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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, 2010

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.)



|                                         |  |           
|---------------------------------------- |  | ----------
|55 Cambridge Parkway, Cambridge, MA      |  | 02142     
|(Address of principal executive offices) |  | (Zip Code)

(617) 674-5300

(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  x |  | Non-accelerated filer   ̈                   |  | Smaller reporting company |  ̈
|                           |  |                      |  | (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 7, 2010 was 12,277,884.









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VERENIUM CORPORATION

INDEX



|                               |  |                                                                                       |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --------
|                               |  |                                                                                       |  | Page No.
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements                                           |  |         
|                               |  | 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 |  | 27      
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 43      
|Item 4.                        |  | Controls and Procedures                                                               |  | 43      
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 43      
|Item 1A.                       |  | Risk Factors                                                                          |  | 46      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 70      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 70      
|Item 4.                        |  | (Removed and Reserved)                                                                |  | 71      
|Item 5.                        |  | Other Information                                                                     |  | 71      
|Item 6.                        |  | Exhibits                                                                              |  | 71      
|                               | 
|SIGNATURES                     |  | 73                                                                                   



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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 31,2010 |          |   | December 31,2009 |  
|                                                                                                                                                                                          |  | (Unaudited)   |          |   |                  |  
|ASSETS                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                 |  | $             | 15,505   |   |                  | $ | 32,055   |  
|Accounts receivable, net of allowance for doubtful accounts of $284 at March 31, 2010 and December 31,
2009                                                                               |  |               | 7,668    |   |                  |   | 7,209    |  
|Inventories, net                                                                                                                                                                          |  |               | 3,621    |   |                  |   | 2,653    |  
|Prepaid expenses and other current assets                                                                                                                                                 |  |               | 4,032    |   |                  |   | 4,657    |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                      |  |               | 30,826   |   |                  |   | 46,574   |  
|Property, plant and equipment, net                                                                                                                                                        |  |               | 105,988  |   |                  |   | 108,399  |  
|Restricted cash                                                                                                                                                                           |  |               | 10,400   |   |                  |   | 10,400   |  
|Debt issuance costs and other assets                                                                                                                                                      |  |               | 2,212    |   |                  |   | 2,549    |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                              |  | $             | 149,426  |   |                  | $ | 167,922  |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                          |  | $             | 8,230    |   |                  | $ | 10,695   |  
|Accrued expenses                                                                                                                                                                          |  |               | 14,139   |   |                  |   | 12,272   |  
|Deferred revenue                                                                                                                                                                          |  |               | 2,599    |   |                  |   | 2,199    |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                 |  |               | 24,968   |   |                  |   | 25,166   |  
|5.5% Convertible Senior Notes (2007 Notes), at face value                                                                                                                               |  |               | 69,033   |   |                  |   | 69,033   |  
|8% Senior Convertible Notes (2008 Notes), at carrying value (face value of $13,001 and $15,201 at March 31, 2010
and December 31, 2009)                                                 |  |               | 9,655    |   |                  |   | 10,906   |  
|9% Convertible Senior Secured Notes (2009 Notes), at carrying value (face value of $13,707 at March 31, 2010 and
December 31, 2009)                                                     |  |               | 25,413   |   |                  |   | 25,817   |  
|Derivative liabilitywarrants                                                                                                                                                             |  |               | 835      |   |                  |   | 692      |  
|Restructuring reserve, less current portion                                                                                                                                               |  |               | 4,599    |   |                  |   | 4,694    |  
|Other long term liabilities                                                                                                                                                               |  |               | 1,399    |   |                  |   | 1,412    |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                         |  |               | 135,902  |   |                  |   | 137,720  |  
|Stockholders deficit:                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Preferred stock$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at March 31, 2010 and
December 31, 2009                                                       |  |               |         |   |                  |   |         |  
|Common stock$0.001 par value; 245,000 shares authorized at March 31, 2010 and December 31, 2009, 12,098 and
11,821 shares issued and outstanding at March 31, 2010 and December 31, 2009 |  |               | 12       |   |                  |   | 12       |  
|Additional paid-in capital                                                                                                                                                                |  |               | 606,417  |   |                  |   | 604,571  |  
|Accumulated deficit                                                                                                                                                                       |  |               | (637,905 | ) |                  |   | (630,032 | )
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total Verenium Corporation stockholders deficit                                                                                                                                          |  |               | (31,476  | ) |                  |   | (25,449  | )
|Noncontrolling interests in consolidated entities                                                                                                                                         |  |               | 45,000   |   |                  |   | 55,651   |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                |  |               | 13,524   |   |                  |   | 30,202   |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  
|Total liabilities, noncontrolling interest and stockholders equity                                                                                                                       |  | $             | 149,426  |   |                  | $ | 167,922  |  
|                                                                                                                                                                                          |  |               |          |   |                  |   |          |  

Note: The condensed consolidated balance sheet data at December 31, 2009 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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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                           |  |                             |         |   |      |   |         |  
|-------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                           |  | Three Months EndedMarch 31, |        
|                                                                           |  | 2010                        |         |   | 2009 |  
|Revenues                                                                   |  |                             |         |   |      |   |         |  
|Product                                                                    |  | $                           | 11,562  |   |      | $ | 10,569  |  
|Grant                                                                      |  |                             | 738     |   |      |   | 2,558   |  
|Collaborative                                                              |  |                             | 731     |   |      |   | 1,264   |  
|                                                                           |  |                             |         |   |      |   |         |  
|Total revenues                                                             |  |                             | 13,031  |   |      |   | 14,391  |  
|                                                                           |  |                             |         |   |      |   |         |  
|Operating expenses:                                                        |  |                             |         |   |      |   |         |  
|Cost of product revenues                                                   |  |                             | 6,516   |   |      |   | 5,755   |  
|Research and development                                                   |  |                             | 16,999  |   |      |   | 17,815  |  
|Selling, general and administrative                                        |  |                             | 7,698   |   |      |   | 9,172   |  
|                                                                           |  |                             |         |   |      |   |         |  
|Total operating expenses                                                   |  |                             | 31,213  |   |      |   | 32,742  |  
|                                                                           |  |                             |         |   |      |   |         |  
|Loss from operations                                                       |  |                             | (18,182 | ) |      |   | (18,351 | )
|Interest and other expense, net                                            |  |                             | (1,980  | ) |      |   | (3,114  | )
|Gain on debt extinguishment                                                |  |                             | 598     |   |      |   | 3,609   |  
|Gain on net change in fair value of derivative assets and liabilities      |  |                             | 68      |   |      |   | 13,309  |  
|                                                                           |  |                             |         |   |      |   |         |  
|Net loss                                                                   |  |                             | (19,496 | ) |      |   | (4,547  | )
|Less: Loss attributed to noncontrolling interests in consolidated entities |  |                             | 7,500   |   |      |   | 7,870   |  
|                                                                           |  |                             |         |   |      |   |         |  
|Net (loss) income attributed to Verenium Corporation                       |  | $                           | (11,996 | ) |      | $ | 3,323   |  
|                                                                           |  |                             |         |   |      |   |         |  
|Basic and diluted net (loss) income per share                              |  | $                           | (0.99   | ) |      | $ | 0.57    |  
|                                                                           |  |                             |         |   |      |   |         |  
|Weighted average shares used in computing:                                 |  |                             |         |   |      |   |         |  
|Basic net (loss) income per share                                          |  |                             | 12,057  |   |      |   | 5,857   |  
|                                                                           |  |                             |         |   |      |   |         |  
|Diluted net (loss) income per share                                        |  |                             | 12,057  |   |      |   | 5,866   |  
|                                                                           |  |                             |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                       |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                       |  | Three Months EndedMarch 31, |        
|                                                                                                       |  | 2010                        |         |   | 2009 |  
|Net (loss) income attributed to Verenium Corporation                                                   |  | $                           | (11,996 | ) |      | $ | 3,323   |  
|Adjustments to reconcile net (loss) income to net cash used in operating activities:                   |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                          |  |                             | 3,500   |   |      |   | 2,589   |  
|Share-based compensation                                                                               |  |                             | 468     |   |      |   | 2,547   |  
|Gain on extinguishment of debt                                                                         |  |                             | (598    | ) |      |   | (3,609  | )
|Gain on net change in fair value of derivative assets and liabilities                                  |  |                             | (68     | ) |      |   | (13,309 | )
|Loss attributed to noncontrolling interest in consolidated entities                                    |  |                             | (7,500  | ) |      |   | (7,870  | )
|Accretion convertible senior notes of debt discount                                                    |  |                             | 292     |   |      |   | 1,285   |  
|Non-cash revisions to restructuring reserve                                                            |  |                             | 134     |   |      |   | 90      |  
|Changes in operating assets and liabilities:                                                           |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                                    |  |                             | (1,035  | ) |      |   | 576     |  
|Inventory                                                                                              |  |                             | (968    | ) |      |   | (2,885  | )
|Other assets                                                                                           |  |                             | 328     |   |      |   | 253     |  
|Accounts payable and accrued expenses                                                                  |  |                             | 1,538   |   |      |   | 1,497   |  
|Restructuring reserve                                                                                  |  |                             | (225    | ) |      |   | (258    | )
|Deferred revenue                                                                                       |  |                             | 400     |   |      |   | 82      |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                                                  |  |                             | (15,730 | ) |      |   | (15,689 | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Investing activities:                                                                                  |  |                             |         |   |      |   |         |  
|Purchases of property, plant and equipment, net                                                        |  |                             | (1,098  | ) |      |   | (1,794  | )
|Reduction of cash due to deconsolidation of Vercipia Biofuels upon adoption of new accounting standard |  |                             | (7,211  | ) |      |   |        |  
|Restricted cash                                                                                        |  |                             |        |   |      |   | (360    | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                                  |  |                             | (8,309  | ) |      |   | (2,154  | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Financing activities:                                                                                  |  |                             |         |   |      |   |         |  
|Make-whole payments on conversion of 2008 Notes                                                      |  |                             |        |   |      |   | (122    | )
|Principal payments on debt obligations                                                                 |  |                             | (18     | ) |      |   | (396    | )
|Proceeds from sale of common stock                                                                     |  |                             | 7       |   |      |   | 265     |  
|Distributions from Galaxy Biofuels LLC                                                                 |  |                             | 7,500   |   |      |   | 26,500  |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                              |  |                             | 7,489   |   |      |   | 26,247  |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                   |  |                             | (16,550 | ) |      |   | 8,404   |  
|Cash and cash equivalents at beginning of period                                                       |  |                             | 32,055  |   |      |   | 7,458   |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                             |  | $                           | 15,505  |   |      | $ | 15,862  |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                                      |  |                             |         |   |      |   |         |  
|Interest paid                                                                                          |  | $                           | 91      |   |      | $ | 10      |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Conversion of convertible senior notes into common stock                                               |  | $                           | 2,200   |   |      | $ | 11,050  |  
|                                                                                                       |  |                             |         |   |      |   |         |  

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 operates in two
business segments, biofuels and specialty enzymes. Its biofuels business segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from
cellulosic biomass. Its specialty enzymes business segment develops customized enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and
improved environmental outcomes.

Recent Developments

Extension of BP Collaboration

As more fully described in Note 3, on April 1, 2010, the Company announced a third extension to August 1, 2010 of its
initial 18-month joint development program established in August 2008 with partner BP Biofuels North America LLC, or BP, which was scheduled to expire on April 1, 2010. The Company and BP also entered into a related agreement regarding
funding by BP, through a loan to Galaxy Biofuels LLC (Galaxy), a special purpose entity equally owned by Verenium Biofuels and BP, of costs for certain work to be agreed upon by both parties which will be conducted by the Company at its
demonstration-scale facility in Jennings, Louisiana.

U.S. Department of Energy (DOE) Grant

In April 2010, the Company was awarded, and collected, an additional $4.9 million from the DOE to fund ongoing activities at its
demonstration-scale facility in Jennings, Louisiana. This cooperative agreement is an extension of the grant previously awarded to the Company in July of 2008 under a DOE program supporting the development of demonstration-scale cellulosic ethanol
biorefinery plants.

Basis of Presentation and Going Concern

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 financial statements and
footnotes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on March 16, 2010.

The Company has incurred a net loss of $12.0 million for the three months ended March 31, 2010 and has an accumulated deficit of
$637.9 million as of March 31, 2010. Based on the Companys current operating plan, its existing working capital will not be sufficient to meet the cash requirements to fund the Companys planned operating expenses, capital
expenditures, required and potential payments under the 2007 Notes, the 2008 Notes, and the 2009 Notes, and working capital requirements through December 31, 2010 without additional sources of cash and/or the deferral, reduction or elimination
of significant planned expenditures.

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

The Company plans to address the expected shortfall of working
capital by generating additional financing through a combination of corporate partnerships and collaborations, federal, state and local grant funding, selling and financing of assets, incremental product sales, and if necessary and available, the
sale of debt or equity securities. If the Company is unsuccessful in raising additional capital from any of these sources, it will defer, reduce, or eliminate certain planned expenditures. The Company will continue to consider other financing
alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

If the Company cannot obtain sufficient additional financing in the short-term, it may be forced to restructure or significantly curtail
its operations, file for bankruptcy or cease operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be forced to take any such actions.



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Basis of Consolidation

The condensed consolidated financial statements prior to January 1, 2010 include the accounts of the Company and its wholly-owned
subsidiaries, including Verenium Biofuels Corporation, as well as its jointly owned subsidiaries Galaxy and Highlands Ethanol, LLC (dba Vercipia Biofuels) (Vercipia), both which were determined to be variable interest entities of which
the Company was the primary beneficiary as defined by authoritative guidance. Effective as of January 1, 2010, as a result of adopting new authoritative accounting guidance for identifying which enterprise has the power to direct activities of
a variable interest entity, the Company concluded it is no longer the primary beneficiary of Vercipia. The Companys investment in Vercipia is therefore accounted for under the equity method beginning in fiscal year 2010. Prior to the adoption
of the new authoritative accounting guidance, the Company was the primary beneficiary of Vercipia and consolidated Vercipias financial results. The Company has not reclassified amounts in the prior period financial statements to conform to the
current period presentation. All intercompany accounts have been eliminated in consolidation.

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

Equity Method of Accounting

On January 1, 2010, the Company adopted new authoritative accounting guidance, which replaced the quantitative-based calculation for
determining which enterprise, if any, has a controlling financial interest in a variable interest entity. The new approach focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most
significantly impacts the variable interest entitys economic performance and (1) the obligation to absorb losses of the variable interest entity or (2) the right to receive benefits from the variable interest entity. As a result
of adopting this new authoritative accounting guidance, the Company was required to change its method of accounting for its variable interest in Vercipia. Since the Company and BP share the ability to impact Vercipias economic
performance, the Company is no longer the primary beneficiary of Vercipia. The Company adopted the new authoritative accounting guidance on a prospective basis therefore beginning in the first quarter of 2010, the Company deconsolidated
Vercipia from the Companys condensed consolidated financial statements and began to account for the Companys ownership interest in Vercipia using the equity method of accounting. As a result, the Company no longer includes
Vercipias revenue and operating expenses in its operating results. Under the equity method of accounting, the Company is required to reflect its initial investment in Vercipia on its balance sheet, decreased by its share of
Vercipias net losses. Upon adoption of the equity method of accounting on January 1, 2010 and through March 31, 2010, the Companys share of net losses exceeded its initial investment in Vercipia, in which case the Company was required to
suspend its share of such losses. As such, the Companys condensed consolidated financial statements do not include its share of Vercipias operating results for the quarter ended March 31, 2010. The Company has not reclassified amounts in
the prior period financial statements to conform to the current period presentation. See Note 3 for additional information.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

Derivative Financial Instruments

The Companys 2008 Notes and 2009 Notes (see Note 2) 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 Measurements

Effective January 1, 2009, the Company adopted authoritative guidance for fair value measurements and the fair value option for
financial assets and financial liabilities. The Company did not record an adjustment to accumulated deficit as a result of the adoption of the guidance for fair value measurements, and the adoption did not have a material effect on the
Companys results of



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operations. The guidance for the fair value option for financial assets and financial liabilities provides companies the irrevocable option to measure many financial assets and liabilities at
fair value with changes in fair value recognized in earnings. The Company has not elected to measure any financial assets or liabilities at fair value that were not previously required to be measured at fair value.

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 guidance also 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, 2010 and December 31, 2009 (in thousands):



|                                                            |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       
|----------------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ------ | ----- | - | - |  | - | ----- |  | - | ------
|                                                            |  | March 31, 2010 |        | December 31, 2009
|                                                            |  | Level 1        |        | Level 2           |   | Level 3 |  | Total |       | Level 1 |   | Level 2 |  | Level 3 |        | Total
|Assets:                                                     |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       
|Cash equivalents (1)                                        |  | $              | 15,505 |                   | $ |        |  | $     |      |         | $ | 15,505  |  | $       | 32,055 |       | $ |  |  | $ |      |  | $ | 32,055
|                                                            |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       
|Liabilities:                                                |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       
|Derivative  warrants (2)                                   |  |                |       |                   |   |        |  |       | 917   |         |   | 917     |  |         |       |       |   |  |  |   | 762   |  |   | 762   
|Derivative  2008 Notes compound embedded derivative (3)(5) |  |                |       |                   |   |        |  |       | 1,371 |         |   | 1,371   |  |         |       |       |   |  |  |   | 1,682 |  |   | 1,682 
|Derivative  2009 Notes Compound Embedded Derivative (4)(5) |  |                |       |                   |   |        |  |       | 1,996 |         |   | 1,996   |  |         |       |       |   |  |  |   | 2,298 |  |   | 2,298 
|                                                            |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       
|                                                            |  | $              |       |                   | $ |        |  | $     | 4,284 |         | $ | 4,284   |  | $       |       |       | $ |  |  | $ | 4,742 |  | $ | 4,742 
|                                                            |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |        |       |   |   |  |   |       |  |   |       



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



|(2) | Represents warrants issued in conjunction with the Companys 2008 Notes in February 2008 (see Note 2) and the Companys public offering in October
2009. The warrants issued in conjunction with the 2008 Notes have a value of $82,000 and $70,000 at March 31, 2010 and December 31, 2009 and classified in long-term liabilities as part of the 2008 Notes carrying value at March 31,
2010 and December 31, 2009, using significant unobservable inputs (Level 3). The warrants issued in conjunction with the Companys public offering have a value of $835,000 and $692,000 and are classified as a long-term liability at
March 31, 2010 and December 31, 2009, using significant unobservable inputs (Level 3).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Represents the compound embedded derivative included in the Companys 2008 Notes (see Note 2). The compound embedded derivative includes, among other
rights, the noteholders right to receive make-whole amounts. The make-whole provision provides that, upon any noteholders conversion of the 2008 Notes into common stock, the Company is obligated to pay such holder
an amount in cash or, subject to certain limitations, shares of common stock equal in value to the interest foregone over the life of the 2008 Notes as a result of such conversion, discounted back to the date of conversion using the published yield
on two-year U.S. Treasury notes as the discount rate, and, if applicable, valuing the shares of stock at a 5% discount to the applicable stock price at the time of conversion. The compound embedded derivative is included in long term liabilities as
part of the 2008 Notes carrying value at March 31, 2010 and December 31, 2009 on the accompanying Condensed Consolidated Balance Sheet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the compound embedded derivative included in the Companys 2009 Notes (see Note 2). The compound embedded derivative includes,
among other rights, the noteholders right to receive make-whole amounts. The make-whole provision
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | provides that, upon any noteholders conversion of the 2009 Notes for common stock, the Company is obligated to pay such holder an amount in cash or, subject to certain limitations, shares
of common stock 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, and, if applicable, valuing the shares of stock at the greater of $9.60 or the applicable stock price at the time of conversion. 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, 2010 and December 31, 2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | 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 2008 Notes and 2009 Notes (collectively, the Notes).
Because the maximizing condition reflects the expected present value of the Notes as a whole and not the make-whole amount, the fair value of the make-whole provisions do not reflect the maximum potential obligation due under
such provisions. As such, the potential make-whole obligation was $2.3 million under the 2008 Notes and $2.7 million under the 2009 Notes, assuming all of the outstanding Notes as of March 31, 2010 converted at that time.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table presents a reconciliation of the assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2010 to March 31, 2010 (in thousands):



|                                                  |  |                               |     |                                                            |   |       |                                                            |  |   |       |  
|------------------------------------------------- |  | ----------------------------- | --- | ---------------------------------------------------------- | - | ----- | ---------------------------------------------------------- |  | - | ----- | -
|                                                  |  | DerivativeLiability Warrants |     | DerivativeLiability 2008
NotesCompound EmbeddedDerivative |   |       | DerivativeLiability
2009 NotesCompound EmbeddedDerivative | 
|Balance at January 1, 2010                        |  | $                             | 762 |                                                            | $ | 1,682 |                                                            |  | $ | 2,298 |  
|Adjustment to fair value included in earnings (1) |  |                               | 155 |                                                            |   | 79    |                                                            |  |   | (302  | )
|Other adjustments (2)                             |  |                               |    |                                                            |   | (390  | )                                                          |  |   |      |  
|                                                  |  |                               |     |                                                            |   |       |                                                            |  |   |       |  
|Balance at March 31, 2010                         |  | $                             | 917 |                                                            | $ | 1,371 |                                                            |  | $ | 1,996 |  
|                                                  |  |                               |     |                                                            |   |       |                                                            |  |   |       |  



|(1) | The derivatives are revalued at the end of each reporting period and the resulting difference is included in the results of operations. The fair value of the 2008
Notes compound embedded derivative, detachable warrants and 2009 Notes compound embedded derivative are primarily affected by the Companys stock price, but are also affected by the Companys stock price volatility, expected life, interest
rates and the passage of time as it relates to the make-whole amount. For the three months ended March 31, 2010, the net adjustment to fair value resulted in a gain of $0.1 million and is included in gain on net change in fair
value of derivative assets and liabilities on the accompanying Condensed Consolidated Statement of Operations (see Note 2).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents decrease in derivative liability because of make-whole payments related to the conversion of $2.2 million in face value of the 2008 Notes (see
Note 2).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2010, the Company had $2.6 million in deferred revenue, of which $1.6 million was related to funding from collaborative partners and $1.0 million was 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 during the quarter in which such revenue is
earned, generally upon shipment by Danisco of product 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. 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.

Grant Revenue

The Company recognizes revenue from grants as related costs are incurred, as long as such costs are within the funding limits specified by
the underlying grant agreements.



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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 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.

Revenue Arrangements with Multiple Deliverables

The Company sometimes enters into revenue arrangements that contain multiple deliverables. In these cases, the Company recognizes revenue
from each element of the arrangement as long as separate value for each element can be determined, the Company has completed its obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

Computation of Net (Loss) Income per Share

Basic and diluted net (loss) income per share has been computed using the weighted-average number of shares of common stock outstanding
during the period. The Company had approximately 5,700 and 17,000 unvested restricted shares outstanding as of March 31, 2010 and 2009. For purposes of the computation of net (loss) income per share, the unvested restricted shares are
considered contingently returnable shares and are not considered outstanding common shares for purposes of computing net 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 (loss) income per share.

Diluted net (loss) income per share is based upon the weighted average number of common and common equivalent shares outstanding during
the period. Common equivalent shares related to stock options, restricted stock and warrants are calculated using the treasury stock method. Common stock equivalents from stock options, restricted stock and warrants of approximately 2.7 million
were excluded from the calculation of net income per share for the three months ended March 31, 2009, because the effect would be anti-dilutive. In addition, common stock equivalents from shares underlying the Companys convertible senior
notes of 3.5 million were excluded from the net income per share for the three months ended March 31, 2009 because the effect would be antidilutive.

Computation for net (loss) income per share for the three months ended March 31, 2010 and 2009 was as follows (in thousands):



|                                                     |  |      |         |   |      |   |      
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | -----
|                                                     |  | 2010 |         |   | 2009
|Numerator                                            |  |      |         |   |      |   |      
|Net (loss) income                                    |  | $    | (11,996 | ) |      | $ | 3,323
|                                                     |  |     
|Denominator                                          |  |      |         |   |      |   |      
|Basic weighted average common shares outstanding     |  |      | 12,057  |   |      |   | 5,857
|Dilutive effect of stock options                     |  |      |        |   |      |   | 9    
|                                                     |  |      |         |   |      |   |      
|Diluted weighted average common shares outstanding   |  |      | 12,057  |   |      |   | 5,866
|                                                     |  |      |         |   |      |   |      
|Basic and diluted net (loss) income per common share |  | $    | (0.99   | ) |      | $ | 0.57 
|                                                     |  |      |         |   |      |   |      

2. Convertible Debt

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



|                             |  |                |        |                   |   |        |            |  |            |        |            |   |        |            |   |        |   |  |   |       
|---------------------------- |  | -------------- | ------ | ----------------- | - | ------ | ---------- |  | ---------- | ------ | ---------- | - | ------ | ---------- | - | ------ | - |  | - | ------
|                             |  | March 31, 2010 |        | December 31, 2009
|                             |  | 2009 Notes     |        | 2008 Notes        |   |        | 2007 Notes |  | 2009 Notes |        | 2008 Notes |   |        | 2007 Notes
|Principal value              |  | $              | 13,707 |                   | $ | 13,001 |            |  | $          | 69,033 |            | $ | 13,707 |            | $ | 15,201 |   |  | $ | 69,033
|Debt premium (discount), net |  |                | 9,710  |                   |   | (4,799 | )          |  |            |       |            |   | 9,812  |            |   | (6,047 | ) |  |   |      
|Derivative liabilities (1)   |  |                | 1,996  |                   |   | 1,453  |            |  |            |       |            |   | 2,298  |            |   | 1,752  |   |  |   |      
|                             |  |                |        |                   |   |        |            |  |            |        |            |   |        |            |   |        |   |  |   |       



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|                     |  |                |        |                   |   |            |  |            |        |            |   |            |  |   |        |  |   |       
|-------------------- |  | -------------- | ------ | ----------------- | - | ---------- |  | ---------- | ------ | ---------- | - | ---------- |  | - | ------ |  | - | ------
|                     |  | March 31, 2010 |        | December 31, 2009
|                     |  | 2009 Notes     |        | 2008 Notes        |   | 2007 Notes |  | 2009 Notes |        | 2008 Notes |   | 2007 Notes
|                     |  |                |        |                   |   |            |  |            |        |            |   |            |  |   |        |  |   |       
|Total Carrying value |  | $              | 25,413 |                   | $ | 9,655      |  | $          | 69,033 |            | $ | 25,817     |  | $ | 10,906 |  | $ | 69,033
|                     |  |                |        |                   |   |            |  |            |        |            |   |            |  |   |        |  |   |       



|(1) | Represents the 2008 Notes detachable warrants and compound embedded derivative and the 2009 Notes compound embedded derivative. The Company has the intent
and the ability to settle the warrants, 2008 Notes conversion rights and 2008 Notes and 2009 Notes make-whole provisions in shares of common stock as of March 31, 2010. As such, the asserted derivative liability
was included in the 2008 Notes carrying value on its consolidated financial statements at March 31, 2010 and December 31, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 face value of the 2007 Notes were exchanged in February 2008 and September 2009, respectively, for
new debt pursuant to the Companys issuance of its 2008 Notes and 2009 Notes. As of March 31, 2010, the Company had $69 million in face value 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 assuming conversion of the entire $69 million in 2007 Notes is 0.9 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 a 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 other long-term
assets on the accompanying Condensed 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.

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. As of March 31, 2010, the outstanding principal balance on the 2008 Notes was $13.0 million.

On July 1, 2009, the Company entered into amendment agreements with the Required Holders (as defined below) of its 2008 Notes to
modify certain terms of all of the 2008 Notes. The amendments became effective on July 6, 2009. Pursuant to their original terms, the 2008 Notes may be amended and restated with the written consent of the holders representing at least 66.67% of
the 2008 Notes outstanding (the Required Holders). As of July 1, 2009, there was approximately $29.5 million aggregate principal amount of the 2008 Notes outstanding. The Company entered into the amendment agreements with holders of
approximately $25.6 million, or 86.8%, of the 2008 Notes.

In connection with the amendment, the conversion price for the 2008
Notes was reduced from $25.56 to $20.88 and the anti-dilution protection included in the 2008 Notes was changed from full ratchet anti-dilution protection to, in most cases, a version of broad-based weighted average anti-dilution protection, subject
to certain limitations. The 2008 Notes are subject to automatic conversion at the Companys option if the Companys closing stock price exceeds $41.76 (formerly $98.16 prior to the amendment) per share over a 30-trading day period ending
prior to the date the Company provides notice of the automatic conversion to investors, the average daily trading volume of the Companys stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are met.



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As more fully discussed in Note 9, one former holder of 2008 Notes that currently no
longer holds any principal amount is a party to a pending lawsuit against the Company, whereby that party also seeks declaratory judgment that its 2008 Notes may not be amended by the Required Holders without that partys consent. This party
has not signed the amendment agreement as of May 7, 2010.

The 2008 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 2008 Notes is subject to certain carve-outs, including without limitation, cash and cash equivalents and intellectual property.

Periodic interest payments on the 2008 Notes are approximately $0.3 million every three months, assuming an outstanding balance of $13
million, payable on January 1, April 1, July 1 and October 1 of each year. Subject to the satisfaction of certain conditions, the Company may pay interest amounts with shares of common stock at a 5% discount to the
applicable stock price at the time of the interest payment.

The 2008 Notes contain several embedded features, which are
required to be bifurcated and accounted separately as derivative liabilities in accordance with authoritative guidance. These embedded features are described in two categories: 1) detachable warrants; and 2) a compound embedded derivative, as set
forth below.

Detachable Warrants. In connection with the 2008 Notes, the Company issued warrants to purchase up to
approximately 0.7 million shares of the Companys common stock. The warrants are exercisable at an initial exercise price of $53.28 per share. The exercise price and the number of shares of the Companys common stock issuable upon
exercise of the warrants are subject to weighted average anti-dilution protection. As a result of anti-dilution provisions triggered by the 2009 Notes exchange in September 2009 and public offering of common stock and warrants in October 2009, the
number of shares issuable upon exercise of the warrants increased to approximately 1.0 million shares of the Companys common stock and the exercise price decreased to $36.62.

Compound embedded derivative. The compound embedded derivative includes certain features of the 2008 Notes, with its major
components consisting of: 1) the base conversion rights, including a version of broad-based weighted average anti-dilution provisions, subject to certain limitations; 2) rights upon an event of default or change in control; and, 3) the
make-whole provision.

Broad-based weighted average anti-dilution protection, subject to certain limitation.
In the event that the Company subsequently issues options (excluding options issued under a stock plan approved by the Board of Directors) or convertible securities or other equity or equity-linked securities at a price per share which is below the
current conversion price of the 2008 Notes, the holders of the 2008 Notes will be entitled to anti-dilution protection, such that the conversion price will reset to a price per share equal to the product of the conversion price in effect and the
weighted average impact of the issuance. As a result of the public offering of common stock and warrants in October 2009, the conversion price of the 2008 Notes decreased to $17.89.

Rights upon an event of default or change in control. If the Company were to trigger an event of default, as defined, holders of
the 2008 Notes may require the Company to redeem all or portion of the 2008 Notes at a premium to their face value. In the event of a change of control, as defined, the conversion rate may be subject to adjustment, or the holders may require the
Company to redeem all or a portion of the 2008 Notes at a premium to their face value.

Make-whole
provision. The 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, the Company is obligated to pay such holder an amount equal to the interest foregone over
the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that the Company may, subject to the satisfaction
of certain conditions, pay interest or make-whole amounts with shares of its common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion.

In addition, concurrent with the issuance of the 2008 Notes, the Company entered into a convertible hedge transaction with a
counterparty, which is intended to reduce the potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two separate call options. Under the first call option, on April 1, 2012 (or earlier upon
conversion of the 2008 Notes), the Company is entitled to purchase approximately 1.1 million shares of the Companys common stock from the counterparty at a price per share equal to the initial conversion price of $49.08 (or a proportion
of such number of shares based on the proportion of the 2008 Notes being converted). Under the second call option, on three exercise dates staggered in six-month intervals beginning on October 1, 2013, the counterparty is entitled to purchase
an aggregate of approximately 1.1 million shares of the Companys common stock at a price per share of $61.92. The cash cost of the convertible hedge transaction was approximately $6.2 million. The convertible hedge transaction has been
separately valued and accounted for as a derivative under authoritative guidance.



13



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##### Table of Contents

Valuation of Debt Liability and Embedded Features of the 2008 Notes

2008 Notes Debt Liability and Equity Component

The Company separately accounted for the debt and equity components of the 2008 Notes in a manner that reflects the Companys
nonconvertible debt (unsecured debt) borrowing rate. The authoritative guidance requires that the carrying amount of the liability component be estimated by measuring the fair value of a similar liability that does not have an associated conversion
feature. As a result, the Company determined that its effective interest rate was 32.6% and, in the absence of comparable market data, determined that, given the features of the 2008 Notes, this derived effective interest rate was a fair
approximation of a market rate of interest for a similar instrument. As a result, the 32.6% rate was applied to the 2008 Notes and coupon interest to calculate the fair value of the liability component. The difference between the cash proceeds
associated with the convertible debt and the estimated fair value of the liability component was recorded as an equity component.

2008 Notes Detachable Warrants

At inception, the fair value of the detachable warrants of $4.7 million 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 2008 Notes, and as unamortized discount, which is being accreted over the term of the 2008 Notes using the effective interest method.

The Company has the intent and the ability as of March 31, 2010 and December 31, 2009 to settle the warrants in shares of
common stock. As such, the asserted derivative liability is included in the 2008 Notes carrying value on its Condensed Consolidated Balance Sheet at March 31, 2010 and December 31, 2009. The 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 warrants was determined using the Black-Scholes Merton
methodology.

2008 Notes Compound Embedded Derivative

At inception, the fair value of the compound embedded derivative included in the 2008 Notes of $31.1 million 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 2008 Notes, and as unamortized discount, which is being accreted over the term of the 2008 Notes using the effective
interest method.

At inception, the derivative liability arising from the compound embedded derivative could require cash
settlement within one year of any balance sheet date under certain conditions outside of the Companys control, including, but not limited to, payments in connection with a conversion at the option of the noteholder. Furthermore, the amount of
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 initially recorded a derivative liability related to the
holders rights to a make-whole payment upon conversion, the portion of the embedded conversion rights that may be settled in cash due to the certain NASDAQ limits, and a derivative liability related to certain other rights. The
Company recorded this compound embedded derivative liability as a component of the current portion of convertible debt on its Condensed Consolidated Balance Sheets. On June 4, 2008, in connection with shareholder approval of issuance of shares
in excess of certain NASDAQ limits that required shareholder approval before shares in excess of such limits could be issued, $14.7 million of the compound embedded derivative value was reclassified into stockholders equity.

However, on January 1, 2009, upon adoption of new authoritative guidance, the entire conversion rights were required to be accounted
for as a derivative liability. As a result, the fair value of the conversion rights on January 1, 2009 of $13.1 million was reclassified from stockholders equity into current liabilities. As a result of the amendment of the 2008 Notes,
the Company has the intent and the ability as of March 31, 2010 and December 31, 2009 to settle the warrants, 2008 conversion rights and make-whole provisions in shares of common stock. As such, the asserted derivative
liability is included in the 2008 Notes carrying value on its Condensed Consolidated Balance Sheet at March 31, 2010 and December 31, 2009. The compound embedded derivative liability, consisting of the make-whole and the
conversion rights, will be 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.

The Companys lattice valuation model
assumes the noteholders exercise patterns will follow risk-neutral conversion behavior throughout the term of the instrument consistent with maximizing the expected present value of the 2008 Notes. Because the maximizing condition reflects the
expected present value of the 2008 Notes as a whole and not the make-whole amount, the fair value of the compound embedded derivative does not reflect the maximum potential obligation due under the make-whole provision. As
such, the potential make-whole obligation is $2.3 million if all of the 2008 Notes outstanding as of March 31, 2010 converted on that date.



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Valuation of Convertible Hedge Transaction

The Company recorded a derivative asset of $6.2 million, representing the net cash paid by the Company to the counterparty of the two
separate call options that comprise the convertible hedge transaction. The convertible hedge transaction does not qualify for equity classification under authoritative guidance, as there are potential circumstances where cash settlement may be
required. As such, the net fair value of the convertible hedge transaction has been reported as a noncurrent derivative asset on the Condensed Consolidated Balance Sheets and 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 Company has determined that the initial cash paid for each of the two separate call options that comprise the convertible hedge
transaction approximated fair value. The fair values of the two call options subsequent to the initial issuance date have been determined using the Black-Scholes Merton methodology and were determined to be zero as of March 31, 2010.

Impact of 2008 Notes Fair Value Remeasurements

The fair value of the compound embedded derivative, warrants, and the two separate call options that comprise the convertible hedge
transaction 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 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, detachable warrants and convertible hedge transaction are primarily affected by the
Companys stock price, but are also affected by the Companys stock price volatility, expected life, interest rates and the passage of time as it relates to the make-whole amount. The net change in fair value measurements
impacting all 2008 Notes derivative assets and liabilities resulted in a loss of $0.1 million for the three months ended March 31, 2010 and a gain of $13.3 million for the three months ended March 31, 2009.

Conversion of 2008 Notes

Since inception through March 31, 2010, holders of the 2008 Notes have 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.

During the three months ended March 31, 2010, the Company recorded a gain on conversion of $0.6 million, 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, the Company 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 that were converted and related make-whole payments.

No additional conversions have occurred in between April 1, 2010 and May 10, 2010.

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.

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
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 $13.7 million in 2009 Notes is 1.4 million shares, excluding common shares to be issued for potential make-whole payments.



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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.

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 $0.6 million every six months, assuming an outstanding balance of $13.7
million, payable on April 1 and October 1 of each year, with the first payment due April 1, 2010. 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.

In connection with the 2009 Notes offering, the Company paid $0.6 million in financing charges, which was
expensed to selling, general and administrative on the accompanying Condensed Consolidated Statement of Operations.

Valuation of Compound Embedded Derivative of the 2009 Notes

The compound embedded derivative includes the make-whole provision and the put features of the 2009 Notes. The
make-whole payment upon conversion is not indexed to the Companys stock, and therefore would not qualify as an equity instrument. 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. Based upon this, the Company recorded a derivative liability of $2.0 million equal to the fair value of the make-whole provision and put
features. 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 will be 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.

The Companys lattice valuation model assumes the noteholders exercise patterns will follow risk-neutral conversion behavior
throughout the term of the instrument consistent with maximizing the expected present value of the 2009 Notes. Because the maximizing condition reflects the expected present value of the 2009 Notes as a whole and not the make-whole
amount, the fair value of the make-whole derivative does not reflect the maximum potential obligation due under the make-whole provision. As such, the potential make-whole obligation would have been $2.7 million
if all of the outstanding 2009 Notes as of March 31, 2010 had converted on that date.

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.



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The fair value of the compound embedded derivative is primarily affected by the
Companys stock price, but is also affected by the Companys stock price volatility, expected life, interest rates and the passage of time as it relates to the make-whole amount. For the three months ended March 31, 2010,
the net change in fair value measurements impacting the 2009 Notes compound embedded derivative liability resulted in a gain of $0.3 million.

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 exchanged 2007 Notes 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, 2010 and 2009 (in
thousands):



|                                                    |  |      |       |   |      |   |      
|--------------------------------------------------- |  | ---- | ----- | - | ---- | - | -----
|                                                    |  | 2010 |       |   | 2009
|5.5% coupon interest, payable in cash               |  | $    | 949   |   |      | $ | 1,354
|Non-cash amortization of debt issuance costs        |  |      | 149   |   |      |   | 247  
|                                                    |  |      |       |   |      |   |      
|2007 Notes Total                                    |  |      | 1,098 |   |      |   | 1,601
|                                                    |  |      |       |   |      |   |      
|8% coupon interest, payable in cash or common stock |  |      | 258   |   |      |   | 1,102
|Non-cash accretion of debt discount(1)              |  |      | 394   |   |      |   | 1,285
|Non-cash amortization of debt issuance costs        |  |      | 19    |   |      |   | 109  
|                                                    |  |      |       |   |      |   |      
|2008 Notes Total                                    |  |      | 671   |   |      |   | 2,496
|                                                    |  |      |       |   |      |   |      
|9% coupon interest, payable in cash or common stock |  |      | 308   |   |      |   |     
|Non-cash amortization of debt premium(2)            |  |      | (102  | ) |      |   |     
|                                                    |  |      |       |   |      |   |      
|2009 Notes Total                                    |  |      | 206   |   |      |   |     
|                                                    |  |      |       |   |      |   |      



|(1) | The initial debt discount relates to the 2008 Notes compound embedded derivative, detachable warrants, and the equity component related to the conversion rights
not included in the compound embedded derivative at issuance. The unamortized value of the debt discount is included in the carrying value of the 2008 Notes on the accompanying Condensed Consolidated Balance Sheets and is being amortized into
interest expense over the term of the 2008 Notes, or approximately four years.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Variable Interest Entities

The Company has a strategic partnership with BP, a related party, which through March 31, 2010 has provided
approximately $110 million in funding. BP is committed to additional funding of $17.5 million through the third quarter 2010, subject to the Companys performance under its existing joint ventures, Galaxy and Vercipia. The Company has
determined that both Galaxy and Vercipia qualify as variable interest entities. As noted in Note 1, effective January 1, 2010, the Company adopted new authoritative accounting guidance which changes the consolidation guidance applicable
to variable interest entities. It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a variable interest entity (and therefore subject to consolidation) by requiring a qualitative analysis
rather than a quantitative analysis. The qualitative analysis includes, among other things, consideration of which variable interest holder has the power to direct the activities of the entity that most significantly impact the entitys
economic performance and who has the obligation to absorb losses or the right to receive benefits of the variable interest entity that could potentially be significant to the variable interest entity. This guidance also requires continuous
reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. As discussed below, as a result of the adoption in the first quarter 2010, the Company determined it was still the primary beneficiary of Galaxy and
would continue to consolidate Galaxy, but was no longer the primary beneficiary of Vercipia and thus was required to deconsolidate that entity as of January 1, 2010.



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Galaxy Biofuels LLC

Effective August 1, 2008, the Company entered into a Joint Development and License Agreement (JDA) with BP focused on the
development and commercialization of cellulosic ethanol technologies. As part of the transaction, Galaxy Biofuels LLC, a special purpose entity, was formed, equally owned by the Company and BP. Pursuant to the JDA, the Company granted to Galaxy a
worldwide, royalty-free license and sublicense to the Companys existing background technology related to the production of cellulosic ethanol, which will continue to be owned by the Company. Galaxy owns new intellectual property relating to
cellulosic ethanol production developed through the joint development program under the JDA and is responsible for administering the licensing of the technology package resulting from the joint development program. Future profits and losses related
to the licensing of these technologies will be shared equally by the Company and BP.

On March 31, 2010, the Company
entered into the third extension of the initial 18-month JDA term, originally scheduled to expire on January 31, 2010. Pursuant to the initial terms of the JDA, BP committed to pay the Company $45 million in non-refundable joint development
fees to co-fund the Companys various scientific and technical initiatives within the field. The Company will receive an additional $2.5 million from BP to co-fund various scientific and technical initiatives for each month through July 2010.
The joint development fees represented approximately 50% of the estimated costs of these initiatives.

The Company is
responsible for the performance of substantially all of the activities under the joint development program. If the Company is not successful in achieving the objectives of the joint development program, BP may terminate the joint development
program, and the Company would no longer be entitled to receive any payments from BP for the performance of the joint development program.

Upon the adoption of the new authoritative accounting guidance, the Company concluded it was still the primary beneficiary of Galaxy and
would continue to consolidate Galaxy in the Companys condensed consolidated financial statements. In reaching the conclusion to consolidate Galaxy, the Company conducted an extensive analysis of Galaxy underlying documents. The Company
determined the most significant activities affecting the economic performance of Galaxy are the achievement of the milestones under the joint development program and concluded the Company has the power to direct the activities under the joint
development program and is, therefore the primary beneficiary of Galaxy as of March 31, 2010.

As such, the transaction
fees and joint development fees are accounted for as follows:



| |  |  | The license to technology granted by the Company and ongoing joint development performed by the Company are accounted for as capital contributions to
Galaxy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction fees and joint development fees paid by BP are accounted for as capital contributions to Galaxy. All transaction fees are subsequently
distributed to the Company and treated as a reduction to the Companys capital account; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ongoing joint development fees are accounted for as a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------------------

As a result, the Companys Consolidated Balance Sheets includes a line item Noncontrolling interests in consolidated
entities, which reflects BPs ownership of Galaxys equity. This line item is adjusted by BPs 50% share of Galaxys profits and losses, and increased by cash distributions made by BP to the Company on behalf of Galaxy.
BPs share of Galaxys losses is reflected in the Consolidated Statement of Operations as Loss attributed to noncontrolling interests in consolidated entities. Since inception, Galaxy has incurred approximately $100 million in
losses through March 31, 2010, 50% of which have been allocated to BP.

The following table presents the changes in
stockholders equity attributed to the noncontrolling interests in Galaxy for the three months ended March 31, 2010 (in thousands):



|                           |  |   |        |  
|-------------------------- |  | - | ------ | -
|Balance at January 1, 2010 |  | $ | 45,000 |  
|Net loss                   |  |   | (7,500 | )
|Capital contributions      |  |   | 7,500  |  
|                           |  |   |        |  
|Balance at March 31, 2010  |  | $ | 45,000 |  



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The Companys investment in Galaxy represents assets that were contributed and continue
to be held at a zero net carrying value.

On March 31, 2010, the Company and BP also entered into a related agreement
regarding funding by BP, through a loan to Galaxy, of costs for certain work beyond the scope of the JDA to be agreed upon which will be conducted by the Company at its demonstration facility in Jennings, Louisiana. As of March 31, 2010, there
were no amounts outstanding under this loan agreement.

Vercipia Biofuels

On February 18, 2009, the Company announced the second phase of its strategic partnership with BP through the formation of a joint
venture to focus on the commercial development of facilities for the production of cellulosic ethanol from non-food feedstocks. The joint venture company, Vercipia, is owned equally by the Company and BP. Vercipia will act as the commercial entity
for the deployment of cellulosic ethanol technology being developed and proven under the Galaxy joint development program. Vercipia is led and supported by a team comprised of employees from both BP and the Company and is governed with equal
representation from both parent companies. This collaboration is intended to develop one of the nations first commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida and to create future opportunities for
commercial implementation of cellulosic ethanol technologies. Vercipia will initially focus on developing and securing financing for a commercial-scale cellulosic ethanol facility in Highlands County, Florida and could break ground on that site as
early as 2010. The estimated construction cost for this facility, which is expected to produce 36 million gallons per year, is estimated to be approximately $300 million. Production from this plant could begin as early as 2012.

The Company originally formed the Vercipia entity in October 2007, as a wholly-owned subsidiary of Verenium Corporation. The entity
was fully consolidated by the Company as a subsidiary for the years ended December 31, 2007 and 2008. BPs consideration was used to acquire a 50% ownership interest in the existing entity. In return for its 50% interest in Vercipia, BP
agreed to pay Vercipia $22.5 million in an initial cash commitment and the Company agreed to contribute development assets related to its Highlands County, Florida development project and another commercial project site in early stages of
development in the Gulf Coast region. BPs contribution is payable in four installments: $7.0 million was paid on April 1, 2009, $5.0 was paid on July 1, 2009, $3.0 million was paid on October 1, 2009, and $7.5 million was
deferred until the second quarter of 2010.

The Company determined the joint venture is a variable interest entity, and, prior
to the adoption of recent authoritative guidance, determined the Company was the primary beneficiary which required consolidation of Vercipia for the year ended December 31, 2009. As a result of the adoption of new authoritative guidance on
January 1, 2010, as more fully described under Note 1, the Company determined that it was not the primary beneficiary of Vercipia and will not consolidate the entity effective January 1, 2010, pursuant to new authoritative
accounting guidance.

In reaching the conclusion to deconsolidate Vercipia, the Company conducted an extensive analysis of
Vercipias underlying documents in order to determine which party has the power over the activities of Vercipia that most significantly affect the economic performance of Vercipa. The Company determined the most significant activities of
Vercipia, at its current stage of development, is developing and securing financing for a commercial-scale cellulosic ethanol facility in Highlands County, Florida and concluded the power to direct these activities are shared between the Company and
BP through their voting interests and board representation. Accordingly, effective as of January 1, 2010, the Company deconsolidated Vercipia and started accounting for its ownership interest in Vercipia under the equity method of accounting.
The Company recorded a one-time reduction to stockholders equity of $4.1 million representing the cumulative effect of this change in accounting principle.

The adoption of this guidance further resulted in the following impacts to the Condensed Consolidated Balance Sheet at January 1,
2010: (1) assets decreased by $8.4 million, including $7.2 million in cash and cash equivalents; (2) liabilities decreased by $1.9 million; and (3) stockholders equity increased by approximately $6.5 million.

The three months ended March 31, 2009 net income attributed to Verenium of $3.3 million includes $0.2 million of research and
development and $0.6 million of selling, general and administrative expenses related to Vercipia, of which $0.4 million, representing BPs 50% share of losses in Vercipia, is included in Loss attributed to noncontrolling interests in
consolidated entities.

Under the equity method of accounting, the Company is required to suspend losses if the
Companys share of Vercipias net loss exceeds the amount of the Companys investment in Vercipia. As such, the Companys condensed consolidated financial statements for the quarter ended March 31, 2010 do not include the
Companys share of Vercipias operating results.



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4. Balance Sheet Details

Inventory

Inventory is recorded at standard cost on a FIFO basis. Inventory consists of the following (in thousands) as of:



|                 |  |               |       |   |                  |   |       |  
|---------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                 |  | March 31,2010 |       |   | December 31,2009 |  
|Raw materials    |  | $             | 587   |   |                  | $ | 438   |  
|Work in progress |  |               | 225   |   |                  |   | 319   |  
|Finished goods   |  |               | 3,034 |   |                  |   | 2,096 |  
|                 |  |               |       |   |                  |   |       |  
|                 |  |               | 3,846 |   |                  |   | 2,853 |  
|Reserve          |  |               | (225  | ) |                  |   | (200  | )
|                 |  |               |       |   |                  |   |       |  
|Net inventory    |  | $             | 3,621 |   |                  | $ | 2,653 |  
|                 |  |               |       |   |                  |   |       |  

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, plant and equipment

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

Property, plant and equipment consist of the following (in thousands) as of:



|                                                |  |               |         |   |                  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | March 31,2010 |         |   | December 31,2009 |  
|Laboratory, machinery and equipment             |  | $             | 43,686  |   |                  | $ | 44,029  |  
|Computer equipment                              |  |               | 9,567   |   |                  |   | 9,451   |  
|Furniture and fixtures                          |  |               | 5,628   |   |                  |   | 5,607   |  
|Leasehold improvements                          |  |               | 5,672   |   |                  |   | 5,672   |  
|Land                                            |  |               | 1,560   |   |                  |   | 1,560   |  
|Pilot facility                                  |  |               | 18,725  |   |                  |   | 18,725  |  
|Demonstration facility                          |  |               | 96,814  |   |                  |   | 95,521  |  
|                                                |  |               |         |   |                  |   |         |  
|Property, plant and equipment, gross            |  |               | 181,652 |   |                  |   | 180,565 |  
|Less: Accumulated depreciation and amortization |  |               | (75,664 | ) |                  |   | (72,166 | )
|                                                |  |               |         |   |                  |   |         |  
|Property, plant and equipment, net              |  | $             | 105,988 |   |                  | $ | 108,399 |  
|                                                |  |               |         |   |                  |   |         |  

Included in the costs of its demonstration facility as of March 31, 2010 and December 31, 2009 is
$7.8 million in capitalized interest, which was determined by applying the Companys effective interest rate to the average amount of accumulated expenditures for its demonstration facility. The demonstration plant was placed in service in
February 2009, and the Company therefore ceased capitalizing interest on that date.

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  
|Pilot facility          |  | 10 years 
|Demonstration facility  |  | 10 years 

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



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Depreciation related to the pilot and demonstration facilities begins in the period that
such assets are placed in service. The pilot facility was placed in service in January 2007, and the demonstration facility was placed in service in February 2009. Subsequent modifications to the pilot and demonstration facilities which do not
extend its useful life but meet the criteria for capitalization are considered immediately placed in service when incurred, and depreciated over the remainder of the facilitys useful life. During the three months ended March 31, 2010, the
demonstration facility is being depreciated using an estimated 10-year life. The Company is in the process of performing an evaluation to determine the final useful lives for the demonstration-scale facility and each of its components.

Accrued expenses

Accrued expenses consist of the following (in thousands) as of:



|                                       |  |               |        |                   |   |       
|-------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                       |  | March 31,2010 |        | December 
31,2009
|Employee compensation                  |  | $             | 3,459  |                   | $ | 2,850 
|Professional and outside services      |  |               | 2,987  |                   |   | 2,520 
|Accrued taxes                          |  |               | 2,337  |                   |   | 2,474 
|Accrued interest on convertible notes  |  |               | 2,878  |                   |   | 1,671 
|Royalties                              |  |               | 1,355  |                   |   | 1,499 
|Restructuring reserve, current portion |  |               | 996    |                   |   | 992   
|Other                                  |  |               | 127    |                   |   | 266   
|                                       |  |               |        |                   |   |       
|                                       |  | $             | 14,139 |                   | $ | 12,272
|                                       |  |               |        |                   |   |       

5. Segment Information and Concentration of Business Risk

Segment Information

The Company operates in two segments identified as biofuels and specialty enzymes. The biofuels segment is focused on developing unique
technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high performance enzymes for use within the alternative
fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

Management assesses performance and allocates resources based on discrete financial information for the biofuels and specialty enzymes
business segments. For the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment, performance is assessed based on total revenues, product revenues, product gross
margin, total operating expenses and capital expenditures. Operating expenses for each segment include direct and allocated research and development and selling, general and administrative expenses. In managements evaluation of performance,
certain corporate operating expenses are excluded from the business segments including non-cash share-based compensation, restructuring charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to
either business segment. In addition, management evaluates segment performance based upon capital expenditures and other assets that are specifically identified to the business segment and excludes certain corporate assets that can be attributed to,
or utilized by, both business segments. Expenses and assets shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in
materially different results by segment. Further, expenses allocated to each of the two segments may not be indicative of the expenses of each operating segment if such segment operated on a stand-alone basis.

The results of operations for the three months ended March 31, 2009 include consolidated results for our 50% joint ventures with BP,
Galaxy and Vercipia. As of January 1, 2010, pursuant to new authoritative accounting guidance, Vercipia is no longer consolidated and therefore not included in the results of operations for the three months ended March 31, 2010.

Selected operating results for each of the Companys business segments are set forth below (in thousands):



|                                 |  |                                  |     |                                  |   |           |  |       |   |          |   |                  |  |           |       |       |   |        |  |   |   |  |   |       
|-------------------------------- |  | -------------------------------- | --- | -------------------------------- | - | --------- |  | ----- | - | -------- | - | ---------------- |  | --------- | ----- | ----- | - | ------ |  | - | - |  | - | ------
|                                 |  | Three Months EndedMarch 31,
2010 |     | Three Months EndedMarch 31,
2009
|                                 |  | Biofuels                         |     | SpecialtyEnzymes                 |   | Corporate |  | Total |   | Biofuels |   | SpecialtyEnzymes |  | Corporate |       | Total
|Product revenues                 |  | $                                |    |                                  | $ | 11,562    |  | $     |  |          | $ | 11,562           |  | $         |      |       | $ | 10,569 |  | $ |  |  | $ | 10,569
|Collaborative and grant revenues |  |                                  | 717 |                                  |   | 752       |  |       |  |          |   | 1,469            |  |           | 2,334 |       |   | 1,488  |  |   |  |  |   | 3,822 
|                                 |  |                                  |     |                                  |   |           |  |       |   |          |   |                  |  |           |       |       |   |        |  |   |   |  |   |       
|Total revenues                   |  |                                  | 717 |                                  |   | 12,314    |  |       |  |          |   | 13,031           |  |           | 2,334 |       |   | 12,057 |  |   |  |  |   | 14,391
|                                 |  |                                  |     |                                  |   |           |  |       |   |          |   |                  |  |           |       |       |   |        |  |   |   |  |   |       



21



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|                                                                         |  |                                  |         |   |                                  |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |       |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | -------------------------------- | ------- | - | -------------------------------- | - | --------- |  | - | ------ | - |  | -------- | ------- | - | ---------------- | - | --------- | - |  | ----- | ----- |  | - | ------ | - |  | - | ------- | -
|                                                                         |  | Three Months EndedMarch 31,
2010 |         |   | Three Months EndedMarch 31,
2009 |  
|                                                                         |  | Biofuels                         |         |   | SpecialtyEnzymes                 |   | Corporate |  |   | Total  |   |  | Biofuels |         |   | SpecialtyEnzymes |   | Corporate |   |  | Total |      
|Product gross profit                                                     |  |                                  |        |   |                                  |   | 5,046     |  |   |       |   |  |          | 5,046   |   |                  |   |          |   |  |       | 4,814 |  |   |       |   |  |   | 4,814   |  
|                                                                         |  |                                  |         |   |                                  |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |       |  |   |        |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) (1)                    |  |                                  | 16,730  |   |                                  |   | 4,072     |  |   | 3,895  |   |  |          | 24,697  |   |                  |   | 17,880    |   |  |       | 4,734 |  |   | 4,373  |   |  |   | 26,987  |  
|                                                                         |  |                                  |         |   |                                  |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |       |  |   |        |   |  |   |         |  
|Total operating income (loss)                                            |  |                                  | (16,013 | ) |                                  |   | 1,726     |  |   | (3,895 | ) |  |          | (18,182 | ) |                  |   | (15,546   | ) |  |       | 1,568 |  |   | (4,373 | ) |  |   | (18,351 | )
|Loss attributed to noncontrolling interests in consolidated entities (1) |  |                                  | 7,500   |   |                                  |   |          |  |   |       |   |  |          | 7,500   |   |                  |   | 7,870     |   |  |       |      |  |   |       |   |  |   | 7,870   |  
|Operating income (loss) attributed to Verenium                           |  | $                                | (8,513  | ) |                                  | $ | 1,726     |  | $ | (3,895 | ) |  | $        | (10,682 | ) |                  | $ | (7,676    | ) |  | $     | 1,568 |  | $ | (4,373 | ) |  | $ | (10,481 | )
|                                                                         |  |                                  |         |   |                                  |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |       |  |   |        |   |  |   |         |  
|Capital expenditures                                                     |  | $                                | 1,098   |   |                                  | $ |          |  | $ |       |   |  | $        | 1,098   |   |                  | $ | 1,543     |   |  | $     | 251   |  | $ |       |   |  | $ | 1,794   |  
|                                                                         |  |                                  |         |   |                                  |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |       |  |   |        |   |  |   |         |  

Identifiable assets by operating segment are set forth below (in thousands):



|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|-------------------------------- |  | -------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                 |  | As of March 31, 2010
|                                 |  | Biofuels             |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net |  | $                    | 101,783 |                  | $ | 2,004     |  | $     | 2,201  |  | $ | 105,988
|Cash and other assets            |  |                      | 295     |                  |   | 11,786    |  |       | 31,357 |  |   | 43,438 
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets        |  | $                    | 102,078 |                  | $ | 13,790    |  | $     | 33,558 |  | $ | 149,426
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        



|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|---------------------------------- |  | ----------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                   |  | As of December 31, 2009
|                                   |  | Biofuels                |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant and equipment, net |  | $                       | 102,810 |                  | $ | 2,430     |  | $     | 3,159  |  | $ | 108,399
|Cash and other assets (2)          |  |                         | 8,190   |                  |   | 10,109    |  |       | 41,224 |  |   | 59,523 
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets          |  | $                       | 111,000 |                  | $ | 12,539    |  | $     | 44,383 |  | $ | 167,922
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        



|(1) | The three months ended March 31, 2009 Biofuels operating loss attributed to Verenium of $7.7 million includes $0.8 million of operating expenses related to
Vercipia, of which $0.4 million, representing BPs 50% share of losses in Vercipia, is included in Loss attributed to noncontrolling interests in consolidated entities. As of January 1, 2010, pursuant to new authoritative
accounting guidance, Vercipia is no longer consolidated and therefore not included in the results of operations for the three months ended March 31, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As of December 31, 2009, Biofuels cash and other assets includes $7.2 million of Vercipia cash and cash equivalents which is limited to Vercipia operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Concentrations 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 Animal Nutrition, represented 61% and 53% of total revenue for the three months ended March 31, 2010 and 2009. Accounts receivable from this one customer
comprised approximately 66% of accounts receivable at March 31, 2010 and 58% at December 31, 2009.

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



|              |  |                              |        |      |   |       
|------------- |  | ---------------------------- | ------ | ---- | - | ------
|              |  | Three Months Ended March 31,
|              |  | 2010                         |        | 2009
|North America |  | $                            | 4,951  |      | $ | 6,626 
|South America |  |                              | 1,736  |      |   | 2,010 
|Europe        |  |                              | 6,185  |      |   | 5,424 
|Asia          |  |                              | 159    |      |   | 331   
|              |  |                              |        |      |   |       
|              |  | $                            | 13,031 |      | $ | 14,391
|              |  |                              |        |      |   |       



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##### Table of Contents

For the three months ended March 31, 2010 and 2009, 69% and 73% of the Companys
product revenue has come from one focus area, animal nutrition and health.

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 assets held at Fermic reported on the Companys Condensed Consolidated Balance Sheet totals approximately $2.0 million at
March 31, 2010 and $2.4 million at December 31, 2009.

6. Share-based Compensation

The Company recognized share-based compensation expense of $0.5 million and $2.5 million during the three months ended March 31, 2010
and 2009. These charges had no impact on the Companys reported cash flows. Share-based compensation expense was allocated among the following expense categories (in thousands):



|                                    |  |                              |     |      |   |      
|----------------------------------- |  | ---------------------------- | --- | ---- | - | -----
|                                    |  | Three Months Ended March 31,
|                                    |  | 2010                         |     | 2009
|Research and development            |  | $                            | 42  |      | $ | 1,476
|Selling, general and administrative |  |                              | 426 |      |   | 1,071
|                                    |  |                              |     |      |   |      
|                                    |  | $                            | 468 |      | $ | 2,547
|                                    |  |                              |     |      |   |      

As of March 31, 2010, there was $2.1 million of
total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the equity incentive plans, including the impact of options and restricted shares assumed in the Companys merger with Celunol Corp.
in 2007. This expense is expected to be recognized over a weighted-average period of 2.1 years as follows (in thousands):



|                                                      |  |   |      
|----------------------------------------------------- |  | - | -----
|Fiscal Year 2010 (April 1, 2010 to December 31, 2010) |  | $ | 827  
|Fiscal Year 2011                                      |  |   | 319  
|Fiscal Year 2012                                      |  |   | 524  
|Fiscal Year 2013                                      |  |   | 440  
|                                                      |  |   |      
|                                                      |  | $ | 2,110
|                                                      |  |   |      

7. Restructuring Charges

In connection with the January 2006 decision to reorganize and refocus the Companys resources, management commenced several cost
containment measures, including a reduction in workforce of 83 employees and the consolidation of its facilities. Pursuant to authoritative guidance requiring accrual of all exit-related costs, the Company recorded net charges of $12.0 million in
2006 related to these activities. The following table sets forth the activity in the restructuring reserves through March 31, 2010 (in thousands):



|                                                    |  |   |        |  
|--------------------------------------------------- |  | - | ------ | -
|Balance at January 1, 2006                          |  | $ |       |  
|Accrued and expensed through December 31, 2009      |  |   | 11,023 |  
|Charged against accrual through December 31, 2009   |  |   | (8,893 | )
|Adjustments and revisions through December 31, 2009 |  |   | 3,558  |  
|                                                    |  |   |        |  
|Balance at January 1, 2010                          |  |   | 5,688  |  
|Charged against accrual                             |  |   | (227   | )
|Adjustments and revisions                           |  |   | 134    |  
|                                                    |  |   |        |  
|Balance at March 31, 2010                           |  | $ | 5,595  |  
|                                                    |  |   |        |  
|                                                    | 
|Restructuring reserve liability:                    |  |   |        |  
|Current portion                                     |  | $ | 996    |  
|Long-term portion                                   |  |   | 4,599  |  
|                                                    |  |   |        |  
|                                                    |  | $ | 5,595  |  
|                                                    |  |   |        |  

The facility consolidation costs are based on estimates representing the discounted cash flow of lease
payments (net of anticipated sublease income) on the vacated space through its contractual lease term in 2016.

Pursuant to
authoritative accounting guidance, the Company is required to reassess these estimates on a periodic basis. Accordingly, the Company may revise these estimates in future periods, which could give rise to additional charges or adjustments. For the
three months ended March 31, 2010 and 2009, the restructuring reserve was adjusted by $134,000 and $90,000 representing the net present value adjustment for the quarter, for a total gross obligation of $7.7 million and $8.7 million, net of
sublease income, as of March 31, 2010 and 2009.



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##### Table of Contents

The net present value adjustments to the restructuring reserve are classified within
selling, general and administrative expenses on the Companys Condensed Consolidated Statement of Operations.

8. Commitments

Letter of Credit

Pursuant to its facilities leases for office and laboratory space in San Diego, the Company is required to maintain a letter of credit on
behalf of its landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on a minimum level of working capital and market capitalization.

As of March 31, 2010, the Company had a letter of credit in place pursuant to this agreement for approximately $10.4 million,
representing approximately 24 months current rent, pursuant to the lease agreement. The letter of credit is issued under the Companys existing bank agreement. The Company is required by the bank to secure this obligation with
cash, which is reflected as restricted cash on the Companys Condensed Consolidated Balance Sheet as of March 31, 2010. Any increases to the letter of credit resulting from increases in rent or changes in working capital or market
capitalization are effective upon notice to the Company by the landlord.

Effective April 2010, the letter of credit was
increased by approximately $0.3 million, representing the contractual rent increase for the subsequent 24- month period.

9. 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
(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.



24



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Noteholder Lawsuit

On April 30, 2009, Capital Ventures International (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. An initial pre-trial conference was held on August 11, 2009 and the case is presently
in the discovery phase.

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 (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. The Motion to Dismiss is
currently pending.

Between February 27, 2009 and January 19, 2010, CVI converted all of its 2008 Notes,
approximately $14.5 million in face value, and the Company has issued approximately 1.3 million shares on a reverse-split adjusted basis, to settle these conversions and related make-whole obligations. Assuming the conversion prices
asserted by CVI of $17.64 from February 27, 2009 through October 5, 2009 and $4.27 for conversions subsequent to October 6, 2009, 0.8 million additional shares would be issuable in connection with CVIs conversions. The
Company does not believe that this lawsuit will have a material impact on its financial statements. The Company believes any contingent liabilities related to these claims are not probable or estimable and therefore no amounts have been accrued for
these matters.

Royalty Dispute

On August 31, 2009, the Company initiated an arbitration proceeding against Asahi Glass Co., Ltd. (Asahi) in the ICC
International Court of Arbitration. The arbitration related to a license agreement with Asahi (the Asahi License) whereby the Company obtained the right to use Asahi technology in connection with the manufacture of a product sold by the
Company. In the arbitration, the Company sought determinations that historical royalty payments made to Asahi were properly calculated and paid, reflecting all amounts properly subject to royalty obligations, and that Asahi had wrongfully interfered
with advantageous business relations of the Company, and further sought reimbursement of its damages, costs and expenses. In response to the Companys Request for Arbitration, Asahi claimed entitlement to additional royalties, breach of
contract, patent infringement, misappropriation of trade secrets, breach of a covenant of good faith and fair dealing, and, if the Company is not found to have breached any of its obligations, seeks to set aside the contract. On April 9, 2010,
the parties agreed to settle their respective claims and to amend the Asahi License. The settlement agreement and the amended Asahi license are not expected to have a material impact on the Companys financial position or results of operations.

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.



25



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##### Table of Contents

10. Impact of Recently Issued Accounting Standards

Joint Venture Accounting

In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance which changes the approach to
determine the primary beneficiary of a variable interest entity (VIE) and requires companies to more frequently assess whether they must consolidate VIEs. This new standard became effective for the Company beginning on January 1,
2010 and resulted in the continued consolidation of the Galaxy joint venture and the deconsolidation of the Vercipia joint venture, as more fully described in Note 1.

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 is currently evaluating the impact of adopting this guidance on the Companys future consolidated financial statements.

Fair Value Measurements and Disclosures

The FASB issued new guidance requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as
well as requiring fair value measurement disclosures for each class of assets and liabilities. The adoption did not have a material impact on our financial statements or our disclosures, as we did not have any transfers between Level 1
and Level 2 fair value measurements and did not have material classes of assets and liabilities that required additional disclosure.



26



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##### Table of Contents

|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:



| |  |  | the length of time that we will be able to fund our operations with existing cash and cash commitments and from other sources or potential sources of
financing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the continuation of, and expected benefits from, our strategic partnership with BP Biofuels North America LLC (BP) to advance our
cellulosic ethanol technology;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to continue as a going concern;
| | - |  | -------------------------------------------



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



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



| |  |  | the effects of governmental regulation and programs on our business and financial results;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | 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, grants and licenses granted to third parties and our ability to maintain our collaborative
relationships with third parties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to repay our outstanding debt (including in connection with any make-whole payments that may be due upon conversion of our 8%
Senior Convertible Notes due April 1, 2012 (2008 Notes) and 9% Convertible Senior Secured Notes due April 1, 2027 (2009 Notes));
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------

Forward looking statements applicable to our biofuels business include statements related to:



| |  |  | the continuation of, and expected benefits from, our strategic partnership with BP to advance our cellulosic ethanol technology;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential growth in the use of ethanol, including cellulosic ethanol, the economic prospects for the ethanol industry and cellulosic ethanol and the
advantages of cellulosic ethanol versus ethanol and other fuel sources;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continued development of our pilot facility;
| | - |  | ------------------------------------------------



| |  |  | the optimization of our demonstration-scale facility and our plans to prove the economic and commercial viability of our cellulosic ethanol production
process in 2010;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that production from the commercial-scale cellulosic ethanol facility that Highlands Ethanol, LLC (dba Vercipia Biofuels)
(Vercipia) is developing in Highlands, Florida could begin as early as 2012 and that we could break ground for that facility as early as 2010, and that the estimated construction cost for that facility will be approximately $300 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financing, development and construction of commercial-scale cellulosic ethanol facilities;
| | - |  | ----------------------------------------------------------------------------------------------



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| |  |  | our ability to use multiple non-food feedstocks to produce cellulosic ethanol;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our expectation regarding funding amounts from the U.S. Department of Energy; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the implied value of our biofuels business model.
| | - |  | -------------------------------------------------

Forward looking statements applicable to our specialty enzymes business include statements related to:



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



| |  |  | our ability to maintain good relationships with the companies with whom we contract for the manufacture of certain of the products in our specialty
enzymes business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 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, including our strategic partnership with BP, our ability to
commercialize products directly and through our collaborators, the timing of anticipated regulatory approvals and product launches, the timing of conversion of the 2008 Notes and 2009 Notes, if any, our ability to make any required cash
make-whole payments due upon conversion of our 2008 Notes and 2009 Notes and other risks associated with the 2008 Notes and 2009 Notes as set forth in the section of this report entitled Risk Factors, 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
two business segments, biofuels and specialty enzymes. Our biofuels business segment operates through our wholly-owned subsidiary, Verenium Biofuels Corporation and jointly-owned subsidiaries with BP, Galaxy Biofuels LLC (Galaxy) and
Vercipia, and is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol produced from cellulosic biomass. We currently believe the most
significant commercial opportunity for our biofuels business segment will be derived from the large-scale commercial production of cellulosic ethanol derived from multiple non-food biomass feedstocks, with our initial focus on energy canes and
grasses. Our specialty enzymes segment develops high-performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved
environmental outcomes. We believe the most significant commercial opportunity for our specialty enzymes business segment will be derived from continued sales, and gross product margins from our existing portfolio of enzyme products.

Our biofuels and specialty enzymes businesses are both supported by a research and development team with expertise in gene discovery and
optimization, cell engineering, bioprocess development, biochemistry and microbiology. Over the past 18 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 our proprietary technologies, which include 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 (i) integrated solutions for the production of advanced biofuels, such as cellulosic ethanol, and (ii) specialty enzymes for alternative fuels, specialty industrial processes, and animal nutrition and
health. We have current collaborations and agreements with market leaders such as BP and Bunge Oils and with the U.S. Department of Energy, each of which complement our internal technology and product development efforts.

We have a substantial intellectual property estate comprising more than 260 issued patents and more than 380 pending patents as of
March 31, 2010. We believe that we can leverage our intellectual property estate to enhance and improve our technology development and commercialization efforts across both business units while maintaining protection on key intellectual
property assets.

Excluding our non-cash gains in the first quarter of 2009 attributed to our 2008 Notes, we have incurred net
losses since our inception. For the three months ended March 31, 2010, we had a net loss of $12.0 million, and as of March 31, 2010, we had an accumulated deficit of approximately $637.9 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 into the foreseeable future as a result of any combination of one or more of the following:



| |  |  | anticipated additional investments to implement our biofuels commercialization strategy, including capital expenditures related to optimization of our
demonstration facility, and capital or operating costs we may incur for land acquisition, feedstock development, and design and engineering for our first commercial plants through our joint ventures with BP;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining or increasing our sales and marketing infrastructure to support our specialty enzyme business;
| | - |  | ----------------------------------------------------------------------------------------------------------



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



| |  |  | continued research and development expenses for our biofuels commercialization strategy as well as the progression of internal product candidates in
our specialty enzymes business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 Risk Factorsbeginning on page 46, Liquidity and Capital Resourcesbeginning on page 37 and
Note 1 of the Notes to Condensed Consolidated Financial Statements beginning on page 6 of this report, our independent registered public accounting firm has included an explanatory paragraph in its report on our 2009 financial
statements related to the uncertainty in our ability to continue as a going concern. We will continue to focus our efforts on raising or generating additional cash through a combination of corporate partnerships and collaborations, federal, state
and local grant funding, selling or financing assets, incremental product sales and, if necessary and available, the additional sale of equity or debt securities. If we are unable to raise additional capital from any of these sources, we will need
to defer, reduce or eliminate certain planned expenditures, restructure or significantly curtail our operations, file for bankruptcy or cease operations.

Recent Events

Extension of BP Collaboration

On April 1, 2010, we announced the third extension to August 1, 2010 of the initial 18-month joint development program, or JDA,
established in August 2008 with our partner BP, which was initially scheduled to expire on April 1, 2010. We will receive an additional $2.5 million from BP each month to co-fund various scientific and technical initiatives through July
2010. The Company and BP also entered into a related agreement regarding funding by BP, through a loan to Galaxy, of costs for certain work beyond the scope of the JDA to be agreed upon by both parties which will be conducted by the Company at its
demonstration-scale facility in Jennings, Louisiana.

U.S. Department of Energy (DOE) Grant

In April 2010, we were awarded, and collected, an additional $4.9 million from the DOE to fund ongoing activities at our
demonstration-scale facility in Jennings, Louisiana. This cooperative agreement is an extension of the grant previously awarded to us in July 2008 under a DOE program supporting the development of demonstration-scale cellulosic ethanol biorefinery
plants.

Results of Operations

Three Months Ended March 31, 2010 and 2009

Selected Segment Financial Data

Our business consists of two business units, which we refer to as our biofuels segment and our specialty enzymes segment. The biofuels
segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high
performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

We assess performance and allocate resources based on discrete financial information for the biofuels and specialty enzymes segments. For
the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment, performance is assessed based on total revenues, product revenues, product gross profit, total operating
expenses and capital expenditures. For the three months ended March 31, 2010 and 2009, the specialty enzyme segment comprised 100% of our product revenue and cost of product revenue. Our operating expenses for each segment include direct and
allocated research and development and selling, general and administrative expenses. In managements evaluation of performance, certain corporate operating expenses are excluded from the business segments including non-cash share-based
compensation, restructuring charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to either business segment. In addition, we evaluate segment performance based upon capital expenditures and other
assets that are specifically identified to the business segment, excluding certain corporate assets such as cash, short-term investments, and other assets that can be attributed to, or utilized by, both business segments. Expenses and assets shared
by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment. Further, expenses
allocated to each of the two segments may not be indicative of the expenses of each operating segment if such segments operated on a stand-alone basis.



29



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The results of operations for the three months ended March 31, 2009 include
consolidated results including our 50% joint ventures with BP, Galaxy and Vercipia. As of January 1, 2010, pursuant to new authoritative accounting guidance, Vercipia is not consolidated and therefore not included in the results of operations
for the three months ended March 31, 2010.

Selected operating results for the three months ended March 31, 2010 and
2009, and identifiable assets as of March 31, 2010 and December 31, 2009 for each of our business segments is set forth below (in thousands):



|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------------------------- | ------- | - | --------------------------------- | - | --------- |  | - | ------ | - |  | -------- | ------- | - | ---------------- | - | --------- | - |  | ----- | ------ |  | - | ------ | - |  | - | ------- | -
|                                                                         |  | Three Months Ended March 31, 2010 |         |   | Three Months Ended March 31, 2009 |  
|                                                                         |  | Biofuels                          |         |   | SpecialtyEnzymes                  |   | Corporate |  |   | Total  |   |  | Biofuels |         |   | SpecialtyEnzymes |   | Corporate |   |  | Total |       
|Product revenues                                                         |  | $                                 |        |   |                                   | $ | 11,562    |  | $ |       |   |  | $        | 11,562  |   |                  | $ |          |   |  | $     | 10,569 |  | $ |       |   |  | $ | 10,569  |  
|Collaborative and grant revenues                                         |  |                                   | 717     |   |                                   |   | 752       |  |   |       |   |  |          | 1,469   |   |                  |   | 2,334     |   |  |       | 1,488  |  |   |       |   |  |   | 3,822   |  
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|Total revenues                                                           |  |                                   | 717     |   |                                   |   | 12,314    |  |   |       |   |  |          | 13,031  |   |                  |   | 2,334     |   |  |       | 12,057 |  |   |       |   |  |   | 14,391  |  
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|Product gross profit                                                     |  |                                   |        |   |                                   |   | 5,046     |  |   |       |   |  |          | 5,046   |   |                  |   |          |   |  |       | 4,814  |  |   |       |   |  |   | 4,814   |  
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) (1)                    |  |                                   | 16,730  |   |                                   |   | 4,072     |  |   | 3,895  |   |  |          | 24,697  |   |                  |   | 17,880    |   |  |       | 4,734  |  |   | 4,373  |   |  |   | 26,987  |  
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|Total operating (loss) income                                            |  |                                   | (16,013 | ) |                                   |   | 1,726     |  |   | (3,895 | ) |  |          | (18,182 | ) |                  |   | (15,546   | ) |  |       | 1,568  |  |   | (4,373 | ) |  |   | (18,351 | )
|Loss attributed to noncontrolling interests in consolidated entities (1) |  |                                   | 7,500   |   |                                   |   |          |  |   |       |   |  |          | 7,500   |   |                  |   | 7,870     |   |  |       |       |  |   |       |   |  |   | 7,870   |  
|Operating (loss) income attributed to Verenium                           |  | $                                 | (8,513  | ) |                                   | $ | 1,726     |  | $ | (3,895 | ) |  | $        | (10,682 | ) |                  | $ | (7,676    | ) |  | $     | 1,568  |  | $ | (4,373 | ) |  | $ | (10,481 | )
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  
|Capital expenditures                                                     |  | $                                 | 1,098   |   |                                   | $ |          |  | $ |       |   |  | $        | 1,098   |   |                  | $ | 1,543     |   |  | $     | 251    |  | $ |       |   |  | $ | 1,794   |  
|                                                                         |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |           |   |  |       |        |  |   |        |   |  |   |         |  

Identifiable assets by operating segment are set forth below (in thousands):



|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|---------------------------------- |  | ----------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                   |  | As of March 31, 2010   
|                                   |  | Biofuels                |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net   |  | $                       | 101,783 |                  | $ | 2,004     |  | $     | 2,201  |  | $ | 105,988
|Cash and other assets              |  |                         | 295     |                  |   | 11,786    |  |       | 31,357 |  |   | 43,438 
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets          |  | $                       | 102,078 |                  | $ | 13,790    |  | $     | 33,558 |  | $ | 149,426
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|                                   | 
|                                   |  | As of December 31, 2009
|                                   |  | Biofuels                |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant and equipment, net |  | $                       | 102,810 |                  | $ | 2,430     |  | $     | 3,159  |  | $ | 108,399
|Cash and other assets (1)          |  |                         | 8,190   |                  |   | 10,109    |  |       | 41,224 |  |   | 59,523 
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets          |  | $                       | 111,000 |                  | $ | 12,539    |  | $     | 44,383 |  | $ | 167,922
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        



|(1) | The three months ended March 31, 2009 Biofuels operating loss attributed to Verenium of $7.7 million includes $0.8 million of operating expenses related to
Vercipia, of which $0.4 million, representing BPs 50% share of losses in Vercipia, is included in Loss attributed to noncontrolling interests in consolidated entities. As of January 1, 2010, pursuant to new authoritative
accounting guidance, Vercipia is no longer consolidated and therefore not included in the results of operations for the three months ended March 31, 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | As of December 31, 2009, Biofuels cash and other assets includes $7.2 million of Vercipia cash and cash equivalents which is limited to Vercipia
operations.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated Results of Operations

Revenues

Revenues for the three months ended March 31, 2010 and 2009 are as follows (in thousands):



|                   |  |                              |        |          |   |        |  |     |   
|------------------ |  | ---------------------------- | ------ | -------- | - | ------ |  | --- | --
|                   |  | Three Months Ended March 31, |        | % Change |  
|                   |  | 2010                         |        | 2009     |  
|Revenues:          |  |                              |        |          |   |        |  |     |   
|Phyzyme phytase    |  | $                            | 7,954  |          | $ | 7,597  |  | 5   | % 
|All other products |  |                              | 3,608  |          |   | 2,972  |  | 21  | % 
|                   |  |                              |        |          |   |        |  |     |   
|Total product      |  |                              | 11,562 |          |   | 10,569 |  | 9   | % 
|Grant              |  |                              | 738    |          |   | 2,558  |  | (71 | )%
|Collaborative      |  |                              | 731    |          |   | 1,264  |  | (42 | )%
|                   |  |                              |        |          |   |        |  |     |   
|Total Revenues     |  | $                            | 13,031 |          | $ | 14,391 |  | (9  | )%
|                   |  |                              |        |          |   |        |  |     |   

Revenues decreased 9%, or $1.4 million, to $13.0 million for the three months ended March 31, 2010
compared to March 31, 2009. For the three months March 31, 2010, our revenue mix continued to shift to a larger percentage of product revenue, consistent with our strategy to grow product sales and increase spending on biofuels projects,
and de-emphasize collaborations that are not core to our strategic market focus. Product revenue represented 89% of total revenues for the three months ended March 31, 2010, as compared to 73% for the three months ended March 31, 2009.

Product revenues increased $1.0 million, or 9%, for the three months ended March 31, 2010, as compared to the same
period in 2009. This increase was due to an increase in the royalty we receive from Danisco for Phyzyme net profits, as well as an increase in revenues from our newer enzymes, including Veretase and Xylathin, which continued to gain acceptance in
the grain ethanol markets. In addition, our Purifine enzyme for the soybean oil processing market achieved moderate revenue growth over 2009, resulting from Purifine deployment by Molinos in Argentina under the supply agreement we announced this
past March. Our Fuelzyme enzyme also returned to revenue levels from the first quarter of 2009, indicating both a recovery in the corn ethanol market as well as continued demand for this product.

Net revenues from Phyzyme in the first quarter of 2010 increased $0.4 million, or 5%, compared to the same period in 2009, and
represented approximately 69% of total product revenues for the three months ended March 31, 2010 and 72% for the comparable period in 2009. Although we expect that Phyzyme will continue to represent a significant percentage of our total
product revenues in the foreseeable future, we expect that net revenue from Phyzyme will remain flat or gradually decrease in future periods. This is largely due to our method of revenue recognition for Phyzyme 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. We recognize revenue from
Phyzyme that is manufactured by Genencor in an amount equal to the royalty received from Danisco, as compared to the full value of the manufacturing costs plus the royalty on operating profit we currently recognize for Phyzyme we manufacture at
Fermic. 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, it does have a negative impact on the gross product revenue we recognize for Phyzyme as
the volume of Phyzyme manufactured by Genencor increases. We expect over time a greater proportion of our Phyzyme manufacturing will transition to Genencor resulting in lower reported Phyzyme product revenue, however, we believe this will make
available existing capacity to accommodate expected growth for our other higher margin enzyme products.

Despite recent
indications of recovery from the worldwide recession, we cannot be certain that demand for our enzyme products and resulting sales will continue to meet expectations. In particular:



| |  |  | During 2009, we and our partner Danisco, saw a softening in the phytase animal feed market attributed to a recessionary decline in consumer consumption
of protein and financial distress in the poultry industry, which negatively impacted demand for feed and thus our enzyme, particularly during the first half of 2009. Nevertheless, Phyzyme sales have recovered since late 2009, as demand for poultry
has begun to recover with improved economic conditions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand for Fuelzyme was significantly impacted by challenges in the corn ethanol industry during 2009, which experienced distress due to high corn
prices and low ethanol prices. During the first half of 2009, there were several well-publicized bankruptcies, including two of the largest producers of corn ethanol in the U.S. Operating rates in the industry were significantly reduced, which
negatively impacted demand for enzymes in the first half of 2009. Recently, we have seen ethanol plant operating rates return to pre-2009 levels, and some idle capacity has been brought back on line, signaling a recovery in the corn ethanol
industry.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | A primary market for Purifine, used for soybean oil processing, is Latin America, which had suffered drought, political upheaval over taxes on
agricultural exports, and overall challenging market conditions over the last two years. As a result, adoption of Purifine in the region was delayed, thus Purifine revenue was below expectations for 2009. Recently, however, Purifine has gained
strong commercial traction, which we expect to continue through 2010. In addition to continued demand from Bunge, our primary customer for Purifine, we recently signed a long-term contract with Molinos, operator of the worlds largest soybean
processing plant in Argentina, to implement the commercial-scale oil degumming process using Purifine.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Grant revenue decreased $1.8 million, to $0.7 million for the three months ended March 31, 2010, compared to 2009. The decrease in
grant revenue was attributable to the completion of various grants in late 2009 and no longer recognizing revenue for Vercipia related grants as a result of the deconsolidation of our Vercipia joint venture, effective January 1, 2010, in
accordance with new authoritative guidance. On April 22, 2010, we announced an additional $4.9 million grant from the Department of Energy to fund ongoing activities are our demonstration-scale facility. We continue to pursue additional
opportunities to secure federal, state or local agency funding to support our biofuels initiatives. As of March 31, 2010, we have committed funding from various governmental agencies totaling $7.9 million through 2012, but expect grant revenue
for 2010 to be lower than 2009.

Collaborative revenue decreased $0.5 million, to $0.7 million, for the three months ended
March 31, 2010. We have continued to de-emphasize collaborations that are not core to our current focus in favor of greater emphasis on sales of products and biofuels projects. We anticipate that collaborative revenue will continue to represent
a small component of our revenue in 2010, due in large part to this de-emphasis of non-strategic collaborations and 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 substantially 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, timing and amount of funding under government grants, as well as regulatory approval timelines
for new products. We anticipate that our revenue mix will continue to shift toward a higher percentage of product and grant revenue.

Product Gross Profit & Margin

Product gross profit and margin for the three months ended March 31, 2010 and 2009 are as follows (in thousands):



|                        |  |                              |        |   |          |   |        |   |  |    |  
|----------------------- |  | ---------------------------- | ------ | - | -------- | - | ------ | - |  | -- | -
|                        |  | Three Months Ended March 31, |        |   | % Change |  
|                        |  | 2010                         |        |   | 2009     |   |       
|Product revenue         |  | $                            | 11,562 |   |          | $ | 10,569 |   |  | 9  | %
|Cost of product revenue |  |                              | 6,516  |   |          |   | 5,755  |   |  | 13 | %
|                        |  |                              |        |   |          |   |        |   |  |    |  
|Product gross profit    |  | $                            | 5,046  |   |          | $ | 4,814  |   |  | 5  | %
|Product gross margin    |  |                              | 44     | % |          |   | 46     | % |  |    |  

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 $0.8 million, or 13%, to $6.5 million for the three months ended March 31, 2010 compared to the three months ended
March 31, 2009. The increase in cost of product revenue from the comparable period in the prior year is primarily due to the buildup of inventory during the three months ended March 31, 2009 resulting in a higher proportion of production
costs being capitalized in inventory as of March 31, 2009 and as a result higher margins compared to the same period in 2010.

Product gross margin totaled $5.0 million, or 44% of product revenue, for the three months ended March 31, 2010, compared to $4.8
million, or 46% of product revenue, for the three months ended March 31, 2009. Gross margin percentage decrease primarily due to higher capacity utilization in the first quarter of 2009 to build up inventory levels.

Because a large percentage of our manufacturing costs are fixed, our gross margin may be negatively impacted in the future if our product
revenues decrease or if they do not grow in line with our increase in minimum capacity requirements at Fermic. Our gross margins are also dependent upon the mix of product sales as the cost of product revenue varies from product to product.



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In addition, because Phyzyme represents a significant percentage of our product revenue, our
product gross margin is impacted to a great degree by the gross margin achieved on sales of Phyzyme. Under our manufacturing and sales agreement with Danisco, we sell our Phyzyme inventory to Danisco at our cost and then, 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 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 margin from quarter-to-quarter.

In addition, our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice,
to assume manufacturing rights for Phyzyme. If Danisco decides to exercise this right, we may 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 manufacturing rights, this may have a negative impact on our revenues and our product gross margin.

Operating Expenses

Research and development and selling, general and administrative expenses for the three months ended March 31, 2010 and 2009 are as
follows (in thousands):



|                                             |  |                              |        |          |   |        |  |     |   
|-------------------------------------------- |  | ---------------------------- | ------ | -------- | - | ------ |  | --- | --
|                                             |  | Three Months Ended March 31, |        | % Change |  
|                                             |  | 2010                         |        | 2009     |  
|Research and development                     |  | $                            | 16,999 |          | $ | 17,815 |  | (5  | )%
|Selling, general and administrative expenses |  |                              | 7,698  |          |   | 9,172  |  | (16 | )%
|                                             |  |                              |        |          |   |        |  |     |   
|                                             |  | $                            | 24,697 |          | $ | 26,987 |  | (8  | )%
|                                             |  |                              |        |          |   |        |  |     |   

Operating expenses for the three months ended March 31, 2010 decreased $2.3 million, or 8%, to $24.7
million (including share-based compensation of $0.5 million) compared to $27.0 million (including share-based compensation of $2.5 million) for the three months ended March 31, 2009. Excluding the impact of share-based compensation, total
operating expenses decreased $0.3 million for the three months ended March 31, 2010 as compared to the same period in 2009 due to $0.8 million decrease in Vercipia operating expenses as a result of the deconsolidation of Vercipia upon adoption
of new authoritative guidance on January 1, 2010. This decrease was partially offset by increases in expenses primarily related to our demonstration-scale facility optimization efforts.

Research and Development

Research and development expenses consist primarily of costs associated with internal development of our technologies and our product
candidates, including engineering costs associated with our pilot and demonstrationscale cellulosic ethanol facilities, 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, 2010, we estimate that approximately 30%
of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that approximately 70% were spent on research activities funded in whole or in part by our partners. For the
three months ended March 31, 2009, we estimate that approximately 37% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that approximately 63% were spent
on research activities funded by our collaborations and grants. The increase in percentage of time spent on funded product and technology development from the prior year is primarily attributed to our focus on cellulosic ethanol process development,
which is partially funded by federal grants and BP through our Galaxy and Vercipia joint ventures.

We have a limited history
of developing commercial products and technologies. We determine which products and technologies 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. 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 and grants 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. For example, in 2008 we
entered into a joint collaboration with BP to co-fund the advancement and validation of our cellulosic ethanol process technology, which had previously been largely self-funded; 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 decreased $0.8 million, to $17.0 million (including share-based
compensation of $42,000) for the three months ended March 31, 2010 compared to $17.8 million (including share-based compensation of $1.5 million) for the three months ended March 31, 2009. Excluding the impact of share-based compensation,
total research and development expenses increased $0.7 million for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to increases in expenses related to our demonstration-scale facility optimization
efforts.

Our research and development expenses by operating segment for the three months ended March 31, 2010 and 2009
were as follows (in thousands):



|                  |  |                              |        |      |   |          |  |     |   
|----------------- |  | ---------------------------- | ------ | ---- | - | -------- |  | --- | --
|                  |  | Three Months Ended March 31, |        |      |  
|                  |  | 2010                         |        | 2009 |   | % Change | 
|Biofuels          |  | $                            | 15,803 |      | $ | 15,679   |  | 1   | % 
|Specialty Enzymes |  |                              | 1,196  |      |   | 2,136    |  | (44 | )%
|                  |  |                              |        |      |   |          |  |     |   
|                  |  | $                            | 16,999 |      | $ | 17,815   |  | (5  | )%
|                  |  |                              |        |      |   |          |  |     |   

Biofuels Research and Development

Research and development expenses related to our biofuels business include costs related to our ongoing development and validation of our
cellulosic ethanol process technology, including, but not limited to, enzyme discovery and development and bioprocess development designed to improve ethanol yields and reduce cost-per-gallon, feedstock testing and validation at the laboratory,
pilot- and demonstration-plant scale, as well as costs related to commissioning, optimization and operation of our demonstration-scale facility in Jennings, Louisiana.

Our biofuels research and development expenses increased $0.1 million, to $15.8 million (including share-based compensation of $40,000)
for the three months ended March 31, 2010 compared to $15.7 million (including share-based compensation of $1.0 million) for the three months ended March 31, 2009. Excluding the impact of share-based compensation, biofuels research and
development increased $1.1 million for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to the acceleration of our biofuels technology development efforts during 2010, particularly related to our
demonstration-scale facility optimization at our site in Jennings, Louisiana, which BP has substantially funded through our Galaxy joint venture. As described in more detail below, our gross research and development costs related to Galaxy are
included in Research and development on our Condensed Consolidated Statements of Operations, with BPs cost reimbursement to us included in Loss attributed to noncontrolling interests in consolidated entities.

We consider our current cellulosic ethanol technology under development to be our Generation 1 or
Gen 1 technology. To date, we have demonstrated that our Gen 1 technology can produce cellulosic ethanol at a small scale in the laboratory, pilot plant, and demonstration-scale facility, but at yields and cost that are not yet
commercially viable. We will require continued and substantial investment to further develop our Gen 1 technology, and continue to believe that Gen 1 will produce a viable technology that could be deployed on a commercial scale as early as 2012. We
anticipate that we could break ground on our first commercial plant through our Vercipia joint venture as early as 2010.



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Specialty Enzymes Research and Development

Research and development expenses related to our specialty enzyme business include costs related to ongoing bioprocess development and
manufacturing process yield improvements, funded support for research collaborations and to a lesser extent, early stage product development.

Due to limited capital resources and challenging economic conditions, we have not spent significant resources on early stage specialty
enzyme product development for the past three years.

Our specialty enzyme research and development expenses decreased $0.9
million, to $1.2 million (including share-based compensation of $2,000) for the three months ended March 31, 2010 compared to $2.1 million (including share-based compensation of $0.5 million) for the three months ended March 31, 2009.
Excluding the impact of share-based compensation, biofuels research and development decreased $0.4 million for the three months ended March 31, 2010 as compared to the same period in 2009 primarily due to our shift in focus to biofuels process
development, and to a lesser extent the de-emphasis of early stage product development for our specialty enzyme business segment and collaboration and grant work not core to our current focus.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2010 and 2009 are as follows (in thousands):



|                                             |  |                              |       |          |   |       |  |     |   
|-------------------------------------------- |  | ---------------------------- | ----- | -------- | - | ----- |  | --- | --
|                                             |  | Three Months Ended March 31, |       | % Change |  
|                                             |  | 2010                         |       | 2009     |  
|Selling, general and administrative expenses |  | $                            | 7,698 |          | $ | 9,172 |  | (16 | )%

Selling,
general and administrative expenses decreased $1.5 million, or 16%, to $7.7 million (including share-based compensation of $0.4 million) for the three months ended March 31, 2010 compared to $9.2 million (including share-based compensation of
$1.1 million) for the prior three months ended March 31, 2009. Excluding the impact of share-based compensation, selling, general and administrative expenses decreased $0.8 million for the three months ended March 31, 2010 as compared to
the same period in 2009. The decrease during the three months ended March 31, 2010 compared to the same period in the prior year was primarily due to a $0.6 million decrease in Vercipia operating expenses as a result of the deconsolidation of
Vercipia upon adoption of new authoritative guidance on January 1, 2010.

Share-Based Compensation Charges

We recognized $0.5 million, or $0.04 per share, and $2.5 million, or $0.43 per share, for the three months ended
March 31, 2010 and 2009. Share-based compensation expense was allocated among the following expense categories (in thousands):



|                                    |  |                              |     |      |   |      
|----------------------------------- |  | ---------------------------- | --- | ---- | - | -----
|                                    |  | Three Months Ended March 31,
|                                    |  | 2010                         |     | 2009
|Research and development            |  | $                            | 42  |      | $ | 1,476
|Selling, general and administrative |  |                              | 426 |      |   | 1,071
|                                    |  |                              |     |      |   |      
|                                    |  | $                            | 468 |      | $ | 2,547
|                                    |  |                              |     |      |   |      

Share-based compensation decreased $2.1 million for
the three months ended March 31, 2010 as compared to the same period in 2009, primarily related to the suspension of our employee stock purchase plan during the first quarter of 2009, longer vesting periods due to our option exchange during
2009 and an overall decrease in equity awards granted since our merger with Celunol Corp. in 2007.

Interest and other
expense, net

Interest income on cash and cash equivalents decreased $31,000 for the three months ended March 31, 2010
compared to the three months ended March 31, 2009 primarily due to lower average cash and cash equivalents balances.

Interest expense was $2.1 million for the three months ended March 31, 2010 compared to $3.2 million for the three months ended
March 31, 2009, net of $1.0 million in capitalized interest for the demonstration-scale facility. Our demonstration-scale facility was placed in service in February 2009, and as such, we ceased capitalizing interest on that date. The decrease
in interest expense from the comparable periods in 2009 was primarily attributed to the decrease in the outstanding principal amount of the 2008 Notes from conversions and exchange of our 2007 Notes for 2009 Notes in September 2009. Total interest
expense for the three months ended March 31, 2010 and 2009 was comprised of the following (in thousands):



|                                             |  |                              |     |      |   |      
|-------------------------------------------- |  | ---------------------------- | --- | ---- | - | -----
|                                             |  | Three Months Ended March 31,
|                                             |  | 2010                         |     | 2009
|5.5% coupon interest, payable in cash        |  | $                            | 949 |      | $ | 1,354
|Non-cash amortization of debt issuance costs |  |                              | 149 |      |   | 247  
|                                             |  |                              |     |      |   |      



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|                                                    |  |                              |       |   |      |   |        |  
|--------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ------ | -
|                                                    |  | Three Months Ended March 31, |      
|                                                    |  | 2010                         |       |   | 2009 |  
|2007 Notes Total                                    |  |                              | 1,098 |   |      |   | 1,601  |  
|                                                    |  |                              |       |   |      |   |        |  
|8% coupon interest, payable in cash or common stock |  |                              | 258   |   |      |   | 1,102  |  
|Non-cash accretion of debt discount                 |  |                              | 394   |   |      |   | 1,285  |  
|Non-cash amortization of debt issuance costs        |  |                              | 19    |   |      |   | 109    |  
|                                                    |  |                              |       |   |      |   |        |  
|2008 Notes Total                                    |  |                              | 671   |   |      |   | 2,496  |  
|                                                    |  |                              |       |   |      |   |        |  
|9% coupon interest, payable in cash or common stock |  |                              | 308   |   |      |   |       |  
|Non-cash amortization of debt premium               |  |                              | (102  | ) |      |   |       |  
|                                                    |  |                              |       |   |      |   |        |  
|2009 Notes Total                                    |  |                              | 206   |   |      |   |       |  
|                                                    |  |                              |       |   |      |   |        |  
|Equipment financing                                 |  |                              |      |   |      |   | 12     |  
|Other                                               |  |                              | 84    |   |      |   | 92     |  
|Capitalized interest                                |  |                              |      |   |      |   | (1,039 | )
|                                                    |  |                              |       |   |      |   |        |  
|Total interest expense                              |  | $                            | 2,059 |   |      | $ | 3,162  |  
|                                                    |  |                              |       |   |      |   |        |  

Gain 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
Operations as Gain on net change in fair value of derivative assets and liabilities. We recorded a net gain of $0.1 million for the three months ended March 31, 2010 compared to $13.3 million for the three months ended
March 31, 2009 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, 2010, we recorded a gain
on debt extinguishment of $0.6 million compared to $3.6 million for the three months ended March 31, 2009. 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. The carrying value of the converted 2008 Notes for the three months ended March 31, 2009 was equal to $7.5 million which represented the difference between the principal converted of $10.0 million and
the unamortized debt discount and issuance costs. During the three months ended March 31, 2009, we issued a total of 0.7 million shares with a total market value as of the dates of conversion of $3.9 million to settle the converted 2008
Notes and related make-whole payments.

Loss Attributed to Noncontrolling Interest in Consolidated Entities

In connection with the initial phase of our strategic partnership with BP, we formed Galaxy and Vercipia as special
purpose entities. Effective January 1, 2010, we adopted new authoritative accounting guidance which changes the consolidation treatment applicable to variable interest entities. As a result of the adoption of such guidance in the first quarter
2010, we determined that we were no longer the primary beneficiary of Vercipia and were required to deconsolidate as of January 1, 2010. As a result, Vercipia operations are included in our consolidated results only from inception,
February 18, 2009, through December 31, 2009.

We continue to be considered the primary beneficiary of Galaxy and
consolidate its financial results. Pursuant to current accounting rules, the transaction fees and joint development fees are accounted for as follows:



| |  |  | The license to technology we granted to Galaxy and ongoing joint development work we perform for Galaxy are accounted for as capital contributions to
Galaxy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction fees and joint development fees paid by BP are accounted for as capital contributions to Galaxy, which are subsequently distributed to us
as a reduction to our capital account; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ongoing joint development fees are accounted for as a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------------------

As a result, our consolidated financial statements include a line item Noncontrolling interests in consolidated entities. On
our Condensed Consolidated Balance Sheets, this line reflects BPs ownership of Galaxys equity as of March 31, 2010 and includes BPs ownership in both Galaxy and Vercipias equity as of December 31, 2009. This line
item is reduced by BPs 50% share of Galaxys losses, and increased by cash contributions made by BP. BPs share of losses in Galaxy, and Vercipia from inception, February 18, 2009, through December 31, 2009, are reflected
in our Condensed Consolidated Statements of Operations as Loss attributed to



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noncontrolling interests in consolidated entities. Galaxy has incurred losses through March 31, 2010, 50% of which have been allocated to BP, and we anticipate this entity will
continue to incur losses related to ongoing joint development through at least the initial joint development program and construction processes.

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, 2010, we had an accumulated deficit of approximately $637.9 million. As of March 31, 2010 our strategic partners, including BP, have provided us
with more than $375 million in funding since inception, including more than $40 million from various government agencies, and are committed to additional funding of more than $15 million through 2012, subject to our performance under existing
agreements, excluding milestone payments, license and commercialization fees, and royalties or profit sharing.

Our future
committed funding is subject to our performance under existing agreements, and is concentrated within a limited number of collaborators. Our failure to successfully maintain our relationships with these collaborators could have a material adverse
impact on our operating results and financial condition.

Capital Requirements

As of March 31, 2010, we had available cash and cash equivalents of approximately $15.5 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 cellulosic ethanol pilot and demonstration-scale facilities and other working capital requirements, and 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. As of March 31, 2010, we had an accumulated deficit of approximately $637.9 million.

We will require additional capital to fund our operations. Our independent registered public accounting firm has included an explanatory
paragraph in its report on our 2009 financial statements related to the substantial doubt regarding our ability to continue as a going concern. Our cash at March 31, 2010, along with anticipated cash from grants, revenue, our commitment from BP
and other sources is not sufficient to meet cash requirements to fund our operating expenses, capital expenditures, required and potential payments under our 2007 Notes, 2008 Notes and 2009 Notes, and working capital requirements through 2010,
without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures.

We are
dependent upon BPs financial and technical contributions to our joint ventures in order to realize the benefits of the strategic partnership with BP. The efforts under the first phase of our partnership have been co-funded by BP under an
18-month initial agreement which was scheduled to expire on January 31, 2010 and has been extended through August 1, 2010. If BP were to discontinue its participation, we would need to continue the efforts on our own or identify and enter
into arrangements with one or more other partners. If we were required to fund all of the technology development efforts contemplated under this partnership, we would need to raise additional funds to do so, which may be difficult or impossible in
the current financing environment. Furthermore, it may be difficult or impossible for us to find a different partner that is a good strategic fit and to enter into a new strategic relationship on terms that are favorable to us. If we are unable to
find an additional partner or raise additional funds, we may be required to discontinue our biofuels business or dispose of certain assets related to it.

Through our Vercipia joint venture with BP, we will also need to raise sufficient capital to fund the construction of our first
commercial cellulosic ethanol plant to be located in Highlands County, Florida. We estimate that the total costs of construction for this first commercial plant will be approximately $300 million, which we anticipate will be funded from a
combination of non-recourse debt and equity capital. In February 2009, we and BP filed a joint application for a Department of Energy (DOE) loan guarantee program. On June 25, 2009, we announced our application had been selected by
the DOE to enter the due diligence phase of its Title XVII Loan Guarantee Program. If awarded, funding from this program could cover a substantial portion of the total cost of construction of the project We expect the remaining portion to be
funded by project equity investments from BP and us. This may require us to raise project financing in addition to the cash required to fund our ongoing operations. Pending the timing of project financing, we anticipate that Vercipia could break
ground on this facility as early as 2010.

We are focusing efforts on generating additional cash to fund our operations
through a combination of additional corporate partnerships and collaborations, federal, state and local grant funding, incremental product sales, selling or financing assets, and, if necessary and available, the sale of equity or debt securities. If
we are unsuccessful in raising additional capital from any of these sources, we will need to defer, reduce or eliminate certain planned expenditures or sell certain of our assets to raise cash.

There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are not able to
defer, reduce or eliminate our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may need to restructure or significantly curtail our operations, divest all or a portion of our business, file for
bankruptcy or cease operations.



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Convertible Debt Obligations

The following table summarizes our principal contractual and interest obligations for the 2007 Notes, 2008 Notes and 2009 Notes as of
March 31, 2010, assuming such obligations are not converted prior to maturity (in thousands):



|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|---------------------------------------- |  | ----- | ------- | ---------------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ------ |  | - | -------
|                                         |  |       |         | Payments due by Period
|                                         |  | Total |         | Less than1 Year        |   | 1 - 3 Years |  | 3 - 5 Years |        | More than5
Years
|2007 Notes (1)                           |  | $     | 135,478 |                        | $ | 3,797       |  | $           | 7,594  |                  | $ | 7,594  |  | $ | 116,493
|2008 Notes (2)                           |  |       | 15,341  |                        |   | 1,040       |  |             | 14,301 |                  |   |       |  |   |       
|2009 Notes (3)                           |  |       | 35,295  |                        |   | 1,234       |  |             | 2,467  |                  |   | 2,467  |  |   | 29,127 
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|Total Principal and Interest Obligations |  | $     | 186,114 |                        | $ | 6,071       |  | $           | 24,362 |                  | $ | 10,061 |  | $ | 145,620
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        



|(1) | The holders of the 2007 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. Total obligations under the 2007 Notes include approximately $66.5 million (including $3.8 million due within one year) in interest through maturity of the 2007 Notes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Total obligations under the 2008 Notes include approximately $2.3 million (including $1.0 million due within one year) in interest through maturity of the 2008 Notes.
Interest payments on the 2008 Notes may be made, at our option and subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at a 5% discount to the average of the volume weighted stock price during a
measurement period prior to the applicable interest payment date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The holders of the 2009 Notes have the right to require us to purchase the 2009 Notes for cash (including any accrued and unpaid interest) on April 1,
2012, April 1, 2017 and April 1, 2022. Total obligations under the 2009 Notes include approximately $21.6 million (including $1.2 million due within one year) in interest through maturity of the 2009 Notes. Interest payments on the
2009 Notes may be made, at our option and subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at the greater of the applicable conversion price in effect, which was $9.60 as of March 31,
2010, or the average of the volume weighted stock price during a measurement period prior to the applicable interest payment date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance Sheet

Our consolidated assets have decreased by $18.5 million, to $149.4 million at March 31, 2010 from $167.9 million at December 31,
2009, attributable primarily to the decrease in cash and cash equivalents of $16.6 million, of which $7.2 million related to the deconsolidation of Vercipia as a result of the adoption of new authoritative accounting guidance effective
January 1, 2010.

Our consolidated liabilities have decreased by $1.8 million, to $135.9 million at March 31, 2010
from $137.7 million at December 31, 2009, primarily attributable to a decrease in our carrying value of debt, due to additional conversions of the 2008 Notes during the first quarter, which resulted in the issuance of 0.2 million shares of
our common stock as well as the deconsolidation of $1.9 million of Vercipia liabilities.

Cash Flows Related to Operating,
Investing and Financing Activities

Our operating activities used cash of $15.7 million for the three months ended
March 31, 2010. Our cash used in operating activities consisted primarily of cash used to fund our efforts in cellulosic ethanol technology process development and commercialization, which was partially offset by proceeds
from BPs capital contributions to Galaxy which are included in financing activities described below.

Our investing
activities used cash of $8.3 million for the three months ended March 31, 2010. Our investing activities included the impact of deconsolidation of Vercipias cash and cash equivalents of $7.2 million and purchases of property, plant and
equipment primarily for the optimization of our demonstration facility.

Since 2007, we have spent in excess of $100 million
(including expenditures by Celunol Corp., with which we merged in June 2007) in capital expenditures for further modifications and improvements to our pilot facility and the construction, start-up, commissioning and optimization of our
1.4 million gallon-per-year demonstration-scale cellulosic ethanol facility in Jennings, Louisiana. In 2009, we achieved a key development milestone when our demonstration-scale facility was commissioned and produced our first gallons of
cellulosic ethanol from the plant. Work to optimize the facility and make process improvements has continued throughout 2009 and into early 2010 to ensure reliable and cost-effective operation. We may require additional capital and operating
expenditures to complete the optimization of our demonstration-scale facility throughout 2010. We do not have fixed-priced arrangements with our major engineering and construction firms; as such, most of our engineering and construction costs
related to



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our demonstration-facility are incurred and paid on a time and materials basis. Since 2007, we have incurred significant costs in excess of our projected expenditures for the improvements to our
pilot plant and construction, commissioning and optimization of our demonstration-scale facility.

Our financing activities
generated net cash of $7.5 million for the three months ended March 31, 2010, consisting primarily of capital contributions by BP into Galaxy, our consolidated variable interest entity.

Contractual Obligations

The following table summarizes our contractual obligations at March 31, 2010, excluding the principal and interest payments for our
2009 Notes, 2008 Notes and 2007 Notes shown above (in thousands):



|                                  |  |       |        |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |      
|--------------------------------- |  | ----- | ------ | - | ---------------------- | - | ------ | ----------- |  | - | ----------- | - |  | ---------------- | ------ | - |  | - | -----
|                                  |  |       |        |   | Payments due by Period
|                                  |  | Total |        |   | Less than1 Year        |   |        | 1 - 3 Years |  |   | 3 - 5 Years |   |  | More than5 Years
|Contractual Obligations           |  |       |        |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |      
|Operating leases gross            |  | $     | 39,571 |   |                        | $ | 6,190  |             |  | $ | 12,995      |   |  | $                | 12,701 |   |  | $ | 7,685
|Sublease income (1)               |  |       | (5,249 | ) |                        |   | (995   | )           |  |   | (2,102      | ) |  |                  | (2,152 | ) |  |   |     
|                                  |  |       |        |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |      
|Operating leases, net             |  |       | 34,322 |   |                        |   | 5,195  |             |  |   | 10,893      |   |  |                  | 10,549 |   |  |   | 7,685
|Manufacturing costs to Fermic (2) |  |       | 35,483 |   |                        |   | 13,664 |             |  |   | 21,819      |   |  |                  |       |   |  |   |     
|License and research agreements   |  |       | 1,945  |   |                        |   | 295    |             |  |   | 590         |   |  |                  | 540    |   |  |   | 520  
|                                  |  |       |        |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |      
|Total Contractual Obligations     |  | $     | 71,750 |   |                        | $ | 19,154 |             |  | $ | 33,302      |   |  | $                | 11,089 |   |  | $ | 8,205
|                                  |  |       |        |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |      



|1 | Sublease rental income is expected to be received through February 2015, pursuant to a facilities sublease agreement we entered into during the fourth quarter of
2007.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Manufacturing and Supply Agreements

During 2002, we entered into a manufacturing agreement with Fermic to provide us with the capacity to produce commercial quantities of
enzyme products. Based on actual and projected increased product requirements, the agreement was amended in 2006 to provide for additional capacity to be installed over the next two years. Under the terms of the agreement, we can cancel the
committed purchases with thirty months notice provided that the term of the agreement, including the termination notice period, aggregates four years. Pursuant to our agreement with Fermic, we are also obligated to reimburse monthly costs
related to manufacturing activities. These costs scale up as our projected manufacturing volume increases. As of March 31, 2010, under this agreement we have made minimum commitments to Fermic of approximately $35.5 million over the next two
and a half years.

During the remainder of 2010, we anticipate funding as much as $2.5 million in additional equipment costs
related to our manufacturing agreement with Fermic. As we continue to develop our commercial manufacturing platforms, we may decide to purchase additional capital equipment under this agreement. Since inception through March 31, 2010, we had
incurred costs of approximately $20.9 million for property and equipment related to this agreement.

In 2008, we contracted
with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for Phyzyme. Our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume the right to
manufacture Phyzyme. If Danisco were to exercise this right, we may experience excess capacity at Fermic. If Danisco assumed the right to manufacture Phyzyme 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.

Letter of Credit

Pursuant to our facilities leases for our office and laboratory space in San Diego, we are required to maintain a letter of credit on
behalf of our landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on minimum required working capital and market capitalization. As of March 31, 2010, we had a letter of credit in place pursuant to
this agreement for approximately $10.4 million, representing the $100,000 minimum and approximately 24 months current rent. The letter of credit is issued under our existing bank agreement. We are required by the bank to secure this obligation
with cash, which is reflected as restricted cash on our consolidated balance sheet as of March 31, 2010 and December 31, 2009.

Effective April 2010, the letter of credit was increased by approximately $0.3 million, representing the contractual rent increase for
the subsequent 24-month period.



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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,
2010.

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.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our
consolidated financial statements.

Revenue Recognition

We follow the provisions as set forth by authoritative accounting guidance.

We generally recognize revenue when we have satisfied all contractual obligations and we are reasonably assured of collecting the
resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue under current accounting rules. In those instances where we have billed our customers or received payment
from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on our balance sheet.

We
generate revenue from research collaborations generally through funded research, up-front fees to initiate research projects, fees for exclusivity in a field, and milestones. We recognize revenue from research funding on a proportional
performance basis, as research hours are incurred under each agreement. We recognize fees to initiate research over the life of the project. We recognize revenue from exclusivity fees over the period of exclusivity. Our collaborations often
include contractual milestones. When we achieve these milestones, we are entitled to payment, as defined by the underlying agreements. We recognize revenue for 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) our past research and development services, as well as our ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees
that the we customarily charge for similar research and development services.

We recognize revenue from grants as related
costs are incurred, as long as such costs are within the funding limits specified by the underlying grant agreements.

We
recognize revenue related to the sale of our inventory as we ship or deliver products, provided all other revenue recognition criteria have been met. We recognize revenue from products sold through distributors or other third-party arrangements upon
shipment of the products, if the distributor has a right of return, provided that (a) the price is substantially fixed and determinable at the time of sale; (b) the distributors obligation to pay us is not contingent upon resale of
the products; (c) title and risk of loss passes to the distributor at time of shipment; (d) the distributor has economic substance apart from that provided by us; (e) we have no significant obligation to the distributor to bring about
resale of the products; and (f) 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. We include revenue from our royalty on operating
profit in product revenues on the statement of operations. We recognize royalty on operating profit during the quarter in which such revenues are earned based on calculations provided by our partner. To date, we have generated a substantial portion
of our product revenues, including royalty on operating profit, through our agreements with Danisco. We may record our quarterly royalty on operating profit based on estimates from Danisco, and the final calculation of the royalty 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.

We have contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. Under current accounting
guidance, product manufactured for us by Genencor is recognized on a net basis equal to the royalty on operating profit received from Danisco, as all the following indicators of net revenue reporting are met: i) the third party is the obligor; ii)
the amount earned is fixed; and iii) the third party maintains inventory risk, as compared to the full value of the manufacturing costs plus royalty on operating profit we currently recognize for Phyzyme we manufacture.



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We sometimes enter into revenue arrangements that include the delivery of more than one
product or service. In these cases, we recognize revenue from each element of the arrangement as long as we are able to determine a separate value for each element, we have completed our obligation to deliver or perform on that element and we are
reasonably assured of collecting the resulting receivable.

Share-based Compensation

Effective January 1, 2006, we calculate the fair value of all share-based payments to employees and non-employee directors, including
grants of stock options, non-restricted and restricted shares, and awards issued under the employee stock purchase plan, and amortize these fair values to share-based compensation in the income statement over the respective vesting periods of the
underlying awards.

Share-based compensation related to stock options includes the amortization of the fair value of options
at the date of grant determined using the Black-Scholes Merton (BSM) valuation model. We amortize the fair value of options to expense over the vesting periods of the underlying options.

Share-based compensation related to awards issued under our employee stock purchase plan, or ESPP, after December 31, 2005 are based
on calculations of fair value under the BSM valuation model which are similar to how stock option valuations are made. We amortize the fair value of ESPP awards to expense over the vesting periods of the underlying awards.

We estimate the fair value of stock option awards and awards under the ESPP on the date of grant using assumptions about volatility,
expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock and an analysis of our peers. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time awards are granted, based on maturities which approximate the expected life of the options. The expected life of the options granted is estimated using the historical exercise behavior of employees and
an analysis of our peers. The expected dividend rate takes into account the absence of any historical payments and managements intention to retain all earnings for future operations and expansion.

We estimate the fair value of non-restricted and restricted stock awards based upon the closing market price of our common stock at the
date of grant. We charge the fair value of non-restricted awards to share-based compensation upon grant. We amortize the fair value of restricted awards to share-based compensation expense over the vesting period of the underlying awards.

Convertible Debt and Derivative Accounting

We adopted new guidance as issued on January 1, 2009 which significantly impacted the accounting for our 2008 Notes by requiring us
to account separately for the liability and equity components of the convertible debt. The liability component is measured so that the effective interest expense associated with the convertible debt reflects the issuers borrowing rate at the
date of issuance for similar debt instruments without the conversion feature. The difference between the cash proceeds associated with the convertible debt and this estimated fair value is recorded as a debt discount and amortized to interest
expense over the life of the convertible debt.

Determining the fair value of the liability component requires the use of
accounting estimates and assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the liability component and, in effect, the associated interest expense. According to the
guidance, the carrying amount of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. If no similar liabilities exist, estimates of fair value are primarily
determined using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities.

At inception, we perform an assessment of all embedded features of a debt instrument to determine if 1) such features should be
bifurcated and separately accounted for, and, 2) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liability. The fair value of the embedded feature is measured initially, included as a
liability on the balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the statement of operations. We monitor, on an ongoing basis, whether events or circumstances could give rise to a change in our
classification of embedded features.

We account for the conversion of our 2008 Notes in accordance with authoritative
accounting guidance, which states that upon conversion the difference between the carrying value of the converted 2008 Notes and the fair value of the common stock delivered to the noteholders is recorded as a gain (loss) on debt extinguishment in
our Consolidated Statement of Operations.

Variable Interest Entities

We have implemented the provisions of authoritative accounting guidance, which addresses consolidation by business enterprises of variable
interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential
characteristic of a controlling financial interest.



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We have entered into a strategic collaboration with BP which includes two special purpose
entities, Galaxy and Vercipia, both of which are jointly owned by BP and us.

We have determined that both Galaxy and Vercipia
qualify as variable interest entities. Effective January 1, 2010, we adopted new authoritative accounting guidance which changes the consolidation guidance applicable to variable interest entities. It also amends the guidance governing the
determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis includes, among other
things, consideration of who has the power to direct the activities of the entity that most significantly impact the entitys economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. As a result of the adoption in the first quarter 2010, we determined we were no longer
the primary beneficiary of Vercipia and were required to deconsolidate as of January 1, 2010. We concluded we are still the primary beneficiary of Galaxy and therefore subject to consolidation by us. As a result, BPs capital contributions
are recorded as noncontrolling interests in consolidated entities on our Condensed Consolidated Balance Sheets. We consolidate the operating results of Galaxy, and record an adjustment to the noncontrolling interests in consolidated entities for
BPs share of profits and/or losses.

Long-Lived Assets

We review long-lived assets, including leasehold improvements, property and equipment, and acquired intangible assets for impairment
whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. This requires us to estimate future cash flows related to these assets. Actual results could differ from those
estimates, which may affect the carrying amount of assets and the related amortization expense.

Income Taxes

Effective in 2007, we account for income taxes pursuant to authoritative accounting guidance,which prescribes a
recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on our tax return. We do not recognize an uncertain tax position as a deferred tax asset if it has less than a
50% likelihood of being sustained.

We adopted the updated authoritative guidance on January 1, 2007, and commenced
analyzing filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As a result of adoption, we have recorded no additional tax
liability. As of March 31, 2010 we have not yet completed our analysis of our deferred tax assets for net operating losses and research and development credits. As such, we have removed these amounts and the offsetting valuation allowance
from our deferred tax assets. We are in the process of completing a Section 382 analysis regarding the limitation of the net operating loss and research and development credits.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their
net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Our deferred tax assets at March 31, 2010 were fully offset by a valuation allowance.

Inventories

We value inventory at the lower of cost (first in, first out) or market value and, if necessary, reduce the value by an estimated
allowance for excess and obsolete inventories. The determination of the need for an allowance is based on our review of inventories on hand compared to estimated future usage and sales, as well as judgments, quality control testing data, and
assumptions about the likelihood of obsolescence.

Recently Issued Accounting Standards

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



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|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, 2010, 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. Foreign currency risk is minimized because the amount of such obligations is not material.



|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 Exchange Act
reports is recorded, processed, summarized and reported within the timelines specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with
the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e)
and 15d-15(e)) as of March 31, 2010. Based on such evaluation, such officers have concluded that, as of March 31, 2010, our disclosure controls and procedures were effective.

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 (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
(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



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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.

Noteholder Lawsuit

On April 30, 2009, Capital Ventures International (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. An initial pre-trial conference was held on August 11, 2009 and the case is presently
in the discovery phase.

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 (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. The Motion to Dismiss is
currently pending.

Between February 27, 2009 and January 19, 2010, CVI converted all of its 2008 Notes,
approximately $14.5 million in face value, and the Company has issued approximately 1.3 million shares on a reverse-split adjusted basis, to settle these conversions and related make-whole obligations. Assuming the conversion prices
asserted by CVI of $17.64 from February 27, 2009 through October 5, 2009 and $4.27 for conversions subsequent to October 6, 2009, 0.8 million additional shares would be issuable in connection with CVIs conversions. The
Company does not believe that this lawsuit will have a material impact on its financial statements. The Company believes any contingent liabilities related to these claims are not probable or estimable and therefore no amounts have been accrued for
these matters.

Royalty Dispute

On August 31, 2009, the Company initiated an arbitration proceeding against Asahi Glass Co., Ltd. (Asahi) in the ICC
International Court of Arbitration. The arbitration related to a license agreement with Asahi (the Asahi License) whereby the Company obtained the right to use Asahi technology in connection with the manufacture of a product sold by the
Company. In the arbitration, the Company sought determinations that historical royalty payments made to Asahi were properly calculated and paid, reflecting all amounts properly subject to royalty obligations, and that Asahi had wrongfully interfered
with advantageous business relations of the Company, and further sought reimbursement of its damages, costs and expenses. In response to the Companys Request for Arbitration, Asahi claimed entitlement to additional royalties, breach of
contract, patent infringement, misappropriation of trade secrets, breach of a covenant of good faith and fair dealing, and, if the Company is not found to have breached any of its obligations, seeks to set aside the contract. On April 9, 2010,
the parties agreed to settle their respective claims and to amend the Asahi License. The settlement agreement and the amended Asahi license are not expected to have a material impact on the Companys financial position or results of operations.



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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.



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|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, 2009.

Risks Applicable to Our
Business Generally

We will need additional capital in the future. If additional capital is not available, we may have to curtail or
cease operations.

We will need to raise more money to continue to fund our business. Our capital requirements will depend
on several factors, including:



| |  |  | Expenditures and investments to implement our biofuels business strategy, including increased capital expenditures in relation to such strategy, for
example, to optimize our demonstration-scale facility, and build our commercial-scale facilities under our agreement with BP;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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, including our agreement with BP;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 will seek additional funds through a combination of existing and additional corporate partnerships and collaborations, federal, state
and local grant funding and loan guarantees, product sales, selling or financing assets, and the sale of equity or debt securities. In addition, we expect to attempt to raise funds in the non-recourse, project-finance capital markets to finance
growth of our project portfolio. Such funds may not be available to us or may be available on terms not satisfactory to us. We currently have applications pending for federal, state and local financial incentives such as grants; however, such funds
may not be available to us in adequate amounts, if at all. An inability to raise adequate funds to support the growth of our project portfolio will materially adversely affect our business.

If we cannot raise more money, we will have to implement one or more of the following remedies:



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



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



| |  |  | scale back our efforts to commercialize cellulosic ethanol;
| | - |  | -----------------------------------------------------------



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

As of March 31, 2010, we had a net loss for the three months ended of $12.0 million an accumulated deficit of approximately $637.9
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 2010 will result from the same sources, as well as from grant revenue. Future revenue from collaborations is uncertain and



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will depend upon our ability to maintain our current collaborations, including that with BP, enter into new collaborations and to meet research, development, and commercialization objectives
under new and existing agreements, and we have been de-emphasizing collaborations that are not core to our strategic market focus. Over the past two years, our product revenue in absolute dollars and as a percentage of total revenues has increased
significantly, and our grant revenue in absolute dollars and as a percentage of total revenues increased significantly during 2009. Our product and grant 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. Additionally, as our business model develops, our general and administrative expenses might increase based on broadening
our infrastructure to support continued growth in the business. In addition, the amounts we spend will impact our ability to become profitable and this will depend, in part, on:



| |  |  | the progress of our research and development programs for the production of ethanol from various sources of cellulosic biomass;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of building, operating and maintaining research and production facilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the number of production facilities that we ultimately attempt to develop;
| | - |  | --------------------------------------------------------------------------



| |  |  | 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.

Even if we generate significant additional revenue in our specialty enzymes business, we do not expect to achieve overall profitability
for the foreseeable future, as we make additional investments to implement our vertical integration strategy within biofuels. In order for us to generate revenue, we must not only retain our existing collaborations and/or attract new ones and
achieve milestones under them, but we must also develop products or technologies that we or our partners choose to commercialize and that are commercially successful and from which we can derive revenue through sales or royalties. Even if we do
achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We continue to experience
losses from operations, and we may not be able to fund our operations and continue as a going concern.

The report of our
independent registered public accounting firm for the fiscal year ended December 31, 2009 contains an explanatory paragraph which states that we have incurred recurring losses from operations and, based on our operating plan and existing
working capital, this raises substantial doubt about our ability to continue as a going concern. As of March 31, 2010, we have an accumulated deficit of approximately $637.9 million.

We have used the proceeds received from sales of our 2007 Notes in April 2007 and 2008 Notes in February 2008 to make enhancements to our
pilot facility, to complete construction and commissioning of our demonstration-scale facility in Jennings, Louisiana, to advance development of the site for our first commercial cellulosic ethanol plant, to commercialize our specialty enzymes
products, to continue our research and development efforts in both specialty enzymes and biofuels, and for expenses related to the merger with Celunol, all of which have adversely affected, and will continue to adversely affect, our operating
results until revenues reach levels at which we can fully support our operating and capital expenditures. We have used the net proceeds of our equity offering in October 2009 for general corporate purposes, which include research and development,
capital expenditures, working capital, and general and administrative expenses.

We will require additional capital to fund
our operations, including substantial capital to fund the first commercial cellulosic ethanol plant with BP, which we estimate will cost approximately $300 million to complete. We believe that we will be successful in raising or generating
additional cash to fund these requirements through a combination of additional corporate partnerships and collaborations, federal, state and local grant funding, selling and financing assets, incremental product sales, and, if necessary and
available, the sale of equity or debt securities. There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are unsuccessful in raising additional capital from any of these sources, we
may need to defer, reduce or eliminate certain planned expenditures, including our collaboration with BP.

If we are not able
to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure or significantly curtail our operations, file for
bankruptcy or cease operations.



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We are dependent on our collaborative partners, including BP, and our failure to successfully manage our
existing and future collaboration relationships could prevent us from developing and commercializing cellulosic ethanol and/or our specialty 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 of cellulosic ethanol, or all of the potential specialty 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, such as our collaboration with BP. 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. For example, we have recently entered into negotiations with
our strategic partner, BP, and have not yet come to acceptable terms on the second phase of our collaboration, which has required multiple extensions of the negotiating period. Our expectations concerning our biofuels business are dependent upon our
continued collaboration with BP, the future terms of which we are continuing to negotiate with BP. There can be no assurance that we will successfully conclude these negotiations in manner that is beneficial to the Company or our biofuels business.
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 either of our joint ventures with BP or with any of our other strategic partners or collaborators;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are unable to obtain funding to build commercial cellulosic ethanol plants;
| | - |  | ------------------------------------------------------------------------------



| |  |  | 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 are dependent on BP under our joint ventures in cellulosic ethanol.

We have a strategic partnership with BP to accelerate the development and commercialization of cellulosic ethanol technology. The first
phase of our partnership combines a broad technology platform and operational capabilities in an effort to advance the development of a portfolio of low-cost, environmentally-sound cellulosic ethanol production facilities in the United States, and
potentially throughout the world. The second phase of our partnership is focused on the commercial deployment of our technologies into a commercial-scale cellulosic ethanol production facility. We are dependent upon BPs financial and technical
contributions under both of these joint ventures in order to realize the benefits of the strategic partnership with BP and continue to operate our biofuels business, as it is currently composed. If BP were not to engage actively in efforts to
perform under our joint ventures or were to pursue alternative efforts in cellulosic ethanol, the joint ventures may not be successful and our business could be harmed, including requiring us to shutdown or dispose of our biofuels business. The
efforts under the first phase of our partnership have been co-funded by BP under an 18-month initial agreement that was scheduled to expire on January 31, 2010 and was extended through August 1, 2010. If BP were to discontinue its
participation in either of these joint ventures, we would need to continue the efforts on our own or identify and enter into arrangements with one or more other partners, or shutdown or dispose of our biofuels business. If we were to have to fund
all of the technology development efforts, we would need to raise additional funds to do so, which would be difficult in the current financing environment. Furthermore, it may be difficult for us to find a different partner that is a good strategic
fit and to enter into a new strategic relationship on terms that are favorable to us. If we could not find an alternative way to pursue our development and commercialization efforts in cellulosic ethanol, our business would be adversely affected.



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Our failure to successfully develop our cellulosic ethanol processes and technology would adversely
affect our ability to achieve the benefits under our strategic partnership with BP, and could prevent us from successfully developing and commercializing cellulosic ethanol and achieving or sustaining profitability.

A substantial part of our efforts in our biofuels business over the near term will be focused upon the joint development program with BP.
We have agreed with BP that for a limited period, we will not use our existing technology in any other technology development program in the field of conversion of biomass to fermentable sugars for the production, or the use in production, of
ethanol, with limited exceptions. The limited period may be extended if our joint development program with BP is extended. We are responsible for performance of substantially all of the activities under the joint development program. If we are not
successful in achieving the objectives of the joint development program, BP may terminate the joint development program, and we will no longer be entitled to receive any payments from BP for performance of the joint development program, which would
have a material adverse impact on our business, financial condition, and results of operations. The technology in the defined field that we develop in the course of the joint development program will be owned by Galaxy, a special purpose entity
which is equally owned by BP and us. We will only have access to the technology owned by Galaxy through any license that Galaxy grants to us. In addition, the license to our existing technology that we granted to Galaxy in the defined field will
continue in effect on a non-exclusive basis even if the joint development program terminates, unless the termination is caused by BPs failure to make payments to us when due. If BP terminates the joint development program, we may not be
successful in entering into an agreement with another strategic partner or otherwise economically exploiting our technology in the defined field, and the continuing rights of Galaxy to exploit our existing technology and technology developed during
the joint development program may adversely affect our ability to do so.

If we are unable to perform our obligations under our joint
development program with BP, including funding our portion of its costs, we may lose certain voting rights in the management of Galaxy, the special purpose entity formed to exploit the technology developed through our relationship with BP, and the
anticipated economic benefits resulting from the joint development program may be delayed or may not occur.

We are
co-funding our joint development program with BP and have an equal vote with BP in decisions regarding the management of Galaxy, including decisions regarding future funding, the commercial use of the technology package that we anticipate will
result from the joint development program and the timing of monetary distributions to the owners of Galaxy. However, if we are unable to fund our portion of the joint development program costs, or are unable to fulfill certain of our other
obligations under the joint development program, we may lose our ability to participate in certain aspects of the decision-making process, including decisions about how and when funding occurs. If we are unable to fulfill our funding commitments, BP
may chose to fund our portion of the joint development program and to receive its contributions back before we receive any additional distributions from license fees, royalties or other revenue, which could result in the delay of distributions to us
or in our receiving no distributions. A delay or failure to receive distributions could have a material adverse impact on our future revenues and could have a material adverse impact on our business, financial condition and results of operations.

If we do not participate in projects under our commercial joint venture with BP or are unable to fund our portion of projects that we have
elected to participate in under the joint venture, our interest in the joint venture may be bought out by BP or diluted, and the anticipated economic benefits to us of the joint venture may be lost or reduced.

We are participating in commercial development activities with BP under Highlands Ethanol, LLC (dba Vercipia Biofuels)
(Vercipia), a joint venture owned equally by BP and us, which will act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under our joint development program with BP. This joint
venture is intended to progress the development of one of the nations first commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida, and to create future opportunities for commercializing cellulosic ethanol
technologies. If we do not continue to participate in the development of the Vercipia project by funding our portion of the costs, or if we do participate but are unable to meet our funding obligations with respect to the project, BP may choose to
buy out our interest in the joint venture or may dilute our interest in the joint venture. Loss or reduction of our interest in Vercipia could have a material adverse impact on our future revenues and could have a material adverse impact on our
business, financial condition and results of operations.



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If we are unable to co-develop commercial plant production projects with BP under our Vercipia joint
venture, we may not achieve the anticipated benefits of our relationship with BP.

There are substantial risks involved in
the design, development, and construction of commercial-scale cellulosic ethanol production facilities, which is the focus of our Vercipia joint venture with BP, including, but not limited to, the following risks:



| |  |  | legal and regulatory risk related to land use, permitting, and environmental regulations;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | cost overruns;
| | - |  | --------------



| |  |  | risk that technology will not scale from a demonstration to commercial facility;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risk that production costs will not be competitive with the price of competing fuels like gasoline or corn-based ethanol;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to obtain necessary financing to fund the commercial project;
| | - |  | -----------------------------------------------------------------------



| |  |  | decrease in support from the government through loss of subsidies, loss of tax credits, or a decrease in federal financial support including the risk
that we may not be granted the loan guarantee from the DOE which BP and we recently applied for; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | introduction of next-generation technologies that are superior to our cellulosic ethanol process technology.
| | - |  | ------------------------------------------------------------------------------------------------------------

Any one of these factors could have a material adverse impact on our and BPs ability to complete our first planned commercial
facility, which would have a material adverse impact on our business, financial condition and results of operations.

We should be viewed
as an early stage company with new and unproven technologies.

You must evaluate our business in light of the
uncertainties and complexities affecting an early stage biotechnology company or cellulosic ethanol manufacturing company. Our existing proprietary technologies are new and in the early stage of development for both biofuels and specialty enzymes.
We may not be successful in the commercial development of these 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, all in the specialty enzymes area, including our Purifine, Fuelzyme, Veretase, Xylathin, and Luminase 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. We have not yet commercialized any products or processes related to our biofuels segment. Our specialty enzyme 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 or biofuels production processes 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, or if we are unable to sell our cellulosic ethanol or an integrated solution for the production of cellulosic
ethanol, 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.

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 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. As of March 31, 2010, approximately $69 million of the 2007 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 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. For example, the holders of the 2008 Notes may require us to redeem the 2008 Notes under such circumstances. 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 will be in default under
the indenture for the 2007 Notes or the indenture for the 2009 Notes, as applicable, which would also cause an event of default under the 2008 Notes and 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.



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We may not have adequate funds to pay interest or make-whole payments on our 2008 Notes, or
to purchase the 2008 Notes at required times.

In February 2008, we completed a private placement of $71 million of 2008
Notes and warrants to purchase our common stock. As of March 31, 2010, approximately $13.0 million of the 2008 Notes remains outstanding. On July 1, 2008, certain terms of all of the outstanding 2008 Notes were modified pursuant to
convertible note amendment agreements entered into with certain holders of the 2008 Notes.

We are required to pay interest on
the 2008 Notes at the rate of 8% per year, and the 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, we are obligated to pay such holder an amount equal to
the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that we may, subject to
the satisfaction of certain conditions, pay interest or make-whole amounts with shares of our common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion. As of March 31, 2010, our
potential maximum remaining make-whole obligation assuming conversion of 100% of the 2008 Notes on that date was approximately $2.3 million, which we may be required to settle in cash if we are unable to satisfy the conditions for paying
make-whole amounts with shares or the noteholders do not otherwise waive these conditions. Were many holders of our 2008 Notes to convert their 2008 Notes, or if a significant amount were converted at approximately the same time, and we
were at that time unable to satisfy the conditions for paying make-whole amounts in shares and the noteholders did not otherwise waive those conditions, our cash resources at that time could be insufficient to make the required
make-whole payments. Also, one holder of 2008 Notes has asserted that certain make- whole payments made to it in shares should have been paid in cash, and has 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. The lawsuit requests additional shares based on such conversions, damages and declaratory relief. We have disputed the assertions made by that noteholder and believe our positions are correct. However, if
we were found to have been required to pay such make-whole payments in cash, or were found to have otherwise not satisfied our obligations under the 2008 Notes, we could, among other negative consequences, be required to redeem some or
all of the 2008 Notes. The holders of the 2008 Notes may also require us to redeem their 2008 Notes in connection with certain change of control events, and any borrowing agreements which we may enter into from time to time may similarly
require early repayment of borrowings under circumstances like those constituting a change of control under the terms of the 2008 Notes. For example, the holders of the 2007 Notes and 2009 Notes may require us to repurchase, for cash,
all or a portion of the 2007 Notes or 2009 Notes, as applicable, in such circumstances. Those agreements may also make our repurchase of 2008 Notes an event of default under the agreements. We may not have sufficient funds to pay any required cash
interest or cash make-whole payments or repurchase or redemption amounts of the 2008 Notes when due, or any amounts due under other borrowing agreements at the same time such amounts are due under the 2008 Notes or otherwise, and any
default under the 2008 Notes or any other borrowing agreements (including the 2007 Notes and 2009 Notes) could cause events of default under our other debt obligations (including the 2009 Notes, 2008 Notes and the 2007 Notes, as applicable). Any of
these events could cause the maturity of some or all of our debt obligations (including the 2009 Notes, 2008 Notes and the 2007 Notes, as applicable) to be accelerated, and could have a material adverse effect on our business, results of operations
and financial condition, up to and including causing us to cease operations.

Conversion of the 2008 Notes, the 2007 Notes and/or the 2009
Notes, exercise of related warrants, anti-dilution adjustments that may occur under the 2008 Notes and/or the related warrants, and the issuance of shares of common stock in payment of interest or make-whole payments under the 2008 Notes
will dilute the ownership interest of existing stockholders.

The conversion or exercise of some or all of the 2007 Notes,
2009 Notes and/or the 2008 Notes and related warrants, and the issuance of shares of common stock in payment of interest or make-whole payments under the 2008 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. In February 2009, the conversion price of the 2008 Notes decreased from
$49.08 per share to $25.56 per share, based on a reset provision contained in the 2008 Notes, in July 2009 decreased further to $20.88 per share in connection with the amendment of the 2008 Notes, and in October 2009 decreased further to $17.89 per
share in connection with our recent equity financing. 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, 2008 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.

The 2008 Notes also contain a version of broad-based weighted average anti-dilution protection, subject to
certain exceptions and limitations, which could cause further reductions in the $17.89 conversion price for the 2008 Notes should we engage in subsequent issuances that trigger those provisions. One holder of the 2008 Notes has 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. If we were required to honor those conversion notices or future conversion
notices at the lower conversion price, that would cause additional shares to be issued. Additionally, the warrants related to the 2008 Notes and certain warrants held by Syngenta



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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 2008 Notes by issuing shares, which we intend to do to the extent permissible under the terms of the
2008 Notes, including to the extent we obtain waivers from the holders to do so, we will be issuing relatively more shares than if our stock price was at a higher level. For example, in connection with the conversion of $45.9 million in aggregate
principal amount of 2008 Notes that occurred between January 1, 2009 and May 7, 2010, we issued approximately 1.9 million shares in partial satisfaction of the related make-whole obligations. Sales in the public market of
the common stock issuable upon conversion of the 2007 Notes and/or 2008 Notes or exercise of the related warrants, or issuable in payment of interest or make-whole payments under the 2008 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 2008 Notes may encourage short selling by market participants because
the conversion of the 2007 Notes and 2008 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2008 Notes into shares of our common stock could depress the price of our common stock.

The covenants in the 2008 Notes restrict our financial and operational flexibility.

We are subject to certain covenants under the 2008 Notes that restrict our financial and operational flexibility. For example, we are
restricted from incurring additional indebtedness (other than certain project financing debt, certain unsecured subordinated indebtedness and up to $187 million principal amount of additional indebtedness). The 2008 Notes also include a version of
broad-based weighted average anti-dilution protection, subject to certain exceptions and limitations, and the warrants issued in connection with the 2008 Notes also contain weighted-average anti-dilution protection. Any future financing by us
involving the issuance of equity, or rights to acquire equity, at a price or prices below the prevailing conversion price of the 2008 Notes at the time of such financing would trigger these provisions in the 2008 Notes and the warrants, causing a
further, possibly substantial, reduction in the conversion price for the 2008 Notes or the exercise price of the warrants and additional possible dilution for our shareholders, which would increase the cost and reduce the benefits to us of any such
equity financing. As a result of these covenants, our ability to finance our operations through the incurrence of additional debt or the issuance of additional equity is limited. The 2008 Notes also contain other covenants that restrict our
financial and operational flexibility.

One holder of our 2008 Notes (the Disputing Noteholder) has filed a lawsuit against us
asserting that our recent amendment of the 2008 Notes, which became effective on July 6, 2009, failed to amend such noteholders 2008 Note (the Disputed Note), and that certain actions we have taken that are permitted under the
terms of the 2008 Notes, as recently amended, constitute a breach under the Disputed Note.

The Disputing Noteholder did
not consent to the recent amendment of our 2008 Notes and has asserted that such amendment did not effectively amend the Disputed Note. We have disputed this assertion and believe that the recent amendment effectively amended all of the 2008 Notes,
including the Disputed Note. The 2008 Notes, as recently amended, and the Disputed Note, if not amended, contain different provisions regarding the amount of indebtedness that we may incur, actions that we may take vis-à-vis the 2007 Notes,
our use of cash from any sale of specified assets, and with respect to anti-dilution protection. If it is ultimately determined that the recent amendment did not amend the Disputed Note, certain actions that we have taken or that we may take that
are permitted under the terms of the 2008 Notes, as recently amended, may be determined to cause a default under the Disputed Note. For example, our exchange in September 2009 of approximately $30.5 million in aggregate principal amount of our 2007
Notes for approximately $13.7 million in aggregate principal amount of our 2009 Notes was permitted under the terms of the 2008 Notes, as recently amended, but would not be permitted under the terms of the 2008 Notes that were in effect prior to the
amendment. The Disputing Noteholder has asserted that the exchange of our 2007 Notes for 2009 Notes is not authorized under the Disputed Note and is invalid.

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, 2010, which includes the 2007 Notes, the 2008 Notes, and the
2009 Notes was approximately $95.7 million, representing approximately 87% 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, 2008 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------

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.

If the recent 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 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, raise
project finance capital for the development of commercial cellulosic ethanol plants, or otherwise continue to maintain or grow our business.

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

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

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

Our strategy includes entering into and working on simultaneous projects, frequently across multiple industries, in both our specialty
enzymes and biofuels businesses. 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, especially with respect to our vertical integration strategy within biofuels. 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. We may not be able to successfully implement
improvements to our management information and control systems in an efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls.

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, 2010, 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.



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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. Although we have made and are continuing to make improvements in our internal controls, if we discover other deficiencies or material
weaknesses, it may adversely impact our ability to report accurately and in a timely manner our financial condition and results of operations in the future, which may cause investors to lose confidence in our financial reporting and may negatively
affect the price of our common stock. Moreover, effective internal controls are necessary to produce accurate, reliable financial reports and to prevent fraud. If we continue to have 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



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may be challenged by others. For example, in February 2007, an interference proceeding was declared in the United States Patent and Trademark Office between a United States patent assigned
to us and a pending United States patent application owned by a third party, with allowable claims directed to our GeneReassembly technology. On February 25, 2008 the Board of Patent Appeals and Interferences ruled in favor of the other party
and the claims in our issued patent were cancelled. 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;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | stop production of cellulosic ethanol at our production facilities;
| | - |  | -------------------------------------------------------------------



| |  |  | 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.

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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.

In the United States, specialty 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 specialty enzyme projects to date have focused on non-human applications and specialty 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.

In order to achieve and maintain market acceptance, our biofuels business will need to meet a significant number of environmental and
other regulations and standards established by various federal, state and local regulatory agencies. As these regulations and standards evolve, and if new regulations or standards are implemented, we may be required to modify our proposed facilities
and processes or develop and support new facilities or processes and this will increase our costs. Any failure to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay our
production of ethanol and the provision of related services including plant operation and engineering services in support of anticipated licenses of our technology, which could harm our biofuels business. Market uncertainty regarding future policies
may also affect our ability to develop new ethanol production facilities or license our technologies to third parties. Any inability to address these requirements and any regulatory changes could have a material adverse effect on our biofuels
business, financial condition and operating results.

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.



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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, applicable to ethanol operations, more vigorous enforcement policies and discovery of currently unknown
conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial position.

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

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

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

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

We face, and will continue to face, intense competition in our specialty enzymes business. There are a
number of companies who compete with us in various steps throughout our technology process. For example, Codexis, Maxygen, Inc., Evotec, and Xencor have alternative evolution technologies. Integrated Genomics Inc., Myriad Genetics, Inc., and ArQule,
Inc. perform screening, sequencing, and/or bioinformatics services. Novozymes A/S, Genencor International Inc., and Dyadic International are involved in development, overexpression, 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.

The ethanol production and marketing industry is extremely competitive. In addition to cellulosic ethanol producers using different
technology platforms, our competitors are grain ethanol producers as well as other providers of alternative and renewable fuels. Significant competitors in the grain ethanol production and marketing industry include Archer Daniels Midland Company,
Cargill, Inc., VeraSun Energy Corporation, and Aventine Renewable Energy, Inc. Many companies are engaged in research and development activities in the emerging cellulosic ethanol industry, and companies with announced pilot facility and/or
demonstration facility development activities in the cellulosic ethanol space include Abengoa Bioenergy Corp., BlueFire, Genencor, Iogen Corporation, Losonoco, Mascoma, Range Fuels, and Xethanol. Larger industrial companies with announced cellulosic
strategies include Archer Daniels Midland, DONG Energy (Elsam), DuPont/POET (formerly known as Broin), Tate & Lyle, and Novozymes. Cellulosic gasification technologies are being pursued by companies including ClearFuels and BRI-Infinium.
Some or all of these competitors or other competitors, as well as academic, research and government institutions, are developing or may develop technologies for, and are competing or may compete with us in, the production of ethanol from cellulosic
biomass or other feedstocks, such as municipal or construction waste, production of cellulosic ethanol or other fuels employing different steps within the production process, such as acid hydrolysis and/or gasification, and/or the production of
other alternative fuels or biofuels, such as biobutanol. Some of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. As a result, our competitors may be able to
develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to many of our significant competitors may cause us
to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and prevent us from achieving any market share, sales and/or profitability, and adversely affect our
results of operations and financial position.

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.



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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 biofuels and cellulosic ethanol and other 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 and New
England areas, or due to competition for, or availability of, personnel with the qualifications or experience necessary for our biofuels business, particularly in the Jennings, Louisiana 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.

Several 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, especially in our biofuels business. 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.

Risks Specific to Our Vertically-Integrated Biofuels
Business

We may not be successful in the development of individual steps in, or an integrated process for, the production of
ethanol from cellulosic biomass at commercial scale in a timely or economic manner or at all.

The production of ethanol
from cellulosic biomass requires multiple integrated steps, including:



| |  |  | obtaining the cellulosic raw material;
| | - |  | --------------------------------------



| |  |  | pretreatment of the biomass to make its constituent fibers accessible to enzymes;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | treatment with enzymes to produce fermentable sugars;
| | - |  | -----------------------------------------------------



| |  |  | fermentation by organisms to produce ethanol from the fermentable sugars;
| | - |  | -------------------------------------------------------------------------



| |  |  | distillation of the ethanol to concentrate and separation of it from other materials;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | purification of the ethanol; and
| | - |  | --------------------------------



| |  |  | storage and distribution of the ethanol.
| | - |  | ----------------------------------------



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We are currently focused on the pilot-scale research and development of such processes in
our pilot facility in Jennings, Louisiana, as well as the optimization of our demonstration-scale facility located at the same site that is intended to demonstrate the economics of cellulosic ethanol production using our proprietary processes. We
have limited experience with sourcing cellulosic feedstocks and distilling ethanol produced from biomass, and we have no experience storing and/or distributing significant volumes of ethanol produced from biomass sources. To date, we have
focused the majority of our research and development efforts on producing ethanol from corn stover, sugarcane bagasse, and wood. The technological and logistical challenges associated with each one of these processes are extraordinary, and we may
not be able to resolve such difficulties in a timely or cost effective fashion, or at all. Even if we are successful in developing an economical commercial-scale process for converting a particular cellulosic biomass to cellulosic ethanol,
we may not be able to adapt such process to other biomass raw materials.

While we have a pilot-scale cellulosic ethanol
facility and have commissioned our demonstration-scale cellulosic ethanol facility to demonstrate the economics of cellulosic ethanol production using our proprietary processes, we have yet to complete the optimization of our demonstration-scale
facility, nor have we begun construction of a large-scale commercial cellulosic ethanol facility. While we have estimated the construction and operating costs for our initial large-scale commercial cellulosic ethanol facilities, these
assumptions may prove to be incorrect. Accordingly, we cannot be sure that we can manufacture cellulosic ethanol in an economical manner at large scale. If we fail to commence large-scale production in a timely manner or to develop large-scale
manufacturing capacity and experience, or fail to manufacture cellulosic ethanol economically on a commercial scale or in commercial volumes, our commercialization of cellulosic ethanol and our business, financial condition, and results of
operations will be materially adversely affected.

We may not be able to implement our planned expansion strategy to build, own and operate
commercial-scale cellulosic ethanol facilities, including as a result of our failure to successfully manage our growth, which would prevent us from achieving our goals.

Our strategy currently includes the continued development of our pilot-scale facility for process development, optimization of our
demonstration-scale plant to validate the economics of our processes at commercial-scale volumes of cellulosic ethanol production, and development and construction of commercial scale plants for the production of large quantities of ethanol for
commercial distribution and sale. We plan to grow our business by investing in new facilities and/or acquiring existing facilities, either independently or with potential development partners, as well as pursuing other business opportunities such as
the production of other renewable fuels to the extent we deem those opportunities advisable. We believe that there is increasing competition for suitable production sites. We may not find suitable sites for construction of new facilities, suitable
acquisition candidates or other suitable expansion opportunities.

We must also obtain numerous regulatory approvals and
permits in order to construct and operate facilities. These requirements may not be satisfied in a timely manner or at all. Federal and state governmental requirements may substantially increase our costs, which could have a material adverse effect
on our results of operations and financial position. Our expansion plans may also result in other unanticipated adverse consequences, such as the diversion of managements attention from our existing operations and products.

Rapid growth, resulting from our operation or other involvement with cellulosic ethanol facilities or otherwise, may impose a significant
burden on our administrative and operational resources. Our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain
qualified management, technicians and other personnel. We may be unable to do so.

We may not find additional appropriate
sites for new facilities, or development partners with whom we can implement our growth strategy, and we may not be able to finance, construct, develop or operate these new facilities successfully. We also may be unable to find suitable acquisition
candidates. Accordingly, we may fail to implement our planned expansion strategy, including as a result of our failure to successfully manage our growth, and as a result, we may fail to achieve our goals.

We have experienced, and may continue to experience, significant delays or cost overruns related to our cellulosic ethanol plant projects.

We have experienced cost overruns for our demonstration-scale facility through the commissioning phase. We may continue
to experience significant delays or cost overruns during the optimization phase as a result of a variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen design flaws, construction
defects, or labor issues, any of which could prevent us from commencing or optimizing operations as expected at our facilities.

Our construction costs may also increase to levels that would make a new facility too expensive to complete or, for demonstration and
commercial-scale plants, unprofitable to operate. Contractors, engineering firms, construction firms and equipment suppliers may lack the expertise in cellulosic ethanol, which may result in delays or cost overruns. Contractors, engineering firms,
construction firms and equipment suppliers also receive requests and orders from other clients, including other ethanol companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial
terms.



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If we are unable to successfully commercialize our technology, our business may fail to generate
sufficient revenue, if any, which would adversely affect our operating results.

We expect to derive a significant portion
of our future revenue from the commercialization of our proprietary technology for producing fuel-grade cellulosic ethanol by developing, either alone or with partners, cellulosic ethanol production plants and by licensing our proprietary
technology. In order to develop a viable cellulosic ethanol business, we will need to:



| |  |  | successfully complete the optimization of our demonstration facility;
| | - |  | ---------------------------------------------------------------------



| |  |  | successfully design, finance and construct commercial-scale cellulosic ethanol facilities; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | prove that we can operate commercial-scale ethanol facilities at costs that are competitive with grain-based ethanol facilities, other cellulosic
ethanol technologies that may be developed and other alternative fuel technologies that may be developed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Currently, there are no commercial-scale cellulosic ethanol production plants in operation in the United States, and we have no previous
experience developing, constructing or operating commercial-scale cellulosic ethanol production plants. We are in the optimization phase of our first demonstration-scale cellulosic ethanol facility. There can be no assurance that we will be able to
develop and operate cellulosic ethanol production plants on a commercial scale, that we will be able to successfully license our technology to third parties, or that any cellulosic ethanol facilities developed by us or our licensees will be
profitable.

We may not realize the economic return expected from our acquired in-process research and development.

We allocated $42.4 million of the purchase price of Celunol on June 20, 2007 to acquired in-process research and development
projects. Acquired in-process research and development, or IPR&D, represents the valuation of acquired, to-be-completed research projects. Prior to the merger, Celunols ongoing research and development initiatives primarily involved the
development of its patented and proprietary biotechnology to enable production of fuel-grade ethanol from cellulosic biomass materials. As of the merger date, pursuant to authoritative guidance, these projects were not determined to have reached
technological feasibility and have no alternative future use. Accordingly, the amounts allocated to those projects were expensed in our statements of operations in June 2007, the period in which the merger was consummated.

The values of the research projects, namely, our Generation 1 or Gen 1 technology, were determined by estimating
the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. These cash flows were estimated by forecasting
total revenue expected from these products and then deducting appropriate operating expenses, cash flow adjustments and contributory asset returns to establish a forecast of net cash flows arising from the acquired in-process technology. These cash
flows were substantially reduced to take into account the time value of money and the risks associated with the inherent difficulties and uncertainties given the projected stage of development of these projects at closing. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 40% were considered appropriate for valuation of the IPR&D. We believe that these discount rates were commensurate
with the projects stage of development and the uncertainties in the economic estimates described above.

Since our
IPR&D represents costs for technology that has not yet reached technological feasibility, we have, and will continue to, require substantial investment in the future development and commercialization of our Gen 1 technology. While we expect
to deploy this technology at a commercial scale as early as 2012, we cannot assure you that we will ever be successful in commercializing this technology. If these projects are not successfully developed, our sales and profitability will be
adversely affected in future periods.

If we are unable to successfully operate our pilot cellulosic ethanol production facility or to
successfully optimize and operate our demonstration-scale cellulosic ethanol production facility, we may be unable to proceed with the development of cellulosic facilities on a commercial-scale, which would have a material adverse effect on our
business.

To date, we have not operated demonstration-scale cellulosic ethanol facilities or built or operated
commercial-scale cellulosic ethanol facilities. The development of a portfolio of ethanol production facilities is dependent on the performance of our pilot facility, which we continue to upgrade, as well as our demonstration facility, which is now
in the optimization phases. The operation of our pilot facility and the optimization of our demonstration facility might be subject to significant interruption and delay in case of a major accident or damage from severe weather or other natural
disasters, or due to supply shortages of necessary materials and services which we, along with other participants in the ethanol industry, have experienced. For these and other reasons, the operation of our pilot facility and the optimization and
operation of our demonstration facility may be subject to significant cost overruns from our budgeted amounts. If we are unable to fund these expenditures, our progress at the pilot facility and demonstration facility could be significantly delayed
or curtailed until such financing is available. In addition, our demonstration facility, once operational, may not produce ethanol in sufficient quantities or the operating costs for the facility may be significantly higher than we have expected. If
we are unable to produce ethanol in the demonstration facility at competitive variable and/or total costs, we may be unable to proceed with the development of commercial-scale facilities.



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In order to successfully develop commercial-scale facilities, we will need to address siting,
construction and other issues, and if we fail to successfully overcome these issues we will not be able to commercialize our technology.

Even if we can demonstrate that our technology can be deployed on a commercial-scale to produce cellulosic ethanol on a cost-competitive
basis, in order to be successful we must develop a number of commercial-scale projects. In order to successfully develop commercial-scale projects, we must overcome a number of risks and uncertainties including the following:



| |  |  | Sites. In order to develop commercial facilities, we will need to identify and obtain rights to appropriate sites. In evaluating and
obtaining sites, we will need to address a number of issues, including the proximity to potential feedstocks and proximity to transportation infrastructure and end-user markets. Competition for suitable cellulosic ethanol production sites may
increase as the market evolves. We may not find suitable additional sites for the construction of new facilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Joint Venture Partners. In addition to identifying sites for projects we develop on our own and with BP, we may seek to develop commercial
facilities through other joint venture partners. We may not find suitable joint venture partners for construction of new facilities. As the market for cellulosic ethanol projects evolves, competition may increase for potential joint venture partners
with favorable sites.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Supply of Cellulosic Feedstock. Operation of commercial facilities requires a continuous long-term supply of feedstocks that are generally
located in geographic proximity to the facility. We may not be successful in obtaining long-term supply agreements, or our supply of feedstocks could be disrupted by weather, climate, natural disasters, or other factors. In addition, prices and
competition for feedstocks could increase, adversely effecting our ability to operate economically or at all.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-Take Arrangements. In order to successfully develop a commercial-scale facility, we will need to enter into off-take arrangements for
the sale of ethanol to be produced at that facility. If we are unable to enter into appropriate off-take arrangements, we may be unable to obtain project financing for the particular facility.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Construction. We will need to identify and retain a significant number of contractors, engineering firms, construction firms and equipment
suppliers on satisfactory terms in order to be able to develop and construct multiple commercial-scale cellulosic ethanol facilities. These vendors also receive requests and orders from other companies in the ethanol and other industries and,
therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms. If we are unable to enter into construction and supply contracts on satisfactory terms, we will not be able to obtain financing
for our commercial scale projects. In addition, our construction costs may also increase to levels that would make a new facility too expensive to develop or unprofitable to operate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Risks. If we are able to build commercial-scale ethanol facilities, our operation of these facilities may be subject to labor
disruptions and unscheduled downtime, or other operational hazards inherent in the ethanol industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some
of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties.
Our insurance may not be adequate to fully cover the potential operational hazards described above. Any delay in development or interruption due to these potential operational risks could result in substantial losses and material adverse effects on
our results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We will rely heavily on future strategic partners to support our biofuels business.

An important component of our current business plan is to enter into strategic partnerships:



| |  |  | to provide capital, equipment and facilities, including significant capital for the construction of cellulosic ethanol research and production
facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to provide expertise in performing certain process development, production and logistical activities;
| | - |  | -----------------------------------------------------------------------------------------------------



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



| |  |  | to provide access to cellulosic feedstocks; and
| | - |  | -----------------------------------------------



| |  |  | to support or provide sales, marketing and distribution services.
| | - |  | -----------------------------------------------------------------

These arrangements with collaborative partners are, and will continue to be, critical to our success in implementing our vertical
integration biofuels strategy and manufacturing and selling cellulosic ethanol profitably. 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.



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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.

In order to gain broad acceptance of our technology, we may need to enter into licensing arrangements with third parties. If we fail to successfully
identify and enter into licenses with qualified third parties or to successfully manage existing and future licensing relationships, we may not be able to successfully commercialize our technology.

We currently have a technology transfer agreement in place with Marubeni Corporation and Tsukishima Kikai Co., Ltd. We also expect that a
significant portion of our future revenue could be derived from licensing agreements that we or our Galaxy joint venture with BP will enter into in the future. If we fail to enter into and maintain license agreements, we may not be able to gain
broad acceptance for our technology, grow our business or generate sufficient revenues to support our operations. Our future license opportunities could be harmed if:



| |  |  | we do not successfully operate our pilot facility or successfully optimize and operate our demonstration facility;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | we are unable to successfully develop commercial-scale facilities;
| | - |  | ------------------------------------------------------------------



| |  |  | we develop processes or enter into licenses that conflict with the business objectives of our existing licensees;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | we disagree with our licensees as to rights to intellectual property we develop or our licensees research programs or commercialization
activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are unable to manage multiple licensee relationships;
| | - |  | --------------------------------------------------------



| |  |  | our licensees become our competitors or enter into agreements with our competitors;
| | - |  | -----------------------------------------------------------------------------------



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



| |  |  | consolidation in our target markets limits the number of potential strategic licensees or we are unable to negotiate additional license agreements
having terms satisfactory to us.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may not be able to develop manufacturing capacity sufficient to meet demand in an
economical manner or at all.

If demand for cellulosic ethanol increases beyond the scope of our production facilities, we
may incur significant expenses in the expansion and/or construction of production facilities and increases in personnel in order to increase production capacity. To finance the expansion of a commercial-scale production facility is complex and
expensive. We cannot assure you that we will have the necessary funds to finance the development of production facilities, or that we will be able to develop this infrastructure in a timely or economical manner, or at all.

The feedstocks, raw materials and energy necessary to produce ethanol may be unavailable or may increase in price, adversely affecting our sales and
profitability.

We intend to use various sources of cellulosic biomass, such as sugarcane bagasse, dedicated energy crops,
agricultural residues (which may include corn stover), sorghum, switchgrass and wood, to make cellulosic ethanol. However, rising prices for any or all of these feedstocks would produce lower profit margins and, therefore, represent unfavorable
market conditions. This is especially true since market conditions generally would not allow us to pass along increased costs to customers, because the price of ethanol is primarily determined by other factors, such as the price of oil and gasoline.
Additionally, once we elect to use a particular feedstock in the ethanol production process, it may be technically or economically impractical to change to a different feedstock. At certain levels, feedstock prices may make ethanol uneconomical to
use in markets where the use of fuel oxygenates is not mandated.

Weather conditions and other factors affecting crop yields,
farmer planting decisions, and general economic, market and regulatory factors may influence the availability, transportation costs and price of biomass feedstocks used in our pilot facility and to be used in our demonstration- and commercial-scale
production facilities. There can be no guarantee that feedstock costs to us may not increase over time. Government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply, also impact the
price and transportation costs of agricultural products. The significance and relative effects of



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these factors on the potential cost of feedstocks are difficult to predict. Any increase in the cost of feedstocks will result in increased costs, and negative effects on our operating results.
Other inputs to our cellulosic-ethanol production process will also be subject to price variation. These include chemicals, nutrients, enzymes, acid and lime, among others. Increases in the costs of these materials, or our failure to achieve
reductions in the use of such materials, could increase our operating costs and have negative effects on our operating results. The gross margin of our anticipated ethanol production business depends principally on the spread between the price for
ethanol and our production costs. Any increase in production costs or decrease in the demand or price of ethanol will negatively affect our business.

The production of ethanol also requires a significant amount of other raw materials and energy, primarily water, electricity and natural
gas. We plan to utilize the lignin remaining after the pretreatment of cellulosic biomass as a source of energy to power our cellulosic ethanol production facilities, however we may not be successful in using lignin as a source of energy and, if so,
we may have to supplement our energy use with other sources, including electricity and natural gas. The prices of electricity and supplemental fuels such as natural gas have fluctuated significantly in the past and may fluctuate significantly in the
future. Local water, electricity and gas utilities may not be able to reliably supply the water, electricity and supplemental fuels that our facilities will need or may not be able to supply such resources on acceptable terms. In addition, if there
is an interruption in the supply of water or energy for any reason, we may be required to halt ethanol production.

The high concentration
of our efforts towards developing processes for the production of cellulosic ethanol could increase our losses, especially if demand for ethanol declines.

If we are successful in producing and marketing cellulosic ethanol, our revenue will be derived primarily from sales of ethanol. Ethanol
competes with several other existing products and other alternative products could also be developed for use as fuel additives. An industry shift away from ethanol or the emergence of new competing products may reduce the demand for ethanol. A
downturn in the demand for ethanol would significantly and adversely affect any sales and/or profitability.

The market price of ethanol is
volatile and subject to significant fluctuations, which may cause our profitability from the production of cellulosic ethanol to fluctuate significantly.

The market price of ethanol is dependent upon many factors, including the price of gasoline, which is in turn dependent upon the price of
petroleum. Petroleum prices are highly volatile and difficult to forecast due to frequent changes in global politics and the world economy. The distribution of petroleum throughout the world is affected by incidents in unstable political
environments, such as Iraq, Iran, Kuwait, Saudi Arabia, Nigeria, Venezuela, the former U.S.S.R. and other countries and regions. The industrialized world depends critically upon oil from these areas, and any disruption or other reduction in oil
supply can cause significant fluctuations in the prices of oil and gasoline. We cannot predict the future price of oil or gasoline and may establish unprofitable prices for the sale of ethanol due to significant fluctuations in market prices. In
recent years, the prices of gasoline, petroleum and ethanol have all reached historically high levels. If the prices of gasoline and petroleum decline, we believe that the demand for and price of ethanol may be adversely affected. Fluctuations in
the market price of ethanol may cause our revenue and profitability to fluctuate significantly from quarter-to-quarter and year-to-year.

The production of ethanol has expanded rapidly in recent years. As of the end of 2009, according to RFA, there was more than 13 billion
gallons of installed capacity in the US, including more than 1.15 billion gallons of idled capacity, and over 1.4 billion gallons of projects under construction or expansion. We expect existing ethanol plants to expand by increasing production
capacity and actual production, particularly in response to the mandates contained in the Renewable Fuel Standard as expanded in the Energy Independence and Security Act of 2007 (RFS2). Increases in the demand for ethanol may not be
commensurate with increasing supplies of ethanol, particularly in light of factors such as the 10% limitation on ethanol blending in gasoline and the rate of expansion of E85 dispensing infrastructure. Thus, increased production of ethanol may lead
to lower ethanol prices. Also, the increased production of ethanol could result in increased demand for feedstocks for the production of ethanol. This could result in higher prices for feedstocks and cause higher ethanol production costs and, in the
event that we are unable to pass increases in the price of feedstocks on to our customers, will result in lower profits. We cannot predict the future price of ethanol or feedstocks. Any material decline in the price of ethanol, or any material
increase in the price of feedstocks, will adversely affect any sales and/or profitability.

If ethanol demand decreases, does not increase,
or does not increase as much as supply, there may be excess capacity in our industry which would likely cause a decline in ethanol prices, adversely impacting our results of operations, cash flows and financial condition.

Domestic fuel ethanol production has increased steadily from 1.5 billion gallons per year in 1999 to 10.6 billion gallons per year in
2009, according to the Renewable Fuels Association. In addition, there is a significant amount of capacity being added to the fuel ethanol industry, including capacity that may be added as a result of government programs and/or incentives, and
capacity added to address anticipated increases in demand. However, demand for ethanol may not increase as quickly as expected, or at all. If the ethanol industry has excess capacity, a fall in prices will likely occur which will have an adverse
impact on the viability of our vertical integration strategy within biofuels, as well as our results of operations, cash flows and financial condition if we proceed to market



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ethanol. Demand for ethanol could be impaired due to a number of factors, including regulatory developments, limits on the blending of ethanol in gasoline, the pace of infrastructure development
for high-ethanol fuel blends including E85, and reduced United States gasoline consumption. Reduced gasoline consumption could occur as a result of increased gasoline or oil prices. For example, price increases could cause businesses and consumers
to reduce driving or acquire vehicles with more favorable gasoline mileage capabilities. A petition filed with the EPA in March 2009 to allow an increase of ethanol blending in gasoline from 10% up to 15% remains pending in early 2010.

The United States ethanol industry is highly regulated by federal and state legislation and regulation and any changes in such legislation or
regulation could materially adversely affect our results of operations and financial condition.

The elimination or
significant reduction in the Federal Excise Tax Credit could have a material adverse effect on our results of operations.

The production of ethanol is made significantly more competitive by federal tax incentives. The Volumetric Ethanol Excise Tax Credit, or
VEETC, program, which is scheduled to expire on December 31, 2010, allows gasoline distributors that blend ethanol with gasoline to receive a federal excise tax rate reduction for each blended gallon they sell regardless of the blend rate. The
current federal excise tax on gasoline is $0.184 per gallon, and is paid at the terminal by refiners and marketers. If the fuel is blended with ethanol, the blender may claim a $0.45 tax credit for each gallon of ethanol used in the mixture. In
addition, Congress enacted a $1.01/gallon production tax credit (PTC) that is available to cellulosic biofuels producers in the Farm, Conservation and Energy Act of 2008 (FCEA). This credit, which is inclusive of the VEETC,
is set to expire on December 31, 2012. The VEETC may not be renewed prior to its expiration in 2010, or if renewed, it may be renewed on terms significantly less favorable than current tax incentives. In addition, the blenders credits, as
well as other federal and state programs benefiting ethanol (such as tariffs), generally are subject to United States government obligations under international trade agreements, including those under the World Trade Organization Agreement on
Subsidies and Countervailing Measures, and might be the subject of challenges thereunder, in whole or in part. The elimination or significant reduction in either the VEETC or the PTC could have a material adverse effect on our results of operations.

Waivers of the Renewable Fuels Standard minimum levels of renewable fuels included in gasoline, or the lapse of the
increased weight given for the use of cellulosic ethanol for compliance with the Renewable Fuels Standard, could have a material adverse effect on our results of operations.

Under the Energy Policy Act of 2005, the Department of Energy, in consultation with the Secretary of Agriculture and the Secretary of
Energy, may waive the Renewable Fuels Standard, or RFS, mandate with respect to one or more states if the administrator determines that implementing the requirements would severely harm the economy or the environment of a state, a region or the
United States, or that there is inadequate supply to meet the requirement. Any waiver of the RFS with respect to one or more states or with respect to a particular year, or the lapse or alteration of the extra weight cellulosic ethanol is given in
complying with the RFS, could adversely affect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

While the Energy Policy Act of 2005 imposes the RFS, it does not mandate the use of ethanol and eliminates the oxygenate requirement
for reformulated gasoline in the Reformulated Gasoline Program included in the Clean Air Act.

The Reformulated Gasoline,
or RFG, programs oxygenate requirements contained in the Clean Air Act was completely eliminated on May 5, 2006 by the Energy Policy Act of 2005. While the RFA expects that ethanol should account for the largest share of renewable fuels
produced and consumed under the RFS, the RFS is not limited to ethanol and also includes biodiesel and any other liquid fuel produced from biomass or biogas. The elimination of the oxygenate requirement for reformulated gasoline in the RFG program
included in the Clean Air Act may result in a decline in ethanol consumption in favor of other alternative fuels, which in turn could have a material adverse effect on our results of operations and financial condition.

The elimination or alteration of the mandates for ethanol use contained in the Energy Independence and Security Act of 2007 could have
a material adverse effect on our results of operations.

Under the Energy Independence and Security Act of 2007, use of
renewable fuels, including ethanol, in the United States is mandated to increase from 12.95 billion gallons in 2010 to 36 billion gallons by 2022. The Act also mandates the use of 16 billion gallons per year of cellulosic ethanol by
2022. Elimination or reduction of these mandated targets could adversely affect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

Changes in enacted federal, state or local legislation, or the enaction of new legislation, may adversely impact our business.

Federal, state and local legislators may enact legislation, or modify or amend currently enacted legislation, that could adversely affect
the industries in which we currently operate. For example, several federal laws encourage the development of the ethanol and/or biofuels industry in the United States. If those laws are repealed or are not renewed, it could adversely impact the
ethanol and/or biofuels industries as a whole, which would have an adverse effect on our financial results. In addition, legislation could be enacted



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that might not negatively impact our industry as a whole, but could negatively impact that portion of the industry in which we operate or our particular business. For example, in the future we
may consider the effect of state or local incentives, such as grants or tax abatements, in formulating our internal projections and budgets and when choosing where to locate and operate commercial-scale plants for the production of cellulosic
ethanol. If those incentives should be repealed or no longer become available, the profitability of any commercial-scale plants which are reliant on such incentives could be negatively affected, which in turn would negatively affect our operating
results.

Certain countries can export ethanol to the United States duty-free, which may undermine the ethanol production industry in the
United States.

Imported ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem tax that was
designed to offset the $0.51 per gallon ethanol subsidy available under the federal excise tax incentive program for refineries that blend ethanol in their fuel. There is a special exemption from the tariff for ethanol imported from certain
countries in Central America and the Caribbean islands, which is limited to a total of 7.0% of United States production per year (with additional exemptions for ethanol produced from feedstock in the Caribbean region over the 7.0% limit). We do not
know the extent to which the volume of imports would increase or the effect on United States prices for ethanol if the tariff is not renewed beyond its current expiration in early 2011. In addition The North America Free Trade Agreement countries,
Canada and Mexico, are exempt from duty. Imports from the exempted countries have increased in recent years and are expected to increase further as a result of new plants under development. In particular, the ethanol industry has expressed concern
with respect to a new plant under development by Cargill, Inc., one of the largest ethanol producers in the United States, in El Salvador that would take the water out of Brazilian ethanol and then ship the dehydrated ethanol from El Salvador to the
United States duty-free. Since production costs for ethanol in Brazil are estimated to be significantly less than what they are in the United States, the import of the Brazilian ethanol duty-free through El Salvador, or the import of ethanol
duty-free from any country exempted from the tariff, may negatively impact the demand for domestic ethanol and the price at which we sell our ethanol.

Our competitive position, financial position and results of operations may be adversely affected by technological advances.

Even if we are able to execute our business plan and develop commercial-scale cellulosic ethanol production plants and successfully
license our proprietary technology, the development and implementation of new technologies may result in a significant reduction in the costs of ethanol production by others. For example, any technological advances by others in the efficiency or
cost to produce ethanol from corn or other biomass could have an adverse effect on our competitiveness. We cannot predict when new technologies may become available, the rate of acceptance of new technologies by our competitors or the costs
associated with new technologies. In addition, advances in the development of alternatives to ethanol could significantly reduce demand for or eliminate the need for ethanol. Any advances in technology which require significant capital expenditures
to remain competitive or which reduce demand or prices for ethanol would have a material adverse effect on the results of our operations and financial position.

The termination or loss of our exclusive license from the University of Florida Research Foundation, Inc., would have a material adverse effect on our
business.

We have an exclusive worldwide license to use, develop and commercially exploit the ethanol production patent
estate of the University of Florida Research Foundation, Inc., or UFRFI, which consists of several patents and pending patents and other related proprietary ethanol technology, and any extensions and improvements thereof for the production of
ethanol, all of which is referred to herein as the UFRFI technology. The UFRFI license agreement expires on the later of October 2015 or the expiration of the last patent related to the UFRFI licensed technology. Based on the latest to expire of the
current granted United States patents, the UFRFI license agreement will extend into 2022. Pending and future patent applications related to the UFRFI licensed technology, if granted, would extend the expiration date of the UFRFI license agreement
beyond 2026. Loss of the rights to the UFRFI technology licensed to us, for example, due to our inability to comply with the terms and conditions or otherwise of the UFRFI license agreement would have a material adverse effect on our business.

Growth in the sale and distribution of ethanol is dependent on the changes to and expansion of related infrastructure which may not occur
on a timely basis, if at all, and our contemplated operations could be adversely affected by infrastructure disruptions.

Substantial development of infrastructure will be required by persons and entities outside our control for our contemplated licensing and
cellulosic ethanol production operations, and the ethanol industry generally, to grow. Areas requiring expansion include, but are not limited to:



| |  |  | the automobile industrys manufacture of flexible fuel vehicles;
| | - |  | ----------------------------------------------------------------



| |  |  | additional rail capacity affecting distribution of ethanol;
| | - |  | -----------------------------------------------------------



| |  |  | additional storage facilities for ethanol;
| | - |  | ------------------------------------------



| |  |  | increases in truck fleets capable of transporting ethanol within localized markets;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | expansion of refining and blending facilities to handle ethanol; and
| | - |  | --------------------------------------------------------------------



| |  |  | growth in service stations equipped to handle ethanol fuels.
| | - |  | ------------------------------------------------------------

Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely
basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand for our proprietary technology or the production of cellulosic ethanol, impede our delivery of cellulosic ethanol, impose additional costs on
us, or otherwise have a material adverse effect on our results of operations or financial position. Our contemplated business will be dependent on the continuing availability of infrastructure and any infrastructure disruptions could have a material
adverse effect on our business.

New ethanol plants under construction or decreases in the demand for ethanol may result in excess United
States production capacity.

A number of our competitors are divisions of substantially larger enterprises and have
substantially greater financial resources than we have. Smaller competitors also pose a threat. Farmer-owned cooperatives and independent firms consisting of groups of individual farmers and investors have been able to compete successfully in the
ethanol industry. These smaller competitors operate smaller facilities which do not affect the local price of corn grown in proximity to the facility as much as larger facilities. In addition, many of these smaller competitors are farmer-owned and
often require their farmer-owners to commit to selling them a certain amount of corn as a requirement of ownership. A significant portion of production capacity in the ethanol industry consists of smaller-sized facilities. In addition, institutional
investors and high net worth individuals could heavily invest in ethanol production facilities and oversupply the demand for ethanol, resulting in lower ethanol price levels that might adversely affect the results of our contemplated cellulosic
ethanol production operations and financial position.

Risks Specific to Our Specialty Enzymes Business

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 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.



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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.

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 specialty enzyme products on a commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our
specialty enzyme products. We have arrangements with third parties that have the required manufacturing equipment and available capacity to manufacture our commercial enzymes. While we have our own pilot development facility, we continue to depend
on third parties for large-scale commercial manufacturing. 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 specialty enzyme products, and harm our relationships with our
specialty enzyme strategic partners, collaborators, or customers.

We have experienced inventory losses and decreased manufacturing yields
related to our manufacturing processes for our enzyme products, which negatively impacted our product gross margins.

We
have in the past experienced inventory losses and decreased manufacturing yields related to contamination and manufacturing issues for our enzyme products. While we believe we have adequately resolved our contamination issues and 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 results of operations and financial condition would be adversely affected.

If Genencor assumes all or a part of our Phyzyme 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
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. Pursuant to current accounting rules, revenue from Phyzyme 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 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, it does have a negative impact on the gross product revenue we recognize for Phyzyme as the
volume of Phyzyme manufactured by Genencor increases.

In addition, our supply agreement with Danisco for Phyzyme contains
provisions which allow Danisco, with six months advance notice, to assume manufacturing rights of Phyzyme. 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 have only limited experience in independently developing, manufacturing, marketing, selling, and distributing commercial specialty enzyme products.

We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute specialty
enzyme products on a commercial scale. We will determine which specialty 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 specialty enzyme products that we had intended to pursue
independently. We may pursue specialty enzyme products that ultimately require more resources than we anticipate or which may be technically unsuccessful.



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In order for us to commercialize more specialty 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 specialty enzyme products resulting from our internal product development efforts, we will continue to incur losses in our specialty enzymes business, as well
as in our business as a whole. Even if we successfully develop a commercial specialty enzyme product, we may not generate significant sales and achieve profitability in our specialty enzymes business, or in our business as a whole.

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

Historically, we have relied upon a number of collaborations, including those with Syngenta, Danisco, Bunge, Cargill, and BASF, to
enhance and support our development and commercialization efforts for our specialty enzymes. An important component of our business plan is to enter into strategic partnerships:



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



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



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

These arrangements with collaborative partners are, and will continue to be, critical to the success of our specialty enzymes 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 and have adopted a shareholder rights plan
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. In addition, we adopted a share purchase rights plan that has anti-takeover effects. The rights under the plan will cause substantial dilution to a person or group that attempts to acquire us
on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board, since the rights may be amended to permit such an acquisition or may be redeemed by us. These
provisions in our charter documents, under Delaware law, and in our rights plan 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.



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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;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | the cost and timing of optimization and operation of our cellulosic ethanol demonstration facility;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the extent, cost and timing of any new projects for the development of commercial-scale cellulosic ethanol facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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



| |  |  | increased expenses related to the implementation of our vertical integration strategy within biofuels.
| | - |  | ------------------------------------------------------------------------------------------------------

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 7, 2010, the closing market price of our common stock has ranged from a low of $2.76 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 $2.76 to $81.96. The closing market price of our common stock on March 31, 2010 was $5.06, and the closing price of our common stock on May 7, 2010 was
$3.64. 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | interruption or delay in the optimization and operation of our cellulosic ethanol demonstration facility;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | risks and uncertainties related to siting, permitting, construction, materials and equipment procurement, and other issues related to development of
commercial-scale facilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | reductions in the price of gasoline or increases in the prices for biomass feedstocks;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | 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 biofuels and
cellulosic ethanol and other products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | significant accidents, damage from severe weather or other natural disasters affecting our cellulosic ethanol pilot and demonstration facilities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | developments involving our 2009 Notes, 2008 Notes and 2007 Notes;
| | - |  | -----------------------------------------------------------------



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



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



| |  |  | decreases in the market for ethanol, and cellulosic ethanol;
| | - |  | ------------------------------------------------------------



| |  |  | 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, 2008 Notes, 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 2008 Notes and 2009 Notes or to pay interest due under the
2008 Notes and 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.

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, 2010. 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 7, 2010, we had 12,277,884 shares of common stock outstanding.

Furthermore, the anti-dilution provisions of our 2008 Notes and of the warrants issued in connection therewith would be triggered by any
issuance of shares of our common stock at a price below the conversion price or exercise price, as applicable, in effect at the time of such issuance, resulting in an increase in the number of shares of common stock issuable upon conversion or
exercise, as applicable, of the 2008 Notes and the warrants issued in connection therewith, causing a further dilutive effect to other stockholders.



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

None.



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

None.



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



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

None.



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

(a)



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No.
000-29173), filed with the Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                          
|               | 
|3.2            |  | Certificate of Amendment of Restated Certificate of Incorporation - filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006, 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 Bylaw - 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, as amended, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|4.2            |  | Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 13, 2000 (including the Form of Certificate of
Designation of Series A Junior Participating Preferred Stock attached thereto as Exhibit A, the Form of Right Certificate attached thereto as Exhibit B, and the Summary of Rights to Purchase Preferred Shares attached thereto as Exhibit C) - filed as
an exhibit to the Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.
|               | 
|4.3            |  | Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 2, 2002 - filed as an exhibit to
the Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities and Exchange Commission on December 4, 2002, and incorporated herein by reference.                                                                                                                                                                                                                                                                          
|               | 
|4.4            |  | Certificate of Designation of Series A Junior Participating Preferred Stock - filed as an exhibit to the Companys Current Report on Form 8-K (File No. 000-29173), filed with
the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                   



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|      |  |                                                                                                                                                                                                                                                                                                                                                                             
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|4.5   |  | Second Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of February 12, 2007 - filed as an
exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 12, 2007, and incorporated herein by reference.                              
|      | 
|10.1  |  | Amendment No. 1 to Joint Development and License Agreement dated as of January 31, 2010, by and among Verenium Biofuels Corporation, BP Biofuels North America LLC and Galaxy
Biofuels LLC - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2010, and incorporated herein by reference.  
|      | 
|10.2  |  | Extension Agreement to Joint Development and License Agreement dated as of February 26, 2010, by and among Verenium Biofuels Corporation, BP Biofuels North America LLC and Galaxy
Biofuels LLC - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 1, 2010, and incorporated herein by reference.
|      | 
|10.3  |  | Extension Agreement to Joint Development and License Agreement dated as of March 31, 2010, by and among Verenium Biofuels Corporation, BP Biofuels North America LLC and Galaxy
Biofuels LLC - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 1, 2010, and incorporated herein by reference.   
|      | 
|10.4 |  | Letter Agreement dated as of March 31, 2010, by and among Verenium Biofuels Corporation, BP Biofuels North America LLC and Galaxy Biofuels LLC - filed herewith.                                                                                                                                                                                                            
|      | 
|10.5 |  | Master Promissory Note dated as of March 31, 2010, by Galaxy Biofuels LLC in favor of BP Biofuels North America LLC - filed herewith.                                                                                                                                                                                                                                       
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed
herewith.                                                                                                                                                                                                  
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed
herewith.                                                                                                                                                                                                  
|      | 
|32.1  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
filed herewith.                                                                                                                                                                             



| | Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including redacted terms, has been separately
filed with the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 10, 2010 |  |  |  | /S/ JAMES E. LEVINE          
|                   |  |  |  | James E. Levine              
|                   |  |  |  | Executive Vice President and 
|                   |  |  |  | Chief Financial Officer      
|                   |  |  |  | (Principal Financial Officer)



73