UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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





For the quarterly period ended September 30, 2010





OR





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





For the transition period from                to





Commission file number 001-33133





METABOLIX, INC.





Delaware

04-3158289(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)21 Erie Street

Cambridge, MA

02139(Address of principal executive offices)

(Zip Code)





(617) 583-1700


(Registrant’s telephone number, including area code)








(Former name, former address and former fiscal year, if changed since last report.)





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





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





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











Large accelerated filer o

Accelerated filer xNon-accelerated filer o

Smaller reporting company o(Do not check if a smaller reporting company)





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





The number of shares outstanding of the registrant’s common stock as of November 5, 2010 was 26,892,204.





2





Metabolix, Inc.


Form 10-Q


For the Quarter Ended September 30, 2010





Table of Contents





PagePart I. Financial InformationItem1.
Consolidated Financial Statements (Unaudited)
4Consolidated Balance Sheets at September 30, 2010, and December 31, 2009
4Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009
5Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
6Notes to the Consolidated Financial Statements
72.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
143.
Quantitative and Qualitative Disclosures About Market Risk
254.
Controls and Procedures
25Part II. Other InformationItem1.
Legal Proceedings
251A.
Risk Factors
252.
Unregistered Sales of Equity Securities and Use of Proceeds
253.
Defaults Upon Senior Securities
264.
(Removed and Reserved)
265.
Other Information
266.
Exhibits
26SIGNATURES
27


3
  PART I.  FINANCIAL INFORMATION





ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.





METABOLIX, INC.


CONSOLIDATED BALANCE SHEETS


UNAUDITED


(in thousands, except share and per share data)





September 30,


December 31,2010


2009AssetsCurrent Assets:Cash and cash equivalents
$
14,432


$
10,814Short-term investments

55,457



81,388Accounts receivable (billed and unbilled)

17



22Due from related parties

473



365Prepaid expenses and other current assets

441



764Total current assets

70,820



93,353Restricted cash

622



593Property and equipment, net

3,069



3,513Other assets

117



95Total assets
$
74,628


$
97,554Liabilities and Stockholders' EquityCurrent Liabilities:Accounts payable
$
6


$
626Accrued expenses

4,355



3,746Current portion of deferred rent

165



165Short-term deferred revenue

2,542



25Total current liabilities

7,068



4,562Deferred rent

427



552Long-term deferred revenue

35,232



37,299Other long-term liabilities

105



97Total liabilities

42,832



42,510Commitments and contingencies (Note 11)Stockholders' Equity:Preferred stock ($0.01 par value per share): 5,000,000 shares authorized,

no shares issued or outstanding

-



-Common stock ($0.01 par value per share); 100,000,000 shares

authorized at September 30, 2010 and December 31, 2009;

26,883,515 and 26,514,076 shares issued and outstanding at

September 30, 2010 and December 31, 2009, respectively

269



265Additional paid-in capital

228,945



222,831Accumulated other comprehensive income (loss)

(8
)


22Accumulated deficit

(197,410
)


(168,074
)Total stockholders' equity

31,796



55,044Total liabilities and stockholders' equity
$
74,628


$
97,554


The accompanying notes are an integral part of these interim consolidated financial statements





4


METABOLIX, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


UNAUDITED


(in thousands, except share and per share data)





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Revenue:Research and development revenue
$
-


$
49


$
212


$
79License fee and royalty revenue from related parties

25



25



97



91License fee revenue

-



10



-



10Grant revenue

21



527



26



1,040Total revenue

46



611



335



1,220Operating expense:Research and development expenses, including cost of revenue

5,906



6,173



17,912



18,504Selling, general, and administrative expenses

4,161



3,968



11,878



11,620Total operating expenses

10,067



10,141



29,790



30,124Loss from operations

(10,021
)


(9,530
)


(29,455
)


(28,904
)Other income (expense):Interest income, net

30



113



119



706Net loss
$
(9,991
)

$
(9,417
)

$
(29,336
)

$
(28,198
)Net loss per share:Basic and Diluted
$
(0.37
)

$
(0.41
)

$
(1.10
)

$
(1.23
)Number of shares used in per share calculations:Basic and Diluted

26,880,595



23,015,604



26,733,969



22,995,510


The accompanying notes are an integral part of these interim consolidated financial statements





5


METABOLIX, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


UNAUDITED


(in thousands)





Nine Months EndedSeptember 30,2010


2009Cash flows from operating activitiesNet Loss
$
(29,336
)

$
(28,198
)Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization

1,203



2,019Charge for 401(k) company common stock match

377



406Stock-based compensation

3,474



3,426Gain on the sale of equipment

-



(70
)Changes in operating assets and liabilities:Receivables (billed and unbilled)

5



34Due from related party

(25
)


-Prepaid expenses and other assets

301



80Accounts payable

(620
)


(813
)Accrued expenses

456



(329
)Deferred rent

(125
)


(124
)Deferred revenue

366



3,671Net cash used in operating activities

(23,924
)


(19,898
)Cash flows from investing activitiesPurchase of property and equipment

(646
)


(911
)Change in restricted cash

(29
)


-Proceeds from the sale of equipment

-



70Purchase of short-term investments

(73,118
)


(79,349
)Proceeds from the sale and maturity of short-term investments

99,022



83,594Net cash provided by investing activities

25,229



3,404Cash flows from financing activitiesProceeds from options and warrants exercised

2,316



75Net cash provided by financing activities

2,316



75Effect of exchange rate changes on cash and cash equivalents

(3
)


-Net increase ( decrease) in cash and cash equivalents

3,618



(16,419
)Cash and cash equivalents at beginning of period

10,814



26,194Cash and cash equivalents at end of period
$
14,432


$
9,775


The accompanying notes are an integral part of these interim consolidated financial statements





6


METABOLIX, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED




(All dollar amounts, except per share amounts, are stated in thousands)





1. BASIS OF PRESENTATION





The accompanying consolidated financial statements are unaudited and have been prepared by Metabolix, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position and results of operations for the interim periods ended September 30, 2010 and 2009.





The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2009, which are contained in the Company’s Annual Report on Form 10-K filed with the SEC.





During August 2010, the Company began to conduct research operations through its newly established wholly-owned subsidiary, Metabolix Oilseeds, Inc. (“MOI”), located in Saskatoon, Saskatchewan, Canada.  The Company has leased office, laboratory and greenhouse space in Saskatoon and will conduct its industrial oilseed research there. Accordingly, the operating results of MOI from August 1, 2010 are included in the Company’s results beginning with the fiscal quarter ending September 30, 2010.




2. ACCOUNTING POLICIES





Except as noted below, there has been no material change in accounting policies since the Company’s fiscal year ended December 31, 2009, as described in Note 2 to the consolidated financial statements included in its Annual Report on Form 10-K for the year then ended.




Principles of Consolidation




The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Metabolix Securities Corporation and MOI. All significant intercompany transactions were eliminated. The financial statements of Telles, the Company’s joint venture with Archer Daniels Midland Company, are not being consolidated by the Company.




Foreign Currency Translation





Foreign denominated assets and liabilities of MOI are translated into U.S. dollars at the prevailing exchange rates in effect at the end of the reporting period. Income statement accounts are translated at a weighted average of exchange rates which were in effect during the month the expense was incurred. Translation adjustments that arise from translating MOI’s financial statements from local currency to U.S. currency are recorded in the accumulated other comprehensive income (loss) component of stockholders’ equity.





3. RECENT ACCOUNTING PRONOUNCEMENTS





From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company’s management believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.





7





Recently Adopted Accounting Standards





Effective January 1, 2010, the Company adopted a newly issued accounting standard which provides guidance for the consolidation of variable interest entities and requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This amended consolidation guidance for variable interest entities replaces the existing quantitative approach for identifying which enterprise should consolidate a variable interest entity, which was based on which enterprise is exposed to a majority of the risks and rewards, with a qualitative approach, based on which enterprise has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the variable interest entity. The Company evaluated the Telles joint venture as a variable interest entity and determined that it is not required to consolidate Telles under this accounting standard. As a result, the adoption of this standard did not have an impact on the Company’s financial position or results of operations. Determination about whether an enterprise should consolidate a variable interest entity is required to be evaluated continuously and changes to existing relationships or future transactions may result in the Company consolidating the Telles joint venture or other arrangements.




In January 2010, the Company adopted a newly issued accounting standard which requires additional disclosure about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. This standard also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Company’s financial position or results of operations. In addition, effective for interim and annual periods beginning after December 15, 2010, this standard will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than as one net amount.




Recently Issued Accounting Standards




In April 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-17, Revenue Recognition — Milestone Method ("ASU 2010-017"). ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require the Company to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As the Company plans to implement ASU No. 2010-17 prospectively, the effect of this guidance will be limited to future transactions. The Company does not expect adoption of this standard to have a material impact on its financial position or results of operations as it has no material research and development arrangements which will be accounted for under the milestone method.




In October 2009, a new accounting consensus was issued for multiple-deliverable revenue arrangements. This consensus amends existing revenue recognition accounting standards. This consensus provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously the existing accounting consensus required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under the existing accounting consensus, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is in the process of evaluating whether the adoption of this standard will have a material effect on its financial position, results of operations or cash flows.




8




4. COMPREHENSIVE LOSS





Comprehensive loss is comprised of net loss, net unrealized gains or losses on marketable securities and foreign currency translation adjustments. Total comprehensive loss for the three and nine months ended September 30, 2010 and 2009 is as follows:





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Net loss
$
(9,991
)

$
(9,417
)

$
(29,336
)

$
(28,198
)Other comprehensive income:Change in unrealized gain (loss) on investments

(14
)


(57
)


(27
)


(368
)Change in foreign currency translation adjustment

(3
)


-



(3
)


-Total other comprehensive loss

(17
)


(57
)


(30
)


(368
)Comprehensive loss
$
(10,008
)

$
(9,474
)

$
(29,366
)

$
(28,566
)
 
 5. BASIC AND DILUTED NET LOSS PER SHARE





Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding, excluding the dilutive effects of common stock equivalents. Common stock equivalents include stock options and warrants. Diluted net loss per share is computed by dividing net loss by the weighted-average number of dilutive common shares outstanding during the period. Diluted shares outstanding is calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock from outstanding stock options and warrants based on the treasury stock method. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported there is no difference in basic and dilutive loss per share.





The number of shares of potentially dilutive common stock related to options and warrants that were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive for the three and nine months ended September 30, 2010 and 2009, respectively, are shown below:





Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Options

3,213,588



3,164,390



3,213,588



3,164,390Warrants

4,086



4,086



4,086



4,086Total

3,217,674



3,168,476



3,217,674



3,168,476
 
 6. STOCK-BASED COMPENSATION





The Company recognized stock-based compensation expense, related to employee stock option awards, of $1,230 and $3,445 for the three and nine months ended September 30, 2010, respectively.  Stock-based compensation expense, related to employee stock option awards, was $1,162 and $3,485 for the three and nine months ended September 30, 2009, respectively. At September 30, 2010, there was approximately $9,410 of pre-tax stock-based compensation expense, net of estimated forfeitures, related to unvested awards not yet recognized which is expected to be recognized over a weighted average period of 2.48 years.





9




A summary of option activity for the nine months ended September 30, 2010 is as follows:




Number of


Weighted AverageShares


Exercise PriceOutstanding at December 31, 2009

3,138,829


$
11.04Granted

737,200



12.15Exercised

(342,977
)


6.75Cancelled

(319,464
)


15.70Outstanding at September 30, 2010

3,213,588



11.29Options exercisable at September 30, 2010

1,779,244Weighted average grant date fair value of options granted

during the nine months ended September 30, 2010




$
8.17


For the nine months ended September 30, 2010 and 2009, the Company determined the fair value of stock options using the Black-Scholes option pricing model with the following assumptions for option grants, respectively:




Nine Months EndedSeptember 30,2010

2009Expected dividend yield
-

-Risk-free rate
1.41% - 2.59%

1.67% - 2.58%Expected option term (in years)
5.4 - 5.6

5.5Volatility
80%

81%





Non-employee Stock Option Awards





The compensation expense related to non-employee stock options is generally recognized over a period of four years. The grants generally vest quarterly and such vesting is contingent upon future services provided by the consultants to the Company. The Company recorded non-employee stock-based compensation expense of $4 and $29 for the three and nine months ended September 30, 2010. The Company recorded non-employee related stock-based compensation expense of $14 for the three months ended September 30, 2009 and recorded a benefit of $59 for the nine months ended September 30, 2009. Options remaining unvested for non-employees are subject to remeasurement each reporting period prior to vesting in full. Since the fair market value of the options issued to non-employees are subject to changes in the future, the compensation expense recognized in each quarter may not be indicative of future compensation charges.





7. SIGNIFICANT COLLABORATION





On November 3, 2004, the Company signed an agreement with ADM Polymer Corporation (“ADM”), a subsidiary of Archer Daniels Midland Company, to establish an alliance whereby the Company would provide technology, licenses and research and development services, and ADM would provide manufacturing services and capital necessary to producepolyhydroxyalkanoate (“PHA”) polymers on a commercial scale.





On July 12, 2006, ADM exercised an option to enter into a commercial alliance for further research, development, manufacture, use and sale of PHA polymers on the terms and conditions set forth in the Commercial Alliance Agreement. The first product of this alliance is a family of bioplastics branded under the name MirelTM.





10


The Commercial Alliance Agreement specifies the terms and structure of the relationship between the Company and ADM. The primary function of this agreement is to establish the activities and obligations of the Company and ADM by which the parties will commercialize Mirel. These activities include: the establishment of a joint sales company, which has been named Telles, to market and sell Mirel, the construction of a manufacturing facility capable of producing 110 million pounds of material annually (the “Commercial Manufacturing Facility”), the licensing of technology to Telles and to ADM, and the conducting of various research, development, manufacturing, sales and marketing, compounding and administrative services by the parties.





Telles is a limited liability company, formed and equally owned by the Company and ADM, and is intended to: (i) serve as the commercial entity to establish and develop the commercial market for Mirel, and conduct the marketing and sales in accordance with the goals of the commercial alliance, (ii) assist in the coordination and integration of the manufacturing, compounding and marketing activities, and (iii) administer and account for financial matters on behalf of the parties. The Company and ADM each have 50% ownership and voting interest in Telles.





A summary of the key activities under this agreement is as follows: (i) ADM will arrange for, finance the construction of, and own, a facility in which it will manufacture Mirel under contract to Telles, (ii) the Company will either arrange for and finance the acquisition or construction of a facility in which it will compound Mirel or it will arrange for third parties to compound Mirel, and (iii) the Company, acting in the name and on behalf of Telles, will establish the initial market for Mirel. The Company will also continue its research and development efforts to further advance the technology and expand and enhance the commercial potential of Mirel. Subject to certain limitations, ADM will finance the working capital requirements of Telles.





The Commercial Alliance Agreement called for Telles to pay the Company quarterly support payments of $1,575 each. The last of fourteen quarterly support payments was received as of June 30, 2009. All quarterly support payments received from ADM on behalf of Telles, totaling $22,050, have been recorded as deferred revenue on the Company’s balance sheet.





During the “Construction Phase” of the agreement all pre-commercial material production expenses incurred by ADM and the Company are shared equally. Accordingly, from the execution of this agreement in July 2006 through September 30, 2010, ADM has reimbursed the Company $9,040. All amounts received from ADM, prior to the “Commercial Phase,” relating to this agreement are recorded as deferred revenue. The Company will continue to defer recognition of these and future payments received from ADM during the Construction Phase of the agreement.





The Construction Phase of the commercial alliance will end, and the Commercial Phase will begin, upon the achievement of a milestone referred to in the Commercial Alliance Agreement as “First Commercial Sale.” Achievement of this milestone requires the sale by Telles to third parties of at least one million pounds of Mirel manufactured at the Commercial Manufacturing Facility. Qualifying sales must meet certain criteria, including a minimum order size, product acceptance by the customers in accordance with the terms of their contracts, and receipt of payment, in order for such sales to contribute towards First Commercial Sale.





During the Commercial Phase of the agreement Telles will pay the Company royalties on sales of Mirel. In addition, if Telles engages the Company to perform certain services, and the Company accepts the service arrangement, Telles will reimburse the Company for the cost of the services provided pursuant to the Commercial Alliance Agreement.





While Telles is a fifty-fifty joint venture, ADM has advanced a disproportionate share of the financial capital needed to construct the Commercial Manufacturing Facility and to fund the joint venture’s activities. Therefore, under the agreement all profits, after payment of all royalties, reimbursements and fees, from Telles will first be distributed to ADM until ADM’s cost of constructing the Commercial Manufacturing Facility and any negative net cash flow of Telles funded by ADM have been returned. Once ADM has recovered such amounts, the profits of Telles will be distributed in equal amounts to the parties.





11


The Commercial Alliance Agreement provides for expansion of the operations of Telles beyond the initial license of 110 million pound annual production through an equally-owned joint venture. While certain principles of the joint venture have been agreed to, the detailed terms and conditions will not be determined until a later date.





Revenue recognition for amounts deferred through September 30, 2010 is expected to commence when the Commercial Phase of the alliance begins. The deferred amounts will be recognized on a straight line basis over the estimated period, of approximately ten years, in which the Company’s obligations are fulfilled in accordance with the Commercial Alliance Agreement. A portion of the deferred revenue representing estimated amounts expected to be recognized within the next twelve months has been classified as short-term in the Company’s balance sheet at September 30, 2010. The Company also expects to receive payments from Telles for the compounding services it provides as well as royalty payments. The compounding payments and royalty payments are due to the Company as Telles sells product to its customers. These payments will be recognized as revenue during the period in which they are earned.





The Commercial Alliance Agreement and related agreements include detailed provisions setting out the rights and obligations of the parties in the event of a termination of the Commercial Alliance Agreement. These provisions include the right for either party to terminate the Commercial Alliance Agreement upon a material default of a material obligation by the other party after a notice and cure period has expired. The parties are also permitted to terminate the Commercial Alliance Agreement if a change in circumstances that is not reasonably within the control of a party makes the anticipated financial return from the project inadequate or too uncertain. The parties have specific obligations to fulfill in the event of termination or if they file for bankruptcy protection.





8. INCOME TAXES





The Company follows the accounting guidance related to income taxes including guidance which addresses accounting for uncertainty in income taxes. This guidance prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. The Company had no amounts recorded for any unrecognized tax benefits as of September 30, 2010 or September 30, 2009.





The tax years 2007 through 2009 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the U.S.





The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2010, and December 31, 2009, the Company had no accrued interest or penalties recorded related to uncertain tax positions.





At December 31, 2009 the Company had net operating loss carryforwards ("NOLs") for federal and state income tax purposes of $105,427 and $75,080, respectively. Included in the federal and state net operating loss carryforwards is approximately $18,935 of deduction related to the exercise of stock options subsequent to the adoption of amended accounting guidance related to stock-based compensation. This amount represents an excess tax benefit as defined under the amended accounting guidance related to stock-based compensation and has not been recorded as a deferred tax asset. The Company’s existing federal and state net operating loss carryforwards began to expire in 2010. The Company also had available research and development credits for federal and state income tax purposes of approximately $3,947 and $2,447, respectively. The federal and state research and development credits will begin to expire in 2014 and 2016, respectively. As of December 31, 2009 the Company also had available investment tax credits for state income tax purposes of $92 which also began to expire in 2010. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets.





12


Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not currently completed an evaluation of ownership changes through September 30, 2010 to assess whether utilization of the Company’s NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject to limitation.





9. ACCRUED LIABILITIES





Accrued liabilities consisted of the following at:




September 30, 2010


December 31, 2009Employee compensation and benefits
$
2,351


$
2,505Material production cost

57



279Professional services

363



193Intellectual property

371



188Other

1,213



581Total accrued expenses
$
4,355


$
3,746


10. SEGMENT INFORMATION





The accounting guidance for segment reporting establishes standards for reporting information on operating segments in annual financial statements. The Company operates in one segment, which is the business of developing and commercializing technologies for the production of polymers and chemicals in plants and in microbes. The Company's chief operating decision-maker does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s consolidated operating results. As of September 30, 2010 less than 10% of the Company’s combined total assets were located outside of the United States. In addition, the reported net loss outside of the United States was less than 10% of the combined net loss of the consolidated Company.  As of September 30, 2009, all losses were incurred, and all assets were held, in the United States of America.





11. COMMITMENTS AND CONTINGENCIES





Legal Proceedings







From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not currently aware of any such proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition or results of operations.





12. FAIR VALUE MEASUREMENTS





The Company has certain financial assets recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions.





The Company’s financial assets classified as Level 2 have been initially valued at the transaction price and subsequently valued typically utilizing third party pricing services. Because the Company’s investment portfolio may include securities that do not always trade on a daily basis, the pricing services use many observable market inputs to determine value including reportable trades, benchmark yields and benchmarking of like securities. The Company validates the prices provided by the third party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing the validation procedures, the Company did not adjust or override any fair value measurements provided by these pricing services as of September 30, 2010 or December 31, 2009.





13


The tables below present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. To conform prior year figures to current year presentation, $8,116 of money market funds have been reclassified from Level 2 to Level 1 as of December 31, 2009.





Fair value measurements at reporting date usingQuoted prices in active markets for identical assets


Significant other observable inputs


Significant unobservable inputsBalance as of 9/30/10Description

(Level 1)


(Level 2)


(Level 3)Cash equivalents:Money market funds

$
11,113


$
-


$
-


$
11,113Short-term investments:Government-sponsored enterprises


-



55,457



-



55,457$
11,113


$
55,457


$
-


$
66,570
  Fair value measurements at reporting date usingQuoted prices in active markets for identical assets


Significant other observable inputs


Significant unobservable inputsBalance as of 12/31/09Description

(Level 1)


(Level 2)


(Level 3)Cash equivalents:Money market funds

$
8,116


$
-


$
-


$
8,116Government-sponsored enterprises


-



1,490



-



1,490Short-term investments:Treasuries


-



8,939



-



8,939Government-sponsored enterprises


-



72,449



-



72,449$
8,116


$
82,878


$
-


$
90,994
 13. RELATED PARTIES





The Company engaged in various transactions with Tepha, Inc., a related party, and recorded $25 and $97 of license and royalty revenue during the three and nine months ended September 30, 2010, respectively. During the three and nine months ended September 30, 2009 the company recorded license and royalty revenue from Tepha, Inc. of $25 and $91, respectively.  The Company had no outstanding receivable balance due from Tepha as of September 30, 2010 or December 31, 2009. The Company had various transactions with its alliance partner ADM, a related party, during the three and nine months ended September 30, 2010 and 2009. The Company had an outstanding receivable balance of $448 and $365 due from ADM at September 30, 2010 and December 31, 2009, respectively. The Company also had various transactions with Telles. The Company had an outstanding receivable balance of $25 due from Telles as of September 30, 2010. There was no balance receivable from Telles at December 31, 2009. For more information on the Company’s related party transactions, please see Note 8 to the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2009.





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








(All dollar amounts are stated in thousands)





Forward Looking Statements





This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements contained in the Form 10-Q, including but not limited to, statements regarding our future results of operations and financial position, business strategy and plan prospects, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipate,” “intends,” “target,” “projects,” “contemplates,” “believe,” “estimates,” “predicts,” “potential,” and “continue,” or similar words.





14


Although we believe that our expectations are based on reasonable assumptions within the limits of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees. Our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. These forward looking statements include, but are not limited to, statements concerning: future financial performance and position, management’s strategy, plans and objectives for future operations, plans and objectives for product development and commercialization, plans and objectives for present and future research and development and results of such research and development, plans and objectives for manufacturing, the commercialization of environmentally sustainable, economically attractive alternatives to petroleum-based plastics, chemicals and energy, the commercialization of MirelTM bioplastic (“Mirel”) through our alliance with Archer Daniels Midland Company (“ADM”), sales of Mirel as an alternative to petroleum-based plastics, the construction, start-up and expansion of the Commercial Manufacturing Facility, the production of Mirel at the Commercial Manufacturing Facility, the commercial success of Mirel, the feasibility of extracting bioplastics from plant crops, the commercial viability of  bio-engineered chemicals and plant-produced plastics, recognition of revenue, and management’s plans and expectations for revenue, expenses and capital and working capital requirements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated including, without limitation, the following risks: (1) we may not be able to successfully manufacture Mirel at commercial scale in a timely or economical manner, (2) we may not be successful in the development of plant crops for production of plastics or bio-engineered chemicals, (3) if initial sales of Mirel are slower than anticipated, our financial results will be negatively affected, (4) we may not be able to develop manufacturing capacity sufficient to meet demand in an economical manner or at all, (5) we may not achieve market acceptance of our products, (6) we may not be successful in the development of commercial formulations of Mirel, (7) we have limited marketing and sales experience and capabilities, which may make the commercialization of our products difficult, (8) we rely heavily on ADM and may rely heavily on future collaborative partners, (9) our success will be influenced by the price of petroleum, the primary ingredient in conventional petroleum-based plastics, relative to corn sugar, the primary ingredient in Mirel, (10) our future profitability is uncertain, and we have a limited operating history on which you can base your evaluation of our business, (11) we may need to secure additional funding and may be unable to raise additional capital on favorable terms or at all, (12) if we lose key personnel or are unable to attract and retain necessary talent, we may be unable to develop or commercialize our products under development, (13) we may not be able to obtain rights to intellectual property developed by others using our information and technology, which could limit our ability to compete, (14) intellectual property protection for our products is important and uncertain, (15) a substantial portion of the technology used in our business is owned by or subject to retained rights of third parties, (16) third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result, (17) if we are unable to manage our growth effectively, our business could be adversely affected, (18) we may not be successful in identifying market needs for new technologies and developing new products to meet those needs, (19) our products are made using genetically-engineered systems and may be, or may be perceived as being, harmful to human health or the environment, (20) we face and will face substantial competition in several different markets that may adversely affect our results of operations, (21) we are subject to significant foreign and domestic government regulations, including environmental and health and safety regulations, and compliance or failure to comply with these regulations could harm our business, (22) we may not have adequate insurance and may have substantial exposure to payment of product liability claims, (23) potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results, and (24) each part of our operations is currently conducted at a single location, which makes us susceptible to disasters or other disruptions.





The forward-looking statements and risk factors presented in this document are made only as of the date hereof and we do not intend to update any of these risk factors or to publicly announce the results of any revisions to any of our forward-looking statements other than as required under the federal securities laws.





Overview





We are an innovation-driven bioscience company which is focused on bringing environmentally friendly solutions to the plastics, chemicals and energy industries. We have core capabilities in microbial genetics, fermentation process engineering, chemical engineering, polymer science, plant genetics and botanical science, and we have assembled these capabilities in a way that has allowed us to integrate biotechnology with chemical engineering and industrial practice.




15





Our first platform, which we are commercializing through Telles, LLC ("Telles"), a joint venture with Archer Daniels Midland Company, or ADM, is a proprietary, large-scale microbial fermentation system for producing a versatile family of polymers known as polyhydroxyalkanoates ("PHA’s"), which we have branded under the name MirelTM. Through Telles, we intend to sell these bioplastics as biobased and biodegradable, but functionally equivalent, alternatives to petroleum-based plastics. Mirel offers superior biodegradability characteristics and can be used in a wide range of commercial applications, including products used in agriculture and horticulture, compost and organic waste diversion bags, marine and aquatic applications, consumer products, business equipment and durable goods, and general packaging materials. Mirel is now being produced in a commercial scale plant located in Clinton, Iowa ("the Commercial Manufacturing Facility") designed for an annual capacity of 110 million pounds. ADM completed construction of the initial phase of the Commercial Manufacturing Facility in 2009. The Commercial Manufacturing Facility produces biobased and biodegradable Mirel plastic using corn sugar, an abundant agriculturally-produced renewable resource.





Our second technology platform, which is in an early stage, is a biomass biorefinery system using plant crops to co-produce both bioplastics and bioenergy. For this system, we intend to extract polymer from the engineered plant crop, so that the remaining plant material can be used as a biomass feedstock for the production of bioenergy products including electricity and biofuel. We are engineering switchgrass to produce bioplastics in the leaf and stem of the plant. Switchgrass is a commercially and ecologically attractive, non-food energy crop that is indigenous to North America and is generally considered to be a leading candidate for cellulose-derived production of ethanol and other biofuels.We are also conducting research to develop an advanced industrial oilseed crop for co-production of bioplastics along with vegetable oil, biodiesel fuel, or oleochemicals. In August 2010 we established a research facility in Saskatchewan, Canada to further pursue our research with industrial oilseed crops. Sugarcane is an established energy crop that is well suited for tropical regions of the world. We are collaborating with the Australian Research Council to further pursue our research with sugarcane. We believe that using these crops to co-produce bioplastics with bioenergy products can offer superior economic value and productivity as compared to single product systems that produce them individually. We have been working on our biomass biorefinery platform using switchgrass for several years, and we believe that we are a scientific leader in this field. Our goal for this program is to have commercially viable plant varieties in pre-commercial field trials within two years. We may also seek to establish alliances with partners to commercially exploit this platform.





As demonstrated by our first two technology platforms, we take an integrated systems approach to our technology development. We are focused on developing entire production systems from gene to end product as opposed to developing specific technologies (for example, gene sequencing, shuffling or directed evolution) or singular aspects of a product’s production (for example, providing a key enzyme, catalyst or ingredient). We believe this systems approach optimizes manufacturing productivity and, when commercialized, will enable us to capture more economic value from any platform that we pursue.





For our third platform we intend to apply our core capabilities in microbial engineering to develop biological routes to other chemicals and chemical intermediates. During 2009 we completed all work under our U.S. Department of Commerce National Institute of Standards and Technology grant, a $2 million grant aimed at producing four-carbon (“C4”) chemicals from renewable sources. C4 chemicals are a large family of chemicals enabling a wide range of end use applications, including engineering resins, urethanes, solvents, and personal care products. We were able to achieve all of the technical milestones outlined in this grant. Based on these accomplishments, we believe we have the technical foundation for an attractive C4 chemicals business. After conducting a review of the C4 external economic and competitive landscape we are prioritizing the specialty C4 chemicals segment for commercialization. We are focused on scale up development activities in 2010.





To exploit our first technology platform, are working closely with ADM to bring the Commercial Manufacturing Facility in Clinton, Iowa to full operations and capacity in advance of customer demand for Mirel. The biodegradable bioplastics that this facility is now producing are highly versatile and range in properties from hard and strong to soft and flexible. These properties allow for a wide variety of commercial applications, offering a biobased alternative to petroleum-derived synthetic materials which are not biodegradable. Through Telles we are positioning Mirel as a premium priced specialty material catering to customers who want to match the functionality of petroleum-based plastic with the added dimension of environmental responsibility for their products and brands.





16


As of September 30, 2010, we had an accumulated deficit of $197,410 and total stockholders’ equity was $31,796.





Collaborative Arrangements





Our strategy for collaborative arrangements is to retain substantial participation in the future economic value of our technology while receiving current cash payments to offset research and development costs and working capital needs. By their nature, these agreements are complex and have multiple elements that cover a variety of present and future activities.





In 2004, we entered into the “Technology Alliance and Option Agreement” with ADM Polymer Corporation, or ADM Polymer, a subsidiary of ADM. The goal of the Technology Alliance and Option Agreement was to demonstrate the capabilities of our fermentation and recovery technologies at commercial scale and to prepare a master plan and budget for the construction of a commercial facility with a 110 million pound annual capacity. Upon achievement of such goals, ADM Polymer had the option to enter into a commercial alliance with us through execution of the “Commercial Alliance Agreement,” for further research, development, manufacture, use, and sale of bioplastics. In July 2006, ADM Polymer exercised its option under our Technology Alliance and Option Agreement and entered into a Commercial Alliance Agreement with us. Upon entering into the Commercial Alliance Agreement, the Technology Alliance and Option Agreement terminated pursuant to its terms.





The Commercial Alliance Agreement called for Telles to pay the Company quarterly support payments of $1,575 each. The last of fourteen quarterly support payments was received as of June 30, 2009. All quarterly support payments received from ADM on behalf of Telles, totaling $22,050, have been recorded as deferred revenue on the Company’s balance sheet, and we will continue to defer recognition of these payments received from ADM during the “Construction Phase” of our agreement. We expect to begin recognizing this deferred revenue at the time of the achievement of a milestone referred to in the Commercial Alliance Agreement as the “First Commercial Sale.” The deferred revenue will be recognized on a straight line basis over a period of approximately ten years in which our contractual obligations are fulfilled in accordance with the terms of the Commercial Alliance Agreement. Achievement of the First Commercial Sale requires the sale by Telles to third parties of at least one million pounds of Mirel manufactured at the Commercial Manufacturing Facility. Qualifying sales must meet certain criteria, including a minimum order size, product acceptance by the customers in accordance with the terms of their contracts and receipt of payment, in order for such sales to contribute towards the First Commercial Sale milestone. A portion of the deferred revenue representing estimated amounts expected to be recognized within the next twelve months has been classified as short-term in the Company’s balance sheet at September 30, 2010. We also expect to receive payments from Telles for the compounding services we provide as well as royalty payments. The compounding payments and royalty payments are due to us as Telles sells product to its customers. These payments will be recognized as revenue during the period in which they are earned.





We received the following payments from these arrangements to offset operating cash needs:





·
upfront payment of $3,000 from ADM in November 2004;





·
milestone payments of $2,000 from ADM in May 2006;





·
support payments of $22,050 from ADM, on behalf of Telles, through June 30, 2009;





·
cumulative cost sharing payments from ADM for pre-commercial manufacturing plant construction and operations made in accordance with the Technology Alliance and Option Agreement of $1,209; and





·
cumulative cost sharing payments from ADM for pre-commercial manufacturing plant construction and operations made in accordance with the Commercial Alliance Agreement of $9,040.





During the commercial alliance, ADM is responsible for the construction, financing and operation of the Commercial Manufacturing Facility which ADM Polymer owns, through a manufacturing agreement with Telles. We will provide or procure compounding services to convert the output from the Commercial Manufacturing Facility into forms that are suitable for various commercial applications.





17


Although Telles is a separate legal entity owned equally by us and ADM, ADM will disproportionately fund the activities of the joint venture. Specifically, the cost of the Commercial Manufacturing Facility, the working capital requirements of the joint venture and the support payments to us will exceed the investments made by us to establish compounding operations for the joint venture. In order to rebalance the respective investments made by the parties, a preferential distribution of cash flow provides that all profits, after payment of all royalties, reimbursements and fees, from the joint venture will be distributed to ADM until ADM’s disproportionate investment in the joint venture, including the costs of constructing the Commercial Manufacturing Facility, have been returned to ADM. Once ADM has recovered these amounts, the profits of the joint venture will be distributed in equal amounts to the parties. In order to track the disproportionate investments ADM has made, a Ledger Account has been established to record the respective investments made by the parties. As of September 30, 2010 the balance of the ADM Ledger Account was $397,585.  This balance is expected to increase as the remaining manufacturing equipment and systems are brought online at the Commercial Manufacturing Facility and until Telles achieves positive cash flow from its operations.





United States Government Grant





As of September 30, 2010, expected gross proceeds of $332 remain to be received under our government grant, which includes amounts for reimbursement to our subcontractors, as well as reimbursement for our employees’ time, benefits and other expenses related to future performance.





The status of our United States government grant is as follows:





Total


Total received


Remaining amountFunding

Government


through


available as of

Contract/GrantProgram Title

Agency

Funds


September 30, 2010


September 30, 2010

ExpirationBlow Molded Bioproducts

Department ofFrom Renewable Plastics

Agriculture

$
349


$
17


$
332

August 2011Total



$
349


$
17


$
332
 
 Critical Accounting Estimates and Judgments





The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2010 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009. The critical accounting policies and the significant judgments and estimates used in the preparation of our consolidated financial statements for the three and nine months ended September 30, 2010 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments.”





18





Results of Operations





Comparison of the Three Months Ended September 30, 2010 and 2009








Revenue




Three Months EndedSeptember 30,2010


2009


ChangeResearch and development revenue

$
-


$
49


$
(49
)License fee and royalty revenue from related parties


25



25



-License fee revenue


-



10



(10
)Grant revenue


21



527



(506
)Total revenue

$
46


$
611


$
(565
)


Total revenue was $46 and $611 for the three months ended September 30, 2010 and 2009, respectively. During the three months ended September 30, 2010 we recognized $21 of grant revenue compared to $527 for the respective period in 2009. During the three months ended September 30, 2010 we had one active grant, the Blow Molded Bioproducts from Renewable Plastics grant, with total funding of $349. During the three months ended September 30, 2009 grant revenue primarily consisted of revenue derived from the Bio-Engineered Chemicals grant, which was completed during the fourth quarter of 2009.





We expect grant revenue to continue to be minimal in 2010, compared to 2009, as we have only the one grant described above with total remaining funding of $332. In addition we expect research and development revenue to be minimal during the remainder of 2010 as the sale of product produced at the Commercial Manufacturing Facility is being recorded as revenue by Telles, which is not included in our consolidated financial statements.





Expenses





Three Months EndedSeptember 30,2010


2009


ChangeResearch and development expenses, including cost of revenue

$
5,906


$
6,173


$
(267
)Selling, general, and administrative expenses


4,161



3,968



193Total operating expense

$
10,067


$
10,141


$
(74
)


Research and development expenses, including cost of revenue





Research and development expenses, including cost of revenue, were $5,906 and $6,173 for the three months ended September 30, 2010 and 2009, respectively. The 4% decrease of $267 was primarily due to a decrease in material production costs and a decrease in depreciation expense, partially offset by an increase in employee compensation and related benefit expenses. Material production costs decreased to $524 for the three months ended September 30, 2010 from $1,048, for the respective period in 2009. The decrease of $524 was primarily attributable to reduced activity at our pre-commercial manufacturing facility as a result of commencing operations at the Commercial Manufacturing Facility. Depreciation expense decreased to $362 during the three months ended September 30, 2010 from $672 for the respective period in 2009 as a result of reaching full depreciation on equipment and facility improvements at the pre-commercial manufacturing facility at the end of 2009. Employee compensation and related benefit expenses increased to $3,096 for the three months ended September 30, 2010 from $2,801 for the respective period in 2009. The increase of $295 was primarily attributable to annual salary increases and bonuses and an increase in stock-based compensation expense resulting from annual employee stock option awards.





We expect to incur increased research and development expenses through the remainder of the Construction Phase of the ADM agreement as we continue to undertake technology improvements and product development activities as we develop, test, and refine product to meet the specification requirements of Telles customers. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to development of Mirel are expected to decrease significantly as these expenses will be transferred to Telles. Until then, we will continue to bear these expenses.





19





Selling, general, and administrative expenses





Selling, general, and administrative expenses were $4,161 and $3,968 for the three months ended September 30, 2010 and 2009, respectively. The increase of $193 was primarily attributable to an increase in recruiting and relocation expenses related to hiring efforts for the expansion of our business development and marketing activities.   Recruiting and relocation expenses were $128 for the three months ended September 30, 2010. There was no expense for recruiting and relocation for the three months ended September 30, 2009.





We expect to incur increased selling, general, and administrative expenses through the Construction Phase of the ADM agreement as we increase our market development activities for Mirel. Upon the commencement of the Commercial Phase of the agreement, selling, general, and administrative expenses are expected to decrease significantly as these Mirel related costs will be transferred to Telles. During the transition period between the initial start-up of the Commercial Manufacturing Facility and the commencement of the Commercial Phase, we will continue to bear these expenses.





Other Income (Net)




Three Months EndedSeptember 30,2010


2009


ChangeTotal other income (net)

$
30


$
113


$
(83
)
 
 Other income (net) was $30 and $113 for the three months ended September 30, 2010 and 2009, respectively. Other income (net) during both periods consisted of investment income. The overall decrease of $83 was primarily due to a decline in investment income earned on our U.S. Treasury and government debt instruments.





Comparison of the Nine Months Ended September 30, 2010 and 2009





Revenue





Nine Months EndedSeptember 30,2010


2009


ChangeResearch and development revenue

$
212


$
79



133License fee and royalty revenue from related parties


97



91



6License fee revenue


-



10



(10
)Grant revenue


26



1,040



(1,014
)Total revenue

$
335


$
1,220



(885
)


Total revenue was $335 and $1,220 for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010 we recognized $212 of research and development revenue compared to $79 for the respective period in 2009. Research and development revenue was derived primarily from the delivery of product samples from our pre-commercial manufacturing facility to potential customers. There was $26 of grant revenue earned during the nine months ended September 30, 2010 from our one active grant, the Blow Molded Bioproducts from Renewable Plastics grant. During the nine months ended September 30, 2009 $1,040 of grant revenue primarily consisted of revenue derived from the Integrated Bio-Engineered Chemicals grant, which was completed during the fourth quarter of 2009.





We expect grant revenue to continue to be minimal in 2010, compared to 2009, as we currently have the one outstanding grant described above with total remaining funding of $332. In addition we expect research and development revenue to remain lower during the remainder of 2010 as the sale of product produced at the Commercial Manufacturing Facility is recorded as revenue by Telles, which is not included in our consolidated financial statements.





20





Expenses





Nine Months EndedSeptember 30,2010


2009


ChangeResearch and development expenses, including cost of revenue

$
17,912


$
18,504


$
(592
)Selling, general, and administrative expenses


11,878



11,620



258Total operating expense

$
29,790


$
30,124


$
(334
)
 
 Research and development expenses, including cost of revenue





Research and development expenses, including cost of revenue, were $17,912 and $18,504 for the nine months ended September 30, 2010 and 2009, respectively. The decrease of $592 was primarily due to a decrease in material production costs and a decrease in depreciation expenses, partially offset by an increase in employee compensation and related benefit expenses. Material production costs decreased to $2,119 from $3,201 for the nine months ended September 30, 2010 and 2009, respectively. The reduction of $1,082 was primarily the result of reduced activity at our pre-commercial manufacturing facility as a result of commencing operations at the Commercial Manufacturing Facility. Depreciation expense decreased to $1,117 during the nine months ended September 30, 2010 from $1,905 during the respective period in 2009 as a result of reaching full depreciation on equipment and facility improvements at the pre-commercial manufacturing facility at the end of 2009. Employee compensation and related expenses increased to $9,638 during the nine months ended September 30, 2010 compared to $8,591 for the respective period in 2009.  The increase of $1,047 was primarily attributable to annual salary increases and bonuses and an increase in stock-based compensation expense resulting from annual employee stock option awards.





We expect to incur increased research and development expenses through the remainder of the Construction Phase of the ADM agreement as we continue to undertake technology improvements and product development activities as we develop, test, and refine product to meet the specification requirements of Telles customers. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to development of Mirel are expected to decrease significantly as these expenses will be transferred to Telles. Until then, we will continue to bear these expenses.





Selling, general, and administrative expenses





Selling, general, and administrative expenses were $11,878 and $11,620 for the nine months ended September 30, 2010 and 2009, respectively. The increase of $258 was primarily attributable to an increase in consulting fees. Consulting fees were $858 for the nine months ended September 30, 2010 compared to $660 for the respective period in 2009. The increase of $198 was primarily related to strategy and business development consultation to support our research and development of C4 chemicals.





We expect to incur increased selling, general, and administrative expenses through the Construction Phase of the ADM agreement as we increase our market development activities for Mirel. Upon the commencement of the Commercial Phase of the agreement, selling, general, and administrative expenses are expected to decrease significantly as these Mirel related costs will be transferred to Telles. During the transition period between the initial start-up of the Commercial Manufacturing Facility and the commencement of the Commercial Phase, we will continue to bear these expenses.





21





Other Income (Net)


Nine Months EndedSeptember 30,2010


2009


ChangeTotal other income (net)

$
119


$
706


$
(587
)


Other income (net) was $119 and $706 for the nine months ended September 30, 2010 and 2009, respectively. Other income (net) during both periods consisted of investment income. The overall decrease of $587 was primarily due to a decline in investment income earned on our U.S. Treasury and government debt instruments.





Liquidity and Capital Resources





Currently, we require cash to fund our working capital needs, to purchase capital assets and to pay our operating lease obligations.





The primary sources of our liquidity have been:


·
equity financing;
 
 ·
our strategic alliance with ADM;
 
 ·
government grants; and
 
 ·
interest earned on cash and short-term investments.
 
 We have incurred significant expenses relating to our research and development efforts. As a result, we have incurred net losses since our inception. As of September 30, 2010, we had an accumulated deficit of $197,410. Our total unrestricted cash, cash equivalents and short-term investments as of September 30, 2010 were $69,889 as compared to $92,202 at December 31, 2009. As of September 30, 2010, we had no outstanding debt.





Our cash and cash equivalents at September 30, 2010 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. The primary objective of our investment activities is to preserve our capital. As of September 30, 2010 we had restricted cash of $622. Restricted cash consists of $522 held in connection with the lease agreements for our Cambridge, Massachusetts facilities and $100 held in connection with our corporate credit card program. Short-term investments are made in accordance with our corporate investment policy, as approved by our Board of Directors. Investments are limited to high quality corporate debt, U.S. Treasury bills and notes, bank debt obligations, municipal debt obligations and asset-backed securities. The policy establishes maturity limits, concentration limits, and liquidity requirements. As of September 30, 2010, we were in compliance with this policy.





We believe that our cash, cash equivalents and short-term investments and interest we earn on these balances will be sufficient to meet our anticipated cash requirements, including cash requirements with respect to the commercial launch of Mirel, for at least the next 24 months. If our available cash, cash equivalents, and short-term investments are insufficient to satisfy our liquidity requirements, or if we develop additional products, we may need to sell additional equity or debt securities or obtain a credit facility. In addition, we may seek to raise additional capital when we believe market conditions are favorable or when we otherwise believe it is prudent. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our current forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.





22


Net cash used in operating activities was $23,924 for the nine months ended September 30, 2010 compared to $19,898 for the respective period in 2009. The cash used during the nine months ended September 30, 2010 primarily reflects the net loss for the period partially offset by non-cash expenses, including stock-based compensation expense of $3,474, depreciation expense of $1,203 and the Company’s 401(k) stock matching contribution of $377. The increase in cash used in operating activities during the nine months ended September 30, 2010 as compared to the respective period in 2009 was primarily due to the receipt of $3,150 in quarterly support payments from ADM during the nine months ended September 30, 2009. No further support payments were received after June 30, 2009. We received $119 in funds from investment income during the nine months ended September 30, 2010 compared to $706 for the respective period in 2009.





After the Commercial Phase of the ADM alliance begins, Telles will reimburse us for the costs of services provided pursuant to the Commercial Alliance Agreement, including research and development, product development and sales and marketing. During the transition period between the initial start-up of the Commercial Manufacturing Facility, which occurred in December 2009, and the commencement of the Commercial Phase, we will continue to bear these costs. If there are difficulties, delays or other unforeseen issues with the ramp-up of the Commercial Manufacturing Facility or with the ramp-up of commercial sales, we will incur additional unreimbursed pilot manufacturing, product development, sales and marketing costs until the Commercial Phase of the alliance begins.





Net cash of $25,229 was provided by investing activities during the nine months ended September 30, 2010, compared to net cash of $3,404 provided by investing activities for the respective period in 2009. Net cash provided by investment activities for the nine months ended September 30, 2010 included $99,022 provided by the sale and maturity of short-term investments, partially offset by $73,118 used to purchase short-term investments and $646 used to purchase capital equipment.





Net cash of $2,316 and $75 was provided by financing activities for the nine months ended September 30, 2010 and 2009, respectively. The cash provided by financing activities during the nine months ended September 30, 2010 and 2009 was solely attributable to the proceeds received from the exercise of stock options and warrants.





Contractual Obligations





The following table summarizes our contractual obligations at September 30, 2010 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:





Payments Due by PeriodLess than


2-3


4-5


More thanTotal


1 year


years


years


5 yearsPurchase obligations
$
165


$
65


$
50


$
50


$
-Operating lease obligations

4,683



1,467



2,393



823



-Total
$
4,848


$
1,532


$
2,443


$
873


$
-
 
 Off-Balance Sheet Arrangements





As of September 30, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.





Related Party Transactions





We engaged in various transactions with Tepha, Inc., a related party, and recorded $25 and $97 of license and royalty revenue during the three and nine months ended September 30, 2010, respectively. During the three and nine months ended September 30, 2009 we recorded license and royalty revenue from Tepha, Inc. of $25 and $91, respectively.  We had no outstanding receivable balance due from Tepha as of September 30, 2010 or December 31, 2009. We also had various transactions with our alliance partner ADM, a related party, during the three and nine months ended September 30, 2010 and 2009. We had an outstanding receivable balance of $448 and $365 due from ADM at September 30, 2010 and December 31, 2009, respectively. We also had various transactions with Telles. We had an outstanding receivable balance of $25 as of September 30, 2010. We had no balance receivable from Telles at December 31, 2009. For more information on our related party transactions, please see Note 8 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.





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Recent Accounting Pronouncements





From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or results of operations upon adoption.





Recently Adopted Accounting Standards




Effective January 1, 2010, we adopted a newly issued accounting standard which provides guidance for the consolidation of variable interest entities and requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This amended consolidation guidance for variable interest entities replaces the existing quantitative approach for identifying which enterprise should consolidate a variable interest entity, which was based on which enterprise is exposed to a majority of the risks and rewards, with a qualitative approach, based on which enterprise has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the variable interest entity. We evaluated the Telles joint venture as a variable interest entity and determined that it is not required to consolidate Telles under this accounting standard. As a result, the adoption of this standard did not have an impact on our financial position or results of operations. Determination about whether an enterprise should consolidate a variable interest entity is required to be evaluated continuously and changes to existing relationships or future transactions may result in consolidating the Telles joint venture or other arrangements.




In January 2010, we adopted a newly issued accounting standard which requires additional disclosure about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. This standard also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position or results of operations. In addition, effective for interim and annual periods beginning after December 15, 2010, this standard will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than as one net amount.




Recently Issued Accounting Standards




In April 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-17, Revenue Recognition — Milestone Method ("ASU 2010-017"). ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. Early adoption is permitted; however, adoption of this guidance as of a date other than January 1, 2011 will require us to apply this guidance retrospectively effective as of January 1, 2010 and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. As we plan to implement ASU No. 2010-17 prospectively, the effect of this guidance will be limited to future transactions. We do not expect adoption of this standard to have a material impact on our financial position or results of operations as we have no material research and development arrangements which will be accounted for under the milestone method.




In October 2009, a new accounting consensus was issued for multiple-deliverable revenue arrangements. This consensus amends existing revenue recognition accounting standards. This consensus provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previously the existing accounting consensus required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. Under the existing accounting consensus, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are in the process of evaluating whether the adoption of this standard will have a material effect on our financial position, results of operations or cash flows.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





There have been no material changes in information regarding our exposure to market risk, as described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009.





ITEM 4. CONTROLS AND PROCEDURES.





Evaluation of Disclosure Controls and Procedures





Our management (with the participation of our Principal Executive Officer and Principal Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2010. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that these disclosure controls and procedures are effective.





Changes in Internal Control over Financial Reporting





There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II — OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS.





From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on the business, financial condition or the results of operations.





ITEM 1A. RISK FACTORS.





There have been no material changes in information regarding our risk factors as described in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.





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





Recent Sales of Unregistered Securities







On July 12, 2010 the Company issued 7,558 shares of common stock to participants in its Metabolix, Inc. 401(k) Plan as a matching contribution. The issuance of these securities is exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933 as exempted securities.





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Issuer Purchases of Equity Securities





During the three months ended September 30, 2010, there were no repurchases made by us or on our behalf, or by any “affiliated purchasers,” of shares of our common stock.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.




None.








ITEM 4. (REMOVED AND RESERVED).





ITEM 5. OTHER INFORMATION.





Our policy governing transactions in our securities by our directors, officers, and employees permits our officers, directors, employees, and entities affiliated with our directors to enter into trading plans complying with Rule 10b5-l under the Exchange Act , as amended. We have been advised that during the quarter ended September 30, 2010, Oliver P. Peoples, our Chief Scientific Officer and Vice President of Research and Development, and Johan van Walsem, our Vice President of Stategy and Commercial Development, entered into a trading plan in accordance with Rule 10b5-l and our policy governing transactions in our securities. We undertake no obligation to update or revise the information provided herein, including revisions or termination of an established trading plan.





ITEM 6. EXHIBITS.





31.1Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Principal Executive Officer (furnished herewith).





31.2Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Principal Financial Officer (furnished herewith).





32.1Section 1350 Certification (furnished herewith).




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





METABOLIX, INC.November 9, 2010
By:
/s/ RICHARD P. ENORichard P. EnoPresident and Chief Executive Officer(Principal Executive Officer)November 9, 2010
By:
/s/ JOSEPH D. HILLJoseph D. HillChief Financial Officer(Principal Financial and Accounting Officer)