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YIELD10 BIOSCIENCE, INC. - Quarter Report: 2009 June (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

 

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

 

 

 

For the quarterly period ended June 30, 2009

 

 

 

OR

 

 

 

o

 

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

 

For the transition period from                  to

 

Commission file number 001-33133

 

METABOLIX, INC.

 

Delaware

 

04-3158289

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

21 Erie Street
Cambridge, MA

 

02139

(Address of principal executive offices)

 

(Zip Code)

 

(617) 583-1700

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the registrant’s common stock as of August 3, 2009 was 23,011,137.

 

 

 



Table of Contents

 

Metabolix, Inc.

Form 10-Q

For the Quarter Ended June 30, 2009

 

Table of Contents

 

 

 

 

Page

Part I. Financial Information

 

3

 

 

 

 

Item

 

 

 

1.

Consolidated Financial Statements (Unaudited)

 

3

 

Consolidated Balance Sheets at June 30, 2009, and December 31, 2008

 

3

 

Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

 

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

 

5

 

Notes to the Consolidated Financial Statements

 

6

2.

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

 

16

3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

4.

Controls and Procedures

 

27

 

 

 

 

Part II. Other Information

 

28

 

 

 

 

Item

 

 

 

1.

Legal Proceedings

 

28

1A.

Risk Factors

 

28

2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

3.

Defaults Upon Senior Securities

 

30

4.

Submission of Matters to a Vote of Security Holders

 

30

5.

Other Information

 

30

6.

Exhibits

 

30

 

 

 

 

SIGNATURES

 

32

 

2



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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

METABOLIX, INC.

CONSOLIDATED BALANCE SHEETS

UNAUDITED

(in thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,314

 

$

26,194

 

Short-term investments

 

68,292

 

64,902

 

Accounts receivable

 

164

 

159

 

Due from related parties

 

752

 

 

Unbilled receivables

 

122

 

56

 

Prepaid expenses and other current assets

 

606

 

530

 

Total current assets

 

79,250

 

91,841

 

Restricted cash

 

593

 

593

 

Property and equipment, net

 

4,077

 

4,388

 

Other assets

 

96

 

124

 

Total assets

 

$

84,016

 

$

96,946

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

108

 

$

858

 

Accrued expenses

 

3,755

 

3,587

 

Current portion of deferred rent and other current liabilities

 

266

 

165

 

Total current liabilities

 

4,129

 

4,610

 

Deferred rent

 

634

 

717

 

Long-term deferred revenue

 

36,653

 

32,440

 

Other long-term liabilities

 

93

 

88

 

Total liabilities

 

41,509

 

37,855

 

Commitments and contingencies (Note 11)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock ($0.01 par value per share): 5,000,000 shares authorized, no shares issued or outstanding

 

 

 

Common stock ($0.01 par value per share); 100,000,000 shares authorized at June 30, 2009 and December 31, 2008; 23,000,361 and 22,962,628 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

 

230

 

230

 

Additional paid-in capital

 

191,040

 

188,532

 

Accumulated other comprehensive income

 

135

 

446

 

Accumulated deficit

 

(148,898

)

(130,117

)

Total stockholders’ equity

 

42,507

 

59,091

 

Total liabilities and stockholders’ equity

 

$

84,016

 

$

96,946

 

 

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

 

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Table of Contents

 

METABOLIX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

(in thousands, except share and per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenue:

 

 

 

 

 

 

 

 

 

Research and development revenue

 

$

24

 

$

11

 

$

30

 

$

79

 

License fee and royalty revenue from related parties

 

41

 

35

 

66

 

70

 

Grant revenue

 

283

 

355

 

513

 

656

 

Total revenue

 

348

 

401

 

609

 

805

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

Research and development expenses, including cost of revenue

 

6,323

 

6,008

 

12,331

 

11,942

 

Selling, general, and administrative expenses

 

3,938

 

4,048

 

7,652

 

8,145

 

Total operating expenses

 

10,261

 

10,056

 

19,983

 

20,087

 

Loss from operations

 

(9,913

)

(9,655

)

(19,374

)

(19,282

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income, net

 

241

 

730

 

593

 

1,909

 

Net loss

 

$

(9,672

)

$

(8,925

)

$

(18,781

)

$

(17,373

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.42

)

$

(0.39

)

$

(0.82

)

$

(0.76

)

 

 

 

 

 

 

 

 

 

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

22,995,026

 

22,787,087

 

22,985,297

 

22,717,913

 

 

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

 

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METABOLIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(18,781

)

$

(17,373

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,310

 

1,814

 

Charge for 401(k) company common stock match

 

279

 

212

 

Stock-based compensation

 

2,250

 

2,192

 

Gain on the sale of equipment

 

(70

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables (billed and unbilled)

 

(71

)

90

 

Due from related party

 

226

 

119

 

Prepaid expenses and other assets

 

(48

)

212

 

Accounts payable

 

(750

)

245

 

Accrued expenses

 

(215

)

(996

)

Deferred rent

 

(83

)

(80

)

Deferred revenue

 

3,336

 

5,302

 

Net cash used in operating activities

 

(12,617

)

(8,263

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of property and equipment

 

(655

)

(483

)

Proceeds from the sale of equipment

 

70

 

 

Purchase of short-term investments

 

(63,590

)

(62,188

)

Proceeds the from sale and maturity of short-term investments

 

59,891

 

69,685

 

Net cash provided by (used in) investing activities

 

(4,284

)

7,014

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from options and warrants exercised

 

21

 

664

 

Net cash provided by financing activities

 

21

 

664

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(16,880

)

(585

)

Cash and cash equivalents at beginning of period

 

26,194

 

22,686

 

Cash and cash equivalents at end of period

 

$

9,314

 

$

22,101

 

 

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

 

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Table of Contents

 

METABOLIX, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

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

 

1. BASIS OF PRESENTATION

 

The accompanying consolidated financial statements are unaudited and have been prepared by Metabolix, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position and results of operations for the interim periods ended June 30, 2009 and 2008.

 

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008, which are contained in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Subsequent Events

 

During the quarter ended June 30, 2009, the Company implemented Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations.  Events or transactions that occurred after June 30, 2009 up through August 5, 2009, the date the Company’s financial statements were filed with the SEC, were reviewed for subsequent event accounting and disclosure.  During this period we did not have any material recognizable subsequent events.

 

2. ACCOUNTING POLICIES

 

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

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

Effective January 1, 2009, the Company implemented Statement of Financial Accounting Standards No. 141(R), Business Combination, or SFAS 141(R). This standard requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in process research and development and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The adoption of this standard did not impact the Company’s financial position or results of operations as SFAS 141(R) is applicable to acquisitions completed after January 1, 2009 and the Company did not complete any business combination transactions during the first six months of 2009.

 

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In April 2009, the FASB issued the following new accounting standards:

 

·                  FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4. FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

 

·                  FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2, FAS 124-2, and EITF 99-20-2; FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

 

·                  FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements.

 

These standards are effective for periods ending after June 15, 2009. The adoption of these standards did not impact the presentation of the Company’s financial position or results of operations.

 

Recently Issued Accounting Standards

 

In June 2009, the FASB issued the following new accounting standards:

 

·                  SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166;

 

·                  SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS 167; and

 

·                  SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS 168

 

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

 

SFAS 167 amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine

 

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whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for all variable interest entities and relationships with variable interest entities existing as of January 1, 2010. The Company has not determined the effect that the adoption of SFAS 167 will have, if any, on its financial position or results of operations.

 

SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with GAAP. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of this standard to have an impact on its financial position or results of operations.

 

4. COMPREHENSIVE LOSS

 

Comprehensive loss is comprised of net loss and net unrealized gains or losses on marketable securities. Total comprehensive loss for the three and six months ended June 30, 2009 and 2008 is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June, 30

 

 

 

2009

 

2008

 

2009

 

2008

 

Net loss

 

$

(9,672

)

$

(8,925

)

$

(18,781

)

$

(17,373

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

(145

)

(353

)

(311

)

(192

)

Total other comprehensive income

 

(145

)

(353

)

(311

)

(192

)

Comprehensive loss

 

$

(9,817

)

$

(9,278

)

$

(19,092

)

$

(17,565

)

 

5. BASIC AND DILUTED NET LOSS PER SHARE

 

In accordance with SFAS No. 128, Earnings Per Share, basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and warrants outstanding during the period that were previously issued for little or no consideration, excluding the dilutive effects of common stock equivalents. Common stock equivalents include stock options and certain warrants. Diluted net loss per share is computed by dividing net loss by the weighted-average number of dilutive common shares outstanding during the period. Diluted shares outstanding is calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock from outstanding stock options and warrants based on the treasury stock method. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported the calculation of basic and dilutive loss per share results in the same value.

 

The number of shares of potentially dilutive common stock related to options and warrants that were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive for the three and six months ended June 30, 2009 and 2008, respectively, are shown below:

 

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Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Options

 

3,032,506

 

2,385,352

 

3,032,506

 

2,385,352

 

Warrants

 

4,086

 

4,086

 

4,086

 

4,086

 

Total

 

3,036,592

 

2,389,438

 

3,036,592

 

2,389,438

 

 

In January 2009, the Company implemented FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, or FSP EITF 03-6-1. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company’s awards do not have nonforfeitable rights to dividends or dividend equivalents and therefore the adoption of FSP EITF 03-6-1 did not impact its financial statements.

 

6. STOCK-BASED COMPENSATION

 

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123(R). Under the provisions of SFAS 123(R), compensation cost recognized for the three and six months ended June 30, 2009 and 2008 included compensation cost for stock options granted to employees subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R) and recognized over the vesting period of the applicable award on a straight-line basis. The effect of SFAS 123(R) for the three and six months ended June 30, 2009 was an expense of $1,216 and $2,323. The corresponding increase in basic and diluted net loss per share for the three and six months ended June 30, 2009 was $0.05 and $0.10. The effect of SFAS 123(R) for the three and six months ended June 30, 2008 was an expense of $1,108 and $2,334. The corresponding increase in basic and diluted net loss per share for the three and six months ended June 30, 2008 was $0.05 and $0.10. There is no expense recorded for options which were granted prior to January 1, 2006 under the minimum value method if the exercise price was equal to the fair value of common stock and the measurement date was fixed at the time of grant.

 

A summary of option activity for the six months ended June 30, 2009 and 2008 is as follows:

 

 

 

2009

 

2008

 

 

 

Number of

 

Weighted Average

 

Number of

 

Weighted Average

 

 

 

Shares

 

Exercise Price

 

Shares

 

Exercise Price

 

Outstanding at December 31,

 

2,646,765

 

$

11.59

 

2,151,784

 

$

10.70

 

Granted

 

424,785

 

7.24

 

720,700

 

12.52

 

Exercised

 

(11,220

)

1.86

 

(291,053

)

2.32

 

Cancelled

 

(27,824

)

17.64

 

(196,079

)

14.39

 

Outstanding at June 30,

 

3,032,506

 

10.96

 

2,385,352

 

11.97

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at June 30,

 

1,573,875

 

 

 

1,118,881

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average grant date fair value of options granted during the six months ended June 30,

 

 

 

$

4.89

 

 

 

$

7.40

 

 

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

 

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Six Months Ended

 

 

 

June 30,

 

 

 

2009

 

2008

 

Expected dividend yield

 

 

 

Risk-free rate

 

1.67% - 2.56%

 

2.71% - 3.68%

 

Expected option term (in years)

 

5.41

 

6.1

 

Volatility

 

81%

 

61%

 

 

Non-employee Stock Option Awards

 

The compensation expense related to non-employee stock options is generally recognized over a period of four years. The grants generally vest quarterly and such vesting is contingent upon future services provided by the consultants to the Company. The Company recorded a consultant related stock-based compensation expense of $15 for the three months ended June 30, 2009 and recorded a benefit of $73 for the six months ended June 30, 2009.  The Company recorded consultant related stock-based compensation expense of $3 for the three months ended June 30, 2008 and recorded a benefit of $142 for the six months ended June 30, 2008. Options remaining unvested for non-employees are subject to remeasurement each reporting period prior to vesting in full. Since the fair market value of the options issued to non-employees are subject to changes in the future, the compensation expense recognized in each quarter may not be indicative of future compensation charges.

 

7. SIGNIFICANT COLLABORATION

 

Effective in the quarter ended March 31, 2009, the Company implemented EITF No. 07-1, Accounting for Collaborative Arrangements, or EITF 07-1, which prescribes that certain transactions between collaborators be recorded in the income statement on either a gross or net basis, depending on the characteristics of the collaboration relationship, and provides for enhanced disclosure of collaborative relationships. In accordance with EITF 07-1, the Company evaluated its collaborative agreements for proper income statement classification based on the nature of the underlying activity. If payments to and from collaborative partners are not within the scope of other authoritative accounting literature, the income statement classification for the payments is based on a reasonable, rational analogy to authoritative accounting literature that is applied in a consistent manner. Amounts due from collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to the Company’s operations. For collaborations with commercialized products, if the Company is the principal, as defined in EITF No. 99-19, Reporting Revenue as a Principal versus Net as an Agent, or EITF 99-19, it records revenue and the corresponding operating costs in the respective line items within the statement of operations. If the Company is not the principal, it records operating costs as a reduction of revenue. EITF 99-19 describes the principal as the party who is responsible for delivering the product or service to the customer, has latitude with establishing price, and has the risks and rewards of providing product or service to the customer, including inventory and credit risk. The adoption of EITF 07-1 did not affect the financial position or results of operations of the Company.

 

ADM Agreement

 

On November 3, 2004, the Company signed an agreement with ADM Polymer Corporation (“ADM”), a subsidiary of Archer Daniels Midland Company, to establish an alliance whereby the Company would provide technology and licenses thereto and research and development services, and ADM would provide manufacturing services and capital necessary to produce MirelTM biobased plastic on a commercial scale basis. This agreement was amended by the parties on September 8, 2005 to define certain cost sharing activities related to pre-commercial manufacturing, to change certain milestones and to make other minor modifications.

 

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On July 12, 2006, ADM exercised an option to enter into a commercial alliance for further research, development, manufacture, use and sale of Mirel on the terms and conditions set forth in the Commercial Alliance Agreement.

 

Commercial Alliance Agreement

 

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

 

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

 

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

 

The Commercial Alliance Agreement called for Telles to pay the Company twelve quarterly support payments of $1,575 each during the period of construction of the Commercial Manufacturing Facility. The last of the twelve quarterly support payments was received in December 2008. In January 2009 Telles agreed to provide the Company with two additional quarterly payments of $1,575, both of which were received as of June 30, 2009. As of June 30, 2009, all quarterly support payments received from ADM on behalf of Telles, totaling $22,050, have been recorded as deferred revenue on the Company’s balance sheet and the Company will continue to defer recognition of these and future payments received from ADM during the Construction Phase of the agreement.

 

During the Construction Phase of the agreement all pre-commercial material production expenses incurred by ADM and the Company are shared equally. Accordingly, from the execution of this agreement in July 2006 through June 30, 2009, ADM has reimbursed the Company $7,675. All amounts received from ADM, prior to the Commercial Phase, relating to this agreement are recorded as deferred revenue.

 

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

 

While Telles is a fifty-fifty joint venture, ADM will be advancing a disproportionate share of the financial capital needed to construct the Commercial Manufacturing Facility and to fund its activities. Therefore, a preferential distribution of cash flow will be used, whereby all profits (after payment of all royalties, reimbursements and fees) from Telles will be distributed to ADM until ADM’s disproportionate investment in the alliance has been returned in full. Once ADM has recovered such amounts, the profits of Telles will be distributed in equal amounts to the parties.

 

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

 

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

 

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

 

8. INCOME TAXES

 

The Company adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007 with no effect on financial position. In addition, the Company has no amounts recorded for any unrecognized tax benefits as of June 30, 2009 or June 30, 2008.

 

The tax years 2005 through 2008 remain open to examination by federal and state taxing jurisdictions to which the Company is subject, which are primarily in the U.S.

 

The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2009, and December 31, 2008, respectively, the Company had no accrued interest or penalties recorded related to uncertain tax positions.

 

At December 31, 2008 the Company had net operating loss carryforwards (NOLs) for federal and state income tax purposes of $62,855 and $47,603, respectively.  Included in the federal and state net operating loss carryforwards is approximately $16,500 of deduction related to the exercise of stock options subsequent to the adoption of FAS 123(R). This amount represents an excess tax benefit as defined under FAS 123(R) and has not been included as part of the gross deferred tax asset. The Company’s federal and state net operating loss carryforwards began to expire in 2009. The Company also had available research and development credits for federal and state income tax purposes of $2,743 and $2,217 respectively. The federal and state research and development credits will begin to expire in 2012 and 2015, respectively. As of December 31, 2008 the Company also had available investment tax credits for state income tax purposes of $92 which began to expire in 2009. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets.

 

Utilization of NOLs and Research & Development, or R&D, credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 and 383 of the Internal Revenue Code of 1986, as well

 

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as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. The Company is conducting a study to assess whether there have been multiple changes of control since the Company’s formation. If the Company has experienced a change in control at any time since the Company’s formation, utilization of the Company’s NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 and 383. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being presented as uncertain tax positions under FIN 48.

 

9. ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following at:

 

 

 

June 30, 2009

 

December 31, 2008

 

Employee compensation and benefits

 

$

1,604

 

$

1,618

 

Pre-commercial manufacturing costs

 

294

 

350

 

Professional services

 

283

 

206

 

Contracted research and development

 

248

 

317

 

Other

 

1,326

 

1,096

 

Total accrued expenses

 

$

3,755

 

$

3,587

 

 

10. SEGMENT INFORMATION

 

The Company operates in one segment. There have been no changes in the segment information since the fiscal year ended December 31, 2008, as described in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

11. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

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

 

License Agreement with Massachusetts Institute of Technology (“MIT”)

 

The Company’s exclusive license agreement with MIT requires the Company to pay annual license fees of $25 and additional potential royalty payments to MIT based on a percentage of sublicensing revenue or net sales of products or services covered by patents that are subject to the license. As of June 30, 2009, and December 31, 2008, the Company had accrued $4 and $2, respectively, for license fees and royalties attributable to this agreement.

 

Joint Research Agreement with The Cooperative Research Centre for Sugar Industry Innovation through Biotechnology

 

The Company entered a joint research arrangement, known as the Cooperative Research Centre for Sugar Industry Innovation through Biotechnology, with the Commonwealth of Australia and various other

 

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parties for the purpose of developing and gaining access to certain intellectual property. The Commonwealth of Australia established the program to enhance the transfer of research outputs into commercial or other outcomes of economic, environmental or social benefit to Australia. The terms of the contract stipulate that the contract commenced on January 1, 2007, and the Company’s funding obligation continues until July 1, 2010. In connection with this agreement the Company was obligated at the beginning of the contract to provide funding in the form of cash in the amount of $805 Australian dollars and in kind contribution in the amount of $2,287 Australian dollars. As of June 30, 2009 the remaining cash portion of the Company’s obligation, denominated in U.S. dollars, is $185 and the total remaining amount of in kind contribution the Company is committed to is $546, denominated in U.S. dollars. The in kind contribution consists of salaries and overhead attributable to research associated with the joint research agreement. The cash and in kind contributions are recorded as research and development expense as incurred, in the consolidated statement of operations.

 

12. FAIR VALUE MEASUREMENTS

 

In accordance with Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157, the Company’s assets and liabilities are measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

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

 

 

 

Fair value measurements at reporting date using

 

 

 

 

 

Quoted prices in
active markets for

 

Significant other

 

Significant unobservable

 

 

 

 

 

identical assets

 

observable inputs

 

inputs

 

Balance as of

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

6/30/09

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money Market funds

 

$

 

$

6,125

 

$

 

$

6,125

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Treasuries

 

 

767

 

 

767

 

Commercial paper

 

 

6,498

 

 

6,498

 

Government-sponsored enterprises

 

 

61,027

 

 

61,027

 

 

 

$

 

$

74,417

 

$

 

$

74,417

 

 

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

 

 

 

Fair value measurements at reporting date using

 

 

 

 

 

Quoted prices in active markets for identical

 

Significant other

 

Significant
unobservable

 

 

 

 

 

assets

 

observable inputs

 

inputs

 

Balance as of

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

12/31/08

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money Market funds

 

$

 

$

23,152

 

$

 

$

23,152

 

Commercial paper

 

 

1,100

 

 

1,100

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Treasuries

 

 

4,000

 

 

4,000

 

Commercial paper

 

 

23,497

 

 

23,497

 

Government-sponsored enterprises

 

 

37,405

 

 

37,405

 

 

 

$

 

$

89,154

 

$

 

$

89,154

 

 

Short-term investments were valued at June 30, 2009 using information provided by a pricing service based on market observable information, or for investments in money market funds, at calculated net asset values, and are therefore classified as Level 2. Because the Company’s investment portfolio may include securities that do not always trade on a daily basis, the pricing service applies other available

 

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information as applicable through processes such as benchmark yields, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. The Company validates the prices provided by a third party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. The fair values of the Company’s cash equivalents and short-term investments are determined through market and observable sources and have been classified as Level 2. After completing the validation procedures, the Company did not adjust or override any fair value measurements provided by its pricing services as of June 30, 2009 and December 31, 2008.

 

In January 2009, the Company implemented SFAS 157 for its nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. The adoption of SFAS 157 for its nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not have a significant impact on the Company’s financial statements.

 

13. CHANGE IN ACCOUNTING ESTIMATE

 

In the first quarter of 2009, due to an extended construction period and revised estimated completion date of the Commercial Manufacturing Facility, the Company determined it would extend the period of use of its pre-commercial manufacturing plant by six months to December 2009 from June 2009. In connection with this, the useful lives of the leasehold improvements connected to the pre-commercial manufacturing plant were increased by six months. This change in accounting estimate was adopted prospectively from January 1, 2009. The effect of the change in accounting estimate on the financial statements for the three and six months ended June 30, 2009 is a decrease in loss from operations and net loss of $354 and $708, respectively. Loss per share decreased by $0.02 and $0.03 for the three and six months ended June 30, 2009.

 

14. RELATED PARTIES

 

The Company recorded $41 and $66 of license and royalty revenue from Tepha, Inc., a related party, during the three and six months ended June 30, 2009. During the three and six months ended June 30, 2008 the Company recorded license and royalty revenue from Tepha, Inc. of $35 and $70, respectively. The Company had an outstanding receivable balance due from Tepha of $34 as of June 30, 2009. As of December 31, 2008 there was no outstanding receivable balance due from Tepha. The Company also had various transactions with its alliance partner ADM, a related party, during the three and six months ended June 30, 2009 and 2008. The Company had an outstanding receivable balance of $718 due from ADM at June 30, 2009. As of December 31, 2008 there was no significant outstanding receivable balance due from ADM.  For more information on the Company’s related party transactions, please see Note 8 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

15. SHAREHOLDER RIGHTS PLAN

 

The Company has adopted a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future.  The Shareholder Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of the Company’s Common Stock.  The following summary description of the Shareholder Rights Plan does not purport to be complete and is qualified in its entirety by reference to the Company’s Shareholder Rights Plan, which has been previously filed with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A.

 

In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock to shareholders of record as of the close of business on July 8, 2009.  The Rights currently are not exercisable and are attached to and trade with the outstanding shares of Common Stock.  Under the Shareholder Rights Plan, the Rights become exercisable if a person becomes an “acquiring person” by acquiring 15% or more of the outstanding shares of Common Stock or if a person commences a tender offer that would result in that person owning 15% or more of the Common Stock.  If a

 

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person becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s preferred stock which are equivalent to shares of Common Stock having twice the exercise price of the Right.  If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.

 

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

(All dollar amounts are stated in thousands)

 

Forward Looking Statements

 

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

 

Although we believe that our expectations are based on reasonable assumptions within the limits of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees. Our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. These forward looking statements include, but are not limited to, statements concerning: future financial performance and position, management’s strategy, plans and objectives for future operations, plans and objectives for product development and commercialization, plans and objectives for present and future research and development and results of such research and development, plans and objectives for manufacturing, the commercialization of environmentally sustainable, economically attractive alternatives to petroleum-based plastics, chemicals and energy, the commercialization of Mirel™ biobased plastic (“Mirel”) through our alliance with Archer Daniels Midland Company (“ADM”), sales of Mirel as an alternative to petroleum-based plastics, the construction of the Commercial Manufacturing Facility, the production of Mirel at the Commercial Manufacturing Facility, the commercial success of Mirel, the feasibility of extracting bioplastics from plant crops, the commercial viability of plant-produced plastics, recognition of revenue, and management’s plans and expectations for revenue, expenses and capital and working capital requirements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated including, without limitation, the following risks: (1) we may not be successful at manufacturing Mirel on a commercial scale in a timely and economical manner, (2) we may not be successful in the development of commercial formulations of Mirel, (3) we may not be successful in the development of plant crops for production of plastics, (4) if there are additional delays or cost increases in ADM’s construction and start-up of the Commercial Manufacturing Facility, our financial results will be negatively affected, (5) we may not be able to develop manufacturing capacity sufficient to meet demand in an economical manner or at all, (6) we may not achieve market acceptance of our products, (7) we have limited marketing and sales experience and capabilities, (8) we rely heavily on ADM and will rely heavily on future collaborative partners, (9) our success will be influenced by the price of petroleum relative to corn sugar (10) our future profitability is uncertain, and we have a limited operating history on which you can base your evaluation of our business, (11) we may need to secure additional funding and may be unable to raise additional capital on favorable terms or at all, (12) we may lose key personnel or are unable to attract and retain necessary talent, we may be unable to develop or commercialize our products, (13) we may not be able to obtain rights to intellectual property developed by others using our information and technology, (14) intellectual property protection for our products is important and uncertain, (15) a substantial portion of the technology used in our business is owned by or subject to retained rights of third parties, (16) third parties may claim we infringe

 

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their intellectual property, (17) we may be unable to manage our growth effectively, (18) we may not be successful in identifying market needs for new technologies and developing new products to meet those needs, (19) our products may be, or may be perceived as being, harmful to human health or the environment, (20) we face and will face substantial competition in several different markets, (21) we are subject to significant foreign and domestic government regulations, including environmental and health and safety regulations, and compliance or failure to comply with these regulations could harm our business, (22) we may not have adequate insurance and may have substantial exposure to payment of product liability claims, (23) potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results, and (24) each segment of our operations is currently conducted at a single location which makes us susceptible to disruptions.

 

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

 

Overview

 

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

 

Our first platform, which we are commercializing through Telles, a joint venture with Archer Daniels Midland Company, or ADM, is a proprietary, large-scale microbial fermentation system for producing a versatile family of polymers known as polyhydroxyalkanoates, which we have branded under the name Mirel™. Through Telles, we intend to sell these bioplastics as environmentally friendly, but functionally equivalent, alternatives to petroleum-based plastics. In addition, this family of polymers offers superior biodegradability characteristics and can be used in a wide range of commercial applications, including products used in agriculture and horticulture, compost and organic waste diversion bags, marine and aquatic applications, consumer products, business equipment and durable goods, and general packaging materials. Mirel will be produced in a commercial scale plant designed for a 110 million pound annual capacity, or the Commercial Manufacturing Facility, which is presently under construction by ADM in Clinton, Iowa. The plant is expected to begin production by the end of 2009. The Commercial Manufacturing Facility will produce biobased and biodegradable Mirel plastic using corn sugar, an abundant agriculturally-produced renewable resource. We are currently producing pre-commercial quantities of Mirel jointly with ADM at a small scale pre-commercial manufacturing facility.

 

Our second technology platform, which is in an early stage, is a biomass biorefinery system using plant crops to co-produce both bioplastics and bioenergy. For this system, we intend to extract polymer from the engineered plant crop, so that the remaining plant material can be used as a biomass feedstock for the production of bioenergy products including electricity and biofuel. We are engineering switchgrass to produce bioplastics in the leaf and stem of the plant. We have also collaborated with the Australian Cooperative Research Centre to do the same in sugarcane, and in 2008 we established a strategic research collaboration with the Donald Danforth Plant Science Center to develop an advanced industrial oilseed crop for co-production of bioplastics along with vegetable oil, biodiesel fuel, or oleochemicals. Switchgrass is a commercially and ecologically attractive, non-food energy crop that is indigenous to North America and is generally considered to be a leading candidate for cellulose-derived production of ethanol and other biofuels. Sugarcane is an established energy crop that is well suited for tropical regions of the world. We believe that using these crops to co-produce bioplastics with bioenergy products can offer superior economic value and productivity as compared to single product systems that produce them individually. We have been working on our biomass biorefinery platform using switchgrass for several years, and we believe that we are a scientific leader in this field. Our goal for this program is to have commercially viable

 

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plant varieties in pre-commercial field trials in two to three years. We may also seek to establish alliances with partners to commercially exploit this platform.

 

As demonstrated by our first two technology platforms, we take an integrated systems approach to our technology development. We are focused on developing entire production systems from gene to end product as opposed to developing specific technologies (for example, gene sequencing, shuffling or directed evolution) or singular aspects of a product’s production (for example, providing a key enzyme, catalyst or ingredient). We believe this systems approach optimizes manufacturing productivity and, when commercialized, will enable us to capture more economic value from any platform that we pursue. We have core capabilities in microbial genetics, fermentation process engineering, chemical engineering, polymer science, plant genetics and botanical science, and we have assembled these capabilities in a way that has allowed us to integrate biotechnology with chemical engineering and industrial practice. We believe that our approach can be applied to chemicals and other products to help establish and grow environmentally sustainable plastics, chemicals and energy industries.

 

For our third platform we intend to apply our core capabilities in microbial engineering and plant transformation to develop biological routes to other chemicals and chemical intermediates. In September 2007, the U.S. Department of Commerce’s National Institute of Standards and Technology approved a $2 million award for us to develop a commercially viable process for producing biobased chemicals from renewable agricultural products. This award will contribute to our integrated bio-engineered chemicals program, which is developing sustainable solutions for widely used industrial chemicals. Specifically, this award is being utilized in the development of the four-carbon (“C4”) family of chemical products.

 

To exploit our first technology platform, we are working with ADM as they build the Commercial Manufacturing Facility in Clinton, Iowa. The biodegradable bioplastics that this facility will produce are highly versatile and range in properties from hard and strong to soft and flexible. These properties allow for a wide variety of commercial applications, offering a biobased alternative to petroleum-derived synthetic materials which are not biodegradable. Through Telles we intend to position Mirel as a premium priced specialty material catering to customers who want to match the functionality of petroleum-based plastic, but add the dimension of environmental responsibility to their products and brands.

 

As of June 30, 2009, we had an accumulated deficit of $148,898 and total stockholders’ equity was $42,507.

 

Collaborative Arrangements

 

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

 

We entered into our alliance with ADM in 2004. As of June 30, 2009, all payments received from ADM have been recorded as deferred revenue on our balance sheet. We expect that future payments from ADM, through at least the Construction Phase of the Commercial Alliance Agreement, will be classified as deferred revenue as well. We expect to begin recognizing this deferred revenue at the time of the First Commercial Sale of Mirel (as defined in the Commercial Alliance Agreement). All amounts will be recognized on a straight-line basis over the estimated period, of approximately ten years, in which our obligations are fulfilled in accordance with the terms of the Commercial Alliance Agreement.

 

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

 

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

 

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

 

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

 

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

 

·                cumulative cost sharing payments from ADM for pre-commercial manufacturing plant construction and operations made in accordance with the Commercial Alliance Agreement of $7,675.

 

During the commercial alliance, ADM will construct, finance, own and operate the Commercial Manufacturing Facility through a manufacturing agreement with Telles, and we will provide or procure compounding services to convert the output from the Commercial Manufacturing Facility into forms that are suitable for various commercial applications.

 

We expect to incur increased research and development expenses through the Construction Phase of the ADM agreement for pre-commercial manufacturing and product development activities as we continue to develop, test, and refine product to meet the specification requirements of our customers. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to product development are expected to decrease as these expenses will be transferred to Telles. During the transition period between the initial start-up of the commercial manufacturing facility and the commencement of the Commercial Phase (as defined in the agreement), we will continue to bear these expenses.

 

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

 

Even though Telles is a separate legal entity owned equally by us and ADM, ADM will disproportionately fund the activities of the joint venture. Specifically, the cost of the Commercial Manufacturing Facility, the working capital requirements of the joint venture and the support payments to us will exceed the investments made by us to establish compounding operations for the joint venture. In order to rebalance the respective investments made by the parties, a preferential distribution of cash flow will be used, whereby all profits, after payment of all royalties, reimbursements and fees, from the joint venture, will be distributed to ADM until ADM’s disproportionate investment in the joint venture, and the costs of constructing the Commercial Manufacturing Facility, have been returned to ADM. Once ADM has recouped such amounts, the profits of the joint venture will be distributed in equal amounts to the parties. In order to track the disproportionate investments ADM has made, a Ledger Account has been established to record the respective investments made by the parties. As of June 30, 2009, the balance of the ADM Ledger Account was $327,010 and this balance is expected to increase as the construction of the Commercial Manufacturing Facility progresses and Telles becomes operational.

 

United States Government Contracts and Grants

 

As of June 30, 2009, expected gross proceeds of $837 remain to be received under our government contracts and grants, which include amounts for reimbursement to our subcontractors, as well as reimbursement for our employees’ time, benefits and other expenses related to future performance under the various contracts.

 

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

 

 

 

 

 

Total

 

Total received

 

Remaining amount

 

 

 

 

 

Funding

 

Government

 

through

 

available as of

 

Contract/Grant

 

Program Title

 

Agency

 

Funds

 

June 30, 2009

 

June 30, 2009

 

Expiration

 

 

 

 

 

 

 

 

 

 

 

 

 

Integrated Bio-Engineered Chemicals

 

Department of Commerce

 

$

2,000

 

$

1,163

 

$

837

 

October 2009

 

Total

 

 

 

$

2,000

 

$

1,163

 

$

837

 

 

 

 

Critical Accounting Estimates and Judgments

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2009 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. The critical accounting policies and the significant judgments and estimates used in the preparation of our consolidated financial statements for the three and six months ended June 30, 2009 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Judgments.”

 

In the first quarter of 2009, due to an extended construction period and revised estimated completion date of the Commercial Manufacturing Facility, we determined we would extend the period of use of our pre-commercial manufacturing plant by six months from June 2009 to December 2009. In connection with this, the useful lives of the leasehold improvements connected to the pre-commercial manufacturing plant were increased by six months. This change in accounting estimate was adopted prospectively from January 1, 2009. The effect of the change in accounting estimate on the financial statements for the three and six months ended June 30, 2009 is a decrease in loss from operations and net loss of $ 354 and $708, respectively. Loss per share decreased by $0.02 and $0.03 for the three and six months ended June 30, 2009.

 

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Results of Operations

 

Comparison of the Three Months Ended June 30, 2009 and 2008

 

Revenue

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Research and development revenue

 

$

24

 

$

11

 

$

13

 

License fee and royalty revenue from related parties

 

41

 

35

 

6

 

Grant revenue

 

283

 

355

 

(72

)

Total revenue

 

$

348

 

$

401

 

$

(53

)

 

Total revenue was $348 and $401 for the three months ended June 30, 2009 and 2008, respectively. During the three months ended June 30, 2009 we recognized $24 of research and development revenue compared to $11 for the respective period in 2008. Research and development revenue is derived from research and development services and delivery of sample product produced from research and development services. Grant revenue decreased during the three months ended June 30, 2009 to $283 from $355 during the three months ended June 30, 2008, primarily as a result of the completion of the Strategic Environmental Research Development Program grant that ended in February 2009.

 

Expenses

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Research and development expenses, including cost of revenue

 

$

6,323

 

$

6,008

 

$

315

 

Selling, general, and administrative expenses

 

3,938

 

4,048

 

(110

)

Total operating expense

 

$

10,261

 

$

10,056

 

$

205

 

 

Research and development expenses, including cost of revenue

 

Research and development expenses were $6,323 and $6,008 for the three months ended June 30, 2009 and 2008, respectively. The increase of $315 was primarily due to the addition of new employees and related benefit expenses partially offset by a reduction in pre-commercial manufacturing costs. Employee and benefit related costs were $2,911 for the three months ended June 30, 2009 compared to $2,215 for the respective period in 2008. The increase of $696 in payroll and benefits was primarily the result of hiring personnel needed to support our pre-commercial manufacturing process and microbial and plant research programs. Pre-commercial manufacturing expenses decreased to $1,103 compared to $1,701 for the three months ended June 30, 2009 and 2008, respectively. The decrease of $601 was primarily due to improvements in our production process made during the last year as we continue to focus our attention on reducing production costs, moving certain manufacturing processes in house and improving the quality of our pre-commercial manufacturing material.

 

We expect to incur increased research and development expenses through the Construction Phase of the ADM agreement for pre-commercial manufacturing and product development activities as we continue to develop, test, and refine product to meet the specification requirements of our customers. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to product development are expected to decrease as these expenses will be transferred to Telles. During the transition period between the initial start-up of the commercial manufacturing facility and the commencement of the Commercial Phase (as defined in the agreement), we will continue to bear these expenses.

 

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Selling, general, and administrative expenses

 

Selling, general, and administrative expenses were $3,938 and $4,048 for the three months ended June 30, 2009 and 2008, respectively. The decrease of $110 was primarily due to travel related expenses. Travel related expenses decreased to $119 from $205 for the three months ended June 30, 2009 compared to the respective period in 2008.

 

We expect that selling, general, and administrative expenses will increase through the Construction Phase of the ADM agreement due to increasing payroll and expanding infrastructure to support sales and marketing efforts relating to the commercialization of Mirel. Upon the commencement of the Commercial Phase of the agreement, selling, general, and administrative expenses are expected to decrease as the cost of sales and marketing efforts will be transferred to Telles. During the transition period between the initial start-up of the commercial manufacturing facility and the commencement of the Commercial Phase (as defined in the agreement), we will continue to bear these expenses.

 

Other Income (Net)

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Total other income (net)

 

$

241

 

$

730

 

$

(489

)

 

Other income (net) was $241 and $730 for the three months ended June 30, 2009 and 2008, respectively. Other income (net) during both periods consisted of investment income. The decrease of $489  was primarily due to a market decline in investment yields during the period, our decision to convert a majority of our investment portfolio to lower risk/lower yield U.S. Federal Treasury Notes and government -backed Federal Agency Notes and a decrease in average cash and short-term investments held during the comparative three month periods.

 

Results of Operations

 

Comparison of the Six Months Ended June 30, 2009 and 2008

 

Revenue

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Research and development revenue

 

$

30

 

$

79

 

(49

)

License fee and royalty revenue from related parties

 

66

 

70

 

(4

)

Grant revenue

 

513

 

656

 

(143

)

Total revenue

 

$

609

 

$

805

 

(196

)

 

Total revenue was $609 and $805 for the six months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 we recognized $30 of research and development revenue compared to $79 for the respective period in 2008. Research and development revenue is derived from research and development services and delivery of sample product produced from research and development services. Grant revenue decreased during the six months ended June 30, 2009 to $513 from $656 during the six months ended June 30, 2008, primarily as a result of the completion of the Strategic Environmental Research Development Program grant that ended in February 2009.

 

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Expenses

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Research and development expenses, including cost of revenue

 

$

12,331

 

$

11,942

 

$

389

 

Selling,general, and administrative expenses

 

7,652

 

8,145

 

(493

)

Total operating expense

 

$

19,983

 

$

20,087

 

$

(104

)

 

Research and development expenses, including cost of revenue

 

Research and development expenses were $12,331 and $11,942 for the six months ended June 30, 2009 and 2008, respectively. The increase of $389 was primarily due to the addition of new employees and related benefit expenses and expenses related to the expansion of our research departments offset by a reduction in pre-commercial manufacturing costs. Employee and benefit related costs were $5,790 for the six months ended June 30, 2009 compared to $4,390 for the respective period in 2008. The increase of $1,400 in payroll and benefits was primarily the result of hiring personnel needed to support our pre-commercial manufacturing process and microbial and plant research programs. Expenses relating to the expansion of our research and development departments included increases in research and development supplies and an increase in facility related expenses. Expenses relating to research and development supplies increased to $477 for the six months ended June 30, 2009 compared to $310 for the comparative period in 2008. Facility related expenses increased to $1,221 for the six months ended June 30, 2009 compared to $1,024 for the comparative period in 2008. Pre-commercial manufacturing expenses offset most of these expense increases as a result of decreasing $1,494 in comparison to the six months ended June 30, 2008, primarily due to improvements in our production process made during the last year as we continue to focus our attention on reducing production costs, moving certain manufacturing processes in house and improving the quality of our pre-commercial manufacturing material.

 

We expect to incur increased research and development expenses through the Construction Phase of the ADM agreement for pre-commercial manufacturing and product development activities as we continue to develop, test, and refine product to meet the specification requirements of our customers. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to product development are expected to decrease as these expenses will be transferred to Telles. During the transition period between the initial start-up of the commercial manufacturing facility and the commencement of the Commercial Phase (as defined in the agreement), we will continue to bear these expenses.

 

Selling, general, and administrative expenses

 

Selling, general, and administrative expenses were $7,652 and $8,145 for the six months ended June 30, 2009 and 2008, respectively. The decrease of $493 was primarily due to a decrease in stock-based compensation expense and a decrease in recruiting expense. Stock-based compensation expense decreased to $1,468 for the six months ended June 30, 2009 from $1,707 for the comparable period in 2008. Stock-based compensation decreased mainly as a result of the completion, in May 2008, of the vesting period for options granted to our board of directors and an officer of the company. Recruiting expense decreased to $44 for the six months ended June 30, 2009 compared to $227 for the comparable period in 2008. The decrease of $183 in recruiting expense is primarily attributable to the recruitment of our CEO and CFO during the six months ended June 30, 2008. In addition, consulting related expenses decreased to $447 from $508 for the six months ended June 30, 2009 and 2008, respectively. The decrease of $61 was primarily due to decreased use of consultants to support administrative activities such as employee compensation reviews and accounting compliance.

 

We expect that selling, general, and administrative expenses will increase through the Construction Phase of the ADM agreement due to increasing payroll and expanding infrastructure to support sales and marketing efforts relating to the commercialization of Mirel. Upon the commencement of the Commercial

 

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Phase of the agreement, selling, general, and administrative expenses are expected to decrease as the cost of sales and marketing efforts will be transferred to Telles. During the transition period between the initial start-up of the commercial manufacturing facility and the commencement of the Commercial Phase (as defined in the agreement), we will continue to bear these expenses.

 

Other Income (Net)

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

 

2009

 

2008

 

Change

 

Total other income (net)

 

$

593

 

$

1,909

 

$

(1,316

)

 

Other income (net) was $593 and $1,909 for the six months ended June 30, 2009 and 2008, respectively. Other income (net) during both periods consisted of investment income. The decrease of $1,316 was primarily due to a market decline in investment yields during the period, our decision to convert a majority of our investment portfolio to lower risk/lower yield U.S. Federal Treasury Notes and government-backed Federal Agency Notes and a decrease in average cash and short-term investments held during the comparative six month periods.

 

Liquidity and Capital Resources

 

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

 

We fund our cash requirements primarily through the following methods:

 

· our strategic alliance with ADM;

 

· government grants;

 

· equity financing; and

 

· interest earned on cash and short-term investments.

 

Currently our products are in the pre-commercial stage of development, and large-scale commercial sales have not begun. In addition, we have incurred significant expenses relating to our research and development efforts. As a result, we have incurred net losses since our inception. As of June 30, 2009, we had an accumulated deficit of $148,898. Our total unrestricted cash, cash equivalents and short-term investments as of June 30, 2009 were $77,606 as compared to $91,096 at December 31, 2008. As of June 30, 2009, we had no outstanding debt.

 

Our cash, cash equivalents and short-term investments at June 30, 2009 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. The primary objective of our investment activities is to preserve our capital to support the growth of our business. As of June 30, 2009 we had restricted cash of $593. Restricted cash consists of $493 held in connection with the lease agreement for our Erie Street facility in Cambridge, Massachusetts and $100 held in connection with our corporate credit card program. Short-term investments are made in accordance with our corporate investment policy, as approved by our Board of Directors. Investments are limited to high quality corporate debt, U.S. Treasury bills and notes, bank debt obligations, municipal debt obligations and asset-backed securities. The policy establishes maturity limits, concentration limits, and liquidity requirements. At June 30, 2009, we were in compliance with this policy.

 

We believe that our cash, cash equivalents and short-term investments, the interest we earn on these balances, as well as cash expected from government grants and our ADM alliance will be sufficient to meet our anticipated cash requirements, including cash requirements with respect to the commercial launch of Mirel, for at least the next 24 months. If our available cash, cash equivalents, and short-term securities are

 

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insufficient to satisfy our liquidity requirements, or if we develop additional products, we may need to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

 

Net cash used in operating activities increased to $12,617 during the six months ended June 30, 2009 from $8,263 used during the six months ended June 30, 2008. Net cash used during the six months ended June 30, 2009 primarily reflects the net loss for the period partially offset by non-cash expenses, including stock-based compensation expense of $2,250, depreciation expense of $1,310 and the Company’s 401(k) matching stock compensation of $279. The increase in cash used for operating activities during the six months ended June 30, 2009 as compared to the respective period in 2008 was primarily due to a decrease in pre-commercial cost sharing payments received from ADM and a decrease in funds received from investment income as a result of lower investment yields and lower average funds available for investing. We received $301 in pre-commercial cost sharing payments from ADM during the six months ended June 30, 2009 compared to $2,102 during the respective period in 2008. Pre-commercial cost sharing payments were lower during the six months ended June 30, 2009 due to a reduction in pre-commercial manufacturing costs. We received $593 in funds from investment income during the six months ended June 30, 2009 compared to $1,909 for the respective period in 2008.

 

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

 

Net cash used in investing activities was $4,284 during the six months ended June 30, 2009 compared to net cash of $7,014 provided by investing activities during the six months ended June 30, 2008. Net cash used in investing activities during the six months ended June 30, 2009 primarily represents net cash of $3,699 used in the purchase, sale and maturity of investments and a cash outflow of $655 used to purchase new equipment for research purposes.

 

Net cash provided by financing activities was $21 and $664 for the six months ended June 30, 2009 and 2008, respectively. The cash provided by financing activity during the six months ended June 30, 2009 and 2008 was solely attributable to proceeds received from the exercise of stock options and warrants.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at June 30, 2009 and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

 

 

 

Payments Due by Period

 

 

 

 

 

Less than

 

2-3

 

4-5

 

More than

 

 

 

Total

 

1 year

 

years

 

years

 

5 years

 

Purchase obligations

 

$

415

 

$

250

 

$

90

 

$

50

 

$

25

 

Operating lease obligations

 

5,454

 

1,284

 

2,358

 

1,812

 

 

Total

 

$

5,869

 

$

1,534

 

$

2,448

 

$

1,862

 

$

25

 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2009, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of the Securities and Exchange Commission’s Regulation S-K.

 

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Related Party Transactions

 

We recorded $41 and $66 of license and royalty revenue from Tepha, Inc., a related party, during the three and six months ended June 30, 2009. During the three and six months ended June 30, 2008 we recorded license and royalty revenue from Tepha, Inc. of $35 and $70, respectively. We had an outstanding receivable balance due from Tepha of $34 as of June 30, 2009. As of December 31, 2008 there was no outstanding receivable balance due from Tepha. We also had various transactions with our alliance partner ADM, a related party, during the three and six months ended June 30, 2009 and 2008. We had an outstanding receivable balance of $718 due from ADM at June 30, 2009. As of December 31, 2008 there was no significant outstanding receivable balance due from ADM.  For more information on our related party transactions, please see Note 8 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Recent Accounting Pronouncements

 

Effective January 1, 2009, the Company implemented Statement of Financial Accounting Standards No. 141(R), Business Combination, or SFAS 141(R). This standard requires an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize in process research and development and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The adoption of this standard did not impact our financial position or results of operations as SFAS 141(R) is applicable to acquisitions completed after January 1, 2009 and we did not complete any business combination transactions during the first six months of 2009.

 

In April 2009, the FASB issued the following new accounting standards:

 

·                  FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, or FSP FAS 157-4. FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

 

·                  FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2, FAS 124-2, and EITF 99-20-2; FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities.

 

·                  FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1, amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements.

 

These standards are effective for periods ending after June 15, 2009. The adoption of these standards did not impact the presentation of our financial position or results of operations.

 

Recently Issued Accounting Standards

 

In June 2009, the FASB issued the following new accounting standards:

 

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·

SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166;

 

 

·

SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or SFAS 167; and

 

 

·

SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS 168

 

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

 

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

 

SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with GAAP. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management (with the participation of our Principal Executive Officer and Principal Financial Officer) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2009. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to

 

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management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that these disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting

 

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

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

Except as listed below there have been no material changes in information regarding our risk factors as described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

 

If ADM does not successfully build and start up the Commercial Manufacturing Facility on time and on budget, our financial results will be negatively affected.

 

The cost of planning, designing, constructing and operating the Commercial Manufacturing Facility being developed to serve the alliance with ADM, and the cost of ancillary facilities and services related to the production of Mirel by Telles, will be very significant. ADM will be advancing a disproportionate share of the financial capital needed for such activities and, therefore, under our agreement all profits, after payment of all royalties, reimbursements and fees, from Telles will first be distributed to ADM until ADM’s disproportionate investment in the joint venture has been returned. Previously, we expected that commercial quantities of Mirel from the Commercial Manufacturing Facility would be available for customers by December 2008. We now expect that commercial quantities of Mirel from the Commercial Manufacturing Facility will be available for customers by the end of 2009. If there are further difficulties, delays or other unforeseen issues with the construction and start-up of the Commercial Manufacturing Facility, the cost of such activities will almost certainly increase, we may incur additional unreimbursed pilot manufacturing, product development, sales and marketing costs until the Commercial Phase of the alliance begins, and the revenue from sales, if any, of Mirel and the distribution of profits, if any, to us will be further delayed.

 

We may not achieve market acceptance of our products.

 

Telles currently has only limited customer commitments for commercial quantities of Mirel. Market acceptance of Mirel and our future products will depend on numerous factors, many of which are outside of our control, including among others:

 

· public acceptance of such products;

· ability to produce products that offer functionality comparable or superior to existing or new polymer products;

· our ability to produce products fit for their intended purpose;

 

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· our ability to obtain necessary regulatory approvals for our products;

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

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

· the strategic reaction of companies that market competitive products;

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

· general market conditions.

 

Prospective customers are currently evaluating and performing tests on Mirel prior to making any large-scale purchase decisions. We may not be able to successfully demonstrate that our plastics have properties comparable or superior to those of environmentally sustainable competitors or similar to conventional petroleum-based plastics. There can be no assurance that products based on our technologies will be perceived as being comparable or superior to existing products or new products being developed by competing companies or that such products will otherwise be accepted by consumers. The market for our biobased plastics may not be willing to support premium prices to purchase environmentally sustainable plastics. If there is not broad market acceptance of our products, we may not generate significant revenues. Generally, new product applications require a long lead time and sufficient quantities of polymer for development and qualification before customers enter into sales commitments. Delays in the availability of material for product development, compounding scale-up and marketing activities could delay or slow the ramp-up of commercial sales from the Commercial Manufacturing Facility. If the start of the commercial phase of the alliance is delayed as a result of such delays or for other reasons, we may incur additional unreimbursed product development and sales and marketing costs until the commercial phase of the alliance begins.  In addition, if such delays occur, or if we are unable to obtain the anticipated premium pricing for Mirel, there could be a material adverse effect on the timing of the distribution of Telles profits, if any, to us.

 

Provisions in our certificate of incorporation and by-laws and Delaware law and our shareholder rights plan might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

· limitations on the removal of directors;

· a classified board of directors so that not all members of our board are elected at one time;

· advance notice requirements for stockholder proposals and nominations;

· the inability of stockholders to act by written consent or to call special meetings;

· the ability of our board of directors to make, alter or repeal our by-laws;

· a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and

· the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

 

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

 

We have adopted a shareholder rights plan, the purpose of which is, among other things, to enhance our Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the company is made in the future.  The shareholder rights plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, our company or a large block of our company’s Common Stock.

 

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In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

 

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.

 

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

 

Recent Sales of Unregistered Securities

 

On April 28, 2009, the Company issued 17,001 shares of common stock to participants in its Metabolix, Inc. 401(k) Plan as a matching contribution. The issuance of these securities is exempt from registration pursuant to Section 3(a)(2) of the Securities Act of 1933 as exempted securities.

 

Issuer Purchases of Equity Securities

 

During the three months ended June 30, 2009, there were no repurchases made by us or on our behalf, or by any “affiliated purchasers,” of shares of our common stock.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company’s annual meeting of stockholders was held on May 28, 2009.

 

The stockholders elected Richard P. Eno, Edward M. Giles, and Anthony J. Sinskey to serve on the Board of Directors until the annual meeting of stockholders to be held in 2012. The tabulation of votes with respect to the election of such directors is as follows:

 

 

 

Number of Shares

 

 

 

For

 

Withheld

 

Abstain

 

Richard P. Eno

 

20,010,578

 

318,190

 

0

 

Edward M. Giles

 

19,750,414

 

578,354

 

0

 

Anthony J. Sinskey

 

15,876,259

 

4,452,509

 

0

 

 

Following the meeting, the Company’s Board of Directors consists of Jay Kouba (Chairman), Richard P. Eno, Edward M. Giles, Peter N. Kellogg, Edward M. Muller, Oliver P. Peoples, Anthony J. Sinskey, Matthew Strobeck and Robert L. Van Nostrand.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

10.1

 

Employment Agreement between the Registrant and Johan van Walsem executed July 9, 2009 (filed herewith).

 

 

 

31.1

 

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

 

 

 

31.2

 

Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the

 

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Principal Financial Officer (furnished herewith).

 

 

 

32.1

 

Section 1350 Certification (furnished herewith).

 

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SIGNATURES

 

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

 

 

METABOLIX, INC.

 

 

 

 

August 5, 2009

By:

/s/ RICHARD P. ENO

 

 

Richard P. Eno

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

August 5, 2009

By:

/s/ JOSEPH D. HILL

 

 

Joseph D. Hill

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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