the years ended December 31,2009, 2008 and 2007 were $1.95, $4.21 and $8.39 per share, respectively, usingthe Black-Scholes model with the following weighted average assumptions(annualized percentages):

 
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected  volatility     |       | 69.10                             | %          | 62.81 | % | 67.33 | % |
| Risk-free  interest rate |       | 2.03                              | %          | 2.69 | % | 4.62 | % |
| Dividend  yield          |       | 0.0                               | %          | 0.0 | % | 0.0 | % |
| Expected  term           |       | 6 years                           |       | 6 years |   | 6 years |   |

 

The weighted-averageestimated fair value of employee stock purchase rights granted during the yearsended December 31, 2009, 2008 and 2007 were $1.62, $2.04 and $5.63 pershare, respectively, using the Black-Scholes model with the following weightedaverage assumptions (annualized percentages):

 
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected  volatility     |       | 101.55                            | %          | 65.93 | % | 64.59 | % |
| Risk-free  interest rate |       | 0.38                              | %          | 1.99 | % | 4.46 | % |
| Dividend  yield          |       | 0.0                               | %          | 0.0 | % | 0.0 | % |
| Expected  term           |       | 1.25 years                        |       | 1.25 years |   | 1.25 years |   |

 

Expected volatility isbased on the Company’s historical volatility and the historical volatilities ofthe common stock of comparable publicly traded companies.  In 2009, the Company attributed approximately80% of the expected volatility to the Company’s historical volatility, withapproximately 20% of the expected volatility attributed to the historicalvolatilities of the common stock of comparable publicly traded companies.  In 2008, the Company attributed approximately50% of the expected volatility to the Company’s historical volatility, withapproximately 50% of the expected volatility attributed to the historicalvolatilities of the common stock of comparable publicly traded companies.  In 2007, the Company attributed approximately25% of the expected volatility to the Company’s historical volatility, withapproximately 75% of the expected volatility attributed to the historicalvolatilities of the common stock of comparable publicly traded companies.  The risk-free interest rate for the expectedterm of the option is based on the average United States Treasury yieldcurve at the balance sheet date for the expected term.  The expected term of options granted isderived from the average midpoint between vesting and the contractual term, asdescribed in the Compensation-Stock Compensation Topic of the FASB’s AccountingStandards Codification*. *The assumptions related toexpected volatility and risk-free interest rate used for the valuation of stockoptions under the Company’s stock plan differ from those used for the valuationof stock purchase rights under the Company’s employee stock purchase planprimarily due to the difference in their respective expected terms.

 

As stock-basedcompensation expense recognized in the Statement of Operations for 2009, 2008and 2007 is based on awards ultimately expected to vest, it should be reducedfor estimated forfeitures.  TheCompensation-Stock Compensation Topic of the FASB’s Accounting StandardsCodification requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates.  Pre-vesting forfeitureswere estimated to be approximately 6.8%, 6.8% and 3.7% for the years ended December 31,2009, 2008 and 2007, respectively, based on historical experience.

 

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Compensation expenserelated to stock-based compensation for options and awards is recognized on astraight-line basis.  Compensationexpense related to stock-based compensation is allocated to research anddevelopment or general and administrative based upon the department to whichthe associated employee or non-employee reports.

 

Total estimatedstock-based compensation expense, related to all of the Company’s stock-basedawards granted to employees and non-employee directors, recognized for theyears ended December 31, 2008, 2007 and 2006 was comprised as follows (inthousands):

 
| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Research  and development                                            |       | $                                 | (1,784     | ) | $ | (2,262 | ) | $ | (1,997 | ) |
| General  and administrative                                          |       | (4,117                            | )          | (4,000 | ) | (4,222 | ) |
| Employee  and non-employee director stock-based compensation expense |       | $                                 | (5,901     | ) | $ | (6,262 | ) | $ | (6,219 | ) |

 

At December 31,2009, total unrecognized estimated compensation expense related to non-vestedstock options granted prior to that date was $6.9 million, which is expected tobe recognized over a weighted average period of 2.0 years.

 

***Net Loss Per Share***

 

The Company calculated net loss per share inaccordance with the Earnings Per Share Topic of the FASB’s Accounting StandardsCodification. Basic earnings per share (“EPS”) is calculated by dividing thenet loss by the weighted average number of common shares outstanding for theperiod, without consideration for common stock equivalents. Diluted EPS iscomputed by dividing the net income or loss by the weighted average number ofcommon share equivalents outstanding for the period determined using thetreasury-stock method.  Dilutive commonshare equivalents include the dilutive effect of in-the-money shares, which iscalculated based on the average share price for each period using the treasurystock method. Under the treasury stock method, the exercise price of a share,the amount of compensation cost, if any, for future service that the Companyhas not yet recognized, and the amount of estimated tax benefits that would berecorded in paid-in capital, if any, when the share is exercised are assumed tobe used to repurchase shares in the current period.  For purposes of this calculation, commonstock subject to repurchase by the Company, convertible preferred stock,options, and warrants are considered to be common stock equivalents and are onlyincluded in the calculation of diluted earnings per share when their effect isdilutive.

 

The following table sets forth the computation ofbasic and diluted net loss per share for the respective periods.

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Historical:**                                                |       |                              |       |   |   |   |   |
| Net loss (in thousands)                                        |       | $                                 | (26,165    | ) | $ | (26,934 | ) | $ | (21,831 | ) |
|                                                           |       |                              |       |   |   |   |   |
| Weighted average common shares                                 |       | 30,935,090                        |       | 30,602,635 |   | 30,350,277 |   |
| Weighted average unvested common shares subject to  repurchase |       | —                            |       | (154 | ) | (23,509 | ) |
|                                                           |       |                              |       |   |   |   |   |
| Denominator for basic and diluted earnings per share           |       | 30,935,090                        |       | 30,602,481 |   | 30,326,768 |   |
|                                                           |       |                              |       |   |   |   |   |
| Basic and diluted net loss per share                           |       | $                                 | (0.85      | ) | $ | (0.88 | ) | $ | (0.72 | ) |

 

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| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                        |       |                              |       |   |   |   |   |
| **Historical outstanding antidilutive securities  not included in diluted net loss per share calculation:** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock subject to repurchase                                                                          |       | —                            |       | — |   | 1,275 |   |
| Options to purchase common stock                                                                            |       | 6,775,388                         |       | 5,035,184 |   | 4,120,085 |   |
|                                                                                                        |       |                              |       |   |   |   |   |
|                                                                                                        |       | 6,775,388                         |       | 5,035,184 |   | 4,121,360 |   |

 

***Segment Reporting***

 

The Company currently operates in a single operatingsegment.

 

***Future Accounting Requirements***

 

In October 2009, theFASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, aconsensus of the FASB Emerging Issues Task Force. This new pronouncement iseffective for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. Early adoption ispermitted. The Company is currently evaluating the impact of adoption of ASU No. 2009-13on its financial statements.

 

***Adoption of New Accounting Standards***

 

In August 2009, theFASB issued Accounting Standards Update (“ASU”) No. 2009-05, Fair ValueMeasurements and Disclosures (Topic 820) — Measuring Liabilities at FairValue.  ASU No. 2009-05 providesclarification for measuring liabilities at fair value that in circumstances inwhich a quoted price in an active market for the identical liability is notavailable, a reporting entity is required to measure fair value using avaluation technique that uses either the quoted price of the identicalliability when traded as an asset, quoted prices for similar liabilities orsimilar liabilities when traded as assets, or another valuation technique thatis consistent with the principles of Topic 820. ASU No. 2009-05 is effective for financial statements issued forthe first reporting period (including interim periods) after issuance.  The adoption of ASU No. 2009-05 did nothave a material impact on the Company’s financial statements.

 

**2. Balance Sheet Details**

 

***Investments Available-for-Sale***

 

The following is a summary of investmentsavailable-for-sale securities at December 31, 2009 (in thousands):

 
| ** **               | ** ** | **Amortized Cost** | ** **  | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|--------------------------|------------|--------------------|-------------|---------------------|------------|---------------------|------------|---------------------------|------------|
| United States Treasuries |       | $                  | 5,996       |                | $          | 3                   |       | $                         | —     |   | $ | 5,999 |   |
|                     |       |               |        |                |       |                |       |                      |       |
|                     |       | $                  |  5,996 |                | $          | 3                   |       | $                         | —     |   | $ | 5,999 |   |

 

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The following is a summary of investmentsavailable-for-sale securities at December 31, 2008 (in thousands):

 
| ** **                            | ** ** | **Amortized Cost** | ** **  | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------|------------|--------------------|-------------|---------------------|------------|---------------------|------------|---------------------------|------------|
| United States Government Agency Bonds |       | $                  | 6,094       |                | $          | 6                   |       | $                         | —     |   | $ | 6,100 |   |
|                                  |       |               |        |                |       |                |       |                      |       |
|                                  |       | $                  |  6,094 |                | $          | 6                   |       | $                         | —     |   | $ | 6,100 |   |

 

Gross realized gains and losses on available-for-salesecurities were immaterial during the years ended December 31, 2009 and2008. All of the available-for-sale securities have a contractual maturity at December 31,2009 of one year or less.

 

***Property and Equipment***

 

Property and equipment consists of the following (inthousands):

 
| ** **                                     | ** ** | **As of December 31,** | ** **   |
|------------------------------------------------|------------|-----------------------------|--------------|
| ** **                                     | ** ** | **2009**                    | ** **   | **2008** | ** ** |
| Scientific equipment                           |       | $                           | 10,441       |   | $ | 10,225 |   |
| Computer equipment                             |       | 2,738                       |         | 3,052 |   |
| Furniture and fixtures                         |       | 1,030                       |         | 1,027 |   |
| Leasehold improvements                         |       | 11,792                      |         | 11,792 |   |
|                                           |       |                        |         |   |   |
|                                           |       | 26,001                      |         | 26,096 |   |
| Less accumulated depreciation and amortization |       | (15,487                     | )            | (12,678 | ) |
|                                           |       |                        |         |   |   |
|                                           |       | $                           |  10,514 |   | $ | 13,418 |   |

 

Depreciation expense was $3.3 million, $3.6 millionand $3.0 million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

***Accounts Payable and Accrued Expenses***

 

Accounts payable and accrued expenses consist of thefollowing (in thousands):

 
| ** **                | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Accounts payable          |       | $                           | 242        |   | $ | 759 |   |
| Accrued employee benefits |       | 4,155                       |       | 4,002 |   |
| Other accrued expenses    |       | 882                         |       | 1,147 |   |
|                      |       |                        |       |   |   |
|                      |       | $                           | 5,279      |   | $ | 5,908 |   |

 

**3.Fair Value Disclosures**

 

The following table presents information about the Company’s financialassets and financial liabilities measured at fair value on a recurring basis asof December 31, 2009, and indicates the fair value hierarchy of thevaluation techniques utilized by the Company to determine such fair value. Ingeneral, fair values determined by Level 1 inputs utilize quoted prices(unadjusted) in active markets for identical assets or liabilities that theCompany has the ability to access.  TheCompany classifies money market funds as Level 1 assets.  Fair values determined by Level 2 inputsutilize inputs other than quoted prices included in Level 1 that are observablefor the asset or liability, either directly or indirectly. Level 2 inputsinclude

 

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quoted prices for similar assets and liabilities in active markets, andinputs other than quoted prices that are observable for the asset or liability,such as interest rates and yield curves that are observable at commonly quotedintervals. The Company classifies U. S. Treasuries, U.S. government agencysecurities and commercial paper holdings as Level 2 assets.  Level 3 inputs are unobservable inputs forthe asset or liability, and include situations where there is little, if any,market activity for the asset or liability. The Company does not hold any Level3 assets.  In certain cases, the inputsused to measure fair value may fall into different levels of the fairvalue hierarchy. In such cases, the level in the fair value hierarchywithin which the fair value measurement in its entirety falls has beendetermined based on the lowest level input that is significant to the fairvalue measurement in its entirety. The Company’s assessment of thesignificance of a particular input to the fair value measurement in itsentirety requires judgment, and considers factors specific to the asset orliability.

 

Assets that have recurring measurements are shown below:

 
| ** **                        | ** ** | ** **                                   | ** ** | **Fair  Value Measurement at Reporting Date Using**                               | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **Description**                   | ** ** | **Balance  as of  December 31,   2009** | ** ** | **Quoted  Prices  in Active   Markets for   Identical   Assets********(Level 1)** | ** ** | **Significant    Other   Observable   Inputs (Level 2)** | ** ** | **Significant    Unobservable   Inputs********(Level 3)** | ** ** |
|                              |       |                                         |       |                                                                              |       |   |   |   |   |
| Financial instruments owned:      |       |                                         |       |                                                                              |       |   |   |   |   |
| Money market funds                |       | $                                            | 24,946     |                                                                              | $          | 24,946 |   | $ | — |   | $ | — |   |
| U.S. Treasuries                   |       | 5,999                                        |       | —                                                                            |       | 5,999 |   | — |   |
| Total financial instruments owned |       | $                                            | 30,945     |                                                                              | $          | 24,946 |   | $ | 5,999 |   | $ | — |   |

 

**4. Product Discovery and Development Collaborations**

 

*Ajinomoto.*   InMarch 2006, the Company entered into a collaboration agreement withAjinomoto for the discovery and commercialization of novel flavor ingredientson an exclusive basis in the soup, sauce and culinary aids, and noodle productcategories, and on a co-exclusive basis in the bouillon product category withinJapan and other Asian markets.  Theagreement requires Ajinomoto to pay an upfront license fee and make researchand development funding payments for up to three years. The Company is alsoeligible to receive milestone payments upon the achievement of specific productdiscovery and development goals and, in the event of commercialization, receiveroyalties on sales of products containing new flavor ingredients developedunder the agreement until the expiration of relevant patents.

 

In April 2007, the Company and Ajinomoto amendedthe agreement to expand Ajinomoto’s rights into North America.  Under the terms of the April amendment,Ajinomoto has agreed to pay the Company a non-refundable upfront license feeand the Company is eligible to receive an additional milestone payment uponachievement of a specific goal.  TheCompany is also eligible to receive minimum periodic royalty payments.

 

In August 2007, the Company and Ajinomoto furtheramended the agreement to expand Ajinomoto’s rights into additional productcategories and geographies that were not previously licensed by theCompany.  Under the terms of the August amendment,Ajinomoto has agreed to pay the Company a non-refundable upfront licensefee.  The Company is also eligible toreceive minimum periodic royalty payments.

 

In March 2009,the Company and Ajinomoto further amended the agreement to extend thecollaborative period for an additional year through March 2010.  Under the terms of the extension, Ajinomotoagreed to pay the Company incremental research funding. The potential milestonepayments upon achievement of certain research and development goals remainunchanged.  Upon commercialization, Ajinomotowill make royalty payments based on sales of Ajinomoto’s products that containSenomyx novel flavor ingredients discovered under the agreement.

 

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Through December 31, 2009, the Company hasreceived $17.5 million in upfront fees and research and development funding,one milestone of $500,000 and cost reimbursement payments of $480,000.  If all milestones are achieved, and includingthe $18.5 million in upfront fees, research and development funding, milestoneand cost reimbursements paid through December 31, 2009, the Company may beentitled to up to $19.8 million in upfront fees, research and developmentfunding and milestone payments.  Inaddition to the upfront fees, research and development funding and milestonepayment, the Company has received minimum periodic royalty payments.  These minimum periodic royalty payments arenon-refundable.  Under the terms of thecontract, Ajinomoto will provide the Company a sales report and the Companywill record any additional calculated royalties as commercial revenues.  There is no guarantee that the Company willreceive any further milestone payments or royalties under this collaboration.

 

In October 2006, the Company entered into asecond collaboration agreement with Ajinomoto for the discovery andcommercialization of specified natural flavor ingredients.  The agreementrequires Ajinomoto to make research and development funding payments for up tothree years. This agreement expired in October 2009.  Under the second collaborative agreement,through December 31, 2009 the Company has received $1.4 million inresearch and development funding.

 

*Cadbury.*   InJuly 2005, the Company entered into a collaboration agreement with Cadburyfor the discovery and commercialization of new flavor ingredients in the gumconfectionary area. The agreement requires Cadbury to pay an upfront licensefee and to make research funding payments for up to two years.  The Company and Cadbury periodically amendedthe agreement to extend the research funding phase to January 2010.  This agreement expired in January 2010.  Through December 31, 2009, the Companyhas received $2.9 million in non-refundable upfront license fees and researchfunding.

 

*Campbell.*   InMarch 2001, the Company entered into a collaboration agreement withCampbell to work for a three-year collaborative period for the discovery anddevelopment of specified flavors and flavor enhancers. The agreement requiresCampbell to make research funding payments over three years totaling$3.6 million. The Company is also eligible to receive milestone paymentsupon the achievement of a specific product development goal and, in the eventof commercialization, receive royalties on future net sales of collaboratorproducts containing a discovered ingredient.

 

The agreement was amended in July 2002 to providefor an option to negotiate the right to expand the field to include additionalspecified products. The Company received $1.8 million from Campbell forthe option. The agreement was further amended in November 2002 to redefinecalculated royalties during the royalty term. In July 2003, the Company received $650,000 in additional upfrontresearch support funding and expense reimbursement.

 

The agreement was further amended in March 2004to extend the collaborative period until the earlier of March 2006 or whena flavor or flavor enhancer selected by Campbell receives Generally Recognizedas Safe (“GRAS”) determination, subject to earlier termination under specifiedcircumstances. Under the terms of the extension, the Company will provideadditional research and receive additional research funding totaling$3.0 million for two additional years.

 

The agreement was further amended in February 2006to extend the collaborative period until the earlier of March 2009 or whena flavor or flavor enhancer selected by Campbell receives a GRAS determination,subject to earlier termination under specified circumstances. Under the termsof the extension, the Company will provide additional research and receiveadditional research funding totaling up to $3.0 million for threeadditional years.

 

Theagreement was further amended in March 2009 to extend the collaborativeperiod for an additional year, with three annual options of one year each thatcould further extend the collaboration. Under the terms of the extension, Campbell will provide additionalresearch funding of $300,000, with additional amounts due upon Campbell’selection of the annual options. The potential milestone payment upon achievementof a certain research and development goal remains unchanged.  Upon commercialization, Campbell will makeroyalty payments based on sales of Campbell’s products using the newingredients discovered under the agreement.

 

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Through December 31, 2009, the Company hasreceived $11.2 million in option payments and research and development funding.If all milestones are achieved, and including the $11.2 million in optionpayments and research and development funding paid through December 31,2009, the Company may be entitled to up to $12.2 million. There is noguarantee that the Company will receive any milestone payments or royaltiesunder this collaboration.

 

*Coca-Cola.*   InApril 2002, the Company entered into a collaboration agreement withCoca-Cola for the discovery and development of specified flavors and flavorenhancers. The agreement required Coca-Cola to make research funding paymentsover three years totaling $6.0 million. The Company is also eligible toreceive milestone payments upon the achievement of specific product developmentgoals and, in the event of commercialization, receive minimum periodicroyalties and royalties on future sales of collaborator products containing adiscovered ingredient.  The agreement was amended in April 2004to extend the collaborative period until April 2008, subject to earliertermination under specified circumstances. The agreement was further amended inApril 2008 to extend the collaborative period until April 2010.  Under terms of the first extension, theCompany provided additional research and received additional research fundingtotaling $6.0 million for three additional years.  Under the terms of the second extension, theCompany is providing additional research and is receiving additional researchfunding totaling $4.0 million for two additional years.

 

Through December 31, 2009, the Company hasreceived $15.5 million in research and development funding and onemilestone payment of $500,000. If all milestones are achieved, and includingthe $16.0 million in research and development funding and milestone payment,the Company may be entitled to up to $18.8 million. There is no guaranteethat the Company will receive any milestone payments or royalties under thiscollaboration.

 

***Firmenich***.   In December 2007, the Companyentered into a collaboration agreement with Firmenich to work for a three-yearcollaborative period to discover and develop novel compounds that may be usedby Firmenich on an exclusive basis worldwide as ingredients that impart a cooltaste in flavor systems.  Under theagreement, Firmenich has agreed to pay research funding and specified paymentsupon the achievement of milestones of up to $4.0 million.  In addition, in the event of regulatoryapproval of a discovered compound, the Company is entitled to minimum periodicroyalties.  In the event ofcommercialization, the Company is entitled to receive royalties on future salesof products containing a discovered flavor or flavor enhancer until theexpiration of relevant patents.

*** ***

***Through December 31, 2009, theCompany has received $2.0 million in research funding and $100,000 in costreimbursement payments.  If allmilestones are achieved and including the $2.1 million in research funding andcost reimbursement paid through December 31, 2009, the Company may beentitled to up to $4.0 million. *** There is no guarantee that the Companywill receive any milestone payments or royalties under this collaboration.

*** ***

In November 2008,the Company entered into a Collaborative Commercialization and LicenseAgreement with Firmenich for S2383, the Company’s novel enhancer of thehigh-intensity sweetener sucralose.  Under the terms of the agreement,Firmenich has agreed to pay to the Company royalty payments based on sales ofS2383 when it is sold on either a stand-alone basis or within a flavor system.   Through December 31, 2009, the Companyhas not received any royalties based on sales of S2383.  There is no guarantee that the Company willreceive any royalties under this collaboration.

 

In July 2009,the Company entered into a third collaboration agreement with Firmenich to workfor a minimum two-year collaborative period to discover novel flavoringredients intended to provide a sweet enhancement taste of effect of sucrose,fructose or various forms of rebaudioside. The agreement includes three consecutive options of one year each thatcould further extend the collaborative research funding period.  Under the agreement, Firmenich has agreed topay a license fee, payable in three installments, 

 

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research and developmentfees and specified payments upon the achievement of milestones.  In the event of commercialization, theCompany is entitled to receive royalties on future sales of products containinga discovered flavor ingredient.  Through December 31,2009, the Company has received $12.9 million in license fees and research anddevelopment funding.  In January 2010,the remaining $8 million portion of the second license fee installment becamedue to the Company.  In addition to thelicense fee installment, the Company will also receive additional paymentsrelated to the achievement of one or more milestones and for reimbursement of specifiedexpenses in accordance with the terms of the agreement.  If all milestones are achieved and allextension periods are exercised, and including the $12.9 million in licensefees and research and development funding paid through December 31, 2009,the Company may be entitled to up to $34.5 million.

 

*Kraft Foods Global, Inc.*   InDecember 2000, the Company entered into a collaboration agreement withKraft Foods Global Inc. (“Kraft Foods”) for the discovery and development offlavor enhancers. Under the terms of the collaboration, Kraft Foods agreed topay research funding of approximately $1.4 million per year for threeyears. In May 2002, the agreement was amended to provide for an additionalcollaborative program. The level of research support under the original programwas reduced from $1.4 million to $1.1 million per year for theremainder of the research term. In May 2005 and July 2005, theagreement was further amended to extend the collaborative period until June 2005and July 2007, respectively, and to provide for an additional specifiedproduct field.

 

Kraft Foods agreed to make research funding paymentsrelated to the May 2002 program of $1.8 million over the period from May 2002through December 2003, $1.8 million over the period from January 2004through May 2005, $339,000 over the period May 2005 through July 2005,and $1.7 million from July 2005 through November 2006.  The Company earned a milestone payment of$375,000 in 2002 and a milestone payment of $250,000 in 2006 under the May 2002research program.

 

In December 2005, the Company further amended theagreement to provide for a new three-year discovery and developmentcollaboration. In November 2006, this agreement was further amended torevise the structure of the research and development funding.   Under the terms of the new collaboration,Kraft Foods agreed to pay the Company an initial license fee and incrementalresearch and development funding over the three-year period.  The Company was eligible to receive milestonepayments upon achievement of specific product discovery and development goals,and, in the event of commercialization, receive royalties based on sales ofKraft Foods products containing any flavor modifiers developed under theagreement.

 

In July 2007, the Company further amended thecollaboration agreement to extend until December 9, 2008 Kraft Foods’ability to evaluate novel flavor modifiers under development by us forpotential use by Kraft Foods on an exclusive basis in a specified product fieldin the dessert product category and on a co-exclusive basis in the powderedbeverage product field.  In October 2007the Company received notification from Kraft Foods terminating thecollaboration agreement effective as of December 2007.  All rights previously licensed to Kraft Foodsreturned to the Company upon such termination.

 

Through December 31, 2009, the Company hasreceived $12.1 million in research and development funding and twomilestone payments which totaled $625,000.

 

*Nestlé.*   InApril 2002, as amended in April 2005, April 2008 and September 2008,the Company entered into a collaboration agreement with Nestlé for thediscovery and development of specified flavors and flavor enhancers. Theagreement requires Nestlé to make research funding payments through April 2010,subject to earlier termination under specified circumstances.  The Company is also eligible to receivemilestone payments upon the achievement of specific product development goalsand, in the event of commercialization, receive royalties on net sales ofcollaborator products containing a discovered ingredient. The Company receivedpayments for the achievement of four milestones in 2002, 2003, 2004 and2005.  The Company also received paymentfor the reimbursement of certain regulatory expenses in 2005.  Through December 31, 2009, the Companyhas received $13.9 million in research and development funding, fourmilestone payments of $375,000 each, and $339,000 in reimbursement of certainregulatory costs. In addition, the Company has received royalties on net salesof collaborator products containing 

 

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discoveredflavor ingredients. If all milestones are achieved, and including the $15.7million in research and development funding, milestones and reimbursement ofcertain regulatory expenses, the Company may be entitled to up to$17.5 million.  In addition, theCompany has received royalty payments and minimum periodic royalty paymentsfrom Nestlé.  The agreement currently hasa specified escalating non-refundable payment arrangement in lieu of asales-based royalty through March 2010. After March 2010, the agreement will revert back to a sales-basedroyalty.  There is no guarantee that theCompany will receive any further milestone payments or royalties under thiscollaboration.

 

In October 2004, the Company entered into asecond product discovery and development collaboration agreement with Nestléwhich provides for a five-year collaborative period focusing on the discoveryand commercialization of specified novel flavor ingredients, subject toextension or earlier termination under specified circumstances.  This agreement has subsequently been extendedfor three three-month increments and one 12-month increment.  The agreement has also been amended to agreethat the discovery phase of the agreement concluded in January 2009 andthe program advanced into the development phase with Nestlé paying fundingthrough July 2010, one year earlier than anticipated.  The Company is also eligible to receivemilestone payments upon achievement of specific product discovery anddevelopment goals, and in the event of commercialization, is entitled toreceive royalties on future net sales of products containing a discovered novelflavor ingredient.  There is no guaranteethat the Company will receive any milestone payments or royalties under thiscollaboration.

 

Under this second agreement, through December 31,2009, the Company has received $9.7 million in research and developmentfunding, one milestone of $350,000 and one milestone of $500,000. If allmilestones are achieved, and including the $10.6 million in research anddevelopment funding and milestone, the Company may be entitled to up to$12.1 million. There is no guarantee that the Company will receive anymilestone payments or royalties under this collaboration.

 

*Solae.*   InApril 2007, as amended in September 2008 and April 2009, theCompany entered into a collaboration agreement with Solae for the discovery andcommercialization of novel flavor ingredients for soy proteins.  The agreement requires Solae to make researchfunding payments through 2010, subject to earlier termination under specifiedcircumstances.  The Company is alsoeligible to receive milestone payments upon the achievement of specific productdiscovery and development goals, and in the event of commercialization,royalties on future sales of products containing flavor ingredients developedunder the agreement.  Through December 31,2009, the Company has received $3.6 million in research and development fundingand one milestone payment of $250,000. If all milestones are achieved and including the $3.9 million inresearch and development funding and milestone, the Company may be entitled toup to $6.4 million.  There is noguarantee that the Company will receive any further milestone payments orroyalties under this collaboration.

 

In connection with the above listed collaborationagreements, the Company has recognized development revenue of $14.6 million,$16.8 million and $18.2 million for the years ended December 31, 2009,2008 and 2007, respectively. As of December 31, 2009 and 2008, the Companyhas deferred revenue of $11.2 million and $2.3 million, respectively.

 

**5. Commitments**

 

***Leases and Loans***

 

The Company leases its primary office facility underthe Nexus Lease that expires on February 28, 2017. The Company moved themajority of its operations to the new facility in November 2006.  Rent payments on the facility commenced April 1,2007. The Nexus Lease provides for an annual minimum 3% rent increase. TheCompany began recognizing rent expense upon the facility being ready tooccupy.  Rent expense for the years endedDecember 31, 2009, 2008 and 2007 was $1.7 million, $1.7 million and $2.1million, respectively.  The Company hasalso entered into various operating lease agreements for office equipment.

 

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The estimated annual future minimum rental paymentsunder the Company’s operating leases in effect at December 31, 2009, whichexpire through 2017, for the years ending December 31 are as follows (inthousands):

 
| ** **                   | ** ** | **Operating  Leases** | ** **   |
|------------------------------|------------|-----------------------|--------------|
| 2010                         |       | $                     |  2,632  |   |
| 2011                         |       | 2,688                 |         |
| 2012                         |       | 2,759                 |         |
| 2013                         |       | 2,837                 |         |
| 2014                         |       | 2,921                 |         |
| Thereafter                   |       | 6,620                 |         |
|                         |       |                  |         |
| Total minimum lease payments |       | $                     |  20,457 |   |

 

In connection with certain license agreements, theCompany’s annual future minimum obligation payments are $153,000 for the yearending December 31, 2010.

 

**6. Stockholders’ Equity**

 

***Convertible Preferred Stock***

 

The Company’s certificate of incorporation, as amendedand restated, authorizes the Company to issue up to 7,500,000 shares ofpreferred stock, with a par value of $0.001, in one or more series. The Boardof Directors may authorize the issuance of convertible preferred stock withvoting or conversion rights that could adversely affect the voting power orother rights of the holders of the common stock. The issuance of convertible preferredstock, while providing flexibility in connection with possible acquisitions andother corporate purposes, could, among other things, have the effect ofdelaying, deferring or preventing a change in control of the Company and mayadversely affect the market price of the common stock and the voting and otherrights of the holders of common stock. No shares of convertible preferred stock were outstanding as of December 31,2009 or 2008.

 

***Equity Incentive Plan***

 

During 1999, the Company adopted the 1999 EquityIncentive Plan, which was amended and restated by the 2004 Equity IncentivePlan in connection with the Company’s initial public offering (the “Plan”),which provides for the grant of incentive and non-statutory stock options andrestricted stock purchase rights to employees, directors and consultants of theCompany. The Plan, as amended, authorizes the Company to issue up to12,280,040 shares of common stock. At December 31, 2009, the Company has repurchased a total of131,153 shares and 3,375,832 shares remain available for grant underthe Plan.  The Company issues new sharesupon the exercise of stock options.

 

The Plan allows the Company to grant restricted stockpurchase rights at no less than 85% of the fair value of the Company’s commonstock as determined by the Board of Directors at the date of the grant. Allrestricted stock purchase rights vest in accordance with a vestingschedule determined by the Board of Directors, typically over a four-yearperiod.  Since the Plan’s inception,under the Plan, 457,069 restricted stock purchase rights have been granted atexercise prices ranging from $0.35 to $0.94 per share, all of which have beenexercised as of December 31, 2009, of which no shares are subject torepurchase.  No restricted stock purchaserights were granted during the years ended December 31, 2009, 2008 or2007.

 

Options granted under the Plan generally expire nolater than 10 years from the date of grant (five years for a 10% stockholder).Options generally vest and become fully exercisable over a period of fouryears.  In certain cases, grants toofficers, directors and consultants can be made fully exercisable at the dateof grant. The exercise price of incentive stock options must be equal to atleast the fair value of the Company’s common stock on the date of grant, andthe exercise price of non-statutory stock options may be no less than 85% ofthe fair value of the Company’s common stock on the date of grant. The exercise

 

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priceof any option granted to a 10% stockholder may be no less than 110% of the fairvalue of the Company’s common stock on the date of grant.  The Company has an option to repurchase allunvested shares, at the original purchase price, upon the voluntary orinvoluntary termination of employment with, or consulting services provided to,the Company for any reason.  At December 31,2009, no shares of common stock were unvested and subject to repurchase.

 

The following is a further breakdown of the optionsoutstanding as of December 31, 2009:

 
| ** **                      | ** **        | ** **             | ** ** | **Options Outstanding**                             | ** ** | **Options Vested and Exercisable**     | ** ** |
|---------------------------------|-------------------|------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| **Range of   Exercise  Prices** | ** **        | **Number of  Options** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                            |              |                   |       |                                                |       |                                   |       |   |   |   |   |
| $                               |  0.74-3.20   |                   | 565,487    |                                                | 5.23       |                                   | $          |  1.20 |   | 422,862 |   | $ |  0.99 |   |
| $                               |  3.21-3.21   |                   | 1,867,400  |                                                | 9.13       |                                   | $          |  3.21 |   | 42,397 |   | $ |  3.21 |   |
| $                               |  3.40-7.49   |                   | 1,762,935  |                                                | 6.88       |                                   | $          |  6.62 |   | 1,213,677 |   | $ |  6.51 |   |
| $                               |  8.00-12.91  |                   | 1,382,140  |                                                | 6.38       |                                   | $          |  11.39 |   | 1,129,591 |   | $ |  11.12 |   |
| $                               |  13.10-16.25 |                   | 1,161,626  |                                                | 6.32       |                                   | $          |  15.50 |   | 1,074,424 |   | $ |  15.55 |   |
| $                               |  16.45-18.99 |                   | 35,800     |                                                | 5.70       |                                   | $          |  18.17 |   | 35,769 |   | $ |  18.17 |   |
|                            |              |                   |       |                                                |       |                                   |       |   |   |   |   |
|                            |              | 6,775,388              |       |                                                |       | $                                      |  7.79 |   | 3,918,720 |   | $ |  9.79 |   |

 

As of December 31, 2009, the total intrinsicvalue of options outstanding and exercisable was $1.2 million.  At December 31, 2009, the weightedaverage remaining contractual term for options vested and exercisable was 6.0years.

 

The following is a summary of stock option and stockaward activity under the Plan through December 31, 2009:

 
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|
|                                  |       |                  |       |                                   |       |
| Outstanding at January 1, 2007   |       | 3,489,874             |       | $                                      | 9.86       |   |
| Granted                               |       | 1,214,691             |       | $                                      | 12.86      |   |
| Exercised                             |       | (230,492              | )          | $                                      | 5.61       |   |
| Cancelled                             |       | (353,988              | )          | $                                      | 12.70      |   |
|                                  |       |                  |       |                                   |       |
| Outstanding at December 31, 2007 |       | 4,120,085             |       | $                                      | 10.74      |   |
| Granted                               |       | 1,184,490             |       | $                                      | 7.08       |   |
| Exercised                             |       | (31,269               | )          | $                                      | 5.91       |   |
| Cancelled                             |       | (238,122              | )          | $                                      | 11.53      |   |
|                                  |       |                  |       |                                   |       |
| Outstanding at December 31, 2008 |       | 5,035,184             |       | $                                      | 9.87       |   |
| Granted                               |       | 2,387,060             |       | $                                      | 3.12       |   |
| Exercised                             |       | (41,431               | )          | $                                      | 1.78       |   |
| Cancelled                             |       | (605,425              | )          | $                                      | 7.13       |   |
|                                  |       |                  |       |                                   |       |
| Outstanding at December 31, 2009 |       | 6,775,388             |       | $                                      | 7.79       |   |

 

Thetotal intrinsic value of stock option exercises during the years ended December 31,2009, 2008 and 2007 was $83,000, $18,000 and $1.5 million, respectively.

 

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***Employee Stock Purchase Plan***

 

During 2004, the Companyadopted the 2004 Employee Stock Purchase Plan (the “Purchase Plan”), whichallows all eligible employees to purchase shares of the Company’s common stockat the lower of: (i) 85% of the fair market value on the first day of atwo-year offering period; or (ii) 85% of the fair market value on the lastdate of each six-month purchase period within the two-year offeringperiod.  Employees may authorize theCompany to withhold up to 15% of their compensation during any purchase period,subject to certain limitations.  ThePurchase Plan authorizes up to 1,513,096 shares to be granted.  At December 31, 2009, 912,365 shares ofcommon stock have been issued under the Purchase Plan at an average price of$4.41 per share.

 

***Shares Reserved for Future Issuance***

 

The following shares of common stock are reserved forfuture issuance:

 
| ** **                                              | ** ** | **December 31,   2009** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| Common stock options granted and outstanding            |       | 6,775,388                    |       |
| Common stock options reserved for future grant          |       | 3,375,832                    |       |
| Common stock reserved under Purchase Plan               |       | 600,731                      |       |
| Total common stock shares reserved for future  issuance |       | 10,751,951                   |       |

 

***Shareholders’ Rights Plan***

 

In February 2005, the Company entered into aShare Purchase Rights Plan (the “Rights Plan”). Terms of the Rights Plan provide for a dividend distribution of onepreferred share purchase right (a “Right”) for each outstanding share of commonstock, par value $0.001 per share (the “Common Shares”), of the Company.  Thedividend was payable on February 21, 2005 to the stockholders of record onthat date.  Each Right entitles the registered holder to purchase from theCompany one one-hundredth of a share of Series A Junior ParticipatingPreferred Stock, par value $0.001 per share (the “Preferred Shares”), at a price of$100.00 per one one-hundredth of a Preferred Share, subject toadjustment.  Each one one-hundredth of a share of Preferred Shares hasdesignations and powers, preferences and rights, and the qualifications,limitations and restrictions which make its value approximately equal to thevalue of a Common Share.  The description and terms of the Rights are setforth in a Rights Agreement, dated as of February 14, 2005 entered intobetween the Company and Mellon Investor Services LLC, as rights agent.

 

**7. Income Taxes**

 

The Company follows theprovisions of the Income Taxes Topic of FASB’s Accounting StandardsCodification that defines a recognition threshold and measurement attributesfor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The Income Taxes Topic also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.  Under theIncome Taxes Topic, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.

 

The Company commencedanalyzing filing positions in all of the federal and state jurisdictions whereit is required to file income tax returns, as well as all open tax years inthese jurisdictions.  As a result of adoption,the Company recorded no additional tax liability.  The total amount of unrecognized tax benefitsas of January 1, 2009 was approximately $1.1 million.   As of December 31, 2007, the Companyhas completed its analysis of whether the deferred tax assets for net operatinglosses of $105.8 million and research and development credits of $2.6 milliongenerated in years prior to 2008 would be subject to an annual limitation as aresult of an ownership change.  TheCompany’s analysis concluded that the Company’s deferred tax assets for netoperating losses and research and development credits will be subject to anannual limitation.  As such $3.1 millionof net operating losses will expire and $760,000 of research and developmentcredits will expire as a result of the multiple ownership changes whichoccurred.  The 

 

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Company has determinedthat it will reserve a portion of the available research and development creditcarryforward as this has historically been the amount disallowed by relevanttax authorities.  As a result of thecompletion of the analysis, the Company has included the net operating loss andresearch and development credit carryforward net of the amount to be expired asa deferred tax asset.  However, theCompany has determined that sufficient future taxable income will not beavailable to realize the deferred tax assets for net operating loss andresearch and development credit carryforwards. Therefore, the Company has recognized a full valuation allowance forthese deferred tax assets.

 

The completion of theCompany’s Section 382 and 383 analyses for years prior to 2008 does notprevent further limitations to the Company’s net operating loss and researchand development credit carryforwards.  TheCompany updated the Section 382 and 383 analyses through December 31, 2009 anddetermined that there has not been a subsequent ownership change; however,additional limitations may arise if the Company experiences an ownership changein subsequent years.

 

Arollforward of changes in the Company’s unrecognized tax benefits is shownbelow (in thousands).

 
| Balance at January 1, 2009                               |   | $      | 1,096  |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Additions based on tax positions related to the  current year |   | 219    |   |
| Additions for tax positions of prior years                    |   | 226    |   |
| Reductions for tax positions of prior years                   |   | — |   |
| Settlements                                                   |   | — |   |
| Balance at December 31, 2009                             |   | $      | 1,541  |   |

 

Due to theexistence of the valuation allowance, future changes in ourunrecognized tax benefits will not impact the Company’s effective taxrate.

 

The Company is subject totaxation in the U.S. and state jurisdictions. The Company’s tax years for 2006 and forward are subject to examinationby the IRS and tax years 2005 and forward are subject to examination byCalifornia tax authorities.  Due to thecarryforward of unutilized net operating losses and research and developmentcredits, the IRS and the California tax authorities may go back to the taxableyears in which the net operating losses and research and development creditsbecame available to recompute such amounts, but not redetermine the taxliability for such years.  The Company iscurrently not under examination by any taxing authorities.

 

The Company’s practice isto recognize interest and/or penalties related to income tax matters in incometax expense.  During the twelve monthsended December 31, 2009 and 2008, the Company did not recognize anyinterest or penalties.  Upon adoption ofthe Income Taxes Topic on January 1, 2007, the Company did not record anyinterest or penalties.

 

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Significant components of the Company’s net deferredtax assets at December 31, 2009 and 2008 are shown below (in thousands). Avaluation allowance of $70.7 million and $61.4 million has been established tooffset the net deferred tax assets as of December 31, 2009 and 2008,respectively, due to uncertainties surrounding the Company’sability to generate future taxable income to realize these assets.

 
| ** **                                  | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | **2009**                           | ** ** | **2008** | ** ** |
|                                        |       |                               |       |   |   |
| Deferred tax assets:                        |       |                               |       |   |   |
| Net operating loss carryforwards            |       | $                                  | 48,589     |   | $ | 45,518 |   |
| Capitalized research and development        |       | 6,009                              |       | 5,473 |   |
| Research and development credits            |       | 3,704                              |       | 3,292 |   |
| Deferred revenue                            |       | 4,561                              |       | 931 |   |
| Stock compensation                          |       | 5,194                              |       | 4,278 |   |
| Other, net                                  |       | 2,606                              |       | 1,899 |   |
|                                        |       |                               |       |   |   |
| Total deferred tax assets                   |       | 70,663                             |       | 61,391 |   |
|                                        |       |                               |       |   |   |
| Total deferred tax liabilities              |       | —                             |       | — |   |
|                                        |       |                               |       |   |   |
| Net deferred tax assets                     |       | 70,663                             |       | 61,391 |   |
| Valuation allowance for deferred tax assets |       | (70,663                            | )          | (61,391 | ) |
|                                        |       |                               |       |   |   |
| Net deferred tax assets                     |       | $                                  | —     |   | $ | — |   |

 

The provision for incometaxes on earnings subject to income taxes differs from the statutory federalrate at December 31, 2009, 2008 and 2007, due to the following (inthousands):

 
| ** **                                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  income taxes at 35%                       |       | $        | (9,158     | )        | $          | (9,427   | )          | $ | (7,640 | ) |
| State  income tax, net of federal benefit          |       | (1,503   | )          | (1,548   | )          | (1,254   | )          |
| Tax  effect on non-deductible expenses and credits |       | 1,229    |       | 3,570    |       | 374      |       |
| Other                                              |       | (154     | )          | —   |       | —   |       |
| Increase  in valuation allowance                   |       | 9,427    |       | 7,405    |       | 8,520    |       |
|                                               |       | $        | (159       | )        | $          | —   |       | $ | — |   |

 

The Company recognizes windfall tax benefits associatedwith the exercise of stock options directly to stockholders’ equity only whenrealized.  Accordingly, deferred taxassets are not recognized for net operating loss carryforwards resulting fromwindfall tax benefits occurring from January 1, 2006 onward.  At December 31, 2009 deferred tax assetsdo not include excess tax benefits from stock-based compensation ofapproximately $1.1 million.

 

At December 31, 2009, the Company had federal andCalifornia tax net operating loss carryforwards of approximately$139.5 million and $34.4 million, respectively.  The federal and California tax losscarryforwards will begin to expire in 2019 and 2012, respectively, unlesspreviously utilized.

 

At December 31, 2009, the Company also hadfederal and California research and development tax credit carryforwards ofapproximately $3.9 million and $2.9 million, respectively. The federalcredit carryforward will begin to expire in 2019 unless previously utilized andthe California credit will carry forward indefinitely until utilized.

 

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**8. Summary of Quarterly Financial Data (unaudited)**

 

The following is a summary of the unaudited quarterlyresults of operations for the years ended December 31, 2009 and 2008 (inthousands, except per share amounts):

 
| ** **                                  | ** ** | **Year Ended December 31,  2009** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                     | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                   |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                      | 3,512      |   | $ | 2,966 |   | $ | 4,157 |   | $ | 4,876 |   |
| Total operating expenses                    |       | 10,865                                 |       | 11,035 |   | 10,489 |   | 9,494 |   |
| Net loss                                    |       | (7,341                                 | )          | (8,047 | ) | (6,165 | ) | (4,612 | ) |
| Basic and diluted net loss per common share |       | $                                      | (0.24      | ) | $ | (0.26 | ) | $ | (0.20 | ) | $ | (0.15 | ) |

 
| ** **                                  | ** ** | **Year Ended December 31,  2008** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                     | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                   |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                      | 6,069      |   | $ | 3,566 |   | $ | 4,035 |   | $ | 3,496 |   |
| Total operating expenses                    |       | 11,452                                 |       | 11,552 |   | 10,762 |   | 11,589 |   |
| Net loss                                    |       | (4,823                                 | )          | (7,677 | ) | (6,479 | ) | (7,955 | ) |
| Basic and diluted net loss per common share |       | $                                      | (0.16      | ) | $ | (0.25 | ) | $ | (0.21 | ) | $ | (0.26 | ) |

 

**9.****Subsequent Event**

 

On January 29,2010 the Company announced that Firmenich SA has made a decision to proceedwith commercial development of S6973, the Company’s sucrose (table sugar)enhancer.  In conjunction with Firmenich’sdecision to select S6973 for commercial development, the Company will receivean additional $8.0 million license fee payment from Firmenich during the firstquarter of 2010. The Company will also receive additional payments relating tothe achievement of one or more milestones and for reimbursement of specifiedexpenses in accordance with the terms of the Collaborative Research andDevelopment Agreement between the Company and Firmenich dated July 28,2009, as amended.

 

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**Item9.    *Changes in andDisagreements with Accountants on Accounting and Financial Disclosure***

 

There were no changes in or disagreements with Ernst &Young LLP on accounting and financial disclosure required to be reported underthis Item 9.

 

**Item9A.    *Controls andProcedures***

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended, or the Exchange Act.Based on this evaluation, our principal executive officer and our principalfinancial officer concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this annual report.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our management, includingour Chief Executive Officer and our Vice President and Chief Financial Officer,we conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in *InternalControl - Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in *Internal Control — IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2009.

 

The effectiveness of ourinternal control over financial reporting as of December 31, 2009 has beenaudited by Ernst & Young LLP, an independent registered publicaccounting firm, as stated in their report which is included herein.

 

**Changesin Internal Control Over Financial Reporting**

 

There was no change inour internal control over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

**Report of IndependentRegistered Public Accounting Firm**

** **

The Board of Directorsand Stockholders of Senomyx, Inc.

 

We have audited SenomyxInc.’s internal control over financial reporting as of December 31, 2009,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). Senomyx Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

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A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, SenomyxInc. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on****the COSO criteria**.**

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the balance sheets as of December 31, 2009 and 2008, andthe related statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2009 of Senomyx, Inc.and our report dated February 4, 2010 expressed an unqualified opinionthereon.

 

 
|   | /s/ Ernst &  Young LLP |
|--------|---------------------------------|

 

 

San Diego, California

February 4, 2010

** **

**Item9B.    *Other Information***

 

None.

 

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**PART III**

 

Certain information required by Part III of this Form 10-Kis omitted from this report because registrant will file a definitive ProxyStatement within 120 days after the end of its fiscal year pursuant toRegulation 14A for its 2010 Annual Meeting of Shareholders to be held on June 3,2010, referred to as the Proxy Statement, and the information included thereinis incorporated herein by reference.

 

**Item10.    *Directors,Executive Officers and Corporate Governance***

 

We have adopted a Code of Business Conduct and EthicsPolicy that applies to our directors and employees (including our principalexecutive officer, principal financial officer, principal accounting officerand controller), and have posted the text of the policy on our website (www.senomyx.com)in connection with “Investor Relations” materials. In addition, we intend topromptly disclose (i) the nature of any amendment to the policy thatapplies to our principal executive officer, principal financial officer,principal accounting officer or controller, or persons performing similarfunctions and (ii) the nature of any waiver, including an implicit waiver,from a provision of the policy that is granted to one of these specifiedindividuals, the name of such person who is granted the waiver and the date ofthe waiver on our website in the future.

 

The other information required by this item isincorporated by reference to the Proxy Statement under the sections entitled “Electionof Directors” and “Section 16(a) Beneficial Ownership ReportingCompliance.”

 

**Item11.    *ExecutiveCompensation***

 

The information required by this item is incorporatedherein by reference to the information from the Proxy Statement under thesections entitled “Executive Compensation,” “Compensation Committee Report”and “Compensation Committee Interlocks and Insider Participation.”

 

**Item12.    *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

The information required by this item is incorporatedherein by reference to the information from the Proxy Statement under thesections entitled “Security Ownership of Certain Beneficial Owners andManagement” and “Securities Authorized for Issuance under Equity CompensationPlans.”

 

**Item13.    *CertainRelationships and Related Transactions, and Director Independence***

 

The information required by this item is incorporatedherein by reference to the information from the Proxy Statement under thesections entitled “Election of Directors” and “Certain Relationships andRelated Transactions.”

 

**Item14.    *PrincipalAccountant Fees and Services***

 

The information required by this item is incorporatedherein by reference to the information from the Proxy Statement under thesection entitled “Principal Accountant Fees and Services.”

 

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**PART IV**

 

**Item15.    *Exhibits andFinancial Statement Schedules***

 

**(a)**                                1. ***Financial Statements***

 

See Index to Financial Statements in Item 8 of thisannual report on Form 10-K, which is incorporated herein by reference.

 

2. ***Financial Statement Schedules***

 

All schedules have been omitted because they are notapplicable or required, or the information required to be set forth therein isincluded in the Financial Statements or notes thereto included in Item 8of this annual report on Form 10-K.

 

3.***Exhibits***

** **
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                     |
|-----------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)                   |       | 3.1                     |       | Amended and  Restated Certificate of Incorporation as currently in effect.                                                                                      |
| (2)                   |       | 3.2                     |       | Amended and  Restated Bylaws as currently in effect.                                                                                                            |
| (3)                   |       | 3.3                     |       | Certificate of  Designation of Series A Junior Participating Preferred Stock, as filed  with the Secretary of State of Delaware on February 14, 2005. |
| (1)                   |       | 4.1                     |       | Form of  Common Stock Certificate.                                                                                                                         |
| (3)                   |       | 4.2                     |       | Form of  Rights Certificate.                                                                                                                               |
| (3)                   |       | 4.3                     |       | Rights  Agreement, dated February 14, 2005 by and between the Registrant and  Mellon Investor Services LLP.                                                |
| (1)                   |       | 10.1+                   |       | Form of  Indemnity Agreement.                                                                                                                              |
| (1)                   |       | 10.2+                   |       | 1999 Equity  Incentive Plan and Form of Stock Option Agreement thereunder.                                                                                 |
| (1)                   |       | 10.3+                   |       | Amended and  Restated 2004 Equity Incentive Plan and Form of Employee and Consultant  Stock Option Agreement thereunder.                                   |
| (4)                   |       | 10.4+                   |       | Form of  Non-Employee Director Stock Option Agreement under the 2004 Equity Incentive  Plan.                                                               |
| (1)                   |       | 10.5+                   |       | 2004 Employee  Stock Purchase Plan and Form of Offering Document thereunder.                                                                               |
| (5)                   |       | 10.6+                   |       | Senomyx, Inc.  2009 Executive Bonus Plan (as revised on September 29, 2009).                                                                          |
| (4)                   |       | 10.7+                   |       | Non-Employee  Director Compensation Policy.                                                                                                                     |
| (6)                   |       | 10.8+                   |       | Description of  director compensation provided to Jay Short.                                                                                                    |
| (7)                   |       | 10.9+                   |       | Senomyx, Inc.  2009 Executive Bonus Plan.                                                                                                                  |
| (1)                   |       | 10.10+                  |       | Employment  letter agreement dated June 2, 2003 between the Registrant and Kent  Snyder.                                                                   |
| (8)                   |       | 10.11+                  |       | First Amendment  to Employment Agreement dated June 2, 2003, as amended effective  December 31, 2008, between the Registrant and Kent Snyder.         |
| (1)                   |       | 10.12+                  |       | Employment  letter agreement dated September 8, 2003 between the Registrant and John  Poyhonen.                                                            |
| (9)                   |       | 10.13+                  |       | Employment  letter agreement dated March 14, 2006 between the Registrant and Sharon  Wicker.                                                               |
| (8)                   |       | 10.14+                  |       | First Amendment  to Employment Agreement dated March 14, 2006, as amended effective  December 31, 2008, between the Registrant and Sharon Wicker.     |
| (10)                  |       | 10.15+                  |       | Employment  letter agreement dated December 6, 2007 between the Registrant and David  B. Berger.                                                           |
| (5)                   |       | 10.16+                  |       | Employment  letter agreement dated February 20, 2002 between the Registrant and  Antony E. Rogers.                                                         |
| (8)                   |       | 10.17+                  |       | Form of  Amended and Restated Change in Control Agreement.                                                                                                 |
| (11)                  |       | 10.18*                  |       | Lease Agreement  between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                               |

 

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|   |   | 10.19  |   | Subordination,  Non-Disturbance and Attornment Agreement dated October 23, 2009 by and  between Pacific Life Insurance Co., the Registrant and ARE-Nexus Centre II,  LLC.                                                                                               |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9)    |   | 10.20* |   | License  Agreement between the Registrant and The Regents of the University of  California dated October 11, 2006.                                                                                                                                                      |
| (12)   |   | 10.21* |   | First Amendment  dated February 7, 2007 to the License Agreement between  Senomyx, Inc. and The Regents of the University of California dated  October 11, 2006.                                                                                              |
|   |   | 10.22* |   | Second Amendment  dated November 20, 2009 to the License Agreement between the Registrant  and The Regents of the University of California dated October 11, 2006.                                                                                                 |
| (1)    |   | 10.23* |   | Collaborative  Research and License Agreement dated November 1, 2000, as amended  April 16, 2002, between the Registrant and Aurora Biosciences  Corporation.                                                                                                      |
| (1)    |   | 10.24* |   | Collaborative  Research and License Agreement dated March 28, 2001, as amended  July 26, 2002, November 5, 2002 and February 19, 2004 between  the Registrant and Campbell Soup Company.                                                                 |
| (13)   |   | 10.25* |   | Fourth Amendment  to the Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002, February 19,  2004 and February 24, 2006 between the Registrant and Campbell Soup  Company.                |
| (14)   |   | 10.26* |   | Fifth Amendment  dated March 27, 2009 to the Collaborative Research and License Agreement  dated March 28, 2001 between the Registrant and Campbell Soup Company.                                                                                                  |
| (1)    |   | 10.27* |   | Collaborative  Research and License Agreement dated April 18, 2002, as amended October 23,  2003, between the Registrant and Nestec, Ltd.                                                                                                                          |
| (15)   |   | 10.28* |   | Second Amendment  dated April 17, 2005 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, between the  Registrant and Nestec, Ltd.                                                                       |
| (13)   |   | 10.29* |   | Third Amendment  dated March 22, 2006 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003 and  April 17, 2005, between the Registrant and Nestec, Ltd.                                                |
| (16)   |   | 10.30* |   | Fourth Amendment  dated April 14, 2008 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005 and March 22, 2006, between the Registrant and Nestec, Ltd.                          |
| (17)   |   | 10.31* |   | Fifth Amendment  dated September 15, 2008 to the Collaborative Research and License  Agreement dated April 18, 2002, as amended October 23, 2003,  April 17, 2005, March 22, 2006 and April 14, 2008, between the  Registrant and Nestec, Ltd. |
| (3)    |   | 10.32* |   | Collaborative  Research and License Agreement, dated October 26, 2004, between the  Registrant and Nestec, Ltd.                                                                                                                                                         |
| (10)   |   | 10.33* |   | First Amendment  dated May 4, 2009 to the Collaborative Research and License Agreement  dated October 26, 2004 between the Registrant and Nestec, Ltd.                                                                                                             |
| (1)    |   | 10.34* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  April 22, 2002, as amended April 7, 2004, between the Registrant  and the Coca-Cola Company.                                                                                  |
| (16)   |   | 10.35* |   | Second Amendment  dated April 8, 2008 to the Collaborative Research, Development,  Commercialization and License Agreement dated April 22, 2002, as amended  April 7, 2004, between the Registrant and the Coca-Cola Company.                                 |
| (13)   |   | 10.36* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                                 |
| (9)    |   | 10.37* |   | First Amendment  to the Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto  Co., Inc.                                                                                         |

 

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| (18)   |   | 10.38* |   | Second Amendment  dated April 24, 2007 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between  Senomyx, Inc. and Ajinomoto Co., Inc.       |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (19)   |   | 10.39* |   | Third Amendment  dated August 1, 2007 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between  Senomyx, Inc. and Ajinomoto Co., Inc.        |
| (14)   |   | 10.40* |   | Fourth Amendment  dated March 23, 2009 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between the  Registrant and Ajinomoto Co., Inc.           |
| (18)   |   | 10.41* |   | Collaborative  Research, Development, Commercialization and License Agreement between  Senomyx, Inc. and Solae, LLC dated April 23, 2007.                                                                       |
| (17)   |   | 10.42* |   | First Addendum  dated September 1, 2008 to the Collaborative Research, Development,  Commercialization and License Agreement dated April 23, 2007 between  Senomyx, Inc. and Solae, LLC.                   |
| (5)    |   | 10.43* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  July 20, 2009 between the Registrant and Firmenich SA.                                                                          |
|   |   | 10.44* |   | First Amendment  dated October 30, 2009 to the Collaborative Research, Development,  Commercialization and License Agreement dated July 20, 2009 between the  Registrant and Firmenich SA.                      |
|   |   | 23.1   |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                |
|   |   | 24.1   |   | Power of  Attorney. Reference is made to the signature page.                                                                                                                                                              |
|   |   | 31.1   |   | Certification of  Kent Snyder, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                  |
|   |   | 31.2   |   | Certification of  Antony Rogers, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                |
|   |   | 32.1   |   | Certification of  Kent Snyder, Chief Executive Officer, and Antony Rogers, Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

**+             **Indicates management contract or compensatory plan.

 

*              Confidential treatment has been granted or requestedwith respect to certain portions of this exhibit. Omitted portions have beenfiled separately with the Securities and Exchange Commission.

 

(1)           Filed as an exhibit to RegistrationStatement File No. 333-113998 and incorporated herein by reference.

 

(2)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 20,2007 and incorporated herein by reference.

 

(3)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on September 25,2009 and incorporated herein by reference.

 

(5)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2009 andincorporated herein by reference.

 

(6)           Filed as our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 13, 2006 andincorporated herein by reference.

 

(7)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on February 9,2009 and incorporated herein by reference.

 

(8)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 23,2008 and incorporated herein by reference.

 

(9)           Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2006 andincorporated herein by reference.

 

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(10)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2009 andincorporated herein by reference.

 

(11)         Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2005 andincorporated herein by reference.

 

(12)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2007 andincorporated herein by reference.

 

(13)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2006 andincorporated herein by reference.

 

(14)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009 andincorporated herein by reference.

 

(15)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 andincorporated herein by reference.

 

(16)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2008 andincorporated herein by reference.

 

(17)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2008 andincorporated herein by reference.

 

(18)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2007 andincorporated herein by reference.

 

(19)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2007 andincorporated herein by reference.

 

**(b) Exhibits**

 

See Item 15(a) above.

 

**(c) Financial StatementSchedules**

 

See Item 15(a) above.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                          | Senomyx, Inc. |
|-------------------------------|--------------------|
|                          | By:                | /S/ KENT SNYDER |
|                          |               | Kent Snyder |
|                          |               | Chief Executive  Officer and   Chairman of the Board of Directors |
|                          |               |   |
|                          |               |   |
| Dated:  February 4, 2010 |               |   |

 

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**POWER OFATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Kent Snyder and AntonyRogers, and each of them, as his or her true and lawful attorneys-in-fact andagents, with full power of substitution and resubstitution, for him or her andin his or her name, place, and stead, in any and all capacities, to sign anyand all amendments to this report, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, and eachof them, full power and authority to do and perform each and every act andthing requisite and necessary to be done in connection therewith, as fully toall intents and purposes as he or she might or could do in person, herebyratifying and confirming that all said attorneys-in-fact and agents, or any ofthem or their or his substitute or substituted, may lawfully do or cause to bedone by virtue hereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **Signature**                | ** ** | **Title**                                     | ** ** | **Date**              |
|------------------------------|------------|-----------------------------------------------|------------|-----------------------|
|                         |       |                                          |       |                  |
| /S/ KENT SNYDER              |       | Chief Executive  Officer and Chairman         |       | February 4, 2010 |
| Kent Snyder                  |       | of the Board of  Directors                    |       |                  |
|                         |       | (Principal  Executive Officer)                |       |                  |
|                         |       |                                          |       |                  |
| /S/ ANTONY  ROGERS           |       | Vice President  and Chief Financial Officer   |       | February 4, 2010 |
| Antony Rogers                |       | (Principal  Financial and Accounting Officer) |       |                  |
|                         |       |                                          |       |                  |
|                         |       |                                          |       |                  |
| /S/ ROGER D.  BILLINGSLEY    |       | Director                                      |       | February 4, 2010 |
| Roger D.  Billingsley, Ph.D. |       |                                          |       |                  |
|                         |       |                                          |       |                  |
|                         |       |                                          |       |                  |
| /S/ STEPHEN A.  BLOCK        |       | Director                                      |       | February 4, 2010 |
| Stephen A.  Block, Esq. |       |                                          |       |                  |
|                         |       |                                          |       |                  |
|                         |       |                                          |       |                  |
| /S/ MICHAEL E.  HERMAN       |       | Director                                      |       | February 4, 2010 |
| Michael E.  Herman           |       |                                          |       |                  |
|                         |       |                                          |       |                  |
|                         |       |                                          |       |                  |
| /S/ JAY M. SHORT             |       | Director                                      |       | February 4, 2010 |
| Jay M.  Short, Ph.D.    |       |                                          |       |                  |
|                         |       |                                          |       |                  |
|                         |       |                                          |       |                  |
| /S/ CHRISTOPHER  TWOMEY      |       | Director                                      |       | February 4, 2010 |
| Christopher  Twomey          |       |                                          |       |                  |

 

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**EXHIBITINDEX**

 
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                           |
|-----------------------|------------|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)                   |       | 3.1                     |       | Amended and  Restated Certificate of Incorporation as currently in effect.                                                                                                      |
| (2)                   |       | 3.2                     |       | Amended and  Restated Bylaws as currently in effect.                                                                                                                            |
| (3)                   |       | 3.3                     |       | Certificate of  Designation of Series A Junior Participating Preferred Stock, as filed  with the Secretary of State of Delaware on February 14, 2005.                 |
| (1)                   |       | 4.1                     |       | Form of  Common Stock Certificate.                                                                                                                                         |
| (3)                   |       | 4.2                     |       | Form of  Rights Certificate.                                                                                                                                               |
| (3)                   |       | 4.3                     |       | Rights  Agreement, dated February 14, 2005 by and between the Registrant and Mellon  Investor Services LLP.                                                                |
| (1)                   |       | 10.1+                   |       | Form of  Indemnity Agreement.                                                                                                                                              |
| (1)                   |       | 10.2+                   |       | 1999 Equity  Incentive Plan and Form of Stock Option Agreement thereunder.                                                                                                 |
| (1)                   |       | 10.3+                   |       | Amended and  Restated 2004 Equity Incentive Plan and Form of Employee and Consultant  Stock Option Agreement thereunder.                                                   |
| (4)                   |       | 10.4+                   |       | Form of  Non-Employee Director Stock Option Agreement under the 2004 Equity Incentive  Plan.                                                                               |
| (1)                   |       | 10.5+                   |       | 2004 Employee  Stock Purchase Plan and Form of Offering Document thereunder.                                                                                               |
| (5)                   |       | 10.6+                   |       | Senomyx, Inc.  2009 Executive Bonus Plan (as revised on September 29, 2009).                                                                                          |
| (4)                   |       | 10.7+                   |       | Non-Employee  Director Compensation Policy.                                                                                                                                     |
| (6)                   |       | 10.8+                   |       | Description of  director compensation provided to Jay Short.                                                                                                                    |
| (7)                   |       | 10.9+                   |       | Senomyx, Inc.  2009 Executive Bonus Plan.                                                                                                                                  |
| (1)                   |       | 10.10+                  |       | Employment  letter agreement dated June 2, 2003 between the Registrant and Kent  Snyder.                                                                                   |
| (8)                   |       | 10.11+                  |       | First Amendment  to Employment Agreement dated June 2, 2003, as amended effective  December 31, 2008, between the Registrant and Kent Snyder.                         |
| (1)                   |       | 10.12+                  |       | Employment  letter agreement dated September 8, 2003 between the Registrant and John  Poyhonen.                                                                            |
| (9)                   |       | 10.13+                  |       | Employment  letter agreement dated March 14, 2006 between the Registrant and Sharon  Wicker.                                                                               |
| (8)                   |       | 10.14+                  |       | First Amendment  to Employment Agreement dated March 14, 2006, as amended effective  December 31, 2008, between the Registrant and Sharon Wicker.                     |
| (10)                  |       | 10.15+                  |       | Employment  letter agreement dated December 6, 2007 between the Registrant and David  B. Berger.                                                                           |
| (5)                   |       | 10.16+                  |       | Employment  letter agreement dated February 20, 2002 between the Registrant and  Antony E. Rogers.                                                                         |
| (8)                   |       | 10.17+                  |       | Form of  Amended and Restated Change in Control Agreement.                                                                                                                 |
| (11)                  |       | 10.18*                  |       | Lease Agreement  between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                                               |
|                  |       | 10.19                   |       | Subordination,  Non-Disturbance and Attornment Agreement dated October 23, 2009 by and  between Pacific Life Insurance Co., the Registrant and ARE-Nexus Centre II,  LLC.  |
| (9)                   |       | 10.20*                  |       | License  Agreement between the Registrant and The Regents of the University of  California dated October 11, 2006.                                                         |
| (12)                  |       | 10.21*                  |       | First Amendment  dated February 7, 2007 to the License Agreement between  Senomyx, Inc. and The Regents of the University of California dated  October 11, 2006. |
|                  |       | 10.22*                  |       | Second Amendment  dated November 20, 2009 to the License Agreement between the Registrant  and The Regents of the University of California dated October 11, 2006.    |
| (1)                   |       | 10.23*                  |       | Collaborative  Research and License Agreement dated November 1, 2000, as amended  April 16, 2002, between the Registrant and Aurora Biosciences Corporation.          |
|                       |            |                         |            |                                                                                                                                                                                 |  |  |

 

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| (1)  |   | 10.24* |   | Collaborative  Research and License Agreement dated March 28, 2001, as amended  July 26, 2002, November 5, 2002 and February 19, 2004 between  the Registrant and Campbell Soup Company.                                                                 |
|------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13) |   | 10.25* |   | Fourth Amendment  to the Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002, February 19,  2004 and February 24, 2006 between the Registrant and Campbell Soup  Company.                |
| (14) |   | 10.26* |   | Fifth Amendment  dated March 27, 2009 to the Collaborative Research and License Agreement  dated March 28, 2001 between the Registrant and Campbell Soup Company.                                                                                                  |
| (1)  |   | 10.27* |   | Collaborative  Research and License Agreement dated April 18, 2002, as amended  October 23, 2003, between the Registrant and Nestec, Ltd.                                                                                                                          |
| (15) |   | 10.28* |   | Second Amendment  dated April 17, 2005 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, between the  Registrant and Nestec, Ltd.                                                                       |
| (13) |   | 10.29* |   | Third Amendment  dated March 22, 2006 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003 and April 17,  2005, between the Registrant and Nestec, Ltd.                                                |
| (16) |   | 10.30* |   | Fourth Amendment  dated April 14, 2008 to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005 and March 22, 2006, between the Registrant and Nestec, Ltd.                          |
| (17) |   | 10.31* |   | Fifth Amendment  dated September 15, 2008 to the Collaborative Research and License  Agreement dated April 18, 2002, as amended October 23, 2003,  April 17, 2005, March 22, 2006 and April 14, 2008, between the  Registrant and Nestec, Ltd. |
| (3)  |   | 10.32* |   | Collaborative  Research and License Agreement, dated October 26, 2004, between the  Registrant and Nestec, Ltd.                                                                                                                                                         |
| (10) |   | 10.33* |   | First Amendment  dated May 4, 2009 to the Collaborative Research and License Agreement  dated October 26, 2004 between the Registrant and Nestec, Ltd.                                                                                                             |
| (1)  |   | 10.34* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  April 22, 2002, as amended April 7, 2004, between the Registrant  and the Coca-Cola Company.                                                                                  |
| (16) |   | 10.35* |   | Second Amendment  dated April 8, 2008 to the Collaborative Research, Development,  Commercialization and License Agreement dated April 22, 2002, as amended  April 7, 2004, between the Registrant and the Coca-Cola Company.                                 |
| (13) |   | 10.36* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                                 |
| (9)  |   | 10.37* |   | First Amendment  to the Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto  Co., Inc.                                                                                         |
| (18) |   | 10.38* |   | Second Amendment  dated April 24, 2007 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between  Senomyx, Inc. and Ajinomoto Co., Inc.                                                          |
| (19) |   | 10.39* |   | Third Amendment  dated August 1, 2007 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between  Senomyx, Inc. and Ajinomoto Co., Inc.                                                           |
| (14) |   | 10.40* |   | Fourth Amendment  dated March 23, 2009 to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between the  Registrant and Ajinomoto Co., Inc.                                                              |
| (18) |   | 10.41* |   | Collaborative  Research, Development, Commercialization and License Agreement between  Senomyx, Inc. and Solae, LLC dated April 23, 2007.                                                                                                                          |
| (17) |   | 10.42* |   | First Addendum  dated September 1, 2008 to the Collaborative Research, Development,  Commercialization and License Agreement dated April 23, 2007 between  Senomyx, Inc. and Solae, LLC.                                                                      |

 

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| (5)    |   | 10.43* |   | Collaborative  Research, Development, Commercialization and License Agreement dated  July 20, 2009 between the Registrant and Firmenich SA.                                                                          |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10.44* |   | First Amendment  dated October 30, 2009 to the Collaborative Research, Development,  Commercialization and License Agreement dated July 20, 2009 between the  Registrant and Firmenich SA.                      |
|   |   | 23.1   |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                |
|   |   | 24.1   |   | Power of  Attorney. Reference is made to the signature page.                                                                                                                                                              |
|   |   | 31.1   |   | Certification of  Kent Snyder, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                  |
|   |   | 31.2   |   | Certification of  Antony Rogers, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                |
|   |   | 32.1   |   | Certification of  Kent Snyder, Chief Executive Officer, and Antony Rogers, Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

**+             **Indicates management contract or compensatory plan.

 

*              Confidential treatment has been granted or requestedwith respect to certain portions of this exhibit. Omitted portions have beenfiled separately with the Securities and Exchange Commission.

 

(1)           Filed as an exhibit to RegistrationStatement File No. 333-113998 and incorporated herein by reference.

 

(2)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 20,2007 and incorporated herein by reference.

 

(3)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on September 25,2009 and incorporated herein by reference.

 

(5)           Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2009 andincorporated herein by reference.

 

(6)           Filed as our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 13, 2006 andincorporated herein by reference.

 

(7)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on February 9,2009 and incorporated herein by reference.

 

(8)           Filed as an exhibit to our CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 23,2008 and incorporated herein by reference.

 

(9)           Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2006 andincorporated herein by reference.

 

(10)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2009 andincorporated herein by reference.

 

(11)         Filed as an exhibit to our AnnualReport on Form 10-K for the year ended December 31, 2005 andincorporated herein by reference.

 

(12)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2007 andincorporated herein by reference.

 

(13)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2006 andincorporated herein by reference.

 

(14)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2009 and incorporatedherein by reference.

 

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(15)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 andincorporated herein by reference.

 

(16)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2008 andincorporated herein by reference.

 

(17)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2008 andincorporated herein by reference.

 

(18)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended June 30, 2007 andincorporated herein by reference.

 

(19)         Filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ended September 30, 2007 andincorporated herein by reference.

 

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