Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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, 2009** |
|                                                        |                                                                                                     |
| **OR**                                                      |
|                                                        |                                                                                                     |
| **o**                                                       | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For thetransition period from                to                **

 

**Commissionfile 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 telephonenumber, including area code)

 

 

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

 

Indicate by check mark whether theregistrant (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 forthe past 90 days.  Yes x No o

 

Indicate by check mark whether theregistrant has submitted electronically and posted on its corporate Web site,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 whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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

 

The number of shares outstanding ofthe registrant’s common stock as of October 29, 2009 was 23,045,846.

 

 

 

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**Metabolix, Inc.**

**Form 10-Q**

**For the Quarter Ended September 30,2009**

**Table of Contents**

 
| ** **                              | ** **                                                                                                   | **Page** |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------|----------|
| **Part I.  Financial Information** |                                                                                                         |
|                                    |                                                                                                         |     |
| Item                                    |                                                                                                         |     |
| 1.                                      | Consolidated  Financial Statements (Unaudited)                                                               | 3        |
|                                    | Consolidated  Balance Sheets at September 30, 2009, and December 31, 2008                          | 3        |
|                                    | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 | 4        |
|                                    | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2009  and 2008           | 5        |
|                                    | Notes to  the Consolidated Financial Statements                                                              | 6        |
| 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  | 15       |
| 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                  | 26       |
| 4.                                      | Controls and  Procedures                                                                                     | 26       |
|                                    |                                                                                                         |     |
| **Part II. Other  Information**    | 26                                                                                                           |
|                                    |                                                                                                         |     |
| Item                                    |                                                                                                         |     |
| 1.                                      | Legal Proceedings                                                                                            | 26       |
| 1A.                                     | Risk Factors                                                                                                 | 26       |
| 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                 | 36       |
| 3.                                      | Defaults  Upon Senior Securities                                                                             | 36       |
| 4.                                      | Submission  of Matters to a Vote of Security Holders                                                         | 36       |
| 5.                                      | Other Information                                                                                            | 36       |
| 6.                                      | Exhibits                                                                                                     | 36       |
|                                    |                                                                                                         |     |
| **SIGNATURES**                          | 37                                                                                                           |

 

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.  CONSOLIDATED FINANCIALSTATEMENTS**

 

**METABOLIX, INC.**

**CONSOLIDATED BALANCE SHEETSUNAUDITED**

**(in thousands, except share and per sharedata)**

 
| ** **                                                                                                                                                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Current Assets:                                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                     |       | $                      | 9,775      |                  | $          | 26,194 |   |
| Short-term investments                                                                                                                                                                                                                                        |       | 60,290                 |       | 64,902                |       |
| Accounts receivable                                                                                                                                                                                                                                           |       | 28                     |       | 159                   |       |
| Due from related parties                                                                                                                                                                                                                                      |       | 850                    |       | —                |       |
| Unbilled receivables                                                                                                                                                                                                                                          |       | 153                    |       | 56                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                     |       | 479                    |       | 530                   |       |
| Total current assets                                                                                                                                                                                                                                          |       | 71,575                 |       | 91,841                |       |
| Restricted cash                                                                                                                                                                                                                                               |       | 593                    |       | 593                   |       |
| Property and equipment, net                                                                                                                                                                                                                                   |       | 3,907                  |       | 4,388                 |       |
| Other assets                                                                                                                                                                                                                                                  |       | 95                     |       | 124                   |       |
| Total assets                                                                                                                                                                                                                                                  |       | $                      | 76,170     |                  | $          | 96,946 |   |
|                                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Current Liabilities:                                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                              |       | $                      | 45         |                  | $          | 858 |   |
| Accrued expenses                                                                                                                                                                                                                                              |       | 3,966                  |       | 3,587                 |       |
| Current portion of deferred rent and other current  liabilities                                                                                                                                                                                               |       | 200                    |       | 165                   |       |
| Total current liabilities                                                                                                                                                                                                                                     |       | 4,211                  |       | 4,610                 |       |
| Deferred rent                                                                                                                                                                                                                                                 |       | 593                    |       | 717                   |       |
| Long-term deferred revenue                                                                                                                                                                                                                                    |       | 36,927                 |       | 32,440                |       |
| Other long-term liabilities                                                                                                                                                                                                                                   |       | 95                     |       | 88                    |       |
| Total liabilities                                                                                                                                                                                                                                             |       | 41,826                 |       | 37,855                |       |
| Commitments 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, 2009 and December 31, 2008; 23,036,809  and 22,962,628 shares issued and outstanding at September 30, 2009 and  December 31, 2008, respectively |       | 230                    |       | 230                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                    |       | 192,351                |       | 188,532               |       |
| Accumulated other comprehensive income                                                                                                                                                                                                                        |       | 78                     |       | 446                   |       |
| Accumulated deficit                                                                                                                                                                                                                                           |       | (158,315               | )          | (130,117              | )          |
| Total stockholders’ equity                                                                                                                                                                                                                               |       | 34,344                 |       | 59,091                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                               |       | $                      | 76,170     |                  | $          | 96,946 |   |

 

*The accompanying notes are an integralpart of these interim consolidated financial statements*

 

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**METABOLIX, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**UNAUDITED**

**(in thousands, except share and per sharedata)**

 
| ** **                                                    | ** ** | **Three Months  Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                                    | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue:                                                      |       |                    |       |                   |       |   |   |   |   |
| Research and development revenue                              |       | $                       | 49         |                   | $          | 27 |   | $ | 79 |   | $ | 106 |   |
| License fee and royalty revenue from related parties          |       | 25                      |       | 25                     |       | 91 |   | 95 |   |
| License fee revenue                                           |       | 10                      |       | —                 |       | 10 |   | — |   |
| Grant revenue                                                 |       | 527                     |       | 299                    |       | 1,040 |   | 955 |   |
| Total revenue                                                 |       | 611                     |       | 351                    |       | 1,220 |   | 1,156 |   |
|                                                          |       |                    |       |                   |       |   |   |   |   |
| Operating expense:                                            |       |                    |       |                   |       |   |   |   |   |
| Research and development expenses, including cost of  revenue |       | 6,173                   |       | 6,571                  |       | 18,504 |   | 18,513 |   |
| Selling, general, and administrative expenses                 |       | 3,968                   |       | 4,048                  |       | 11,620 |   | 12,193 |   |
| Total operating expenses                                      |       | 10,141                  |       | 10,619                 |       | 30,124 |   | 30,706 |   |
| Loss from operations                                          |       | (9,530                  | )          | (10,268                | )          | (28,904 | ) | (29,550 | ) |
|                                                          |       |                    |       |                   |       |   |   |   |   |
| Other income (expense):                                       |       |                    |       |                   |       |   |   |   |   |
| Interest income, net                                          |       | 113                     |       | 540                    |       | 706 |   | 2,449 |   |
| Net loss                                                      |       | $                       | (9,417     | )                      | $          | (9,728 | ) | $ | (28,198 | ) | $ | (27,101 | ) |
|                                                          |       |                    |       |                   |       |   |   |   |   |
| Net loss per share:                                           |       |                    |       |                   |       |   |   |   |   |
| Basic and Diluted                                             |       | $                       | (0.41      | )                      | $          | (0.42 | ) | $ | (1.23 | ) | $ | (1.19 | ) |
|                                                          |       |                    |       |                   |       |   |   |   |   |
| Number of shares used in per share calculations:              |       |                    |       |                   |       |   |   |   |   |
| Basic and Diluted                                             |       | 23,015,604              |       | 22,942,898             |       | 22,995,510 |   | 22,793,456 |   |

 

*The accompanying notes are an integralpart of these interim consolidated financial statements*

 

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**METABOLIX, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**UNAUDITED**

**(in thousands)**

 
| ** **                                                               | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** |
| ** **                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                                 |       |                   |       |   |   |
| Net loss                                                                 |       | $                      | (28,198    | ) | $ | (27,101 | ) |
| Adjustments to reconcile net loss to cash used in  operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                            |       | 2,019                  |       | 2,764 |   |
| Charge for 401(k) company common stock match                        |       | 406                    |       | 347 |   |
| Stock-based compensation                                                 |       | 3,426                  |       | 3,233 |   |
| Gain on the sale of equipment                                            |       | (70                    | )          | — |   |
| Changes in operating assets and liabilities:                             |       |                   |       |   |   |
| Receivables (billed and unbilled)                                        |       | 34                     |       | 148 |   |
| Due from related party                                                   |       | —                 |       | 120 |   |
| Prepaid expenses and other assets                                        |       | 80                     |       | 250 |   |
| Accounts payable                                                         |       | (813                   | )          | (146 | ) |
| Accrued expenses                                                         |       | (329                   | )          | (89 | ) |
| Deferred rent                                                            |       | (124                   | )          | (119 | ) |
| Deferred revenue                                                         |       | 3,671                  |       | 5,896 |   |
| Net cash used in operating activities                                    |       | (19,898                | )          | (14,697 | ) |
|                                                                     |       |                   |       |   |   |
| **Cash flows from investing activities**                                 |       |                   |       |   |   |
| Purchase of property and equipment                                       |       | (911                   | )          | (746 | ) |
| Proceeds from the sale of equipment                                      |       | 70                     |       | — |   |
| Purchase of short-term investments                                       |       | (79,349                | )          | (91,478 | ) |
| Proceeds from the sale and maturity of short-term  investments           |       | 83,594                 |       | 110,735 |   |
| Net cash provided by investing activities                                |       | 3,404                  |       | 18,511 |   |
|                                                                     |       |                   |       |   |   |
| **Cash flows from financing activities**                                 |       |                   |       |   |   |
| Proceeds from options and warrants exercised                             |       | 75                     |       | 788 |   |
| Net cash provided by financing activities                                |       | 75                     |       | 788 |   |
|                                                                     |       |                   |       |   |   |
| Net increase (decrease) in cash and cash equivalents                     |       | (16,419                | )          | 4,602 |   |
| Cash and cash equivalents at beginning of period                         |       | 26,194                 |       | 22,686 |   |
| Cash and cash equivalents at end of period                               |       | $                      | 9,775      |   | $ | 27,288 |   |

 

*The accompanying notes are an integralpart of these interim consolidated financial statements*

 

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**METABOLIX, INC.**

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

**UNAUDITED**

 

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

 

**1. BASIS OF PRESENTATION**

 

The accompanying consolidated financial statements areunaudited and have been prepared by Metabolix, Inc. (the “Company”) inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and pursuant to the rules and regulations of the U.S.Securities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in the Company’s annual consolidated financialstatements have been condensed or omitted. The year-end consolidated balancesheet data was derived from audited financial statements, but does not includeall disclosures required by GAAP. The consolidated financial statements, in theopinion of management, reflect all adjustments (consisting only of normalrecurring adjustments) necessary for a fair statement of the financial positionand results of operations for the interim periods ended September 30, 2009and 2008.

 

The results of operations for the interim periods are notnecessarily indicative of the results of operations to be expected for anyfuture period or the entire fiscal year. These interim consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements for the year ended December 31, 2008, which arecontained in the Company’s Annual Report on Form 10-K filed with the SEC.

 

***Subsequent Events***

 

In June 2009 the Financial Accounting Standards Board(FASB) amended the existing guidance relating to the disclosure of subsequentevents. Effective in the second quarter of 2009 the general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued were established. The adoption ofthe amended guidance did not impact the Company’s financial position or resultsof operations.  Events or transactions that occurred between September 30,2009 and November 3, 2009, the date the Company’s financial statementswere filed with the SEC, were reviewed for subsequent event accounting anddisclosure.  During this period the Company did not have any materialrecognizable subsequent events.

 

**2. ACCOUNTING POLICIES**

 

There has been no material change in accounting policiessince the Company’s fiscal year ended December 31, 2008, as described inNote 2 to the consolidated financial statements included in its Annual Reporton Form 10-K for the year then ended.

 

**3. RECENT ACCOUNTING PRONOUNCEMENTS**

 

From time to time, new accounting pronouncements are issuedby the FASB or other standard setting bodies that are adopted by the Company asof the specified effective date. Unless otherwise discussed, the Company’smanagement believes that the impact of recently issued standards that are notyet effective will not have a material impact on its consolidated financialposition or results of operations upon adoption.

 

***Recently IssuedAccounting Standards***

 

In August 2009, the FASB issued Accounting StandardsUpdate No. 2009-05, Measuring Liabilities at Fair Value, or ASU 2009-05.ASU 2009-05 amends Accounting Standards Codification Topic 820, Fair ValueMeasurements. Specifically, ASU 2009-05 provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following methods: 1) a valuation techniquethat uses a) the quoted price of the identical liability when traded as anasset or b) quoted prices for similar liabilities or similar liabilitieswhen traded as assets and/or 2) a valuation technique that is consistentwith the principles of Topic 820 of the Accounting Standards Codification (e.g.an income approach or market approach). ASU 2009-05 also clarifies that whenestimating the fair value of a liability, a reporting entity is not required toadjust to include inputs relating to the existence of transfer restrictions onthat liability. The adoption of this standard did not have an impact on theCompany’s financial position or results of operations; however, this standardmay impact the Company in future periods.

 

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In October 2009, the FASB issued ASU No. 2009-13, *Multiple-Deliverable Revenue Arrangements,*or ASU 2009-13. ASU 2009-13, amends existing revenue recognition accountingpronouncements that are currently within the scope of FASB Accounting StandardsCodification, or ASC, Subtopic 605-25 (previously included withinEITF 00-21, Revenue Arrangements with Multiple Deliverables, orEITF 00-21). The consensus to EITF Issue No. 08-01, RevenueArrangements with Multiple Deliverables, or EITF 08-01, providesaccounting principles and application guidance on whether multiple deliverablesexist, how the arrangement should be separated, and the considerationallocated. This guidance eliminates the requirement to establish the fair valueof undelivered products and services and instead provides for separate revenuerecognition based upon management’s estimate of the selling price for anundelivered item when there is no other means to determine the fair value ofthat undelivered item. Where fair value can be established, there is still arequirement to establish stand-alone value. EITF 00-21 previously requiredthat the fair value of the undelivered item be the price of the item eithersold in a separate transaction between unrelated third parties or the pricecharged for each item when the item is sold separately by the vendor. This wasdifficult to determine when the product was not individually sold because ofits unique features. Under EITF 00-21, if the fair value of all of theelements in the arrangement was not determinable, then revenue was deferreduntil all of the items were delivered or fair value was determined. This newapproach is effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010.The Company is currently evaluating the potential impact of this standard onits financial position and results of operations and which method of adoptionit will apply once this standard is effective.

 

***Other Recently Issued Accounting Standards***

 

In June 2009, the FASB issued the following twonew accounting standards, which have not yet been integrated into theCodification:

 

·                  SFAS No. 166, *Accounting for Transfers of Financial Assets, anamendment of FASB Statement No. 140*, or SFAS 166; and

 

·                  SFAS No. 167, *Amendments to FASB Interpretation No. 46(R),*orSFAS 167

 

SFAS 166 prescribes the information that areporting entity must provide in its financial reports about a transfer offinancial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuing involvementin transferred financial assets. Specifically, among other aspects,SFAS 166 amends Statement of Financial Standard No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*, or SFAS 140, byremoving the concept of a qualifying special-purpose entity from SFAS 140and removes the exception from applying FIN 46(R) to variableinterest entities that are qualifying special-purpose entities. It alsomodifies the financial-components approach used in SFAS 140. SFAS 166is effective for transfers of financial assets occurring on or after January 1,2010. The Company has not determined the effect that the adoption ofSFAS 166 will have on its financial position or results of operations, butthe effect will generally be limited to future transactions, if any.

 

SFAS 167 amends FASB Interpretation No. 46, *Consolidation of Variable Interest Entities (revised December 2003) —an interpretation of ARB No. 51*, or FIN 46(R), to requirean enterprise to determine whether its variable interest or interests give it acontrolling financial interest in a variable interest entity. The primarybeneficiary of a variable interest entity is the enterprise that has both (1) thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance and (2) theobligation to absorb losses of the entity that could potentially be significantto the variable interest entity or the right to receive benefits from theentity that could potentially be significant to the variable interest entity.SFAS 167 also amends FIN 46(R) to require ongoing reassessmentsof whether an enterprise is the primary beneficiary of a variable interestentity. SFAS 167 is effective for all variable interest entities andrelationships with variable interest entities existing as of January 1,2010. The Company has not determined the effect that the adoption ofSFAS 167 will have, if any, on its financial position or results ofoperations.

 

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***RecentlyAdopted Accounting Standards***

 

Effective January 1, 2009, the Companyimplemented a newly issued accounting standard for business combinations. Thisstandard requires an acquiring company to measure all assets acquired andliabilities assumed, including contingent considerations and all contractualcontingencies, at fair value as of the acquisition date. In addition, anacquiring company is required to capitalize in process research and developmentand either amortize it over the life of the product, or write it off  if the project is abandoned or impaired. Theadoption of this standard did not impact the Company’s financial position or resultsof operations as it is applicable to acquisitions completed after January 1,2009 and the Company did not complete any business combination transactionsduring the first nine months of 2009.

 

**4. COMPREHENSIVE LOSS**

 

Comprehensive loss is comprised of net loss and netunrealized gains or losses on marketable securities. Total comprehensive lossfor the three and nine months ended September 30, 2009 and 2008 is asfollows:

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                                 |       | $                      | (9,417     | )                      | $          | (9,728 | ) | $ | (28,198 | ) | $ | (27,101 | ) |
| Other comprehensive income:              |       |                   |       |                   |       |   |   |   |   |
| Change in unrealized gain on investments |       | (57                    | )          | 99                     |       | (368 | ) | (93 | ) |
| Total other comprehensive income         |       | (57                    | )          | 99                     |       | (368 | ) | (93 | ) |
| Comprehensive loss                       |       | $                      | (9,474     | )                      | $          | (9,629 | ) | $ | (28,566 | ) | $ | (27,194 | ) |

 

**5. BASIC AND DILUTED NET LOSS PER SHARE**

 

Basic net loss per share is computed by dividing net loss bythe weighted-average number of common shares outstanding and warrantsoutstanding during the period that were previously issued for little or noconsideration, excluding the dilutive effects of common stock equivalents.Common stock equivalents include stock options and certain warrants. Dilutednet loss per share is computed by dividing net loss by the weighted-averagenumber of dilutive common shares outstanding during the period. Diluted sharesoutstanding is calculated by adding to the weighted shares outstanding anypotential (unissued) shares of common stock from outstanding stock options andwarrants based on the treasury stock method. In periods when a net loss isreported, all common stock equivalents are excluded from the calculationbecause they would have an anti-dilutive effect, meaning the loss per sharewould be reduced. Therefore, in periods when a loss is reported the calculationof basic and dilutive loss per share results in the same value.

 

The number of shares of potentially dilutive common stockrelated to options and warrants that were excluded from the calculation ofdilutive shares since the inclusion of such shares would be anti-dilutive forthe three and nine months ended September 30, 2009 and 2008, respectively,are shown below:

 
| ** ** | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------|------------|------------------------|------------|------------------------|------------|
| ** ** | ** ** | **Septembr 30,**       | ** ** | **September 30,** | ** ** |
| ** ** | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Options    |       | 3,164,390              |       | 2,438,423              |       | 3,164,390 |   | 2,438,423 |   |
| Warrants   |       | 4,086                  |       | 4,086                  |       | 4,086 |   | 4,086 |   |
| Total      |       | 3,168,476              |       | 2,442,509              |       | 3,168,476 |   | 2,442,509 |   |

 

In January 2009, the FASB amended the existing guidancepertaining to the calculation of earnings per share to address whetherinstruments granted in share-based payment transactions are participatingsecurities prior to vesting and, therefore, need to be included in the earningsallocation in computing earnings per share under the two-class method asdescribed in the original guidance addressing earnings per share. Effective inthe first quarter of 2009, unvested share-based payment awards that containnon-forfeitable rights to dividends or dividend equivalents (whether paid orunpaid) are participating securities and shall be included in the computationof earnings per share pursuant to the two-class method. The Company’s awards donot have nonforfeitable rights to dividends or dividend equivalents andtherefore the adoption of this provision did not impact its financialstatements.

 

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**6. STOCK-BASED COMPENSATION**

 

On January 1, 2006, the Company adopted the FASB’samended guidance on accounting for stock-based compensation. Under theprovisions of the amended guidance compensation cost recognized for the threeand nine months ended September 30, 2009 and 2008 included compensationcost for stock options granted to employees subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof the FASB’s amended guidance on accounting for stock-basedcompensation and recognized over the vesting period of the applicableaward on a straight-line basis. The effect of this amendment for the threeand nine months ended September 30, 2009 was an expense of $1,162 and$3,485, respectively. The effect of this amendment for the three and ninemonths ended September 30, 2008 was an expense of $1,003 and $3,337, respectively.There is no expense recorded for options which were granted prior to January 1,2006 under the minimum value method if the exercise price was equal to the fairvalue of common stock and the measurement date was fixed at the time of grant.

 

A summary of option activity for the nine months ended September 30,2009  is as follows:

 
| ** **                                                                                                 | ** ** | **2009**      | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                                                 | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** |
| ** **                                                                                                 | ** ** | **Shares**    | ** ** | **Exercise Price** | ** ** |
| Outstanding at December 31,                                                                           |       | 2,646,765     |       | $ | 11.59 |   |
| Granted                                                                                                    |       | 587,785       |       | 8.16 |   |
| Exercised                                                                                                  |       | (37,710       | )          | 1.99 |   |
| Cancelled                                                                                                  |       | (32,450       | )          | 17.07 |   |
| Outstanding at September 30,                                                                          |       | 3,164,390     |       | 11.01 |   |
|                                                                                                       |       |          |       |   |   |
| Options exercisable at September 30,                                                                  |       | 1,685,142     |       |   |   |
|                                                                                                       |       |          |       |   |   |
| Weighted average grant date fair value of options granted during  the nine months ended September 30, |       |          |       | $ | 5.14 |   |

 

For the nine months ended September 30, 2009 and 2008,the Company determined the fair value of stock options using the Black-Scholesoption pricing model with the following assumptions for option grants,respectively:

 
| ** **                       | ** ** | **Nine  Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** |
| ** **                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Expected dividend yield          |       | —                 |       | — |   |
| Risk-free rate                   |       | 1.67%  - 2.58%         |       | 2.71%  - 3.77% |   |
| Expected option term (in  years) |       | 5.49                   |       | 6.1 |   |
| Volatility                       |       | 81%                    |       | 61%  - 63% |   |

 

**Non-employee Stock Option Awards**

 

The compensation expense related to non-employee stockoptions is generally recognized over a period of four years. The grantsgenerally vest quarterly and such vesting is contingent upon future servicesprovided by the consultants to the Company. The Company recorded a consultant relatedstock-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.  The Company recorded consultant related stock-based compensationexpense of $38 for the three months ended September 30, 2008 and recordeda benefit of $104 for the nine months ended September 30, 2008. Optionsremaining unvested for non-employees are subject to remeasurement eachreporting period prior to vesting in full. Since the fair market value of theoptions issued to non-employees are subject to changes in the future, thecompensation expense recognized in each quarter may not be indicative of futurecompensation charges.

 

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**7. SIGNIFICANT COLLABORATION**

 

Effective in the quarter ended March 31, 2009, the FASBamended the existing guidance relating to collaborative arrangements. Duringthe first quarter of fiscal year 2009, the Company implemented the newamendments which prescribe that certain transactions between collaborators berecorded in the income statement on either a gross or net basis, depending onthe characteristics of the collaboration relationship, and provides forenhanced disclosure of collaborative relationships. The Company evaluated itscollaborative agreements for proper income statement classification based onthe nature of the underlying activity. If payments to and from collaborativepartners are not within the scope of other authoritative accounting literature,the income statement classification for the payments is based on a reasonable,rational analogy to authoritative accounting literature that is applied in aconsistent manner. Amounts due from collaborative partners related todevelopment activities are generally reflected as a reduction of research anddevelopment expense because the performance of contract development services isnot central to the Company’s operations. For collaborations with commercializedproducts, if the Company is the principal, as defined in the FASB guidance, itrecords revenue and the corresponding operating costs in the respective lineitems within the statement of operations. If the Company is not the principal,it records operating costs as a reduction of revenue. The FASB guidancedescribes the principal as the party who is responsible for delivering theproduct or service to the customer, has latitude with establishing price, andhas the risks and rewards of providing product or service to the customer,including inventory and credit risk. The adoption of amended guidance did notaffect the financial position or results of operations of the Company.

 

***ADM Agreement***

 

On November 3, 2004, the Company signed an agreementwith ADM Polymer Corporation (“ADM”), a subsidiary of Archer Daniels MidlandCompany, to establish an alliance whereby the Company would provide technologyand licenses thereto and research and development services, and ADM would providemanufacturing services and capital necessary to produce**Mirel*TM* biobasedplastic on a commercial scale basis. This agreement was amended by the partieson September 8, 2005 to define certain cost sharing activities related topre-commercial manufacturing, to change certain milestones and to make otherminor modifications.

 

On July 12, 2006, ADM exercised an option to enter intoa commercial alliance for further research, development, manufacture, use andsale of Mirel on the terms and conditions set forth in the Commercial AllianceAgreement.

 

***Commercial Alliance Agreement***

 

The Commercial Alliance Agreement specifies the terms andstructure of the relationship between the Company and ADM. The primary functionof this agreement is to establish the activities and obligations of the Companyand ADM by which the parties will commercialize Mirel. These activitiesinclude: the establishment of a joint sales company, which has been namedTelles, to market and sell Mirel, the construction of a manufacturing facilitycapable of producing 110 million pounds of material annually (the “CommercialManufacturing Facility”), the licensing of technology to Telles and to ADM, andthe conducting of various research, development, manufacturing, sales andmarketing, compounding and administrative services by the parties.

 

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

 

A summary of the key activities under this agreement is asfollows: (i) ADM will arrange for, finance the construction of, and own, afacility in which it will manufacture Mirel under contract to Telles; (ii) theCompany will either arrange for and finance the acquisition or construction ofa facility in which it will compound Mirel or it will arrange for third partiesto compound Mirel; and (iii) the Company, acting in the name and on behalfof Telles, will establish the initial market for Mirel. The Company will alsocontinue its research and development efforts to further advance the technologyand expand and enhance the commercial potential of Mirel. Subject to certainlimitations, ADM will finance the working capital requirements of Telles.

 

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The Commercial Alliance Agreement called for Telles to paythe Company twelve quarterly support payments of $1,575 each during the periodof construction of the Commercial Manufacturing Facility. The last of thetwelve quarterly support payments was received in December 2008. In January 2009Telles agreed to provide the Company with two additional quarterly payments of$1,575, both of which were received as of June 30, 2009. As of September 30,2009, all quarterly support payments received from ADM on behalf of Telles,totaling $22,050, had been recorded as deferred revenue on the Company’sbalance sheet.  No further quarterlysupport payments are expected.

 

During the Construction Phase of the agreement allpre-commercial material production expenses incurred by ADM and the Company areshared equally. Accordingly, from the execution of this agreement in July 2006through September 30, 2009, ADM has reimbursed the Company $7,818. Allamounts received from ADM, prior to the Commercial Phase, relating to thisagreement are recorded as deferred revenue. The Company will continue to deferrecognition of these and future payments received from ADM during theConstruction 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 AllianceAgreement as “First Commercial Sale.”  Achievement of this milestonerequires the sale by Telles to third parties of at least one million pounds ofMirel manufactured at the Commercial Manufacturing Facility.  Sales must meet certain criteria, including aminimum order size, and payment must be received from the customer in order forsuch sales to contribute towards the First Commercial Sale milestone.

 

During the Commercial Phase of the agreement Telles will paythe Company royalties on sales of Mirel. In addition, if Telles engages theCompany to perform certain services, and the Company accepts the servicearrangement, Telles will reimburse the Company for the cost of the servicesprovided pursuant to the Commercial Alliance Agreement.

 

While Telles is a fifty-fifty joint venture, ADM will beadvancing a disproportionate share of the financial capital needed to constructthe Commercial Manufacturing Facility and to fund its activities. Therefore, under the agreement allprofits, after payment of all royalties, reimbursements and fees, from Telleswill first be distributed to ADM until ADM’s cost of constructing theCommercial Manufacturing Facility and any negative net cash flow of Tellesfunded by ADM have been returned. OnceADM has recovered such amounts, the profits of Telles will be distributed inequal amounts to the parties.

 

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

 

Revenue recognition for amounts deferred through September 30,2009 is expected to commence when the Commercial Phase of the alliance begins.The deferred amounts will be recognized on a straight line basis over theestimated period, of approximately ten years, in which the Company’sobligations are fulfilled in accordance with the Commercial Alliance Agreement.The Company also expects to receive payments from Telles for the compoundingservices it provides as well as royalty payments. The compounding payments androyalty payments will be due to the Company as Telles sells product to itscustomers. These payments will be recognized as revenue during the period inwhich they are earned.

 

The Commercial Alliance Agreement and related agreementsinclude detailed provisions setting out the rights and obligations of theparties in the event of a termination of the Commercial Alliance Agreement.These provisions include the right for either party to terminate the CommercialAlliance Agreement upon a material default of a material obligation by theother party after a notice and cure period has expired. The parties are alsopermitted to terminate the Commercial Alliance Agreement if a change incircumstances that is not reasonably within the control of a party makes theanticipated financial return from the project inadequate or too uncertain. Theparties have specific obligations to fulfill in the event of termination or ifthey file for bankruptcy protection.

 

**8. INCOME TAXES**

 

The Company follows FASB guidance relating to income taxesincluding guidance, which address accounting for uncertainty in income taxes.The Company’s policy is to record estimated interest and penalties related touncertain tax positions in income tax expense. As of September 30, 2009,and December 31, 2008, respectively, the Company had no accrued interestor penalties recorded related to uncertain tax positions. In addition, theCompany has no amounts recorded for any unrecognized tax benefits as of September 30,2009 or September 30, 2008.

 

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The tax years 2006 through 2008 remain open to examinationby federal and state taxing jurisdictions to which the Company is subject,which are primarily in the U.S.

 

At December 31, 2008 the Company had net operating losscarryforwards (NOLs) for federal and state income tax purposes of $74,613 and$59,064, respectively.  Included in the federal and state net operatingloss carryforwards is approximately $18,600 of deduction related to theexercise of stock options subsequent to the adoption of amended FASB guidancerelated to stock-based compensation. This amount represents an excess taxbenefit as defined under the amended FASB guidance related to stock-basedcompensation and has not been recorded as a deferred tax asset. The Company’sexisting federal and state net operating loss carryforwards begin to expire in2009. The Company also had available research and development credits forfederal and state income tax purposes of approximately $2,803 and $2,216respectively. The federal and state research and development credits will beginto expire in 2012 and 2015, respectively. As of December 31, 2008 theCompany also had available investment tax credits for state income tax purposesof $112 which also begin to expire in 2009. Management of the Company hasevaluated the positive and negative evidence bearing upon the realizability ofits deferred tax assets, which are comprised principally of net operating losscarryforwards and research and development credits. Under the applicableaccounting standards, management has considered the Company’s history of lossesand concluded that it is more likely than not that the Company will not recognizethe benefits of federal and state deferred tax assets. Accordingly, a fullvaluation allowance has been established against the deferred tax assets.

 

Utilization of the net operating loss and research anddevelopment credit carryforwards may be subject to a substantial annuallimitation under Section 382 of the Internal Revenue Code of 1986 due toownership change limitations that have occurred previously or that could occurin the future. These ownership changes may limit the amount of net operatingloss and research and development credit carryforwards that can be utilizedannually to offset future taxable income and tax, respectively.  During the third quarter, the Company finalized a study of thechange in control provisions under Internal Revenue Code Section 382.Based on this analysis, the Company has concluded that the net operating lossand research and development credit carryforwards are available to offsetfuture taxable income.  To the extent an ownership change occurs in thefuture, the net operating loss and credit carryforwards may be subject tolimitation.

 

**9. ACCRUED LIABILITIES**

 

Accrued liabilities consisted of the following at:

 
| ** **                          | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Employee compensation and benefits  |       | $                           | 2,032      |                       | $          | 1,618 |   |
| Pre-commercial manufacturing costs  |       | 335                         |       | 350                        |       |
| Professional services               |       | 258                         |       | 206                        |       |
| Contracted research and development |       | 134                         |       | 317                        |       |
| Other                               |       | 1,207                       |       | 1,096                      |       |
| Total accrued expenses              |       | $                           | 3,966      |                       | $          | 3,587 |   |

 

**10. SEGMENT INFORMATION**

 

The Company operates in one segment. There have been nochanges in the segment information since the fiscal year ended December 31,2008, as described in Note 2 to the financial statements included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008.

 

**11. COMMITMENTS AND CONTINGENCIES**

 

**Legal Proceedings**

 

From time to time, the Company may be subject to legalproceedings and claims in the ordinary course of business. The Company is notcurrently 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.

 

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**Joint Research Agreement with TheCooperative Research Centre for Sugar Industry Innovation through Biotechnology**

 

The Company entered a joint research arrangement, known asthe Cooperative Research Centre for Sugar Industry Innovation throughBiotechnology, with the Commonwealth of Australia and various other parties forthe purpose of developing and gaining access to certain intellectual property.The Commonwealth of Australia established the program to enhance the transferof research outputs into commercial or other outcomes of economic,environmental or social benefit to Australia. The terms of the contractstipulate that the contract commenced on January 1, 2007, and the Company’sfunding obligation continues until July 1, 2010. In connection with thisagreement the Company was obligated at the beginning of the contract to providefunding in the form of cash in the amount of $805 Australian dollars and inkind contribution in the amount of $2,287 Australian dollars. As of September 30,2009 the remaining cash portion of the Company’s obligation, denominated inU.S. dollars, is $151 and the total remaining amount of in kind contributionthe Company is committed to is $444, denominated in U.S. dollars. The in kindcontribution consists of salaries and overhead attributable to researchassociated with the joint research agreement. The cash and in kindcontributions are recorded as research and development expense as incurred, inthe consolidated statement of operations.

 

**12. FAIR VALUE MEASUREMENTS**

 

Effective during the first quarter of fiscal year 2009 theCompany adopted the authoritative guidance for fair value measurements and thefair value option for financial assets and liabilities. In accordance with thisguidance the Company’s assets and liabilities were measured at fair value as ofSeptember 30, 2009 and December 31, 2008. Fair values determined byLevel 1 inputs utilize observable data such as quoted prices in active markets.Fair values determined by Level 2 inputs utilize data points other than quotedprices in active markets that are observable either directly or indirectly.Fair values determined by Level 3 inputs utilize unobservable data points in whichthere is little or no market data, which require the reporting entity todevelop its own assumptions.

 

The following table represents the Company’s assets andliabilities measured at fair value on a recurring basis at September 30,2009.

 
| ** **                       | ** ** | **Fair value measurements at reporting date  using** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **Quoted prices in**                                 | ** ** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **active markets for**                               | ** ** | **Significant other** | ** ** | **unobservable** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **identical assets**                                 | ** ** | **observable inputs** | ** ** | **inputs** | ** ** | **Balance as of** | ** ** |
| **Description**                  | ** ** | **(Level 1)**                                        | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **9/30/09** | ** ** |
| Cash equivalents:                |       |                                                 |       |   |   |   |   |   |   |
| Money Market funds               |       | $                                                    | —     |   | $ | 6,373 |   | $ | — |   | $ | 6,373 |   |
| Short-term investments:          |       |                                                 |       |   |   |   |   |   |   |
| Treasuries                       |       |                                                 |       | 770 |   |   |   | 770 |   |
| Government-sponsored enterprises |       | —                                               |       | 59,520 |   | — |   | 59,520 |   |
|                             |       | $                                                    | —     |   | $ | 66,663 |   | $ | — |   | $ | 66,663 |   |

 

The following table represents the Company’s assets andliabilities measured at fair value on a recurring basis at December 31,2008.

 
| ** **                       | ** ** | **Fair value measurements at reporting date  using** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **Quoted prices in**                                 | ** ** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **active markets for**                               | ** ** | **Significant other** | ** ** | **unobservable** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **identical assets**                                 | ** ** | **observable inputs** | ** ** | **inputs** | ** ** | **Balance as of** | ** ** |
| **Description**                  | ** ** | **(Level 1)**                                        | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **12/31/08** | ** ** |
| Cash equivalents:                |       |                                                 |       |   |   |   |   |   |   |
| Money Market funds               |       | $                                                    | —     |   | $ | 23,152 |   | $ | — |   | $ | 23,152 |   |
| Commercial paper                 |       | —                                               |       | 1,100 |   | — |   | 1,100 |   |
| Short-term investments:          |       |                                                 |       |   |   |   |   |   |   |
| Treasuries                       |       | —                                               |       | 4,000 |   | — |   | 4,000 |   |
| Commercial paper                 |       | —                                               |       | 23,497 |   | — |   | 23,497 |   |
| Government-sponsored enterprises |       | —                                               |       | 37,405 |   | — |   | 37,405 |   |
|                             |       | $                                                    | —     |   | $ | 89,154 |   | $ | — |   | $ | 89,154 |   |

 

Short-term investments were valued at September 30,2009 using information provided by a pricing service based on market observableinformation, or for investments in money market funds, at calculated net assetvalues, and are therefore classified as Level 2. Because the Company’sinvestment portfolio may include securities that do not always trade on a dailybasis, the pricing service applies other available information as applicablethrough processes such as benchmark yields, benchmarking of like securities,sector groupings and matrix pricing to prepare evaluations. The Company validatesthe prices provided by a third party pricing services by reviewing theirpricing methods and obtaining market values from other pricing sources. Thefair values of the Company’s cash equivalents and short-term investments aredetermined through market and observable sources and have been classified asLevel 2. After completing the validation procedures, the Company did not adjustor override any fair value measurements provided by its pricing services as of September 30,2009 and December 31, 2008.

 

In January 2009, the Companyimplemented the authoritative guidance for fair value measurements and the fairvalue option for its nonfinancial assets and liabilities that are remeasured atfair value on a non-recurring basis with no significant impact on  its financial statements.

 

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**13. CHANGE IN ACCOUNTING ESTIMATE**

 

In the first quarter of 2009, due to an extendedconstruction period and revised estimated completion date of the CommercialManufacturing Facility, the Company determined it would extend the period ofuse of its pre-commercial manufacturing plant by six months to December 2009from June 2009. In connection with this, the useful lives of the leaseholdimprovements connected to the pre-commercial manufacturing plant were increasedby six months. This change in accounting estimate was adopted prospectivelyfrom January 1, 2009. The effect of the change in accounting estimate onthe financial statements for the three months ended September 30, 2009 wasan increase in loss from operations and net loss of $354 and an increase inloss per share of $0.02. The effect of the change in accounting estimate for thenine months ended September 30, 2009 was a decrease in loss fromoperations and net loss of $354 and a decrease in net loss per share of $0.02.

 

**14. RELATED PARTIES**

 

The Company recorded $25 and $91 of license and royaltyrevenue from Tepha, Inc., a related party, during the three and ninemonths ended September 30, 2009. During the three and nine months ended September 30,2008 the Company recorded license and royalty revenue from Tepha, Inc. of$25 and $95, respectively. The Company had no outstanding receivable balancedue from Tepha as of September 30, 2009 or December 31, 2008. TheCompany also had various transactions with its alliance partner ADM, a relatedparty, during the three and nine months ended September 30, 2009 and 2008.The Company had an outstanding receivable balance of $850 due from ADM at September 30,2009. As of December 31, 2008 there was no significant outstandingreceivable balance due from ADM.  For more information on the Company’srelated party transactions, please see Note 8 to the Company’s auditedfinancial statements included in its Annual Report on Form 10-K for theyear ended December 31, 2008.

 

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**15. SHAREHOLDER RIGHTS PLAN**

 

On July 7, 2009, the Company adopted a Shareholder RightsPlan, the purpose of which is, among other things, to enhance the Board’sability to protect shareholder interests and to ensure that shareholders receivefair treatment in the event any coercive takeover attempt of the Company ismade in the future.  The Shareholder Rights Plan could make it moredifficult for a third party to acquire, or could discourage a third party fromacquiring, the Company or a large block of the Company’s Common Stock. The following summary description of the Shareholder Rights Plan does notpurport to be complete and is qualified in its entirety by reference to theCompany’s Shareholder Rights Plan, which has been previously filed with theSecurities and Exchange Commission as an exhibit to a Registration Statement onForm 8-A.

 

In connection with the adoption of the Shareholder RightsPlan, the Board of Directors of the Company declared a dividend distribution ofone preferred stock purchase right (a “Right”) for each outstanding share ofCommon Stock to shareholders of record as of the close of business on July 8,2009.  The Rights currently are not exercisable and are attached to andtrade with the outstanding shares of Common Stock.  Under the ShareholderRights Plan, the Rights become exercisable if a person becomes an “acquiringperson” by acquiring 15% or more of the outstanding shares of Common Stock orif a person commences a tender offer that would result in that person owning15% or more of the Common Stock.  If a person becomes an “acquiringperson,” each holder of a Right (other than the acquiring person) would beentitled to purchase, at the then-current exercise price, such number of sharesof the Company’s preferred stock which are equivalent to shares of Common Stockhaving twice the exercise price of the Right.  If the Company is acquiredin a merger or other business combination transaction after any such event,each holder of a Right would then be entitled to purchase, at the then-currentexercise price, shares of the acquiring company’s common stock having a valueof twice the exercise price of the Right.

 

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

*(All dollar amounts are stated inthousands)*

 

**Forward Looking Statements**

 

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

 

Although we believe that our expectations are based onreasonable assumptions within the limits of our knowledge of our business andoperations, the forward-looking statements contained in this document areneither promises nor guarantees. Our business is subject to significant riskand uncertainties and there can be no assurance that our actual results willnot differ materially from our expectations. These forward looking statementsinclude, but are not limited to, statements concerning: future financialperformance and position, management’s strategy, plans and objectives forfuture operations, plans and objectives for product development andcommercialization, plans and objectives for present and future research anddevelopment and results of such research and development, plans and objectivesfor manufacturing, the commercialization of environmentally sustainable,economically attractive alternatives to petroleum-based plastics, chemicals andenergy, the commercialization of MirelTM biobased plastic (“Mirel”) through ouralliance with Archer Daniels Midland Company (“ADM”), sales of Mirel as analternative to petroleum-based plastics, the construction of the CommercialManufacturing Facility, the production of Mirel at the Commercial ManufacturingFacility, the commercial success of Mirel, the feasibility of extractin*g* bioplastics from plant crops, thecommercial viability of plant-produced plastics, recognition of revenue, andmanagement’s plans and expectations for revenue, expenses and capital andworking capital requirements. Such forward-looking statements are subject to anumber of risks and uncertainties that could cause actual results to differmaterially from those anticipated including, without limitation, the followingrisks: (1) we may not be successful at manufacturing Mirel on a commercialscale in a timely and economical manner, (2) we may not be successful inthe development of commercial formulations of Mirel, (3) we may not besuccessful in the development of plant crops for production of plastics, (4) ifthere are additional delays or cost increases in ADM’s construction andstart-up of the Commercial 

 

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Manufacturing Facility, our financial results will benegatively affected, (5) we may not be able to develop manufacturingcapacity sufficient to meet demand in an economical manner or at all, (6) wemay not achieve market acceptance of our products, (7) we have limitedmarketing and sales experience and capabilities, (8) we rely heavily onADM and will rely heavily on future collaborative partners, (9) oursuccess will be influenced by the price of petroleum relative to corn sugar, (10) ourfuture profitability is uncertain, and we have a limited operating history onwhich you can base your evaluation of our business, (11) we may need to secureadditional funding and may be unable to raise additional capital on favorableterms or at all, (12) we may lose key personnel or be unable to attractand retain necessary talent, (13) we may not be able to obtain rights tointellectual property developed by others using our information and technology,(14) intellectual property protection for our products is important anduncertain, (15) a substantial portion of the technology used in ourbusiness is owned by or subject to retained rights of third parties,(16) third parties may claim we infringe their intellectual property,(17) we may be unable to manage our growth effectively, (18) we maynot be successful in identifying market needs for new technologies anddeveloping new products to meet those needs, (19) our products may be, ormay be perceived as being, harmful to human health or the environment,(20) we face and will face substantial competition in several differentmarkets, (21) we are subject to significant foreign and domesticgovernment regulations, including environmental and health and safetyregulations, and compliance or failure to comply with these regulations couldharm our business, (22) we may not have adequate insurance and may havesubstantial exposure to payment of product liability claims,(23) potential future acquisitions could be difficult to integrate, divertthe attention of key personnel, disrupt our business, dilute stockholder valueand impair our financial results, and (24) each segment of our operationsis currently conducted at a single location which makes us susceptible todisruptions.

 

The forward-looking statements and risks factors presentedin this document are made only as of the date hereof and we do not intend toupdate any of these risk factors or to publicly announce the results of anyrevisions to any of our forward-looking statements other than as required underthe federal securities laws.

 

**Overview**

 

We are a bioscience company that develops and is in theprocess of commercializing environmentally sustainable, economically attractivealternatives to petroleum-based plastics, with work underway to do the samewith chemicals and energy. Our corporate strategy is to develop technologyplatforms that integrate advanced biotechnology with current industrial practiceand to commercialize these platforms with industry leading strategic partners.

 

Our first platform, which we are commercializing throughTelles, a joint venture with Archer Daniels Midland Company, or ADM, is aproprietary, large-scale microbial fermentation system for producing aversatile family of polymers known as polyhydroxyalkanoates, which we havebranded under the name MirelTM. Through Telles, we intend to sell thesebioplastics as environmentally friendly, but functionally equivalent,alternatives to petroleum-based plastics. In addition, this family of polymersoffers superior biodegradability characteristics and can be used in a widerange of commercial applications, including products used in agriculture andhorticulture, compost and organic waste diversion bags, marine and aquaticapplications, consumer products, business equipment and durable goods, andgeneral packaging materials. Mirel will be produced in a commercial scale plantdesigned for a 110 million pound annual capacity, or the CommercialManufacturing Facility, which is presently under construction by ADM inClinton, Iowa. ADM is targeting completion of the Commercial ManufacturingFacility in November 2009, and the start-up process has begun in severalsections of the plant. The Commercial Manufacturing Facility will producebiobased and biodegradable Mirel plastic using corn sugar, an abundantagriculturally-produced renewable resource. We are currently producingpre-commercial quantities of Mirel jointly with ADM at a small scalepre-commercial manufacturing facility.

 

Our second technology platform, which is in an early stage,is a biomass biorefinery system using plant crops to co-produce bothbioplastics and bioenergy. For this system, we intend to extract polymer fromthe engineered plant crop, so that the remaining plant material can be used asa biomass feedstock for the production of bioenergy products includingelectricity and biofuel. We are engineering switchgrass to produce bioplasticsin the leaf and stem of the plant. We have also collaborated with theAustralian Cooperative Research Centre to do the same in sugarcane, and in 2008we established a strategic research collaboration with the Donald DanforthPlant Science Center to develop an advanced industrial oilseed crop forco-production of bioplastics along with vegetable oil, biodiesel fuel, oroleochemicals. Switchgrass is a commercially and ecologically attractive,non-food energy crop 

 

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that is indigenous to North America and is generallyconsidered to be a leading candidate for cellulose-derived production ofethanol and other biofuels. Sugarcane is an established energy crop that iswell suited for tropical regions of the world. We believe that using thesecrops to co-produce bioplastics with bioenergy products can offer superioreconomic value and productivity as compared to single product systems thatproduce them individually. We have been working on our biomass biorefineryplatform using switchgrass for several years, and we believe that we are ascientific leader in this field. Our goal for this program is to havecommercially viableplantvarieties in pre-commercial field trials in two to three years. We may alsoseek to establish alliances with partners to commercially exploit thisplatform.

 

As demonstrated by our first two technology platforms, wetake an integrated systems approach to our technology development. We arefocused on developing entire production systems from gene to end product asopposed 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 thissystems approach optimizes manufacturing productivity and, when commercialized,will enable us to capture more economic value from any platform that we pursue.We have core capabilities in microbial genetics, fermentation processengineering, chemical engineering, polymer science, plant genetics andbotanical science, and we have assembled these capabilities in a way that hasallowed us to integrate biotechnology with chemical engineering and industrialpractice. We believe that our approach can be applied to chemicals and otherproducts to help establish and grow environmentally sustainable plastics,chemicals and energy industries.

 

For our third platform we intend to apply our corecapabilities in microbial engineering and plant transformation to developbiological routes to other chemicals and chemical intermediates. In September 2007,the U.S. Department of Commerce’s National Institute of Standards andTechnology approved a $2 million award for us to develop a commerciallyviable process for producing biobased chemicals from renewable agriculturalproducts. This award will contribute to our Integrated Bio-Engineered ChemicalsProgram, which is developing sustainable solutions for widely used industrialchemicals. Specifically, this award is being utilized in the development of thefour-carbon (“C4”) family of chemical products.

 

To exploit our first technology platform, we are workingwith ADM as they build the Commercial Manufacturing Facility in Clinton, Iowa.The biodegradable bioplastics that this facility will produce are highlyversatile and range in properties from hard and strong to soft and flexible.These properties allow for a wide variety of commercial applications, offeringa biobased alternative to petroleum-derived synthetic materials which are notbiodegradable. Through Telles we intend to position Mirel as a premium pricedspecialty material catering to customers who want to match the functionality ofpetroleum-based plastic, but add the dimension of environmental responsibilityto their products and brands.

 

As of September 30, 2009, we had an accumulated deficitof $158,315 and total stockholders’ equity was $34,344.

 

**Collaborative Arrangements**

 

Our strategy for collaborative arrangements is to retainsubstantial participation in the future economic value of our technology whilereceiving current cash payments to offset research and development costs andworking capital needs. By their nature, these agreements are complex and havemultiple elements that cover a variety of present and future activities.

 

We entered into our alliance with ADM in 2004. As of September 30,2009, all payments received from ADM have been recorded as deferred revenue onour balance sheet. We expect that future payments from ADM, through at leastthe Construction Phase of the Commercial Alliance Agreement, will be classifiedas deferred revenue as well. The “Construction Phase” of the commercial alliance will end, and the“Commercial Phase” will begin, upon the achievement of a milestone referred toin the Commercial Alliance Agreement as “First Commercial Sale.” Achievement of this milestone requires the sale by Telles to third parties ofat least one million pounds of Mirel manufactured at the CommercialManufacturing Facility.Sales must meet certain criteria, including a minimumorder size, and payment must be received from the customer in order for suchsales to contribute towards the First Commercial Sale milestone. Weexpect to begin recognizing this deferred revenue when the Commercial Phase ofthe Alliance begins. All amounts will be recognized on a straight-line basisover the estimated period, of approximately ten years, in which our obligationsare fulfilled in accordance with the terms of the Commercial AllianceAgreement.

 

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

 

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

 

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

 

·                  supportpayments of $22,050 from ADM, on behalf of Telles, through June 30,2009

 

·                  cumulativecost sharing payments from ADM for pre-commercial manufacturing plantconstruction and operations made in accordance with the Technology Alliance andOption Agreement of $1,209; and

 

·                  cumulativecost sharing payments from ADM for pre-commercial manufacturing plantconstruction and operations made in accordance with the Commercial AllianceAgreement of $7,818.

 

During the commercial alliance, ADM will construct, finance,own and operate the Commercial Manufacturing Facility through a manufacturingagreement with Telles, and we will provide or procure compounding services toconvert the output from the Commercial Manufacturing Facility into forms thatare suitable for various commercial applications.

 

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We expect to incur increased research and developmentexpenses through the Construction Phase of the ADM agreement for pre-commercialmanufacturing and product development activities as we continue to develop,test, and refine product to meet the specification requirements of ourcustomers. Upon commencement of the Commercial Phase of the ADM agreement,expenses relating to product development are expected to decrease as theseexpenses will be transferred to Telles. During the transition periodbetween the initial start-up of the Commercial Manufacturing Facility and thecommencement of the Commercial Phase, we will continue to bear these expenses.

 

Telles is a limited liability company, formed and equallyowned by us and ADM, and is intended to: (i) serve as the commercialentity to establish and develop the commercial market for Mirel, and conductthe marketing and sales in accordance with the goals of the commercialalliance, (ii) assist in the coordination and integration of themanufacturing, compounding and marketing activities, and (iii) administerand account for financial matters on behalf of the parties. We and ADM eachhave 50% ownership and voting interest in Telles.

 

Even though Telles is a separate legal entity owned equallyby us and ADM, ADM will disproportionately fund the activities of the jointventure. Specifically, the cost of the Commercial Manufacturing Facility, theworking capital requirements of the joint venture and the support payments tous will exceed the investments made by us to establish compounding operationsfor the joint venture. Therefore,under our agreement all profits, after payment of all royalties, reimbursementsand fees, from Telles will first be distributed to ADM until ADM’s cost ofconstructing the Commercial Manufacturing Facility and any negative net cashflow of Telles funded by ADM have been returned. OnceADM has recovered such amounts, the profits of Telles will be distributed inequal amounts to the parties. In order to track the disproportionateinvestments ADM has made, a Ledger Account has been established to record therespective investments made by the parties. As of September 30, 2009, thebalance of the ADM Ledger Account was $368,625 and this balance is expected toincrease as the construction of the Commercial Manufacturing Facilityprogresses and Telles becomes operational.

 

**United States Government Contracts andGrants**

 

As of September 30, 2009, expected gross proceeds of$600 remain to be received under our government contracts and grants, whichinclude amounts for reimbursement to our subcontractors, as well asreimbursement for our employees’ time, benefits and other expenses related tofuture performance under the various contracts.

 

The status of our United States government contracts andgrants is as follows:

 
| ** **                                      | ** ** | ** **                | ** ** | **Total**      | ** ** | **Total received**          | ** ** | **Remaining amount**        | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|----------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Funding**               | ** ** | **Government** | ** ** | **through**                 | ** ** | **available as of**         | ** ** | **Contract/Grant**  | ** ** |
| **Program Title**                               | ** ** | **Agency**                | ** ** | **Funds**      | ** ** | **September 30, 2009** | ** ** | **September 30, 2009** | ** ** | **Expiration**      | ** ** |
|                                            |       |                      |       |           |       |                        |       |                        |       |                |       |
| Integrated Bio-Engineered Chemicals             |       | Department of Commerce    |       | $              | 2,000      |                        | $          | 1,749                       |       | $                   | 251        |   | October 2009 |   |
|                                            |       |                      |       |           |       |                        |       |                        |       |                |       |
| Blow Molded Bioproducts From Renewable Plastics |       | Department of Agriculture |       | 349            |       | —                      |       | 349                         |       | September 2010 |       |
|      Total             |       |                      |       | $              | 2,349      |                        | $          | 1,749                       |       | $                   | 600        |   |   |   |

 

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**Critical Accounting Estimates and Judgments**

 

The discussion and analysis of our financial condition andresults of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”) for interim financialinformation. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an ongoing basis, we evaluate our estimates, includingthose related to revenue recognition and stock-based compensation. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying value of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates. The significant accounting policies used in preparationof these condensed consolidated financial statements for the three and ninemonths ended September 30, 2009 are consistent with those discussed inNote 2 to the consolidated financial statements in our Annual Report on Form 10-Kfor the year ended December 31, 2008. The critical accounting policies andthe significant judgments and estimates used in the preparation of ourconsolidated financial statements for the three and nine months ended September 30,2009 are consistent with those discussed in our Annual Report on Form 10-Kfor the year ended December 31, 2008 in the section captioned “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Estimates and Judgments.”

 

In the first quarter of 2009, due to an extendedconstruction period and revised estimated completion date of the CommercialManufacturing Facility, the Company determined it would extend the period ofuse of its pre-commercial manufacturing plant by six months to December 2009from June 2009. In connection with this, the useful lives of the leaseholdimprovements connected to the pre-commercial manufacturing plant were increasedby six months. This change in accounting estimate was adopted prospectivelyfrom January 1, 2009. The effect of the change in accounting estimate onthe financial statements for the three months ended September 30, 2009 isan increase in loss from operations and net loss of $354 and an increase inloss per share of $0.02. The effect of the change in accounting estimate forthe nine months ended September 30, 2009 is a decrease in loss fromoperations and net loss of $354 and a decrease in net loss per share of $0.02.

 

**Results of Operations**

 

**Comparison of theThree Months Ended September 30, 2009 and 2008**

 

**Revenue**

 
| ** **                                            | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                            | ** ** | **September  30,**      | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2009**                | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Research and  development revenue                     |       | $                       | 49         |       | $          | 27 |   | $ | 22 |   |
| License fee and  royalty revenue from related parties |       | 25                      |       | 25         |       | — |   |
| License fee  revenue                                  |       | 10                      |       | —     |       | 10 |   |
| Grant revenue                                         |       | 527                     |       | 299        |       | 228 |   |
| Total revenue                                         |       | $                       | 611        |       | $          | 351 |   | $ | 260 |   |

 

Totalrevenue was $611 and $351 for the three months ended September 30, 2009and 2008, respectively. During the three months ended September 30, 2009we recognized $49 of research and development revenue 

 

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compared to $27 for therespective period in 2008. Research and development revenue is derived fromresearch and development services and delivery of sample product produced fromour pre-commercial manufacturing facility. Grant revenue increased during thethree months ended September 30, 2009 to $527 from $299 during the threemonths ended September 30, 2008, primarily as a result of increasedactivity relating to the Integrated Bio-Engineered Chemicals Program.

 

**Expenses**

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Research and development expenses, including cost of  revenue |       | $                      | 6,173      |       | $          | 6,571 |   | $ | (398 | ) |
| Selling, general, and administrative expenses                 |       | 3,968                  |       | 4,048      |       | (80 | ) |
| Total operating expense                                       |       | $                      | 10,141     |       | $          | 10,619 |   | $ | (478 | ) |

 

***Research and developmentexpenses, including cost of revenue***

 

Researchand development expenses were $6,173 and $6,571 for the three months ended September 30,2009 and 2008, respectively. The decrease of $398 was primarily due to areduction in pre-commercial manufacturing and sponsored research costspartially offset by increased payroll and related benefit expenses andlicensing expenses. Pre-commercial manufacturing costs were $1,048 for thethree months ended September 30, 2009 compared to $1,634 for therespective period in 2008. The decrease was primarily due to improvements inour production process made during the last year as we continue to focus ourattention on reducing manufacturing costs, moving certain manufacturingprocesses in-house and improving the quality of our pre-commercialmanufacturing material. Payroll and benefit related expenses increased to$2,801 for the three months ended September 30, 2009 compared to $2,576for the respective period in 2008. The increase of $225 was primarily due tothe addition of new employees and related benefit expenses. License feesincreased to $248 for the three months ended September 30, 2009 comparedto $21 for the respective period in 2008. The increase is attributable to anintellectual property licensing agreement.

 

Weexpect to incur increased research and development expenses through theConstruction Phase of the ADM agreement for pre-commercial manufacturing andproduct development activities as we continue to develop, test, and refineproduct to meet the specification requirements of our customers. Uponcommencement of the Commercial Phase of the ADM agreement, expenses relating toproduct development are expected to decrease as these expenses will betransferred to Telles. During the transition period between the initialstart-up of the commercial manufacturing facility and the commencement of theCommercial Phase, we will continue to bear these expenses.

 

***Selling, general, andadministrative expenses***

 

Selling,general, and administrative expenses were $3,968 and $4,048 for the threemonths ended September 30, 2009 and 2008, respectively. Although selling,general, and administrative expenses were fairly consistent for the comparativethree month periods we expect that these expenses will increase through theConstruction Phase of the ADM agreement due to increasing payroll and expandinginfrastructure to support sales and marketing efforts relating to the globalcommercialization of Mirel. Upon the commencement of the Commercial Phase ofthe agreement, selling, general, and administrative expenses are expected todecrease as the cost of sales and marketing efforts will be transferred toTelles. During the transition period between the initial start-up of thecommercial manufacturing facility and the commencement of the Commercial Phase,we will continue to bear these expenses.

 

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**Other Income (Net)**

 
| ** **                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------------------|------------|------------|------------|
| ** **                | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Total  other income (net) |       | $                      | 113        |       | $          | 540 |   | $ | (427 | ) |
|                           |            |                        |            |            |            |  |  |  |  |  |

 

Otherincome (net) was $113 and $540 for the three months ended September 30,2009 and 2008, respectively. Other income (net) during both periods consistedof investment income. The decrease of $427 was primarily due to a marketdecline in investment yields during the period, our decision to convert amajority of our investment portfolio to lower risk/lower yield U.S. FederalTreasury Notes and government-backed Federal Agency Notes, and a decrease inaverage cash and short-term investments held during the comparative three monthperiods.

 

**Results of Operations**

 

**Comparison of theNine Months Ended September 30, 2009 and 2008**

 

**Revenue**

 
| ** **                                            | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                            | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Research  and development revenue                     |       | $                      | 79         |       | $          | 106 |   | (27 | ) |
| License  fee and royalty revenue from related parties |       | 91                     |       | 95         |       | (4 | ) |
| License  fee revenue                                  |       | 10                     |       | —     |       | 10 |   |
| Grant  revenue                                        |       | 1,040                  |       | 955        |       | 85 |   |
| Total  revenue                                        |       | $                      | 1,220      |       | $          | 1,156 |   | 64 |   |

 

Totalrevenue was $1,220 and $1,156 for the nine months ended September 30, 2009and 2008, respectively. During the nine months ended September 30, 2009 werecognized $79 of research and development revenue compared to $106 for therespective period in 2008. Research and development revenue is derived fromresearch and development services and delivery of sample product produced fromour pre-commercial manufacturing facility. Grant revenue increased during thenine months ended September 30, 2009 to $1,040 from $955 during the ninemonths ended September 30, 2008, primarily as a result of increasedactivity relating to the Integrated Bio-Engineered Chemicals Program.

 

**Expenses**

 
| ** **                                                    | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                    | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Research and development expenses, including cost of  revenue |       | $                      | 18,504     |       | $          | 18,513 |   | $ | (9 | ) |
| Selling, general, and administrative expenses                 |       | 11,620                 |       | 12,193     |       | (573 | ) |
| Total operating expense                                       |       | $                      | 30,124     |       | $          | 30,706 |   | $ | (582 | ) |

 

***Research and developmentexpenses, including cost of revenue***

 

Researchand development expenses were $18,504 and $18,513 for the nine months ended September 30,2009 and 2008, respectively. The decrease of $9 was primarily due to the netresult of the addition of new employees and related benefit expenses, expensesrelated to the expansion of our research activities and licensing expensesoffset by a reduction in pre-commercial manufacturing costs. Payroll andbenefit related costs were $8,591 for the nine months ended September 30,2009 compared to $6,965 for the respective period in 2008. The increase of$1,626 was primarily the result of hiring personnel to support ourpre-commercial manufacturing process and microbial and plant researchprograms.  Expenses relating to researchand development supplies increased to $681 for the nine months ended September 30,2009 compared to $501 for the respective period in 2008.  Expenses relating to licensing agreementsincreased to $362 for the nine months ended September 30, 2009 compared to$87 for the respective period in 2008. The increase is attributable to anintellectual property licensing agreement. Pre-commercial manufacturing costswere $3,201 for the nine months ended September 30, 2009 compared to$5,279

 

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for the respective periodin 2008. The decrease of $2,078 was primarily due to improvements in ourproduction process made during the last year as we continue to focus ourattention on reducing manufacturing costs, moving certain manufacturingprocesses in-house and improving the quality of our pre-commercialmanufacturing material.

 

Weexpect to incur increased research and development expenses through theConstruction Phase of the ADM agreement for pre-commercial manufacturing andproduct development activities as we continue to develop, test, and refineproduct to meet the specification requirements of our customers. Uponcommencement of the Commercial Phase of the ADM agreement, expenses relating toproduct development are expected to decrease as these expenses will be transferredto Telles. During the transition period between the initial start-up of thecommercial manufacturing facility and the commencement of the Commercial Phase,we will continue to bear these expenses.

 

***Selling, general, andadministrative expenses***

 

Selling, generaland administrative expenses were $11,620 and $12,193 for the nine months ended September 30,2009 and 2008, respectively. The decrease of $573 was primarily attributable toa decrease in stock-based compensation expense, a decrease in recruitingexpense and lower depreciation expense during the period. Stock-basedcompensation expense decreased to $2,224 for the nine months ended September 30,2009 from $2,436 for the comparable period in 2008. Stock-based compensationdecreased mainly as a result of the completion, in May 2008, of thevesting period for certain options granted to our Board of Directors and anofficer of the company. Recruiting expense also decreased to $54 for the ninemonths ended September 30, 2009 compared to $377 for the comparable periodin 2008. The decrease of $323 in recruiting expense is primarily attributableto the recruitment of our CEO and CFO during the nine months ended September 30,2008. The decrease in selling, general and administrative expenses was partiallyoffset by increased employee compensation and benefit related expenses as aresult of increased headcount.

 

Weexpect that selling, general, and administrative expenses will increase throughthe Construction Phase of the ADM agreement due to increasing payroll andexpanding infrastructure to support sales and marketing efforts relating to thecommercialization of Mirel. Upon the commencement of the Commercial Phase ofthe agreement, selling, general, and administrative expenses are expected todecrease as the cost of sales and marketing efforts will be transferred toTelles.

 

**Other Income (Net)**

 
| ** **               | ** ** | **Nine Months Ended**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------------------|------------|------------|------------|
| ** **               | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2009**               | ** ** | **2008**   | ** ** | **Change** | ** ** |
| Total other income (net) |       | $                      | 706        |       | $          | 2,449 |   | $ | (1,743 | ) |
|                          |            |                        |            |            |            |  |  |  |  |  |

 

Otherincome (net) was $706 and $2,449 for the nine months ended September 30,2009 and 2008, respectively. Other income (net) during both periods consistedof investment income. The decrease of $1,743 was primarily due to a market decline in investment yields during theperiod, our decision to convert a majority of our investment portfolio to lowerrisk/lower yield U.S. Federal Treasury Notes and government-backed FederalAgency Notes, and a decrease in average cash and short-term investments heldduring the comparative nine month periods.

 

**Liquidity and Capital Resources**

 

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

 

We fund our cash requirements primarily through thefollowing methods:

 

· our strategic alliance with ADM;

 

· government grants;

 

· equity financing; and

 

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· interest earned on cash andshort-term investments.

 

Currently our products are in the pre-commercial stage ofdevelopment, and large-scale commercial sales have not begun. In addition, wehave incurred significant expenses relating to our research and developmentefforts. As a result, we have incurred net losses since our inception. As of September 30,2009, we had an accumulated deficit of $158,315. Our total unrestricted cash,cash equivalents and short-term investments as of September 30, 2009 were$70,065 as compared to $91,096 at December 31, 2008. As of September 30,2009, we had no outstanding debt.

 

Our cash, cash equivalents and short-term investments at September 30,2009 were held for working capital purposes. We do not enter into investmentsfor trading or speculative purposes. The primary objective of our investmentactivities is to preserve our capital to support the growth of our business. Asof September 30, 2009 we had restricted cash of $593. Restricted cashconsists of $493 held in connection with the lease agreement for our ErieStreet facility in Cambridge, Massachusetts and $100 held in connection withour corporate credit card program. Short-term investments are made inaccordance with our corporate investment policy, as approved by our Board ofDirectors. Investments are limited to high quality corporate debt, U.S.Treasury bills and notes, bank debt obligations, municipal debt obligations andasset-backed securities. The policy establishes maturity limits, concentrationlimits, and liquidity requirements. At September 30, 2009, we were incompliance with this policy.

 

We believe that our cash, cash equivalents and short-terminvestments, the interest we earn on these balances, as well as cash expectedfrom government grants and our ADM alliance will be sufficient to meet ouranticipated cash requirements, including cash requirements with respect to thecommercial launch of Mirel, for at least the next 24 months. If ouravailable cash, cash equivalents, and short-term securities areinsufficient to satisfy our liquidityrequirements, or if we develop additional products, we may need to selladditional equity or debt securities or obtain a credit facility. The sale ofadditional equity and debt securities may result in additional dilution to ourstockholders. If we raise additional funds through the issuance of debtsecurities or preferred stock, these securities could have rights senior tothose of our common stock and could contain covenants that would restrict ouroperations. We may require additional capital beyond our currently forecastedamounts. Any such required additional capital may not be available onreasonable 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 ourplanned research, development and commercialization activities, which couldharm our business.

 

Net cash used in operating activities increased to$19,898 during the nine months ended September 30, 2009 from $14,697during the nine months ended September 30, 2008. Net cash used during thenine months ended September 30, 2009 primarily reflects the net loss forthe period partially offset by non-cash expenses, including stock-basedcompensation of $3,426, depreciation expense of $2,019 and the Company’s 401(k) matchingstock compensation of $406. The increase in cash used in operating activitiesduring the nine months ended September 30, 2009 as compared to therespective period in 2008 was primarily due to a decrease in pre-commercialcost sharing payments received from ADM and a decrease in funds received frominvestment income as a result of lower investment yields and lower averagefunds available for investing. We received $444 in pre-commercial cost sharingpayments from ADM during the nine months ended September 30, 2009 comparedto $2,611 during the respective period in 2008. Pre-commercial cost sharingpayments were lower during the nine months ended September 30, 2009 due toa reduction in pre-commercial manufacturing costs. We received $706 in fundsfrom investment income during the nine months ended September 30, 2009compared to $2,449 for the respective period in 2008.

 

After the Commercial Phase of the ADM alliance begins,Telles will reimburse us for the costs of services provided pursuant to theCommercial Alliance Agreement, including product development and sales andmarketing. During the transition period between the initial start-up of theCommercial Manufacturing Facility and the commencement of the Commercial Phase,we will continue to bear these costs. If there are difficulties, delays orother unforeseen issues with the construction and start-up of the CommercialManufacturing Facility or the ramp-up of commercial sales from the CommercialManufacturing Facility, we may incur additional unreimbursed pilotmanufacturing, product development, sales and marketing costs until theCommercial Phase of the alliance begins.

 

Net cash provided by investing activities was $3,404 duringthe nine months ended September 30, 2009 compared to $18,511 for therespective period in 2008. Net cash provided by investing activities during thenine

 

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months ended September 30, 2009 primarily representsnet cash of $4,245 from the purchase, sale and maturity of short-terminvestments and a cash outflow of $911 for the purchase of equipment used forresearch purposes.

 

Net cash provided by financing activities was $75 and $788for the nine months ended September 30, 2009 and 2008, respectively. Thecash provided by financing activity during the nine months ended September 30,2009 and 2008 was solely attributable to proceeds received from the exercise ofstock options and warrants.

 

**Contractual Obligations**

 

The following table summarizes our contractual obligationsat September 30, 2009 and the effects such obligations are expected tohave on our liquidity and cash flows in future periods:

 
| ** **                  | ** ** | **Payments Due by  Period** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | ** **                  | ** ** | **Less than** | ** ** | **2-3** | ** ** | **4-5** | ** ** | **More than** | ** ** |
| ** **                  | ** ** | **Total**                   | ** ** | **1 year** | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| Purchase obligations        |       | $                           | 355        |   | $ | 215 |   | $ | 90 |   | $ | 50 |   | $ | — |   |
| Operating lease obligations |       | 5,119                       |       | 1,244 |   | 2,310 |   | 1,565 |   | — |   |
| Total                       |       | $                           | 5,474      |   | $ | 1,459 |   | $ | 2,400 |   | $ | 1,615 |   | $ | — |   |

 

**Off-Balance Sheet Arrangements**

 

As of September 30, 2009, we had no off-balance sheetarrangements as defined in Item 303(a) (4) of the Securities andExchange Commission’s Regulation S-K.

 

**Related Party Transactions**

 

We recorded $25 and $91 of license and royalty revenue fromTepha, Inc., a related party, during the three and nine months ended September 30,2009. During the three and nine months ended September 30, 2008 werecorded license and royalty revenue from Tepha, Inc. of $25 and $95,respectively. We had no outstanding receivable balance due from Tepha as of September 30,2009 or December 31, 2008. We also had various transactions with ouralliance partner ADM, a related party, during the three and nine months ended September 30,2009 and 2008. We had an outstanding receivable balance of $850 due from ADM atSeptember 30, 2009. As of December 31, 2008 there was no significantoutstanding receivable balance due from ADM.  For more information on ourrelated party transactions, please see Note 8 to our audited financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2008.

 

**Recent Accounting Pronouncements**

 

From time to time, new accounting pronouncements are issuedby the FASB or other standard setting bodies that are adopted by the Company asof the specified effective date. Unless otherwise discussed,  management believes that the impact ofrecently issued standards that are not yet effective will not have a materialimpact on our consolidated financial position or results of operations uponadoption.

 

***Recently IssuedAccounting Standards***

 

In August 2009, the FASB issued Accounting StandardsUpdate No. 2009-05, Measuring Liabilities at Fair Value, or ASU 2009-05.ASU 2009-05 amends Accounting Standards Codification Topic 820, Fair ValueMeasurements. Specifically, ASU 2009-05 provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following methods: 1) a valuation techniquethat uses a) the quoted price of the identical liability when traded as anasset or b) quoted prices for similar liabilities or similar liabilitieswhen traded as assets and/or 2) a valuation technique that is consistentwith the principles of Topic 820 of the Accounting Standards Codification (e.g.an income approach or market approach). ASU 2009-05 also clarifies that whenestimating the fair value of a liability, a reporting entity is not required toadjust to include inputs relating to the existence of transfer restrictions

 

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on that liability. The adoption of this standard did nothave an impact on our financial position or results of operations; however,this standard may impact us in future periods.

 

In October 2009, the FASBissued ASU No. 2009-13, *Multiple-DeliverableRevenue Arrangements,* or ASU 2009-13. ASU 2009-13, amends existingrevenue recognition accounting pronouncements that are currently within thescope of FASB Accounting Standards Codification, or ASC, Subtopic 605-25(previously included within EITF 00-21, Revenue Arrangements with MultipleDeliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01,Revenue Arrangements with Multiple Deliverables, or EITF 08-01, providesaccounting principles and application guidance on whether multiple deliverablesexist, how the arrangement should be separated, and the considerationallocated. This guidance eliminates the requirement to establish the fair valueof undelivered products and services and instead provides for separate revenuerecognition based upon management’s estimate of the selling price for an undelivereditem when there is no other means to determine the fair value of thatundelivered item. Where fair value can be established, there is still arequirement to establish stand-alone value. EITF 00-21 previously requiredthat the fair value of the undelivered item be the price of the item eithersold in a separate transaction between unrelated third parties or the pricecharged for each item when the item is sold separately by the vendor. This wasdifficult to determine when the product was not individually sold because ofits unique features. Under EITF 00-21, if the fair value of all of theelements in the arrangement was not determinable, then revenue was deferreduntil all of the items were delivered or fair value was determined. This new approachis effective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010. We arecurrently evaluating the potential impact of this standard on our financialposition and results of operations and which method of adoption we will applyonce this standard is effective.

 

***Other Recently Issued Accounting Standards***

 

In June 2009, the FASB issued the following twonew accounting standards, which have not yet been integrated into theCodification:

 

·      SFAS No. 166, *Accounting for Transfers of Financial Assets, an amendment of FASBStatement No. 140*, or SFAS 166; and

 

·      SFAS No. 167, *Amendments to FASB Interpretation No. 46(R),*orSFAS 167

 

SFAS 166 prescribes the information that areporting entity must provide in its financial reports about a transfer offinancial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuinginvolvement in transferred financial assets. Specifically, among other aspects,SFAS 166 amends Statement of Financial Standard No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*, or SFAS 140, byremoving the concept of a qualifying special-purpose entity from SFAS 140and removes the exception from applying FIN 46(R) to variableinterest entities that are qualifying special-purpose entities. It alsomodifies the financial-components approach used in SFAS 140. SFAS 166is effective for transfers of financial assets occurring on or after January 1,2010. We have not determined the effect that the adoption of SFAS 166 willhave on our financial position or results of operations, but the effect willgenerally be limited to future transactions, if any.

 

SFAS 167 amends FASB Interpretation No. 46, *Consolidation of Variable Interest Entities (revised December 2003) —an interpretation of ARB No. 51*, or FIN 46(R), to requirean enterprise to determine whether its variable interest or interests give it acontrolling financial interest in a variable interest entity. The primarybeneficiary of a variable interest entity is the enterprise that has both (1) thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance and (2) theobligation to absorb losses of the entity that could potentially be significantto the variable interest entity or the right to receive benefits from theentity that could potentially be significant to the variable interest entity.SFAS 167 also amends FIN 46(R) to require ongoing reassessmentsof whether an enterprise is the primary beneficiary of a variable interestentity. SFAS 167 is effective for all variable interest entities andrelationships with variable interest entities existing as of January 1,2010. We have not determined the effect that the adoption of SFAS 167 willhave, if any, on our financial position or results of operations.

 

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***RecentlyAdopted Accounting Standards***

 

Effective January 1, 2009, we implemented a newlyissued accounting standard for business combinations. This standard requires anacquiring company to measure all assets acquired and liabilities assumed,including contingent considerations and all contractual contingencies, at fairvalue as of the acquisition date. In addition, an acquiring company is requiredto capitalize in process research and development and either amortize it overthe life of the product, or write it off if the project is abandoned orimpaired. The adoption of this standard did not impact our financial positionor results of operations as it is applicable to acquisitions completedafter January 1, 2009 and we did not complete any business combinationtransactions during the first nine months of 2009.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes in information regardingour exposure to market risk, as described in Item 7A of our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Our management (with the participation of our PrincipalExecutive Officer and Principal Financial Officer) evaluated the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)), as of September 30, 2009. Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by the Company inthe reports it files or submits under the Exchange Act is recorded, processed,summarized and reported on a timely basis and that such information isaccumulated and communicated to management, including the Principal ExecutiveOfficer and Principal Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Based on this evaluation, ourPrincipal Executive Officer and Principal Financial Officer concluded thatthese disclosure controls and procedures are effective.

 

**Changes in Internal Control over FinancialReporting**

 

There was no change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the quarter ended September 30, 2009 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A. RISK FACTORS**

 

Except as listed below,there have been no material changes in information regarding our risk factorsas described in Part I, Item 1A, of our Annual Report on Form 10-Kfor the year ended December 31, 2008, and our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009.

 

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**We may not be successful in thedevelopment of plant crops for production of plastics.**

 

In addition to our development and scale-up work toproduce Mirel through fermentation, we are also at an early stage of developingthe technology and processes to produce biobased plastics in plant crops,including switchgrass, sugar cane and oilseed. We are currently focused on thegenetic and process engineering required in connection with such programs.Because we will be funding much, or perhaps all, of the development of suchprograms, there is a risk that we may not be able to continue to fund suchprograms to completion or to provide the support necessary to distribute,market and sell resulting products, if any, on a worldwide basis. These developmentprograms will consume substantial resources.

 

To date our efforts to produce biobased plastics incrops have focused primarily on the genetic engineering required to cause thecrops to aggregate plastic in the plant mass during the life cycle of theplant. We have not yet achieved a high enough concentration of plastic incommercial crops to make the current technology and process economicallyfeasible at a commercial scale. If we are able to complete the geneticengineering work that leads to such aggregation at acceptable levels, we willalso need to perform additional process engineering so that plastic can berecovered from the harvested crops, processed and formulated as required toconstitute a marketable product. Such engineering work may not be successfuland we may not have the financial resources to fund such work.

 

In connection with these efforts, we are acquiringknow-how and developing technology internally that will be useful in efforts toengineer the crops so that upon completion of the harvest and recovery ofbiobased plastic, the residual material, or biomass, can be readily convertedinto energy through, for example, burning the biomass with coal or otherconventional fuels or by converting the biomass into a liquid fuel such as ethanol.These development efforts are at a very early stage. The technologicalchallenges associated with these programs are extraordinary and

 

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we may not be able to overcome these challenges. Wewill be required to invest a significant amount over a long period of time tocomplete such development work, if it can be completed at all.

 

We cannot predict the costs of producing biobasedplastics in plant crops, given the stage of development of this program. Theanticipated methods for manufacturing biobased plastics in crops, and forproducing chemicals and energy, are highly complex processes in which a varietyof difficulties may arise and there are extensive regulatory requirements to bemet. Given these uncertainties, we may not be able to successfully producebiobased plastics in plant crops in an economical manner.

 

**If ADM does not successfully buildand start up the Commercial Manufacturing Facility on time and on budget, ourfinancial results will be negatively affected.**

 

The cost of planning, designing, constructing andoperating the Commercial Manufacturing Facility being developed to serve thealliance with ADM, and the cost of ancillary facilities and services related tothe production of Mirel by Telles, is very significant. ADM has advanced and willcontinue advancing a disproportionate share of the financial capital needed forsuch activities and, therefore, under our agreement all profits, after paymentof all royalties, reimbursements and fees, from Telles will first bedistributed to ADM until ADM’s cost of constructing the CommercialManufacturing Facility and any negative net cash flow of Telles funded by ADMhave been returned. Previously, we expected that commercial quantities of Mirelfrom the Commercial Manufacturing Facility would be available for customers by December 2008.We now expect that initial fermentations will be conducted in December 2009,with recovery operations to immediately follow. If there are furtherdifficulties, delays or other unforeseen issues with the construction andstart-up of the Commercial Manufacturing Facility, the cost of such activitieswill almost certainly increase, we may incur additional unreimbursed pilotmanufacturing, product development, sales and marketing costs until theCommercial Phase of the alliance begins, and the revenue from sales, if any, ofMirel and the distribution of profits, if any, to us will be further delayed.

 

**We may not be able to developmanufacturing capacity sufficient to meet demand in an economical manner or atall.**

 

The initial phase of the Commercial ManufacturingFacility is being completed in modular increments.  We cannot assure you that we will have thenecessary funds to finance the construction of the remaining modules or any improvements to theCommercial Manufacturing Facility or that ADM will pay its share of the costsincurred by Telles, or that we will be able to develop this manufacturinginfrastructure in a timely or economical manner, or at all. ADM couldexperience financial or other setbacks unrelated to our collaboration thatcould, nevertheless, adversely affect us. If the Commercial ManufacturingFacility is not constructed to its full design capacity of 110 millionpounds, or does not achieve that capacity in actual operations, or ifconstruction to full capacity is not completed in a timely manner, Mirel maynot reach its full market potential, because Telles may not be able to meetmarket demand for Mirel, and because Mirel manufacturing costs may not beeconomical. Also, the expansion of a commercial-scale manufacturing facility iscomplex and expensive. If demand for Mirel increases beyond the scope of theCommercial Manufacturing Facility being built to serve Telles, we may incursignificant expenses in the expansion and/or construction of manufacturingfacilities and increases in personnel in order to increase manufacturingcapacity.

 

**We may not achieve market acceptanceof our products.**

 

Telles currently has only limited customer commitmentsfor commercial quantities of Mirel. Market acceptance of Mirel and our futureproducts will depend on numerous factors, many of which are outside of ourcontrol, including among others:

 

·                  public acceptance of such products;

 

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·                  ability to produce products of consistent quality thatoffer functionality comparable or superior to existing or new polymer products;

 

·                  our ability to produce products fit for their intendedpurpose;

 

·                  our ability to obtain necessary regulatory approvalsfor our products;

 

·                  the willingness and speed at which potential customersqualify Mirel for use in their products;

 

·                  pricing of our products compared to competitiveproducts, including petroleum-based plastics;

 

·                  the strategic reaction of companies that marketcompetitive products;

 

·                  our reliance on third parties who support or controldistribution channels; and

 

·                  general market conditions.

 

Prospective customers are currently evaluating andperforming tests on Mirel prior to making any large-scale purchase decisions.We may not be able to successfully demonstrate that our plastics haveproperties comparable or superior to those of environmentally sustainablecompetitors or similar to conventional petroleum-based plastics. There can beno assurance that products based on our technologies will be perceived as beingcomparable or superior to existing products or new products being developed bycompeting companies or that such products will otherwise be accepted byconsumers. The market for our biobased plastics may not be willing to supportpremium prices to purchase environmentally sustainable plastics. If there isnot broad market acceptance of our products, we may not generate significantrevenues. Generally, new product applications require a long lead time andsufficient quantities of polymer for development and qualification beforecustomers enter into sales commitments. Delays in the availability of materialfor product development, compounding scale-up and marketing activities coulddelay or slow the ramp-up of commercial sales from the Commercial ManufacturingFacility. If the start of the Commercial Phase of the alliance is delayed as aresult of such delays or for other reasons, we may incur additionalunreimbursed product development and sales and marketing costs until the CommercialPhase of the alliance begins.  In addition, if such delays occur, or if weare unable to obtain the anticipated premium pricing for Mirel, there could bea material adverse effect on the timing of the distribution of Telles profits,if any, to us.

 

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**Our future profitability isuncertain, and we have a limited operating history on which you can base yourevaluation of our business.**

 

We have had net operating losses since being foundedin 1992. At September 30, 2009, our accumulated deficit was approximately$158 million. Since 1992, we have been engaged solely in research anddevelopment and other pre-commercial and early-stage commercial activities. Asa part of our strategic alliance, ADM Polymer is constructing the commercialscale Commercial Manufacturing Facility for Mirel.We expect that initialfermentations will be conducted in December 2009, with recovery operationsto immediately follow, and we expect that it will require an additional periodof time to ramp up production. Until such time, Telles will not havesignificant revenues from sales of Mirel. No Telles profits will be distributedto us until ADM’s cost of constructing the Commercial Manufacturing Facilityand any negative net cash flow of Telles funded by ADM have been returned toADM. Because we have a limited history of commercial operations and we operatein a rapidly evolving industry, we cannot be certain that we will generatesufficient revenue to operate our business and become profitable.

 

Our product revenue will be dependent on thesuccessful completion of the scale-up and commercialization of Mirel throughour strategic alliance with ADM, and other future products through otherpartnerships or joint ventures, if any, with third parties and separately forour own account. In addition, if we are unable to develop, commercialize andfurther advance technologies relating to the production of biobased plastics incrops and other products, or if sales of Mirel or such other products are notsignificant, we could have significant losses in the future due to ongoingexpenses to perform research and product development and our inability toobtain additional research and development funding in connection with suchproducts.

 

In addition, the amount we spend will impact ourability to become profitable and this will depend, in part, on:

 

·                  the progress of our research and development programsfor the production of biobased plastics in crops and for other products;

 

·                  the cost of building, operating and maintainingmanufacturing and research facilities;

 

·                  the number of products that we attempt to develop;

 

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

 

·                  how competing technological and market developmentsaffect our proposed products; and

 

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

 

We may not achieve any or all of these goals and,thus, we cannot provide assurances that we will ever be profitable or achievesignificant revenues. If we fail to achieve profitability or significantrevenues, the market price of our common stock will likely decrease.

 

**We may need to secure additionalfunding and may be unable to raise additional capital on favorable terms or atall.**

 

We have consumed substantial amounts of capital sinceour inception in 1992 for our research and development activities. Although webelieve our unrestricted cash, cash equivalents and short-term investments ofapproximately $70 million as of September 30, 2009, will besufficient to fund our anticipated cash requirements for at least the next24 months, we may require significant additional financing in the futureto fund our operations. We cannot assure you that additional financing will beavailable on terms acceptable to us, or at all. Until we can generatesignificant continuing revenues, we expect to satisfy our future cash needsthrough the use of existing cash

 

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resources and through strategic collaborations,governmental research grants, and/or by licensing all or a portion of ourprograms or technology. We may also seek additional funds through private orpublic sales of our securities, or debt financings. If funds are not available,we may be required to delay, reduce the scope of, or eliminate one or more ofour research or development programs or our commercialization efforts. Further,additional funding may significantly dilute existing stockholders.

 

**We may not be able to obtain rightsto intellectual property developed by others using our information andtechnology, which could limit our ability to compete.**

 

We enter into confidentiality and intellectualproperty assignment agreements with our employees, consultants, outsidescientific collaborators, and other advisors. These agreements generally providethat inventions conceived by that party in the course of rendering services tous will be our exclusive property or that we will have the option to licensesuch rights. We also enter into material transfer agreements with potentialcustomers and vendors, prohibiting the other party from disclosing or filing apatent that discloses certain results of their evaluation of our developmentalmaterials. However, these agreements may not be honored and may not effectivelyassign intellectual property rights to us. Enforcing a claim that a partyillegally obtained intellectual property rights is difficult, expensive andtime consuming and the outcome is unpredictable. The failure to obtain suchrights for Metabolix or to prevent others from obtaining such rights couldadversely affect our competitive position.

 

**Intellectual property protection forour products is important and uncertain.**

 

Our commercial success will depend in part on ourobtaining and maintaining patent, trade secret and trademark protection of ourtechnologies in the United States and other jurisdictions, as well assuccessfully enforcing this intellectual property and defending thisintellectual property against third-party challenges. We will only be able toprotect our technologies from unauthorized use by third parties by keeping themas trade secrets or to the extent that valid and enforceable intellectualproperty protections, such as patents, cover them. In particular, we placeconsiderable emphasis on obtaining patent protection for significant newtechnologies, products and processes in the United States and in foreignjurisdictions where we plan to use such technologies. Legal means may affordonly limited protection and may not adequately protect our rights or permit usto gain or keep our competitive advantage. Foreign jurisdictions may not affordthe same protections as U.S. law, and we cannot ensure that foreign patentapplications will have the same scope of the U.S. patents.

 

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Our patent position involves complex legal and factualquestions. Accordingly, we cannot predict the breadth of claims that may beallowed or enforced in our patents or in third-party patents. For example:

 

·                  we or our licensors might not have been the first tomake the inventions covered by each of our pending patent applications andissued patents;

 

·                  we or our licensors might not have been the first tofile patent applications for these inventions;

 

·                  others may independently develop similar oralternative technologies not encompassed by our patents;

 

·                  our issued patents and issued patents of our licensorsmay not provide us with any competitive advantages, or may be challenged andinvalidated by third parties; and

 

·                  we may not develop additional proprietary technologiesthat are patentable.

 

Patents may not be issued for any pending or futurepending patent applications owned by or licensed to us, and claims allowedunder any issued patent or future issued patent owned or licensed by us may notbe valid or sufficiently broad to protect our technologies. Moreover, we may beunable to protect certain of our intellectual property in the United States orin foreign countries. Any issued patents owned by or licensed to us now or inthe future may be challenged, invalidated, or circumvented, and the rightsunder such patents may not provide us with competitive advantages. In addition,competitors may design around our technology or develop competing technologies.We could incur substantial costs to bring suits in which we may assert ourpatent rights against others or defend ourselves in suits brought against us.An unfavorable outcome of any such litigation could have a material adverseeffect on our business and results of operations.

 

We also rely on trade secrets to protect ourtechnology and proprietary information, especially where we believe patentprotection is not appropriate or obtainable. However, trade secrets aredifficult to protect. We vigorously pursue confidentiality agreements andcontractual provisions with our collaborators, potential customers, employees,and consultants to protect our trade secrets and proprietary know-how. Theseagreements may be breached and we may not have adequate remedies for suchbreach. While we use reasonable efforts to protect our trade secrets, ouremployees, consultants, contractors or scientific and other advisors, ourpotential customers, or our strategic partners may unintentionally or willfullydisclose our proprietary information to competitors. If we were to enforce aclaim that a third party had illegally obtained and was using our tradesecrets, our enforcement efforts would be expensive and time consuming, and theoutcome would be unpredictable. In addition, courts outside the United Statesare sometimes unwilling to protect trade secrets. Moreover, if our competitorsindependently develop equivalent knowledge, methods and know-how, it will bemore difficult for us to enforce our rights and our business could be harmed.

 

If we are not able to defend the patent or tradesecret protection position of our technologies, then we will not be able toexclude competitors from developing or marketing competing technologies, and wemay not generate enough revenues from product sales to justify the cost ofdevelopment of our technologies and to achieve or maintain profitability.

 

We also rely on trademarks to establish a marketidentity for our products. We and Telles currently have five registeredtrademarks in the United States and six pending trademark applications filedwith the U.S. Patent and Trademark Office in addition to registrations andpending application in foreign jurisdictions. We expect to file additionalapplications as new trademarks are selected for our products, but because ofthe costs of filing and prosecuting such applications, there will be manycountries in which we will choose not to file applications. To maintain thevalue of our trademarks, we might have to file lawsuits against third partiesto prevent them from using trademarks confusingly similar to or dilutive of ourregistered or unregistered trademarks. Also, we might not obtain registrationsfor our pending or future trademark applications, and might have to defend ourregistered trademark

 

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and pending trademark applications from challenge bythird parties. Enforcing or defending our registered and unregisteredtrademarks might result in significant litigation costs and damages, includingthe inability to continue using certain trademarks. In the event that we areunable to continue using certain trademarks, we may be forced to rebrand ourproducts, which could result in the loss of brand recognition, and couldrequire us to devote resources to advertise and market brands.

 

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**Each segment of our operations iscurrently conducted at a single location, which makes us susceptible todisasters or other disruptions.**

 

Our pre-commercial manufacturing recovery operationsare currently conducted at a single location in Fort Mill, South Carolina. Aspart of our joint venture with ADM, ADM is constructing the CommercialManufacturing Facility at a single location in Clinton, Iowa, where Telles willinitially conduct all of its commercial manufacturing operations. Our researchand development operations are located at a single facility in Cambridge,Massachusetts. We take precautions to safeguard our facilities, includinginsurance, health and safety protocols, and off-site storage of criticalresearch results and of computer data. However, a natural disaster, such as afire, flood or earthquake, or a disruption due to mechanical failure, humanerror, business failure of a contractor, labor strikes or vandalism, coulddamage or destroy our equipment, inventory, our microbial strains, plants orother biological materials, or result in the loss of data from our informationtechnology systems. This could delay our research and development programs andcould cause us to incur additional expenses. The insurance we maintain againstfires, floods, earthquakes and other natural disasters or businessinterruptions may not be adequate to cover our losses in any particular case.

 

**An active trading market for ourcommon stock may not be available on a consistent basis to provide stockholderswith adequate liquidity. Our stock price may be extremely volatile, and ourstockholders could lose a significant part of their investment.**

 

Prior to November 10, 2006, there was no publicmarket for our common stock. An active trading market for shares of our commonstock may not be sustained on a consistent basis. The public trading price forour common stock will be affected by a number of factors, including:

 

·                 reported progress of our business and technologydevelopment, including start-up of the Commercial Manufacturing Facility,relative to investor expectations;

 

·                 changes in earnings estimates, investors’ perceptions,recommendations by securities analysts or our failure to achieve analysts’earning estimates;

 

·                 quarterly variations in our or our competitors’results of operations;

 

·                 general market conditions and other factors unrelatedto our operating performance or the operating performance of our competitors;

 

·                 future sales of our common stock;

 

·                 future issuance and/or sale of preferred stock;

 

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·                 announcements by us, or our competitors, ofacquisitions, new products, significant contracts, commercial relationships orcapital commitments;

 

·                 commencement of, or involvement in, litigation;

 

·                 any major change in our board of directors ormanagement;

 

·                 changes in governmental regulations or in the statusof our regulatory approvals;

 

·                 announcements related to patents issued to us or ourcompetitors and to litigation involving our intellectual property;

 

·                 a lack of, limited, or negative industry or securityanalyst coverage;

 

·                 developments in our industry and general economicconditions; and

 

·                 the other factors described elsewhere in these “RiskFactors.”

 

As a result of these factors, our stockholders may notbe able to resell their shares at, or above, their purchase price. In addition,the stock prices of many technology companies have experienced widefluctuations that have often been unrelated to the operating performance ofthose companies. The valuations of many biotechnology companies without consistentproduct revenues and earnings are extraordinarily high based on conventionalvaluation standards, such as price to earnings and price to sales ratios. Thesetrading prices and valuations may not be sustained. Any negative change in thepublic’s perception of the prospects of biotechnology companies could depressour stock price regardless of our results of operations. These factors may havea materially adverse affect on the market price of our common stock.

 

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**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

**Recent Sales ofUnregistered Securities**

 

On July 9,2009, the Company issued 9,958 shares of common stock to participants in itsMetabolix, Inc. 401(k) Plan as a matching contribution. The issuanceof these securities is exempt from registration pursuant to Section 3(a)(2) ofthe Securities Act of 1933 as exempted securities.

 

**Issuer Purchases of Equity Securities**

 

During the three months ended September 30, 2009, therewere no repurchases made by us or on our behalf, or by any “affiliatedpurchasers,” of shares of our common stock.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

The Company has receiveda grant from the USDA Cooperative State Research, Education, and ExtensionService (CSREES). The award will be used by the Company to further enhancebiobased, biodegradable resins suitable for blow molding operations. This USDAaward will fund a program designed to produce advanced formulations ofbioplastic for use on commercial scale equipment running at manufacturingspeed. Advances in polyhydroxyalkanoate (PHA) formulation and processingtechnology developed in an earlier phase of this project demonstrated thefeasibility of blow molding Mirel bioplastics at laboratory scale. This programseeks to improve Mirel formulations with the necessary physical propertiesrequired for blow molded parts at industrial scale.

 

The Company has completeda field trial of tobacco, genetically engineered to express PHA biobasedpolymers. The Company obtained the necessary permits from the U.S. Departmentof Agriculture Animal Plant Health Inspection Service (APHIS) to perform anopen air field trial in March of 2009, and field trial experiments werecompleted in early October. The trial was performed on 0.8 acres of land andprovided valuable data and information relating to polymer production, with thebest plants producing 3-5% PHA. This furthers development of Metabolix croptechnologies for the co-production of biobased plastics in non-food bioenergycrops.

 

In October 2009, Telles,our joint venture with ADM, submitted a dossier to the FDA for Mirel foodcontact notification. This dossier is made up of the results of a number ofextraction studies conducted under specific guidelines as well as a polymer analysisand other information.  The dossier addressed applications for allfood types in conditions ranging from frozen food contact to contact withboiling water.  After submittal of a dossier, the FDA has up to 120 daysto ask for clarification of information included in the dossier, additionaltesting or to modify the submitted approach.   Once this time periodhas elapsed, assuming no objections from the FDA or required additionalanalyses, one is free to pursue the submitted food contact segments.

 

Ourpolicy governing transactions in our securities by our directors, officers, andemployees permits our officers, directors, employees, and entities affiliatedwith our directors to enter into trading plans complying with Rule 10b5-lunder the Exchange Act , as amended. We have been advised that during the quarterended September 30, 2009, Sarah P. Cecil, Anthony J. Sinskey, Johan vanWalsem, and the Metabolix 2006 GRAT II entered into trading plans in accordancewith 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**

 
| 3.1    |   | Certificate of Designations, Preferences and Rights of a  Series of Preferred Stock of Metabolix, Inc. classifying and  designating the Series A Junior Participating Cumulative Preferred  Stock, filed as an exhibit to the Company’s Registration Statement on  Form 8-A on July 8, 2009 and incorporated herein by reference. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.1    |   | Shareholder Rights Agreement, dated as of July 7,  2009, between Metabolix, Inc. and American Stock Transfer &  Trust Company, LLC, as Rights Agent, filed as an exhibit to the Company’s  Registration Statement on Form 8-A on July 8, 2009 and incorporated  herein by reference.                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 31.1   |   | Certification Pursuant to  Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of  the Principal Executive Officer (furnished herewith).                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 31.2   |   | Certification Pursuant to  Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of  the Principal Financial Officer (furnished herewith).                                                                                                                                                                                             |

 

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| 32.1 |   | Section 1350 Certification (furnished herewith). |
|------|--------|-------------------------------------------------------|

 

**SIGNATURES**

 

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

 
|                  | METABOLIX, INC. |
|-----------------------|-----------------|
|                  |            |
|                  |            |
| November 3, 2009 | By:             | /s/ Richard P. Eno |
|                  |            | Richard P. Eno |
|                  |            | *President and Chief Executive Officer* |
|                  |            | *(Principal Executive Officer)* |
|                  |            |   |
| November 3, 2009 | By:             | /s/ Joseph D. Hill |
|                  |            | Joseph D. Hill |
|                  |            | *Chief Financial Officer* |
|                  |            | *(Principal Financial and Accounting  Officer)* |

 

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