S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 23, 2011

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Genomatica, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   2860   33-0831527

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

10520 Wateridge Circle

San Diego, California 92121

(858) 824-1771

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Christophe H. Schilling, Ph.D.

President and Chief Executive Officer

Genomatica, Inc.

10520 Wateridge Circle

San Diego, California 92121

(858) 824-1771

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

Thomas A. Coll, Esq.

Charles S. Kim, Esq.

Charles J. Bair, Esq.

Cooley LLP

4401 Eastgate Mall

San Diego, California 92121

(858) 550-6000

 

Allison B. Spinner, Esq.

Richard Cameron Blake, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

Large accelerated filer  ¨

    

Accelerated filer  ¨

Non-accelerated filer  x (Do not check if a  smaller reporting company)

 

Smaller reporting company  ¨

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed maximum

aggregate offering price(1)

  Amount of
registration fee

Common Stock, $0.0001 par value per share

  $100,000,000   $11,610

 

 

  (1)   Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued August 23, 2011

 

         Shares

 

LOGO

 

COMMON STOCK

 

 

 

Genomatica, Inc. is offering          shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $          and $          per share.

 

 

 

We have applied to list our common stock on the Nasdaq Global Market under the symbol “GENO.”

 

 

 

Investing in our common stock involves substantial risks. See “Risk Factors” beginning on page 11.

 

 

 

PRICE $         A SHARE

 

 

 

      

Price to

Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Genomatica

Per Share

     $              $              $        

Total

     $                      $                      $                

 

We have granted the underwriters the right to purchase up to an additional          shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2011.

 

 

 

MORGAN STANLEY    J.P. MORGAN    JEFFERIES

 

PIPER JAFFRAY

 

 

 

  RAYMOND JAMES   

 

                    , 2011


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     40   

Use of Proceeds

     42   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     45   

Selected Financial Data

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

Industry Overview

     74   

Business

     80   

Strategic Relationships

     103   

Management

     107   
 

 

 

 

You should rely only on the information contained in this prospectus and in any free writing prospectus that we may provide to you in connection with this offering. Neither we nor any of the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any such free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor any of the underwriters are making an offer to sell or seeking offers to buy these securities in any jurisdiction where or to any person to whom the offer or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and future growth prospects may have changed since those dates.

 

Through and including                     , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and the related notes, before deciding to buy shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Genomatica,” “we,” “us” and “our” refer to Genomatica, Inc.

 

GENOMATICA, INC.

 

Our Company

 

We are a technology leader for the global chemical industry. We deliver new, transformative manufacturing processes that enable our partners to produce intermediate and basic chemicals from renewable feedstocks. Intermediate and basic chemicals serve as the basis for making substantially all of the products that make modern life possible, and our processes enable the production of the exact same chemicals that are at the core of the chemical industry. Our processes are designed to deliver better economics with enhanced sustainability and a smaller environmental footprint than conventional petroleum-based manufacturing processes. Our proprietary biotechnology platform allows us to create fermentation-based manufacturing processes and to engineer the enabling microorganisms that drive the efficient conversion of renewable feedstocks into numerous existing high-volume intermediate and basic chemicals. We are developing a pipeline of manufacturing processes for the production of these chemicals, including our first target chemical, butanediol, or BDO, and our second target chemical, butadiene. A key element of our strategy is to partner with industry leaders through a combination of joint venture and licensing arrangements in order to accelerate the broad and rapid commercial utilization of our production processes. Through this approach, we expect the first commercial-scale BDO plant that utilizes our processes to begin high-volume production by the end of 2012.

 

Technology Platform

 

We harness biotechnology to develop manufacturing processes that can convert multiple renewable feedstocks into numerous existing chemicals that meet industry specifications for large, well-defined established markets. Our technology platform combines predictive computational modeling with advanced laboratory technology and process engineering in a uniquely integrated approach to develop highly efficient biologically driven manufacturing processes faster than traditional process development methods. Our platform is designed to identify the most efficient biochemical pathways and select the most effective microorganisms to convert feedstocks into target chemicals, leading to optimal process technologies developed in a capital-efficient manner. Our intellectual property currently targets processes to produce over 20 intermediate and basic chemicals, including BDO and butadiene.

 

Manufacturing Processes

 

We expect our process technologies to enable economically advantaged production of target chemicals, considering both capital and operating costs, relative to conventional petroleum-based processes run at chemical manufacturing plants throughout the world. We believe that plants using our production processes will offer three primary economic advantages relative to conventional plants: lower capital costs per pound of chemical product for similar-sized plants, lower production costs for similar-sized plants and the ability to cost-effectively operate plants at a smaller scale. Our manufacturing processes are also designed to deliver enhanced sustainability and a reduced environmental footprint versus conventional approaches. Based on performance achieved at laboratory, pilot and demonstration scale, we believe our first manufacturing process for BDO will be economically

 

 

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advantaged at commercial scale as compared to conventional petroleum-based production processes. Our initial BDO production process will use conventional sugars, such as sucrose from sugarcane or sugar beets, and dextrose from corn or cassava. We expect our economic advantage with respect to the production of target chemicals to continue to improve over time as a result of process technology improvements and our anticipated ability to utilize other renewable feedstocks projected to have even lower costs, such as sugars from cellulosic biomass and synthesis gas, or syngas, from municipal solid waste.

 

Commercialization Strategy

 

To drive rapid and parallel commercialization of multiple plants for each of our target chemicals, our approach is to partner with industry leaders through a combination of joint venture and licensing arrangements. We have announced the following relationships related to development, financing and production of chemicals using our production processes.

 

Tate & Lyle. In March 2011, we entered into a joint development agreement with Tate & Lyle Ingredients Americas, Inc., or Tate & Lyle, to jointly scale up the production of BDO from dextrose sugar feedstocks in North America. Under this agreement, we are jointly operating a plant at demonstration scale, with the potential for commercial-scale production in North America pursuant to a contemplated joint venture agreement. Tate & Lyle will supply dextrose sugar feedstock for the initial commercial-scale plant in North America.

 

Novamont. In June 2011, we signed a non-binding letter of intent with Novamont S.p.A., or Novamont, regarding a proposed joint venture for the commercial-scale production of BDO using our process technology at a Novamont industrial plant to be converted for such purpose. This letter of intent contemplates our first commercial-scale BDO plant in Italy with a capacity of approximately 40 million pounds per year to begin production by the end of 2012. According to the letter of intent, Novamont will provide all construction capital and consume all product off-take for captive use.

 

Mitsubishi Chemical. In April 2011, we entered into a non-binding memorandum of understanding with Mitsubishi Chemical Corporation, or Mitsubishi Chemical, pursuant to which we agreed in principle to a joint venture in Asia for the production of BDO using our process technology and a possible research and development collaboration for other target chemicals.

 

M&G / Chemtex. In February 2011, we entered into a non-binding memorandum of understanding with Gruppo Mossi & Ghisolfi, or M&G, regarding a proposed partnering arrangement for the development and commercialization of certain target chemicals from sugars from cellulosic biomass using our process technology. The first target chemical is BDO and, as contemplated by the memorandum of understanding, we entered into a joint development agreement with Chemtex Italia S.r.l., or Chemtex, a wholly-owned subsidiary of M&G, in April 2011 to develop a process for producing BDO from sugars from cellulosic biomass feedstocks.

 

Waste Management. In December 2010, we entered into a joint development agreement with WM Organic Growth, Inc., or Waste Management, to develop a commercial-scale process to produce a particular intermediate chemical from syngas sourced primarily from municipal solid waste.

 

Renewable Feedstocks

 

We have demonstrated our ability to produce multiple chemicals from a variety of renewable feedstocks, including various conventional sugars and sugars from cellulosic biomass, using our proprietary microorganisms and processes. We believe providing this flexibility in feedstocks will enable further reductions in production costs and offer the best match of available feedstocks for a given geography. We have developed strategic relationships with companies such as Tate & Lyle for dextrose sugar, M&G for sugars from cellulosic biomass, and Waste Management for syngas, to accelerate development and time-to-market for our process solutions that use these renewable feedstocks.

 

 

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Initial Target Chemicals

 

Our first manufacturing process targets BDO, an intermediate chemical used in everyday products that include athletic apparel, running shoes, electronics and automobiles. According to the most recently available data from research firm IHS Inc., or IHS, the global BDO demand in 2009 was 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices. Our process has been producing BDO from dextrose sugar at demonstration scale since June 2011 at a plant located at an industrial site owned by our partner, Tate & Lyle. Our second manufacturing process targets butadiene, a basic chemical used in a variety of other everyday products such as tires, carpeting and latex products. According to the research firm Nexant, Inc., or Nexant, the global butadiene demand in 2011 is forecasted to be over 20 billion pounds, which equates to a market size of approximately $40 billion based on June 2011 prices. In August 2011, we announced that we had successfully produced pound quantities of butadiene made from renewable feedstocks. We are also developing a pipeline of sustainable processes to enable production of many other intermediate and basic chemicals that, like BDO and butadiene, have large, well-defined established markets.

 

We expect the first commercial-scale BDO plant that utilizes our process to produce approximately 40 million pounds of BDO per year in an industrial plant in Europe that is owned and operated by one of our industry partners, Novamont, with whom we have entered into a non-binding letter of intent. Our goal is for this plant to begin production by the end of 2012 and for larger commercial-scale BDO plants owned and operated together with our industry partners in the United States, Europe and Asia to begin high-volume production in 2014 and 2015. We are jointly operating a plant with our partner Tate & Lyle at demonstration scale, with the potential for commercial-scale production with Tate & Lyle in North America pursuant to a contemplated joint venture agreement. In addition, we have entered into a non-binding memorandum of understanding with Mitsubishi Chemical pursuant to which we agreed in principle to a joint venture in Asia for the production of BDO using our process technology. We expect that BDO plants using our process will typically produce 100 to 130 million pounds of BDO per year, though individual plants may be smaller or larger depending on factors such as regional supply and demand and market dynamics. Our objective is to enter into multiple similar arrangements with partners to rapidly grow the commercial production of butadiene and other target chemicals.

 

Challenges Facing the Chemical Industry

 

Because the production of approximately 95% of all manufactured goods is enabled by chemicals, the challenges facing the chemical industry directly affect consumers and the global economy. These challenges impact chemical manufacturers and companies dependent on chemicals to make downstream products and materials, and include:

 

   

Dependence on Fossil-Fuel Feedstocks with Volatile Pricing. The chemical industry’s reliance on fossil-fuel feedstocks, such as crude oil, natural gas and coal, leads to significant price volatility in input costs, large swings in earnings and difficulty in forecasting future performance.

 

   

Increasing Scarcity and Rising Price of C3 and C4 Chemicals. Due to the recent increased availability of natural gas, especially in North America, crude oil has become relatively more expensive than natural gas and many ethylene cracking operations are now using lighter natural gas feedstocks to earn higher margins. In the midst of rising demand, this has led to significantly lower quantities of, and rising prices for, intermediate and basic chemicals with three and four carbon atoms, or C3 and C4 chemicals, such as propylene and butadiene, which are largely made from crude oil.

 

   

Cyclicality From Supply-Demand Imbalances Due to Increasingly Larger-Scale Manufacturing. To achieve production economies of scale, the chemical industry has historically and increasingly built large-scale manufacturing plants. Given the significant investment required and the extended lead times for construction of such large plants, the chemical industry has historically struggled to accurately time its capacity expansion programs, which has contributed to supply and demand imbalances and the cyclical nature of the industry.

 

 

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Consumer Demand for Greater Sustainability. We believe the increased demand for more sustainable products and materials from consumers, as well as manufacturers and the retailers that serve them, results in increasing pressure on chemical makers to produce chemicals with a smaller environmental footprint.

 

Our Solution

 

We believe our technology addresses the challenges facing the chemical industry as follows:

 

   

Enables Renewable Feedstock Flexibility to Reduce Volatility. Our processes enable chemical production of the exact same chemicals as petroleum-based processes using a range of renewable feedstocks rather than fossil-fuel feedstocks. We believe this will provide our partners greater feedstock flexibility, leading to lower and more consistent cost of inputs.

 

   

Increases Long-Term Supply of C3 and C4 Chemicals. We believe our technology will provide the chemical industry with an entirely different way to cost-effectively produce high-volume C3 and C4 chemicals that will reduce the long-term supply challenges and pricing volatility associated with the use of fossil-fuel feedstocks for their production.

 

   

Enables Smaller-Scale Production Plants with Better Economics. We expect that production plants built to use our processes will provide superior capital efficiencies and lower operating costs compared to conventional petroleum-based chemical plants. In addition, the smaller the production capacity of the production plant, the more we expect our relative capital advantage to increase compared to conventional plants of the same size.

 

   

Results in More Sustainable Products. Because our processes use renewable feedstocks, have lower greenhouse gas emissions and use less energy, the downstream products ultimately derived from our processes should have a smaller environmental footprint than products manufactured using conventional petroleum-based manufacturing processes.

 

Our Competitive Strengths

 

We believe the following combination of capabilities and strengths distinguishes us from our potential competitors:

 

   

Differentiated Proprietary Biotechnology Platform Targeting Exact Same Chemicals. We have developed a proprietary biotechnology platform that lets us create multiple processes for numerous existing high-volume chemicals quickly. Our technology platform facilitates the renewable feedstocks-based production of the exact same high-volume chemicals that are currently produced using fossil-fuel feedstocks. By exact same chemicals, we mean that the chemicals produced by our processes meet the same industry specifications and have the same chemical structure as those produced by conventional petroleum-based processes. We believe producing the exact same chemicals, which can be mixed with petroleum-based chemicals if desired, will reduce sole sourcing concerns and facilitate relatively fast vendor qualification and integration of those chemicals into standard purchasing cycles. We believe we will be able to continue to rapidly develop and deliver multiple processes for numerous chemicals using our platform in a capital-efficient manner.

 

   

Cost-Advantaged Production. We believe chemical production plants designed to use our production processes will cost less to build and operate and will have better economics at smaller scales than similar-sized conventional production plants. We expect these cost advantages to increase over time given long-term fossil-fuel feedstock projected price increases, coupled with potential improvements in our processes and our planned introduction over time of the use of projected lower cost feedstocks, such as sugars from cellulosic biomass and syngas from municipal solid waste.

 

 

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Partnerships with Industry Leaders. As a result of our biotechnology platform and our ability to deliver a sustainable, economically-advantaged solution for the production of chemicals using a broad range of renewable feedstocks as inputs to our processes, we have been able to attract key industry partners in our markets. For example, we are operating the first demonstration-scale BDO-production plant that uses renewable feedstocks in partnership with Tate & Lyle in the United States with the potential for commercial-scale production in North America pursuant to a contemplated joint venture agreement. We currently have a non-binding memorandum of understanding with Mitsubishi Chemical and a non-binding letter of intent with Novamont for the commercial production of BDO in Asia and Europe, respectively. We have partnered with M&G and intend to integrate their proprietary process to convert cellulosic biomass into fermentable sugars with our proprietary process to convert those sugars into chemicals. Further, we have partnered with Waste Management for the conversion of syngas to chemicals with a particular focus on syngas that can be generated from municipal solid waste.

 

   

Capital Efficiency. We believe that the relatively lower cost of building plants designed to use our processes, coupled with our partnering strategy and future licensing arrangements will allow us to accelerate the commercialization of our production processes using substantially less of our capital than if we were to pursue a model to build, own and operate these production plants ourselves. We expect this to provide us with greater business flexibility to deploy multiple manufacturing processes for numerous target chemicals in parallel.

 

   

Significant Feedstock Flexibility. We believe the ability to produce intermediate and basic chemicals from multiple renewable feedstocks, such as conventional sugars, sugars from cellulosic biomass, or syngas from a variety of sources, will provide us and our partners with significant business flexibility. We expect our process technology will allow us and our partners to achieve better economics in part as a result of a more diversified set of feedstock options compared to the fossil-fuel feedstocks used in conventional petroleum-based manufacturing processes.

 

   

Intellectual Property Position. As of August 15, 2011, we owned or had licensed rights to 23 issued patents and 206 pending patent applications in the United States and in various foreign jurisdictions, in addition to our trade secrets and other intellectual property rights. These issued patents and pending patent applications cover not only the chemical production processes that we are developing or may pursue in the future, but also certain of the underlying technologies used to develop our processes.

 

   

Management Team with Extensive Industry Experience. Our management team brings over 100 years of combined operations, technology, partnering and licensing experience in the chemical and other technology industries, including at large global chemical companies such as The Dow Chemical Company, or Dow, E.I. du Pont de Nemours and Company, or DuPont, International Specialty Products, Inc., or ISP, and LyondellBasell Industries N.V., or LyondellBasell. In addition, members of our management team have significant biotechnology experience and have been deeply involved in the development, scale-up and commercialization of numerous bio-based products at both growth-stage and well-established companies.

 

Our Strategy

 

Our strategy is to drive transformation of the chemical industry by enabling global production of a wide range of intermediate and basic chemicals using renewable feedstocks to enable greater profitability and sustainability for the industry. The key elements of our strategy include:

 

   

Focus on Intermediate and Basic Chemicals. We target multiple intermediate and basic chemicals, each of which has an existing market in the billions to tens of billions of dollars per year. Our initial focus has been to commercialize our processes for intermediate chemicals, and we are now leveraging our technology platform to pursue in parallel the commercialization of processes for higher-volume basic chemicals, as well as additional intermediate chemicals.

 

 

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Execute on the Global Commercialization of our BDO Process. We intend to use a selective approach to partnering and establish joint ventures for the production of our first target chemical, BDO, in major markets, including North America, Europe and Asia. By employing a joint venture-based model, we intend to leverage our industry partners to reach consumers of major downstream applications of BDO.

 

   

Leverage our Technology Platform to Create Multiple Chemical Production Processes. With our proprietary biotechnology platform and intellectual property base, we plan to develop production processes targeting other chemicals in addition to BDO, including our second target chemical, butadiene. We apply a rigorous internal process for assessing and prioritizing opportunities on an ongoing basis.

 

   

Partner with Industry Leaders to Accelerate Commercialization. We intend to partner with industry leaders across entire product supply chains to accelerate development and commercialization of our production processes in a capital-efficient manner. We believe this will allow for the rapid deployment of multiple production plants, while allowing us to develop multiple process technologies in parallel. Generally, we seek to commercialize our manufacturing processes by pursuing joint ventures and licensing arrangements to accelerate commercialization of our manufacturing processes.

 

   

Improve Margins by Introducing Lower Cost Feedstocks. We believe we can deliver attractive margins using conventional sugars as the feedstocks for our processes. In addition, we are developing the technology and processes to use feedstocks projected to have even lower costs to further improve the margins realized using our processes, reduce feedstock price volatility and add increased global feedstock flexibility for us and our partners.

 

Risks Associated with Our Business and Industry

 

Our business and our ability to execute our business strategy are subject to a number of risks and uncertainties that you should understand before you decide to invest in our common stock. These risks are discussed more fully in “Risk Factors” and include:

 

   

we have not recognized revenue associated with the sale of chemicals produced using our processes, have incurred significant net losses since inception and may never become profitable;

 

   

neither we nor our partners have ever commercialized chemicals produced using our processes and may fail to successfully do so;

 

   

our failure to effectively scale up our technology and processes;

 

   

we rely heavily on industry partners and may not successfully enter into, maintain and manage these relationships;

 

   

our failure to select and negotiate the best partnering arrangements or to enter into definitive agreements with our partners;

 

   

fluctuations in the prices and availability of feedstocks used to manufacture the chemicals produced using our processes as well as competitors’ chemicals, and fluctuations in the market prices of our target chemicals;

 

   

our failure to develop processes that allow for the utilization of lower cost feedstocks in producing chemicals with our industry partners;

 

   

the intense competition in our industry and our failure to successfully compete;

 

   

the need to successfully respond to changes in our industry;

 

   

effectively growing our business and managing our growth;

 

   

the loss of key personnel or failure to attract, integrate and retain additional key personnel;

 

   

meeting necessary standards or being approved and accepted by target customers or end users;

 

 

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compliance with applicable rules and regulations;

 

   

obtaining and maintaining our intellectual property protection and not infringing others’ intellectual property; and

 

   

effectively transitioning to and operating as a public company.

 

Company Information

 

We were originally incorporated in the State of California in November 1998. We subsequently reincorporated in the State of Delaware in October 2007. Our principal executive offices are located at 10520 Wateridge Circle, San Diego, California 92121, and our telephone number is (858) 824-1771. Our corporate website address is www.genomatica.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

We own registered trademarks for Genomatica®, the Genomatica Sustainable Chemicals® logo, the Genomatica Three Rings® logo, SimPheny®, Bio-BDO® and Bringing Genomes to Life® in the United States. We own trademark registrations or applications for trademark registrations in certain foreign jurisdictions for Genomatica, the Genomatica Sustainable Chemicals logo, the Genomatica Three Rings logo and SimPheny. This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

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THE OFFERING

 

Common stock offered by us

  

         shares

Common stock to be outstanding after this offering

  

         shares

Over-allotment option

  

         shares

Use of proceeds

   We intend to use the net proceeds from this offering for research and development expenses, capital expenditures, capital contributions required in connection with joint ventures, working capital and other general corporate purposes, including for costs and expenses associated with being a public company. See “Use of Proceeds.”

Risk factors

   You should read the “Risk Factors” section of this prospectus for a discussion of certain of the factors to consider carefully before deciding to purchase any shares of our common stock.

Proposed Nasdaq Global Market symbol

  

“GENO”

 

 

 

The number of shares of our common stock to be outstanding after this offering is based on 63,308,961 shares of common stock outstanding as of June 30, 2011, after giving effect to the conversion of our outstanding convertible preferred shares into 58,063,325 shares of common stock, and excludes:

 

   

9,902,645 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2011, at a weighted average exercise price of $0.22 per share;

 

   

108,683 shares of common stock issuable upon the exercise of an outstanding warrant as of June 30, 2011, at an exercise price of $1.8402 per share;

 

   

         shares of common stock reserved for future issuance under our 2011 equity incentive plan, or the 2011 plan (including 3,612,076 shares of common stock reserved for issuance under our 2008 equity incentive plan, or the 2008 plan, which shares will be added to the shares reserved under the 2011 plan upon its effectiveness), which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year; and

 

   

         shares of common stock reserved for future issuance under our 2011 employee stock purchase plan, or the 2011 purchase plan, which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year.

 

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

the conversion of all our outstanding convertible preferred stock into an aggregate of 58,063,325 shares of common stock in connection with the closing of this offering;

 

   

the conversion of our outstanding convertible preferred stock warrant into a common stock warrant;

 

   

no exercise by the underwriters of their over-allotment option to purchase up to an additional         shares of our common stock; and

 

   

the filing of our restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering.

 

 

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SUMMARY FINANCIAL DATA

 

The following table summarizes our financial data. We derived the summary statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited financial statements and related notes appearing elsewhere in this prospectus. We derived the summary statement of operations data for the six months ended June 30, 2010 and 2011 and the summary balance sheet data as of June 30, 2011 from our unaudited financial statements and related notes appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. The summary financial data should be read together with our financial statements and related notes, “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2008     2009     2010         2010             2011      
                      (unaudited)  
    (in thousands, except per share amounts)  

Statement of Operations Data:

         

Revenues

  $ 2,488      $ 887      $ 726      $ 319      $ 1,915   

Operating expenses:

         

Research and development

    5,106        6,063        9,593        4,359        7,200   

Marketing, general and administrative

    3,779        3,852        5,173        2,336        3,806   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating (expenses)

    8,885        9,915        14,766        6,695        11,006   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (6,397     (9,028     (14,040     (6,376     (9,091

Interest and other income

    491        83        18        9        46   

Interest and other expense

    (16     (44     (32     (8     (17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (5,922   $ (8,989   $ (14,054   $ (6,375   $ (9,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share(1)

  $ (1.27   $ (1.80   $ (2.79   $ (1.27   $ (1.77

Shares used to calculate net loss per common share(1)

    4,657        4,997        5,043        5,010        5,132   

Pro forma basic and diluted net loss per share (unaudited)(2)

  $ (0.27   $ (0.40   $ (0.37   $ (0.17   $ (0.15

Shares used to calculate pro forma net loss per share (unaudited)(2)

    22,068        22,474        38,477        36,917        60,608   

 

(1)   See Note 1 to our Financial Statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per common share and the number of shares used in the computation of the per share amounts.
(2)   Pro forma net loss per share has been calculated assuming the conversion of all outstanding shares of our preferred stock into shares of common stock which will occur upon the closing of this offering.

 

 

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     June 30, 2011  
     Actual     Pro  Forma(3)     Pro Forma
As Adjusted(4)(5)
 
     (unaudited)  
     (in thousands)  

Balance Sheet Data:

      

Cash, cash equivalents and marketable securities

   $ 39,278      $ 39,278      $                

Working capital

     35,244        35,392     

Total assets

     44,676        44,676     

Indebtedness(6)

     194        194     

Convertible preferred stock warrant liability

     148            

Series B, C and C-1 convertible preferred stock

     78,545            

Accumulated deficit

     (43,543     (43,543  

Total stockholders’ equity (deficit)

     (38,833     39,860     

 

(3)   Pro forma amounts reflect the conversion of all our outstanding shares of convertible preferred stock into an aggregate of 58,063,325 shares of our common stock and the conversion of our outstanding convertible preferred stock warrant into a common stock warrant and the related reclassification of the warrant liability to stockholders’ equity (deficit).
(4)   Pro forma as adjusted reflects the pro forma conversion adjustments as well as the sale of          shares of our common stock in this offering at an assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(5)   A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) each of the cash, cash equivalents and marketable securities, working capital, total assets and total stockholders’ equity by $        , $        , $         and $        , respectively, assuming the number of shares offered by us as stated on the cover of this prospectus remain unchanged and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) each of cash, cash equivalents and marketable securities, working capital, total assets and total stockholders’ equity by $        , $        , $         and $        , respectively, assuming the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(6)   Indebtedness includes our current and non-current notes and capital lease obligations.

 

 

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RISK FACTORS

 

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business and Industry

 

We have not recognized revenue associated with the sale of chemicals produced using our processes, have incurred significant net losses since inception and anticipate that we will incur continued net losses for at least the next several years. We may never become profitable.

 

Though we deliver new, transformative manufacturing processes that enable our partners to produce intermediate and basic chemicals from renewable feedstocks, to date, our processes have not produced chemicals on a commercial scale and chemicals produced from our processes have not been sold commercially. As of June 30, 2011, we had an accumulated deficit of $43.5 million. For the years ended December 31, 2008, 2009 and 2010 and six months ended June 30, 2011, we had net losses of $5.9 million, $9.0 million, $14.1 million and $9.1 million, respectively, and had not generated any revenue associated with commercial sales of chemicals produced using our processes. We expect to continue to incur substantial and increasing net losses for the next several years, in particular as we seek to scale up our BDO process toward commercialization, expand our research and development efforts and transition to a public company. Because of the numerous risks and uncertainties associated with developing and commercializing processes to produce chemicals based on new technology, we are unable to predict the extent of any future losses. Our processes may never be used by our partners to successfully commercialize any chemicals, and thus we may never have any significant future revenues or achieve and sustain profitability.

 

Our ability to generate revenue associated with sales of chemicals produced using our processes, including BDO and butadiene, depends heavily on our success in a wide range of areas, including:

 

   

developing processes using our technology to enable the production of commercial quantities of chemicals at acceptable quality levels and in a cost-effective manner;

 

   

effectively scaling up our technology and processes;

 

   

establishing, maintaining and managing partnering arrangements with third parties, such as our strategic partnering arrangements relating to BDO and butadiene;

 

   

identifying industry partners with the capability to develop and operate facilities necessary to produce chemicals using our processes, including BDO and butadiene;

 

   

addressing changes in availability of and prices for feedstock to produce chemicals using our processes as well as those used in our competitors’ processes;

 

   

developing the technology necessary to enable our partners to utilize lower cost feedstocks in the production of chemicals;

 

   

maintaining or enhancing our competitive position, which includes successfully further developing and enhancing our technology platform;

 

   

raising additional capital when required or on acceptable terms;

 

   

managing our growth, in particular with respect to BDO commercialization efforts and the transition to operating as a public company;

 

   

attracting and retaining key members of our management team and other personnel;

 

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marketing and selling chemicals produced using our processes to our target customers;

 

   

identifying new market opportunities and needs and developing technologies, processes and products to meet those needs;

 

   

obtaining patents and other intellectual property rights to protect our technology and processes from competition and not infringing on others’ intellectual property rights;

 

   

conducting our business in compliance with applicable laws and regulations; and

 

   

conducting our business outside of the United States.

 

Neither we nor our partners have ever commercialized chemicals produced using our processes, including BDO and butadiene, and as a result we may encounter unforeseen difficulties and fail to successfully do so.

 

We have limited experience operating in the chemical industry, and we have not, nor have our partners, ever commercialized chemicals produced using our processes, including BDO and butadiene. Even if we are successful in entering into strategic partnering arrangements, there are no guarantees they will result in commercially viable chemical production.

 

Commercializing chemicals produced using renewable feedstocks is subject to substantial risks and uncertainties. The manufacturing of chemicals produced using our process, including BDO and butadiene, requires multiple integrated steps, including fermentation, cell separation, salt separation, water evaporation and purification. The technological, logistical and other challenges associated with each of these and other processes involved in producing chemicals using our processes are substantial. We may not be able to resolve any difficulties that arise in a timely or cost-effective manner, or at all. To date, we have produced limited quantities of chemicals using our processes for customer/vendor sampling and validation. Moreover, constructing production facilities of the types and sizes required to produce commercial quantities of chemicals using our processes are complex and lengthy undertakings that require sophisticated, multi-disciplinary planning and precise execution. Despite detailed planning, a commercial-scale production facility may take longer than anticipated to construct and may not perform as expected. Various design parameters may need to be adjusted to meet required product or volume specifications. Production rate, concentration and purity may vary dramatically from our expectations. We may need to install additional equipment to achieve desired specifications, which could delay commercialization and increase costs. Our challenges are magnified in producing BDO using our process given the fact that we utilize microorganisms which may be sensitive to temperature and other environmental factors, including contamination. We may encounter these or other operational challenges, and we may be unable to devise workable or cost-effective solutions. Furthermore, our processes require us to maintain certain levels of product purity to assure consistent product quality. In the event an impurity is introduced in a particular batch of chemicals produced using our technology, the product quality may be reduced or the product rendered unsalable, which would affect our profitability. In addition, we have never sourced commercial quantities of feedstocks, and we have no experience storing and/or distributing significant volumes of BDO. We may not be able to do so cost-effectively. We may also have difficulty in recruiting, training and retaining qualified personnel to assist in our commercial-scale operations. Moreover, successfully commercializing chemicals produced using our processes entails numerous other risks, including risks associated with legal and regulatory compliance as well as customer acceptance. Failure to successfully commercialize chemicals produced using our processes on our anticipated timelines, including BDO and butadiene, would likely have a material adverse effect on our business, financial condition and results of operations, and harm our reputation.

 

The chemicals we target have never been produced at commercial scale using our processes, and we will not succeed if we cannot, together with our partners, effectively scale up our technology and processes.

 

To successfully commercialize any chemicals using our processes, including BDO and butadiene, we and our partners must have the capability to produce chemicals in significantly larger quantities than we have to date at acceptable quality levels on a cost-effective basis, and otherwise effectively scale up our operations. This will

 

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require that our technology and processes be scalable from laboratory, pilot and demonstration-scale production to commercial-scale production. Any chemicals that we develop to the point of commercial production may not perform in the same manner as we have seen at earlier, smaller-scale stages, or we may encounter operational challenges for which we are unable to devise a workable solution. If this occurs, our ability to commercially scale our technology and processes will be adversely affected, and with respect to any products that are brought to market, we may not be able to lower our and our partners’ cost of production, which would adversely affect our ability to increase the future profitability of our business. We have successfully produced BDO at pilot scale and are now producing BDO using our process at demonstration scale at a plant located at an industrial site owned by our partner, Tate & Lyle. In order to produce commercial quantities of BDO using our processes, we will need to further refine our processes and maintain fermentation performance, such as rate, yield and titer, when producing BDO in those larger quantities. We may never achieve the necessary fermentation results to produce BDO at commercial scale or achieve other production process efficiencies. Any failure to successfully scale up our and our partners’ operations and commercially produce any chemical in which we have invested and that we have sought to develop may harm our reputation and have a material adverse effect on our business. Moreover, upon commercial production of target chemicals using our processes, we anticipate it taking multiple months to ramp up production to target production rate. Even if we and our partners are able to successfully produce chemicals using our processes on a commercial scale, it may take longer than anticipated for the plant to produce such chemicals at capacity at target productions rates, which would affect our profitability. In addition, although our management team has significant experience in chemical and fermentation technology, the skills and knowledge gained in these fields and in operating smaller-scale production facilities may prove insufficient in connection with our operation of commercial-scale facilities with our industry partners.

 

Additionally, we are highly dependent on our industry partners, including Tate & Lyle, in the demonstration production of BDO using our process, and rely extensively on their prior experiences and know-how in manufacturing chemicals. There are no guarantees the prior experiences of our industry partners will translate into the production of chemicals using our processes and that we will be able to replicate some of the successes that our industry partners, including Tate & Lyle, have had in the past commercializing other chemicals. We may face unforeseen difficulties as a result. Any such difficulties could delay the timing or prevent our industry partners from commercializing chemicals produced using our processes, including BDO, could increase our costs, and could have a material adverse effect on our business, financial condition and results of operations.

 

We rely heavily and expect to continue to rely heavily on industry partners for our growth strategy and the execution of our business plan, and our failure to successfully enter into, maintain and manage these relationships could delay our anticipated timelines, prevent the successful development and commercialization of chemicals produced using our processes, negatively impact our financial results, and prevent us from ever achieving or sustaining profitability.

 

Our ability to successfully enter into, maintain and manage partnering arrangements will be critical factors to the success of our business and growth. We rely heavily and expect to continue to rely heavily on such arrangements, including our relationships with M&G, Mitsubishi Chemical, Novamont, Tate & Lyle and Waste Management. We have limited or no control over the amount or timing of resources that any third party commits to negotiating a partnering arrangement with us or, if negotiated and entered into, the timing or amount of resources that a third party will commit to our projects. Any third party with which we are in negotiations may experience a change of policy or priorities and may discontinue negotiations with us. Any of our industry partners may fail to perform their obligations as expected. These industry partners may breach or terminate their agreements with us or otherwise fail to conduct their partnering activities successfully and in a timely manner. Further, our industry partners may not develop commercially viable chemicals arising out of our partnering arrangements or devote sufficient resources to the development, manufacture, marketing and/or sale of chemicals produced using our processes. Moreover, disagreements with an industry partner regarding strategic direction, economics of our relationship, intellectual property or other matters could develop, and any such conflict could reduce our ability to enter into future partnering agreements and negatively impact our relationships with one or more existing industry partners. Any of these events could delay our anticipated timelines, prevent the successful

 

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development and commercialization of chemicals produced using our processes, negatively impact our financial results, and prevent us from ever achieving or sustaining profitability. Moreover, these negative consequences could be augmented in the event that we are forced to seek replacement partners, particularly for those whose plant locations would have allowed for favorable relevant feedstock acquisition costs.

 

Our partnering opportunities could be harmed and our anticipated timelines could be delayed if:

 

   

we do not achieve our objectives under our arrangements in a timely manner, or at all;

 

   

our existing or potential industry partners become unable, unwilling or less willing to expend their resources on research and development or commercialization efforts with us due to general market conditions, their financial condition, feedstock pricing or other circumstances, many of which are beyond our control;

 

   

we disagree with our industry partners as to rights to intellectual property we jointly develop, or their research programs or commercialization activities;

 

   

we are unable to successfully manage multiple simultaneous partnering arrangements;

 

   

applicable laws and regulations, domestic or foreign, impede our ability to enter into strategic arrangements;

 

   

we develop processes or enter into additional partnering arrangements that conflict with the business objectives of our other arrangements;

 

   

our industry partners become competitors of ours or enter into agreements with our competitors; or

 

   

consolidation in our target markets limits the number of potential industry partners.

 

Additionally, our business could be negatively impacted if any of our industry partners undergoes a change of control or assigns the rights or obligations under any of our agreements. If any of our industry partners were to assign these agreements to our competitors or to a third party who is not willing to work with us on the same terms or commit the same resources as the current industry partner, our business and prospects could be adversely affected.

 

Even if we are successful in entering into strategic partnering arrangements, there are a number of different arrangements that we can pursue, and there are no assurances that we will select and negotiate the best arrangements for us and our stockholders.

 

We seek to commercialize our chemical manufacturing processes by pursuing joint ventures in some markets and licensing agreements in others. This joint venture and licensing business strategy is based on a wide variety of factors, including the size and competitive environment in each market, and our perceived ability to best monetize our proprietary technology. The types of arrangements we enter into with our industry partners will be significant in determining the amount of risk and control that we maintain with respect to the development and commercialization of chemicals produced using our processes. The contractual arrangements with our industry partners will also determine the amount of capital we need to contribute to a particular project, as well as the revenue we may receive associated with any sale of chemicals produced using our processes and will be a driver for the margins we are able to obtain on the chemicals sold. We will need to analyze these issues properly and negotiate corresponding arrangements with our industry partners in order to efficiently balance the amount of risk we take, level of control we maintain, and the amount of revenues and margins we obtain with respect to chemicals produced using our processes. There are no assurances that we will select and negotiate the best arrangements for us and our stockholders. Failure to choose optimal arrangements could result in delays or failures in the commercial development of certain chemicals produced using our processes, sub-optimal economic returns and capital commitments that negatively impact our business, and negatively impact our ability to successfully pursue multiple opportunities in parallel.

 

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We have entered into and anticipate entering into non-binding letters of intent, memoranda of understanding, term sheets and other arrangements with potential industry partners and cannot assure you that such arrangements will lead to definitive agreements. If we are unable to complete these arrangements in a timely manner and on terms favorable to us, our business will be adversely affected.

 

We have engaged in negotiations with a number of companies and have agreed to preliminary terms regarding the development and commercialization of certain chemicals produced using our processes, such as our letter of intent with Novamont, our memorandum of understanding with Mitsubishi Chemical and our memorandum of understanding with M&G. These agreements are non-binding. In addition, our joint development agreement with Tate & Lyle contemplates the parties negotiating to reach definitive agreement for the commercialization of BDO produced using our processes if we proceed to the commercialization phase. We may be unable to negotiate final terms in a timely manner, or at all, and there is no guarantee that the terms of any final, definitive, binding agreement will be the same or similar to those currently contemplated in a preliminary agreement. Final terms may include terms less favorable to us than those set forth in the preliminary agreements. Delays in negotiating final, definitive, binding agreements could slow the development and commercialization of chemicals produced using our processes. Failure to agree to final terms for the development and commercialization of such chemicals could prevent us from growing our business, result in wasted resources and cause us to consume capital significantly faster than we currently anticipate. For example, failure to successfully partner could force us to build our own manufacturing facilities, which would require substantial cash outlay by us.

 

Fluctuations in the prices of feedstocks used to manufacture the chemicals produced using our processes may affect our or our industry partners’ cost structure, gross margin and ability to compete.

 

The cost to produce the chemicals we are attempting to commercialize with our industry partners is highly dependent on the cost and usage of various feedstocks, including conventional sugars such as sucrose from sugarcane or sugar beets and dextrose from corn or cassava, and potentially sugars from cellulosic biomass and syngas. The prices of many of these feedstocks are cyclical and volatile. For example, the average market price per bushel of corn ranged from a low of $3.09 per bushel to a high of $7.55 per bushel during 2008, and was $7.14 per bushel as of August 11, 2011. An increase in the price of the feedstocks used to manufacture the chemicals produced using our processes would likely change our or our industry partners’ cost structure and impact our gross margin. At certain levels, feedstock prices may make the chemicals produced using our processes uneconomical to manufacture. Even in situations where we develop the technology to enable the use of a variety of feedstocks to make a particular chemical, the need to substitute feedstocks because of price fluctuations may not be economically feasible and could negatively impact the ability to deliver chemicals produced using our processes to customers in a timely and cost-effective fashion, or at all.

 

Although there may be indices that show the pricing of the feedstock used for production that closely track to our end products, there are no assurances that these indices will be valid or, if valid, that current prices will not later change. In addition, we may underestimate the volume of feedstock required to operate at commercial scale. For example, although the feedstock usage quantities are based on predictable chemical reactions, the actual consumption required to produce chemicals such as BDO on a commercial scale may be greater, affecting production cost and impacting production volumes. We cannot control the cost of these feedstocks, and we could underestimate feedstock pricing and volume requirements. These uncertainties could affect our costs and gross margin.

 

Declines in the prices of feedstocks our competitors use to produce their chemicals could allow them to reduce the prices of their products which could cause us or our industry partners to reduce the prices of the chemicals produced using our processes. This could make it uneconomical for our partners to produce chemicals using our processes.

 

The cost to produce the chemicals our competitors are commercializing and attempting to commercialize is highly dependent on the cost and usage of various feedstocks. For BDO, the cost to produce this chemical by our competitors is highly dependent on the prices of fossil-fuel feedstocks such as crude oil and natural gas. The

 

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prices of many of these feedstocks are cyclical and volatile, and there has recently been significant volatility in the prices of crude oil and natural gas in particular. For example, the average market price per barrel of Brent crude oil ranged from a low of $34.04 per barrel to a high of $145.66 per barrel during 2008 and was $106.48 per barrel as of August 18, 2011. These recent increases in crude oil prices have made it more expensive to produce BDO using this fossil-fuel feedstock. There are no guarantees that prices for fossil-fuel feedstocks such as crude oil will remain at the same price levels as recently observed, and we expect that prices of fossil-fuel feedstocks will continue to fluctuate in the future. Declines in the prices of the feedstocks our competitors use to produce their chemicals, and declines in the prices of crude oil and natural gas in particular with respect to BDO, could allow our competitors to reduce the prices of their products. This in turn could cause us and our industry partners to have to reduce the prices of any competing products that are commercialized using our processes, or make it uneconomical for our partners to produce chemicals using our processes. Even the perception of future declines in the feedstocks our competitors utilize may adversely affect the prices we and our industry partners can obtain from customers or prevent potential customers from entering into agreements to buy chemicals produced using our processes.

 

If the availability of the feedstocks used in our processes declines, we may experience delayed or reduced production, raise the prices of the chemicals produced using our processes, and reduce the demand for the chemicals produced using our processes and our revenue.

 

The production of chemicals using our processes will require large volumes of feedstocks. For BDO, we currently anticipate requiring significant amounts of conventional sugars such as sucrose from sugarcane or sugar beets and dextrose from corn or cassava, and potentially others such as sugars from cellulosic biomass in the future. We cannot predict the future availability of any feedstock necessary to produce chemicals using our processes, or be sure that the suppliers of these feedstocks will be able to supply them in sufficient quantities, in a timely manner or at a cost that allows us to competitively price chemicals produced using our processes. The supply of feedstocks might be impacted by a wide range of factors, including weather conditions, natural disasters, droughts, floods, crop disease and pestilence, growing-season disruptions, crop yields, infestations, natural disasters, farming decisions or government policies and subsidies. In particular, weather conditions have historically caused volatility in the sugar industries by causing crop failures or reduced harvests. Excessive rainfall can adversely affect the supply of certain feedstocks by reducing the sugar content and limiting growers’ ability to harvest the crop. Crop disease and pestilence can adversely affect growth, potentially rendering unusable all or a substantial portion of affected harvests. The limited amount of time during which certain feedstocks retain their sugar content after harvest also limits our ability to substitute supply, if necessary. Declines in the availability of the feedstocks used to produce chemicals using our processes could force us to delay or reduce production, raise the prices of chemicals produced using our processes, and result in reduced demand for chemicals produced using our processes and reduced revenue.

 

We may not be successful in developing processes that allow for the utilization of projected lower cost feedstocks in producing chemicals with our industry partners, which may negatively impact our ability to compete.

 

Since the cost to produce the chemicals we are attempting to enable our partners to commercialize is highly dependent on the cost and usage of the applicable feedstocks, we focus our research and development activities in part on seeking to allow for the utilization of projected lower cost feedstocks in the manufacturing of chemicals produced using our processes. For example, we are currently expending resources attempting to develop the ability to use sugars from cellulosic biomass and syngas to produce chemicals. There is no guarantee that we will be able to develop any of these alternative processes for producing chemicals, and we may expend substantial resources and time attempting to do so. Our inability to successfully develop the technology to allow for the production of chemicals using projected lower cost feedstocks could prevent us from effectively competing in the markets in which we operate and executing on our business plan. Moreover, not having multiple potential sources of feedstock for a particular chemical makes us and our partners more dependent on a particular feedstock and susceptible to adverse results based on the availability and price of that feedstock. Any such

 

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adverse results based on the availability and price of feedstocks of which we are or our partners are dependant could increase our costs and could have a material adverse effect on our business, financial condition and results of operations.

 

We expect to face intense competition for the chemicals produced using our processes, often from larger companies with greater resources and experience than us.

 

The industrial chemicals market is highly competitive. In this market, we expect to face vigorous competition from the traditional, largely petroleum-based chemical companies making the same chemicals, with companies seeking to produce these chemicals using more sustainable methods (such as companies focusing on the use of succinic acid to produce BDO) and with companies seeking to produce alternatives to existing chemicals, which alternatives could be substitutes for the chemicals we expect to produce with our partners. In addition, some end-users of chemicals, including BDO, produce their chemical requirements internally. In the BDO market, our potential competitors include BASF Corporation, or BASF, Dairen Chemical Corporation, or Dairen Chemical, ISP, INVISTA and LyondellBasell. We may also compete with companies such as BioAmber Inc., Metabolix, Inc., Myriant Technologies, Inc. and Royal DSM. In the butadiene market, our potential competitors include Formosa Petrochemical Co., LyondellBassell, Shell Chemicals Limited and TPC Group Inc. And we are seeking to develop processes used to produce other chemicals, each of which will subject us to increased competition. We also compete with other production technologies. For example, for BDO, we compete with the Reppe process, the Davy process, propylene and propylene oxide production processes, butadiene-acetic acid processes and the GEMINOX process.

 

Existing and potential competitors may have substantially greater financial, technical, sales and marketing, manufacturing, distribution and other resources and name recognition than us, strong historical relationships with their customers, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enable them to compete effectively against us. In addition, traditional producers of existing petroleum-based chemicals have dominated their markets for many years. Moreover, in order to be successful, we must convince customers that our processes produce the exact same chemicals on a cost-competitive basis, and are produced with required capacity and reliability. Our failure to successfully compete may have a material adverse effect on our business, financial condition and results of operations.

 

Even if we are successful in gaining a share of any intermediate or basic chemical markets, we may be subject to aggressive competitive tactics from our competitors, who may use their strong positions in the market and established relationships with existing suppliers and customer to take measures that negatively impact our ability to compete effectively in this industry.

 

Technological innovation could render our technology and the chemicals produced using our processes obsolete or uneconomical.

 

The bio-based chemical industry is characterized by rapid and significant technological change. Our success will depend on our ability to maintain a competitive position with respect to technological advances. Our technology and the chemicals derived from our technology may be rendered obsolete or uneconomical by technological advances, more efficient and cost-effective bio-based chemicals or entirely different approaches developed by one or more of our competitors. Though we plan to continue to expend significant resources to enhance our technology platform and processes, there are no assurances we will be able to keep pace with technological change.

 

Our financial results could vary significantly from quarter to quarter and are difficult to predict.

 

Our financial results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control and are difficult to predict. As a result, comparing our results of operations on a

 

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period-to-period basis may not be meaningful. In addition to the risk factors stated herein, other factors that could cause our quarterly results of operations to fluctuate include:

 

   

achievement of, or failure to achieve, technology or product development milestones needed to allow us to enter identified markets on a timely and cost-effective basis;

 

   

delays or greater than anticipated expenses associated with our research and development activities;

 

   

delays or greater than anticipated expenses associated with the scale-up and the commercialization of BDO produced using our process;

 

   

the levels of capital expenditures we make in connection with our strategic partnerships;

 

   

our ability to successfully enter into partnering arrangements, and the terms of those relationships;

 

   

fluctuations in the prices or availability of the feedstocks required to produce chemicals produced using our processes or those of our competitors;

 

   

changes in the amount that we invest to develop, acquire or license new technologies and processes;

 

   

changes in the size and complexity of our organization, including our expanded operations as a public company;

 

   

changes in general economic, industry and market conditions, both domestically and in our foreign markets;

 

   

business interruptions, including disruptions in the production process at any facility where chemicals produced using our processes are manufactured;

 

   

the unavailability of contract manufacturing capacity altogether or at anticipated cost;

 

   

departure of executives or other key management employees;

 

   

changes in the needs for the chemicals produced using our technology;

 

   

the development of new competitive technologies or products by others;

 

   

the entry of new competitors into our market whether by established companies or by new companies;

 

   

the timing, size and mix of sales to customers for chemicals produced using our processes;

 

   

seasonal production and sale of chemicals produced using our processes;

 

   

changes in our pricing policies or those of our competitors, including our responses to price competition;

 

   

changes in governmental, accounting and tax rules and regulations, environmental, health and safety requirements, and other rules and regulations;

 

   

risks associated with the international aspects of our business;

 

   

changes in energy costs;

 

   

our ability to use our net operating loss carryforwards to offset future taxable income;

 

   

our ability to integrate businesses that we may acquire; and

 

   

fluctuations in foreign currency exchange rates.

 

Due to these and other factors, our financial results for any quarterly or annual period may not meet our expectations or the expectations of our investors and may not be meaningful indications of our future performance.

 

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We may require substantial additional financing to fund our operations and complete the development and commercialization of BDO, butadiene or any other chemicals produced using our processes, and we may not be able to do so on favorable terms.

 

Our operations have consumed substantial amounts of cash since inception, and we expect to substantially increase our spending, in particular as we:

 

   

enter into and engage in strategic partnering arrangements to produce target chemicals, including BDO and butadiene, cost-effectively at acceptable quality levels and price points, including making capital contributions for the construction of certain plants;

 

   

expand our research and development efforts;

 

   

grow our business organization;

 

   

seek to identify additional market opportunities for the chemicals produced using our processes; and

 

   

pursue non-U.S. based partnering arrangements.

 

We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months. Moreover, we estimate that the net proceeds from this offering will be approximately $        , assuming an initial public offering price of $         per share (the mid-point of the range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. For example, our industry partners may require capital contributions beyond what we currently anticipate, or we or our industry partners may encounter difficulties in connection with our chemical production efforts that require significantly higher amounts of capital contribution than currently anticipated. Depending on our ability to successfully partner with respect to our chemical production development and commercialization efforts, including those related to BDO and butadiene, we may need to build our own manufacturing facilities, which would require substantial cash outlay by us. Moreover, there may be delays in the ability of us and our industry partners to produce commercial quantities of chemicals, including BDO and butadiene, using our processes cost-efficiently at acceptable quality levels, which would delay our ability to generate revenue associated with the sale of such products. Securing additional financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

 

If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

 

   

delay or suspend some or all of our commercialization efforts, in particular those related to BDO and butadiene;

 

   

decrease or abandon some or all of our research and development efforts;

 

   

decrease the financial resources dedicated to our partnering efforts, which may substantially delay the development, manufacture, marketing or sale of existing and future chemicals produced using our processes;

 

   

decrease the amount of time and resources we spend to market any of the chemicals produced using our processes to target customers;

 

   

decrease the amount of time and resources we spend to identify additional market opportunities for the chemicals produced using our processes; and

 

   

suspend the growth of our organization.

 

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To raise additional funds to support our business operations, we may sell additional equity or convertible debt securities which would result in the issuance of additional shares of our capital stock and dilution to our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing discovery, development and commercialization efforts and our ability to generate revenues and achieve or sustain profitability will be substantially harmed.

 

If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be damaged, and our business and results of operations may be harmed.

 

Over the past several years, we have experienced significant expansion of our business. For example, we have grown from 33 full-time employees as of January 1, 2010 to 69 full-time employees as of June 30, 2011. In addition, a number of key members of our management have recently joined our company. We expect this growth to continue and accelerate in the future in connection with our BDO commercialization efforts, expanded research and development activities, and as we transition to operating as a public company. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among other things, the following:

 

   

enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures;

 

   

effectively scale our operations;

 

   

successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees;

 

   

expand our facilities and equipment;

 

   

effectively manage and maintain our corporate culture; and

 

   

address challenges associated with any non-U.S. partnering arrangements or activities.

 

These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. And our growth will continue to place a strain on our operational, financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects and reputation. Our senior management has only worked together for a relatively short period of time, and this may exacerbate our inability to effectively manage our rapid growth.

 

If we lose key personnel or are unable to attract, integrate and retain additional key personnel, it could harm our research and development efforts, delay the commercialization of chemicals produced using our processes, delay the launch of products in our development pipeline and impair our ability to meet our business objectives.

 

Our business involves complex operations spanning a variety of disciplines and demanding a management team and employee workforce that is knowledgeable in the many areas necessary for our operations. The loss of any key member of our management team, including our Chief Executive Officer, Christophe H. Schilling, Ph.D., our Executive Vice President and Chief Technology Officer, Mark J. Burk, Ph.D., and our Executive Chairman of the Board and Chief Business Development Officer, William H. Baum, or key research and development or operational employees, or the failure to attract and retain such employees, could prevent us from developing and commercializing chemicals produced using our processes and executing our business plan.

 

We may not be able to attract or retain qualified employees due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the bio-based chemicals

 

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area, or due to the scarcity of personnel with the qualifications or experience necessary for our business. Hiring, training and successfully integrating qualified personnel into our operation can be lengthy and expensive, and efforts to integrate may not be successful. The market for qualified personnel is very competitive because of the limited number of people available with the necessary technical skills and understanding of our technology and anticipated products, and given the number of companies in this industry seeking this type of personnel. If we are not able to attract, integrate and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to support our internal research and development programs or satisfy customer demands for chemicals produced using our processes. In particular, our production process development, process engineering, research and development, and plant operations programs are dependent on our ability to attract, integrate and retain highly skilled scientific, technical and operational personnel. Competition for such personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms, or at all. These personnel related risks will increase and we will face additional geography specific challenges as we expand our international operations. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any time.

 

Adverse conditions in the global economy and disruption of financial markets may prevent the successful development and commercialization of chemicals produced using our processes, as well as significantly harm our results of operations and ability to generate revenue and become profitable.

 

The global economy has been experiencing significant economic turbulence, and global credit and capital markets have experienced substantial volatility and disruption. These adverse conditions and general concerns about the fundamental soundness of domestic and international economies could limit our partners’ or potential partners’ ability or willingness to invest in new technologies or work with us, in particular given our current joint venture and licensing strategy that typically entails our industry partners contributing significant capital to our endeavors. Moreover, these economic and market conditions could negatively impact customers’ ability to obtain adequate financing or credit to purchase and pay for products made from chemicals produced using our processes or willingness to make discretionary purchases. Changes in governmental banking, monetary and fiscal policies to address liquidity and increase credit availability may not be effective. Significant government investment and allocation of resources to assist the economic recovery of various sectors which do not include the bio-based chemical industry may reduce the resources available for government grants and related funding for research and development, which has been a key source of revenue for us to date. Any one of these events, and continuation or further deterioration of these financial and macroeconomic conditions, could prevent the successful and timely development and commercialization of chemicals produced using our processes, as well as significantly harm our results of operations and ability to generate revenue and become profitable.

 

We cannot assure you that the chemicals produced using our processes, including BDO and butadiene, will be accepted by target customers.

 

If we fail to successfully market chemicals produced using our processes, such as BDO or butadiene, for commercial sale to our target customers, our business, financial condition and results of operations will be adversely affected. For BDO and butadiene, the markets we intend to enter first are those for chemicals used by large consumer products or chemical companies. In entering these markets, we and our industry partners intend to sell these chemicals produced using our processes as alternatives to current petroleum-based chemicals. Although significant markets currently exist for BDO and butadiene produced from fossil-fuel feedstocks, to our knowledge, neither BDO nor butadiene developed from renewable feedstocks have ever been produced or sold at a commercial scale. Many potential chemical industry customers have invested substantial amounts of time and money in developing petroleum-based production channels. These potential customers for chemicals produced using our processes, including BDO and butadiene, generally have well-developed manufacturing processes and, in many instances, arrangements with suppliers of the components of their products. We will need to spend substantial resources educating potential purchasers of the chemicals produced using our processes, that this product is the exact same chemical as its petroleum-based counterparts, and that the chemicals produced using

 

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our processes are compatible with their current production facilities and manufacturing processes. Additionally, pre-existing contractual commitments and long-term relationships with current suppliers may slow the market acceptance of any chemicals produced using our processes. Furthermore, some end-users of chemicals we target, such as BDO, have been producing their chemical requirements internally, and we may therefore face additional challenges in procuring business from these potential customers. These types of factors may limit the market for certain chemicals produced using our processes. Our inability to overcome these and other customer acquisition related obstacles may prevent us from generating revenue associated with the chemicals produced using our processes, which could harm our business, financial condition and operating results.

 

BDO, butadiene and any other chemicals produced using our processes may not be produced in accordance with customer specifications.

 

It is critically important that we are able to meet customers’ product and volume specifications. If we fail to do so, prospective customers will not purchase the chemicals produced using our processes and existing customers could terminate their agreements to purchase the chemicals produced using our processes. Failure to successfully meet the specifications of our customers and potential customers for chemical intermediates would decrease demand for the chemicals produced using our processes and significantly hinder market adoption of such products.

 

Even if the chemicals produced using our processes are produced at contractual or targeted specifications, as the case may be, we may face delays or reduced demand for such products related to current or future customer qualification trials that could take several months. For the chemicals produced using our processes to be accepted, our customers may need to test and certify it for use in their processes and, in some cases, determine whether products that contain the chemicals produced using our processes satisfy additional third-party specifications. We may need to demonstrate to our customers that the chemicals produced using our processes do not contain impurities that cause such products to behave differently than the petroleum-based equivalent in a way that impacts their end product quality. Our customers, in turn, may need to validate the use of the chemicals produced using our processes in chemicals produced for third parties. Meeting these suitability standards could be a time-consuming and expensive process, and we may invest substantial time and resources into such qualification efforts without ultimately securing approval by our customers. This could materially and adversely impact revenues until customer qualification is achieved and maintained.

 

We have limited experience in structuring arrangements with customers for our processes and for the purchase of chemicals produced using our processes, including BDO and butadiene, and we may not be successful in this essential aspect of our business.

 

To date, we have not generated revenue associated with commercial sales of chemicals produced using our processes and have limited experience operating in our customers’ industries and interacting with the customers that we are targeting. Developing that expertise may take longer than we expect and will require that we expand and improve our sales and marketing infrastructure. These activities could delay our ability to capitalize on the opportunities that our technology and products present, and may prevent us or our partners from achieving commercialization of chemicals produced using our processes, including BDO and butadiene. Our target customers are generally much larger than we are and have substantially longer operating histories in the chemical industry than we have. As a result, we may not be effective in negotiating or managing the terms of our relationships with these companies, which could adversely affect our future results of operations.

 

The levels of supply of our target intermediate and basic chemicals, including BDO and butadiene, could result in reduced demand for chemicals produced using our processes, and negatively affect the pricing of chemicals produced using our processes, our margins and results of operations.

 

The levels of supply of our target intermediate and basic chemicals, including BDO and butadiene, have been historically volatile, and we expect continued volatility in the future. Moreover, this volatility may increase as additional suppliers of these chemicals or any chemical-substitutes enter the market, including us and our

 

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industry partners. The levels of supply of our target chemicals are affected by a number of factors, many of which are outside of our control, including the pricing and availability of applicable feedstocks, technological advances and the demand for these chemicals. Fluctuations in the levels of supply of our target chemicals could result in reduced demand for chemicals produced using our processes, and negatively affect our pricing, margins and results of operations. In addition, target chemical supply could result in us and our industry partners having surpluses of chemicals produced using our processes, which in turn could result in our needing to record charges for excess inventory.

 

Our failure to accurately forecast demand for any chemical produced using our processes, including BDO and butadiene, could result in an unexpected shortfall or surplus that could negatively affect our results of operations or our brand.

 

Because of the length of time it takes to develop and commercialize the chemicals produced using our processes, such as BDO and butadiene, we must make development and production decisions well in advance of commercial production and sale of such chemicals. Our ability to accurately forecast demand for any of the chemicals produced using our processes that are commercialized can be adversely affected by a number of factors, many of which are outside of our control, including actions by our competitors, changes in market conditions, environmental factors and adverse weather conditions. A shortfall or surplus in the supply of chemicals produced using our processes may reduce our revenues, damage our reputation and adversely affect customer or partner relationships, which could harm our business, results of operations and financial condition. In addition, surpluses of chemicals produced using our processes could result in our needing to record charges for excess inventory.

 

Our success is highly dependent on our ability to maintain and efficiently utilize our technology platform, and to effectively identify potential product candidates to develop and commercialize.

 

We are highly dependent on our technology platform for the development and commercialization of bio-based chemicals. If we experience challenges in our technology platform, such as problems with engineering complex metabolic systems in microorganisms, or if we encounter problems interpreting and analyzing data using our technology platform, our business may be harmed. For example, challenges may result in us expending significant time and resources on the development of products that are unlikely to generate revenues for us in the future.

 

We may not be successful in identifying new market opportunities and needs and developing technologies, processes or products to meet those needs.

 

The success of our business model depends in part on our ability to identify new market opportunities and needs for bio-based chemicals, and developing technologies, processes or products to meet those needs. The manufacturing technologies we research and develop are new and continuously changing and advancing. The bio-based chemicals that are derived from these technologies may not be applicable or compatible with demands in existing or future markets. Furthermore, we may not be able to identify new opportunities as they arise for bio-based chemicals since future applications of any given product may not be readily determinable, and we cannot reasonably estimate the size of any markets that may develop. If we are not able to successfully identify new market opportunities and needs and develop new products to meet those needs, we may be unable to expand our business beyond BDO and butadiene and will therefore be highly dependent on these potential chemicals.

 

Our prior success in developing BDO using our processes may not be indicative of our ability to develop other bio-based chemicals using our processes in the future.

 

The success we have had in manufacturing BDO produced using our process to date may not be indicative of our ability to develop other bio-based chemicals, including butadiene, using our processes in the future. We intend to spend substantial resources to enable our industry partners to produce other intermediate and basic chemicals,

 

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such as butadiene, from renewable feedstocks. We may not be successful in our efforts to develop and commercialize these new processes, or the time period required to commercialize these chemicals produced using our processes may take substantially longer and require more resources than we or our industry partners anticipate. Additionally, we may find that new chemicals produced using our processes that we or our industry partners attempt to commercialize are more complex than we anticipate or require processes that we are unfamiliar with or which require larger scale development facilities than expected. Any of these issues could impact our ability to develop new chemical manufacturing processes in a timely and cost-effective fashion. Even if we are able to develop processes to produce other chemicals from renewable feedstocks, we may find that there is a lack of partnering opportunities for the commercialization of such chemicals, which could further delay or prevent us from generating revenue associated with these chemicals. Our inability to develop and eventually commercialize chemicals produced using our processes beyond BDO could harm our business, financial condition and operating results.

 

Our failure or the failure of our industry partners to realize expected economies of scale could limit our or our partners’ ability to sell chemicals produced using our processes at competitive prices, negatively impact our ability to enter into other strategic arrangements, and materially and adversely affect our business and prospects.

 

We and our industry partners may be unable to realize expected economies of scale in connection with scale up and commercialization efforts, including those associated with our BDO initiatives. The failure to achieve these efficiencies or realize these expected benefits could negatively impact our or our industry partners’ ability sell chemicals produced using our processes at competitive prices, negatively impact our ability to enter into other strategic arrangements, and materially and adversely affect our business and prospects.

 

Natural or man-made disasters, social, economic and political instability, and other similar events may significantly disrupt our and our industry partners’ businesses, and negatively impact our results of operations and financial condition.

 

Our corporate headquarters are located in San Diego, California, the plant we jointly operate with our partner, Tate & Lyle, is located in Decatur, Illinois, and we anticipate working with our industry partners in multiple other locations, including non-U.S. sites. San Diego is situated on or near earthquake fault lines. Decatur is exposed to and affected by severe weather. And other locations, in particular a number of potential non-U.S. locations, may be subject to social, economic and political instability, such as social uprisings. Any of our or our industry partners’ facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, tsunamis, nuclear disasters, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us or our industry partners to operate our business for some period of time. Our and our industry partners’ facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our or our industry partners’ operations could negatively impact our business and results of operations, and harm our reputation. Our disaster recovery plan may not be sufficient to address an actual disaster, in particular any events that negatively impact our or our industry partners’ physical infrastructures. In addition, we and our industry partners may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our results of operations and financial condition, and success as an overall business.

 

We and our industry partners are subject to extensive regulatory rules and regulations, and any failure to comply with these rules and regulations or timely obtain and maintain any necessary regulatory approvals, permits, licenses, registrations, certifications or other requirements could have a material adverse effect on our business and substantially hinder our and our partners’ ability to manufacture and commercialize chemicals produced using our processes.

 

As a technology company partnering with other companies in the bio-based chemical industry, we and our industry partners are subject to extensive regulatory laws, rules and regulations in a variety of jurisdictions. For example, the Toxic Substances Control Act, or TSCA, and analogous state laws and regulations impose

 

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requirements on the use, storage and disposal of chemicals. A similar program exists in the European Union, called REACH (Registration, Evaluation, Authorization, and Restriction of Chemical Substances). The Occupational Safety and Health Act and analogous state laws and regulations govern the protection of the health and safety of employees. The Clean Air Act and analogous state laws and regulations impose obligations related to air emissions. CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) and analogous state laws and regulations govern the cleanup of hazardous substances. The Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws and regulations govern discharges into waters. With respect to BDO in particular, we are also subject to certain Drug Enforcement Administration regulations. In addition, we and our industry partners are or will be required to obtain and maintain various approvals, permits, licenses, registrations, certifications and other requirements, such as air emission and water discharge permits, construction permits, boiler licenses and obtaining Microbial Commercial Activity Notices from the EPA. The development of new processes, manufacture of new chemicals produced using our processes, commercial sales of chemicals produced using our processes as well as geographic expansion, and in particular international expansion, will subject us and/or our industry partners to additional regulatory rules and regulations.

 

As a condition to granting the permits and other approvals necessary for operating our and our partners’ production plants, regulators could likewise make demands that increase our construction and operating costs, and result in the procurement of additional financing. Failure to obtain and comply with all applicable permits and other approvals could halt construction and subject us and our partners to future claims. We therefore cannot guarantee procurement or compliance with the terms of all permits and all other approvals needed to complete our and our partners’ production plants.

 

In addition to actual plant operations, liabilities could arise from investigation and cleanup of environmental contamination at our and our partners’ production plants. We and our partners may also be subject to third-party claims alleging property damage or personal injury due to the release of or exposure to hazardous substances. In addition, new laws, new regulations, new interpretations of existing laws or regulations, future governmental enforcement of environmental laws or other developments could result in significant expenditures.

 

Any failure by us or our industry partners to comply with applicable regulatory rules and regulations could harm our reputation as well as our business, financial condition and operating results. In addition, regulatory approvals, registrations, permits, licenses, certifications and other requirements may be denied or rescinded, resulting in significant delays, additional costs and abandonment of certain planned activities, or require us to engage in costly and time consuming efforts to remediate. Compliance with applicable regulatory rules and regulations can be costly and time consuming.

 

We and our industry partners use hazardous materials and must comply with applicable environmental laws and regulations. Any claims relating to improper handling, storage or disposal of these materials or noncompliance with applicable laws and regulations could be time consuming and costly and could adversely affect our business and results of operations.

 

We and our industry partners use hazardous chemicals and biological materials and are subject to a variety of international, federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials. Although we and our industry partners have implemented safety procedures for handling and disposing of these materials and waste products, we cannot be sure that our safety measures are compliant with legal requirements or adequate to eliminate the risk of accidental injury or contamination. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our insurance coverage. There can be no assurance that neither we nor any of our industry partners will violate environmental, health and safety laws as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations is expensive and time consuming, and the failure to comply with past, present, or future laws could result in the imposition of fines, third-party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations. Our liability in such an event may exceed our

 

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total assets. Liability under environmental laws can be joint and several and without regard to comparative fault. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and harm our business. Accordingly, violations of present and future environmental laws by us or any of our industry partners could restrict our ability to develop and commercialize chemicals using our processes, build out or expand facilities, or pursue certain technologies, and could require us and our industry partners to acquire equipment or incur potentially significant costs to comply with environmental regulations. In addition, our hazardous materials and environmental laws and regulations related risks may augment as we expand our international operations, including imposition of laws and regulations impacting our ability to transfer hazardous chemicals and biological materials between countries.

 

We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business, reputation and brand.

 

The chemicals produced using our processes that we and our industry partners intend to commercialize, including BDO, may contain undetected defects or impurities that are not discovered until after the chemicals have been used by customers and incorporated into products for end-users. This could result in claims from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or impurity. Therefore, the sale of chemicals produced using our processes entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business, reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.

 

Ethical, legal and social concerns about genetically engineered products and processes, and similar concerns about feedstocks that could be used for food production, could limit or prevent the use of chemicals produced using our processes and could limit our revenues.

 

The use of genetically-engineered products and processes is subject to laws and regulations in many countries, some of which are new or still evolving. Public attitudes about the safety and environmental hazards of genetically-engineered products and processes, and ethical concerns over genetic research, could influence public acceptance of our technology, processes and chemicals produced using our processes.

 

Our ability to develop and commercialize one or more of our technologies or processes could be limited by the following additional factors:

 

   

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 others from supporting, developing or commercializing chemicals produced using our processes;

 

   

public attitudes and ethical concerns surrounding production of feedstocks on land which could be used to grow food, which could influence public acceptance of our technology, processes and the chemicals produced using our processes; and

 

   

governmental reaction to negative publicity concerning genetically engineered organisms, which could result in greater government regulation of genetic research and derivative products or feedstocks produced on land that could be used to grow food, which could result in greater government regulation of feedstock sources.

 

The subjects of genetically engineered organisms and the alternative use of feedstocks that could be otherwise used for food production have received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically engineered products or feedstocks grown on land suitable for food production. These trends could result in increased expenses, delays or other impediments to our programs or the public acceptance and commercialization of the chemicals produced using our processes.

 

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Our government grants are subject to uncertainty, which could harm our business and results of operations.

 

To date, government grants have generally constituted a significant portion of our revenues. We may seek to obtain government grants in the future to offset a portion of the costs of our research and development, commercialization and other activities. We cannot be certain that we will be able to secure any such government grants in a timely fashion, or at all. Moreover, any of our existing grants or new grants that we may obtain may be terminated, modified or recovered by the granting governmental body under certain conditions.

 

We may also be subject to additional regulations and audits by government agencies as part of routine audits of our activities funded by our government grants. As part of an audit, these agencies may review our performance, cost structures and compliance with applicable laws, regulations and standards. Funds available under grants must be applied by us toward the research and development programs specified by the granting agencies, rather than for all of our programs generally. If any of our costs are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed may have to be refunded. Accordingly, an audit could result in an adjustment to our revenues and results of operations.

 

If we are not successful entering into, maintaining and managing partnering arrangements, we may be required to construct and operate our own commercial-scale chemical production facilities which would significantly increase our risk and costs, and negatively impact our business plan.

 

We rely and expect to increasingly rely on industry partners to manufacture the chemicals produced using our processes, including BDO, on a commercial scale. If we are not successful entering into, maintaining and managing these partnering arrangements, we may be forced to construct and operate our own commercial scale chemical production facilities. We have no experience constructing a production facility of the type and size required to produce commercial quantities of chemicals, and doing so is a complex and lengthy undertaking that requires sophisticated, multi-disciplinary planning and precise execution. The construction of new facilities may be subject to construction cost overruns due to labor costs, labor shortages or delays, costs of equipment and materials, weather delays, inflation or other factors, any of which could be material. In addition, the construction of commercial scale facilities may be subject to the receipt of approvals and permits from various regulatory agencies. Those agencies may not approve the projects in a timely manner or may impose restrictions or conditions on a production facility that could potentially prevent construction from proceeding, lengthen its expected completion schedule and increase its anticipated cost. Failure to successfully construct a commercial-scale chemical production facility could delay our ability to generate revenues, could have a material adverse effect on our business, financial condition and results of operations and force us to abandon a process in which we have invested significant time and resources.

 

Even if we are successful in the construction of a commercial-scale production facility for a chemical produced using our processes, we have no experience operating and maintaining a facility of this type and size. As a result, our operating and maintenance costs may be significantly higher than we anticipate. In addition, our facilities may not operate as efficiently as we expect and may experience unplanned problems or downtime, which may be significant. As a result, our commercial-scale production plants may be unable to achieve our expected investment return, which could adversely affect our business and results of operations.

 

Furthermore, if we are required to construct, operate and maintain a commercial-scale production facility for a chemical produced using our processes, we will be forced to consume capital significantly faster than we currently anticipate, and we will need to spend significantly more money than currently expected. As a result, we would need to raise additional funds more rapidly than we presently anticipate. Securing additional financing will require a substantial amount of time and attention from our management and may divert a disproportionate amount of its attention away from our day-to-day activities, which may adversely affect our management’s ability to conduct our day-to-day operations. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

 

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Any acquisition or investment could disrupt our business and harm our operating results and financial condition.

 

We may selectively pursue acquisitions or investments that we believe may allow us to complement our growth strategy or expand into other markets, or broaden our technology or intellectual property. We cannot forecast the number, timing or size of such transactions, or the effect that any such transactions might have on our operating or financial results. We have very limited experience engaging in these types of transactions. And such transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including:

 

   

an acquired company, asset or technology not furthering our business strategy as anticipated;

 

   

difficulties entering and competing in new product or geographic markets and increased competition, including price competition;

 

   

integration challenges;

 

   

overpayment for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition;

 

   

significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses, assets or technologies; and

 

   

requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensation and other items.

 

Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions or investments after we have expended resources on them. Any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition.

 

In addition, from time to time we may enter into negotiations for acquisitions or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.

 

We and our industry partners face risks in connection with changes in energy expenses and availability.

 

We and our industry partners depend on various energy products in processes used in our businesses. Generally, we acquire energy products at market prices and do not use financial instruments to hedge energy prices. As a result, we are exposed to market risks related to changes in energy prices. In addition, many of the customers and industries to whom we market our services are directly or indirectly dependent upon the cost and availability of energy resources. Our business and profitability may be materially and adversely affected to the extent that energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, chemicals produced using our processes. In addition, events impacting the availability of energy required to operate our business could disrupt our business and negatively impact our operating results.

 

If we expand internationally as we anticipate, we will face significant additional risks associated with these activities.

 

We anticipate seeking to produce and commercialize chemicals using our processes outside the United States, including BDO in Europe and Asia. International business operations are subject to a variety of risks, including:

 

   

challenges associated with operating in diverse cultural and legal environments, including legal restrictions that impact our ability to enter into strategic partnering arrangements;

 

   

the need to comply with a variety of U.S. laws applicable to the conduct of overseas operations, including export control laws and the Foreign Corrupt Practices Act;

 

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our ability, or reduced ability, to protect our intellectual property in certain countries;

 

   

longer sales cycles in certain countries;

 

   

changes in or interpretations of foreign rules and regulations that may adversely affect our ability to produce or sell chemicals produced using our processes or repatriate profits to the United States;

 

   

economic, political or social instability in foreign countries;

 

   

difficulties in staffing and managing foreign and geographically dispersed operations;

 

   

changes in demand for chemicals produced using our processes in international markets;

 

   

the imposition of tariffs and other foreign taxes;

 

   

the imposition of limitations on, or increase of, withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

 

   

the imposition of limitations on genetically-engineered products or processes and the production or sale of those products or processes in foreign countries;

 

   

currency exchange rate fluctuations; and

 

   

the availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us.

 

Our inability to overcome these obstacles could harm our business, financial condition and operating results. Even if we are successful in managing these obstacles, our partners internationally are subject to these same risks and may not be able to manage these obstacles effectively.

 

Any future international sales will expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.

 

In the future, if we or our partners are able to successfully commercialize and sell chemicals produced using our technologies, including BDO or butadiene, we believe that a portion of our revenues will be generated outside of the United States and intend to derive the related revenues in the local currencies of customers. As a result, our revenues and results of operations will be subject to foreign exchange fluctuations, which we may not be able to manage successfully. We bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the U.S. dollar compared to those foreign currencies will increase our costs as expressed in U.S. dollars. The prices of the chemicals produced using our processes may not be adjusted to offset the effects of inflation on our or our partners’ cost structure, which could increase costs and reduce net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.

 

Risks Related to Our Intellectual Property

 

Our patent rights may not provide commercially meaningful protection against competition.

 

Our success will depend, in part, on our ability to obtain and maintain patent protection and other intellectual property rights to protect our technology, which includes engineered microorganisms, methods, processes, enzymes, nucleic acids, metabolic modeling software, devices and discoveries, from competition. We have adopted a strategy of seeking patents and patent licenses in the United States and in certain foreign countries with respect to certain technologies used in, or relating to, our process technology for developing chemicals. Much of our patent portfolio is in early stages of examination and as of August 15, 2011, only a small number of our applications have been allowed or issued.

 

The strength of patents in the biotechnology field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States

 

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or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology industry, including interference and reexamination proceedings before the U.S. Patent and Trademark Office, or oppositions or comparable proceedings in foreign jurisdictions. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our patent claims. Moreover, third parties could practice our inventions in secret and in territories where we do not have patent protection. Such third parties may then try to sell or import products made using our inventions in and into the United States or other territories. We may be unable to prove that such products were made using our inventions. Additional uncertainty may result from patent reform legislation proposed by the U.S. Congress and other national governments and from legal precedent as handed down by the U.S. Court of Appeals for the Federal Circuit, the U.S. Supreme Court and the courts of foreign countries, as they determine legal issues concerning the scope, validity and construction of patent claims. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publication of discoveries in the scientific literature often lags behind the actual discoveries, there is additional uncertainty as to validity of any issued patent. Accordingly, we cannot be certain that any of our patent applications will result in issued patents, or even if issued, be sure of their validity or enforceability. Moreover, we cannot predict whether any of our patent rights will be broad enough in scope to provide commercial advantage and prevent circumvention. Also, it may be difficult for us to trace chemicals imported into the United States that are produced by others using microorganisms or processes covered by our patents without our authorization, which will limit our ability to enforce our patent rights against potential infringers. In any event, patents are enforceable only for a limited term.

 

We may not be able to enforce our intellectual property rights throughout the world.

 

We plan in the future to build, or partner with others in building, manufacturing facilities using our technology in countries other than the United States. However, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Many companies have encountered significant problems in protecting and enforcing intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to bio-industrial technologies. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patents and other proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to enforce our intellectual property rights in such countries may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop. Moreover, outside the United States, we only file our patent applications in selected foreign jurisdictions and therefore will have no protection against potential infringers in jurisdictions where we have not applied for patent protection.

 

We may not be able to operate our business without infringing third-party patents.

 

Our ability and the ability of our partners to commercialize the chemicals produced using our technology platform, including BDO, depends on the ability to develop, manufacture, market and sell such chemicals without infringing the proprietary rights of third parties. Numerous U.S. and foreign patents and pending patent applications owned by third parties, including parties with whom we may compete, exist in fields including nucleic acids, enzymes and processes that relate to our technology platform and the processes derived using our technology platform. These third parties may allege that our technology platform or the processes derived using our technology platform, or even the methods, organisms and enzymes themselves, infringe their intellectual property rights. If we are found to infringe their intellectual property rights, we or our partners could be prohibited from commercializing the product produced using the infringing technology, or from licensing our technology, unless we obtain a license to use the technology covered by the third-party patent or patents or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign our technology or processes to avoid infringement. Even if we are able to redesign technology or processes to avoid an infringement

 

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claim, our efforts to design around the patent may lead to an inferior or more costly product. A court could also order us to pay compensatory damages for any infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently prohibit us and our partners from making, using, selling or offering to sell one or more of the chemicals that may be produced using our technology platform and processes, or could enter an order mandating that we undertake certain remedial activities.

 

In addition to our patent rights, we rely in part on trade secrets to protect our technology. Trade secrets can be difficult to protect and enforce.

 

We rely on trade secrets and confidentiality agreements to protect some of our technology and proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our technology platform that involve proprietary know-how, information or technology that is not covered by patents, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain and protect. Our strategy for scale-up of production requires us to share confidential information with our business partners and other parties. Our business partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, foreign courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them. Our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements 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. Nevertheless, our proprietary information may be disclosed, third parties could reverse engineer our systems 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.

 

If our metabolic pathway designs or our engineered microorganisms that we keep as a trade secret, are stolen, misappropriated or reverse engineered, others could use these designs or microorganisms to produce competing bio-based chemicals.

 

A number of third parties, including various industry partners, plant operators, university scientists and researchers, customers and those involved in the shipping and handling of our engineered microorganism and our fermentation products, have or may have access in the future to our proprietary engineered microorganism or to our metabolic pathway designs. If our metabolic pathway designs or our engineered microorganisms covered by our trade secrets, were stolen, misappropriated or reverse engineered based on unauthorized use or based on our disclosures in our patent applications, they could be used by other parties for their own commercial gain. If this were to occur, it could be difficult, time consuming and costly for us to discover or challenge this type of use, especially in countries with limited intellectual property protection.

 

We may not retain exclusive rights to intellectual property created as a result of our strategic partnering arrangements.

 

We are a party to joint development agreements with Tate & Lyle, Chemtex and Waste Management and are seeking to enter into agreements with other parties, each of which involve research and development efforts.

 

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We expect to enter into additional strategic partnering arrangements in the future. Under our existing agreements, we share, and would share, to various degrees, intellectual property we jointly develop. Such provisions may limit our ability to gain commercial benefit from some of the intellectual property we develop or jointly develop with our industry partners and may lead to costly or time- consuming disputes with parties with whom we have commercial relationships over rights to certain innovations or with other third parties that may result from the activities of the strategic partnering arrangements.

 

Some of our intellectual property may be subject to federal regulation such as “march-in” rights, reporting requirements and a preference for U.S. industry.

 

Some of the intellectual property that protects our technology platform has been funded by grants from U.S. government agencies and is subject to certain federal regulations. For example, under the “march-in” provisions of the Bayh-Dole Act, the government may have the right under limited circumstances to require us to grant exclusive, partially exclusive or non-exclusive rights to third parties under any intellectual property discovered through the government funded programs. March-in rights can be triggered if the government determines that we have failed to work sufficiently towards achieving practical application of a technology or if action is necessary to alleviate health or safety needs, to meet requirements for public use specified by federal regulations or to give preference to U.S. industry. We are also subject to certain reporting requirements as well as a preference for U.S. industry relating to manufacturing of products under the Bayh-Dole Act.

 

We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from developing or selling our processes.

 

We rely on licenses in order to be able to use various proprietary technologies that are material to our business, including licenses with The Regents of The University of California, or UC, and The Penn State Research Foundation, or Penn State, related to our metabolic modeling technology. We do not own the patents that underlie these licenses. Our rights to use the technology we license are subject to the continuation of and compliance with the terms of those licenses. We do not control the prosecution, maintenance, or filing of the patents to which we hold licenses. Thus, these patents and patent applications were not written by us or our attorneys, and we did not have control over the drafting and prosecution. Our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting and/or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

 

Our rights to use the technology we license are subject to the validity of the owners’ intellectual property rights. Enforcement of our licensed patents or defense or any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors and/or interpretation of the license agreements. We cannot be certain that we will have control of the enforcement of these patents against third parties. Legal action could be initiated against the owners of the intellectual property that we license. Even if we are not a party to these legal actions, an adverse outcome could harm our business because it might prevent our licensors from continuing to license the intellectual property that we may need to operate our business.

 

Certain of our licenses contain provisions that allow the licensor to terminate the license upon specific conditions, including breach or insolvency. Our rights under the licenses are subject to our continued compliance with the terms of the license, including the payment of royalties due under the license. Termination of these licenses could prevent us from developing or marketing some or all of our processes. Because of the complexity of our technologies underlying our processes and the patents we have licensed, determining the scope of the license and related royalty obligation can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance

 

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with the terms of the license, the licensor might attempt to revoke the license. If such an attempt were successful, we might be barred from developing and selling some or all of our processes.

 

Any strategic partnering arrangement that involves the licensing of any of our intellectual property may increase our risks, harm our competitive position and increase our costs.

 

In addition to partnering with industry leaders through joint ventures, we may enter into licensing arrangements aimed to accelerate commercialization of our production process pipeline. Licensing any of our intellectual property increases the number of people who have access to some of our proprietary information. The scope of any such license may not be sufficiently narrow to adequately protect our interests. Moreover, contractual obligations of our licensees not to disclose or misuse our intellectual property may not be sufficient to prevent such disclosure or misuse. The costs of enforcing contractual rights could substantially increase our operating costs and may not be cost-effective, reasonable under the circumstances or ultimately succeed in protecting our proprietary rights. If our competitors access our intellectual property, they may gain further insight into the technology and design of our processes, which would harm our competitive position.

 

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, or lawsuits asserted by a third party, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

Interference proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments.

 

Because of the uncertainties involved in the issuance and enforcement of patents, and the value of a patent, patent disputes and litigations are common. We may become involved in patent disputes relating to infringement of our technology, with third-parties asserting their patents, with our licensors or licensees, with industry partners and with employees, among others. Patent disputes can take years to resolve, can be very costly and can result in loss of rights, injunctions and substantial penalties. Moreover, patent disputes and related proceedings can distract management’s attention and interfere with running the business.

 

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Risks Related to this Offering and Ownership of Our Common Stock

 

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market for our common stock will develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market.

 

The trading price of our common stock is likely to be volatile, and you could incur substantial losses or lose your entire investment. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the factors set forth in this risk factors section and the following:

 

   

the timing and level of success of our and our partners’ efforts to develop and commercialize chemicals produced using our processes, including BDO and butadiene;

 

   

our ability to successfully enter into partnering arrangements, and the terms of those relationships;

 

   

announcements of business developments, including significant acquisitions, partnering arrangements, joint ventures or capital commitments, by us or our competitors;

 

   

introduction of new products, services or technologies offered by us or our competitors;

 

   

actual or anticipated variations in our operating and financial results;

 

   

our ability to meet or exceed any financial or other projections we provide to the public;

 

   

our ability to meet or exceed the estimates and projections of the investment community;

 

   

ratings downgrades or failure to maintain coverage of our stock by any securities analysts;

 

   

changes in the market valuations of similar companies;

 

   

general U.S. and global economic and market conditions;

 

   

changes in laws or regulations applicable to chemicals produced using our processes;

 

   

the perception of the bio-based chemical industry by the public, legislatures, regulators and the investment community;

 

   

additions or departures of key personnel;

 

   

issuances of debt or equity securities;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technology;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

sales of our common stock by our officers, directors, significant stockholders or other stockholders in the future;

 

   

trading volume of our common stock;

 

   

changes in accounting principles; and

 

   

other events or factors, many of which are beyond our control.

 

In addition, the stock market in general, and the Nasdaq Global Market and companies in the bio-based chemical industry in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

 

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If securities or industry analysts do not publish research or reports, or publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.

 

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

 

Our executive officers, directors, 5% stockholders and their affiliates beneficially owned approximately 90% of our outstanding voting stock as of July 31, 2011, after giving effect to the issuance of 55,728,049 shares of our common stock upon conversion of preferred stock beneficially owned by them and, upon the closing of this offering, that same group will hold approximately     % of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option).

 

Therefore, even after this offering these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq Global Market have imposed various requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate our business. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

 

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As a public company, we will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to comply with Section 404 in a timely manner, it may affect the reliability of our internal control over financial reporting.

 

Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act and are therefore not required to make an assessment of the effectiveness of our internal control over financial reporting.

 

For the year ending December 31, 2012, pursuant to Section 404 of the Sarbanes-Oxley Act, management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting. Additionally, our effectiveness of internal control over financial reporting will be required to be audited for the year ending December 31, 2012.

 

The process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to establish and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot be certain at this time whether we will be able to successfully complete the procedures, certification and attestation requirements of Section 404, or that we will not identify material weaknesses in our internal control over financial reporting. If we fail to comply with the requirements of Section 404, it may affect the reliability of our internal control over financial reporting. If we identify and report a material weakness, it could adversely affect our stock price.

 

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

   

limiting the removal of directors by the stockholders;

 

   

creating a staggered board of directors;

 

   

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

 

   

eliminating the ability of stockholders to call a special meeting of stockholders;

 

   

permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

 

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

 

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Sales of a substantial number of shares of our common stock in the public market by our existing stockholders 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. We are unable to predict the effect that sales may have on the prevailing market price of our common stock. Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders’ ability to transfer shares of our common stock for at least 180 days from the date of this prospectus, subject to certain exceptions. The lock-up agreements limit the number of shares of common stock that may be sold immediately following the public offering. Subject to certain limitations, approximately          shares will become eligible for sale upon expiration of the lock-up period. In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

 

Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

 

Future sales and issuances of our common stock or rights to purchase common stock by us, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

 

We expect that significant additional capital will be needed in the future to continue our planned operations, including commercialization efforts for BDO produced using our process, expanded research and development activities and costs associated with operating as a public company. To the extent we raise additional capital by issuing equity or convertible securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

 

Pursuant to the 2011 plan, our management is authorized to grant stock options to our employees, directors and consultants. The number of shares available for future grant under the 2011 plan will automatically increase each year by an amount equal to the lesser of          shares and     % of all shares of our capital stock outstanding as of December 31st of the preceding calendar year, subject to the ability of our board of directors to take action to reduce the size of such increase in any given year. Currently, we plan to register the increased number of shares available for issuance under the 2011 plan each year. Unless our board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

 

If you purchase shares of common stock sold in this offering, because the initial public offering price of our common stock will be substantially higher than the pro forma as adjusted net tangible book value per share following this offering, you will incur immediate and substantial dilution.

 

The initial public offering price will be substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the amount of $         per share, the difference between the assumed initial public offering price per share of $         (the mid-point of the range set forth on the cover of this

 

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prospectus) and the pro forma as adjusted net tangible book value per share of our outstanding common stock as of                     , 2011, after giving effect to the full conversion of our preferred stock and the issuance of          shares of our common stock in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity and convertible debt issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. As of June 30, 2011, options to purchase 9,902,645 shares of our common stock at a weighted average exercise price of $0.22 per share and a warrant exercisable for up to 108,683 shares of our Series C-1 convertible preferred stock at an exercise price of $1.8402 per share were outstanding. See “Dilution.” As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation.

 

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.

 

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

 

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We believe that, with our initial public offering and other transactions that have occurred over the past three years, we may trigger or have already triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. We have removed the deferred tax assets for net operating losses and research and development credits from the deferred tax asset schedule in our financial statements. A corresponding decrease in our valuation allowance has also been made such that our net deferred tax assets remain fully reserved.

 

We are at risk of securities class action litigation.

 

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and companies in the bio-based chemical industry have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

 

No public market for our common stock currently exists, and an active public trading market for our common stock may not develop or be sustained following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

 

Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on the Nasdaq Global Market, we cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that

 

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market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all, and that may reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to fund operations by selling shares and may impair our ability to acquire other companies, technologies or services by using our shares as consideration.

 

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

 

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Strategic Relationships.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our ability to produce the exact same chemicals that are currently produced using fossil-fuel feedstocks;

 

   

the target chemicals our manufacturing processes can produce;

 

   

our ability to access markets and otherwise form strategic relationships with industry leaders, including moving from non-binding arrangements to definitive agreements;

 

   

our ability to successfully develop and produce BDO and other target chemicals, particularly at a commercial scale;

 

   

the timing and volume of scale-up production of chemicals produced using our processes, including BDO;

 

   

the timing and cost of building or converting chemical production facilities designed to use our manufacturing processes, including our expected capital contributions relative to the capital contributions of our partners;

 

   

our ability to produce BDO and other target chemicals in a cost-advantaged manner;

 

   

the increased efficiencies and reduced capital intensity expected for production facilities that use our processes;

 

   

the anticipated market sizes for our target chemicals;

 

   

our ability to consistently access and utilize cost-efficient renewable feedstocks;

 

   

the future prices, supplies and volatility of the renewable feedstocks for our processes;

 

   

the future prices, supplies and volatility of fossil-fuel feedstocks;

 

   

anticipated market acceptance of chemicals produced from our processes, including expected related benefits from producing the exact same chemicals;

 

   

the relative specifications or other performance attributes of chemicals produced from our processes and the products derived from those chemicals;

 

   

our ability to deploy multiple manufacturing processes in parallel;

 

   

our ability to successfully expand internationally;

 

   

the ability of our technology platform to develop efficient manufacturing processes faster than traditional methods and to identify the most efficient pathways and select the most effective microorganisms;

 

   

the achievement of advances in our technology platform, including the ability to effectively utilize lower cost renewable feedstocks in our processes;

 

   

the potential benefits of being able to utilize a variety of renewable feedstocks;

 

   

our ability to obtain and maintain intellectual property protection for our processes and other technology and not infringe on others’ rights;

 

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our ability to obtain and maintain regulatory approvals related to production, storage, transport and sale of chemicals using our processes in the United States and foreign countries;

 

   

our ability to hire and retain personnel and successfully grow our business;

 

   

our anticipated future financial results and trends related thereto;

 

   

our need for and ability to obtain additional financing; and

 

   

our use of proceeds from this offering.

 

In some cases, you can identify these statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or the negative of those terms, and similar expressions. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under the heading “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this prospectus by these cautionary statements.

 

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $         million (or approximately $         million if the underwriters’ over-allotment option is exercised in full) from the sale of the shares of common stock offered by us in this offering, based on an assumed initial public offering price of $         per share, (the mid-point of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us by $        , assuming the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus), remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering for research and development expenses, capital expenditures, capital contributions required in connection with joint ventures, working capital and other general corporate purposes, including costs and expenses associated with being a public company. We may also use a portion of the net proceeds to in-license, acquire or invest in complementary businesses, technologies, products or assets. However, we have no current commitments or obligations to do so. We cannot currently allocate specific percentages of the net proceeds that we may use for the purposes specified above. Accordingly, we will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our stock. Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash, cash equivalents and marketable securities, and our capitalization as of June 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the conversion of all our outstanding convertible preferred stock into an aggregate of 58,063,325 shares of our common stock upon closing of this offering and (2) the conversion of our outstanding convertible preferred stock warrant into a common stock warrant, and the related reclassification of the warrant liability to stockholders’ equity (deficit); and

 

   

on a pro forma as adjusted basis, reflecting the pro forma adjustments discussed above and giving further effect to the sale by us of          shares of our common stock at an assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma information below is illustrative only and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

     June 30, 2011  
     Actual     Pro Forma     Pro Forma
As Adjusted(1)
 
     (unaudited)  
     (in thousands, except per share amounts)  

Cash, cash equivalents and marketable securities

   $ 39,278      $ 39,278      $                
  

 

 

   

 

 

   

 

 

 

Indebtedness(2)

   $ 194      $ 194      $     

Convertible preferred stock warrant liability

     148            
  

 

 

   

 

 

   

 

 

 

Total debt and convertible preferred stock warrant liability

     342        194     

Series B, C and C-1 convertible preferred stock; $0.0001 par value: 52,794 shares authorized, 52,576 shares issued and outstanding, actual; No shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     78,545            

Stockholders’ equity (deficit):

      

Series A and A-1 convertible preferred stock; $0.0001 par value: 3,850 shares authorized, issued and outstanding, actual; No shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     3,830            

Common stock and additional paid-in capital; $0.0001 par value: 74,817 shares authorized, 5,246 shares issued and outstanding, actual; 74,817 shares authorized, 63,309 shares issued and outstanding, pro forma;          shares authorized,          shares issued and outstanding, pro forma as adjusted

     881        83,404     

Note receivable from stockholders

     (13     (13  

Accumulated other comprehensive income

     12        12     

Accumulated deficit

     (43,543     (43,543  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (38,833     39,860     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 40,054      $ 40,054      $                
  

 

 

   

 

 

   

 

 

 

 

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(1)   A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus), would increase (decrease) each of the pro forma as adjusted cash, cash equivalents and marketable securities and total capitalization by approximately $         and $        , respectively, and decrease (increase) pro forma as adjusted total stockholders’ equity (deficit) by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) each of the pro forma as adjusted cash, cash equivalents and marketable securities and total capitalization by approximately $         and $        , respectively, and decrease (increase) pro forma as adjusted total stockholders’ equity (deficit) by approximately $        , assuming the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus), remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2)   Indebtedness includes the current and non-current portions of our notes and capital lease obligations.

 

The number of shares shown as issued and outstanding on a pro forma and on a pro forma as adjusted basis in the table above is based on the number of shares outstanding as of June 30, 2011 and excludes:

 

   

9,902,645 shares of common stock issuable upon the exercise of outstanding stock options as of June 30, 2011, at a weighted average exercise price of $0.22 per share;

 

   

108,683 shares of common stock issuable upon the exercise of an outstanding warrant as of June 30, 2011, at an exercise price of $1.8402 per share;

 

   

         shares of common stock reserved for future issuance under the 2011 plan (including 3,612,076 shares of common stock reserved for issuance under the 2008 plan, which shares will be added to the shares reserved under the 2011 plan upon its effectiveness), which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year; and

 

   

         shares of common stock reserved for future issuance under the 2011 purchase plan, which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year.

 

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DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering.

 

Our historical net tangible book value (deficit) as of June 30, 2011 was approximately $(38.8) million, or $(7.40) per share of common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our liabilities and convertible preferred stock which is not included within equity. Net historical tangible book value (deficit) per share is our historical net tangible book value (deficit) divided by the number of shares of common stock outstanding as of June 30, 2011. Our pro forma net tangible book value (deficit) as of June 30, 2011 was $39.9 million, or $0.63 per share of common stock. Pro forma net tangible book value (deficit) gives effect to the conversion of all of our outstanding convertible preferred stock into an aggregate of 58,063,325 shares of our common stock and the reclassification of our preferred stock warrant liability into permanent equity, both of which will occur automatically upon the closing of this offering.

 

Pro forma as adjusted net book value is our pro forma net tangible book value (deficit), plus the effect of the sale of shares of our common stock in this offering at an assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders, and an immediate dilution of $         per share to new investors participating in this offering.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

     $                

Historical net tangible book value (deficit) per share as of June 30, 2011

   $ (7.40  

Pro forma increase in net tangible book value per share as of June 30, 2011 attributable to the conversion of convertible preferred stock

     8.03     
  

 

 

   

Pro forma net tangible book value per share as of June 30, 2011, before giving effect to this offering

     0.63     
  

 

 

   

Increase in pro forma net tangible book value per share attributable to new investors participating in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to new investors participating in this offering

     $     
    

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $         per share and the dilution in pro forma per share to investors participating in this offering by approximately $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $         and the dilution in pro forma per share to investors participating in this offering by approximately $        , assuming the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their over-allotment option in full to purchase         additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase to $         per

 

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share, representing an immediate increase to existing stockholders of $         per share and an immediate dilution of $         per share to new investors participating in this offering.

 

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2011, the number of shares purchased or to be purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders and new investors participating in this offering at an assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover of this prospectus), before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, new investors participating in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

     Total Shares     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    
    

(in thousands, except percents and

per share amounts)

 

Existing stockholders before this offering

       63,309                          $ 84,601                          $ 1.34   

Investors participating in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $                      100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) the total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by approximately $        , $         and $        , respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a one million share increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by approximately $        , $         and $        , respectively, assuming the assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover of this prospectus) remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the underwriters exercise their over-allotment option in full to purchase         additional shares of our common stock in this offering, the number of shares of common stock held by existing stockholders will be reduced to         , or     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to         , or    % of the total number of shares of common stock to be outstanding after this offering.

 

The foregoing discussion and tables are based on 63,308,961 shares of common stock outstanding as of June 30, 2011, after giving effect to the conversion of our outstanding convertible preferred shares into an aggregate of 58,063,325 shares of common stock, and excludes:

 

   

9,902,645 shares of common stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $0.22 per share;

 

   

108,683 shares of common stock issuable upon the exercise of an outstanding warrant at an exercise price of $1.8402 per share;

 

   

        shares of common stock reserved for future issuance under the 2011 plan (including 3,612,076 shares of common stock reserved for issuance under the 2008 plan, which shares will be added to the shares reserved under the 2011 plan upon its effectiveness), which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year; and

 

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        shares of common stock reserved for future issuance under the 2011 purchase plan, which will become effective upon the closing of this offering and will contain provisions that will automatically increase the number of shares reserved for issuance each year.

 

Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options or warrants are exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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SELECTED FINANCIAL DATA

 

The following table provides selected historical financial data. We derived the selected statements of operations data for the years ended December 31, 2008, 2009 and 2010 and the balance sheet data as of December 31, 2009 and 2010 from our audited financial statements appearing elsewhere in this prospectus. We derived the selected statement of operations data for the year ended December 31, 2007 and the selected balance sheet data as of December 31, 2007 and 2008 from our audited financial statements and related notes not included in this prospectus. The selected statement of operations data for the year ended December 31, 2006 and the balance sheet data as of December 31, 2006 is unaudited. We derived the selected statement of operations data for the six months ended June 30, 2010 and 2011 and the selected balance sheet data as of June 30, 2011 from our unaudited financial statements and related notes included elsewhere in this prospectus. The selected financial data should be read together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and results for the six months ended June 30, 2011 are not necessarily indicative of results to be expected for the fiscal year.

 

    Years Ended December 31,     Six Months
Ended June 30,
 
    2006     2007     2008     2009     2010     2010     2011  
    (unaudited)                             (unaudited)  
    (in thousands, except per share data)  

Statement of Operations Data:

             

Revenues

  $ 3,105      $ 3,583      $ 2,488      $ 887      $ 726      $ 319      $ 1,915   

Operating Expenses:

             

Research and development

    2,404        3,094        5,106        6,063        9,593        4,359        7,200   

Marketing, general and administrative

    846        2,585        3,779        3,852        5,173        2,336        3,806   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,250        5,679        8,885        9,915        14,766        6,695        11,006   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (145     (2,096     (6,397     (9,028     (14,040     (6,376     (9,091

Interest and other income

    20        447        491        83        18        9        46   

Interest and other (expense)

    (14     (15     (16     (44     (32     (8     (17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (139   $ (1,664   $ (5,922   $ (8,989   $ (14,054   $ (6,375   $ (9,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share(1)

  $ (0.06   $ (0.70   $ (1.27   $ (1.80   $ (2.79   $ (1.27   $ (1.77

Shares used to calculate net loss per common share(1)

    2,187        2,382        4,657        4,997        5,043        5,010        5,132   

Pro forma basic and diluted net loss per share(2)

  $ (0.02   $ (0.13   $ (0.27   $ (0.40   $ (0.37   $ (0.17   $ (0.15

Shares used to calculate pro forma basic and diluted net loss per share(2)

    6,037        12,656        22,068        22,474        38,477        36,917        60,608   

 

(1)   See Note 1 to our Financial Statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per common share.
(2)   Pro forma net loss per share has been calculated assuming the conversion of all outstanding shares of our preferred stock into shares of common stock which will occur upon the closing of this offering.

 

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     December 31,     June  30,
2011
 
     2006     2007     2008     2009     2010    
     (unaudited)                             (unaudited)  
     (in thousands)  

Balance Sheet Data:

            

Cash, cash equivalents and marketable securities

   $ 609      $ 18,540      $ 12,255      $ 3,605      $ 24,141      $ 39,278   

Working capital

     68        17,709        11,254        2,196        21,790        35,244   

Total assets

     1,404        19,881        14,905        6,195        30,496        44,676   

Indebtedness(3)

     179        104        215        219        169        194   

Series B, C and C-1 convertible preferred stock

            19,849        20,249        20,249        54,969        78,545   

Accumulated deficit

     (3,722     (5,516     (11,438     (20,427     (34,481     (43,543

Total stockholders’ (deficit)

     (636     (1,385     (7,126     (16,020     (29,920     (38,833

 

(3)   Indebtedness includes both current and non-current portions of our notes and capital lease obligations, and for the years ended December 31, 2006 and 2007, a note payable to certain employees of $48,000 and $23,000, respectively, which was paid in full in 2008.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see “Special Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a technology leader for the global chemical industry. We deliver new, transformative manufacturing processes that enable our partners to produce intermediate and basic chemicals from renewable feedstocks. Intermediate and basic chemicals serve as the basis for making substantially all of the products that make modern life possible, and our processes enable the production of the exact same chemicals that are at the core of the chemical industry. Our processes are designed to deliver better economics with enhanced sustainability and a smaller environmental footprint than conventional petroleum-based manufacturing processes. Our proprietary biotechnology platform allows us to create fermentation-based manufacturing processes and to engineer the enabling microorganisms that drive the efficient conversion of renewable feedstocks into numerous existing high-volume intermediate and basic chemicals. We are developing a pipeline of manufacturing processes for the production of these chemicals, including our first target chemical, BDO, and our second target chemical, butadiene. A key element of our strategy is to partner with industry leaders through a combination of joint venture and licensing arrangements in order to accelerate the broad and rapid commercial utilization of our production processes. Through this approach, we expect the first commercial-scale BDO plant that utilizes our processes to begin high-volume production by the end of 2012.

 

In 1998, we founded our company based on our proprietary technology platform for the predictive, computational modeling and simulation of metabolism in living organisms. We developed our software platform, called SimPheny, which is designed for modeling and simulating these complex biochemical pathways. From 1998 to 2006, we operated as a research and development organization advancing our technology platform and our expertise in metabolism and metabolic modeling across a range of applications in industrial and medical biotechnology. During this period, we funded our operations primarily through collaborative research agreements, government grants and licenses of our proprietary software to academic and research institutions. Beginning in 2007, we focused on the production of intermediate and basic chemicals utilizing the biochemical pathways discovered through the use of our SimPheny software and the expansion of our capabilities to include advanced laboratory technology and process engineering. We made this strategic decision because intermediate and basic chemicals represent a significant opportunity, and we believed we could create more value by extending our reach into commercializing chemical manufacturing processes. Some of the key milestones of our development to date include:

 

   

In September 2007, we commenced our BDO production process research and development program.

 

   

In February 2008, we achieved proof-of-concept and accomplished the first direct biological production of BDO from renewable feedstocks.

 

   

In May 2009, we generated our first purified samples of BDO from our process at laboratory scale.

 

   

In June 2010, we achieved our first pilot-scale production of BDO at 3,000 liters with a contract manufacturer and generated samples of BDO, which were subsequently externally validated to meet commercial specifications.

 

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In December 2010, we entered into a joint development agreement with Waste Management for the production of a particular intermediate chemical from syngas.

 

   

In February 2011, we enabled the production of polybutylene terephthalate, or PBT, from renewable feedstocks using BDO produced from our process, and we entered into a non-binding memorandum of understanding with M&G regarding a proposed partnering arrangement for the development and commercialization of certain target chemicals from sugars from cellulosic biomass feedstocks using our process technology.

 

   

In March 2011, we entered into a joint development agreement with Tate & Lyle to scale up our BDO production process to demonstration-scale size, including fermentation batches of 13,000 liters.

 

   

In April 2011, we entered into a joint development agreement with Chemtex to develop a process for producing BDO from sugars from cellulosic biomass feedstocks, we entered into a non-binding memorandum of understanding with Mitsubishi Chemical which outlines multiple potential areas for collaboration, including the commercial production of BDO in Asia.

 

   

In May 2011, our work on BDO was the focus of a peer-reviewed article on direct, single-step, biological production of a major chemical, in the journal Nature Chemical Biology.

 

   

In June 2011, we and our partner, Tate & Lyle, successfully produced BDO at demonstration scale of 13,000 liters using our process at a plant located at an industrial site owned by Tate & Lyle, we entered into a non-binding letter of intent with Novamont for the commercial production of BDO in Europe, we were awarded the EPA Presidential Green Chemistry Challenge Award, considered by many to be the industry’s top award, and the U.S. Department of Energy selected us for an award with a potential value of up to $5.0 million to develop processes for the production of BDO from cellulosic biomass.

 

   

In August 2011, we successfully produced pound quantities of butadiene from renewable feedstocks.

 

Our first manufacturing process targets BDO. According to the most recently available data from IHS, the global BDO demand in 2009 was 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices. We expect the first commercial-scale BDO plant that utilizes our processes to produce approximately 40 million pounds of BDO per year in an industrial plant in Europe that is owned and operated by one of our industry partners, Novamont, with whom we have entered into a non-binding letter of intent. Our goal is for this plant to begin production by the end of 2012 and for larger commercial-scale BDO plants owned and operated together with our industry partners in the United States, Europe and Asia to begin high-volume production in 2014 and 2015. We expect that BDO plants using our process will typically produce approximately 100 to 130 million pounds of BDO per year, though individual plants may be smaller or larger depending on factors such as regional supply and demand and market dynamics.

 

Since our inception, we have raised $84.2 million in gross proceeds through the issuance of convertible preferred stock. To date, we have not generated any revenues associated with the sale of chemicals produced using our processes. As of June 30, 2011, our revenues were derived primarily from payments received under joint development agreements, government grants and licenses of our proprietary software to academic and research institutions. We expect to continue to incur significant losses as we invest in our business, and we anticipate such losses to increase as we work with our partners to scale up our BDO production process to commercial scale, expand our research and development efforts and transition to operating as a public company. Our accumulated deficit as of June 30, 2011 was $43.5 million. Our net loss was $5.9 million, $9.0 million and $14.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $9.1 million for the six months ended June 30, 2011.

 

Significant Agreements

 

Tate & Lyle. In March 2011, we entered into a joint development agreement with Tate & Lyle to jointly scale up the production of BDO from dextrose sugar feedstocks in North America. Under this agreement, we are

 

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jointly operating a plant at demonstration scale, with the potential for commercial-scale production in North America pursuant to a contemplated joint venture agreement. Tate & Lyle will supply dextrose sugar feedstock for the initial commercial-scale plant in North America.

 

Novamont. In June 2011, we signed a non-binding letter of intent with Novamont regarding a proposed joint venture for the commercial-scale production of BDO using our process technology at a Novamont industrial plant to be converted for such purpose. This letter of intent contemplates our first commercial-scale BDO plant in Italy with a capacity of approximately 40 million pounds per year to begin production by the end of 2012. According to the letter of intent, Novamont will provide all construction capital and consume all product off-take for captive use.

 

Mitsubishi Chemical. In April 2011, we entered into a non-binding memorandum of understanding with Mitsubishi Chemical pursuant to which we agreed in principle to a joint venture in Asia for the production of BDO using our process technology and a possible research and development collaboration for other target chemicals.

 

M&G / Chemtex. In February 2011, we entered into a non-binding memorandum of understanding with M&G regarding a proposed partnering arrangement for the development and commercialization of certain target chemicals from sugars from cellulosic biomass using our process technology. In April 2011, we entered into a joint development agreement with Chemtex, a wholly-owned subsidiary of M&G, to develop a process for producing BDO from sugars from cellulosic biomass feedstocks.

 

Waste Management. In December 2010, we entered into a joint development agreement with Waste Management to develop a commercial-scale process to produce a particular intermediate chemical from syngas sourced primarily from municipal solid waste.

 

Factors Affecting Our Performance

 

Timing and Efficiency of Commercial-Scale Production. Our ability to successfully scale up our processes to enable commercial production of chemicals is fundamental to the success of our business. For BDO, based on performance achieved at laboratory, pilot and demonstration scale, we believe our manufacturing process provides commercially viable economics; however, we need to achieve multiple performance targets, such as scaling up the size of our fermentation batches to ensure similar production results are achieved as we expand our production to commercial levels. We ran our first fermentations of BDO using our process at demonstration scale of 13,000 liters in June 2011. For butadiene, we only recently produced this chemical using our processes. Delays in our ability to achieve commercially viable economics at laboratory, pilot or demonstration scale could affect the timing and economics of our commercial-scale operations. If we are not able to achieve commercially viable economics for BDO, butadiene and other target chemicals at larger scales within timelines currently anticipated, we will continue to incur substantial net losses, and our portion of the earnings received from the commercial sale of chemicals produced using our processes will be delayed.

 

Renewable Feedstock Availability and Cost. Maintaining low production costs is critical to our and our partners’ ability to sell products profitably, and feedstock costs comprise a significant portion of those costs. We intend to initially enable our industry partners to produce BDO using conventional sugar sources derived from corn, sugarcane, sugar beets and cassava. Access to feedstocks at prices not significantly inflated above current levels relative to fossil-fuel feedstocks is critical for our partners to produce BDO, butadiene and other chemicals using our processes cost-effectively. Our partnering strategy includes entering into commercial partnerships with companies that may have access to relevant feedstocks to help mitigate this risk, but numerous factors can affect renewable feedstock availability, many of which are outside of our control. Our feedstock strategy includes the future use of sugars from cellulosic biomass and syngas as feedstock for the production of certain chemicals, but our initial commercial-scale plants are expected to utilize conventional sugar sources. If we are not able to obtain feedstocks at prices at or lower than current levels relative to fossil-fuel feedstocks, our commercialization

 

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efforts could be delayed or, once commercialization has been established, commercial operations could cease, and earnings and net cash flows could diminish.

 

Crude Oil and Natural Gas Prices. We anticipate that many of the chemicals produced using our processes will be marketed as alternatives to chemicals produced using conventional petroleum-based production methods. We expect our technology will provide for the commercial production of BDO at a cost less than that typically achievable using conventional petroleum-based production methods. If crude oil prices decrease from current levels relative to renewable feedstock prices, the economic advantage which our technology provides compared to conventional manufacturing methods could decrease. Price fluctuations in natural gas could also affect the economic advantage we believe our process technology will provide. The negative effects of price fluctuations in crude oil or natural gas prices could harm or delay our partnering activities and development and commercialization efforts as well as harm our results of operations.

 

Partnerships and Other Commercial Relationships. A key element of our strategy is to partner with industry leaders through a combination of joint venture and licensing arrangements in order to accelerate the broad and rapid commercial utilization of our production processes. For most target chemicals, we currently expect initial partnering arrangements to take the form of joint ventures. In lieu of this joint venture approach or as a follow-on to these initial joint ventures, we may employ licensing arrangements to accelerate commercialization of our manufacturing process for the target chemical. For joint ventures, we expect to contribute the value of our proprietary process technology, as well as capital in certain circumstances, to gain ownership in the joint venture, enabling us to share in the profits generated from the sales of the resulting chemicals produced with our process technology. In instances where we contribute additional capital, our contribution may be significant. Our increased ownership stake in joint ventures will depend on factors that include the negotiated value of the license to our process technology for the production plant and our capital contribution. Our role in the joint venture will also vary depending on the partner in the joint venture. We believe this commercialization strategy will allow for the rapid and parallel deployment of multiple plants for each of our target chemicals. Our failure to enter into these partnering agreements on favorable terms, or at all, could delay or hinder our ability to develop and commercialize our production processes, or significantly increase the cost to us to construct and operate commercial-scale plants. Moreover, the timing for different projects may vary significantly based on the preferences of particular partners and a number of other factors, including their level of commitment to and execution in our joint endeavors.

 

International Operations. Our anticipated international operations, in particular our planned BDO development and commercialization efforts in Europe and Asia, will subject us to risks and uncertainties that could negatively impact our business and results of operations. Government intervention or changes to monetary, taxation, regulatory, intellectual property, subsidy, tariff and other policies in any of the countries we operate, or economic, political or social unrest, could negatively impact our operations in such countries. Our financial results could be adversely affected either directly (such as by fluctuations in foreign currency, increases in interest or tax rates, exchange controls or restrictions on exports, imports or remittances) or indirectly (such as through staffing difficulties, delays or failures in securing licenses, permits or other necessary governmental approvals, consolidation among our local partners or competitors, or poor local transportation and other infrastructure).

 

Factors Impacting Pricing. We believe that there are a number of trends affecting our industry, including significant volatility in the price of the fossil-fuel feedstocks used to produce nearly all intermediate and basic chemicals, dramatic swings in earnings and difficulty in forecasting future performance; the increased availability of natural gas, especially in North America, and the growing spread between the price of crude oil and natural gas leading to decreased production and increased costs of C3 and C4 chemicals; lower supplies of C3 and C4 chemicals; the chemical industry increasingly building large-scale manufacturing facilities; and increasing interest in the environmental consequences of product purchases. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by these and other trends that affect demand and pricing for intermediate and basic chemicals, including, among others, changes in

 

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feedstock availability and pricing, developments in our industry and among our competitors, and changes in consumer preferences and demand.

 

For a more complete discussion of factors and risks facing our business, see “Risk Factors.”

 

Financial Operations Overview

 

Revenues

 

To date, we have funded our operations primarily through collaborative research agreements, government grants and licenses of our proprietary software to academic and research institutions.

 

   

Collaborative research and development revenue consists of payments received for research and development activities related to specific projects. Payments are generally in the form of either upfront or milestone payments, or reimbursement of costs plus a profit. Collaborative research and development revenue comprised the majority of our revenue during the six months ended June 30, 2011, while we had little collaborative research and development revenues during the years ended December 31, 2008, 2009 and 2010.

 

   

License revenue consists of payments received from the license of our proprietary SimPheny software. Payments are generally received upfront and pertain to a one-year license term.

 

   

Government grants consist of payments from government entities, or sub-awards from institutions under government grants, for the performance of certain research and development activities over a contractually specified period of time. In June 2011, we were selected for an award from the U.S. Department of Energy, providing reimbursement to us for up to $5.0 million of a total of $6.25 million of research and development expenses to develop processes for the production of BDO from sugars from cellulosic biomass. As of June 30, 2011, efforts under this grant have not commenced, nor have any payments been received or revenue been recognized.

 

We expect our first commercial-scale plant to begin high-volume production by the end of 2012 at which time we expect to begin recognizing earnings associated with the commercial sale of chemicals produced using our technology pursuant to a joint venture with our industry partner, Novamont. We expect our earnings to increase as additional and larger commercial-scale plants begin production, with participation in a joint venture for our second commercial-scale plant expected to begin high-volume production in 2014. Our participation in partnering arrangements may be structured in a variety of manners, including joint ventures under which we have significant control over the operations of the joint venture, joint ventures under which we are the minority shareholder and license arrangements. Each of these structures may affect our revenue recognition methods. In instances where we have significant control over the operations of the joint venture, we may be considered the consolidating entity in which case we would recognize product revenue and expenses for the entire plant with minority interest recorded to offset the portion of the joint venture which we do not own. In instances where we are the minority shareholder in the joint venture, we would recognize earnings equal to our share of the joint venture’s net profits. In instances where we license our technology, the license may include upfront or non-substantive milestone payments which may result in deferred revenue.

 

We also expect to enter into collaborative research and development arrangements for the development of additional chemical targets besides BDO. Under these agreements, we may receive upfront payments that may be deferred, or we may receive payments upon the successful completion of milestones which may be recognized as revenue upon achieving such milestone, assuming other revenue recognition criteria are met. As a result, we expect our revenues to fluctuate from fiscal period to fiscal period.

 

Research and Development Expenses

 

Our research and development expenses consist primarily of costs incurred for personnel engaged in research and development activities, laboratory supplies, payments to outside service providers, including

 

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contract manufacturers that have assisted us in pilot scale production and purification of BDO, and expenses incurred under cost sharing arrangements such as those under our joint development agreement with Tate & Lyle for demonstration scale production of BDO. Research and development expenses also include a portion of facility and overhead costs attributable to our research and development efforts. We expect our research and development expenses to significantly increase as we continue with our demonstration scale program under the Tate & Lyle joint development agreement, scale up to commercial level production, increase our research and development headcount, including increases in stock-based expense, and develop additional chemical products. We expense all research and development costs as they are incurred.

 

Marketing, General and Administrative Expenses

 

Our marketing, general and administrative expenses consist primarily of personnel-related expenditures pertaining to our executive, legal, finance, human resources, business development, information technology and other administrative functions, as well as costs incurred for professional services related to these functions and our marketing programs. Professional services consist primarily of legal fees related to our external patent and corporate counsel, audit fees, tax fees and certain insurance costs such as those associated with director and officer insurance. Marketing, general and administrative expenses also include a portion of facility and overhead costs attributable to our marketing, general and administrative functions. We expect our marketing, general and administrative expenses to significantly increase as we expand our headcount, including increases in stock-based expense, and incur additional costs associated with being a public company, including increased legal and audit fees, higher tax and accounting expenses, costs of compliance with securities and other regulations including compliance with Section 404 of Sarbanes Oxley, investor relations expenses, stock exchange listing expenses, and increased director and officer insurance premiums.

 

Interest and Other (Expenses) Income

 

To date our interest and other expenses consist primarily of interest costs incurred on our capital leases and charges incurred from the forgiveness of notes receivable from certain stock option holders who exercised their stock options through the issuance of a note in lieu of cash payments. All such notes were completely amortized as of August 2011. In June 2011, we entered into an equipment line of credit to borrow up to $4.0 million for the purchase of certain equipment and software. To the extent we utilize this line of credit, our interest expense will increase. In conjunction with this line of credit, we issued a preferred stock warrant and incurred certain deferred financing costs, both of which are being amortized to interest and other expense over the expected life of the line of credit. We classified the preferred stock warrant liability as a liability and are periodically remeasuring its fair value with the change in fair value recorded to interest and other expense (or income to the extent the liability is reduced). In the event our preferred stock converts to common stock, such as in the case of a qualified initial public offering, the warrant would be exercisable into common stock instead of convertible preferred stock. The fair value of the warrant liability at that time would be reclassified into equity. We may also choose to enter into additional financing arrangements in the future as we participate with our partners in the construction of commercial-scale plants and purchase additional equipment primarily related to our expanding research and development efforts. If we enter into these types of future financing arrangements, we would expect our interest and other expense to increase.

 

Interest income consists primarily of amounts earned on our cash, cash equivalents and marketable securities. We invest our cash, cash equivalents and marketable securities in U.S.-backed government debt and high quality corporate debt and commercial paper. We expect our interest income to vary as our cash, cash equivalents and marketable securities balances vary and as interest rates change.

 

Income Taxes

 

To date, we have been subject to income taxes only in the United States. In the event we expand our operations outside the United States, we will become subject to taxation based on the foreign statutory rates and

 

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our effective tax rate could fluctuate accordingly. We have incurred net losses since inception and with few exceptions, have not recorded any federal or state income tax provisions. Accordingly, we have a full valuation allowance against our net deferred tax assets. Additionally, under the Code our net operating loss carryforwards and tax credits may be limited in the event of a cumulative change in ownership of more than 50% is deemed to have occurred within a three-year period. We have not performed an analysis as to if such an ownership change has been deemed to have occurred but believe that, with our initial public offering and other transactions that have occurred over the past three years, some or all of our net operating loss carryforwards and tax credits may be impaired.

 

Results of Operations

 

Comparison of the Six Months Ended June 30, 2010 and 2011

 

Revenues. The following table shows our revenues for the six months ended June 30, 2010 and 2011, and related period-over-period changes (in thousands, except percentages).

 

     Six Months Ended
June 30,
     Dollar
Change
    Percent
Change
 
         2010              2011           
     (unaudited)               

Collaborative research and development revenue

   $ 121       $ 1,667       $ 1,546        1,278

Government grants

     114         186         72        63   

License revenue

     84         62         (22     (26
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 319       $ 1,915       $ 1,596        500
  

 

 

    

 

 

    

 

 

   

 

 

 

 

For the six months ended June 30, 2011 compared to the same period in 2010, our revenue increased $1.6 million, or 500% primarily due to our collaborative research and development agreement with Waste Management, which commenced in December 2010, for using syngas as a feedstock to make chemicals.

 

Research and Development Expense. The following table shows our research and development expense for the six months ended June 30, 2010 and 2011, and related period-over-period changes (in thousands, except percentages).

 

     Six Months Ended
June 30,
     Dollar
Change
     Percent
Change
 
         2010              2011            
     (unaudited)                

Personnel and related costs

   $ 2,775       $ 4,338       $ 1,563         56

Outside services and supplies

     1,236         2,293         1,057         86   

Depreciation and stock-based expense

     348         569         221         64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total research and development expense

   $ 4,359       $ 7,200       $ 2,841         65
  

 

 

    

 

 

    

 

 

    

 

 

 

 

For the six months ended June 30, 2011 compared to the same period in 2010, our research and development expense increased $2.8 million, or 65%, primarily due to a $1.6 million increase in personnel and related costs and a $1.1 million increase in outside services. Personnel and related costs increased as a result of headcount growth as our operations expanded, especially in the fermentation and process engineering functions. Outside services increased primarily due to commencing demonstration-scale BDO fermentation runs in 2011 with our industry partner, Tate & Lyle. Expenditures on laboratory supplies also increased as our research and development capabilities expanded.

 

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Marketing, General and Administrative Expense. The following table shows our marketing, general and administrative expense for the six months ended June 30, 2010 and 2011, and related period-over-period changes (in thousands, except percentages).

 

     Six Months Ended
June 30,
     Dollar
Change
     Percent
Change
 
         2010              2011            
     (unaudited)                

Personnel and related costs

   $ 1,043       $ 1,644       $ 601         58

Outside services

     1,238         2,038         800         65   

Depreciation and stock-based expense

     55         124         69         125   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketing, general and administrative expense

   $ 2,336       $ 3,806       $ 1,470         63
  

 

 

    

 

 

    

 

 

    

 

 

 

 

For the six months ended June 30, 2011 compared to the same period in 2010, our marketing, general and administrative expense increased $1.5 million, or 63%, primarily due to a $0.6 million increase in personnel and related costs and a $0.8 million increase in outside services. Personnel and related costs increased as a result of headcount growth to support our expanding organization, including an increase in our business development capabilities as our partnering activities increased. Outside services increased due to an increase in legal and patent costs as we expanded our intellectual property portfolio and entered into partnering arrangements. Marketing and administrative consulting costs also increased as we increased our marketing efforts and supported our expanding organization.

 

Interest and other income (expense), net. The following table shows our interest and other income (expense), net for the six months ended June 30, 2010 and 2011, and related period-over-period changes (in thousands, except percentages).

 

     Six Months Ended
June 30,
    Dollar
  Change  
    Percent
  Change  
 
         2010             2011          
     (unaudited)              

Interest and other income

   $ 9      $ 46      $ 37        411

Interest and other (expense)

     (8     (17     (9     113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and other income (expense)

   $ 1      $ 29      $ 28        2,800
  

 

 

   

 

 

   

 

 

   

 

 

 

 

For the six months ended June 30, 2011 compared to the same period in 2010, our interest and other income increased primarily due to an increase in our cash, cash equivalents and marketable securities in 2010 as a result of completing our Series C and Series C-1 financings.

 

Comparisons of the Years Ended December 31, 2008, 2009 and 2010

 

Revenues. The following table shows our revenues for the years ended December 31, 2008, 2009 and 2010, and related period-over-period changes (in thousands, except percentages).

 

     Year Ended December 31,      Dollar Change     Percent Change  
         2008              2009              2010            2009 vs.  
2008
      2010 vs.  
2009
      2009 vs.  
2008
      2010 vs.  
2009
 

Collaborative research and development revenue

   $ 151       $ 10       $ 235       $ (141   $ 225        (93 )%      2,250

Government grants

     1,332         599         155         (733     (444     (55     (74

License revenue

     1,005         278         336         (727     58        (72     21   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 2,488       $ 887       $ 726       $ (1,601   $ (161     (64 )%      (18 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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In 2009 compared to 2008, our total revenue decreased by $1.6 million, or 64%, primarily due to a decrease in government grants of $0.7 million and a decrease in license revenue of $0.7 million. Government grants decreased due to the completion of funding periods under certain grants in 2009. License revenue decreased due to a shift in focus away from providing licensed software solutions to customers as we pursued our business strategy of developing process technologies to produce chemicals from renewable feedstock.

 

In 2010 compared to 2009, our revenues decreased $0.2 million, or 18%, primarily due to a decrease in revenue associated with government grants of $0.4 million, partially offset by an increase in revenues from collaborative research and development agreements of $0.2 million. Government grants decreased due to the completion of funding periods under certain grants in 2010. Collaborative research and development revenue increased due to commencement in December 2010 of our Waste Management collaborative joint development agreement for using syngas as a feedstock to make chemicals.

 

Research and Development Expense. The following table shows our research and development expense for the years ended December 31, 2008, 2009 and 2010, and related period-over-period changes (in thousands, except percentages).

 

     Year Ended December 31,      Dollar Change      Percent Change  
         2008              2009              2010            2009 vs.  
2008
      2010 vs.  
2009
       2009 vs.  
2008
      2010 vs.  
2009
 

Personnel and related costs

   $ 2,749       $ 3,790       $ 6,259       $ 1,041      $ 2,469         38     65

Outside services and supplies

     2,015         1,733         2,521         (282     788         (14     45   

Depreciation and stock-based expense

     342         540         813         198        273         58        51   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total research and development expense

   $ 5,106       $ 6,063       $ 9,593       $ 957      $ 3,530         19     58
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

In 2009 compared to 2008, our research and development expense increased $1.0 million, or 19%, primarily due to a $1.0 million increase in personnel and related costs increased as a result of headcount growth as our operations expanded. Depreciation and stock-based expense increased $0.2 million as a result of increased depreciation expense due to capital expenditures primarily for laboratory equipment to expand our capabilities. These increases were partially offset by a decrease of $0.3 million in our outside services due to less outsourcing of research and development capabilities as our in-house research and development resources expanded.

 

In 2010 compared to 2009, our research and development expense increased $3.5 million, or 58%, primarily due to a $2.5 million increase in personnel and related costs and a $0.8 million increase in outside services. Personnel and related costs increased as a result of headcount growth as our operations expanded, especially in the fermentation and process engineering functions. Outside services increased primarily due to contract manufacturing associated with our pilot scale fermentation runs of BDO during 2010.

 

Marketing, General and Administrative Expense. The following table shows our marketing, general and administrative expense for the years ended December 31, 2008, 2009 and 2010, and related period-over-period changes (in thousands, except percentages).

 

     Year Ended December 31,      Dollar Change      Percent Change  
         2008              2009              2010            2009 vs.  
2008
      2010 vs.  
2009
       2009 vs.  
2008
      2010 vs.  
2009
 

Personnel and related costs

   $ 2,125       $ 1,981       $ 2,261       $ (144   $ 280         (7 )%      14

Outside services

     1,587         1,823         2,772         236        949         15        52   

Depreciation and stock-based expense

     67         48         140         (19     92         (28     192   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total marketing, general and administrative expense

   $ 3,779       $ 3,852       $ 5,173       $ 73      $ 1,321         2     34
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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In 2009 compared to 2008, our marketing, general and administrative expense was largely consistent with 2008, with a $0.1 million decrease in personnel and related costs offset by a $0.2 million increase in outside services. Personnel and related costs decreased as a result of the termination of an executive in 2009. Outside services increased due to an increase in legal and patent expenses associated with expanding our technology intellectual property position.

 

In 2010 compared to 2009, our marketing, general and administrative expense increased $1.3 million, or 34%, primarily due to a $0.9 million increase in outside services as a result of services incurred for marketing and organizational development, as well as patent work. Personnel and related costs increased $0.3 million as a result of headcount growth to support our expanding organization and to increase business development capabilities associated with industry partnering relationships.

 

Interest and other income (expense), net. The following table shows our interest and other income (expense), net for the years ended December 31, 2008, 2009 and 2010, and related period-over-period changes (in thousands, except percentages).

 

     Year Ended December 31,     Dollar Change     Percent Change  
         2008             2009             2010           2009 vs.  
2008
      2010 vs.  
2009
      2009 vs.  
2008
      2010 vs.  
2009
 

Interest and other income

   $ 491      $ 83      $ 18      $ (408   $ (65     (83 )%      (78 )% 

Interest and other (expense)

     (16     (44     (32     (28     12        175        (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and other income (expense)

   $ 475      $ 39      $ (14   $ (436   $ (53     (92 )%      (136 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

In 2009 compared to 2008, our interest and other income decreased $0.4 million, or 83%, primarily due to a decrease in our average cash, cash equivalents and marketable securities during 2009. Also, the interest rate environment decreased during 2009 which further decreased our interest income.

 

In 2010 compared to 2009, our interest and other income decreased $0.1 million, or 78%, primarily due to a decrease in the interest rate on our cash, cash equivalents and marketable securities during 2010.

 

Liquidity and Capital Resources

 

Cash, Cash Equivalents and Marketable Securities

 

Our cash, cash equivalents and marketable securities are held primarily in money market funds, U.S. government agency notes and debt, corporate debt and commercial paper. Our marketable securities are classified as available-for-sale securities, and recorded at fair value. We make our investments in accordance with our investment policy, the primary objectives of which are liquidity and capital preservation. The following table shows balances of our cash, cash equivalents and short-term investments as of December 31, 2009 and 2010, and June 30, 2011 (in thousands):

 

     December 31,        June 30,    
         2009              2010          2011  
                   (unaudited)  

Cash and cash equivalents

   $ 2,301       $ 15,164       $ 6,451   

Marketable securities

     1,304         8,977         32,827   
  

 

 

    

 

 

    

 

 

 

Total cash, cash equivalents and marketable securities

   $ 3,605       $ 24,141       $ 39,278   
  

 

 

    

 

 

    

 

 

 

 

In 2010 compared to 2009, our cash, cash equivalents and marketable securities increased by $20.5 million primarily due to net proceeds of $14.1 million from the sale of 14,493,000 shares of our Series C convertible preferred stock in January 2010 at a price of $1.035 per share, plus net proceeds of $20.6 million from the sale of

 

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11,547,000 shares of our Series C-1 convertible preferred stock at a price of $1.8402 per share in December 2010. The aggregate net proceeds from these financings of $34.7 million were partially offset by cash used in operating activities of $12.1 million and expenditures on property and equipment of $2.0 million.

 

For the six months ended June 30, 2011 compared to the year ended December 31, 2010, our cash, cash equivalents and marketable securities increased by $15.1 million primarily due to net proceeds of $23.6 million from the sale of 12,906,000 shares of our Series C-1 convertible preferred stock at a price of $1.8402 per share from January 2011 through April 2011. The net proceeds from this financing were partially offset by cash used in operating activities of $6.7 million and expenditures on property and equipment of $1.6 million.

 

The following table provides a summary of our cash flow for the years ended December 31, 2008, 2009 and 2010, and the six months ended June 30, 2010 and 2011 (in thousands):

 

     Year Ended December 31,     Six Months Ended
June 30,
 
         2008             2009             2010             2010             2011      
                       (unaudited)  

Net cash used in operating activities

   $ (5,577   $ (7,796   $ (12,123   $ (5,222   $ (6,681

Net cash (used by) provided by investing activities

     2,288        6,153        (9,627     (2,820     (25,642

Net cash provided by (used in) financing activities

     525        (280     34,613        14,031        23,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

   $ (2,764   $ (1,923   $ 12,863      $ 5,989      $ (8,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Sources and Uses of Capital

 

From 1998 to 2006, we operated as a research and development organization advancing our technology platform and our expertise in metabolism and metabolic modeling across a range of applications in industrial and medical biotechnology. During this period, we funded our operations primarily through collaborative research agreements, government grants and licenses of our proprietary software to academic and research institutions. In 2007, we shifted our business strategy to licensing our proprietary software technology platform to customers to using our technology platform to create processes to enable our industry partners to produce chemicals. As of December 31, 2007, we had cash, cash equivalents and marketable securities of $18.5 million. From January 1, 2008 through June 30, 2011, we financed our operations using our existing cash balance and through the receipt of aggregate net proceeds of approximately $64.8 million, primarily from the following sources:

 

   

net proceeds from the issuance of convertible preferred stock of $58.7 million;

 

   

revenues from government grants of $2.3 million;

 

   

revenues from collaborative research and development agreements of $2.1 million; and

 

   

revenues from customers under licensing and software use agreements of $1.7 million.

 

During the period from January 1, 2008 through June 30, 2011, we used an aggregate of $32.2 million of cash to fund our operations and $5.2 million for the purchase of capital expenditures. Our cash used in operations was $5.6 million, $7.8 million and $12.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $6.7 million for the six months ended June 30, 2011. Our cash used for capital expenditures was $1.1 million, $0.5 million and $2.0 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $1.6 million for the six months ended June 30, 2011.

 

As of June 30, 2011, we had cash, cash equivalents and marketable securities of $39.3 million, and notes and capital lease obligations of $0.2 million. As of June 30, 2011, we also had an equipment line of credit in place under which we can finance up to $4.0 million of equipment purchases made through December 31, 2011. Amounts borrowed would be required to be repaid over a 42-month period at an interest rate of prime plus 4.75% (subject to a minimum interest rate of 8.0%), plus an end of term payment equal to 6% of amounts financed for

 

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equipment and 10% of amounts financed for software, freight, installation and similar items. As of June 30, 2011, we had not borrowed any amounts under this equipment line of credit.

 

Since our inception, we have incurred significant net losses. As of June 30, 2011, we had an accumulated deficit of $43.5 million. We expect to continue to incur significant net losses in the future and expect our operating losses to continue to increase as we continue our scale-up activities for BDO, expand our research and development activities, support the potential commercialization activities of our production processes, and expand general and administrative capabilities to support our growing operations and transition to a public company. We are unable to predict the extent of any future losses or when we will be profitable, if at all. In addition, we currently plan to make capital expenditures of approximately $1.0 to $3.0 million to purchase equipment for which we will retain ownership in order to enhance the capabilities of the demonstration plant we are jointly operating with our partner, Tate & Lyle, plus we plan to make additional capital expenditures to expand our research and development capabilities. We may also participate in the construction costs to build commercial-scale plants along with our partners and expect to make capital contributions in some cases to the construction of early commercial-scale plants. In some instances, our capital contributions may be significant. However, we are unable to estimate our share of the contribution, if any, to such total capital expenditures at this time.

 

We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds within this period of time through equity or debt financing arrangements or collaborations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors” elsewhere in this prospectus. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity and/or convertible debt securities, dilution to our existing stockholders will result. If we raise additional financing by the incurrence of indebtedness, we would be subject to increased fixed payment obligations and could also be subject to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional funds, we will have to reduce our operating costs, which will cause a delay or reduction in our technology development and commercialization programs.

 

Six Months Ended June 30, 2010 and 2011

 

Cash Flows from Operating Activities

 

Our cash used in operating activities for the six months ended June 30, 2010 of $5.2 million was due to a net loss of $6.4 million, partially offset by non-cash charges for depreciation and stock-based expense in the aggregate amount of $0.4 million. Net change in our operating assets and liabilities increased cash flow from operations by $0.8 million primarily due to an increase in accounts payable and accrued liabilities related to timing of expenditures and cash payments.

 

Our cash used in operating activities for the six months ended June 30, 2011 of $6.7 million was due to a net loss of $9.1 million, partially offset by non-cash charges for depreciation and stock-based expense in the aggregate amount of $0.7 million. Net change in our operating assets and liabilities increased cash flow from operations by $1.5 million primarily as a result of cash collected in 2011 under our Waste Management joint development agreement and an increase in accounts payable and accrued liabilities related to timing of expenditure and cash payments.

 

Cash Flows from Investing Activities

 

Our cash used in investing activities for the six months ended June 30, 2010 of $2.8 million was due primarily to capital expenditures of $1.2 million from equipment purchases largely to expand our research and development capabilities. Net purchases in marketable securities in this six-month period were $1.6 million.

 

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Our cash used in investing activities for the six months ended June 30, 2011 of $25.6 million was due primarily to net purchases of marketable securities of $24.0 million and capital expenditures of $1.6 million primarily from equipment purchases to expand our research and development capabilities.

 

Cash Flows from Financing Activities

 

Our cash provided from financing activities for the six months ended June 30, 2010 of $14.0 million was due primarily to net proceeds of $14.1 million from the issuance of 14.5 million shares of our Series C convertible preferred stock at a price of $1.035 per share.

 

Our cash provided from financing activities for the six months ended June 30, 2011 of $23.6 million was due primarily to net proceeds of $23.6 million from the issuance of 12.9 million shares of our Series C-1 convertible preferred stock at a price of $1.8402 per share.

 

Years Ended December 31, 2008, 2009 and 2010

 

Cash Flows from Operating Activities

 

Our cash used in operating activities for the year ended December 31, 2008 of $5.6 million was due to a net loss of $5.9 million, partially offset by non-cash charges for depreciation and stock-based expense in the aggregate amount of $0.4 million.

 

Our cash used in operating activities for the year ended December 31, 2009 of $7.8 million was due to a net loss of $9.0 million, partially offset by non-cash charges for depreciation and stock-based expense in the aggregate amount of $0.6 million. Net changes in our operating assets and liabilities increased cash flow from operations by $0.6 million, primarily due to an increase in accounts payable and accrued liabilities related to timing of expenditures and cash payments.

 

Our cash used in operating activities for the year ended December 31, 2010 of $12.1 million was due to a net loss of $14.1 million, partially offset by non-cash charges for depreciation and stock-based expense in the aggregate amount of $1.0 million. Net changes in our operating assets and liabilities increased cash flow from operations by $1.0 million, primarily due to timing of expenditures and cash payments.

 

Cash Flows from Investing Activities

 

Our cash provided from investing activities for the year ended December 31, 2008 of $2.3 million was due primarily to net maturities of marketable securities of $3.6 million, partially offset by capital expenditures of $1.1 million primarily from equipment purchases to expand our research and development capabilities.

 

Our cash provided from investing activities for the year ended December 31, 2009 of $6.2 million was due primarily to net maturities of marketable securities of $6.7 million, partially offset by capital expenditures of $0.5 million primarily from equipment purchases to expand our research and development capabilities.

 

Our cash used in investing activities for the year ended December 31, 2010 of $9.6 million was due primarily to net purchases of marketable securities of $7.7 million and capital expenditures of $2.0 million primarily from equipment purchases to expand our research and development capabilities.

 

Cash Flows from Financing Activities

 

Our cash provided from financing activities for the year ended December 31, 2008 of $0.5 million was due primarily to net proceeds of $0.4 million from the issuance of 0.3 million shares of our Series B convertible preferred stock at a price of $1.4967 per share. An additional $0.2 million was received from the exercise of stock options, most of which were exercised in advance of being vested.

 

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Our cash used in financing activities for the year ended December 31, 2009 of $0.3 million was due primarily to $0.1 million of payments on capital leases and $0.2 million paid to repurchase unvested stock options originally exercised in 2008 upon termination of a prior executive.

 

Our cash provided from financing activities for the year ended December 31, 2010 of $34.6 million was due primarily to net proceeds of $14.1 million from the issuance of 14.5 million shares of our Series C convertible preferred stock at a price of $1.035 per share, and net proceeds of $20.6 million from the issuance of 11.5 million shares of our Series C-1 convertible preferred stock at a price of $1.8402 per share.

 

Contractual Obligations

 

The following table provides a summary of our contractual obligations as of December 31, 2010 (in thousands):

 

        2011              2012              2013              2014            2015 and  
Beyond
       Total    

Principal payments on capital lease obligations

  $ 77       $ 41       $ 41       $ 9       $       $ 168   

Interest payments on capital lease obligations

    11         6         3                         20   

Payments under operating lease obligations

    750         774         793         473                 2,790   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $ 838       $ 821       $ 837       $ 482       $       $ 2,978   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The following table provides a summary of our contractual obligations as of June 30, 2011 (in thousands):

 

      Remainder  
2011
         2012              2013              2014            2015 and  
Beyond
       Total    

Principal payments on capital lease obligations

  $ 35       $ 47       $ 47       $ 9       $       $ 138   

Interest payments on capital lease obligations

    4         5         3                         12   

Payments under operating lease obligations

    343         862         883         905         539         3,532   

Purchase obligations

    1,100                                         1,100   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $ 1,482       $ 914       $ 933       $ 914       $ 539       $ 4,782   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

This table does not reflect the portion of expenses that we expect to incur during 2011 under a grant that is a sub-award from the University of Massachusetts which provides reimbursement to us for up to $0.5 million of a total of $0.6 million of expenses for research activities under this grant. In addition, this table does not reflect the portion of expenses that we expect to incur under a grant that we were selected to receive from the U.S. Department of Energy in June 2011. This grant provides reimbursement to us for up to $5.0 million of a total of $6.25 million of research expenses to develop processes for the production of BDO from cellulosic biomass.

 

Off-Balance Sheet Arrangements

 

During the years ended December 31, 2008, 2009 and 2010 and the six months ended June 30, 2011, we did not have any off-balance sheet arrangements, as such term is defined under SEC rules. Off-balance sheet arrangements include relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for purposes of facilitating financing transactions that are not required to be reflected on our balance sheets.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and debt obligations to the extent we decide to finance future purchases under our available equipment line of credit. We generally invest our available cash balance in investments with short maturities with high credit ratings. Accordingly, our interest income fluctuates with changes in short-term interest rates. As of June 30, 2011, our

 

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investment portfolio consisted primarily of money market funds, U.S. government agency notes and debt, corporate debt and commercial paper. All of our marketable securities are highly liquid investments. Due to the short-term nature of our marketable securities, our exposure to interest rate is minimal. As of June 30, 2011, we have not borrowed any amounts under our available equipment line of credit.

 

Foreign Currency Risk

 

Our operations are currently conducted solely in the United States. We expect to expand internationally, in particular in connection with our planned BDO commercialization efforts in Europe and Asia. As we expand internationally, our results of operations and cash flows may become subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses will increase when translated into U.S. dollars. In addition, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our production processes or the chemicals produced using our processes outside the United States. To date, our foreign currency risk has been minimal and we have not historically hedged our foreign currency risk; however, we may consider doing so in the future.

 

Commodity Price Risk

 

Our exposure to market risk for changes in commodity prices currently relates primarily to our purchases of conventional sugar feedstocks. We have not historically hedged the price volatility of conventional sugar feedstocks, though we may consider doing so in the future.

 

Recent Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition: Multiple Deliverable Revenue Arrangements, which changes the accounting for arrangements with multiple deliverables. Specifically, arrangement consideration is allocated to its deliverables based on their relative selling prices. The new standard also eliminates the use of the residual method of revenue recognition. The standard is effective for arrangements entered into or significantly modified in fiscal years beginning after June 15, 2010. The adoption of this guidance did not have a material impact our financial statements.

 

In October 2009, the FASB issued ASU No. 2009-14, Software: Certain Revenue Arrangements That Include Software Elements, which changes revenue recognition for tangible products containing software and hardware elements. Specifically, revenue arrangements involving tangible products with software elements that are essential to the functionality of the products are scoped out of existing software revenue recognition accounting guidance and will be accounted for under these new accounting standards. The standard is effective for arrangements entered into or significantly modified in fiscal years beginning after June 15, 2010. The adoption of this guidance did not have a material impact on our financial statements.

 

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, which requires new disclosures for fair value measures and provides clarification for existing disclosure requirements. Specifically, this amendment requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, and to describe the reasons for the transfers. It requires disclosure about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements which use significant unobservable inputs. It also clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosure about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The updated guidance is effective for reporting periods beginning after December 15, 2009, except for the disclosures regarding the reconciliation of Level III fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our financial statements.

 

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In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition—Milestone Method, which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition. Certain development, licensing arrangements and similar transactions include payment provisions whereby a portion or all of the consideration is contingent upon the successful completion of milestones. The amendments in these standards provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. The standard is effective for fiscal periods beginning after June 15, 2010, and applies to milestones achieved on or after that time. The adoption of this guidance did not have a material impact on our financial statements.

 

In April 2011, the FASB issued ASU, No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to improve the comparability of fair value measurements disclosed in financial statements prepared under U.S. GAAP and International Financial Reporting Standards. The ASU does not require any additional fair value measurements, but clarifies definitions and enhances disclosures, especially around Level 3 fair value measurements. The standard is effective for fiscal years beginning after December 15, 2011. We do not expect the adoption of this standard to have a material impact on our financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, updating ASC Topic 220, Comprehensive Income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the current option to present other comprehensive income and its components in our statements of convertible preferred stock and stockholders’ equity (deficit). This guidance does not change the components that are recognized in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This standard is effective for fiscal years, and interim periods beginning after December 15, 2011, and is to be applied retrospectively. Our statements of operations and other comprehensive income (loss) present other comprehensive income in accordance with this guidance and no impact on our financial statements is expected from the adoption of this standard.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The carrying amounts of assets and liabilities that are not readily apparent from other sources are based on historical experience and assumptions we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results could differ from those estimates. We believe the following accounting policies involve significant areas of judgment and estimate by management in the preparation of our financial statements.

 

Revenue Recognition

 

We currently recognize revenues from collaborative research agreements, government grants and software licenses. We recognize revenue when all the following are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the fee is fixed or determinable, and (4) collectability is reasonably assured. For multiple deliverable agreements entered into after December 31, 2010, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable.

 

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If sales arrangements contain multiple elements, we evaluate whether the components of each arrangement represent separate units of accounting. If they do contain separate units of accounting, revenue recognition standards require management to estimate the fair value of each individual element and whether it is separable from the other elements of the contract. Appropriate revenue recognition criteria are then applied to each unit of accounting. We have determined that all of our revenue arrangements for the years ended December 31, 2008, 2009 and 2010, and the six months ended June 30, 2011, contain one unit of accounting.

 

For each source of our revenue, we apply the above revenue recognition criteria in the following manner:

 

Collaborative Research Agreements

 

We recognize revenues from collaborative research agreements as the services are performed. Our collaborative research agreements in place as of June 30, 2011 provide for upfront payments pertaining to the subsequent completion of work by us. The upfront payment is proportionate to the expected amount of effort for each stage. Accordingly, we defer the upfront payment and recognize revenue equal to the proportion of work completed to date compared to the expected total effort to complete the stage. If our estimate of the total expected effort to complete the stage is incorrect, the amount of revenue we recognized to date may differ from actual results as they become known. For example, if the effort to complete a stage is greater than what was estimated at any given period, then the revenue recognized to date as of that period would be overstated and future periods would be understated. We frequently analyze our estimates and judgments and adjust accordingly.

 

In the event we enter into collaborative research agreements which provide for milestone payments deemed to be substantial and at risk at the inception of the contract, such milestone payment would be recognized as revenue when and if the milestone is achieved and to the extent the milestone is considered collectible. Collaborative research agreements may also contain arrangements under which we receive payment on a periodic basis based on the actual costs incurred, plus a profit. In these arrangements, we recognize revenue as the work is incurred to the extent payment is considered collectible.

 

Government Grants

 

Our government grants, or sub-awards from institutions that have received government grants, provide for cost reimbursement for certain types of research and development expenditures over a contractually defined period. We recognize revenue from government grants in the period in which the related costs are incurred, provided the conditions under which the government grants was awarded have been met and only perfunctory obligations are outstanding.

 

License Revenue

 

We license our proprietary SimPheny software to academic and research institutions generally over a one-year term. The license agreements provide for support, maintenance and upgrades, if available, over the license term. We generally receive payment for the services upfront, which we defer and recognize as revenue on a straight-line basis over the license term to the extent payment is considered collectible.

 

Impairment of Long-Lived Assets

 

We assess impairment of our long-lived assets, which include property and equipment, on at least an annual basis and test long-lived assets for recoverability when circumstances indicate that their carrying amount may not be recoverable. Events which could trigger a review include significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset, current period and a history of cash flow or operating losses or expected losses associated with the use of the asset, or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

 

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Recoverability is assessed based on the fair value of the asset, which is calculated as the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized in the statements of operations when the carrying amount is determined to be not recoverable and exceeds fair value.

 

We make estimates and judgments about future undiscounted cash flows and fair values. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flow attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated cash flows could be reduced significantly in the future. As a result, the carrying amounts of our long-lived assets could be reduced through impairment charges in the future.

 

Convertible Preferred Stock Warrant Liability

 

We classify freestanding warrants to purchase shares of our convertible preferred stock as liabilities on our balance sheets because the warrants are exercisable into preferred stock that is redeemable under terms that are not under our control. The fair value of the warrants are remeasured each balance sheet date, with the change in fair value recognized as a component of interest and other income (expense). We estimate the fair value of these warrants using a binomial valuation model which uses a number of assumptions including: the remaining term of the warrant, the expected price volatility of the underlying stock over this remaining term, and an appropriate discount rate. These assumptions are highly judgmental and could differ significantly in the future.

 

In June 2011 we issued a convertible preferred stock warrant in conjunction with our $4.0 million equipment line of credit. As of June 30, 2011, the fair value of this warrant has not changed materially from the date of issuance. However, the remeasurement of this warrant to fair value in future periods may have a more significant impact on our statements of operations. For instance, if our preferred stock price increases, the value of the warrant also increases and we would record the change in fair value to interest and other expense. We will continue to record adjustments to the fair value of the warrants until they are exercised, converted into warrants to purchase common stock or expire. At such time, the warrants will no longer be remeasured at each balance sheet date and the then-current fair value of the warrant will be reclassified from liabilities to common stock.

 

Stock-Based Expense

 

We recognize stock-based expense for share-based awards granted to employees, members of our board of directors and consultants. Substantially all of our stock-based expense is due to stock options as opposed to other types of stock-based instruments.

 

Stock-based expense for awards granted to employees and directors is based on the grant date estimated fair value, which we determine using the Black-Scholes option pricing model. The grant date fair value is amortized on a straight-line basis over the requisite service period of the award to the extent such award is probable of being earned. The requisite service period is generally the vesting period of the award.

 

Expense from shared-based awards granted to consultants is based on the fair value of the awards as they vest, which we determine using the Black-Scholes option pricing model. The fair value of the unvested portion of the awards is remeasured each reporting period and is recognized over the expected service period to the extent the award is probable of being earned. There is inherent uncertainty in these estimates and if different assumptions are used, the fair value of the equity instruments issued to consultants could have been significantly different.

 

Significant Factors and Assumptions in Determining Fair Value of Stock-Based Awards

 

We estimate the fair value of our stock options using the Black-Scholes option pricing model, which uses a number of assumptions, including the risk-free interest rate, expected term of the stock options, expected price

 

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volatility of the underlying stock over this remaining term and expected dividend yield. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a zero coupon U.S. Treasury note with a maturity that approximately equals the option’s expected term. We calculate the expected term of employee and director stock options based on a formula driven approach prescribed in Staff Accounting Bulletin No. 110 because we do not have ample relevant historical data to assess our stock option behavior. Our expected volatility is derived from the historical volatilities of several unrelated public companies within our industry over a period of time equal to the expected term of our options because we do not have any trading history to use for calculating the volatility of our own common stock. Our expected dividend yield is assumed to be zero since we have not paid any dividends, nor do we anticipate paying any dividends on our common stock in the foreseeable future. In addition, the amount of stock option expense we recognize in our statements of operations includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors.

 

The fair value of employee and director stock options was estimated on the date of grant for the years ended December 31, 2008, 2009 and 2010, and the six months ended June 30, 2010 and 2011, using the following assumptions:

 

     Year Ended December 31,   Six Months Ended
June 30,
     2008   2009   2010       2010       2011
                 (unaudited)

Risk-free interest rate

   3.0 – 4.5%   1.5 – 3.3%   1.9 – 3.0%   2.97%   1.7 – 2.5%

Expected term (years)

   6.1 to 8.0   5.0 to 8.0   6.1   6.1   5.3 to 8.0

Expected volatility

   65%   65%   65%   65%   65%

Expected dividend yield

   0.0%   0.0%   0.0%   0.0%   0.0%

 

Each of these assumptions is subjective and requires significant judgment. Grant date fair values for options granted in the future may change significantly depending on changes in these assumptions, especially as we establish volatility estimates based on our own stock price trading history, and to the extent the fair value of our common stock increases for future grants. An increase in volatility or an increase in the expected term for our stock options would result in higher future grant date fair values, resulting in an increase in future stock-based expense.

 

We grant our stock options at an exercise price equal to the then-determined estimated fair value of the underlying common stock by our board of directors on the date of grant. In conjunction with this initial public offering and with the benefit of hindsight, we reassessed the fair value of the underlying common stock related to certain of our stock option grants. The following table summarizes our stock option grants from January 2010 through the date of this prospectus, including the reassessed fair value of the underlying common stock:

 

Option Grant Date

   Number of
Shares
Underlying

Options Granted
     Exercise Price
Per Share
     Fair Value of
Underlying
Stock

Per Share
     Intrinsic Value
Per Share
 

June 9, 2010

     2,189,000       $ 0.18       $ 0.18       $   

July 23, 2010

     50,000         0.18         0.18           

September 10, 2010

     860,500         0.18         0.18           

March 11, 2011

     649,000         0.33         0.33           

June 10, 2011

     2,962,200         0.33         0.43         0.10   

July 29, 2011

     1,703,500         1.80         1.80           

 

The fair values of the common stock underlying our stock options have historically been determined by our board of directors with input from management. In the absence of a public trading market for our common stock, our board of directors determined the fair value of the common stock utilizing methodologies, approaches and

 

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assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Guide. In addition, our board of directors considered numerous objective and subjective factors including:

 

   

the prices of our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

   

the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

   

the lack of an active public market for our common and convertible preferred stock;

 

   

the likelihood of achieving a liquidity event such as an initial public offering or sale of our company;

 

   

valuations performed by independent valuation advisors using the methodologies described below;

 

   

the execution of strategic agreements;

 

   

the status and risk of our production process development programs;

 

   

our actual and projected operating and financial performance;

 

   

hiring of key personnel;

 

   

our stage of development;

 

   

the performance of comparable public companies in our industry;

 

   

trends and developments in the bio-based chemical industry; and

 

   

macro-economic events such as trends in the overall stock market and economy.

 

As noted above, in determining or confirming the grant date fair value of our common stock, our board of directors considered common stock valuations performed by independent outside valuation advisors as of August 31, 2008, March 1, 2010, February 22, 2011 and July 22, 2011. Using these valuations, and the other factors described above, our board of directors made the following estimates of fair value of our common stock as of the date of stock option grants through the date of this prospectus.

 

Valuation Date

   Fair Value
Per Share
 

August 31, 2008

   $ 0.25   

March 1, 2010

     0.18   

February 22, 2011

     0.33   

July 22, 2011

     1.80   

 

The valuations that our board of directors considered in determining the fair value of our common stock from August 31, 2008 through February 22, 2011 were based on the estimated aggregate enterprise value at the valuation date using the implied equity value from our convertible preferred stock financings, as the probability of a sale or merger occurring in the foreseeable future were deemed to be highly uncertain. In order to arrive at the fair value of our common stock, the enterprise value of our company was allocated to the shares of convertible preferred stock, shares of common stock and stock options using an option pricing methodology. The option pricing method treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the liquidation preference and accumulated dividends at the time of a liquidity event such as a merger or acquisition, or an initial public offering. The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price. The exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price. Thus, common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The option pricing

 

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method uses the Black-Scholes option pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities. The anticipated timing of a liquidity event utilized in these valuations was based on then-current plans and estimates of our board of directors and management regarding a liquidity event. The aggregate value of the common stock derived from the option pricing method was then divided by the number of shares of common stock outstanding to arrive at the per share value. A discount for lack of marketability was applied to reflect the increased risk arising from the inability to readily sell the shares. This approach is consistent with the methods outlined in the AICPA Practice Guide.

 

The common stock valuation as of August 31, 2008 was performed approximately one year after our Series B convertible preferred stock sold during September 2007 at a price of $1.4967 per share to several venture capital firms, including new investors. The valuation also included our business progress and external factors.

 

The common stock valuation as of March 1, 2010 was performed commensurate with the sale of shares of our Series C convertible preferred stock sold during January 2010 at a price of $1.035 per share to several venture capital firms, including new investors. The price per share and the terms of the Series C convertible preferred stock offering were the result of negotiations between us and the Series C investors.

 

The common stock valuation as of February 22, 2011, was performed commensurate with the sale of shares of our Series C-1 convertible preferred stock from December 2010 through April 2011 at a price of $1.8402 per share to several venture capital firms, industry partners, and new investors. The price per share and terms of the Series C-1 convertible preferred stock offering were the result of negotiations between us and the Series C-1 investors.

 

Commencing in July 2011, the valuations that our board of directors considered in determining the fair value of our common stock were based on the market approach and the income approach to estimate our aggregate enterprise value at each valuation date. The market approach measures the value of a company through the analysis of recent sales of comparable companies. Consideration is given to the financial condition and operating performance of the company being valued relative to those of publicly traded companies operating in the same or similar lines of business. When choosing the comparable companies to be used for the market approach, we focused on companies in our industry. Some of the specific criteria used to select comparable companies within this industry include the business description, business size, projected growth, financial condition and historical earnings. The income approach measures the value of a company as the present value of its future economic benefits by applying an appropriate risk-adjusted discount rate to expected future cash flows. We prepared a financial forecast to be used in the computation of the enterprise value for both the market approach and the income approach. The financial forecasts took into account our past experience and future expectations. The risks associated with achieving these forecasts were assessed in selecting the appropriate discount rate.

 

These contemporaneous valuations used three equity allocation scenarios to derive our common stock fair value as follows: (1) a sale or merger scenario, (2) an initial public offering scenario and (3) remaining private. Under the scenarios, we used an options-based methodology for allocating the estimated aggregate value to each of our securities using the Black-Scholes option-pricing model. Each of the aggregate values of the common stock derived from the option pricing models was then divided by the number of shares of common stock outstanding to arrive at a per share value. A discount for lack of marketability was applied to reflect the increased risk arising from the inability to readily sell the shares.

 

There is inherent uncertainty in these estimates and if we had made different assumptions than those described above, the fair value of the underlying common stock and amount of our stock-based expense, net loss and net loss per share amounts would have differed.

 

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Discussion of Specific Valuation Inputs

 

The stock options we granted from January 2010 through August 23, 2011 had exercise prices ranging from $0.18 to $1.80 per share. The fair value of our underlying common stock had changed over this period based on a number of factors which are summarized below:

 

   

March 1, 2010 Valuation. In January 2010, we completed our Series C convertible preferred stock financing at a price of $1.035 per preferred share. This financing involved significant participation by outside investors who purchased in an arm’s length transaction. In March 2010, we commenced production of pilot-scale fermentation batches of BDO and also hired our Vice President of Operations. Our board of directors considered these events to be significant value-generating events. Our board of directors assessed the fair value of our common stock as of March 1, 2010 to be $0.18 per share, based in part on a valuation analysis as of the same date obtained from an independent third-party valuation specialist, as well as the recently completed preferred stock financing (with rights, privileges and preferences superior to our common stock) and in anticipation of the other developments described above.

 

   

June 9, 2010 Grant. On June 9, 2010, we granted stock options with an exercise price of $0.18 per share, which was the fair value of the underlying common stock at that time as determined by our board of directors. The board determined that no significant internal or external value-generating events had taken place between the March 1, 2010 valuation and the date of this stock option grant.

 

   

July 23, 2010 Grant. On July 23, 2010, we granted stock options with an exercise price of $0.18 per share, which was the fair value of the underlying common stock at that time as determined by our board of directors. The board determined that no significant internal or external value-generating events had taken place since their last fair value determination on June 9, 2010.

 

   

September 10, 2010 Grant. On September 10, 2010, we granted stock options with an exercise price of $0.18 per share in conjunction with the appointment of our then Chairman of our board of directors to our Chief Business Development Officer and Executive Chairman of our board of directors. The board determined that no significant internal or external value-generating events had taken place since their last fair value determination on July 23, 2010.

 

   

February 22, 2011 Valuation. In December 2010, in conjunction with entering into a joint development agreement with Waste Management for the production of a particular intermediate chemical from syngas, we completed the first closing of our Series C-1 convertible preferred stock financing at a price of $1.8402 per preferred share. This financing involved significant participation by outside investors who purchased in an arm’s length transaction. In February 2011, we enabled the production of PBT from renewable feedstocks using BDO produced from our process. Our board of directors considered these events to be significant value-generating events. On February 14, 2011, we entered into a non-binding memorandum of understanding with M&G regarding a proposed partnering arrangement for the development and commercialization of certain target chemicals from sugars from cellulose biomass using our process technology. Our board of directors assessed the fair value of our common stock as of February 22, 2011 to be $0.33 per share, based in part on a valuation analysis as of the same date obtained from an independent third-party valuation specialist, as well as a consideration of the recently completed preferred stock financing (with rights, privileges as preferences superior to our common stock). We continued to complete additional closings of our Series C-1 convertible preferred stock financing through April 2011.

 

   

March 11, 2011 Grant. On March 11, 2011, we granted stock options with an exercise price of $0.33 per share, which was the fair value of the underlying common stock at that time as determined by our board of directors. The board determined that no significant internal or external value-generating events had taken place between the February 22, 2011 valuation and the date of this stock option grant. As stated above, the Series C-1 convertible preferred stock was sold before and after this option grant date at the same price per preferred share to outside investors in arm’s length transactions. We believe

 

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this is further indicia that it was appropriate to come to the same fair valuation determination as of February 22, 2011 and March 11, 2011.

 

   

June 10, 2011 Grant. On March 15, 2011, we entered into a joint development agreement with Tate & Lyle to scale up our BDO production process to demonstration-scale size fermentation batches. On April 15, 2011, we entered into a joint development agreement with Chemtex to develop a process for producing BDO from sugars from cellulosic biomass feedstocks. On April 28, 2011, we entered into a non-binding memorandum of understanding with Mitsubishi Chemical which outlines multiple potential areas for collaboration, including the commercial production of BDO in Asia. On June 10, 2011, we granted stock options at $0.33 per share, which was the fair value at the time as determined by our board of directors. In conjunction with this initial public offering and with the benefit of hindsight, we reassessed the fair value of the underlying stock for these June 10, 2011 options for stock-based expense purposes, taking into consideration the developments described above. For stock-based expense purposes, the reassessed fair value of the stock options granted on June 10, 2011 was determined to be $0.43 per share.

 

   

July 22, 2011 Valuation. On June 10, 2011, the U.S. Department of Energy selected us for an award with a potential value of up to $5.0 million to develop processes for the production of BDO from sugars from cellulosic biomass. On June 15, 2011, we and our partner, Tate & Lyle, successfully produced BDO at demonstration scale using our processes at a plant located at an industrial site owned by Tate & Lyle. On June 17, 2011, we signed a non-binding letter of intent with Novamont for the commercial production of BDO in Europe. On June 20, 2011, we were awarded the EPA Presidential Green Chemistry Challenge Award, considered by many to be the industry’s top award. On July 18, 2011, we hired our Executive Vice President and Chief Financial Officer. In addition, our recent significant business developments, especially our critical BDO production achievement at demonstration scale, coupled with favorable capital markets conditions, resulted in our having the opportunity to start the initial public offering process and plan an initial public offering organizational meeting held later that month. Our board of directors considered these events to be very significant value-generating events. Our board of directors assessed the fair value of our common stock as of July 22, 2011 to be $1.80 per share, based in part on a valuation analysis as of the same date obtained from an independent third-party valuation specialist, as well as the other developments described above.

 

   

July 29, 2011 Grant. On July 29, 2011, we granted stock options with an exercise price of $1.80 per share, which was the fair value of the underlying common stock at that time as determined by our board of directors. The board determined that no significant internal or external value-generating events had taken place between the July 22, 2011 valuation and the date of this stock option grant.

 

Income Taxes

 

We are subject to federal income taxes in the United States and state income taxes in California which we determine using estimates. We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

 

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. As of December 31, 2010, we had a full valuation allowance against all of our deferred tax assets.

 

Effective January 1, 2007, we adopted Accounting Standards Codification, or ASC, 740-10 to account for uncertain tax positions. As of December 31, 2008, 2009 and 2010, we had no significant uncertain tax positions requiring recognition in our financial statements. We do not expect the total amounts of unrecognized income tax benefits will significantly increase or decrease in the next 12 months.

 

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We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (1) the factors underlying the sustainability assertion have changed and (2) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

 

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INDUSTRY OVERVIEW

 

Overview

 

The global chemical market is a $3.0 trillion industry and enables the production of approximately 95% of all manufactured goods. Through chemical reactions, chemical manufacturing processes convert feedstocks into basic and intermediate chemicals which are further processed into higher-value products. Feedstocks are the most basic of starting materials for chemical production. Organic chemicals, or those containing carbon atoms, comprise the majority of chemical products and are typically derived from carbon sources in feedstocks such as crude oil, natural gas or coal. Organic chemicals can also be produced from renewable carbon sources in feedstocks such as plant-derived matter and municipal solid waste, which are key inputs in sustainable bio-based chemical manufacturing processes. Basic and intermediate chemicals, along with inorganic chemicals, fertilizers and other derivatives and basic industrials, account for up to 37% of total industry revenue, or $1.1 trillion, the largest segment of the industry. The following graphic shows the conventional chemical industry value chain:

 

LOGO

 

The chemical industry is a mature industry with established chemical production processes that have been optimized and improved over time. Accordingly, it has become increasingly challenging to achieve significant cost improvements. Key factors that impact basic and intermediate chemicals companies’ profitability and value include feedstock and raw material costs and access, conversion costs, capital costs and geographic location of assets.

 

   

Feedstock and raw material costs and access. Feedstock and raw materials can comprise up to 60% of the cost of production. As a result, chemical companies must focus on procuring the lowest cost feedstocks and raw materials to have competitive cost positions. Volatility in these costs has become a critical issue to manage as it can lead to unpredictable profitability and cash flow. In addition, the limited availability of these materials has constrained producers’ ability to deliver product to their customers at certain times. Within the last few years, for example, limited supplies of raw materials, such as butadiene, have disrupted large segments of the industry by causing chemical companies to shut down production of downstream chemicals and finished products due to the lack of these raw materials.

 

   

Conversion costs. The conversion costs of feedstocks and raw materials into finished products are a key cost driver which is driven by process technologies. Companies develop or license process technologies depending on their capabilities and resources. Their objective is to utilize low-cost

 

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processes that drive greater product yield, faster conversion, lower energy usage and lower separation costs, among other factors. Key competitive advantages can be gained by securing a low-cost position in the industry, especially in the face of recent increasing feedstock and raw material costs and volatility.

 

   

Capital costs. A driver of return on capital for the chemical industry is the cost of facilities per pound of product produced, or capital intensity. Different process technologies require differing capital intensities. In addition, the minimum size of a facility will determine the minimum capital needed to address the required step change of supply in the industry. In general, a facility will need to be of a significant scale to be cost competitive given the need to spread manufacturing costs over a set fixed cost basis. As a result of this need, the industry requires large amounts of capital and long lead times for construction of capacity. In addition, the large step increase of capacity from the construction of these large facilities historically has caused oversupply situations to develop, thereby leading to low industry utilizations, cyclicality in the industry and lower profits as margins fall.

 

   

Location of asset base. The location of a facility is important because shipping costs and availability of feedstocks and raw materials are regional in nature. A producer typically desires to be close to input materials to lower their costs and better secure feedstock supply. In addition, being close to customers is critical to deliver lower cost chemical products on a more reliable basis. For example, in North America, as a result of lower natural gas prices relative to crude oil, the chemical industry is building new capacity for the first time in many years.

 

Two chemicals that have been impacted by these key factors while facing growing demand in various geographies are BDO and butadiene.

 

1,4-Butanediol (BDO) Market

 

BDO is an intermediate chemical used in the production of everyday products such as athletic apparel (spandex), running shoes (urethane foams), and electronics and automotive applications (engineering thermoplastics). BDO is a colorless, non-corrosive, low-toxicity liquid with a high boiling point. According to the most recently available data from IHS, the global BDO demand in 2009 was 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices.

 

Supply is concentrated, with the top four global suppliers (BASF, Dairen Chemical, LyondellBasell and ISP) together accounting for 58% of global capacity in 2010. Worldwide BDO consumption is expected to rise at a 5.1% compound annual growth rate from 2009 to 2014, with similar growth rates for the United States and Western Europe, and demand in China rising the most, at 9.8% average growth per year. Currently, approximately two-thirds of BDO produced worldwide is “captive,” meaning it is consumed by the producing company in the generation of a finished chemical product. The remaining third is sold on the open “merchant” market.

 

Five main processes are currently used commercially in the world to manufacture BDO, all of which utilize chemistry and chemical catalysis to convert a range of fossil-fuel feedstocks into BDO. The following table summarizes world BDO capacity by process. Since first being produced in the 1930s in Germany, a series of new process technologies have been developed that use a range of different feedstocks to find alternative ways to produce BDO to overcome barriers to entry and enable new entrants into the market.

 

Petrochemical BDO Process

    

Primary Raw Material

   Pounds
(in millions)
     % of Total  

Reppe Process

     acetylene      1,859         48

Allyl Alcohol Process

     propylene, propylene oxide      959         25

Huntsman-Davy Process

     n-butane      592         15

Butadiene-Acetic Acid Process

     butadiene      306         8

GEMINOX Process

     n-butane      139         4

 

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Reppe Process. The Reppe process has been the primary manufacturing process for the production of BDO, particularly in the United States and Western Europe. Commercialized in the 1940s by BASF, it remained the only process for producing BDO until the late 1970s. The primary feedstock for this process is acetylene, which is generally limited in supply and increasing in costs. Acetylene can be produced primarily from coal or methane (natural gas). This is a multi-step process and is the most energy intensive of all the petrochemical process technologies for making BDO.

 

   

Butadiene–Acetic Acid Process. This process, developed and first used in the late 1970s by Mitsubishi Chemical, involves the reaction of butadiene with acetic acid and oxygen. Normally, tetrahydrofuran, or THF, is coproduced with BDO in this process. It is a three step chemical conversion. With the high cost of butadiene, this process has become less competitive.

 

   

Allyl Alcohol Process. In the late 1980s, ARCO Chemical Company, or Arco, now LyondellBasell, developed a new multi-step chemical process to make BDO from C3 feedstocks, namely propylene oxide. A similar process is employed by Dairen Chemical in Asia but it utilizes propylene as a feedstock rather than propylene oxide.

 

   

Huntsman-Davy Process. Developed in the early 1990s by Davy Process Technology, this process converts maleic anhydride into BDO. Using a Huntsman process n-butane can be converted into maleic anhydride to feed the Davy process. This process has been exclusively commercialized in Asia and the Middle East. In addition to BDO, the Davy process results in the production of THF, and gamma-butyrolactone, or GBL, as a co-product.

 

   

GEMINOX Process. Developed in the late 1990s by BP p.l.c./Lurgi GmbH, this process converts n-butane to maleic acid in a fluidized bed process which is then converted to BDO in a multi step process. There is one plant that uses this technology which is located in the United States and operated by ISP.

 

The table below shows world BDO capacity of the top five producers, as of July 2010:

 

Company   Annual Capacity
(pounds
in  millions)
  Process /
Raw Material
  Geographic Regions
of Production
BASF   919   Reppe / acetylene   North America,
Europe, Asia 
(1)
Dairen Chemical   564   Allyl Alcohol / propylene   Asia
LyondellBasell   397   Allyl Alcohol / propylene oxide   North America,

Europe

ISP   359   GEMINOX / n-butane

Reppe / acetylene

  North America,

Europe

INVISTA   240   Reppe / acetylene   North America

 

(1)   Via joint ventures.

 

Once produced, BDO is incorporated directly into polymers and a number of derivative chemical products. These include:

 

   

Tetrahydrofuran, or THF. BDO is converted into THF, a derivative chemical product. The majority of THF is used in the production of polytetramethylene ether glycol (PTMEG), which has applications in polyurethane elastomeric fibers (e.g., spandex). THF’s other uses include manufacturing solvent for cements and coatings, and reaction solvent in the production of pharmaceuticals. THF accounted for approximately 49% of global BDO consumption in 2009, according to IHS.

 

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Polybutylene Terephthalate, or PBT. BDO is directly incorporated into PBT polymers. PBT is a compounded polymer, or plastic, used in the automotive, electrical and appliance industries. PBT is also compatible with several other thermoplastics which enable a compounder to tailor a polymer alloy to an end-user’s specifications. Current applications of PBT include automotive front and rear fascia, bumpers, fenders and spoilers. PBT accounted for approximately 24% of global BDO consumption in 2009.

 

   

Gamma-butyrolactone, or GBL. BDO is converted into GBL, a derivative chemical product. Applications of GBL include use as a solvent in lube oil extraction and electronic applications, use in the production of cosmetics and hairsprays, and miscellaneous applications such as process aids in beverage clarification. This end-use derivative accounted for approximately 14% of global BDO consumption in 2009.

 

   

Polyesters in Polyurethane Applications. BDO is directly incorporated into these materials, which are formulated into urethane elastomers with excellent oil, chemical and ultraviolet resistance and good mechanical properties over a broad temperature range, as well as high flexibility and abrasion resistance. Applications of urethane elastomers that incorporate BDO include footwear, electrical enclosures, recreation equipment and furniture. Polyesters in polyurethane applications accounted for approximately 9% of global BDO consumption in 2009.

 

The cost to produce BDO is highly dependent on the prices of the feedstock used, including fossil fuels such as crude oil and natural gas. The prices of these feedstocks are cyclical and volatile, and there has recently been significant volatility in the price of crude oil, as reflected in the chart below.

 

LOGO

 

Butadiene Market

 

Butadiene is a precursor to certain intermediate chemicals, including BDO, however, its primary use is for direct incorporation into polymers, which are used in the production of a variety of products, such as tires, carpeting and latex products. It is a colorless gas at room temperature and is extremely hazardous due to its high flammability. While butadiene is most commonly used as a co-polymer in styrene butadiene rubber for vehicle tires, it is also used in basic plastics and other rubber products such as polybutadiene rubber, also for vehicle

 

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tires. According to Nexant, the global butadiene demand in 2011 is forecasted to be over 20 billion pounds, which equates to a market size of approximately $40 billion based on June 2011 prices.

 

The United States currently represents the largest global supplier by nation with 35% of total capacity, followed by Europe (18%), China (14%), Japan (12%) and other Asian nations (18%), with the 2% balance made up by the rest of the world. Supply is fragmented, with the top ten producers, all large chemical and energy companies, such as Shell Chemicals Limited, ExxonMobil Corporation and TPC Group Inc., accounting for 46% of global supply, and no one supplier providing more than 8% of global supply.

 

Approximately 97% of global butadiene output is generated as a co-product of steam-cracking heavy hydrocarbon feedstocks to produce ethylene in ethylene cracking operations. As crude oil has become relatively more expensive than natural gas, many ethylene cracking operations are using lighter natural gas feedstocks to earn higher margins, leading to significantly lower quantities of C3 and C4 chemicals and rising prices. The amount of butadiene produced depends in large part on the volume of ethylene production, the feedstocks employed and the steam-cracking intensity. A small amount of butadiene is also made in several different dehydration and ethanol production processes. The following table depicts the light feedstocks (ethane, propane and n-butane) and heavy feedstocks (naphthas, atmospheric gas oil and vacuum gas oil) that go into ethylene cracking and the cracking severity, feedstock/ethylene yield ratio and butadiene/ethylene yield ratio.

 

Yields of Coproduct Butadiene from Ethylene Production(1)

 

Feedstock

   Cracking
Severity
   Pounds of
Feedstock Per
Pound of Ethylene
   Pounds of Butadiene
Per  100
Pounds of Ethylene
 

Ethane

   High    1.24      2.5   

Propane

   Medium to high    2.18-2.67      7.2   

n-Butane

   High    2.65      8.7   

Naphthas(2)

   Medium to high    2.60-3.77      13.6   

Atmospheric Gas Oil

   Medium to high    3.60-4.09      17.6   

Vacuum Gas Oil

   Medium    4.24-4.44      26.2   

 

  (1)   Data are representative of coproduct butadiene output from an ethylene plant with a capacity of one billion pounds per year when feeding one feedstock at high severity conditions. Ethane and propane recycle to extinction is assumed for all feedstock categories.

 

  (2)   The wide ranges for this category are because of the following factors: naphtha is not uniformly defined and the average carbon chain length of the contained hydrocarbons may vary significantly; and producers employ different cracking severity (temperature and residence time) depending on desired product mix.

 

Specific uses of butadiene include the following:

 

   

Styrene butadiene rubber, or SBR. SBR is used almost entirely in tires, with consumption affected by trends in the size, type and quality of tires demanded by consumers. SBR is also used in industrial hoses and belting and neoprene wet suits, and accounted for 27% of global butadiene demand in 2009.

 

   

Butadiene rubber, or BR. Also known as polybutadiene rubber, BR is synthetic rubber used in tires and as an impact modifier in polystyrene. Other uses are as industrial products such as conveyor belts, hoses, seals and gaskets and adhesives. BR accounted for 27% of global butadiene demand in 2009.

 

   

Acrylonitrile-butadiene-styrene, or ABS. ABS is a high-volume engineering polymer favored for its strength, wear resistance and finish. It is widely used in automotive applications, housings for electrical appliances, various household products, and engineering polymers and alloys or blends. ABS accounted for 13% of global butadiene demand in 2009.

 

   

Styrene butadiene latex, or SBL. SBL is consumed primarily in the carpet backings and paper coating industries. It is also used in fabrics, shoes and foam products, and in the construction industry as an adhesive for concrete, cement and mortar. SBL accounted for 10% of global butadiene demand in 2009.

 

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Other applications. Butadiene is also converted into derivative chemicals, such as hexamethylenediamine (HMDA, a monomer for nylon), nitrile/neoprene rubber, BDO / THF, sulfolane (a solvent used for aromatics extraction) and several other elastomers, rubbers and intermediates.

 

Butadiene consumption is tied to a great extent to tire consumption. Growth is expected to be especially high in China as automobile demand is growing significantly.

 

The price of butadiene generally follows crude oil prices. The feedstock of choice in ethylene production is increasingly ethane, which produces little butadiene co-product relative to that produced by naphtha, which is a derivative of crude oil and another major ethylene feedstock. This is expected to continue to create constrained supply and result in prices facing continued upward pressure and volatility. The chart below shows the U.S. market prices of butadiene from 1996 to 2010 and underscores its volatile market dynamics.

 

LOGO

 

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BUSINESS

 

Overview

 

Our Company

 

We are a technology leader for the global chemical industry. We deliver new, transformative manufacturing processes that enable our partners to produce intermediate and basic chemicals from renewable feedstocks. Intermediate and basic chemicals serve as the basis for making substantially all of the products that make modern life possible, and our processes enable the production of the exact same chemicals that are at the core of the chemical industry. Our processes are designed to deliver better economics with enhanced sustainability and a smaller environmental footprint than conventional petroleum-based manufacturing processes. Our proprietary biotechnology platform allows us to create fermentation-based manufacturing processes and to engineer the enabling microorganisms that drive the efficient conversion of renewable feedstocks into numerous existing high-volume intermediate and basic chemicals. We are developing a pipeline of manufacturing processes for the production of these chemicals, including our first target chemical, butanediol, or BDO, and our second target chemical, butadiene. A key element of our strategy is to partner with industry leaders through a combination of joint venture and licensing arrangements in order to accelerate the broad and rapid commercial utilization of our production processes. Through this approach, we expect the first commercial-scale BDO plant that utilizes our processes to begin high-volume production by the end of 2012.

 

Technology Platform

 

We harness biotechnology to develop manufacturing processes that can convert multiple renewable feedstocks into numerous existing chemicals that meet industry specifications for large, well-defined established markets. Our technology platform combines predictive computational modeling with advanced laboratory technology and process engineering in a uniquely integrated approach to develop highly efficient biologically driven manufacturing processes faster than traditional process development methods. Our platform is designed to identify the most efficient biochemical pathways and select the most effective microorganisms to convert feedstocks into target chemicals, leading to optimal process technologies developed in a capital-efficient manner. In June 2011, we received the U.S. Environmental Protection Agency, or EPA, Presidential Green Chemistry Challenge Award for our technology platform’s ability to enable the “Production of High-Volume Chemicals from Renewable Feedstocks at Lower Cost.” Our intellectual property currently targets processes to produce over 20 intermediate and basic chemicals, including BDO and butadiene. As of August 15, 2011, we owned or had licensed rights to 23 issued patents and 206 pending patent applications in the United States and in various foreign jurisdictions, in addition to our trade secrets and other intellectual property rights.

 

Manufacturing Processes

 

We expect our process technologies to enable economically advantaged production of target chemicals, considering both capital and operating costs, relative to conventional petroleum-based processes run at chemical manufacturing plants throughout the world. We believe that plants using our production processes will offer three primary economic advantages relative to conventional plants: lower capital costs per pound of chemical product for similar-sized plants, lower production costs for similar-sized plants and the ability to cost-effectively operate plants at a smaller scale. Our manufacturing processes are also designed to deliver enhanced sustainability and a reduced environmental footprint versus conventional approaches. Based on performance achieved at laboratory, pilot and demonstration scale, we believe our first manufacturing process for BDO will be economically advantaged at commercial scale as compared to conventional petroleum-based production processes. Our initial BDO production process will use conventional sugars, such as sucrose from sugarcane or sugar beets, and dextrose from corn or cassava. We expect our economic advantage to continue to improve over time as a result of process technology improvements and our anticipated ability to utilize other renewable feedstocks projected to have even lower costs, such as sugars from cellulosic biomass and synthesis gas, or syngas, from municipal solid waste.

 

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Commercialization Strategy

 

To drive rapid and parallel commercialization of multiple plants for each of our target chemicals, our approach is to partner with industry leaders through a combination of joint venture and licensing arrangements. In general, for each joint venture arrangement we will agree to contribute the value of our technology on a non-exclusive basis to a commercial venture formed for the production of a target chemical. In return, the other parties to these arrangements will agree to provide a significant portion of the capital required to construct the production plants along with relevant expertise necessary to operate the plants, and in many cases will also provide other competitive advantages such as guaranteed product off-take or feedstock supply. We and our partners will then agree to share the earnings of the ventures. We believe this commercialization strategy will allow for the rapid and parallel deployment of multiple plants for each of our target chemicals. In lieu of this joint venture approach or as a follow-on to our initial joint ventures, we may employ licensing arrangements to accelerate commercialization of our manufacturing process for certain target chemicals.

 

Renewable Feedstocks

 

We have demonstrated our ability to produce multiple chemicals from a variety of renewable feedstocks, including various conventional sugars and sugars from cellulosic biomass using our proprietary microorganisms and processes. We believe providing this flexibility in feedstocks will enable further reductions in production costs and offer the best match of available feedstocks for a given geography. We have developed strategic relationships with companies such as Tate & Lyle Ingredients Americas, Inc., or Tate & Lyle, for dextrose sugar, Gruppo Mossi & Ghisolfi, or M&G, for sugars from cellulosic biomass, and WM Organic Growth, Inc., or Waste Management, for syngas, to accelerate development and time-to-market for our process solutions that use these renewable feedstocks.

 

Initial Target Chemicals

 

Our first manufacturing process targets BDO, an intermediate chemical used in everyday products that include athletic apparel, running shoes, electronics and automobiles. According to the most recently available data from research firm IHS Inc., or IHS, the global BDO demand in 2009 was 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices. Our process has been producing BDO from dextrose sugar at demonstration scale since June 2011 at a plant located at an industrial site owned by our partner, Tate & Lyle. Our second manufacturing process targets butadiene, a basic chemical used in a variety of other everyday products such as tires, carpeting and latex products. According to the research firm Nexant, Inc., or Nexant, the global butadiene demand in 2011 is forecasted to be over 20 billion pounds, which equates to a market size of approximately $40 billion based on June 2011 prices. In August 2011, we announced that we had successfully produced pound quantities of butadiene made from renewable feedstocks. We are also developing a pipeline of sustainable processes to enable production of many other intermediate and basic chemicals that, like BDO and butadiene, have large, well-defined established markets. By targeting the production of the exact same intermediate and basic chemicals that are at the core of the chemical industry, we can significantly reduce our market risk compared to the risks associated with approaches that target new or substitute bio-based chemicals and materials, which require significant market application development and validation.

 

We expect the first commercial-scale BDO plant that utilizes our process to produce approximately 40 million pounds of BDO per year in an industrial plant in Europe that is owned and operated by one of our industry partners, Novamont S.p.A., or Novamont, with whom we have entered into a non-binding letter of intent. Our goal is for this plant to begin production by the end of 2012 and for larger commercial-scale BDO plants owned and operated together with our industry partners in the United States, Europe and Asia to begin high-volume production in 2014 and 2015. We are jointly operating a plant with our partner Tate & Lyle at demonstration scale, with the potential for commercial-scale production with Tate & Lyle in North America pursuant to a contemplated joint venture agreement. In addition, we have entered into a non-binding memorandum of understanding with Mitsubishi Chemical Corporation, or Mitsubishi Chemical, pursuant to which we agreed in principle to a joint venture in Asia for the production of BDO using our process technology.

 

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We expect that BDO plants using our process will typically produce 100 to 130 million pounds of BDO per year, though individual plants may be smaller or larger depending on factors such as regional supply and demand and market dynamics. Our objective is to enter into multiple similar arrangements with partners to rapidly grow the commercial production of butadiene and other target chemicals.

 

Challenges Facing the Chemical Industry

 

Because the production of approximately 95% of all manufactured goods is enabled by chemicals, the challenges facing the chemical industry directly affect consumers and the global economy. These challenges impact chemical manufacturers and companies dependent on chemicals to make downstream products and materials, and include:

 

   

Dependence on Fossil-Fuel Feedstocks with Volatile Pricing. Nearly all intermediate and basic chemicals are made today from fossil-fuel feedstocks, such as crude oil, natural gas and coal. The chemical industry’s reliance on these feedstocks leads to significant price volatility in input costs, large swings in earnings and difficulty in forecasting future performance.

 

   

Increasing Scarcity and Rising Price of C3 and C4 Chemicals. Chemicals with three carbon atoms, or C3 chemicals, such as propylene, and chemicals with four carbon atoms, or C4 chemicals, such as BDO and butadiene, are most commonly derived from heavier fossil-fuel feedstocks, such as crude oil. Basic chemicals like propylene and butadiene are produced as a by-product of the ethylene cracking process. Recently, there has been increased availability of natural gas, especially in North America, and the spread between the price of crude oil and natural gas has grown. As crude oil has become relatively more expensive than natural gas, many ethylene cracking operations are now using lighter natural gas feedstocks to earn higher margins. This has led to significantly lower quantities of C3 and C4 chemicals and rising prices, in the midst of rising demand. We believe this trend will continue for the foreseeable future.

 

   

Cyclicality From Supply-Demand Imbalances Due to Increasingly Larger-Scale Manufacturing. To achieve production economies of scale, the chemical industry has historically and increasingly built large-scale manufacturing plants. These plants have typically required hundreds of millions of dollars in capital to build, with some basic chemical plants requiring billions of dollars in capital and four to five years of construction time. Given the significant investment required and the extended lead times for construction of such large plants, the chemical industry has historically struggled to accurately time its capacity expansion programs, which has contributed to supply and demand imbalances and the cyclical nature of the industry.

 

   

Consumer Demand for Greater Sustainability. We believe that many consumers, as well as manufacturers and the retailers that serve them, are increasingly interested in the environmental consequences of their purchases. Accordingly, we believe this increased demand for more sustainable products and materials results in increasing pressure on chemical makers to produce chemicals with a smaller environmental footprint.

 

Our Solution

 

We believe our technology addresses the challenges facing the chemical industry as follows:

 

   

Enables Renewable Feedstock Flexibility to Reduce Volatility. Our processes enable production of the exact same chemicals as petroleum-based processes using a range of renewable feedstocks rather than fossil-fuel feedstocks. We believe this will provide our partners greater feedstock flexibility, leading to lower and more consistent cost of inputs. We believe this is true not only of sugars from agricultural feedstocks, like corn, sugar beets, sugarcane and cassava, but also for other renewable feedstocks, such as sugars from cellulosic biomass and syngas from municipal solid waste, which can be sourced in a manner that may reduce commodity pricing risk.

 

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Increases Long-Term Supply of C3 and C4 Chemicals. We believe our technology will provide the chemical industry with an entirely different way to cost-effectively produce high-volume C3 and C4 chemicals that will reduce the long-term supply challenges and pricing volatility associated with the use of fossil-fuel feedstocks for their production. As a result, we believe we will be a strategically important potential partner to companies that produce or rely upon C3 or C4 chemicals. Further, because our processes produce the exact same intermediate and basic chemicals with better economics, we believe we are a better alternative for the industry and one which may allow our partners to lower their production costs.

 

   

Enables Smaller-Scale Production Plants with Better Economics. We expect that chemical production plants built to use our processes will provide superior capital efficiencies and lower operating costs compared to conventional petroleum-based chemical plants. In addition, the smaller the production capacity of the production plant, the more we expect our relative capital advantage to increase compared to conventional plants of the same size. We expect these increased efficiencies and reduced capital intensity to enable us to build economically advantaged production plants at a smaller scale than conventional production plants. We believe these characteristics will allow our partners to more quickly, cost effectively and precisely match supply and demand with lower capital requirements.

 

   

Results in More Sustainable Products. Because our processes use renewable feedstocks, have lower greenhouse gas emissions and use less energy, the downstream products ultimately derived from our processes should have a smaller environmental footprint than products manufactured using chemicals made from conventional petroleum-based manufacturing processes. For example, we believe our first BDO production process will result in approximately 70% less CO2 emissions and use up to 60% less energy than conventional petroleum-based manufacturing processes.

 

Our Competitive Strengths

 

We believe the following combination of capabilities and strengths distinguishes us from our potential competitors:

 

   

Differentiated Proprietary Biotechnology Platform Targeting Exact Same Chemicals. We have developed a proprietary biotechnology platform that lets us create multiple processes for numerous existing high-volume chemicals quickly. From an early stage, our platform’s capabilities were both extended and validated in projects with industry leaders and over 30 research grants from federal government funding agencies. Our technology platform facilitates the renewable feedstocks-based production of the exact same high-volume chemicals that are currently produced using fossil-fuel feedstocks. By exact same chemicals, we mean that the chemicals produced by our processes meet the same industry specifications and have the same chemical structure as those produced by conventional petroleum-based processes. We believe producing the exact same chemicals, which can be mixed with petroleum-based chemicals if desired, will reduce sole sourcing concerns and facilitate relatively fast vendor qualification and integration of those chemicals into standard purchasing cycles. Our platform has been a key driver in developing what we believe to be market-leading economics for our BDO production process in an accelerated timeframe. Based on the capabilities of our platform, we were awarded the 2011 EPA Presidential Green Chemistry Challenge Award for the “Production of High- Volume Chemicals from Renewable Feedstocks at Lower Cost.” The 2010 winners in our category were BASF Corporation, or BASF, teamed with The Dow Chemical Company, or Dow. We believe we will be able to continue to rapidly develop and deliver multiple processes for numerous chemicals using our platform in a capital-efficient manner.

 

   

Cost-Advantaged Production. We believe chemical production plants designed to use our production processes will cost less to build and operate and will have better economics at smaller scales than similar-sized conventional production plants. We estimate that a BDO production plant designed to use our process will cost 30% to 60% less to build than a similar-sized plant using the primary conventional competing process. Furthermore, we believe our renewable feedstock inputs and

 

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processes will result in significantly lower production costs than conventional petroleum-based manufacturing alternatives. We expect these cost advantages to increase over time given long-term fossil-fuel feedstock projected price increases, coupled with potential improvements in our processes and our planned introduction over time of the use of projected lower cost feedstocks, such as sugars from cellulosic biomass and syngas from municipal solid waste.

 

   

Partnerships with Industry Leaders. As a result of our biotechnology platform and our ability to deliver a sustainable, economically-advantaged solution for the production of chemicals using a broad range of renewable feedstocks as inputs to our processes, we have been able to attract key industry partners in our markets. For example, we are operating the first demonstration-scale BDO-production plant that uses renewable feedstocks in partnership with Tate & Lyle in the United States with the potential for commercial-scale production in North America pursuant to a contemplated joint venture agreement. We currently also have a non-binding memorandum of understanding with Mitsubishi Chemical and a non-binding letter of intent with Novamont for the commercial production of BDO in Asia and Europe, respectively. In addition to our BDO-focused partnering arrangements, we have established partnering arrangements to accelerate the potential use of additional renewable feedstocks. For example, we have partnered with M&G and intend to integrate their proprietary process to convert cellulosic biomass into fermentable sugars with our proprietary process to convert those sugars into chemicals. Further, we have partnered with Waste Management for the conversion of syngas to chemicals with a particular focus on syngas that can be generated from municipal solid waste.

 

   

Capital Efficiency. We believe that the relatively lower cost of building plants designed to use our processes, coupled with our partnering strategy and future licensing arrangements will allow us to accelerate the commercialization of our production processes using substantially less of our capital than if we were to pursue a model to build, own and operate these production plants ourselves. We expect this to provide us with greater business flexibility to deploy multiple manufacturing processes for numerous target chemicals in parallel. Additionally, with our proprietary technology platform, we believe these processes can be designed, developed and scaled in a more rapid timeframe and in a less resource-intensive manner than conventional approaches.

 

   

Significant Feedstock Flexibility. We believe the ability to produce intermediate and basic chemicals from multiple renewable feedstocks, such as conventional sugars, sugars from cellulosic biomass, or syngas from a variety of sources, will provide us and our partners with significant business flexibility. We expect our process technology will allow us and our partners to achieve better economics in part as a result of a more diversified set of feedstock options compared to the fossil-fuel feedstocks used in conventional petroleum-based manufacturing processes.

 

   

Intellectual Property Position. As of August 15, 2011, we owned or had licensed rights to 23 issued patents and 206 pending patent applications in the United States and in various foreign jurisdictions, in addition to our trade secrets and other intellectual property rights. These issued patents and pending patent applications cover not only the chemical production processes that we are developing or may pursue in the future, but also certain of the underlying technologies used to develop our processes.

 

   

Management Team with Extensive Industry Experience. Our management team brings over 100 years of combined operations, technology, partnering and licensing experience in the chemical and other technology industries, including at large global chemical companies such as Dow, E.I. du Pont de Nemours and Company, or DuPont, International Specialty Products, Inc., or ISP, and LyondellBasell Industries N.V., or LyondellBasell. In addition, members of our management team have significant biotechnology experience and have been deeply involved in the development, scale-up and commercialization of numerous bio-based products at both growth-stage and well-established companies.

 

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Our Strategy

 

Our strategy is to drive transformation of the chemical industry by enabling global production of a wide range of intermediate and basic chemicals using renewable feedstocks to enable greater profitability and sustainability for the industry. The key elements of our strategy include:

 

   

Focus on Intermediate and Basic Chemicals. We target multiple intermediate and basic chemicals, each of which has an existing market in the billions to tens of billions of dollars per year. Our initial focus has been to commercialize our processes for intermediate chemicals, and we are now leveraging our technology platform to pursue in parallel the commercialization of processes for higher-volume basic chemicals, as well as additional intermediate chemicals.

 

   

Execute on the Global Commercialization of our BDO Process. We intend to use a selective approach to partnering and establish joint ventures for the production of our first target chemical, BDO, in major markets, including North America, Europe and Asia. By employing a joint venture-based model, we intend to leverage our industry partners to reach consumers of major downstream applications of BDO.

 

   

Leverage our Technology Platform to Create Multiple Chemical Production Processes. With our proprietary biotechnology platform and intellectual property base, we plan to develop production processes targeting other chemicals in addition to BDO, including our second target chemical, butadiene. Our intellectual property currently targets processes to produce over 20 intermediate and basic chemicals. We apply a rigorous internal process for assessing and prioritizing opportunities on an ongoing basis, taking into consideration factors such as market size and growth, market structure, technology considerations, intellectual property, competitive environment, pricing and, in some cases, the active support or opportunity for funded development from market leaders for a chemical product coupled with their potential commercialization commitments.

 

   

Partner with Industry Leaders to Accelerate Commercialization. We intend to partner with industry leaders across entire product supply chains to accelerate development and commercialization of our production processes in a capital-efficient manner. We believe this will allow for the rapid deployment of multiple production plants, while allowing us to develop multiple process technologies in parallel. Generally, we seek to commercialize our manufacturing processes by pursuing joint ventures. In lieu of this joint venture approach or as a follow-on to our initial joint ventures, we may employ licensing arrangements to accelerate commercialization of our manufacturing processes. We believe this strategy element will allow us to grow quickly using less of our own capital and will generate higher earnings for us and our partners.

 

   

Improve Margins by Introducing Lower Cost Feedstocks. We believe we can deliver attractive margins using conventional sugars as the feedstocks for our processes. In addition, we are developing the technology and processes to use feedstocks projected to have even lower costs, such as sugars from cellulosic biomass and syngas from municipal solid waste. These next generation feedstocks have the potential to further improve the margins realized using our processes, reduce feedstock price volatility and add increased global feedstock flexibility for us and our partners.

 

Our Approach

 

We intend to create, develop and deliver manufacturing processes that sustainably produce high-volume intermediate and basic chemicals on a commercial scale with better economics and a smaller environmental footprint than conventional petroleum-based processes. We have created an award-winning technology platform that harnesses biotechnology to engineer microorganisms that convert renewable feedstocks into target chemicals as a key part of our manufacturing processes. Leveraging our proprietary predictive modeling and computation, we first design processes to produce our target chemicals by discovering highly efficient biochemical pathways to make the chemical from specific feedstocks of interest and then use simulations designed to select the most effective microorganisms in which to implement those pathways. We then design the rest of the production process to ensure the chemical being generated will meet the industry specifications for product purity and

 

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performance at competitive production costs. Using our advanced laboratory technology and process engineering, tightly integrated with our computational technologies, we can rapidly prototype and develop a process in the laboratory that can then be scaled up to pilot, demonstration and commercial production. Our process engineering capabilities support this scale-up effort and lead to the generation of a Basic Engineering Package, or BEP, that provides the details for building commercial-scale manufacturing plants using our process technology. By partnering with industry leaders across product supply chains, we believe we can accelerate development and commercialization of our manufacturing processes in a capital-efficient manner that not only will allow us with our partners to deploy multiple target chemical production plants, but will also allow us to develop multiple process technologies in parallel.

 

The chemicals we choose to target are intermediate and basic chemicals that are at the core of the chemical industry, all with large, well-defined established markets and clear product specifications. Within this segment of chemicals, we prioritize our targets based on a combination of market, business and technical considerations. We do not target the production of new polymers or chemicals that do not already have large, well-defined established markets and that would require lengthy timelines to build such markets. Instead, we primarily target markets with existing chemical product demand of over two billion pounds per year. These markets are currently served by an established base of conventional chemical production companies whose operating costs serve as benchmarks for us to deliver cost-competitive process technologies from an entirely different class of feedstocks. Focusing on these large, well-defined established markets enables us to substantially reduce market risk and instead focus on our core competency of leveraging our technology platform to deliver economically advantaged and sustainable production processes.

 

We are enabling a range of renewable feedstocks for use in the manufacturing of numerous existing intermediate and basic chemicals, including conventional sugars, sugars from cellulosic biomass, and syngas from municipal solid waste. Our approach is to deliver flexibility in the choice of feedstocks. We continuously strive to lower the production costs for us and our industry partners through the introduction of lower cost raw materials and incremental process improvements. This flexibility is designed to enable the optimal choice of feedstock for further reductions in production cost.

 

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The interplay between feedstocks, production processes, chemicals and our technology platform that drives innovation is shown below.

 

LOGO

 

Our Initial Market Opportunities

 

We are focused on major intermediate and basic chemicals at the core of the $3.0 trillion global chemical market, and which serve as the starting point for production of most other major chemicals and materials. These chemicals have traditionally been produced using fossil-fuel feedstocks and their prices tend to closely follow crude oil prices. Intermediate and basic chemicals represent a major market opportunity in the global chemical industry, which along with inorganic chemicals, fertilizers and other derivatives and basic industrials, account for up to 37% of total revenue, or $1.1 trillion. The intermediate chemical segment is comprised of roughly 30 chemicals, each with an average market size of $9.2 billion. The basic chemical segment is comprised of seven basic chemicals, each with an average market size of $37.6 billion. We believe that we have identified a differentiated market opportunity to enable the production of many of these chemicals using our biotechnology to deliver better economics, enhanced sustainability and a reduced environmental footprint. Key features of this differentiated opportunity include:

 

   

Intermediate and Basic Chemicals. The chemicals we choose to target are existing intermediate and basic chemicals that are at the core of the chemical industry, all with large, well-defined established markets in the billions to tens of billions of dollars per year. While we believe success in deploying our process for any one chemical would build a sizable business, we intend to pursue multiple chemical product markets. We have successfully applied our technology platform to the exploration of over 20 high-volume intermediate and basic chemicals and have discovered and defined pathways that can enable economic production of many of those chemicals through specially-engineered microorganisms and the use of renewable feedstocks.

 

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Exact Same Chemicals as Produced by Petroleum-Based Processes. Our processes enable the production of the exact same chemicals that meet the same specifications as those produced by conventional petroleum-based processes. By exact same chemicals, we mean that the chemicals produced by our processes meet the same industry specifications and have the same chemical structure as those produced by conventional petroleum-based processes. We believe producing the exact same chemicals, which can be mixed with petroleum-based chemicals if desired, will reduce vendor sole sourcing concerns and facilitate relatively fast vendor qualification and integration of those chemicals into standard purchasing cycles.

 

1,4-Butanediol (BDO)

 

Our first commercial manufacturing process targets BDO. We believe we are the only company currently producing BDO from renewable feedstocks at demonstration scale. BDO is an intermediate C4 chemical used in the production of everyday products, such as athletic apparel (spandex), running shoes (urethane foams), and electronics and automotive applications (engineering thermoplastics). According to IHS, worldwide BDO market demand in 2009 was approximately 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices. We are currently producing BDO at demonstration scale and intend to begin high-volume production along with our partners by the end of 2012, with large-scale plants of 100 million pounds or greater in the United States, Europe and Asia projected to begin production in 2014 and 2015. Based on performance achieved at laboratory, pilot and demonstration scale, we believe our BDO manufacturing process would be economically advantaged at commercial scale as compared to conventional petroleum-based production processes. This is motivating our targeted initial commercialization of our BDO manufacturing process by the end of 2012. We have also identified potential approaches for greater margins in the future through feedstock diversification and improved process performance.

 

Butadiene

 

Our second commercial manufacturing process targets butadiene. Butadiene is a basic C4 chemical used in a variety of products, such as tires, carpeting and latex products. According to Nexant, the global butadiene demand in 2011 is forecasted to be over 20 billion pounds, which equates to a market size of approximately $40 billion based on June 2011 prices. As with BDO made using our process technology, this butadiene is the exact same chemical as the butadiene produced from conventional petroleum-based manufacturing processes. Though we are still at a relatively early stage in the development of our butadiene-production process technology, based on our technology platform and our current manufacturing processes, we believe our process technology will be able to economically produce butadiene on a commercial scale. As with BDO, we have also identified potential approaches for greater margins in the future through feedstock diversification and improved process performance for butadiene.

 

Other Intermediate and Basic Chemicals

 

Over 20 additional intermediate and basic chemicals are in our pipeline of potential manufacturing processes, allowing us to continually expand our market opportunities. We apply a rigorous process internally for assessing and prioritizing opportunities on an ongoing basis. Factors include market size and growth, market structure, technology considerations, intellectual property, competitive environment, pricing and, in some cases, the active support or opportunity for funded development from market leaders for a chemical product coupled with their potential commercialization commitments. Opportunities are managed and reviewed through an explicit stage-gate process, with specific criteria required to pass to the next stage of investment in process development activities.

 

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Feedstocks

 

Feedstocks represent the most significant variable cost in petroleum-based chemical manufacturing. As we expect the cost of renewable feedstocks to have a similarly significant role in the production of chemicals using our processes, we have focused and continue to focus substantial effort in optimizing our technology to achieve the most cost-efficient use of a wide range of renewable feedstocks. We have substantial intellectual property, as well as key partnerships to address the three main categories of renewable feedstocks we are enabling in our production processes: conventional sugars, sugars from cellulosic biomass and syngas.

 

   

Conventional Sugars. We expect to deliver better economics than conventional petroleum-based production plants for our initial BDO-production plants, which will be based on conventional sugars, such as sucrose from sugarcane or sugar beets, and dextrose from corn or cassava. We consider these to be conventional sugars, as they have well-established global supply chains with established pricing. For conventional sugars, we have partnered with Tate & Lyle in North America, which converts corn into dextrose sugar. Together with Tate & Lyle, we are producing BDO at a plant located at an industrial site owned by Tate & Lyle in Decatur, Illinois using dextrose sugar from their co-located commercial corn wet mill. Additionally, we have entered into a non-binding letter of intent with Novamont and a non-binding memorandum of understanding with Mitsubishi Chemicals for the production of BDO in Europe and Asia, respectively, and plan to use conventional sugar feedstocks from other supply partners in the production processes.

 

   

Sugars From Cellulosic Biomass. We are developing a proprietary process for the production of BDO from sugars derived from herbaceous biomass, such as energy cane, switchgrass, miscanthus, corn stover, wheat straw and other plant matter. We have partnered with M&G, which operates a biomass plant in Rivalta, Italy at demonstration scale using the PROESA technology of their wholly-owned subsidiary, Chemtex Italia S.r.l., or Chemtex, for converting cellulosic biomass into fermentable sugars. Based on this demonstration, M&G is currently building one of the world’s largest cellulosic biorefineries in Crescentino, Italy, initially designed to convert cellulosic biomass into fermentable sugars and then into ethanol at a scale of over 100 million pounds per year. We are currently working with M&G to convert the existing demonstration plant in Rivalta to become what we expect will be the first biomass-to-chemicals demonstration plant for BDO by converting the biomass-derived sugars into BDO using our BDO manufacturing process. We expect to achieve this by the end of 2012. We expect to obtain exclusive rights to the use of PROESA technology for the production of BDO via any production process. In addition, in June 2011, we were selected for an award from the U.S. Department of Energy with a potential value of up to $5.0 million to develop processes for the production of BDO from cellulosic biomass.

 

   

Syngas. We believe the ability to produce chemicals biologically from syngas as a feedstock represents potentially the most economically attractive production method, as syngas has the potential to be the least expensive feedstock for the carbon, oxygen and hydrogen needed to make organic chemicals. In December 2010, we entered into an agreement with Waste Management to collaborate on the development of processes to produce chemicals from syngas. Pursuant to this agreement, we will endeavor to create proprietary, specially-designed microorganisms and production processes to efficiently and economically convert syngas into certain chemical products, and Waste Management has agreed to provide significant funding for this collaboration.

 

Industry Partners

 

We are focused on being the technology leader for, and preferred partner to, major companies in the global chemical industry. These companies span the supply chain and include feedstock suppliers, current chemical producers, downstream chemical consumers and downstream producers of plastics, other materials and consumer goods. We believe our strategy of working with industry leaders will allow us to more rapidly commercialize our production processes and grow faster, more profitably and with lower capital needs than a “build-own-operate” model for the target chemicals that we pursue.

 

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We intend to commercialize the chemicals made using our production processes through a combination of joint venture and licensing arrangements, which we believe will enable higher earnings with lower capital investments by us and lower ongoing costs. For most target chemicals, we currently expect initial partnering arrangements to take the form of joint ventures. In lieu of this joint venture approach or as a follow-on to our initial joint ventures, we may employ licensing arrangements to accelerate commercialization of our manufacturing process for target chemicals and processes. For joint ventures, we expect to contribute the value of our proprietary process technology, as well as capital in certain circumstances, to gain ownership in the venture, enabling us to share in the profits generated from the sales of the resulting chemicals produced with our processes. Our ownership stake in joint ventures will depend on factors that include the negotiated value of the license to our process technology for a production plant and our capital contribution. Our role in the joint venture will also vary, depending on the partner in the joint venture. For instance, we may partner with a company that purchases a majority of the chemical output of the plant, in which case our role in managing and placing product off-take is minimal, whereas in other circumstances we may drive the off-take relationships if we partner exclusively with a feedstock provider. In some instances our capital contributions may be significant. In the instances when we choose to invest capital, because we also contribute the value of our process technology, we would expect to receive a higher percentage of the earnings stream compared to the percentage of capital we contribute to the joint venture.

 

We believe the reduced amount of capital typically required of us will enable a substantially faster rollout of production plants designed to use our process technologies and that the speed at which these rollouts will be accomplished will therefore be tied largely to market demand and growth, our cost advantages and our speed in formalizing new ventures. Moreover, we have the flexibility to structure a wide range of agreements within this model to match the needs of different partners in different geographies.

 

We believe our strategy to enter into joint development agreements with industry partners enables us to accelerate the development and scale-up of manufacturing processes in our pipeline and our feedstock development strategy. These agreements have allowed us, and are expected in the future to allow us, to leverage capabilities and assets of potential commercialization partners and/or utilize increased financial resources available for the development of specific production processes in exchange for certain commercialization rights.

 

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To date, we have announced the following relationships related to development, financing and production of chemicals using our production processes:

 

Partner

 

Feedstock(s)

 

Chemical(s)

 

Relationship

Tate & Lyle

 

Conventional sugar

  BDO     Joint development agreement
        Jointly operate plant at demonstration scale, with the potential for commercial-scale production in North America pursuant to a contemplated joint venture agreement
        Tate & Lyle to supply dextrose sugar feedstock for initial commercial-scale plant in North America

Novamont

  Conventional sugar and sugar from cellulosic biomass   BDO  

 

 

Letter of intent

 

Build first commercial-scale BDO industrial plant in Italy, with a capacity of approximately 40 million pounds per year, to begin production by the end of 2012; Novamont to provide all construction capital and consume all product off-take for captive use

        Potential to build second commercial-scale BDO plant in Italy, at substantially higher capacity to meet Novamont internal demand; Novamont to provide majority of construction capital and consume product off-take for captive use

Mitsubishi

Chemical

  Conventional sugar   BDO and undisclosed  

 

 

 

 

Memorandum of understanding

 

Explore commercial production of BDO in Asia

 

Explore production of additional chemicals

 

Strategic investment in our company

M&G

 

Sugar from cellulosic biomass

  Undisclosed  

 

 

Memorandum of understanding

 

Explore production of additional chemicals

Chemtex

  Sugar from cellulosic biomass   BDO  

 

 

Joint development agreement

 

Develop integrated process for sugar from cellulosic biomass to BDO at demonstration scale

        Right to enter into exclusive license to use PROESA process for BDO production

Waste

Management

  Syngas   Undisclosed  

 

 

Joint development agreement

 

Develop integrated process for syngas to a particular intermediate chemical

        Explore production of additional chemicals
        Strategic investment in our company

 

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We believe that a broader range of companies are candidates to build production plants using our process technology as compared to conventional petroleum-based plants and to accelerate market demand:

 

Type of Partner

 

Strategic Value to Partner

  

Example

Chemical manufacturer

 

 

Reduce costs, improve profitability

Diversify from crude oil/natural gas

Provide differentiated, sustainable chemicals and downstream derivatives

   Mitsubishi Chemical

Downstream chemical

customer

 

 

Develop additional source of supply in constrained market

Manage important inputs and price volatility

Reduce costs; improve profitability

Provide differentiated, sustainable downstream derivative products

   Novamont

Feedstock supplier

    Realize higher margins by participating in the manufacture and sale of higher value chemicals    Tate & Lyle

 

In addition, we are pursuing opportunities to partner with consumer product and brand manufacturers.

 

Our Technology Platform

 

The foundation underlying the development of our manufacturing processes is a proprietary platform consisting of a highly integrated collection of computational and advanced biotechnologies. This platform has been developed and advanced over ten years with the support of collaborations with global chemical companies and over 30 research grants from federal government funding agencies. Through the proprietary and integrated nature of this platform, we implement a new and differentiated paradigm for research and development: high throughput computational power to guide and inform highly focused and efficient testing and analysis. We refer to this as an integrated systems-based approach to metabolic engineering of microorganisms and the development of our manufacturing processes. The result is rapid prototyping of highly effective microorganisms and focused development of manufacturing processes to produce chemicals. We believe this approach yields faster product development cycles, reduced time to commercial-scale production, lower cost production and lower risk in the overall process. Moreover, our platform can be used to design processes starting from a broad range of input feedstocks to output chemicals using a variety of microorganisms and pathways designed from the start to optimize the production process with favorable economics.

 

   

Virtually All Pathways to Chemicals. We have discovered and defined a large collection of biochemical pathways that enable economic production of existing intermediate and basic chemicals through microorganisms engineered to route renewable feedstocks through these pathways and transform them into the target chemical. We believe our broad intellectual property coverage on both the collection of technologies that comprise the platform and specific biochemical pathways, microorganisms and processes that target over 20 chemicals provides barriers to entry for potential competitors. With our computational technologies we can assess the use of a wide range of feedstocks to make numerous chemicals from a range of industrial microorganisms through virtually all possible pathways. This is part of our integrated approach to metabolic engineering.

 

   

Range of Industrial Microorganisms. Once we select the pathways and microorganism to convert a given feedstock into a target chemical, we then use an integrated systems-based approach to genetically engineer a high-performance microorganism that redirects substantially all of its carbon and energy resources to maximize the production of a desired chemical. We have developed the capability to work with multiple microorganisms, which we believe allows us to choose the best host for producing a desired target chemical, regardless of whether the microorganism naturally produces the target

 

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chemical. The microorganism acts as a miniature biological factory or catalyst for the conversion of a feedstock to a chemical in a highly efficient manner. For example, our BDO production process has been enabled by our ability to engineer the first ever microorganisms to directly convert sugar into BDO. While our BDO production process uses a bacteria, Escherichia coli, or E. coli, our computational capabilities and laboratory setup have been designed and demonstrated to be effective with other microorganisms, including yeasts, which we use for certain other chemical targets that our processes are currently producing in the laboratory. Our microorganisms are then designed to produce industry-standard intermediate and basic chemicals with maximum yield and productivity.

 

   

Large IP Portfolio. We believe that our underlying technology platform encompasses a substantial collection of intellectual property, which has created a significant differentiated competitive advantage. As of August 15, 2011, we owned or had licensed rights to 23 issued patents and 206 pending patent applications in the United States and in various foreign jurisdictions, in addition to our trade secrets and other intellectual property rights. Our intellectual property currently targets processes to produce over 20 intermediate and basic chemicals, including our first target chemical, BDO, and our second target chemical, butadiene.

 

Our technology platform consists of a highly integrated collection of predictive computational and advanced biotechnologies, as well as process engineering and rapid proof-of-concept prototyping. The output of using this platform is the design, development and scale-up of production processes to convert renewable feedstocks into intermediate and basic chemicals that meet industry specifications.

 

The foundation of our platform encompasses four major core competencies, where we leverage both proprietary technologies and modern state-of-the-art techniques:

 

   

Predictive Computational Modeling and Simulation of Metabolism—for computer-aided design and analysis

 

   

Advanced Biotechnology—for metabolic engineering and high throughput screening

 

   

Process Engineering—for product recovery and purification to meet industry specifications and to increase production efficiency

 

   

Rapid Proof-of-Concept Prototyping—for fast, iterative design and testing

 

Our key to successfully leveraging these core competencies lies in the tight integration of these technologies into a highly effective and efficient research and discovery engine, coupled with a custom-built laboratory information management system, or LIMS, for efficient data analysis and seamless information flow to connect advanced laboratory technology and computational capabilities. The result is a new integrated systems-based approach for metabolic engineering and the development of manufacturing processes.

 

Predictive Computational Modeling and Simulation of Metabolism

 

We have designed a suite of proprietary computational technologies that are central to our integrated approach. These technologies are the basis upon which our company was founded. Key to our technology platform is our SimPheny computational system, designed and developed internally. SimPheny contains a collection of software programs and algorithms that enable high throughput computational modeling and simulation and prediction of metabolism and cellular phenotypes. Using SimPheny, we have created a well-established collection of predictive models of the metabolism in different industrial microorganisms. The metabolism or metabolic network and pathways of a microorganism consist of thousands of genes, enzymes and biochemical reactions that convert substrates or nutrients such as sugar into the molecules and energy required for the microorganisms to grow and survive. In this way, metabolism is the engine inside living cells that leads to the production of all molecules, including the chemical structures we target. Using our models of these microorganisms and their metabolisms, we can evaluate and choose precise points in these metabolic networks to

 

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modify in order to channel resources toward the production of target chemicals. We can also determine how to engineer the microorganisms to more efficiently use the feedstocks we are targeting for use in our commercial production processes. We believe this leads to selection and optimization of the best microorganisms.

 

We have also developed a proprietary set of algorithms that can be used to identify virtually all of the possible biochemical pathways or series of reactions that can result in the production of a target chemical independent of the microorganism into which we insert the pathway. In most cases, the most efficient pathways for converting feedstock into a target chemical do not already exist in the microorganism of interest, or as a complete pathway in any known microorganism. In these cases, we can use our technology to identify nearly all of the pathways to make a target chemical and the