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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



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

For the quarterly period ended March 31, 2011

OR



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

For the transition period from              to

Commission file number 000-29173





VERENIUM CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-3297375                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4955 Directors Place, San Diego, CA                            |  | 92121                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(858) 431-8500

(Registrants telephone number, including area code)





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

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

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



|                           |  |  |                      |  |  |                                            |  |  |                           |  
|-------------------------- |  |  | -------------------- |  |  | ------------------------------------------ |  |  | ------------------------- | -
|Large accelerated filer   ̈ |  |  | Accelerated filer   ̈ |  |  | Non-accelerated filer   ̈                   |  |  | Smaller reporting company | x
|                           |  |  |                      |  |  | (do not check if smallerreporting company) |  |  |                           |  

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

The number of shares of the registrants Common Stock outstanding as of May 10, 2011 was 12,612,352.









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VERENIUM CORPORATION

INDEX



|                               |  |                                                                                       |    |          |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                               |  |                                                                                       |    | Page No. |   
|PART I  FINANCIAL INFORMATION |  |                                                                                       |    |         
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements (unaudited):                              |    |          | 3  | 
|                               |  | Condensed Consolidated Balance Sheets                                                 |    |          | 3  | 
|                               |  | Condensed Consolidated Statements of Operations                                       |    |          | 4  | 
|                               |  | Condensed Consolidated Statements of Cash Flows                                       |    |          | 5  | 
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |    |          | 6  | 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |          | 19 | 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |    |          | 29 | 
|Item 4.                        |  | Controls and Procedures                                                               |    |          | 29 | 
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                       |    |         
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |    |          | 30 | 
|Item 1A.                       |  | Risk Factors                                                                          |    |          | 31 | 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |    |          | 45 | 
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |    |          | 45 | 
|Item 4.                        |  | (Removed and Reserved)                                                                |    |          | 45 | 
|Item 5.                        |  | Other Information                                                                     |    |          | 45 | 
|Item 6.                        |  | Exhibits                                                                              |    |          | 46 | 
|                               | 
|SIGNATURES                     |  |                                                                                       | 48 |         



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VERENIUM CORPORATION

PART IFINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
|------- | --------------------------------------------

VERENIUM CORPORATION

CONDENSED CONSOLIDATED
BALANCE SHEETS

(in thousands, except par value)



|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                    |  | March 31,2011 |          |   | December 31,2010 |  
|                                                                                                                                                                                                                    |  | (Unaudited)   |          |   |                  |  
|ASSETS                                                                                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                           |  | $             | 46,150   |   |                  | $ | 87,929   |  
|Accounts receivable, net of allowance for doubtful accounts of $140 at March 31, 2011 and December 31,
2010                                                                                                         |  |               | 9,968    |   |                  |   | 6,708    |  
|Inventories, net                                                                                                                                                                                                    |  |               | 5,772    |   |                  |   | 5,316    |  
|Restricted cash                                                                                                                                                                                                     |  |               | 5,000    |   |                  |   |         |  
|Prepaid expenses and other current assets                                                                                                                                                                           |  |               | 3,016    |   |                  |   | 2,694    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                |  |               | 69,906   |   |                  |   | 102,647  |  
|Property and equipment, net                                                                                                                                                                                         |  |               | 2,968    |   |                  |   | 3,134    |  
|Restricted cash                                                                                                                                                                                                     |  |               |         |   |                  |   | 5,000    |  
|Debt issuance costs and other assets                                                                                                                                                                                |  |               | 650      |   |                  |   | 976      |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                        |  | $             | 73,524   |   |                  | $ | 111,757  |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                                    |  | $             | 6,004    |   |                  | $ | 8,631    |  
|Accrued expenses                                                                                                                                                                                                    |  |               | 5,072    |   |                  |   | 8,218    |  
|Deferred revenue                                                                                                                                                                                                    |  |               | 2,334    |   |                  |   | 894      |  
|Accrued restructuring                                                                                                                                                                                               |  |               | 1,735    |   |                  |   |         |  
|Current liabilities of discontinued operations                                                                                                                                                                      |  |               | 776      |   |                  |   | 1,157    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                           |  |               | 15,921   |   |                  |   | 18,900   |  
|Convertible debt, at carrying value (face value of $44.2 million and $74.7 million at March 31, 2011 and December 31,
2010; maturity date of April 2027, and early put option dates of April 1, 2012, 2017 and 2022 |  |               | 48,593   |   |                  |   | 88,011   |  
|Other long term liabilities                                                                                                                                                                                         |  |               | 1,100    |   |                  |   | 1,216    |  
|Long term liabilities of discontinued operations                                                                                                                                                                    |  |               | 190      |   |                  |   | 460      |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                                                   |  |               | 65,804   |   |                  |   | 108,587  |  
|Stockholders equity:                                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Preferred stock$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at March 31, 2011 and
December 31, 2010                                                                                 |  |               |         |   |                  |   |         |  
|Common stock$0.001 par value; 245,000 shares authorized at March 31, 2011 and December 31, 2010; 12,612 and
12,610 shares issued and outstanding at March 31, 2011 and December 31, 2010                           |  |               | 12       |   |                  |   | 12       |  
|Additional paid-in capital                                                                                                                                                                                          |  |               | 609,870  |   |                  |   | 609,133  |  
|Accumulated deficit                                                                                                                                                                                                 |  |               | (602,162 | ) |                  |   | (605,975 | )
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                          |  |               | 7,720    |   |                  |   | 3,170    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                          |  | $             | 73,524   |   |                  | $ | 111,757  |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  

Note: The condensed consolidated balance sheet data at December 31, 2010 has been derived from the audited consolidated
financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.



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VERENIUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                                     |  |                             |        |   |      |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                     |  | Three Months EndedMarch 31, |       
|                                                                                                     |  | 2011                        |        |   | 2010 |  
|Revenue                                                                                              |  |                             |        |   |      |   |         |  
|Product                                                                                              |  | $                           | 13,032 |   |      | $ | 11,562  |  
|Collaborative                                                                                        |  |                             | 364    |   |      |   | 662     |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Total revenue                                                                                        |  |                             | 13,396 |   |      |   | 12,224  |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Operating expenses:                                                                                  |  |                             |        |   |      |   |         |  
|Cost of product revenue                                                                              |  |                             | 8,084  |   |      |   | 6,516   |  
|Research and development                                                                             |  |                             | 2,632  |   |      |   | 1,451   |  
|Selling, general and administrative                                                                  |  |                             | 4,500  |   |      |   | 7,063   |  
|Restructuring charges                                                                                |  |                             | 2,838  |   |      |   |        |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Total operating expenses                                                                             |  |                             | 18,054 |   |      |   | 15,030  |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Loss from operations                                                                                 |  |                             | (4,658 | ) |      |   | (2,806  | )
|Other income and expenses:                                                                           |  |                             |        |   |      |   |         |  
|Interest and other income                                                                            |  |                             | 33     |   |      |   | 79      |  
|Interest expense                                                                                     |  |                             | (1,094 | ) |      |   | (2,059  | )
|Gain on debt extinguishment upon conversion of convertible notes                                     |  |                             |       |   |      |   | 598     |  
|Gain on debt extinguishment upon repurchase of convertible notes                                     |  |                             | 11,284 |   |      |   |        |  
|Gain (loss) on net change in fair value of derivative assets and liabilities                         |  |                             | (1,813 | ) |      |   | 68      |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Total other income (expenses), net                                                                   |  |                             | 8,410  |   |      |   | (1,314  | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Net income (loss) from continuing operations                                                         |  |                             | 3,752  |   |      |   | (4,120  | )
|Net income (loss) from discontinued operations                                                       |  |                             | 61     |   |      |   | (15,376 | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Net income (loss)                                                                                    |  |                             | 3,813  |   |      |   | (19,496 | )
|Less: Loss attributed to noncontrolling interests in consolidated entities  discontinued operations |  |                             |       |   |      |   | 7,500   |  
|                                                                                                     |  |                             |        |   |      |   |         |  
|Net income (loss) attributed to Verenium Corporation                                                 |  | $                           | 3,813  |   |      | $ | (11,996 | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Net income (loss) per share, basic and diluted:                                                      |  |                             |        |   |      |   |         |  
|Continuing operations                                                                                |  | $                           | 0.30   |   |      | $ | (0.34   | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Discontinued operations                                                                              |  | $                           |       |   |      | $ | (1.28   | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Net income (loss) per share attributed to Verenium Corporation                                       |  | $                           | 0.30   |   |      | $ | (0.99   | )
|                                                                                                     |  |                             |        |   |      |   |         |  
|Shares used in calculating net income (loss) per share, basic and diluted                            |  |                             | 12,604 |   |      |   | 12,057  |  
|                                                                                                     |  |                             |        |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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VERENIUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                                                                                         |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                                                                         |  | 2011                        |         |   | 2010 |  
|Operating activities:                                                                                                                    |  |                             |         |   |      |   |         |  
|Net income (loss)                                                                                                                        |  | $                           | 3,813   |   |      | $ | (19,496 | )
|Net (income) loss from discontinued operations                                                                                           |  |                             | (61     | ) |      |   | 15,376  |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net income (loss) from continuing operations                                                                                             |  |                             | 3,752   |   |      |   | (4,120  | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities of continuing
operations: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                                                            |  |                             | 404     |   |      |   | 525     |  
|Share-based compensation                                                                                                                 |  |                             | 737     |   |      |   | 320     |  
|Gain on extinguishment of debt upon repurchase of convertible debt                                                                       |  |                             | (11,284 | ) |      |   |        |  
|(Amortization) accretion of debt net premium/discount from convertible debt                                                              |  |                             | (91     | ) |      |   | 292     |  
|Gain on debt extinguishment upon conversion of convertible debt                                                                          |  |                             |        |   |      |   | (598    | )
|(Gain) loss on net change in fair value of derivative assets and liabilities                                                             |  |                             | 1,813   |   |      |   | (68     | )
|Non-cash restructuring charges                                                                                                           |  |                             | 2,327   |   |      |   |        |  
|Change in operating assets and liabilities:                                                                                              |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                                                                      |  |                             | (3,260  | ) |      |   | (815    | )
|Inventories                                                                                                                              |  |                             | (456    | ) |      |   | (976    | )
|Other assets                                                                                                                             |  |                             | (183    | ) |      |   | (156    | )
|Accounts payable and accrued liabilities                                                                                                 |  |                             | (5,882  | ) |      |   | 673     |  
|Deferred revenue                                                                                                                         |  |                             | 1,407   |   |      |   | 470     |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in operating activities of continuing operations                                                                           |  |                             | (10,716 | ) |      |   | (4,453  | )
|Investing activities:                                                                                                                    |  |                             |         |   |      |   |         |  
|Purchases of property and equipment, net                                                                                                 |  |                             | (759    | ) |      |   |        |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in investing activities of continuing operations                                                                           |  |                             | (759    | ) |      |   |        |  
|Financing activities:                                                                                                                    |  |                             |         |   |      |   |         |  
|Principal payments on debt obligations                                                                                                   |  |                             |        |   |      |   | (18     | )
|Proceeds from sale of common stock and warrants                                                                                          |  |                             |        |   |      |   | 7       |  
|Repurchase of convertible debt                                                                                                           |  |                             | (29,714 | ) |      |   |        |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in financing activities of continuing operations                                                                           |  |                             | (29,714 | ) |      |   | (11     | )
|Cash provided by (used in) from discontinued operations:                                                                                 |  |                             |         |   |      |   |         |  
|Net cash used in operating activities of discontinued operations                                                                         |  |                             | (590    | ) |      |   | (11,214 | )
|Net cash used in investing activities of discontinued operations                                                                         |  |                             |        |   |      |   | (1,161  | )
|Net cash provided by financing activities of discontinued operations                                                                     |  |                             |        |   |      |   | 7,500   |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in discontinued operations                                                                                                 |  |                             | (590    | ) |      |   | (4,875  | )
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                                                                |  |                             | (41,779 | ) |      |   | (9,339  | )
|Cash and cash equivalents at beginning of year                                                                                           |  |                             | 87,929  |   |      |   | 24,844  |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of year                                                                                                 |  |                             | 46,150  |   |      |   | 15,505  |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                                                                        |  |                             |         |   |      |   |         |  
|Interest paid                                                                                                                            |  | $                           | 914     |   |      | $ | 91      |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  
|Supplemental disclosure of non-cash operating and financing activities:                                                                  |  |                             |         |   |      |   |         |  
|Conversions of convertible senior notes to common stock                                                                                  |  | $                           |        |   |      | $ | 2,200   |  
|                                                                                                                                         |  |                             |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

The Company

Verenium Corporation, Verenium or the Company, was incorporated in Delaware in 1992. The Company is an industrial
biotechnology company that develops and commercializes high performance enzymes for a broad array of industrial processes to enable higher productivity, lower costs, and improved environmental outcomes. The Company operates in one business segment
with three main product lines: animal health and nutrition, grain processing, and oilseed processing.

On September 2,
2010, the Company completed the sale of its ligno-cellulosic business, or LC business, to BP Biofuels North America LLC, or BP. See Note 2 for further details.

Recent Developments

Debt Repurchase

As more fully described in Note 3, on March 14, 2011 and March 16, 2011, Verenium Corporation repurchased a total of $9.6
million in principal amount of its outstanding 9% Convertible Senior Secured Notes due April 2027, or 2009 Notes, and $20.9 million in principal amount of its outstanding 5.5% Convertible Senior Notes due 2027, or 2007 Notes. In total, the Company
repurchased $30.6 million in principal amount of its 2009 and 2007 Notes (collectively, the Notes), leaving an aggregate of $4.1 million in principal amount of 2009 Notes and $40.1 million in principal of 2007 Notes outstanding as of
March 31, 2011. To effect this repurchase, the Company paid a total of $29.7 million in cash to a group of noteholders to retire principal, plus $0.9 million of accrued interest as of the closing dates.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly,
they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are
necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the
year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto contained in the Companys Annual Report
on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (SEC) on March 7, 2011.

The Company had net income from continuing operations of $3.8 million for the three months ended March 31, 2011 and had an accumulated deficit of $602.2 million as of March 31, 2011. In
connection with the sale of the LC business in September 2010, the Company received net cash proceeds of approximately $96.0 million. The Company has used net proceeds of approximately $50.3 million from the sale of the LC business for debt
retirement. The Company intends to use the remaining net proceeds for continued investment in product development and manufacturing improvement efforts, build-out of the Companys new research and development and corporate headquarters in San
Diego, and for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement. The holders of the Notes have the right to require the Company to purchase the Notes for cash (including any accrued and
unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022. Assuming the holders of the Notes exercise their put option in 2012, based on current cash resources and 2011 operating plan, the Companys existing working
capital will not be sufficient to meet the cash requirements to fund the Companys planned operating expenses, capital expenditures and working capital requirements after this date without additional sources of cash. If the Company is unable to
re-finance the Notes or raise additional capital, it will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail operations, issue equity in exchange for the Notes at substantial dilution to current
stockholders, file for bankruptcy, or cease operations.

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

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, discontinued operations, and related disclosures. On an ongoing basis, the Company evaluates these estimates, including those related to revenue
recognition, long-lived assets, accrued liabilities, its convertible debt and income taxes. These estimates are based on historical experience, on



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information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Derivative Financial Instruments

The Companys 2009 Notes (see
Note 3) and certain warrants have been accounted for in accordance with applicable authoritative guidance for derivative instruments which requires identification of certain embedded features to be bifurcated from debt instruments and
accounted for as derivative assets or liabilities. The derivative assets and liabilities are initially recorded at fair value and then at each reporting date, the change in fair value is recorded in the statement of operations.

Fair Value of Financial Instruments

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement
date. The applicable authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Companys assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within
the fair value hierarchy.

The following table presents the Companys fair value hierarchy for assets and liabilities
measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):



|                                                         |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 
|-------------------------------------------------------- |  | -------------- | ------ |  | ----------------- | - | - | ------- |  | - | ----- |  |  | ------- | ------ |  | ------- | - | ------ | ------- |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                                         |  | March 31, 2011 |        |  | December 31, 2010 |  
|                                                         |  | Level 1        |        |  | Level 2           |   |   | Level 3 |  |   | Total |  |  | Level 1 |        |  | Level 2 |   |        | Level 3 |  |   | Total | 
|Assets:                                                  |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 
|Cash and cash equivalents (1)                            |  | $              | 51,150 |  |                   | $ |  |         |  | $ |      |  |  | $       | 51,150 |  |         | $ | 92,929 |         |  | $ |      |  |  | $ |      |  |  | $ | 92,929 | 
|                                                         |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 
|Liabilities:                                             |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 
|Derivative  warrants (2)                                |  |                |       |  |                   |   |  |         |  |   | 259   |  |  |         | 259    |  |         |   |       |         |  |   |      |  |  |   | 307   |  |  |   | 307    | 
|Derivative  2009 Notes compound embedded derivative (3) |  |                |       |  |                   |   |  |         |  |   | 1,646 |  |  |         | 1,646  |  |         |   |       |         |  |   |      |  |  |   | 3,879 |  |  |   | 3,879  | 
|                                                         |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 
|                                                         |  | $              |       |  |                   | $ |  |         |  | $ | 1,905 |  |  | $       | 1,905  |  |         | $ |       |         |  | $ |      |  |  | $ | 4,186 |  |  | $ | 4,186  | 
|                                                         |  |                |        |  |                   |   |   |         |  |   |       |  |  |         |        |  |         |   |        |         |  |   |       |  |  |   |       |  |  |   |        | 



|(1) | Included in cash and cash equivalents and restricted cash on the accompanying Condensed Consolidated Balance Sheet.
|--- | -------------------------------------------------------------------------------------------------------------------



|(2) | Represents warrants issued in February 2008 and October 2009. The warrants issued in 2008 had a value of $0 as of March 31, 2011 and December 31, 2010, using
significant unobservable inputs (Level 3). The warrants issued in 2009 have a value of $259,000 and $307,000 and are classified within other long-term liabilities at March 31, 2011 and December 31, 2010, using significant unobservable
inputs (Level 3).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents the compound embedded derivative included in the Companys 2009 Notes (see Note 3). The compound embedded derivative includes, among other
rights, the noteholders rights to put the 2009 Notes at par at certain future, dates, as well as the right to receive make-whole amounts. The Companys compound embedded derivatives are valued using a lattice
model. The Companys lattice valuation models assume the noteholders exercise patterns will follow risk-neutral conversion behavior throughout the term of the instruments consistent with maximizing the expected present value
of the 2009 Notes. The embedded derivative is included in long term liabilities as part of the 2009 Notes carrying value on the accompanying Condensed Consolidated Balance Sheet as of March 31, 2011 and December 31, 2010.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table presents a reconciliation of the assets and liabilities measured at fair
value on a quarterly basis using significant unobservable inputs (Level 3) from January 1, 2011 to March 31, 2011 (in thousands):



|                                                  |  |                               |     |   |                                                           |   |        |       |  |   |        |  
|------------------------------------------------- |  | ----------------------------- | --- | - | --------------------------------------------------------- | - | ------ | ----- |  | - | ------ | -
|                                                  |  | DerivativeLiability Warrants |     |   | DerivativeLiability 2009 NotesCompoundEmbeddedDerivative |   |        | Total | 
|Balance at January 1, 2011                        |  | $                             | 307 |   |                                                           | $ | 3,879  |       |  | $ | 4,186  |  
|Adjustment to fair value included in earnings (1) |  |                               | (48 | ) |                                                           |   | 1,861  |       |  |   | 1,813  |  
|Extinguishment of debt (2)                        |  |                               |    |   |                                                           |   | (4,094 | )     |  |   | (4,094 | )
|                                                  |  |                               |     |   |                                                           |   |        |       |  |   |        |  
|Balance at March 31, 2011                         |  | $                             | 259 |   |                                                           | $ | 1,646  |       |  | $ | 1,905  |  
|                                                  |  |                               |     |   |                                                           |   |        |       |  |   |        |  



|(1) | The derivatives are revalued at the repurchase date as well as at the end of each reporting period and the resulting difference is included in the results of
operations. The fair value of the 2009 Notes compound embedded derivative were primarily affected by the Companys credit spread, but are also affected by the Companys stock price, stock price volatility, expected life, interest
rates and the passage of time. For the three months ended March 31, 2011, the net adjustment to fair value resulted in a loss of $1.8 million and is included in Gain (loss) on net change in fair value of derivative assets and
liabilities on the accompanying Condensed Consolidated Statement of Operations (see Note 3).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents decrease in derivative liability related to the debt repurchase of $9.6 million in principal amount of the 2009 Notes (see Note 3).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition

The Company recognizes revenue when the following criteria have been met: i) persuasive evidence of an arrangement exists; ii) services have been rendered or product has been delivered; iii) price to the
customer is fixed and determinable; and iv) collection of the underlying receivable is reasonably assured.

Billings to
customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of March 31, 2011, the Company had $3.1 million in short and long-term deferred revenue, of
which $1.0 million related to funding from collaborative partners and $2.1 million related to product sales.

Product
Revenue

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue
recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed and determinable at the time of sale; (ii) the distributors obligation to
pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the
Company has no significant obligation to the distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such
criteria have been met.

The Company recognizes revenue from royalties on operating profit from Danisco Animal Nutrition, or
Danisco, which markets the Companys Phyzyme phytase product, during the quarter in which such revenue is earned. Revenue from royalties on operating profit is recognized generally upon shipment of Phyzyme by Danisco to their customer, based on
information provided by Danisco. Revenue from royalties on operating profit is included in product revenue in the Condensed Consolidated Statement of Operations.

The Company records revenue equal to the full value of the manufacturing costs plus royalties on operating profit for product it manufactures through its contract manufacturing agreement with Fermic S.A.
in Mexico City.

The Company has contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer
of one of its enzyme products. Genencor maintains all manufacturing, sales and collection risk on all inventories produced and sold from its facilities. A set royalty based on profit is paid to the Company on all sales. As such, revenue associated
with product manufactured for the Company by Genencor is recognized on a net basis equal to the royalty on operating profit received from Danisco, as all the following conditions of reporting net revenue are met: i) the third party is the obligor;
ii) the amount earned is fixed; and iii) the third party maintains inventory risk.



8



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##### Table of Contents

Collaborative Revenue

The Company recognizes revenue from research funding under collaboration agreements when earned on a proportional performance
basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any
amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours estimated under the contract.

The Company recognizes fees received to initiate research projects over the life of the project. The Company recognizes fees
received for exclusivity in a field over the period of exclusivity.

The Company adopted new authoritative guidance pertaining
to milestones effective January 1, 2011, and recognizes milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) the Companys past research and development
services, as well as its ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that the Company customarily charges for similar research and development services.
The adoption of this guidance had no impact on the Companys condensed consolidated financial statements for the three months ended March 31, 2011.

Revenue Arrangements with Multiple Deliverables

The Company occasionally
enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the
accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting
period. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could
impact the timing of revenue recognition, which could affect the Companys results of operations.

Effective in 2011, the
Financial Accounting Standards Board issued amended revenue recognition guidance for arrangements with multiple deliverables. This eliminates the residual method of revenue recognition and allows the use of managements best estimate of selling
price for individual elements of an arrangement when vendor specific evidence or third party evidence is unavailable. The adoption of this guidance had no impact on the Companys condensed consolidated financial statements for the three months
ended March 31, 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including unrealized
gains and losses on marketable securities. Comprehensive income (loss) equaled net loss for all periods presented.

Computation of Net
Income (Loss) per Share

Basic net income (loss) per share has been computed using the weighted-average number of
shares of common stock outstanding during the period. For purposes of the computation of net income (loss) per share, unvested restricted shares are considered contingently returnable shares and are not considered outstanding common shares for
purposes of computing net income (loss) per share until all necessary conditions are met that no longer cause the shares to be contingently returnable. The impact of these contingently returnable shares on weighted average shares outstanding has
been excluded for purposes of computing net income (loss) per share.

Computation of net income (loss) per share for the three
months ended March 31, 2011 and 2010 was as follows (in thousands):



|                                                     |  |                              |       |  |      |   |         |  
|---------------------------------------------------- |  | ---------------------------- | ----- |  | ---- | - | ------- | -
|                                                     |  | Three Months Ended March 31, |      
|                                                     |  | 2011                         |       |  | 2010 |  
|Numerator                                            |  |                              |       |  |      |   |         |  
|Net income (loss) from continuing operations         |  | $                            | 3,752 |  |      | $ | (4,120  | )
|Net income (loss) from discontinued operations       |  | $                            | 61    |  |      | $ | (15,376 | )
|Net income (loss) attributed to Verenium Corporation |  | $                            | 3,813 |  |      | $ | (11,996 | )



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##### Table of Contents

|                                                                            |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended March 31, |       
|                                                                            |  | 2011                         |        |   | 2010 |  
|Denominator                                                                 |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding during the period                       |  |                              | 12,612 |   |      |   | 12,063 |  
|Less: Weighted average unvested restricted shares outstanding               |  |                              | (8     | ) |      |   | (6     | )
|                                                                            |  |                              |        |   |      |   |        |  
|Weighted average shares used in computing basic net income (loss) per share |  |                              | 12,604 |   |      |   | 12,057 |  
|                                                                            |  |                              |        |   |      |   |        |  
|Net income (loss) per share, basic and diluted:                             |  |                              |        |   |      |   |        |  
|Continuing operations                                                       |  | $                            | 0.30   |   |      | $ | (0.34  | )
|                                                                            |  |                              |        |   |      |   |        |  
|Discontinued operations                                                     |  | $                            |       |   |      | $ | (1.28  | )
|                                                                            |  |                              |        |   |      |   |        |  
|Net income (loss) attributed to Verenium Corporation                        |  | $                            | 0.30   |   |      | $ | (0.99  | )
|                                                                            |  |                              |        |   |      |   |        |  

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

2. Discontinued Operations

On September 2, 2010, the Company completed the sale of its LC Business to BP. The transaction resulted in net cash proceeds to the Company of $96.0 million (including $5.0 million of the purchase
price placed in escrow). Pursuant to the terms of the Asset Purchase Agreement, $5.0 million of the purchase price was placed in escrow and is subject to the terms of an escrow agreement, to cover the Companys indemnification obligations for
potential breaches of representations and warranties made by the Company in the Asset Purchase Agreement, most of which survive for a period of 18 months following the closing, or March 1, 2012. The Company is not required to make any
indemnification payments until aggregate claims exceed $2.0 million, and then only with respect to the amount by which claims exceed that amount. The Companys maximum indemnification liability is generally capped at $10.0 million with respect
to most representations. This amount is reflected as a current asset on the Companys condensed consolidated balance sheet as of March 31, 2011 and as a non-current asset as of December 31, 2010.

The Companys continuing operations focuses on the development, manufacturing and sale of industrial enzymes primarily within the
animal health and nutrition, grain processing, oilseed processing and emerging enzymes markets. Revenue and expenses allocated to discontinued operations for the three months ended March 31, 2010 were limited to revenue and expenses that were
directly related to the operations of the LC business, or that were eliminated as a result of the sale of the LC business. As a result, certain continuing indirect costs that were previously allocated to the Companys biofuels operating segment
were not allocated to discontinued operations.

The results of operations from discontinued operations for the three months
ended March 31, 2011 and 2010 are set forth below (in thousands):



|                                               |  |      |     |   |      |   |         |  
|---------------------------------------------- |  | ---- | --- | - | ---- | - | ------- | -
|                                               |  | 2011 |     |   | 2010 |  
|Revenue:                                       |  |      |     |   |      |   |         |  
|Grant                                          |  |      |    |   |      | $ | 738     |  
|Collaborative                                  |  |      |    |   |      |   | 69      |  
|                                               |  |      |     |   |      |   |         |  
|Total revenue                                  |  |      |    |   |      |   | 807     |  
|                                               |  |      |     |   |      |   |         |  
|Operating expenses:                            |  |      |     |   |      |   |         |  
|Research and development                       |  |      | (6  | ) |      |   | 15,548  |  
|Selling, general and administrative            |  |      | (55 | ) |      |   | 635     |  
|                                               |  |      |     |   |      |   |         |  
|Total operating expenses                       |  |      | (61 | ) |      |   | 16,183  |  
|                                               |  |      |     |   |      |   |         |  
|Net income (loss) from discontinued operations |  | $    | 61  |   |      | $ | (15,376 | )
|                                               |  |      |     |   |      |   |         |  

The condensed consolidated financial statements for the three months ended March 31, 2010 include the
accounts of the Company and its previously jointly owned subsidiary Galaxy Biofuels LLC, or Galaxy, which was determined to be a variable interest entity. As a result, the Companys consolidated statement of operations includes a line item
Loss attributed to noncontrolling interests in consolidated entities  discontinued operations which reflects BPs share of Galaxy losses for the three months ended March 31, 2010. Upon the completion of the sale of
the LC business, BP became the sole investor in Galaxy. As a result, all results for Galaxy are reflected separately as discontinued operations on the Companys condensed consolidated financial statements.



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3. Convertible Debt

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



|                           |  |                |       |  |            |   |        |       |  |   |        | 
|-------------------------- |  | -------------- | ----- |  | ---------- | - | ------ | ----- |  | - | ------ | 
|                           |  | March 31, 2011 |      
|                           |  | 2009 Notes     |       |  | 2007 Notes |   |        | Total | 
|Principal value            |  | $              | 4,081 |  |            | $ | 40,101 |       |  | $ | 44,182 | 
|Debt premium, net          |  |                | 2,765 |  |            |   |       |       |  |   | 2,765  | 
|Derivative liabilities (1) |  |                | 1,646 |  |            |   |       |       |  |   | 1,646  | 
|                           |  |                |       |  |            |   |        |       |  |   |        | 
|Total carrying value       |  | $              | 8,492 |  |            | $ | 40,101 |       |  | $ | 48,593 | 
|                           |  |                |       |  |            |   |        |       |  |   |        | 



|                           |  |                   |        |  |            |   |        |       |  |   |        | 
|-------------------------- |  | ----------------- | ------ |  | ---------- | - | ------ | ----- |  | - | ------ | 
|                           |  | December 31, 2010 |       
|                           |  | 2009 Notes        |        |  | 2007 Notes |   |        | Total | 
|Principal value            |  | $                 | 13,707 |  |            | $ | 61,033 |       |  | $ | 74,740 | 
|Debt premium, net          |  |                   | 9,392  |  |            |   |       |       |  |   | 9,392  | 
|Derivative liabilities (1) |  |                   | 3,879  |  |            |   |       |       |  |   | 3,879  | 
|                           |  |                   |        |  |            |   |        |       |  |   |        | 
|Total carrying value       |  | $                 | 26,978 |  |            | $ | 61,033 |       |  | $ | 88,011 | 
|                           |  |                   |        |  |            |   |        |       |  |   |        | 



|(1) | Represents the 2009 Notes compound embedded derivative. The Company has the intent and the ability as of March 31, 2011 and December 31, 2010 to settle
the warrants and 2009 Notes make-whole provisions in shares of common stock. As such, the asserted derivative liability is included in the 2009 Notes carrying value on its condensed consolidated financial statements at
March 31, 2011 and December 31, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2007 Notes

In March and April 2007, the Company completed an offering of $120 million aggregate principal amount of 2007 Notes in a private
placement. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of the common stock issuable upon conversion of the 2007 Notes. As more fully described below, $18.5
million and $30.5 million in aggregate principal amount of the 2007 Notes were exchanged in February 2008 and September 2009, respectively, for new debt pursuant to the Companys issuance of its 8% Senior Convertible Notes due April 1,
2012, or 2008 Notes, and 2009 Notes. Further, in September 2010 and March 2011, the Company repurchased 2007 Notes totaling $28.9 million in principal. As of March 31, 2011, the Company had $40.1 million in principal amount outstanding under
the 2007 Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at the
option of the holders at any time prior to maturity, redemption or repurchase into shares of the Companys common stock at a conversion rate of 13.02 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain
circumstances), which represents a conversion price of $76.80 per share. The total common shares that would be issued upon conversion of the entire $40.1 million in principal amount of the 2007 Notes is 0.5 million shares.

On or after April 5, 2012, the Company may, at its option, redeem the 2007 Notes, in whole or in part, for cash at redemption price
equal to 100% of the principal amount of the 2007 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require the Company to
purchase all or a portion of their 2007 Notes at a purchase price in cash equal to 100% of the principal amount of the 2007 Notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require the Company to
repurchase all or a portion of their 2007 Notes upon a fundamental change at a repurchase price in cash equal to 100% of the principal amount of 2007 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date.
Pursuant to the terms of the 2007 Notes, a fundamental change is broadly defined as 1) a change in control, or 2) a termination of trading of the Companys common stock.

In connection with the 2007 Notes offering, the Company paid $5.2 million in financing charges, which is reflected in debt issuance costs
and other assets on the accompanying Consolidated Balance Sheets, and is being amortized to interest expense over the initial five-year term of the 2007 Notes using the effective interest method.

On September 23, 2010, the Company repurchased $8.0 million of principal amount of the 2007 Notes at a value of approximately 85% of
the face value. A total cash payment, principal and accrued interest, of $7.0 million was paid to this holder of the 2007 Notes. As part of the transaction, the note holder released the Company from any and all commitments and indebtedness related
to the 2007 Notes repurchased.



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Further, on March 14, 2011, the Company made an additional repurchase of $20.9 million
of principal of the 2007 Notes at a value of approximately 95% of the face value. A total cash payment, principal and accrued interest, of $20.4 million was paid to this holder of the 2007 Notes. As part of the transaction, the note holder released
the Company from any and all commitments and indebtedness related to the 2007 Notes repurchased. A gain on debt extinguishment of $0.8 million was recognized representing the difference between the carrying value of the 2007 Notes repurchased of
$20.7 million and the repurchase price of $19.9 million.

2008 Notes

On February 27, 2008, the Company completed a private placement of the 2008 Notes and warrants to purchase shares of Verenium common
stock. Concurrent with entering into the Purchase Agreement for the 2008 Notes, the Company also entered into senior notes exchange agreements with certain existing holders of the 2007 Notes pursuant to which such noteholders exchanged approximately
$18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and warrants to purchase common stock. Including the 2008 Notes issued in exchange for the 2007 Notes, the
Company issued $71.0 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 0.7 million shares of common stock.

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

On September 23, 2010, the Company repurchased the remaining $13 million of principal of the 2008 Notes. No additional 2008 Notes remain outstanding after this transaction. A cash payment of $13.8
million, excluding accrued interest, was paid to these noteholders. As part of the transaction the note holders released the Company from any and all commitments and indebtedness related to the 2008 Notes repurchased.

2009 Notes

On
September 1, 2009 and September 25, 2009, the Company completed privately negotiated exchanges with certain existing holders of its 2007 Notes. Pursuant to the exchange agreements, certain existing holders of the 2007 Notes agreed to
exchange $30.5 million in aggregate principal of the 2007 Notes for $13.7 million in aggregate principal amount of the 2009 Notes.

On March 11, 2011, the Company repurchased $9.6 million of principal of the 2009 Notes at a value of approximately 102% of the face value. A total cash payment, principal and accrued interest, of
$10.2 million was paid to these noteholders of the 2009 Notes. As part of the transaction, the noteholders released the Company from any and all commitments and indebtedness related to the 2009 Notes repurchased. A gain on debt extinguishment of
$10.4 million was recognized representing the difference between the carrying value of the 2009 Notes repurchased of $20.3 million and the repurchase price of $9.8 million. The 2009 Notes are carried at a higher value than face value as the exchange
of the 2007 Notes qualified as a troubled debt restructuring requiring the Company to record the 2009 Notes at the 2007 Notes higher carrying value, as further described under Exchange of 2007 Notes below.

The 2009 Notes are secured by a first priority lien (subject to certain exceptions and permitted liens) on certain of the Companys
assets including, subject to certain limitations, present and future receivables, inventory, general intangibles, equipment, investment property, stock of subsidiaries, and certain other assets and proceeds relating thereto. The collateral securing
the 2009 Notes is subject to certain carve-outs, including without limitation, cash and cash equivalents and intellectual property.

The 2009 Notes bear interest at 9% per year, payable in cash, or at the option of the Company, in shares of common stock or a combination thereof, semi-annually, and are convertible at the option of
the holders any time prior to maturity, redemption or repurchase into shares of the Companys common stock at a conversion rate of 104.17 shares per $1,000 principal amount of 2009 Notes (subject to adjustment in certain circumstances), which
represents a conversion price of $9.60 per share, provided that upon conversion the holders make certain certifications. A holder that surrenders 2009 Notes for conversion in connection with a make-whole fundamental change that occurs
before April 5, 2012 may in certain circumstances be entitled to an increased conversion rate. In no event will the conversion price of the 2009 Notes be less than $7.32 per share. The total common shares that would be issued assuming
conversion of the entire $4.1 million in 2009 Notes is 0.4 million shares, excluding common shares to be issued for potential make-whole payments.

If the Companys closing stock price exceeds $19.20 (which represents 200% of the conversion price in effect) per share for at least 20-trading days over a 30-trading day period, the Company may, at
its option, elect to terminate the right of the holders to convert their 2009 Notes.



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On or after April 5, 2012, the Company may, at its option, redeem the 2009 Notes, in
whole or in part, for cash at a redemption price equal to 100% of the principal amount of the 2009 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and
April 1, 2022, holders may require the Company to purchase all or a portion of their 2009 Notes at a purchase price in cash equal to 100% of the principal amount of the 2009 Notes to be purchased plus any accrued and unpaid interest to the
purchase date. Holders may also require the Company to repurchase all or a portion of their 2009 Notes upon a fundamental change at a repurchase price in cash equal to 100% of the principal amount of 2009 Notes to be repurchased plus any
accrued and unpaid interest to the repurchase date. Pursuant to the terms of the 2009 Notes, a fundamental change is broadly defined as 1) a change in control, or 2) a termination of trading of the Companys common stock.

Periodic interest payments on the 2009 Notes are approximately $0.2 million every six months, assuming an outstanding balance
of $4.1 million, payable on April 1 and October 1 of each year. Subject to the satisfaction of certain conditions, the Company may pay interest with shares of common stock at a 5% discount to the applicable stock price at the time of the
interest payment.

The 2009 Notes also include a make-whole provision whereby, upon any holders conversion
of the 2009 Notes for common stock, the Company is obligated to pay such holder an amount equal to the remaining scheduled interest payments attributable to such 2009 Notes from the applicable last interest payment date through April 5, 2012,
discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2009 Notes provide that the Company may, subject to the satisfaction of certain conditions, pay make-whole
amounts with shares of its common stock valued at the greater of (i) the conversion price then in effect or (ii) the 10-day volume weighted average price for the 10 days immediately preceding the conversion notice.

Valuation of Compound Embedded Derivative of the 2009 Notes

The compound embedded derivative includes the put features and the make-whole provision of the 2009 Notes. The put features of
the 2009 Notes allow for the holders to require the Company to purchase the Notes at 100% principal on each of April 1, 2012, April 1, 2017 and April 1, 2022 or upon a fundamental change. The put features are contingently
exercisable and the 2009 Notes were issued at a discount and therefore the authoritative guidance requires the put features to be bifurcated and accounted for as a derivative liability. The make-whole payment upon conversion is not
indexed to the Companys stock, and therefore would not qualify as an equity instrument. Based upon this, the Company recorded a derivative liability of $2.0 million equal to the fair value of the put features and the make-whole
provision. The compound embedded derivative liability was separated from the debt liability and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the 2009 Notes, and as unamortized discount,
which is being accreted through April 1, 2012, the first date the holders can require the Company to purchase the 2009 Notes, using the effective interest method. The Company recorded this derivative liability as a component of the 2009
Notes carrying value on its Condensed Consolidated Balance Sheet. The compound embedded derivative liability is marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the
Condensed Consolidated Statement of Operations. The fair value of the compound embedded derivative was determined using a lattice valuation methodology.

Impact of 2009 Notes Fair Value Remeasurements

The fair value of the
compound embedded derivative is marked-to-market at each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of Operations as non-operating expense or income. Upon conversion or exercise of a derivative
instrument, the instrument will be marked to fair value at the conversion date and then that fair value will be reclassified to equity if settled in the Companys common stock.

The fair value of the compound embedded derivative is primarily affected by the Companys credit spread, but is also affected by the
Companys stock price, stock price volatility, expected life, interest rates and the passage of time. For the three months ended March 31, 2011, the net change in fair value measurements impacting the 2009 Notes compound embedded
derivative liability resulted in a loss of $1.9 million.



13



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Exchange of 2007 Notes

In connection with the issuance of the 2009 Notes, the Company exchanged $30.5 million in aggregate principal amount of the 2007 Notes for
approximately $13.7 million in aggregate principal amount of the 2009 Notes. Pursuant to authoritative guidance, it was determined that the noteholders of the 2007 Notes exchange granted a concession to the Company primarily as a result of the
reduction in principal of 2009 Notes issued as part of the exchange. As a result, the Company, in accordance with authoritative guidance, accounted for the exchange as a troubled debt restructuring and recorded the 2009 Notes at the 2007 Notes
carrying value. This resulted in a debt premium of $16.1 million, of which $12.0 million will be amortized through the April 1, 2027 maturity of the 2009 Notes, as an offset to interest expense, and $4.1 million was recorded as additional paid
in capital. The carrying value of the 2007 Notes was equal to the $30.5 million of principal less the unamortized issuance costs, which totaled $29.8 million, as of the exchange date.

Interest Expense on Convertible Debt

The Company recorded interest
expense related to convertible debt, as follows for the three months ended March 31, 2011 and 2010 (in thousands):



|                                                    |  |                              |     |   |      |   |       |  
|--------------------------------------------------- |  | ---------------------------- | --- | - | ---- | - | ----- | -
|                                                    |  | Three months ended March 31, |    
|                                                    |  | 2011                         |     |   | 2010 |  
|5.5% coupon interest, payable in cash               |  | $                            | 785 |   |      | $ | 949   |  
|Non-cash amortization of debt issuance costs        |  |                              | 127 |   |      |   | 149   |  
|                                                    |  |                              |     |   |      |   |       |  
|2007 Notes Total                                    |  |                              | 912 |   |      |   | 1,098 |  
|                                                    |  |                              |     |   |      |   |       |  
|8% coupon interest, payable in cash or common stock |  |                              |    |   |      |   | 258   |  
|Non-cash accretion of debt discount                 |  |                              |    |   |      |   | 394   |  
|Non-cash amortization of debt issuance costs        |  |                              |    |   |      |   | 19    |  
|                                                    |  |                              |     |   |      |   |       |  
|2008 Notes Total                                    |  |                              |    |   |      |   | 671   |  
|                                                    |  |                              |     |   |      |   |       |  
|9% coupon interest, payable in cash or common stock |  |                              | 273 |   |      |   | 308   |  
|Non-cash amortization of debt premium (1)           |  |                              | (91 | ) |      |   | (102  | )
|                                                    |  |                              |     |   |      |   |       |  
|2009 Notes Total                                    |  |                              | 182 |   |      |   | 206   |  
|                                                    |  |                              |     |   |      |   |       |  



|(1) | The initial debt premium relates to the 2009 Notes being recorded at the 2007 Notes carrying value in accordance with authoritative guidance partially offset by
the debt discount recorded for the compound embedded derivative. The unamortized value of the debt premium is included in the carrying value of the 2009 Notes on the accompanying Condensed Consolidated Balance Sheets and is being amortized into
interest expense through the maturity date of the 2009 Notes, April 1, 2027.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. Balance Sheet Details

Inventory

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



|                 |  |               |       |   |                  |   |       |  
|---------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                 |  | March 31,2011 |       |   | December 31,2010 |  
|Raw materials    |  | $             | 656   |   |                  | $ | 515   |  
|Work in progress |  |               | 529   |   |                  |   | 258   |  
|Finished goods   |  |               | 4,812 |   |                  |   | 4,768 |  
|                 |  |               |       |   |                  |   |       |  
|                 |  |               | 5,997 |   |                  |   | 5,541 |  
|Reserve          |  |               | (225  | ) |                  |   | (225  | )
|                 |  |               |       |   |                  |   |       |  
|Net inventory    |  | $             | 5,772 |   |                  | $ | 5,316 |  
|                 |  |               |       |   |                  |   |       |  

The Company reviews inventory periodically and reduces the carrying value of items considered to be slow
moving or obsolete to their estimated net realizable value. The Company considers several factors in estimating the net realizable value, including shelf life of raw materials, demand for its enzyme products and historical write-offs.

Property and equipment

Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally three to five years) using the straight-line method.



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##### Table of Contents

Property and equipment consists of the following (in thousands):



|                                                |  |               |         |   |                  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | March 31,2011 |         |   | December 31,2010 |  
|Laboratory, machinery and equipment             |  | $             | 23,467  |   |                  | $ | 22,901  |  
|Computer equipment                              |  |               | 2,976   |   |                  |   | 2,783   |  
|Furniture and fixtures                          |  |               |        |   |                  |   | 981     |  
|Leasehold improvements                          |  |               |        |   |                  |   | 570     |  
|                                                |  |               |         |   |                  |   |         |  
|Property and equipment, gross                   |  |               | 26,443  |   |                  |   | 27,235  |  
|Less: Accumulated depreciation and amortization |  |               | (23,475 | ) |                  |   | (24,101 | )
|                                                |  |               |         |   |                  |   |         |  
|Property and equipment, net                     |  | $             | 2,968   |   |                  | $ | 3,134   |  
|                                                |  |               |         |   |                  |   |         |  

Depreciation of property and equipment is provided on the straight-line method over estimated useful lives
as follows:



|                        |  |  |           | 
|----------------------- |  |  | --------- | 
|Laboratory equipment    |  |  | 3-5 years | 
|Computer equipment      |  |  | 3 years   | 
|Furniture and fixtures  |  |  | 5 years   | 
|Machinery and equipment |  |  | 3-5 years | 
|Office equipment        |  |  | 3 years   | 
|Software                |  |  | 3 years   | 

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

Accrued expenses

Accrued expenses consists of the following (in thousands):



|                                        |  |               |       |  |                  |   |       | 
|--------------------------------------- |  | ------------- | ----- |  | ---------------- | - | ----- | 
|                                        |  | March 31,2011 |       |  | December 31,2010 |  
|Employee compensation                   |  | $             | 1,241 |  |                  | $ | 3,311 | 
|Professional and outside services costs |  |               | 1,144 |  |                  |   | 1,753 | 
|Accrued interest on convertible notes   |  |               | 1,286 |  |                  |   | 1,148 | 
|Royalties                               |  |               | 1,033 |  |                  |   | 1,219 | 
|Other                                   |  |               | 368   |  |                  |   | 787   | 
|                                        |  |               |       |  |                  |   |       | 
|                                        |  | $             | 5,072 |  |                  | $ | 8,218 | 
|                                        |  |               |       |  |                  |   |       | 

Current liabilities of discontinued operations as of March 31, 2011 includes $0.2 million
related to employee severance in connection with the sale of the LC business, as well as approximately $0.5 million in restructuring charges related to the office space in Cambridge as further described in Note 5,and $0.1 million related to
Louisiana franchise taxes.

5. Restructuring Activities

The Companys former executive offices were located in a 21,000 square foot area in a building in Cambridge, Massachusetts, under an
operating lease with a term through December 2013. Prior to the sale of the LC business on September 2, 2010, the office space was used by both the Companys corporate management and by employees exclusively supporting the LC business. In
connection with the sale of the LC business, the space used by the former LC business employees was vacated and a restructuring liability was recorded representing the present value of the remaining lease term, net of contracted sublease. The
liability was classified into discontinued operations on the Companys Condensed Consolidated Balance Sheet.

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



|                           |  |                            |      |   |                         |   |      |       |  |   |       |  
|-------------------------- |  | -------------------------- | ---- | - | ----------------------- | - | ---- | ----- |  | - | ----- | -
|                           |  | FacilityConsolidationCosts |      |   | EmployeeSeparationCosts |   |      | Total | 
|Balance at January 1, 2011 |  | $                          | 938  |   |                         | $ | 679  |       |  | $ | 1,617 |  
|Charged against accrual    |  |                            | (96  | ) |                         |   | (411 | )     |  |   | (507  | )
|Adjustments and revisions  |  |                            | (193 | ) |                         |   | (38  | )     |  |   | (231  | )
|                           |  |                            |      |   |                         |   |      |       |  |   |       |  
|Balance at March 31, 2011  |  | $                          | 649  |   |                         | $ | 230  |       |  | $ | 879   |  
|                           |  |                            |      |   |                         |   |      |       |  |   |       |  



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##### Table of Contents

|                                                                       |  |   |     | 
|---------------------------------------------------------------------- |  | - | --- | 
|Restructuring reserve liability attributed to discontinued operations: |  |   |     | 
|Current portion                                                        |  | $ | 689 | 
|Long-term portion                                                      |  |   | 190 | 
|                                                                       |  |   |     | 
|                                                                       |  | $ | 879 | 
|                                                                       |  |   |     | 

Subsequently, as announced on December 14, 2010, the Company closed its office in Cambridge,
Massachusetts. The closure became effective on March 31, 2011. In connection with this closure, a restructuring plan was initiated which primarily includes one-time termination costs, such as severance costs related to the elimination of
duplicative positions and separation costs for two executives as specified in their employment agreements. The restructuring plan also includes charges associated with the closure of the remaining space used in the Cambridge facility as well as
one-time relocation costs for the employees whose employment positions have been moved to the Companys San Diego location. At March 31, 2011, the Company incurred total restructuring expense of $2.8 million and have restructuring accruals
of $1.8 million, as detailed below, for which payments are expected to be substantially completed in early 2012.

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



|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  
|----------------------------------------------- |  | -------------------------- | --- |  | ----------------------- | - | ----- | -------------------- |  | - | ----- | - |  | - | ------ | -
|                                                |  | FacilityConsolidationCosts |     |  | EmployeeSeparationCosts |   |       | AssetImpairmentCosts |  |   | Total |  
|Balance at January 1, 2011                      |  | $                          |    |  |                         | $ |      |                      |  | $ |      |   |  | $ |       |  
|Accrued and expensed                            |  |                            | 145 |  |                         |   | 2,173 |                      |  |   | 520   |   |  |   | 2,838  |  
|Charged against accrual                         |  |                            | 175 |  |                         |   | (664  | )                    |  |   | (520  | ) |  |   | (1,009 | )
|Adjustments and revisions                       |  |                            |    |  |                         |   |      |                      |  |   |      |   |  |   |       |  
|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  
|Balance at March 31, 2011                       |  | $                          | 320 |  |                         | $ | 1,509 |                      |  | $ |      |   |  | $ | 1,829  |  
|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  
|Restructuring reserve liability classification: |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  
|Current portion                                 |  |                            |     |  |                         |   |       |                      |  |   |       |   |  | $ | 1,735  |  
|Long-term portion                               |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   | 94     |  
|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  
|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  | $ | 1,829  |  
|                                                |  |                            |     |  |                         |   |       |                      |  |   |       |   |  |   |        |  

6. Concentration of Business Risk

A relatively small number of customers and collaboration partners historically have accounted for a significant percentage of the Companys revenue. Revenue from the Companys largest customer,
Danisco, represented 56% and 65% of total revenue from continuing operations for the three months ended March 31, 2011 and 2010. Accounts receivable from this one customer comprised approximately 70% of accounts receivable at March 31,
2011 and 64% at December 31, 2010.

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



|              |  |                                      |        |  |      |   |        | 
|------------- |  | ------------------------------------ | ------ |  | ---- | - | ------ | 
|              |  | For the Three Months Ended March 31, |       
|              |  | 2011                                 |        |  | 2010 |  
|North America |  | $                                    | 4,195  |  |      | $ | 3,802  | 
|South America |  |                                      | 2,116  |  |      |   | 2,078  | 
|Europe        |  |                                      | 6,769  |  |      |   | 6,185  | 
|Asia          |  |                                      | 316    |  |      |   | 159    | 
|              |  |                                      |        |  |      |   |        | 
|              |  | $                                    | 13,396 |  |      | $ | 12,224 | 
|              |  |                                      |        |  |      |   |        | 

The Company manufactures and sells enzymes primarily within three main product
lines. The animal health and nutrition product line includes the Companys Phyzyme® XP phytase enzyme,
the grain processing product line includes the Companys Fuelzyme® alpha-amylase, Veretase® alpha-amylase, Xylathin and DELTAZYM® GA L-E5 enzymes, and the oilseed processing product line includes the Companys Purifine® PLC enzyme. The Company also generates nominal product revenue from enzymes in its emerging enzymes product line, for use in other specialty industrial
processes.



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##### Table of Contents

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



|                            |  |                              |        |  |                    |  |     |      |  |   |                    |  |  |  |     |  
|--------------------------- |  | ---------------------------- | ------ |  | ------------------ |  | --- | ---- |  | - | ------------------ |  |  |  | --- | -
|                            |  | Three Months Ended March 31, |       
|                            |  | 2011                         |        |  | % ofProductRevenue |  |     | 2010 |  |   | % ofProductRevenue | 
|Product revenues:           |  |                              |        |  |                    |  |     |      |  |   |                    |  |  |  |     |  
|Animal health and nutrition |  | $                            | 8,075  |  |                    |  | 62  | %    |  | $ | 7,954              |  |  |  | 69  | %
|Grain processing            |  |                              | 3,894  |  |                    |  | 30  | %    |  |   | 3,087              |  |  |  | 27  | %
|All other products          |  |                              | 1,063  |  |                    |  | 8   | %    |  |   | 521                |  |  |  | 4   | %
|                            |  |                              |        |  |                    |  |     |      |  |   |                    |  |  |  |     |  
|Total product revenue       |  | $                            | 13,032 |  |                    |  | 100 | %    |  | $ | 11,562             |  |  |  | 100 | %
|                            |  |                              |        |  |                    |  |     |      |  |   |                    |  |  |  |     |  

The Company manufactures most of its enzyme products through a manufacturing facility in Mexico City, owned
by Fermic S.A., or Fermic. The carrying value of property and equipment held at Fermic reported on the Companys Condensed Consolidated Balance Sheet totaled approximately $1.3 million at March 31, 2011 and $1.1 million at
December 31, 2010.

7. Share-based Compensation

The Company recognized share-based compensation expense for continuing operations of $0.7 million and $0.3 million during the three months ended March 31, 2011 and 2010. These charges had no impact
on the Companys reported cash flows. Share-based compensation expense by category totaled the following (in thousands):



|                                    |  |                              |     |  |      |   |     | 
|----------------------------------- |  | ---------------------------- | --- |  | ---- | - | --- | 
|                                    |  | Three Months Ended March 31, |    
|                                    |  | 2011                         |     |  | 2010 |  
|Continuing Operations:              |  |                              |     |  |      |   |     | 
|Research and development            |  | $                            |    |  |      | $ |    | 
|Selling, general and administrative |  |                              | 226 |  |      |   | 320 | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  |                              | 226 |  |      |   | 320 | 
|                                    |  |                             
|Restructuring:                      |  |                              |     |  |      |   |     | 
|Selling, general and administrative |  |                              | 511 |  |      |   |    | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  |                              | 511 |  |      |   |    | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  | $                            | 737 |  |      | $ | 320 | 
|                                    |  |                              |     |  |      |   |     | 

As described in Note 5, in conjunction with the closure of the Cambridge office, two executives
separated from the Company. Pursuant to their employment agreements, an additional 24 months of option vesting was accelerated for these executives as of their separation dates. This additional stock option expense attributable to the acceleration
was classified as restructuring expense on the Companys condensed consolidated financial statements.

As of
March 31, 2011, there was $0.9 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Companys equity incentive plans. All employees with outstanding unvested options
that were assumed by BP as part of the sale of the LC business were cancelled. The remaining expense attributed to existing outstanding unvested options is expected to be recognized over a weighted average period of 0.8 years as follows
(in thousands):



|                                                      |  |   |     | 
|----------------------------------------------------- |  | - | --- | 
|Fiscal Year 2011 (April 1, 2011 to December 31, 2011) |  | $ | 335 | 
|Fiscal Year 2012                                      |  |   | 578 | 
|                                                      |  |   |     | 
|                                                      |  | $ | 913 | 
|                                                      |  |   |     | 



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##### Table of Contents

8. Contingencies

Class Action Shareholder Lawsuit

In June 2004, the Company executed
a formal settlement agreement with the plaintiffs in a class action lawsuit filed in December 2002 in a U.S. federal district court (the Court). This lawsuit is part of a series of related lawsuits in which similar complaints were filed
by plaintiffs against hundreds of other public companies that conducted an Initial Public Offering, or IPO of their common stock in 2000 and the late 1990s, or the IPO Cases. On February 15, 2005, the Court issued a decision certifying a class
action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary
approval of the modified settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower
Courts earlier decision certifying as class actions the six IPO Cases designated as focus cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO
Cases pending the outcome of the plaintiffs petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but
clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about
August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to
dismiss the claims against them in November 2007 and an opposition to plaintiffs motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew
their class certification motion. On February 25, 2009, liaison counsel for plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and
final approval by the court. On April 2, 2009, the parties submitted a tentative settlement agreement to the court and moved for preliminary approval thereof. On June 11, 2009, the Court granted preliminary approval of the tentative
settlement and ordered that notice of the settlement to be published and mailed. The District Court held a final fairness hearing on September 10, 2009. On October 6, 2009, the District Court certified the settlement class in each IPO Case
and granted final approval to the settlement. On or about October 23, 2009, three shareholders filed a Petition for Permission To Appeal Class Certification Order, objecting to the District Courts final approval order and, in particular,
asserting that the District Courts certification of the settlement classes violates the Second Circuits earlier class certification decisions in the IPO Cases. Beginning on October 29, 2009, a number of shareholders also filed
direct appeals, objecting to final approval of the settlement. If the settlement is affirmed on appeal, the settlement will result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the
Companys pro rata share of the settlement fund will be fully funded by insurance.

The Company is covered by a
claims-made liability insurance policy which it believes will satisfy any potential liability of the Company under this settlement. Due to the inherent uncertainties of litigation, and because the objecting shareholders are seeking to challenge the
settlement on appeal, the ultimate outcome of this matter cannot be predicted, and an estimate of potential losses is not estimatable.

Noteholder Lawsuit

On April 30, 2009, Capital Ventures International, or CVI, a holder at such time of the 2008 Notes, filed a lawsuit against the
Company in the United States District Court for the Southern District of New York alleging that the Company breached the terms of the 2008 Notes by processing certain conversion notices submitted to the Company by CVI at $2.13 per share (now $25.56
per share on a reverse split-adjusted basis) or, following the amendment of the 2008 Notes, $1.74 per share (now $20.88 on a reverse split-adjusted basis) rather than $1.47 per share (now $17.64 per share on a reverse split-adjusted basis) and
asserting that CVI is entitled to additional shares based on its asserted conversion price, as well as damages, and requesting a declaratory judgment that $1.47 per share (now $17.64 per share on a reverse split-adjusted basis) is the conversion
price for the 2008 Notes. On June 3, 2009, CVI amended its complaint to also request a declaratory judgment that the Company cannot amend the 2008 Notes, pursuant to their terms, without the consent of each affected noteholder, including
CVI. The Company filed its answer to CVIs amended complaint on June 30, 2009, denying all material allegations of the complaint, as amended.

On October 6, 2009, in response to the Companys exchange of approximately $30.5 million of 2007 Notes, the granting of security interest in certain assets of the Company to exchanging holders
and holders of the 2008 Notes and the public offering of common stock and warrants, CVI filed a Motion to Amend First Amended Complaint, or the Motion. CVIs amended pleading alleges that the Company further breached the Note by both amending
the terms of the 2008 Notes without CVIs express consent and then undertaking various transactions authorized by the amendment. The amended pleading also alleges that as a result of these transactions the conversion rate should have adjusted
to $4.27 per share rather than $17.89 per share. On February 25, 2010, the Court granted CVIs Motion and CVI filed its Second Amended Complaint. Pursuant to a stipulation between the parties that was approved by the Court, the Company
filed an Answer to the Second Amended Complaint and a Motion to Dismiss on March 15, 2010.



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##### Table of Contents

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

On January 4, 2011, the Court granted the Companys motion for summary judgment, concluding, among other
things, that the proper conversion price was $2.13 per share. Additionally, the Court denied CVIs motion for summary judgment, denied the Companys motion to dismiss as moot, and dismissed the complaint. On February 2,
2011, CVI filed a Notice of Appeal of the Courts decision to the United States Court of Appeals for the Second Circuit. On March 23, 2011, the parties entered into a settlement agreement for $150,000 to resolve the litigation, and on
March 29, 2011, the parties filed a stipulation of withdrawal of the appeal with prejudice. On April 1, 2011, the United States Court of Appeals for the Second Circuit issued an order that the appeal be withdrawn with prejudice.

In conjunction with the settlement, the Company negotiated a reimbursement of legal fees of $1.1 million included in selling,
general and administrative on the Companys Condensed Consolidated Income Statement during the three months ended March 31, 2011. This reimbursement of legal fees was for expenses incurred during 2010 for defense of the noteholder lawsuit.

In addition to the matters noted above, from time to time, the Company is subject to legal proceedings, asserted claims and
investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting
principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect
the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with
respect to the legal matters pending against the Company. It is possible, nevertheless, that the Companys consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or
more of such proceedings, claims or investigations.

9. Impact of Recently Issued Accounting Standards

Revenue Recognition

In October 2009, the FASB issued authoritative guidance for arrangements with multiple deliverables. The guidance will allow companies to
allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transactions economics. The new guidance requires expanded qualitative and quantitative disclosures and is effective for fiscal years
beginning on or after June 15, 2010. Early adoption of the guidance is permitted The Company has adopted this guidance effective January 1, 2011 and the application of this guidance does not have a material impact on the Companys
condensed consolidated financial statements.

In March 2010, the FASB ratified the milestone method of revenue recognition.
Under this new standard, an entity can recognize contingent consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is defined as an event (i) that can
only be achieved based in whole or in part on either the entitys performance or on the occurrence of a specific outcome resulting from the entitys performance, (ii) for which there is substantive uncertainty at the date the
arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the entity. The Company has adopted this guidance effective January 1, 2011 and the application of this guidance
does not have a material impact on the Companys condensed consolidated financial statements.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Except for the historical information contained herein, the following discussion, as well as the other sections of this report, contain
forward-looking statements that involve risks and uncertainties. These statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement.

Forward-looking statements applicable to our business generally include statements related to:



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



| |  |  | our ability to repay outstanding debt upon maturity of $4.1 million face amount of our 9% Convertible Senior Secured Notes due April 2027, or 2009
Notes, in April 2027, or earlier, pursuant to the election of put options by holders of the 2009 Notes, on the put dates of April 1, 2012, April 1, 2017, or April 1, 2022 and maturity of $40.1 million face amount of our 5.50%
Convertible Senior Notes due 2027, or 2007 Notes, in April 2027, or earlier, pursuant to the election of put options by holders of the 2007 Notes, on the put dates of April 1, 2012, April 1, 2017, or April 1, 2022;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | our ability to improve manufacturing processes and increase manufacturing yields in order to improve margins and enable us to continue to meet supply
demand from customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our expected future research and development expenses, sales and marketing expenses, and general and administrative expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | our plans regarding future research, product development, business development, commercialization, growth, independent project development,
collaboration, licensing, intellectual property, regulatory and financing activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our products and product candidates under development;
| | - |  | ------------------------------------------------------



| |  |  | investments in our core technologies and in our internal product candidates;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the opportunities in our target markets and our ability to exploit them;
| | - |  | ------------------------------------------------------------------------



| |  |  | our plans for managing the growth of our business;
| | - |  | --------------------------------------------------



| |  |  | the benefits to be derived from our current and future strategic alliances;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our anticipated revenues from collaborative agreements and licenses granted to third parties and our ability to maintain our collaborative
relationships with third parties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of dilution to our shareholders and a decline in our share price and our market capitalization from future issuances of shares of our common
stock (including in connection with conversion of our convertible notes);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our exposure to market risk;
| | - |  | ----------------------------



| |  |  | the impact of litigation matters on our operations and financial results; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | the effect of critical accounting policies on our financial results.
| | - |  | --------------------------------------------------------------------

Factors that could cause or contribute to differences include, but are not limited to, risks related to our ability to fund our
operations and continue as a going concern, risks involved with our new and uncertain technologies, risks involving manufacturing constraints which may prevent us from maintaining adequate supply of inventory to meet our customers demands,
risks associated with our dependence on patents and proprietary rights, risks associated with our protection and enforcement of our patents and proprietary rights, our dependence on existing collaborations, our ability to enter into and/or maintain
collaboration and joint venture agreements, our ability to commercialize products directly and through our collaborators, the timing of anticipated regulatory approvals and product launches, and the development or availability of competitive
products or technologies, as well as other risks and uncertainties set forth below and in the section of this report entitled Risk Factors.

Overview

We operate in one business segment, industrial enzymes, to enable
higher productivity, lower costs, and improved environmental outcomes. We have three main product lines: animal health and nutrition, grain processing, and oilseed processing. We believe the most significant near-term commercial opportunity for our
business will be derived from continued sales and gross product margins from our existing portfolio of enzyme products. On September 2, 2010, we completed the sale of our ligno-cellulosic business unit, or LC business, to BP Biofuels North
America LLC, or BP. As part of the sale, BP acquired all of the capital stock of our wholly-owned subsidiary, Verenium Biofuels Corporation, as well as assets, including intellectual property, used in or related to the LC business. We retained all
assets used exclusively in our industrial enzymes business.

Our business is supported by a research and development team with
expertise in gene discovery and optimization, cell engineering, bioprocess development, biochemistry and microbiology. Over nearly 20 years, our research and development team has developed a proprietary technology platform that has enabled us to
apply advancements in science to discovering and developing unique solutions in complex industrial or commercial applications. We have dedicated substantial resources to the development of capabilities for sample collection from the worlds
microbial populations, generation of DNA libraries, screening of these libraries using ultra high-throughput methods capable of analyzing more than one billion genes per day, and optimization based on our gene evolution technologies. We have
continued to shift more of our resources from technology development to commercialization efforts for our existing and future technologies and products. While our technologies have the potential to serve many large markets, our primary areas of
focus for product development are specialty enzymes for animal health and nutrition, grain processing, oilseed processing, and emerging enzyme markets. We have current collaborations and agreements with key partners such as Bunge Oils, Alfa
Laval, Desmet Ballestra, Danisco Animal Nutrition, or Danisco, and WeissBioTech (formerly Add Food Services GmbH), each of which complement our internal technology, product development efforts, and distribution efforts.



20



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As of March 31, 2011, we owned 142 issued patents relating to our technologies and had
249 patents pending. Also, as of March 31, 2011, we either jointly owned or in-licensed from BP 120 patents and 128 patents pending. Our rights to sell our products and products in development are largely covered by the patents and patent
applications we own, and to a lesser extent by patents and patent applications we jointly own with BP. Our rights to practice the discovery and evolution technology which we originally developed are covered by patents we in-license from BP. We
believe that we can leverage our owned and licensed intellectual property estate to enhance and improve our technology development and commercialization efforts while maintaining protection on key intellectual property assets.

Excluding our non-cash gains related to our debt repurchases in the first quarter of 2011, we have incurred net losses from our
continuing operations since our inception. As of March 31, 2011, we had an accumulated deficit of approximately $602.2 million. Our results of operations have fluctuated from period to period and likely will continue to fluctuate substantially
in the future. We expect to incur losses in the near term as a result of any combination of one or more of the following:



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



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



| |  |  | maintaining or increasing our sales and marketing infrastructure.
| | - |  | -----------------------------------------------------------------

Results of operations for any period may be unrelated to results of operations for any other period. In addition, we believe that our
historical results are not a good indicator of our future operating results.

As more fully described in the Liquidity and
Capital Resourcesbeginning on page 26 and Note 1 of our Notes to Condensed Consolidated Financial Statements beginning on page 6 of this report, in connection with the sale of our LC business in September 2010, we obtained net
cash proceeds of approximately $96.0 million. To date the Company has used net proceeds of approximately $50.3 million from the transaction for debt retirement. We intend to use the remaining net proceeds for continued investment in product
development and manufacturing improvement efforts for our industrial enzyme business, for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement. The holders of the 2007 and 2009 Notes have the
right to require us to purchase the 2007 and 2009 Notes for cash (including any accrued and unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022. Assuming this occurs in 2012, based on our current cash resources and
2011 operating plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements after this date without additional sources of cash.
If we are unable to raise additional capital, we will need to defer, reduce or eliminate significant planned expenditures, restructure or significantly curtail our operations, file for bankruptcy or cease operations.

Recent Strategic Events

Debt Repurchase

As more fully described in Note 3of our Notes to Condensed Consolidated Financial Statements, on March 14, 2011 and March 16, 2011, we repurchased a total of $9.6 million in
principal amount of our 2009 Notes, as well as $20.9 million in principal amount of our 2007 Notes. In total, we repurchased $30.6 million in principal amount of our 2009 and 2007 Notes, leaving an aggregate of $4.1 million and $40.1 million,
respectively, in principal amount outstanding. To effect this repurchase, we paid a total of $29.7 million in cash to a group of our noteholders to retire principal, in addition to $0.9 million of accrued interest as of the closing date.

Results of Operations  Continuing Operations

Consolidated Results of Operations

Revenues

Revenues for the three months ended March 31, 2011 and 2010 are as follows (in thousands):



|                            |  |                              |        |  |      |   |        |          |  |  |     |   
|--------------------------- |  | ---------------------------- | ------ |  | ---- | - | ------ | -------- |  |  | --- | --
|                            |  | Three Months Ended March 31, |        |  |      |  
|                            |  | 2011                         |        |  | 2010 |   |        | % Change | 
|Revenues:                   |  |                              |        |  |      |   |        |          |  |  |     |   
|Animal health and nutrition |  | $                            | 8,075  |  |      | $ | 7,954  |          |  |  | 2   | % 
|Grain processing            |  |                              | 3,894  |  |      |   | 3,087  |          |  |  | 26  | % 
|All other products          |  |                              | 1,063  |  |      |   | 521    |          |  |  | 104 | % 
|                            |  |                              |        |  |      |   |        |          |  |  |     |   
|Total product               |  |                              | 13,032 |  |      |   | 11,562 |          |  |  | 13  | % 
|Collaborative               |  |                              | 364    |  |      |   | 662    |          |  |  | (45 | )%
|                            |  |                              |        |  |      |   |        |          |  |  |     |   
|Total revenues              |  | $                            | 13,396 |  |      | $ | 12,224 |          |  |  | 10  | % 
|                            |  |                              |        |  |      |   |        |          |  |  |     |   



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Revenues increased 10%, or $1.2 million, to $13.4 million for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010. Product revenues represented 97% of total revenues for the three months ended March 31, 2011, as compared to 95% for the three months ended March 31, 2010.

Product revenues increased 13%, or $1.5 million, for the three months ended March 31, 2011 as
compared to the three months ended 2010. This increase was primarily due to an increase in revenues from our grain processing product line as a result of our growing market share in the fuel ethanol markets. In addition, our Purifine® PLC enzyme for the soybean oil processing market achieved significant revenue growth over the three months ended
March 31, 2010, resulting from Purifine® PLC deployments by Molinos and Terminal 6 in Argentina.

Net revenues from the animal health and nutrition product line, primarily Phyzyme® XP phytase, increased 2%, or $0.1 million for the three months ended March 31, 2011 as compared to the same
period in 2010, and represented approximately 62% of total product revenues for the three months ended March 31, 2011 and 69% for the comparable period in 2010. Although we expect that Phyzyme® XP phytase will continue to represent a significant percentage of our total product revenues in the foreseeable future, we expect that net revenue from Phyzyme® XP phytase will remain flat or gradually decrease in future periods. This is largely due to our method of revenue
recognition for Phyzyme® XP phytase product sales. We manufacture most of our enzyme products through a
manufacturing facility in Mexico City owned by Fermic S.A., or Fermic. We also have contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme® XP phytase. We recognize revenue from
Phyzyme® XP phytase manufactured at Fermic equal to the full value of the manufacturing costs plus royalties on
operating profit, as compared to revenue associated with product manufactured by Genencor which is recognized on a net basis equal to the royalty on operating profit received from Danisco. While this revenue recognition treatment has little or no
negative impact on the gross margin in absolute dollars we recognize for every sale of Phyzyme® XP phytase, it
does have a negative impact on the gross product revenue we recognize for Phyzyme® XP phytase as the volume of
Phyzyme® XP phytase manufactured by Genencor increases. We expect over time a greater proportion of our Phyzyme® XP phytase manufacturing will transition to Genencor resulting in lower reported Phyzyme® XP phytase product revenue; however, we believe this will make available existing capacity to accommodate expected
growth for our other enzyme products, which we expect will generate higher gross margins than Phyzyme® XP
phytase over time.

Collaborative revenue decreased 45%, or $0.3 million, to $0.4 million for the three months ended
March 31, 2011 as compared to the same period in 2010, due in large part to a decrease in revenue related to wind-down of projects with existing strategic collaborators. We will continue to pursue opportunities to expand, renew, or enter into
new collaborations that we believe fit our strategic focus and represent product commercialization opportunities in the future; however, there can be no assurance that we will be successful in renewing or expanding existing collaborations, or
securing new collaboration partners.

Our revenues have historically fluctuated from period to period and likely will continue
to fluctuate in the future based upon the adoption rates of our new and existing commercial products, timing and composition of funding under existing and future collaboration agreements, as well as regulatory approval timelines for new products.

Product Gross Profit & Margin

Product gross profit and margin for the three months ended March 31, 2011 and 2010 are as follows (in thousands):



|                        |  |                              |        |   |      |   |        |          |  |  |    |   
|----------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -------- |  |  | -- | --
|                        |  | Three Months Ended March 31, |        |   |      |  
|                        |  | 2011                         |        |   | 2010 |   |        | % Change | 
|Product revenue         |  | $                            | 13,032 |   |      | $ | 11,562 |          |  |  | 13 | % 
|Cost of product revenue |  |                              | 8,084  |   |      |   | 6,516  |          |  |  | 24 | % 
|                        |  |                              |        |   |      |   |        |          |  |  |    |   
|Product gross profit    |  |                              | 4,948  |   |      |   | 5,046  |          |  |  | (2 | )%
|Product gross margin    |  |                              | 38     | % |      |   | 44     | %        |  |  |    |   

Cost of product revenue includes both fixed and variable costs, including materials and supplies,
labor, facilities, royalties and other overhead costs, associated with our product revenues. Excluded from cost of product revenue are costs associated with the scale-up of manufacturing processes for new products that have not reached
commercial-scale production volumes, which we include in our research and development expenses. Cost of product revenue increased 24%, or $1.6 million, to $8.1 million for the three months ended March 31, 2011, as compared to the same period in
2010. The increases in cost of product revenue from the comparable period in 2010 is primarily due to higher rental expense for incremental fermentation capacity to support the expansion of product mix and increase in product revenues.



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Our cost of product revenues will generally grow in proportion to
revenues, although we expect to achieve benefits from the additional investments we are making at Fermic to better accommodate our enzyme manufacturing capabilities. Because a large percentage of total manufacturing costs are fixed, we should
realize margin improvements as product revenues increase; however, margins could be negatively impacted in the future if product revenues do not grow in line with our committed fermentation capacity at Fermic. We further expanded our fermentation
capacity during the third quarter of 2010, which increased fixed manufacturing costs by an additional $0.7 million per quarter, including the quarter ended March 31, 2011. In addition, gross margins are dependent upon the mix of product
sales as the cost of product revenue varies from product to product. We typically experience lower margins in the early stages of commercial production for our newer enzyme products like Purifine® PLC, as we optimize the manufacturing process for each particular product.

Product gross profit totaled $4.9 million for the three months ended March 31, 2011, compared to $5.0 million for the
three months ended March 31, 2010. Gross margin decreased to 38% of product revenue for the three months ended March 31, 2011, compared to 44% for the three months ended March 31, 2010. Gross margin decreased primarily due to a decrease in our
royalty on profit share from Danisco resulting from decreased external sales reported by Danisco, and to a lesser extent lower manufacturing yields, primarily related to early-stage commercial production of Purifine® PLC.

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

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

Operating Expenses (excluding cost of product revenue)

Operating expenses (excluding cost of product revenue) for the three months ended March 31, 2011 increased 17%, or $1.5 million, to $10.0 million (including share-based compensation of $0.7 million)
compared to $8.5 million (including share-based compensation of $0.3 million) for the three months ended March 31, 2010. Excluding the impact of share-based compensation, restructuring expense, total operating expenses decreased $1.3 million
for the three months ended March 31, 2011 as compared to the same period in 2010 primarily due to reimbursement of legal fees of $1.1 million for expenses incurred during 2010 for defense of the Companys noteholder lawsuit, which was
settled on March 23, 2011.

Research and Development



|                         |  |                              |       |  |      |   |       |          |  |  |    |  
|------------------------ |  | ---------------------------- | ----- |  | ---- | - | ----- | -------- |  |  | -- | -
|                         |  | Three months ended March 31, |       |  |      |  
|                         |  | 2011                         |       |  | 2010 |   |       | % Change | 
|Research and development |  | $                            | 2,632 |  |      | $ | 1,451 |          |  |  | 81 | %

Research and development
expenses consist primarily of costs associated with internal development of our technologies and our product candidates, manufacturing scale-up and bioprocess development for our current products, and costs associated with research activities
performed on behalf of our collaborators.

For the three months ended March 31, 2011, we estimate that approximately 92%
of our research and development personnel costs, based upon hours incurred, were incurred for internally funded product development, and the remaining approximately 8% of such costs were incurred on research activities funded in whole or in part by
our partners. For the three months ended March 31, 2010, we estimate that approximately 32% of our research and development personnel costs, based upon hours incurred, were incurred for internally funded product and technology development, and
the remaining approximately 68% of such costs were incurred on research activities funded by our collaborations. We will continue to pursue opportunities with strategic partners who can share our development costs, accelerate commercialization of,
as well as enable us to expand commercial reach for, our pipeline products.



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##### Table of Contents

We determine which products and technologies to pursue independently based on various
criteria, including: market opportunity, investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization. Successful products and technologies
require significant development and investment prior to regulatory approval and commercialization. As a result of the significant risks and uncertainties involved in developing and commercializing such products, we are unable to estimate the nature,
timing, and cost of the efforts necessary to complete each of our major projects. These risks and uncertainties include, but are not limited to, the following:



| |  |  | Our products and technologies may require more resources than we anticipate if we are technically unsuccessful in initial development or
commercialization efforts;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The outcome of research is unknown until each stage of testing is completed, up through and including trials and regulatory approvals, if needed;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | It can take many years from the initial decision to perform research through development until products and technologies, if any, are ultimately
marketed;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have product candidates and technologies in various stages of development related to collaborations as well as internally developed products and
technologies. At any time, we may modify our strategy and pursue additional collaborations for the development and commercialization of some products and technologies that we had intended to pursue independently; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Any one of these risks and uncertainties could have a significant impact on
the nature, timing, and costs to complete our product and technology development efforts. Accordingly, we are unable to predict which potential commercialization candidates we may proceed with, the time and costs to complete development, and
ultimately whether we will have any products or technologies approved by the appropriate regulatory bodies. The various risks associated with our research and development activities are discussed more fully in this report under Risk
Factors.

Our research and development expenses increased 81%, or $1.2 million to $2.6 million for the three months
ended March 31, 2011, compared to $1.5 million for the three months ended March 31, 2010 primarily due to our increased research and development efforts consistent with our shift in focus to higher investment in pipeline technologies.
Historically, due to limited capital resources, challenging economic conditions, and a focus on cellulosic biofuels technology development through our recently sold LC business, we have not spent significant resources on early stage product
development for the past three years. Beginning in the fourth quarter 2010, we began making additional investment for the development and commercialization of candidates in our enzyme product pipeline. We expect these expenses to further increase in
2011 as we further advance enzyme product candidates through the development pipeline.

Selling, General and Administrative
Expenses



|                                             |  |                              |       |  |      |   |       |          |  |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- |  | ---- | - | ----- | -------- |  |  | --- | --
|                                             |  | Three months ended March 31, |       |  |      |  
|                                             |  | 2011                         |       |  | 2010 |   |       | % Change | 
|Selling, general and administrative expenses |  | $                            | 4,500 |  |      | $ | 7,063 |          |  |  | (36 | )%

Selling, general and
administrative expenses decreased 36%, or $2.6 million, to $4.5 million (including share-based compensation of $0.2 million) for the three months ended March 31, 2011 compared to $7.1 million (including share-based compensation of $0.3 million)
for the three months ended March 31, 2010. Excluding the impact of share-based compensation, selling, general and administrative decreased $2.5 million for the three months ended March 31, 2011 as compared to the same period in 2010. The
decrease year over year is attributed to better alignment of the Company facility and personnel expense with the evolving needs of the business, decreased litigation expenses of approximately $0.6 million and reimbursement of $1.1 million of legal
fees expensed during 2010 related to the noteholder lawsuit, as well as expense minimization efforts to decrease general and administrative spending.

Restructuring Expenses

As announced on December 14, 2010, we closed
our office in Cambridge to better align us with the evolving needs of the business and the market. The closure was effective as of March 31, 2011. As the cease-use date was established on this date, an additional liability of $0.3 million was
established for the facility as of March 31, 2011. Further, personnel costs of $1.3 million were incurred in conjunction with the closure of the office, as well as $0.4 million in relocation costs of employees who remained with the Company and
are moving to the San Diego facility as a result of the closure. In addition to these costs, $0.5 million in stock compensation costs were recognized as part of restructuring costs, which were incurred for option accelerations for two executives who
left the Company, as provided in their respective employment agreements.



24



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Share-Based Compensation Charges

We recognized $0.7 million and $0.3 million in share-based compensation expense for our share-based awards in continuing operations during
the three months ended March 31, 2011 and 2010. Share-based compensation expense was allocated among the following expense categories (in thousands):



|                                    |  |                              |     |  |      |   |     | 
|----------------------------------- |  | ---------------------------- | --- |  | ---- | - | --- | 
|                                    |  | Three Months Ended March 31, |    
|                                    |  | 2011                         |     |  | 2010 |  
|Continuing Operations:              |  |                              |     |  |      |   |     | 
|Research and development            |  | $                            |    |  |      | $ |    | 
|Selling, general and administrative |  |                              | 226 |  |      |   | 320 | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  |                              | 226 |  |      |   | 320 | 
|                                    |  |                             
|Restructuring:                      |  |                              |     |  |      |   |     | 
|Selling, general and administrative |  |                              | 511 |  |      |   |    | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  |                              | 511 |  |      |   |    | 
|                                    |  |                              |     |  |      |   |     | 
|                                    |  | $                            | 737 |  |      | $ | 320 | 
|                                    |  |                              |     |  |      |   |     | 

Share-based compensation increased 130%, or $0.4 million, for the three months ended March 31, 2011 as
compared to the three months ended March 31, 2010, primarily related to the separation of two executives in conjunction with the closure of the Cambridge office. Pursuant to their employment agreements, an additional 24 months of option vesting
was accelerated for these employees as of their respective separation dates. This additional stock option expense attributable to the acceleration was classified into restructuring expense on the Companys condensed consolidated financial
statements.

Interest expense

Interest expense was $1.1 million and $2.1 million for the three months ended March 31, 2011 and 2010. This decrease in interest expense from 2010 was primarily attributed to the decrease in the
outstanding convertible notes principal from repurchases. Total interest expense for the three months ended March 31, 2011 and 2010 was comprised of the following (in thousands):



|                                                    |  |                              |       |   |      |   |       |  
|--------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                                    |  | Three months ended March 31, |      
|                                                    |  | 2011                         |       |   | 2010 |  
|5.5% coupon interest, payable in cash               |  | $                            | 785   |   |      | $ | 949   |  
|Non-cash amortization of debt issuance costs        |  |                              | 127   |   |      |   | 149   |  
|                                                    |  |                              |       |   |      |   |       |  
|2007 Notes Total                                    |  |                              | 912   |   |      |   | 1,098 |  
|                                                    |  |                              |       |   |      |   |       |  
|8% coupon interest, payable in cash or common stock |  |                              |      |   |      |   | 258   |  
|Non-cash accretion of debt discount                 |  |                              |      |   |      |   | 394   |  
|Non-cash amortization of debt issuance costs        |  |                              |      |   |      |   | 19    |  
|                                                    |  |                              |       |   |      |   |       |  
|2008 Notes Total                                    |  |                              |      |   |      |   | 671   |  
|                                                    |  |                              |       |   |      |   |       |  
|9% coupon interest, payable in cash or common stock |  |                              | 273   |   |      |   | 308   |  
|Non-cash amortization of debt premium               |  |                              | (91   | ) |      |   | (102  | )
|                                                    |  |                              |       |   |      |   |       |  
|2009 Notes Total                                    |  |                              | 182   |   |      |   | 206   |  
|                                                    |  |                              |       |   |      |   |       |  
|Other                                               |  |                              |      |   |      |   | 84    |  
|                                                    |  |                              |       |   |      |   |       |  
|Total interest expense                              |  | $                            | 1,094 |   |      | $ | 2,059 |  
|                                                    |  |                              |       |   |      |   |       |  



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Gain on Debt Extinguishment upon repurchase of convertible notes

On March 14 and 16, 2011, we repurchased a total of $9.6 million in principal amount of our 2009 Notes, as well as $20.9 million in
principal amount of our 2007 Notes. In total, we repurchased $30.6 million in principal amount of our 2009 and 2007 Notes, leaving an aggregate of $4.1 million and $40.1 million, respectively, in principal amount outstanding. A gain on debt
extinguishment of $11.3 million was recognized representing the difference between the carrying value of the notes repurchased of $41 million and the repurchase price of $29.7 million calculated as follows (in thousands):



|                             |  |            |        |  |            |   |        |       |  |   |        |  
|---------------------------- |  | ---------- | ------ |  | ---------- | - | ------ | ----- |  | - | ------ | -
|                             |  | 2009 Notes |        |  | 2007 Notes |   |        | Total | 
|Principal                    |  | $          | 9,626  |  |            | $ | 20,932 |       |  | $ | 30,558 |  
|Debt premium, net            |  |            | 6,536  |  |            |   |       |       |  |   | 6,536  |  
|Compound embedded derivative |  |            | 4,092  |  |            |   |       |       |  |   | 4,092  |  
|Issuance costs               |  |            |       |  |            |   | (188   | )     |  |   | (188   | )
|                             |  |            |        |  |            |   |        |       |  |   |        |  
|Carrying value               |  |            | 20,254 |  |            |   | 20,744 |       |  |   | 40,998 |  
|                             |  |            |        |  |            |   |        |       |  |   |        |  
|Repurchase price             |  |            | 9,819  |  |            |   | 19,895 |       |  |   | 29,714 |  
|                             |  |            |        |  |            |   |        |       |  |   |        |  
|Gain on debt extinguishment  |  | $          | 10,435 |  |            | $ | 849    |       |  | $ | 11,284 |  
|                             |  |            |        |  |            |   |        |       |  |   |        |  

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

The fair value of the 2008 Notes compound embedded derivative, the warrants, the convertible hedge transaction in connection with
our 2008 Notes and 2009 Notes compound embedded derivative are recorded as a derivative asset or liability and marked-to-market at each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of
Operationsas Gain (loss) on net change in fair value of derivative assets and liabilities. We recorded a net loss of $1.8 million and net gain of $0.1 million for the three months ended March 31, 2011 and 2010 related to the
change in fair value of our recorded derivative asset and liabilities.

Gain on Debt Extinguishment Upon Conversion of
Convertible Debt

During the three months ended March 31, 2011, we recorded no gain or loss on debt extinguishment as
a result of conversions. During the three months ended March 31, 2010, we recorded a gain on debt extinguishment of $0.6 million. The gain is calculated as the difference between the carrying value of the converted 2008 Notes and the fair value
of the shares of common stock delivered to the noteholders upon conversion. The carrying value of the converted 2008 Notes for the three months ended March 31, 2010 was equal to the $2.2 million of principal less the unamortized debt discount
and issuance costs, which totaled $1.7 million, as of the conversion date. During the three months ended March 31, 2010, we issued a total of 0.2 million shares with a total market value as of the dates of conversion of $1.1 million to
settle the 2008 Notes and make-whole payments.

Net Income (Loss) from Discontinued Operations

As previously noted, on September 2, 2010, we completed the sale of the LC business to BP for net proceeds to the Company of $96.0
million (including $5 million of the purchase price placed in escrow). As such, the current and prior periods presented in this report have been reclassified to reflect the legacy LC business as discontinued operations. Revenue and expenses
allocated to discontinued operations for the three months ended March 31, 2010 were limited to revenue and expenses that were directly related to the operations of the LC business, or that were eliminated as a result of the sale of the LC
business. Net income from discontinued operations for the three months ended March 31, 2011 was attributed primarily to net present value adjustments of future rent obligations related to a portion of the Cambridge office space attributed to
the LC business.

Loss Attributed to Noncontrolling Interest in Consolidated Entities Discontinued Operations

For the three months ended March 31, 2010 we were considered the primary beneficiary of Galaxy and consolidated its
financial results. As a result, BPs share of losses in Galaxy are reflected in our Condensed Consolidated Statements of Operations as Loss attributed to noncontrolling interests in consolidated entities. Upon the completion
of the sale of the LC business, BP became the sole investor in Galaxy. As a result, all results for Galaxy are reflected separately as discontinued operations on the Companys condensed consolidated financial statements.

Liquidity and Capital Resources

Since inception, we have financed our business primarily through the sale of common and preferred stock, funding from strategic partners and government grants, the issuance of convertible debt, and
product sales. As of March 31, 2011, we had an accumulated deficit of approximately $602.2 million.



26



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##### Table of Contents

We have undertaken restructuring activities in connection with the closure of our Cambridge,
Massachusetts office which primarily include one-time termination costs, such as severance costs related to the elimination of duplicative positions and separation costs due to executive employment agreements, charges associated with the closure of
the leased office space and one-time relocation costs for the employees whose employment positions have been moved to our San Diego location. As a result of the plan, we expect to achieve operating efficiencies in future periods related to salary
and overhead costs related to selling, general and administrative costs. At March 31, 2011, we incurred total restructuring expense of $2.8 million and have restructuring accruals of $1.8 million, for which payments are expected to be
substantially completed in early 2012.

Capital Requirements

As of March 31, 2011, we had available cash and cash equivalents of approximately $46.2 million, and restricted cash of $5 million.
Historically, we have funded our capital requirements through available cash, issuances of debt and equity, product, collaboration and grant revenue, capital leases and equipment financing, and line of credit agreements. Since March 2007, we have
raised approximately $158.8 million in net cash proceeds from convertible debt issuances to fund our operations. In October 2009 we raised approximately $12.2 million in net cash proceeds from an underwritten public offering of shares of our common
stock and warrants to purchase shares of our common stock, and in September 2010 we raised approximately $96.0 million net of transaction costs through the sale of our LC business. To date we have used net proceeds of approximately $50.3 million
from the transaction for debt retirement. We intend to use the remaining proceeds for continued investment in product development and manufacturing improvement efforts, build-out of our new research and development and corporate headquarters in San
Diego, for general corporate purposes, including working capital, and, as appropriate, for additional debt retirement.

As
more fully described in Note 3 of our Notes to Condensed Consolidated Financial Statements, the holders of our 2007 and 2009 Notes aggregating $44.2 million have the right to require us to purchase the 2007 and 2009 Notes for cash
(including any accrued and unpaid interest) on April 1, 2012, April 1, 2017 and April 1, 2022, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus any accrued
and unpaid interest to the redemption date. Assuming this occurs in 2012, based on our current cash resources and 2011 operating plan, our existing working capital will not be sufficient to repurchase the 2007 and 2009 Notes. If we are unable to
re-finance our 2007 and 2009 Notes, raise additional capital, we will need to defer restructure or significantly curtail our operations, issue equity in exchange for our 2007 and 2009 Notes at substantial dilution to current stockholders, file for
bankruptcy, or cease operations.

Balance Sheet

Our consolidated assets have decreased by $38.3 million to $73.5 million at March 31, 2011 from $111.8 million at December 31,
2010. This decrease is primarily attributed to a decrease in cash of $41.8 million attributable primarily to the repurchase of our 2007 and 2009 Notes principal and accrued interest of $30.6 million, payments against 2010 liabilities (including
employee cash bonuses) and general operating burn.

Our consolidated liabilities have decreased by $42.8 million to $65.8
million at March 31, 2011 from $108.6 million at December 31, 2010. This decrease is primarily attributable to the debt repurchase of $30.6 million in principal of our 2007 and 2009 Notes with a carrying value of $41.0 million. The
remainder of the decrease is attributed to a reduction in accounts payable and accrued expenses of $5.8 million primarily related to timing of cash payments, partially offset by i) an increase in deferred revenue of $1.4 million due to cash received
in advance of revenue recognition and ii) the establishment of the restructuring accrual associated with the closing of the Cambridge, Massachusetts office space of $1.8 million.

Cash Flows Related to Operating, Investing and Financing Activities

For the three months ended March 31, 2011 we used $10.7 million to fund our operations compared to $4.5 million for the three months
ended March 31, 2010. Although we had net income of $3.8 million for the three months ended March 31, 2011, $11.3 million of such amount was related to non-cash gain on debt extinguishment upon repurchase of convertible notes. The
remaining change in operating cash flows for the three months ended March 31, 2011 primarily reflects an increase in accounts receivable and decrease in accounts payable and accrued liabilities due to timing of cash receipts and payments,
partially offset by an increase in deferred revenue primarily related to cash received in advance of revenue recognition.

Our
investing activities for continuing operations used net cash of $0.8 million for the three months ended March 31, 2011 consisting of purchases of property and equipment.

Our financing activities for continuing operations used cash of $29.7 million for the three months ended March 31, 2011 due to our debt repurchase.



27



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##### Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations at March 31, 2011, including the principal and interest payments for our
2009 and 2007 Notes, assuming such obligations are not redeemed pursuant to noteholder rights prior to maturity in April 2027 (in thousands):



|                                                                                                      |  |       |         |     |                        |   |        |             |  |   |             |  |  |                  |       |  |  |   |        | 
|----------------------------------------------------------------------------------------------------- |  | ----- | ------- | --- | ---------------------- | - | ------ | ----------- |  | - | ----------- |  |  | ---------------- | ----- |  |  | - | ------ | 
|                                                                                                      |  |       |         |     | Payments due by Period |  
|                                                                                                      |  | Total |         |     | Less than1 Year        |   |        | 1 - 3 Years |  |   | 3 - 5 Years |  |  | More than5 Years |      
|Contractual Obligations                                                                               |  |       |         |     |                        |   |        |             |  |   |             |  |  |                  |       |  |  |   |        | 
|Operating lease (1)                                                                                   |  | $     | 2,367   |     |                        | $ | 851    |             |  | $ | 1,516       |  |  | $                |      |  |  | $ |       | 
|Manufacturing costs to Fermic (2)                                                                     |  |       | 39,986  |     |                        |   | 17,243 |             |  |   | 22,743      |  |  |                  |      |  |  |   |       | 
|License and research agreements                                                                       |  |       | 565     |     |                        |   | 70     |             |  |   | 140         |  |  |                  | 140   |  |  |   | 215    | 
|Convertible Debt:                                                                                     |  |       |         |     |                        |   |        |             |  |   |             |  |  |                  |       |  |  |   |        | 
|2007 Notes (principal of $40.1 million and interest of $36.4 million through April 2027 maturity) (3) |  |       | 76,493  | (4) |                        |   | 2,206  |             |  |   | 4,411       |  |  |                  | 4,411 |  |  |   | 65,465 | 
|2009 Notes (principal of $4.1 million and interest $6.0 million through April 2027 maturity) (3)      |  |       | 10,142  | (4) |                        |   | 367    |             |  |   | 735         |  |  |                  | 735   |  |  |   | 8,305  | 
|                                                                                                      |  |       |         |     |                        |   |        |             |  |   |             |  |  |                  |       |  |  |   |        | 
|Total Contractual Obligations                                                                         |  | $     | 129,553 |     |                        | $ | 20,737 |             |  | $ | 29,545      |  |  | $                | 5,286 |  |  | $ | 73,985 | 
|                                                                                                      |  |       |         |     |                        |   |        |             |  |   |             |  |  |                  |       |  |  |   |        | 



|(1) | We lease approximately 21,000 square feet of office space in a building in Cambridge, Massachusetts. The offices are leased to us under an operating lease with a term
through December 2013. On December 14, 2010, we publicly announced that we will be focusing all of our operations in San Diego and closed our office in Cambridge to better align us with the evolving needs of the business and the market. The
closure was effective on March 31, 2011. We completed a sublease agreement in May 2011 for the full Cambridge facility, which will give us additional sublease income of approximately $0.3 million from June 2011 through March 2012, $0.5 million
from April 2012 through March 2013, $0.6 million from April 2013 through the end of the lease term. Additionally, our facilities are currently located in San Diego, California in space we sublease from BP free of rent for a period of up to two years
through August 2012, and therefore, no obligation is reflected in the table.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Pursuant to our manufacturing agreement with Fermic, we are obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our
projected manufacturing volume increases. Under the terms of the agreement, we can cancel the committed purchases with thirty months notice. This commitment represents thirty months of rent at current committed capacity, which is the maximum
capacity allowed under the agreement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The holders of the 2007 and 2009 Notes have the right to require us to purchase the 2007 Notes for cash (including any accrued and unpaid interest) on April 1,
2012, April 1, 2017 and April 1, 2022.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | If the holders of the 2007 and 2009 Notes exercise their right to require us to purchase the Notes for cash (including any accrued and unpaid interest) on April 1,
2012, the total obligation would be $43.4 million, which would include $3.3 million of interest, for the 2007 Notes and $4.6 million, which would include $0.5 million of interest, for the 2009 Notes as of March 31, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Manufacturing and Supply Agreements

We have a manufacturing agreement with Fermic to provide us with the capacity to produce commercial quantities of enzyme products,
pursuant to which we pay Fermic a fixed monthly rent for minimum committed manufacturing capacity. Under the terms of the agreement, we can cancel the committed purchases with 30 months notice. As of March 31, 2011, under this agreement
our minimum commitments to Fermic are approximately $40 million over the next 30 months.

In addition, under the terms of the
agreement, we fund, in whole or in part, capital expenditures for certain equipment required for fermentation and downstream processing of our enzyme products. Since inception through March 31, 2011, we have incurred costs of approximately
$22.3 million for property and equipment related to this agreement, of which $0.4 million we funded in 2011. Our ongoing strategy is to remove our manufacturing bottlenecks, increase manufacturing efficiencies, and remove manufacturing
variability, in order to manufacture more product and reduce our average production cost per unit. For much of 2010, we limited our marketing activities in line with our manufacturing capabilities. In order to improve our manufacturing capabilities,
support growth, and reduce our average unit cost, we plan to make $4 to $5 million of additional capital investments at Fermic during 2011. These investments should improve both our yield of enzymes and the profitability of our enzymes over time.

In 2008, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer
for Phyzyme® XP phytase. Our supply agreement with Danisco for Phyzyme® XP phytase contains provisions which allow Danisco, with six months advance notice, to assume the right to
manufacture Phyzyme® XP phytase. If Danisco were to exercise this right, we may experience excess capacity at
Fermic. If Danisco assumed the right to manufacture Phyzyme® XP phytase and we were unable to absorb or
otherwise reduce the excess capacity at Fermic with other products, our results of operations and financial condition would be adversely affected.



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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that would give rise to additional material contractual obligations as of March 31,
2011.

Facility Commitment

All of our research and development, business development and corporate operations are conducted from a single facility in San Diego, which we currently sublease from BP through August 2012. We are
currently searching for an alternative facility in San Diego. We will need to retrofit an existing facility to accommodate our business, including the build-out of new pilot fermentation/recovery and automation labs. This could require the
expenditure of more than $10 million over the next two years, which we expect to be financed through existing cash and/or additional sources of capital.

Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition,
long-lived assets, accrued liabilities, convertible senior notes, and income taxes. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.

There have been no material changes to our critical accounting policies and estimates from the
information provided in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations,included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Recently Issued Accounting Standards

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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Our exposure to market risk is limited to interest rate risk and, to a lesser extent, foreign currency risk.

Interest Rate Exposure

As of March 31, 2011, all outstanding debt
obligations of the Company are comprised of fixed rate interest and, therefore, there is minimal interest rate exposure.

Foreign Currency
Exposure

We engage third parties, including Fermic, our contract manufacturing partner in Mexico City, to provide various
services. From time to time certain of these services result in obligations that are denominated in other than U.S. dollars.

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



|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Evaluation
of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Securities and Exchange Act of 1934, or Exchange Act, reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission, or SEC, rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



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##### Table of Contents

Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of March 31, 2011. Based on such
evaluation, such officers have concluded that, as of March 31, 2011, our disclosure controls and procedures were effective at the reasonable assurance level.

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

Class Action
Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action
lawsuit filed in December 2002 in a U.S. federal district court, or the Court. This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an
Initial Public Offering, or IPO of their common stock in 2000 and the late 1990s (the IPO Cases). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval
of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On April 24, 2006, the Court
held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Courts earlier decision certifying as class actions the six IPO Cases
designated as focus cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of the plaintiffs petition to the Second Circuit
for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District
Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and
thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to dismiss the claims against them in November 2007 and an opposition to plaintiffs
motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certification motion. On February 25, 2009, liaison counsel for
plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. On April 2, 2009, the parties submitted a
tentative settlement agreement to the court and moved for preliminary approval thereof. On June 11, 2009, the Court granted preliminary approval of the tentative settlement and ordered that notice of the settlement to be published and mailed.
The District Court held a final fairness hearing on September 10, 2009. On October 6, 2009, the District Court certified the settlement class in each IPO Case and granted final approval to the settlement. On or about October 23, 2009,
three shareholders filed a Petition for Permission To Appeal Class Certification Order, objecting to the District Courts final approval order and, in particular, asserting that the District Courts certification of the settlement classes
violates the Second Circuits earlier class certification decisions in the IPO Cases. Beginning on October 29, 2009, a number of shareholders also filed direct appeals, objecting to final approval of the settlement. If the settlement
is affirmed on appeal, the settlement will result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the Companys pro rata share of the settlement fund will be fully funded by insurance.

The Company is covered by a claims-made liability insurance policy which it believes will satisfy any potential liability of
the Company under this settlement. Due to the inherent uncertainties of litigation, and because the objecting shareholders are seeking to challenge the settlement on appeal, the ultimate outcome of this matter cannot be predicted.



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Noteholder Lawsuit

On April 30, 2009, Capital Ventures International , or CVI, a holder at such time of the 2008 Notes, filed a lawsuit against the Company in the United States District Court for the Southern District
of New York alleging that the Company breached the terms of the 2008 Notes by processing certain conversion notices submitted to the Company by CVI at $2.13 per share (now $25.56 per share on a reverse split-adjusted basis) or, following the
amendment of the 2008 Notes, $1.74 per share (now $20.88 on a reverse split-adjusted basis) rather than $1.47 per share (now $17.64 per share on a reverse split-adjusted basis) and asserting that CVI is entitled to additional shares based on its
asserted conversion price, as well as damages, and requesting a declaratory judgment that $1.47 per share (now $17.64 per share on a reverse split-adjusted basis) is the conversion price for the 2008 Notes. On June 3, 2009, CVI amended its
complaint to also request a declaratory judgment that the Company cannot amend the 2008 Notes, pursuant to their terms, without the consent of each affected noteholder, including CVI. The Company filed its answer to CVIs amended complaint
on June 30, 2009, denying all material allegations of the complaint, as amended.

On October 6, 2009, in response to
the Companys exchange of approximately $30.5 million of 2007 Notes, the granting of security interest in certain assets of the Company to exchanging holders and holders of the 2008 Notes and the public offering of common stock and warrants,
CVI filed a Motion to Amend First Amended Complaint, or the Motion. CVIs amended pleading alleges that the Company further breached the Note by both amending the terms of the 2008 Notes without CVIs express consent and then undertaking
various transactions authorized by the amendment. The amended pleading also alleges that as a result of these transactions the conversion rate should have adjusted to $4.27 per share rather than $17.89 per share. On February 25, 2010, the Court
granted CVIs Motion and CVI filed its Second Amended Complaint. Pursuant to a stipulation between the parties that was approved by the Court, the Company filed an Answer to the Second Amended Complaint and a Motion to Dismiss on March 15,
2010.

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

On January 4, 2011, the Court granted the Companys motion for summary judgment, concluding, among other things, that the proper conversion price was $2.13 per
share. Additionally, the Court denied CVIs motion for summary judgment, denied the Companys motion to dismiss as moot, and dismissed the complaint. On February 2, 2011, CVI filed a Notice of Appeal of the Courts decision
to the United States Court of Appeals for the Second Circuit. On March 23, 2011, the parties entered into a settlement agreement of $150,000 to resolve the litigation, and on March 29, 2011, the parties filed a stipulation of withdrawal of
the appeal with prejudice. On April 1, 2011, the United States Court of Appeals for the Second Circuit issued an order that the appeal be withdrawn with prejudice.

In conjunction with the settlement, the Company negotiated a reimbursement of legal fees of $1.1 million included in selling, general and administrative on the Companys Condensed Consolidated Income
Statement during the three months ended March 31, 2011. This reimbursement of legal fees was for expenses incurred during 2010 for defense of the noteholder lawsuit.

In addition to the matters noted above, from time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims,
employment and other matters, which management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless,
that the Companys consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Except for the
historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. Factors that could cause or
contribute to differences in our actual results include those discussed in the following section, as well as those discussed in Part I, Item 2 entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere throughout this quarterly report on Form 10-Q. You should consider carefully the following risk factors, together with all of the other information included in this quarterly report on Form 10-Q. Each of these risk
factors could adversely affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common stock.

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously discussed in our Form 10-K for the year ended December 31, 2010.



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Risks Applicable to Our Business Generally

We may need to raise additional capital or refinance our debt in 2011. If we are unable to do so, we may have to curtail or cease operations.

We may need to refinance our 2007 and 2009 Notes collectively, the Notes, or raise more money to pay down our Notes and to
continue to fund our business. Our capital requirements in 2011 and beyond will depend on several factors, including:



| |  |  | The election of any or all of our Noteholders to require us to repurchase the Notes, pursuant to the exercise of their respective put options in April
2012, 2017, and 2022;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to retire/refinance existing indebtedness;
| | - |  | ------------------------------------------------------



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



| |  |  | The capital required to build out our new facility in San Diego;
| | - |  | ----------------------------------------------------------------



| |  |  | Our ability to enter into new agreements with collaborative partners or to extend the terms of our existing collaborative agreements, and the terms of
any agreement of this type;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | Costs of recruiting and retaining qualified personnel; and
| | - |  | ----------------------------------------------------------



| |  |  | Our possible acquisition or licensing of complementary technologies or acquisition of complementary businesses.
| | - |  | ---------------------------------------------------------------------------------------------------------------

We may seek additional funds through a combination of existing and additional corporate partnerships and collaborations, federal, state
and local grant funding, product sales, selling or financing assets, and the sale of equity or debt securities. Such funds may not be available to us or may be available on terms not satisfactory to us. Our inability to raise adequate funds to
support the growth of our project portfolio will materially adversely affect our business.

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



| |  |  | issue equity to in exchange for all or a portion of our Notes at substantial dilution to current stockholders;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | reduce our capital expenditures;
| | - |  | --------------------------------



| |  |  | further scale back our development of new enzyme products;
| | - |  | ----------------------------------------------------------



| |  |  | significantly reduce our workforce;
| | - |  | -----------------------------------



| |  |  | sell some or all of our assets;
| | - |  | -------------------------------



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



| |  |  | curtail or cease operations.
| | - |  | ----------------------------

*We may not have adequate funds to pay interest on our 2007 Notes and 2009 Notes, or to purchase the 2007 Notes and 2009 Notes on required purchase dates or upon a fundamental change in our business.

In April 2007, we completed the sale of $120 million of 2007 Notes, the terms of which include provisions whereby on each
of April 1, 2012, April 1, 2017 and April 1, 2022, holders of the 2007 Notes may require us to purchase, for cash, all or a portion of their 2007 Notes at 100% of their principal amount, plus any accrued and unpaid interest up
to, but excluding, that date. In September 2009, pursuant to privately negotiated exchange agreements with Verenium, certain holders of the 2007 Notes exchanged approximately $30.5 million in aggregate principal amount of 2007 Notes for
approximately $13.7 million in aggregate principal amount of our 2009 Notes, the terms of which include provisions whereby on each of April 1, 2012, April 1, 2017 and April 1, 2022, holders of the 2009 Notes may require us to
purchase, for cash, all or a portion of their 2009 Notes at 100% of their principal amount, plus any accrued and unpaid interest up to, but excluding, that date. As of March 31, 2011, approximately $40.1 million of the 2007 Notes and $4.1
million of the 2009 Notes remains outstanding. If a fundamental change, which is defined in the indenture related to the 2007 Notes and in the indenture related to the 2009 Notes, occurs, holders of the 2007 Notes or 2009 Notes may
require us to repurchase, for cash, all or a portion of their 2007 Notes or 2009 Notes, as applicable. We may not have sufficient funds to pay the interest, purchase price or repurchase price of the 2007 Notes or 2009 Notes when due in 2027, or
earlier if the 2007 or 2009 noteholders exercise their put options on April 1, 2012, April 1, 2017, or April 1, 2022 . In addition, the terms of any borrowing agreements which we may enter into from time to time may require early
repayment of borrowings under circumstances similar to those constituting a fundamental change. Those agreements may also make our repurchase of 2007 Notes or 2009 Notes an event of default under the agreements. If we fail to pay
interest on the 2007 Notes or 2009 Notes or to purchase or repurchase the 2007 Notes or 2009 Notes when required, we



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will be in default under the indenture for the 2007 Notes or the indenture for the 2009 Notes, as applicable, which may also cause an event of default under the terms of other borrowing
arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including causing us to cease operations altogether.

*Conversion of the 2007 Notes and/or the 2009 Notes, exercise of our outstanding warrants, anti-dilution adjustments that may occur under
certain of our outstanding warrants, and the issuance of shares of common stock in payment of interest or make-whole payments under the 2009 Notes will dilute the ownership interest of existing stockholders.

The conversion or exercise of some or all of the 2007 Notes and 2009 Notes and/or the warrants related to the issuance in 2008 of certain
of our 8% Senior Convertible Notes due April 1, 2012 (all of which were repurchased by us in 2010), the 2008 Notes, and the issuance of shares of common stock in payment of interest or make-whole payments under the 2009 Notes, could
significantly dilute the ownership interests of existing stockholders. In April 2008, the conversion price of the 2007 Notes decreased from $97.92 per share to $76.80 per share, based on a reset provision contained in the 2007 Notes. The initial
conversion price of the 2009 Notes is $9.60 per share and is subject to reduction based on a reset provision contained in the 2009 Notes. These resets and other reductions in the applicable conversion prices for the 2007 Notes and 2009 Notes have
caused, and will continue to cause, additional shares to be issued upon conversion of these instruments compared to the number of shares initially issuable upon such conversions.

Our 2008 Notes that we repurchased also contained a version of broad-based weighted average anti-dilution protection, subject to certain
exceptions and limitations. One holder of the 2008 Notes filed a lawsuit against us asserting a conversion price of $17.64 from February 27, 2009 through October 5, 2009 and $4.27 for conversions subsequent to October 6, 2009, rather
than $25.56 (and with the recent amendment of the 2008 Notes, and recent equity financing, $17.89), for a portion of its 2008 Notes for which it has submitted conversion notices. We have disputed this assertion and believe our position is correct.
On March 23, 2011, we settled the lawsuit with prejudice to resolve the litigation. Additionally, the warrants related to the 2008 Notes and certain warrants held by Syngenta contain weighted average anti-dilution protection that could also cause
more shares to become issuable under those warrants if we engage in subsequent issuances that trigger those provisions. In addition, given the low recent values for our stock price, to the extent we satisfy required interest or
make-whole payments under the 2009 Notes by issuing shares, which we intend to do to the extent permissible under the terms of the 2009 Notes, we will be issuing relatively more shares than if our stock price was at a higher level. Sales
in the public market of the common stock issuable upon conversion of the 2007 Notes and/or 2009 Notes or exercise of our outstanding warrants, or issuable in payment of interest or make-whole payments under the 2009 Notes, have, and we
expect that any future sales based on such conversions, exercises or issuances will continue to, adversely affect prevailing market prices of our common stock. In addition, the existence of the 2007 Notes and 2009 Notes may encourage short selling
by market participants because the conversion of the 2007 Notes and 2009 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2009 Notes into shares of our common stock could depress the price of our
common stock.



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*Our high level of debt limits our ability to fund general corporate requirements, limits our flexibility
in responding to competitive developments, increases our vulnerability to adverse economic and industry conditions, and may harm our financial condition and results of operations.

The face value of our total consolidated long-term debt as of March 31, 2011, which includes the 2007 Notes and the 2009 Notes was
approximately $44.2 million, representing approximately 85% of our total capitalization as of such date.

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



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



| |  |  | reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and
limiting our ability to obtain additional financing for these purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which could
result in all of our debt becoming immediately due and payable;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we
operate and the general economy; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | requiring us to issue equity in exchange for all or a portion of our Notes, at substantial dilution to current stockholders.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

Moreover, if we fail to make any required payments under our debt, or otherwise breach the terms of our
debt, all or a substantial portion of our debt could be subject to acceleration. In such a situation, it is unlikely we would be able to repay the accelerated debt, which would have a material adverse impact on our business, results of operations
and financial condition, up to and including causing us to cease operations.

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

Excluding our non-cash gains related to our debt
repurchases in the first quarter of 2011, we have incurred net losses from our continuing operations since our inception. As of March 31, 2011, we had an accumulated deficit of approximately $602.2 million. We expect to continue to incur
additional losses for the foreseeable future.

Product revenues currently account for the majority of our annual revenues, and
we expect that a significant portion of our revenue for 2011 will continue to result from the same sources. Future revenue from collaborations is uncertain and will depend upon our ability to maintain our current collaborations, enter into new
collaborations and to meet research, development, and commercialization objectives under new and existing agreements. Over the past two years, our product revenue in absolute dollars and as a percentage of total revenues has increased significantly.
Our product revenue may not continue to grow in either absolute dollars or as a percentage of total revenues. If product revenue increases, we would expect sales and marketing expenses to increase in support of increased volume, which could
negatively affect our operating margins and profitability. In addition, the amounts we spend will impact our ability to become profitable and this will depend, in part, on:



| |  |  | the time and expense to build or retrofit, rent, operate and maintain our new facility in San Diego;
| | - |  | ----------------------------------------------------------------------------------------------------



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



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



| |  |  | how competing technological and market developments affect our proposed activities; and
| | - |  | ---------------------------------------------------------------------------------------



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

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

*If we are unable to access the capacity to manufacture products in sufficient quantity, we may not be able to commercialize our products or generate significant sales.

We have only limited experience in enzyme manufacturing, and we do not have our own internal capacity to manufacture enzyme products on a
commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our enzyme products. We have arrangements with third parties that have the required manufacturing equipment and available
capacity to manufacture our commercial enzymes. Additionally, one of our third party manufacturers is located in a foreign country, and is our sole-source supplier for most of our commercial enzyme products. Any difficulties or interruptions of
service with our third party manufacturers or our own pilot manufacturing facility could disrupt our research and development efforts, delay our commercialization of enzyme products, and harm our relationships with our enzyme strategic partners,
collaborators, or customers.



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

We have experienced inventory losses and decreased manufacturing yields related to contamination issues of our enzyme products. While we continue to address contamination issues and, in the past, have
recovered a substantial portion of such losses from our third-party manufacturer Fermic, there can be no assurance that such losses will not occur in the future or that any amount of future losses will be reimbursed by Fermic. If such contamination
issues continue in future periods, or we are not able to otherwise improve our manufacturing yields, our sales would suffer and our results of operations and financial condition would be adversely affected.

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

We are experiencing constraints within our downstream recovery capabilities at our third-party manufacturing
site, Fermic. We currently do not have adequate processing equipment deployed to accommodate expected increased demand for our products. This has created inefficiencies and bottlenecks in our enzyme manufacturing process, which has compromised our
manufacturing yields and has extended manufacturing cycle times at the Fermic plant. To address these shortcomings, together with Fermic, we plan to implement several manufacturing expansion and process improvement projects, which we anticipate will
require additional capital expenditures over the next 12-18 months. If such projects are delayed, or do not adequately resolves our current manufacturing limitations, we may not be able to produce sufficient quantities of our enzyme products, and
our results of operations and financial condition would be adversely affected.

If Genencor assumes all or a part of
our Phyzyme® XP phytase manufacturing, our gross product revenues will be adversely impacted and our product
gross margins could decline.

Due to capacity constraints at Fermic in 2008, we were not able to
supply adequate quantities of Phyzyme® XP phytase necessary to meet the increased demand from Danisco. As a
result, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for
Phyzyme® XP phytase. Pursuant to current accounting rules, revenue from Phyzyme® XP phytase that is supplied to us by Genencor is recognized in an amount equal to the royalty on operating profit
received from Danisco, as compared to the full value of the manufacturing costs plus the royalty on operating profit we currently recognize for Phyzyme® XP phytase we manufacture at Fermic. While this revenue recognition treatment has little or no negative impact on the gross margin we recognize for every sale of
Phyzyme® XP phytase, it does have a negative impact on the gross product revenue we recognize for Phyzyme® XP phytase as the volume of Phyzyme® XP phytase manufactured by Genencor increases.

In addition, our supply agreement with Danisco for Phyzyme® XP
phytase contains provisions which allow Danisco, with six months advance notice, to assume manufacturing rights of
Phyzyme® XP phytase. If Danisco were to exercise this right, we would also have the right to reduce our capacity
commitment to Fermic; nevertheless, we may still experience significant excess capacity at Fermic as a result. If we were unable to absorb this excess capacity with other products, our results of operations and financial condition would be adversely
effected.

We are dependent on our collaborative partners, and our failure to successfully manage our existing and future collaboration
relationships could prevent us from developing and commercializing our enzyme products, and achieving or sustaining profitability.

Revenue from our collaborations has decreased both as a proportion of our total revenue and in absolute dollars in recent years. Since we do not currently possess the resources necessary to independently
fund the development and commercialization all of the potential enzyme products that may result from our technologies, we expect to continue to pursue, and in the near-term derive additional revenue from, strategic alliance and collaboration
agreements to develop and commercialize products and technologies that are core to our current market focus. We will have limited or no control over the resources that any strategic partner or collaborator may devote to our products and
technologies. Any of our present or future strategic partners or collaborators may fail to perform their obligations as expected. These strategic partners or collaborators may breach or terminate their agreements with us or otherwise fail to conduct
their collaborative activities successfully and in a timely manner. Further, our strategic partners or collaborators may not develop technologies or products arising out of our collaborative arrangements or devote sufficient resources to the
development, manufacture, marketing, or sale of these technologies and products. If any of these events occur, or we fail to enter into or maintain strategic alliance or collaboration agreements, we may not be able to commercialize our technologies
and products, grow our business, or generate sufficient revenue to support our operations.

Our present or future strategic
alliance and collaboration opportunities could be harmed if:



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



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



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| |  |  | We develop technologies or products and processes or enter into additional strategic alliances or collaborations that conflict with the business
objectives of our strategic partners or collaborators;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  |  | Our strategic partners or collaborators become less willing to expend their resources on research and development due to general market conditions or
other circumstances beyond our control;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

In connection with the sale of our LC business to BP on September 2, 2010, we transferred ownership of certain intellectual property
for which BP has granted us a license for use within our enzymes business. While the provisions of the purchase agreement provide that BP maintain and protect such intellectual property, there can be no assurance that BP will continue to do so. In
addition, BP may be unsuccessful in protecting the intellectual property which we have a license to, if such intellectual property rights are challenged by third parties. While we have certain rights to take action to maintain or protect such
intellectual property, in the event that BP determines not to, we may be unsuccessful in protecting the intellectual property if challenged by third parties. If either of these events were to occur, we may lose our rights to certain intellectual
property, which could severely harm our business. Similarly, we license additional intellectual property that we use to manufacture our products and otherwise use in our business. In the event that the licensors of this technology do not adequate
protect it, our ability to use that technology will also be restricted, resulting in harm to our business.

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

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

You must evaluate our business in light of the uncertainties and complexities affecting an early stage biotechnology
company. Our existing proprietary technologies are new and in an early stage of development and commercialization. We may not be successful in the continued commercialization of existing products or in the commercial development of new products, or
any further technologies, products or processes. Successful products and processes require significant development and investment, including testing, to demonstrate their cost- effectiveness prior to regulatory approval and commercialization. To
date, we have commercialized 14 of our own products, including our Purifine® PLC, Fuelzyme® alpha-amylase, Veretase® alpha-amylase, Xylathin, and
Luminase® PB-100 enzymes. In addition, four of our collaborative partners, Invitrogen Corporation, Danisco
Animal Nutrition, Givaudan Flavors Corporation, and Syngenta Animal Nutrition (formerly known as Zymetrics, Inc.), have incorporated our technologies or inventions into their own commercial products from which we have generated and/or can generate
royalties. Our products and technologies have only recently begun to generate significant revenues. Because of these uncertainties, our discovery process may not result in the identification of product candidates that we or our collaborative
partners will successfully commercialize. If we are not able to use our technologies to discover new materials, products, or processes with significant commercial potential, we will continue to have significant losses in the future due to ongoing
expenses for research, development and commercialization efforts and we may be unable to obtain additional funding to fund such efforts.

If the volatility in the United States and global equity and credit markets and the decline in the general world economy continue for an extended
period of time, it may become more difficult to raise money in the public and private markets and harm our financial condition and results of operations.

The United States and global equity and credit markets have recently been extremely volatile and unpredictable, reflecting in part a general concern regarding the global economy. This volatility in the
market affects not just our stock price, but also the stock prices of our collaborators. In addition, this volatility has also affected the ability of businesses to obtain credit and to raise money in the capital markets. If we or our collaborators
are unable to obtain credit or raise money in the capital markets, we may not be able to continue to fund our current research and development projects, fund our current products, or otherwise continue to maintain or grow our business.



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We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation
for any return on their investment in us.

We anticipate that we will retain our earnings, if any, for future growth and
therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

We may encounter difficulties managing our growth, which could adversely affect our results of operations.

Our strategy includes entering into and working on simultaneous projects, frequently across multiple industries. This strategy places
increased demands on our limited human resources and requires us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, technicians, scientists and
other personnel. Our ability to effectively manage our operations, growth, and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain
sufficient numbers of talented employees, which we may be unable to do. In addition, we may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner. Moreover, we may
discover deficiencies in existing systems and controls. The failure to successfully meet any of these challenges would have a material adverse impact on our financial condition and results of operations.

*Our building sublease in San Diego will expire within the next 17 months, and we will be required to relocate our research and development and
corporate operations.

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

Our business is subject to complex corporate governance, public disclosure, and accounting requirements that have increased both
our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and
regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Financial Accounting Standards Board,
the Public Company Accounting Oversight Board, the SEC, and NASDAQ, have implemented requirements, standards and regulations, including expanded disclosures, accelerated reporting requirements and more complex accounting rules, and continue
developing additional requirements. Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from operating
activities to compliance activities. We may incur additional expenses and commitment of managements time in connection with further evaluations, either of which could materially increase our operating expenses or accordingly increase our net
loss.

Because new and modified laws, regulations, and standards are subject to varying interpretations, in many cases due to
their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding financial disclosures and compliance matters
and additional costs necessitated by ongoing revisions to our disclosures and governance practices. This further could lead to possible restatements, due to the complex nature of current and future standards and possible misinterpretation or
misapplication of such standards.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report
our financial results or prevent fraud and as a result, investors may be misled and lose confidence in our financial reporting and disclosures, and the price of our common stock may be negatively affected.

The Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal control over financial reporting. A
significant deficiency means a deficiency or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for
oversight of our financial reporting. A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a timely basis.

In the past, we have disclosed
material weaknesses with our financial statement close process that we have since remediated. If we discover other deficiencies or material weaknesses, it may adversely impact our ability to report accurately and in a timely manner our financial
condition and results of operations in the future, which may cause investors to lose confidence in our financial reporting



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and may negatively affect the price of our common stock. Moreover, effective internal controls are necessary to produce accurate, reliable financial reports and to prevent fraud. If we experience
deficiencies in our internal controls over financial reporting, these deficiencies may negatively impact our business and operations.

Our
ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights due to becoming involved in expensive lawsuits or administrative proceedings.

Our success depends in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our
technologies and products in the United States and other countries. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring and preventing unauthorized use of our intellectual property
is difficult and expensive, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United
States. If competitors are able to use our technology, our ability to compete effectively could be harmed. Although we have adopted a strategy of seeking patent protection in the United States and in foreign countries with respect to certain of the
technologies used in or relating to our products, as well as anticipated production capabilities and processes, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that
happens, we may need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all, which could cause great harm to our business.

Our commercial success depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our
technologies, products, and business. The patent positions of companies whose businesses are based on biotechnology, including our patent position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with
certainty. We intend to apply for patents relating to our technologies, processes and products as we deem appropriate. Patents, if issued, may be challenged, invalidated, or circumvented. We cannot be sure that patents have not been issued that
could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or duplicate technologies developed by us. There may be patents in some countries that, if valid, may block our ability to
commercialize products in these countries if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in published patent applications in some countries that, if granted and valid, may also block our
ability to commercialize processes or products in these countries if we are unable to circumvent or license them. Our intellectual property rights may be challenged by others which could result in preventing us from selling or increasing our costs
to sell our products. We are not currently a party to any litigation with regard to our patent position. However, the biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property
rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. When and if we become involved in litigation or interference proceedings declared by the United States Patent and Trademark
Office, or oppositions or other intellectual property proceedings outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, we might have to spend significant amounts of
money. Any intellectual property litigation could potentially force us to do one or more of the following:



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



| |  |  | obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available
on reasonable terms, or at all; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign those products, facilities or processes that use any allegedly infringing technology, which may result in significant cost or delay to us, or
which could be technically infeasible.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are aware of a significant number of patents and patent
applications relating to aspects of our technologies filed by, and issued to, third parties. We cannot assure you that if we are sued on these patents we would prevail.

Should any third party have filed, or file in the future, patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in an interference proceeding
declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding, like the one described above, could result in substantial cost to us
even if the outcome is favorable. Even if successful, an interference may result in loss of claims. The litigation or proceedings could divert our managements time and efforts. Even unsuccessful claims could result in significant legal fees
and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.



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*If we engage in any acquisitions, we will incur a variety of costs, may dilute existing stockholders,
and may not be able to successfully integrate acquired businesses.

If appropriate opportunities become available, we may
consider acquiring businesses, assets, technologies, or products that we believe are a strategic fit with our business. As of March 31, 2011, we have no commitments or agreements with respect to any material acquisitions. If we further pursue
such a strategy, we could:



| |  |  | issue additional equity securities which would dilute current stockholders percentage ownership;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | incur substantial additional debt; or
| | - |  | -------------------------------------



| |  |  | assume additional liabilities.
| | - |  | ------------------------------

We may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial, and
management resources, if at all. In addition, future acquisitions might negatively impact our business relations with our current and/or prospective collaborative partners and/or customers. Any of these adverse consequences could harm our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary
information.

In order to protect our proprietary technology and processes, we also rely in part on trade secret
protection for our confidential and proprietary information. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. Our policy is to execute confidentiality agreements with our
employees and consultants upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the
course of the individuals relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our
exclusive property. Nevertheless, our proprietary information may be disclosed, and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and
time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Ethical, legal, and social concerns about genetically engineered products and processes could limit or prevent the use of our products, processes, and
technologies and limit our revenue.

Some of our anticipated products and processes are genetically engineered or involve
the use of genetically engineered products or genetic engineering technologies. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to genetic engineering, our products and processes may not be
accepted. Any of the risks discussed below could result in expenses, delays, or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. Our ability to
develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:



| |  |  | Public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and
processes, which could influence public acceptance of our technologies, products and processes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Public attitudes regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights
with respect to our genetic material and discourage collaborative partners from supporting, developing, or commercializing our products, processes and technologies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic
research and derivative products, including labeling requirements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The subject of genetically modified
organisms has received negative publicity, which has aroused public debate in the United States and other countries. This adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically altered
products.

Compliance with regulatory requirements and obtaining required government approvals may be time consuming and costly, and could
delay our introduction of products.

All phases, especially the field testing, production, and marketing, of our current
and potential products and processes are subject to significant federal, state, local, and/or foreign governmental regulation. Regulatory agencies may not allow us to produce and/or market our products in a timely manner or under technically or
commercially feasible conditions, or at all, which could harm our business.



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In the United States, enzyme products for our target markets are regulated based on their
use, by either the FDA, the EPA, or, in the case of plants and animals, the USDA. The FDA regulates drugs, food, and feed, as well as food additives, feed additives, and substances generally recognized as safe that are used in the processing of food
or feed. While substantially all of our current enzyme projects to date have focused on non-human applications and enzyme products outside of the FDAs review, in the future we may pursue collaborations for further research and development of
drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any drug product candidates must also be approved by the regulatory agencies of foreign governments before any product can be
sold in those countries. Under current FDA policy, our products, or products of our collaborative partners incorporating our technologies or inventions, to the extent that they come within the FDAs jurisdiction, may be subject to lengthy FDA
reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not meet regulatory requirements or if they are deemed to be food additives whose
safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing significant time and expenditures, our collaborators may not obtain regulatory
approval for any drug products that incorporate our technologies or inventions. Our collaborators have not submitted an investigational new drug application for any product candidate that incorporates our technologies or inventions, and no drug
product candidate developed with our technologies has been approved for commercialization in the United States or elsewhere. The EPA regulates biologically derived chemical substances not within the FDAs jurisdiction. An unfavorable EPA ruling
could delay commercialization or require modification of the production process resulting in higher manufacturing costs, thereby making the product uneconomical. In addition, the USDA may prohibit genetically engineered plants from being grown and
transported except under an exemption, or under controls so burdensome that commercialization becomes impracticable. Our future products may not be exempted by the USDA.

Our results of operations may be adversely affected by environmental, health and safety laws, regulations and liabilities.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage,
handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our contemplated facilities to operate under permits that are subject to renewal
or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit
conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Furthermore, as we operate our business, we may become liable for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site locations
where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive
Environmental Response, Compensation and Liability Act, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties
alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for investigation, cleanup, or other costs.

In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws, or other
developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ethanol production
facilities. Present and future environmental laws and regulations, and interpretations thereof more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse
effect on our results of operations and financial position.

We use hazardous materials in our business. Any claims relating to improper
handling, storage, or disposal of these materials could be time consuming and costly and could adversely affect our business and results of operations.

Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive, and biological materials. Our operations also produce hazardous waste products.
We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, and local laws and regulations govern the use, manufacture, storage, handling, and disposal of these
materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. In addition, compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts.



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Many competitors and potential competitors who have greater resources and experience than we do may
develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.

The biotechnology industry is characterized by rapid technological change, and the area of biomolecule discovery and optimization from biodiversity is a rapidly evolving field. Our future success will
depend on our ability to maintain a competitive position with respect to technological advances. Technological development by others may result in our products and technologies becoming obsolete.

We face, and will continue to face, intense competition in our business. There are a number of companies who compete with us in various
steps throughout our technology process. For example, Dyadic, Codexis and Direvo have alternative evolution technologies; Novozymes A/S and Genencor International Inc. are involved in development, expression, fermentation, and purification of
enzymes. There are also a number of academic institutions involved in various phases of our technology process. Many of these competitors have significantly greater financial and human resources than we do. These organizations may develop
technologies that are superior alternatives to our technologies. Further, our competitors may be more effective at implementing their technologies for modifying DNA to develop commercial products.

Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner
and are technologically superior to and/or are less expensive than other products on the market. Current competitors or other companies may develop technologies and products that are more effective than ours. Our technologies and products may be
rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technology developed by our competitors may be
more effective than those developed by us.

If we lose key personnel or are unable to attract and retain additional personnel, it could
delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

The loss of any key members of our senior management, or business development or scientific staff, or failure to attract or retain other key management, business development or scientific employees, could
prevent us from developing and commercializing new products and entering into collaborations or licensing arrangements to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense
competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the San Diego area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may
experience constraints that will adversely affect our ability to meet the demands of our collaborative partners in a timely fashion or to support our internal research and development programs. In particular, our product and process development
programs are dependent on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Competition for experienced scientists and other technical personnel from numerous companies and
academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

Members of our senior management team have not worked together for a significant length of time and they may not be able to work together
effectively to develop and implement our business strategies and achieve our business objectives. Management will need to devote significant attention and resources to preserve and strengthen relationships with employees, customers and others. If
our management team is unable to develop successful business strategies, achieve our business objectives, or maintain positive relationships with employees, customers, suppliers or other key constituencies, including our strategic collaborators and
partners, our ability to grow our business and successfully meet operational challenges could be impaired.

Our planned
activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions. These activities will require the addition
of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business.

We may be sued for product liability.

We may be held liable if any product or process we develop, or any product which is made or process which is performed with the use of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing, or sale. We currently have limited product liability insurance covering claims up to $10 million that may not fully cover our potential liabilities. In addition, if we attempt to obtain
additional product liability insurance coverage, this additional insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or inhibit the commercialization of products or processes developed by us or our collaborative partners. If we are sued for any injury caused by our products, our liability could
exceed our total assets.



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Macroeconomic conditions beyond our control could lead to decreases in demand for our products, reduced
profitability or deterioration in the quality of our accounts receivable.

Domestic and international economic, political
and social conditions are uncertain due to a variety of factors, including



| |  |  | global, regional and national economic downturns;
| | - |  | -------------------------------------------------



| |  |  | the availability and cost of credit;
| | - |  | ------------------------------------



| |  |  | volatility in stock and credit markets;
| | - |  | ---------------------------------------



| |  |  | energy costs;
| | - |  | -------------



| |  |  | fluctuations in currency exchange rates
| | - |  | ---------------------------------------



| |  |  | the risk of global conflict;
| | - |  | ----------------------------



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



| |  |  | public health issues.
| | - |  | ---------------------

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

The financial instability of our
customers could adversely affect our business and result in reduced sales, profits and cash flows.

We
sell our products to and extend credit to our customers based on an evaluation of each customers financial condition, usually without requiring collateral. Our Fuelzyme® alpha-amylase customers are particularly exposed to the challenges facing the corn ethanol industry. While customer credit losses have historically been within our
expectations and reserves, we cannot assure you that this will continue. The financial difficulties of a customer could cause us to curtail business with that customer or the customer to reduce its business with us and cancel orders. Our inability
to collect on our trade accounts receivable from any of our major customers could adversely affect our results of operations and financial condition. Our international manufacturing operations are subject to the risks of doing business abroad, which
could affect our ability to manufacture our products in international markets, obtain products from foreign suppliers or control the costs of our products.

We manufacture a majority of our commercial enzyme products through a manufacturing facility in Mexico City owned by Fermic S.A., or Fermic. As a result, we are subject to the general risks of doing
business outside the U.S., particularly Mexico, including, without limitation, work stoppages, transportation delays and interruptions, political instability, expropriation, nationalization, foreign currency fluctuation, changing economic
conditions, the imposition of tariffs, import and export controls and other non-tariff barriers, and changes in local government administration and governmental policies, and to factors such as the short-term and long-term effects of health risks
like the recent outbreak of swine flu. There can be no assurance that these factors will not adversely affect our business, financial condition or results of operations.

We have only limited experience in independently developing, manufacturing, marketing, selling, and distributing commercial enzyme products.

We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute enzyme products on a
commercial scale. We will determine which enzyme products to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise
necessary for successful commercialization. At any time, we may modify our strategy and pursue collaborations for the development and commercialization of some enzyme products that we had intended to pursue independently. We may pursue enzyme
products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize more enzyme products directly, we would need to establish or obtain through outsourcing arrangements
additional capability to develop, manufacture, market, sell, and distribute such products. If we are unable to successfully commercialize enzyme products resulting from our internal product development efforts, we will continue to incur losses. Even
if we successfully develop a commercial enzyme product, we may not generate significant sales and achieve profitability in our business.



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

Historically, we have relied upon a number of strategic partners, including those with Bunge Oils, Alfa Laval, Desmet
Ballestra, Danisco Animal Nutrition, and WeissBioTech GmbH (formerly Add Food Services GmbH), to enhance and support our development and commercialization efforts for our industrial enzymes. An important component of our business plan is to enter
into strategic partnerships:



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



| |  |  | to support or provide sales, marketing and distribution services for our enzyme products; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | to provide capital, equipment and facilities, including significant capital to develop and expand our enzyme manufacturing capabilities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

These arrangements with collaborative partners are, and will continue to be, critical to the success of our
business. We cannot guarantee that any collaborative relationship(s) will be entered into, or if entered into, will continue or be successful. Our collaborative partners could experience business difficulties which eliminate or impair their ability
to effectively perform under our arrangements with them. Failure to make or maintain these arrangements or a delay or failure in a collaborative partners performance under any such arrangements would materially adversely affect our business
and financial condition.

We cannot control our collaborative partners performance or the resources they devote to our
programs. We may not always agree with our partners nor will we have control of our partners activities. The performance of our programs may be adversely affected and programs may be delayed or terminated or we may have to use funds,
personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own as a result of these disagreements. Performance issues, program delays or termination or unbudgeted use of our resources may
materially adversely affect our business and financial condition. Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns the technology and other intellectual property that is developed during a
collaboration or other issues arising out of the collaborative agreements. Such a dispute could delay the program on which we are working or could prevent us from obtaining the right to commercially exploit such developments. It could also result in
expensive arbitration or litigation, which may not be resolved in our favor. Our collaborative partners could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could,
nevertheless, adversely affect us.

Risks Related to Owning Our Common Stock

We are subject to anti-takeover provisions in our certificate of incorporation, bylaws, and Delaware law that could delay or prevent an acquisition of
our company, even if the acquisition would be beneficial to our stockholders.

Provisions of our certificate of
incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions in our charter documents and under Delaware law could discourage
potential takeover attempts and could adversely affect the market price of our common stock. Because of these provisions, our common stockholders might not be able to receive a premium on their investment.

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor
losses.

Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These
fluctuations could cause our stock price to fluctuate significantly or decline. Revenue and expenses in future periods may be greater or less than in the immediately preceding period or in the comparable period of the prior year. Some of the factors
that could cause our operating results to fluctuate include:



| |  |  | termination of strategic alliances and collaborations;
| | - |  | ------------------------------------------------------



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



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



| |  |  | our ability to enter into new agreements with potential strategic partners and collaborators or to extend the terms of our existing strategic alliance
agreements and collaborations, and the terms of any agreement of this type;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our need to continuously recruit and retain qualified personnel;
| | - |  | ----------------------------------------------------------------



| |  |  | our ability to successfully satisfy all pertinent regulatory requirements;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | general and industry specific economic conditions, which may affect our, and our collaborative partners, research and development expenditures.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

The market price of our common stock has in the past been and is likely to continue to be subject to significant fluctuations. Between
January 1, 2006 and May 10, 2011, the closing market price of our common stock has ranged from a low of $2.21 to a high of $138.95. Since the completion of our merger with Celunol on June 20, 2007, the closing market price of our
common stock has ranged from $2.21 to $81.96. The closing market price of our common stock on March 31, 2011 was $3.04, and the closing price of our common stock on May 10, 2010 was $2.70. Some of the factors that may cause the market
price of our common stock to fluctuate include:



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



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



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



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



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



| |  |  | our results of operations and financial condition, including our cash reserves and cost level;
| | - |  | ----------------------------------------------------------------------------------------------



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



| |  |  | developments involving our 2009 Notes and 2007 Notes;
| | - |  | -----------------------------------------------------



| |  |  | the loss of key employees;
| | - |  | --------------------------



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



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



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



| |  |  | future sales of our common stock or other capital-raising activities;
| | - |  | ---------------------------------------------------------------------



| |  |  | issuance of shares by us, and sales in the public market of the shares issued, upon conversion of the 2009 Notes and 2007 Notes or exercise of our
outstanding warrants, including the extent to which we issue shares versus pay cash in satisfaction of any make-whole obligation arising upon conversion of some or all of the 2009 Notes or to pay interest due under the 2009 Notes; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | period-to-period fluctuations in our financial results.
| | - |  | -------------------------------------------------------

Moreover, the stock markets in general are currently experiencing substantial volatility related to general economic conditions and may continue to experience volatility for some time. The stock markets
have experienced in the past substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a companys securities, stockholders have often instituted class
action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.



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*Concentration of ownership among our existing officers, directors and principal stockholders may prevent
other stockholders from influencing significant corporate decisions and depress our stock price.

Our officers, directors,
and stockholders with at least 10% of our stock together controlled approximately 12% of our outstanding common stock as of March 31, 2011. If these officers, directors, and principal stockholders act together, they will be able to exert a
significant degree of influence over our management and affairs and matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration
of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could heavily contribute to our entering into transactions or agreements
that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could
depress our stock price.

*Future sales of our common stock in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur could
depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. As of May 10, 2011, we had 12,612,352 shares of common stock outstanding.



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

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



|ITEM 4. | (REMOVED AND RESERVED)
|------- | ----------------------



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



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|ITEM 6. | EXHIBITS.
|------- | ---------

(a)



|               |  |                                                                                                                                                                                                                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                 
|               | 
|2.1            |  | Asset Purchase Agreement, dated as of July 14, 2010, by and between BP Biofuels North America LLC and Verenium Corporation  filed as an exhibit to the Companys Current
Report on Form 8-K, filed with the Securities and Exchange Commission on July 19, 2010, and incorporated herein by reference.
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation  filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No.
000-29173), filed with the Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.             
|               | 
|3.2            |  | Certificate of Amendment of Restated Certificate of Incorporation  filed as an exhibit to the Companys Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 16, 2007, and incorporated herein by reference.                                                        
|               | 
|3.3            |  | Certificate of Amendment of Restated Certificate of Incorporation  filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 26, 2007, and incorporated herein by reference.                                                         
|               | 
|3.4            |  | Certificate of Amendment of Restated Certificate of Incorporation  filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31,
2008, filed with the Securities and Exchange Commission on March 16, 2009, and incorporated herein by reference.                   
|               | 
|3.5            |  | Certificate of Amendment of Restated Certificate of Incorporation  filed as an exhibit to the Companys Current Report on Form 8-K, filed with Securities and Exchange
Commission on September 9, 2009, and incorporated herein by reference.                                                         
|               | 
|3.6            |  | Amended and Restated Bylaws  filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 000-29173), filed
with the Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.                                   
|               | 
|3.7            |  | Amendment to Bylaws of Verenium Corporation  filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on
March 27, 2007, and incorporated herein by reference.                                                                              
|               | 
|4.1            |  | Form of Common Stock Certificate of the Company  filed as an exhibit to the Companys Registration Statement on Form S-1 (No. 333-92853) filed with the Securities and
Exchange Commission on January 20, 2000, as amended, and incorporated herein by reference.                                     



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|               |  |                                                                                                                                                                                                                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                
|               | 
|*10.1          |  | Amendment to Employment Agreement, effective March 31, 2011 by and between the Company and James E. Levine  filed as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission on March 7, 2011, and incorporated herein by reference.   
|               | 
|*10.2          |  | Amendment to Employment Agreement, effective March 31, 2011 by and between the Company and Jeffrey G. Black  filed as an exhibit to the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission on March 7, 2011, and incorporated herein by reference. .
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended  filed
herewith.                                                                                                                                                            
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended  filed
herewith.                                                                                                                                                            
|               | 
|32.1           |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 filed herewith.                                                                                                                                       



|* | Indicates management or compensatory plan or arrangement.
|- | ---------------------------------------------------------



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SIGNATURES

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



|                   |  |  |  |                                                  
|------------------ |  |  |  | -------------------------------------------------
|                   |  |  |  | VERENIUM CORPORATION                             
|                   |  | 
|Date: May 12, 2011 |  |  |  | /S/ JEFFREY G. BLACK                             
|                   |  |  |  | Jeffrey G. Black                                 
|                   |  |  |  | Senior Vice President and Chief Financial Officer
|                   |  |  |  | (Principal Financial Officer)                    



48