Form 10-K

Our product sales accounted for 22%, 31% and 39% of our revenues in 2009, 2010 and 2011, respectively. Our product sales have increased in each of the last three fiscal years, from $18.6 million in 2009, to $32.8 million in 2010 and to $49.0 million in 2011.

Notwithstanding our revenue growth, we have continued to experience significant losses as we have invested heavily in research and development and administrative infrastructure in connection with the growth in our business. In light of the growth in market acceptance of our products and services to date, we intend to continue our investment in research and development. As of December 31, 2011, we had an accumulated deficit of $184.7 million. We incurred net losses of $20.3 million, $8.5 million and $16.6 million in the years ended December 31, 2009, 2010 and 2011, respectively.

We targeted the pharmaceutical industry as the first market for our products and services. In this market, we have historically entered into collaborations, which have involved complex service and intellectual property agreements under which we research and develop optimized enzymes for innovator pharmaceutical companies in connection with their drug development efforts. In these collaborations, we typically receive revenues in the form of one or more of the following: up-front payments, milestone payments, payments based upon the number of full-time employee equivalents, or FTEs, engaged in related research and development activities and licensing fees and royalties.

Our pharmaceutical products include enzymes, pharmaceutical intermediates, active pharmaceutical ingredients, or APIs, and Codex^® Biocatalyst Panels and Kits. Our pharmaceutical customers incorporate our enzymes into the manufacturing processes used to produce their drugs. Our intermediates are complex chemical substances that have been manufactured by, or on behalf of, us using our enzymes. Drug manufacturers use intermediates to produce the APIs used in their drugs. We believe that major pharmaceutical manufacturers are increasingly willing to outsource portions of their own internal manufacturing and to purchase intermediates that are difficult or expensive to manufacture. Our Codex^® Biocatalyst Panels are tools that provide genetically diverse variants of our proprietary biocatalysts, which allow our customers to screen our enzymes for desired activity that is applicable to a particular pharmaceutical manufacturing process. We view our Codex^® Biocatalyst Panels, which we began selling in 2007, as a way to build early and broad awareness of the power and utility of our technology platform. We introduced our Codex^® Biocatalyst Kits in 2010, which provide subsets of the Panel enzymes in individual vials for the same purpose. We plan to increase our efforts to expand use of our Codex^® Biocatalyst Panels and Kits among our current and potential customers.

Our pharmaceutical services include screening and optimization services. We use our screening services to test our customers’ pharmaceutical materials against our existing libraries of enzymes to determine whether our existing enzymes produce any desired activities. We then use our optimization services to improve the performance of these enzymes to meet customer requirements. We also use our optimization services to improve enzymes identified by our customers through their use of our Codex^® Biocatalyst Panels and Kits. The use of our panels, as well as these services, has led to sales of enzymes to our pharmaceutical customers.

We provide our enzymes, Codex^® Biocatalyst Panels and Kits, screening and optimization services and intermediates to our innovator customers and provide intermediates to our generics customers. We have also launched several new intermediates and APIs for the generic equivalents of branded pharmaceutical products, including Lipitor^®, in markets where these products are not subject to patent protection, and intend to sell these same intermediates and APIs for use in other markets when the patent protection for each product expires. We sell our products primarily to pharmaceutical manufacturers through our small direct sales and business development force in the United States and Europe.

In the biofuels market, we entered into a research agreement with Shell in 2006. The goal of this collaboration was to develop biocatalysts to break down renewable sources of non-food plant materials, known as cellulosic biomass, and convert them to fuels. In connection with this collaboration, we received up-front payments, research and development service payments and milestone payments.

Based on the success of this initial collaboration, in 2007, we entered into a new, expanded multi-year research and development collaboration with Shell to develop cellulase enzymes to convert cellulosic biomass into fermentable sugars that are used in the production of fuels and related products and to convert these sugars into fuels and related products. We received an up-front fee and are currently receiving FTE payments under this collaboration. This up-front fee is refundable under certain conditions, such as a change in control in which we are acquired by a competitor of Shell. This refundability lapses ratably over a five-year period beginning on November 1, 2007, on a straight-line basis. In March 2009, we agreed to devote to the research collaboration 128 FTEs, which were required to be funded by Shell at an annual base rate per FTE of $441,000 for FTEs located in the United States, and $350,000 for FTEs located in Hungary. These annual base rates per FTE are subject to annual adjustments based on changes in the Consumer Price Index, or CPI, for the United States and Hungary for each subsequent year of the collaboration. As of December 2011, the annual base rate per FTE was $460,000 for FTEs located in the United States, and $399,000 for FTEs located in Hungary.

Shell has the right to terminate the collaborative research agreement upon nine months’ notice. Shell also has the right to reduce the number of funded FTEs, with any one reduction not to exceed 98 funded FTEs, following advance written notice. The required notice period ranges from 30 to 270 days. Following any such reduction, Shell is subject to a standstill period of between 90 and 360 days during which period Shell cannot provide notice of any further FTE reductions. The notice and standstill periods are dependent on the number of funded FTEs reduced, with the length of notice and standstill periods increasing commensurate with the number of FTEs reduced. Effective August 2011, Shell reduced the number of funded FTEs engaged in our research and development collaboration from 128 to 116 FTEs. This reduction was to FTEs located in the United States. We have not received any further notice of FTE reduction as of the date of this Annual Report on Form 10-K.

The term of the agreement ends in October 2012. We are in discussions with Shell for a continuation of the collaboration agreement. During the term of the agreement, we are required to act exclusively with Shell as it relates to the rights and research described in the arrangement and may not conduct research or contract to conduct research, for another party in the field of use. Under this agreement, we also have a right of first negotiation but not an obligation to manufacture any biocatalysts developed under the collaborative research agreement if Shell decides to out-source the manufacture of such biocatalysts.

We are also eligible for annual milestone payments of up to an aggregate of $30.0 million over the term of the agreement, contingent upon the achievement of certain technical goals beginning in 2009, and a milestone payment of $10.0 million upon achievement of certain commercial goals. In 2011, we met or exceeded four out of six technical goals under the collaborative research agreement by the applicable deadlines and earned milestone payments of $5.6 million. As of December 31, 2011, we remain eligible for $8.5 million in milestone payments related to the technical goals for 2012 and $10.0 million in milestone payments for the commercial goals. Shell will also be required to pay us a royalty per gallon with respect to certain products manufactured using our technology platform, including liquid fuels, fuel additives and lubricants, if Shell or any of its licensees manufactures such products. With respect to cellulosic biomass converted into sugars, Shell agreed to pay us a royalty per gallon of fuel product made from those sugars. With respect to sugars converted into fuel, Shell agreed to pay us a separate royalty per gallon of fuel product. We may be entitled to receive one or both of these royalties depending on whether Shell uses our technology to commercialize one or both of these steps.

Under our research and development collaboration with Shell, we retain ownership of all intellectual property we develop, other than patent rights related to certain fuel innovations, and Shell will have an exclusive license to such intellectual property we develop. We have agreed to work exclusively with Shell until November 2012 to convert cellulosic biomass into fermentable sugars that are used in the production of fuels and related products and to convert these sugars into fuels and related products. However, Shell is not required to work exclusively with us, and could develop or pursue alternative technologies that it decides to use for commercialization purposes instead of any technology developed under our collaborative research agreement. Even if Shell decides to commercialize products based on our technologies, they have no obligation to purchase their biocatalyst supply from us. If Shell chooses to commercialize any biofuels products developed through our

collaboration, we believe that the combination of our technology platform with Shell’s proven project development capabilities and resources could enable a biofuels solution that extends from the conversion of cellulosic biomass into biofuels to delivery and distribution of refined biofuels to consumers at the pump.

In connection with our collaboration with Shell, we entered into a multi-party collaborative research and license agreement with Iogen Energy Corporation, or Iogen, and Shell in July 2009, which is focused on the conversion of cellulosic biomass to ethanol for commercial scale production. Iogen has agreed to pay us a royalty per gallon with respect to certain fuel products, which include liquid fuels, fuel additives and lubricants, that are covered by inventions jointly made by us and Iogen, but that are solely owned by Iogen. We will be entitled to collect royalties from Shell or Iogen for any use of our biofuels technology by Shell or Iogen. Shell can choose to commercialize cellulosic ethanol manufactured using our technology independently, or in collaboration with Iogen.

In October 2010, we acquired Maxygen Inc’s, or Maxygen, directed evolution technology patent portfolio for net consideration of $20.2 million consisting of $20.0 million paid to Maxygen, related transaction costs of $0.7 million and a royalty payable extinguishment of $0.5 million. In conjunction with this transaction, we terminated our existing license agreement with Maxygen including terminating our obligation to pay biofuels royalties to Maxygen.

During 2011, our carbon management program received $2.2 million in funding under a 2010 ARPA-E Recovery Act program grant from the U.S. Department of Energy for development of innovative technology to remove carbon dioxide from coal-fired power plant emissions. The grant supports development of biocatalysts for more efficient carbon capture from these plants and terminates in June 2012. We also had a collaboration in carbon management with Alstom Power, Inc. or Alstom which included funding for up to 12 FTEs. We recognized $3.8 million in revenue in 2011 from this collaboration. The collaboration terminated in October 2011.

We also received grant revenues in 2011 of $1.3 million from the Singapore Economic Development Board, or EDB, for our pharmaceuticals research and development center in Singapore.

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. These agreements are complex and have multiple elements that cover a variety of present and future activities. In addition, certain elements of these agreements are intrinsically difficult to separate and treat as separate units for accounting purposes, especially exclusivity payments. Consequently, we expect to recognize these exclusivity payments over the term of the exclusivity period.

We have limited internal manufacturing capacity at our headquarters in Redwood City, California. We expect to rely on third-party manufacturers for commercial production of our biocatalysts for the foreseeable future. Our in-house manufacturing is dedicated to producing both our Codex^® Biocatalyst Panels and Kits and biocatalysts for use by our customers in pilot scale production. We also supply initial commercial quantities of biocatalysts for use by our collaborators to produce pharmaceutical intermediates and manufacture biocatalysts that we sell.

We actively seek contract manufacturers who are willing to invest in capital equipment to manufacture our products at commercial scale. As a result, we are heavily dependent on the availability of manufacturing capacity at, and the reliability of, our contract manufacturers. We also pursue collaborations with industry leaders that allow us to leverage our collaborators’ engineering, manufacturing and commercial expertise, their distribution infrastructure and their ability to fund commercial scale production facilities. If our collaborators choose to utilize our technology to commercialize new products, we expect our collaborators will finance, build and operate the larger, more expensive facilities for the intermediate or end products in our markets, which will allow us to expand into new markets without having to finance or operate large industrial facilities.

We rely on one contract manufacturer, Lactosan GmbH & Co. KG, or Lactosan, located in Austria, to manufacture substantially all of the enzymes used in our pharmaceutical business. We have qualified other contract manufacturers for the manufacture of our enzymes, but we do not currently use them for any of our supply commitments. In addition, we contract with other suppliers for the manufacture of our pharmaceutical intermediates and APIs. Since 2006, Arch Pharmalabs Limited, or Arch, of Mumbai, India has manufactured all of our commercialized intermediates and APIs for sale to generic and innovator manufacturers. We are party to a number of agreements with Arch that govern the commercialization of various current and future products for supply into the generic and innovator marketplaces.

We intend to rely on contract manufacturers for the production of CodeXyme^® cellulase enzymes for our biofuels and bio-based chemicals business.

Revenues and Operating Expenses

Revenues

Our revenues are comprised of collaborative research and development revenues, product revenues and government grants.

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Collaborative research and development revenues include license, technology access and exclusivity fees, FTE payments, milestones, royalties, and optimization and screening fees.

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Product revenues consist of sales of biocatalysts, intermediates, APIs and Codex^® Biocatalyst Panels and Kits.

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Government grants consist of payments from government entities. The terms of these grants generally provide us with cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Historically, we have received government grants from Germany, Singapore and the United States. Our current grant in Singapore expires in 2013 and our grant in the United States expires in 2012.

Cost of Product Revenues

Cost of product revenues includes both internal and third-party fixed and variable costs including amortization of purchased technology, materials and supplies, labor, facilities and other overhead costs associated with our product revenues.

Research and Development Expenses

Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities. These costs include license and royalty fees paid to Maxygen prior to our acquisition of the Maxygen IP, for consideration that we receive in connection with our biofuels collaboration, our direct and research-related overhead expenses, which include salaries and other personnel-related expenses, facility costs, supplies, depreciation of facilities, and laboratory equipment, as well as research consultants and the cost of funding research at universities and other research institutions, and are expensed as incurred. License and royalty fees paid to Maxygen fluctuated depending on the timing and type of consideration received from Shell in connection with our biofuels research and development collaboration. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred.

Our research and development efforts devoted to our product and process development projects changed from 62 projects in 2009 to 57 projects in 2010 and 38 in 2011 as we have focused our research and development resources on fewer projects. Our internal research and development projects are typically completed in 12 to 24 months, and generally the costs associated with any single internal project during these periods were not material.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation expenses (including stock-based compensation), hiring and training costs, consulting and service provider expenses (including patent counsel related costs), marketing costs, occupancy-related costs, depreciation and amortization expenses, and travel and relocation expenses.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for multiple-element revenue arrangements (“ASU 2009-13”) to:

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provide updated guidance on whether multiple deliverables exist, how the elements in an arrangement should be separated, and how the consideration should be allocated;

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require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of each element if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and

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eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.

In April 2010, the FASB amended the accounting standards for revenue recognition related to milestones (“ASU 2010-17”) to provide updated guidance on accounting for revenue using the milestone method, clarifying that the milestone method is a valid application of the proportional performance model when applied to research or development arrangements. We already applied a milestone method approach to our research or development arrangements.

We adopted the above accounting guidances on January 1, 2011, for applicable arrangements entered into or materially modified after January 1, 2011 (the beginning of our fiscal year). We have determined that adoption of this new guidance did not have a material impact on our results of operations, cash flows or financial position. The potential future impact of ASU 2009-13 and ASU 2010-17 will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future.

Revenues are recognized when the four basic revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) products have been delivered, transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

Our primary sources of revenues consist of collaborative research and development agreements, product revenues and government grants. Collaborative research and development agreements typically provide us with multiple revenue streams, including up-front fees for licensing, exclusivity and technology access, fees for full-time employee equivalent (“FTE”) services and the potential to earn milestone payments upon achievement of contractual criteria and royalty fees based on future product sales or cost savings by our customers. Our collaborative research and development revenues consist of revenues from Shell and revenues from other customers with collaborative research and development agreements.

For each source of collaborative research and development revenues, product revenues and grant revenues, we apply the following revenue recognition criteria:

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Up-front fees received in connection with collaborative research and development agreements, including license fees, technology access fees, and exclusivity fees, are deferred upon receipt, are not considered a separate unit of accounting and are recognized as revenues over the relevant performance periods.

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Revenues related to FTE services are recognized as research services are performed over the related performance periods for each contract. We are required to perform research and development activities as specified in each respective agreement. The payments received are not refundable and are based on a contractual reimbursement rate per FTE working on the project. When up-front payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using the proportionate performance method of revenue recognition based upon the actual amount of research and development labor hours incurred relative to the amount of the total expected labor hours to be incurred by us, up to the amount of cash received. In cases where the planned levels of research services fluctuate substantially over the research term, we are required to make estimates of the total hours required to perform our obligations. Research and development expenses related to FTE services under the collaborative research and development agreements approximate the research funding over the term of the respective agreements.

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A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) results in additional payments being due to us. Milestones are considered substantive when the consideration earned from the achievement of the milestone (i) is commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from our performance; (ii) relates solely to past performance and (iii) is reasonable relative to all deliverable and payment terms in the arrangement.

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Other payments received for which such payments are contingent solely upon the passage of time or the result of a collaborative partner’s performance are recognized as revenue when earned in accordance with the contract terms and when such payments can be reasonably estimated and collectability is reasonably assured.

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We recognize revenues from royalties based on licensees’ sales of products using our technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured.

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Product revenues are recognized once passage of title and risk of loss has occurred and contractually specified acceptance criteria have been met, provided all other revenue recognition criteria have also been met. Product revenues consist of sales of biocatalysts, intermediates, active pharmaceutical ingredients and Codex^® Biocatalyst Panels and Kits. Cost of product revenues includes both internal and third party fixed and variable costs including amortization of purchased technology, materials and supplies, labor, facilities and other overhead costs associated with our product revenues.

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We license mutually agreed upon third party technology for use in our research and development collaboration with Shell. We record the license payments to research and development expense and offset related reimbursements received from Shell. These payments made by Shell to us are direct reimbursements of our costs. We account for these direct reimbursable costs as a net amount, whereby no expense or revenue is recorded for the costs reimbursed by Shell. For any payments not reimbursed by Shell, we will recognize these as expenses in the statement of operations. We elected to present the reimbursement from Shell as a component of our research and development expense since presenting the receipt of payment from Shell as revenues does not reflect the substance of the arrangement.

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We receive payments from government entities in the form of government grants. Government grants are agreements that generally provide us with cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues from government grants are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants were provided have been met and we have only perfunctory obligations outstanding.

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Shipping and handling costs charged to customers are recorded as revenues. Shipping costs are included in our cost of product revenues. Such charges were not significant in any of the periods presented.

Stock-Based Compensation

We recognize compensation expense related to share-based transactions, including the awarding of employee stock options and restricted stock units (“RSU”), based on the estimated fair value of the awards granted.

We estimate the fair value of our stock option grants using the Black-Scholes option-pricing model. We calculate the estimated volatility rate based on selected companies in similar markets, due to a lack of historical information regarding the volatility of our stock price. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available. Due to our limited history of option activity, we calculate the expected life of options granted to employees using the “simplified method” permitted by the United States Securities Exchange Commission, or SEC, as the average of the total contractual term of the option and its vesting period. The risk-free rate assumption was based on U.S. Treasury instruments whose terms were consistent with the terms of our stock options. The expected dividend assumption was based on our history and expectation of dividend payouts.

We account for stock options issued to non-employees based on their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of the options granted to non-employees is remeasured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

Impairment of Goodwill and Intangible Assets and Other Long-lived Assets

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

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

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

Income Tax Provision

We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that will more likely than not be realized.

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future. We have recorded a deferred tax asset in jurisdictions where ultimate realization of deferred tax assets is more likely than not to occur.

We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.

We account for uncertainty in income taxes as required by the provisions of ASC Topic 740 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes.

The Tax Reform Act of 1986 and similar state provisions limit the use of net operating loss carryforwards in certain situations where equity transactions result in a change of ownership as defined by Internal Revenue Code Section 382. In the event we should experience an ownership change, as defined, utilization of our federal and state net operating loss carryforwards could be limited.

Results of Operations

Financial Operations Overview

The following table shows the amounts from our consolidated statements of operations for the periods presented (in thousands).


	Years Ended December 31,									% of Total Revenues
	2011			2010			2009			2011			2010			2009
Revenues:
Product	$	49,021		$	32,835		$	18,554			39	%		30	%		22	%
Collaborative R&D		71,368			70,196			64,308			58	%		66	%		78	%
Government grants		3,476			4,073			46			3	%		4	%		0	%

Total Revenues		123,865			107,104			82,908			100	%		100	%		100	%

Costs and operating expenses:
Cost of product revenues		41,781			27,982			16,678			34	%		26	%		20	%
Research and development		61,049			52,405			54,725			49	%		49	%		66	%
Selling, general and administrative		36,942			33,841			29,871			30	%		32	%		36	%

Total costs and operating expenses		139,772			114,228			101,274			113	%		107	%		122	%

Loss from operations		(15,907	)		(7,124	)		(18,366	)		nm			nm			nm
Interest income		273			166			180			0	%		0	%		0	%
Interest expense and other, net		(675	)		(1,199	)		(2,037	)		nm			nm			nm

Loss before provision for income taxes		(16,309	)		(8,157	)		(20,223	)		nm			nm			nm
Provision for income taxes		241			384			66			0	%		0	%		0	%

Net loss	$	(16,550	)	$	(8,541	)	$	(20,289	)		nm			nm			nm

nm	= not meaningful

Years Ended December 31, 2011 and 2010

Revenues


	Years Ended December 31,				Change
(In Thousands)	2011		2010		$			%
Product	$	49,021	$	32,835	$	16,186			49	%
Collaborative R&D		71,368		70,196		1,172			2	%
Government grants		3,476		4,073		(597	)		(15	%)

Total revenues	$	123,865	$	107,104	$	16,761			16	%

Revenues increased during the year ended December 31, 2011 compared to the year ended December 31, 2010, due to increases from product sales and collaborative research and development projects which was partially offset by a decline from government grants.

Product revenues increased $16.2 million or 49% in 2011 compared to 2010 primarily due to an increase in product sales to both generic and innovator pharmaceutical customers.

Collaborative research and development revenues increased $1.2 million in 2011 compared to 2010 primarily due to $3.9 million increase in our revenues from collaborations with Alstom in carbon management partially offset by a $2.9 million decrease in our collaboration revenues related to Shell. Our pharmaceutical collaboration projects increased $0.3 million in 2011.

Collaborative research and development revenues derived from Shell decreased $2.9 million to $63.2 million in 2011 compared to $66.1 million in 2010. This includes milestone payments of $5.6 million and $7.4 million earned during 2011 and 2010, respectively. We achieved four of six milestone targets in 2011 and seven of eight milestone targets in 2010. Effective August 2011, Shell reduced the number of funded FTEs engaged in our research and development collaboration with them from 128 to 116 FTEs. This reduction was to FTEs located in the United States. We had an average of 124 and 128 FTEs in this collaboration during the years ended December 31, 2011 and 2010, respectively. The decrease in the number of Shell funded FTEs in our collaborative research and development revenues during the year ended December 31, 2011 was partially offset by contractual increases in the billing rates for those FTEs.

Government grant revenues decreased $0.6 million in 2011 due to the recognition of a grant from the EDB for $1.3 million in 2011 compared to $3.2 million in 2010. This decrease was partially offset by an increased grant from the U.S. Department of Energy of $2.2 million in 2011, compared to $0.9 million in 2010.

Our top five customers accounted for 77% and 85% of our total revenues in 2011 and 2010, respectively. Shell accounted for 51% and 62% of our total revenues in 2011 and 2010, respectively.

Cost of Product Revenues


	Years Ended December 31,						Change
(In Thousands)	2011			2010			$		%
Cost of revenues:
Product	$	41,781		$	27,982		$	13,799		49	%

Gross profit:
Product	$	7,240		$	4,853		$	2,387		49	%

Product gross margin %		15	%		15	%

Cost of product revenues increased $13.8 million in 2011 compared to 2010 primarily due to an increase in product sales. Gross margins in 2011 were flat at 15% for 2011 and 2010.

Operating Expenses


	Years Ended December 31,				Change
(In Thousands)	2011		2010		$		%
Research and development	$	61,049	$	52,405	$	8,644		16	%
Selling, general and administrative		36,942		33,841		3,101		9	%

Total operating expenses	$	97,991	$	86,246	$	11,745		14	%

Research and Development. Research and development expenses increased $8.6 million in 2011 compared to 2010 primarily due to a $2.8 million increase in amortization related to our October 2010 acquisition of the Maxygen IP. Our royalty fees paid to Maxygen were zero in 2011 compared to $1.2 million in 2010. The decrease is a result of our acquisition of the Maxygen IP and therefore we are no longer obliged to pay royalties to Maxygen. Additionally, compensation expenses (including stock-based compensation) increased $2.2 million due to increases in headcount. We increased costs approximately $1.0 million for additional product development batches for our research and development efforts. Outside services increased $1.0 million in connection with development cost for our contract manufacturers and lab space expansions. Lab supplies increased $0.9 million to support our increased headcount and ongoing development work. Our facility costs increased $0.8 million primarily as a result of costs to expand our space in Redwood City, California. Costs of information technology equipment and services increased $0.7 million in support of the additional headcount and expanded capabilities.

Our travel costs increased $0.5 million primarily related to increased international travel. Research and development expenses include stock-based compensation expense of $3.3 million and $3.4 million during 2011 and 2010, respectively.

Selling, General and Administrative. Selling, general and administrative expenses increased $3.1 million in 2011 compared to 2010 primarily due to a $1.4 million increase in compensation expenses (including stock-based compensation) as we increased headcount. Outside services increased $0.7 million related to increased consulting costs. Recruiting and relocation costs increased $0.6 million in support our increased headcount. Our travel costs increased $0.5 million due to increased international travel. Selling, general and administrative expenses included stock-based compensation expense of $6.1 million and $5.4 million during 2011 and 2010, respectively. The stock-based compensation expense increase is attributable to additional options granted and outstanding during 2011 compared to 2010.

Other Income (Expense), net


	Years Ended December 31,						Change
(In Thousands)	2011			2010			$		%
Interest income	$	273		$	166		$	107		64	%
Interest expense and other, net		(675	)		(1,199	)		524		(44	%)

Total other income (expense), net	$	(402	)	$	(1,033	)	$	631		(61	%)

Interest Income. Interest income increased $0.1 million due to higher average interest rates received on our cash, cash equivalents and marketable securities balances during 2011 compared to 2010.

Interest Expense and Other, Net. Interest expense and other, net, decreased $0.5 million during 2011 compared to 2010 due to $0.7 million expense from the fair value adjustment related to our preferred stock warrants in 2010 that did not reoccur in 2011 and a decrease in interest expense of $0.5 million due to the payoff of our debt obligation on the GE Capital Loan also in 2010. These were offset by an increase of $0.4 million in unrealized foreign exchange losses primarily related to our operations in Hungary and $0.4 million of other income derived in 2010 from contractual arrangements with Arch that did not reoccur in 2011.

Provision for Income Taxes. The tax provision for 2011 and 2010 primarily consisted of income taxes attributable to foreign operations and expenses related to uncertain tax positions.

Years Ended December 31, 2010 and 2009

Revenues


	Years Ended December 31,				Change
(In Thousands)	2010		2009		$		%
Product	$	32,835	$	18,554	$	14,281		77	%
Collaborative R&D		70,196		64,308		5,888		9	%
Government grants		4,073		46		4,027		nm

Total revenues	$	107,104	$	82,908	$	24,196		29	%

Revenues increased during the year ended December 31, 2010 compared to the year ended December 31, 2009 due to increases from product sales, collaborative research and development projects and government grants.

Product revenues increased $14.3 million in 2010 compared to 2009 primarily due to increased sales to Merck, and increased product sales to our generics customers.

Collaborative research and development revenues increased $5.9 million in 2010 compared to 2009 primarily due to a $3.5 million increase in revenues from our Shell collaboration and a $2.4 million increases in revenues from our collaborative arrangements in pharmaceuticals.

Collaborative research and development revenues related to Shell increased $3.5 million in 2010 primarily due to additional milestone achievements which generated $2.8 million in revenues, and an increase in the number of FTEs engaged in our research and development collaboration with Shell and the contractual increases in the billing rates for FTEs. The expansion of this collaboration resulted in an increase in the number of contractual FTEs from an average of 126 in 2009 to an average of 128 in 2010.

Other collaborative research and development revenues increased in 2010 compared to 2009 primarily due to pharmaceutical research services performed under the December 2009 research agreement with Teva Pharmaceutical Industries, Ltd.

Government grant revenues increased in 2010 due to the recognition of a grant from the EDB for $3.2 million and a grant from the U.S. Department of Energy of $0.9 million.

Our top five customers accounted for 85% and 90% of our total revenues in 2010 and 2009, respectively. Shell accounted for 62% and 76% of our total revenues in 2010 and 2009, respectively.

Cost of Product Revenues


	Years Ended December 31,						Change
(In Thousands)	2010			2009			$		%
Cost of revenues:
Product	$	27,982		$	16,678		$	11,304		68	%

Gross profit:
Product	$	4,853		$	1,876		$	2,977		159	%

Product gross margin %		15	%		10	%

Cost of product revenues increased $11.3 million in 2010 compared to 2009 primarily due to an increase in product sales. Gross margins in 2010 increased to 15% from 10% in 2009, due to certain higher margin products sales during 2010 and a decrease in inventory write downs of approximately $0.6 million in 2010 compared to 2009 due to the closure of our Julich, Germany facility in 2009.

Operating Expenses


	Years Ended December 31,				Change
(In Thousands)	2010		2009		$			%
Research and development	$	52,405	$	54,725	$	(2,320	)		(4	%)
Selling, general and administrative		33,841		29,871		3,970			13	%

Total operating expenses	$	86,246	$	84,596	$	1,650			2	%

Research and Development. Research and development expenses decreased $2.3 million in 2010 compared to 2009 primarily due to a $4.3 million reduction in royalty fees owed to Maxygen. As a result of our acquisition of the Maxygen IP in October 2010, we are no longer obliged to pay royalties to Maxygen. Through October 2010, we incurred $1.2 million of royalties owed Maxygen. In 2009, we paid $3.2 million to Maxygen as a royalty related to Shell’s increased equity investment in our company and $2.3 million related to revenues generated under our biofuels program with Shell. Additionally, outside service costs in 2010 declined by $1.3 million, primarily related to our 2009

investment and joint development agreement with CO₂ Solutions. The decreases in research and development expenses were partially offset by increase in depreciation expense of $1.8 million due to leasehold improvements for lab space expansion and capital equipment acquisitions. Research and development expenses included stock-based compensation expense of $3.4 million and $2.3 million during 2010 and 2009, respectively. The stock-based compensation expense increase is attributable to additional options granted and outstanding during 2010 compared to 2009.

Selling, General and Administrative. Selling, general and administrative expenses increased $4.0 million in 2010 compared to 2009 primarily due to a $4.6 million increase in compensation expenses (including stock-based compensation) as we increased headcount due to our public company readiness efforts. Additionally, we had increased spending on outside accounting and auditing services by $0.9 million due to efforts associated with being a public company. This was partially offset by decreases in cost for consultants, contractors and outside legal services of $2.3 million as we decreased our dependence on outside service providers. Selling, general and administrative expenses included stock-based compensation expense of $5.4 million and $2.5 million during 2010 and 2009, respectively. The stock-based compensation expense increase is attributable to additional options granted and outstanding during 2010 compared to 2009.

Other Income (Expense), net


	Years Ended December 31,						Change
(In Thousands)	2010			2009			$			%
Interest income	$	166		$	180		$	(14	)		(8	%)
Interest expense and other, net		(1,199	)		(2,037	)		838			(41	%)

Total other income (expense), net	$	(1,033	)	$	(1,857	)	$	824			(44	%)

Interest Income. Interest income decreased due to lower average interest rates received on our cash, cash equivalents and marketable securities balances during 2010 compared to 2009.

Interest Expense and Other, Net. Interest expense and other, net, decreased $0.8 million during 2010 compared to 2009 due to $0.4 million of other income derived in 2010 from contractual arrangements with Arch and a decrease in interest expense of $0.9 million due to the payoff of our debt obligation on the GE Capital Loan. These were offset by an increase of $0.4 million in unrealized foreign exchange losses primarily related to our operations in Hungary.

Provision for Income Taxes. The tax provision for 2010 and 2009 primarily consisted of income taxes attributable to foreign operations and expenses related to uncertain tax positions.

Liquidity and Capital Resources


	December 31,
(In Thousands)	2011		2010
Cash and cash equivalents	$	25,762	$	72,396
Marketable securities		27,720		—
Accounts receivable, net		18,917		15,333
Accounts payable, accrued compensation and accrued liabilities		24,503		22,945
Working capital (1)		50,940		64,708

(1)	Working capital consists of total current assets less total current liabilities.


	Years Ended December 31,
(In Thousands)	2011			2010			2009
Net cash used in operating activities	$	(490	)	$	(16,383	)	$	(8,786	)
Net cash used in investing activities		(48,808	)		(5,166	)		(20,958	)
Net cash provided by financing activities		2,579			62,239			39,997
Effect of foreign exchange rates on cash and cash equivalents		85			(79	)		(371	)

Net increase (decrease) in cash and cash equivalents	$	(46,634	)	$	40,611		$	9,882

Cash Flows from Operating Activities

We have historically experienced negative cash flow from operations as we continue to invest in our infrastructure, our technology platform, and expand our business. Our cash flows from operations will continue to be affected principally by the extent to which we increase our headcount, primarily in research and development, in order to grow our business. The timing of hiring of skilled research and development personnel affects cash flows in particular as there is a lag between the hiring of research and development personnel and the generation of collaboration or product revenues and cash flows from those personnel. Our primary source of cash flows from operating activities is cash receipts from our customers. Our largest uses of cash from operating activities are for employee related expenditures, rent payments, inventory purchases to support our revenue growth and non-payroll research and development costs, which historically included payments made to Maxygen in connection with our biofuels research and development collaboration with Shell. As a result of our purchase of the Maxygen IP in October 2010, these payments to Maxygen terminated. In light of the growth in market acceptance of our products and services to date, we currently intend to continue our investment in research and development.

Our operating activities in 2011 used cash of $0.5 million, primarily due to our net loss of $16.6 million in 2011, and increases in accounts receivable of $3.6 million due to increased product revenues and the timing of payments from Shell and a decrease in deferred revenues of $4.3 million primarily as a result of billings to Shell recognized to revenue during 2011. We also had net non-cash charges of $21.6 million, comprised primarily of non-cash share-based compensation expense of $9.4 million, $7.8 million in depreciation and amortization of property and equipment and $3.7 million in amortization of intangible assets.

Our operating activities in 2010 used cash of $16.4 million, primarily due to our net loss of $8.5 million in 2010, and increases in accounts receivable of $8.1 million due to increased product revenues and the timing of payments from Shell and a decrease in deferred revenues of $15.1 million primarily as a result of 2009 billings to Shell recognized to revenue during 2010. We also had net non-cash charges of $19.0 million, comprised primarily of non-cash share-based compensation expense of $8.7 million, $7.2 million in depreciation and amortization of property and equipment and $1.1 million in amortization of intangible assets.

Our operating activities in 2009 used cash of $8.8 million, primarily as a result of our net loss of $20.3 million and increases in accounts receivable of $1.1 million, offset by decreases in deferred revenues of $0.5 million primarily as a result of continuing recognition of up-front exclusivity fees we received from Shell in 2007. We also had net non-cash charges of $12.5 million, comprised primarily of $5.2 million in depreciation and amortization of property and equipment, $4.8 million in stock-based compensation expense, $1.0 million in amortization of intangible assets and $0.6 million related to the increase in the fair value of the redeemable convertible preferred stock warrants during the period.

Cash Flows from Investing Activities

In 2011, cash used in investing activities totaled $48.8 million and primarily consisted of a net increase in marketable securities of $38.0 million and capital expenditures of $10.7 million primarily related to improvements for our facility expansion and purchase of development and lab equipment.

In 2010, cash used in investing activities totaled $5.2 million and primarily consisted of a net decrease in marketable securities of $23.2 million and capital expenditures of $7.0 million primarily related to leasehold improvements for lab space expansion and purchase of manufacturing and lab equipment and $20.7 million for the acquisition of the Maxygen IP.

In 2009, our investing activities used cash of $21.0 million, primarily for the net purchases of $9.1 million of marketable securities, and $10.7 million of capital expenditures. These capital expenditures consisted primarily of laboratory equipment purchases and leasehold improvements in our laboratories.

We expect our capital expenditures to be approximately $6.0 million for 2012. In the future, we will continue to make laboratory equipment purchases to support our increasing research and development efforts and growth strategy.

Cash Flows from Financing Activities

In 2011, our financing activities provided $2.6 million of cash from exercises of stock options.

In 2010, our financing activities provided $62.2 million including gross proceeds received related to our IPO of $72.5 million and $1.6 million from exercises of stock options offset by payments in preparation for our IPO of $3.9 million and the payoff of our financing obligations of $8.0 million.

In 2009, our financing activities provided $40.0 million in cash, primarily from the issuance and sale of 3.7 million shares of Series F preferred stock for $46.9 million, partially offset by $6.1 million in principal payments on our financing obligations.

Contractual Obligations and Commitments

The following summarizes the future commitments arising from our contractual obligations at December 31, 2011 (in thousands):


	Total		2012		2013		2014		2015		2016		2017 and beyond
Operating leases	$	22,975	$	3,268	$	2,909	$	2,731	$	2,808	$	2,812	$	8,447

Total	$	22,975	$	3,268	$	2,909	$	2,731	$	2,808	$	2,812	$	8,447

We have excluded from the above table $1.5 million in contractual obligations related to uncertain tax positions as we cannot make a reasonably reliable estimate of the period of cash settlement.

Off-Balance Sheet Arrangements

As of December 31, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

Accounting Guidance Update

Recently Adopted Accounting Guidance

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income that eliminates the option to present items of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity, and instead requires either, OCI presentation and net income in a single continuous statement in the statement of operations, or as a separate statement of comprehensive income. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted this update in the fourth quarter of 2011. The adoption of this accounting guidance did not have a material impact on our financial statements.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon the achievement of milestone events. An entity may only recognize consideration that is contingent upon the achievement of a milestone in its entirety in the period the milestone is achieved only if the milestone meets certain criteria. We adopted this guidance effective January 1, 2011 and it did not materially impact our financial statements. The potential future impact of this guidance will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future. Refer to Note 2 in the Notes to Consolidated Financial Statements for information related to our evaluation of revenue arrangements with milestones.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. This amended guidance requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers in and out of Levels 1 and Levels 2 fair value measurements and disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of the accounting guidance had no material impact to our financials or disclosures.

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements updating accounting standards for revenue recognition for multiple-deliverable arrangements. The stated objective of the update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements. We adopted this guidance for revenue arrangements entered into or materially modified after January 1, 2011 and it did not have a material impact on our financial statements or disclosures to date. The potential future impact of this guidance will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future. Refer to Note 2 in the Notes to Consolidated Financial Statements for information related to our evaluation of revenue arrangements with multiple-deliverables.

Recent Accounting Guidance Not Yet Effective

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment that simplifies goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. We will adopt this accounting standard upon its effective date for periods beginning after December 15, 2011, and do not anticipate that this adoption will have a significant impact on our financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs that clarifies and changes some fair value measurement principles and disclosure requirements. Among them is the clarification that the concepts of highest and best use and valuation premise in a fair value measurement, should only be applied when measuring the fair value of nonfinancial assets. Additionally, the new guidance requires quantitative information about unobservable inputs, and disclosure of the valuation processes used and narrative descriptions with regard to fair value measurements within the Level 3 categorization of the fair value hierarchy. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. The adoption of this new guidance is not expected to have a material impact on our financial statements or disclosures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $25.8 million at December 31, 2011. These amounts were invested primarily in money market funds and are held for working capital purposes. We had current and non-current marketable securities holdings of $27.7 million and $10.3 million, respectively. These amounts were invested primarily in corporate bonds, commercial paper, and U.S. government obligations and U.S. Government-sponsored enterprise securities and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates fell by 10% in 2011, our interest income would have declined by approximately $28,000, assuming consistent investment levels.

Foreign Currency Risk

Our operations include manufacturing and sales activities in the United States, Austria, France, Germany, Italy, Japan and India, as well as research activities in countries outside the United States, including Singapore and Hungary. As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. For example, we purchase materials for, and pay employees at, our research facility in Singapore in Singapore dollars. In addition, we purchase products for resale in the United States from foreign companies and have agreed to pay them in currencies other than the U.S. dollar. As a result, our expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into U.S. dollars. Although it is possible to do so, we have not hedged our foreign currency since the exposure has not been material to our historical operating results. Although substantially all of our sales are denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products outside the United States. The effect of a 10% adverse change in exchange rates on foreign denominated receivables as of December 31, 2011 would have been a $0.6 million foreign exchange loss recognized as a component of interest expense and other, net in our consolidated statement of operations. We may consider hedging our foreign currency as we continue to expand internationally.

Equity Price Risk

As described further in Note 4 to the consolidated financial statements, we have an investment in common shares of CO₂ Solution’s Inc., a company based in Quebec City, Canada, or CO₂ Solutions, whose shares are publicly traded in Canada on the TSX Venture Exchange. This investment is exposed to fluctuations in both the market price of CO₂ Solutions’s common shares and changes in the exchange rates between the U.S. dollar and the Canadian dollar. The effect of a 10% adverse change in the market price of CO₂ Solutions’s common shares as of December 31, 2011 would have been an unrealized loss of approximately $116,000, recognized as a component of unrealized loss on the consolidated statements of comprehensive income (loss). The effect of a 10% adverse change in the exchange rates between the U.S. dollar and the Canadian dollar as of December 31, 2011 would have been an unrealized loss of approximately $116,000 recognized as a component of interest expense and other, net on the consolidated statements of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

五星体育直播

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Reports of Independent Registered Public Accounting Firm			74
Consolidated Balance Sheets			76
Consolidated Statements of Operations			77
Consolidated Statements of Comprehensive Income			78
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)			79
Consolidated Statements of Cash Flows			80
Notes to Consolidated Financial Statements			81

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

五星体育直播

We have audited the accompanying consolidated balance sheets of 五星体育直播 (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 五星体育直播 at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 五星体育直播’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Redwood City, California

March 5, 2012

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

五星体育直播

We have audited 五星体育直播’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 五星体育直播’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, 五星体育直播 maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 五星体育直播 as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2011 of 五星体育直播 and our report dated March 5, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Redwood City, California

March 5, 2012

五星体育直播

Consolidated Balance Sheets

(In Thousands except Per Share Amounts)


	December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	25,762		$	72,396
Marketable securities		27,720			—
Accounts receivable, net of allowances of $17 and $58 at December 31, 2011 and 2010, respectively		18,917			15,333
Inventories		4,488			2,817
Prepaid expenses and other current assets		2,345			1,646

Total current assets		79,232			92,192

Restricted cash		1,511			1,466
Non-current marketable securities		10,348			1,650
Property and equipment, net		24,176			21,452
Intangible assets, net		16,442			20,158
Goodwill		3,241			3,241
Other non-current assets		972			1,141

Total assets	$	135,922		$	141,300

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,364		$	9,208
Accrued compensation		6,785			8,107
Other accrued liabilities		7,354			5,630
Deferred revenues		3,789			4,539

Total current liabilities		28,292			27,484

Deferred revenues, net of current portion		1,485			5,074
Other long-term liabilities		3,455			1,381
Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000 and 5,000 shares authorized at December 31, 2011 and 2010, respectively; None issued and outstanding at December 31, 2011 and 2010, respectively;

Common stock, $0.0001 par value per share; 100,000 shares authorized at December 31, 2011 and 2010, respectively; 35,996 and 34,829 shares issued and outstanding at December 31, 2011 and 2010, respectively;		4			4
Additional paid-in capital		287,792			275,540
Accumulated other comprehensive loss		(407	)		(34	)
Accumulated deficit		(184,699	)		(168,149	)

Total stockholders’ equity		102,690			107,361

Total liabilities and stockholders’ equity	$	135,922		$	141,300

五星体育直播

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)


	Years Ended December 31,
	2011			2010			2009
Revenues:
Product	$	49,021		$	32,835		$	18,554
Collaborative research and development		71,368			70,196			64,308
Government grants		3,476			4,073			46

Total revenues		123,865			107,104			82,908
Costs and operating expenses:
Cost of product revenues		41,781			27,982			16,678
Research and development		61,049			52,405			54,725
Selling, general and administrative		36,942			33,841			29,871

Total costs and operating expenses		139,772			114,228			101,274

Loss from operations		(15,907	)		(7,124	)		(18,366	)
Interest income		273			166			180
Interest expense and other, net		(675	)		(1,199	)		(2,037	)

Loss before provision for income taxes		(16,309	)		(8,157	)		(20,223	)
Provision for income taxes		241			384			66

Net loss	$	(16,550	)	$	(8,541	)	$	(20,289	)

Net loss per share of common stock, basic and diluted	$	(0.46	)	$	(0.35	)	$	(7.74	)

Weighted average common shares used in computing net loss per share of common stock, basic and diluted		35,674			24,594			2,622

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Consolidated Statements of Comprehensive Income

(In Thousands)


	Years Ended December 31,
	2011			2010			2009
Net loss	$	(16,550	)	$	(8,541	)	$	(20,289	)
Other comprehensive income, net of tax
Foreign currency translation adjustments		(3	)		(37	)		(253	)
Unrealized gain (loss) on marketable securities		(370	)		255			(138	)

Other comprehensive loss		(373	)		218			(391	)

Total comprehensive loss	$	(16,923	)	$	(8,323	)	$	(20,680	)

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Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In Thousands)


	Redeemable Convertible Preferred Stock						Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares			Amount			Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
December 31, 2008		21,513			132,746			2,604		—		10,056			139			(139,319	)		(129,124	)
Exercise of stock options		—			—			66		—		117			—			—			117
Vesting of shares exercised early		—			—			—		—		20			—			—			20
Employee stock-based compensation		—			—			—		—		4,671			—			—			4,671
Non-employee stock-based compensation		—			—			—		—		151			—			—			151
Issuance of Series F redeemable convertible preferred stock, net of issuance costs of $74		3,686			46,926			—		—		—			—			—			—
Total comprehensive loss															(391	)		(20,289	)		(20,680	)

December 31, 2009		25,199			179,672			2,670		—		15,015			(252	)		(159,608	)		(144,845	)
Exercise of common warrants		—			—			42		—		—			—			—			—
Exercise of stock options		—			—			810		—		1,594			—			—			1,594
Vesting of shares exercised early		—			—			—		—		13			—			—			13
Employee stock-based compensation		—			—			—		—		8,468			—			—			8,468
Non-employee stock-based compensation		—			—			—		—		386			—			—			386
Conversion of preferred stock to common stock at initial public offering		(25,199	)		(179,672	)		25,307		3		179,669			—			—			179,672
Shares issued for initial public offering, net of issuance costs		—			—			6,000		1		67,710			—			—			67,711
Conversion of preferred stock warrants		—			—			—		—		2,686			—			—			2,686
Cash paid in lieu of partial shares		—			—			—		—		(1	)		—			—			(1	)
Total comprehensive loss															218			(8,541	)		(8,323	)

December 31, 2010		—			—			34,829		4		275,540			(34	)		(168,149	)		107,361
Exercise of stock options		—			—			1,167		—		2,579			—			—			2,579
Employee stock-based compensation		—			—			—		—		9,286			—			—			9,286
Non-employee stock-based compensation		—			—			—		—		387			—			—			387
Total comprehensive loss															(373	)		(16,550	)		(16,923	)

December 31, 2011		—		$	—			35,996	$	4	$	287,792		$	(407	)	$	(184,699	)	$	102,690

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Consolidated Statements of Cash Flows

(In Thousands)


	Years Ended December 31,
	2011			2010			2009
Operating activities:
Net loss	$	(16,550	)	$	(8,541	)	$	(20,289	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets		3,716			1,063			957
Depreciation and amortization of property and equipment		7,755			7,246			5,172
Revaluation of redeemable convertible preferred stock warrant liability		—			677			627
Loss (gain) on disposal of property and equipment		49			148			(50	)
Extinguishment of royalty payable		—			461			—
Gain from extinguishment of asset retirement obligation		(124	)		—			—
Stock-based compensation		9,431			8,737			4,822
Accretion of asset retirement obligation		39			146			43
Amortization of debt discount		—			26			311
Accretion of premium/discount on marketable securities		771			511			594
Changes in operating assets and liabilities:
Accounts receivable		(3,583	)		(8,087	)		(1,054	)
Inventories		(1,671	)		98			58
Prepaid expenses and other current assets		(682	)		13			11
Other assets		513			2,814			(228	)
Accounts payable		1,156			(2,105	)		1,068
Accrued compensation		(1,322	)		1,589			2,434
Other accrued liabilities		4,351			(6,048	)		(3,792	)
Deferred revenues		(4,339	)		(15,131	)		530

Net cash used in operating activities		(490	)		(16,383	)		(8,786	)

Investing activities:
(Increase) decrease in restricted cash		(45	)		(735	)		193
Purchase of property and equipment		(10,736	)		(6,990	)		(10,697	)
Purchase of marketable securities		(52,564	)		(49,051	)		(37,118	)
Purchase of Maxygen patent portfolio		—			(20,705	)		—
Proceeds from sale of marketable securities		6,037			1,605			—
Proceeds from maturities of marketable securities		8,500			70,695			27,980
Proceeds from disposal of property and equipment		—			15			—
Purchase of shares of CO₂ Solutions common shares		—			—			(1,316	)

Net cash used in investing activities		(48,808	)		(5,166	)		(20,958	)

Financing activities:
Principal payments on financing obligations		—			(8,026	)		(6,087	)
Payments in preparation for initial public offering		—			(3,870	)		(959	)
Proceeds from issuance of preferred stock, net of issuance costs		—			—			46,926
Proceeds from issuance of common stock on IPO, net of underwriting discounts		—			72,541			—
Proceeds from exercises of stock options		2,579			1,594			117

Net cash provided by financing activities		2,579			62,239			39,997

Effect of exchange rate changes on cash and cash equivalents		85			(79	)		(371	)
Net increase (decrease) in cash and cash equivalents		(46,634	)		40,611			9,882
Cash and cash equivalents at the beginning of the period		72,396			31,785			21,903

Cash and cash equivalents at the end of the period	$	25,762		$	72,396		$	31,785

Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$	350		$	1,066

Cash paid for income taxes	$	89		$	336		$	364

Supplemental schedule of noncash investing and financing activities:
Reclassification of preferred stock warrant from liability to additional paid-in capital	$	—		$	2,686		$	—

Conversion of preferred stock to common stock and additional paid-in capital	$	—		$	179,672		$	—

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Notes to Consolidated Financial Statements

1. Description of Business

We are a producer of custom industrial enzymes. Our products enable novel, sustainable processes for the manufacture of biofuels, chemicals, and pharmaceutical ingredients.

We are developing our flagship CodeXyme^™ cellulase enzymes to convert non-food plant material, which we call cellulosic biomass, into affordable sugars, which can then be converted into renewable fuels and chemicals. We have been developing these cellulase enzymes with Royal Dutch Shell plc, or Shell, since 2006 for applications in the biofuels markets. We intend to market CodeXyme^™ cellulase enzymes to chemicals manufacturers worldwide. We are also developing our own novel processes to manufacture certain specialty and commodity bio-based chemicals, which we intend to commercialize with strategic partners. The first of these products is CodeXol^™ detergent alcohols. Detergent alcohols are used to manufacture surfactants, which are key, active cleaning ingredients in consumer products such as shampoos, liquid soaps and laundry detergents.

We have commercialized our technology, products and services in the pharmaceuticals market. There are currently over 50 pharmaceutical firms using our technology, products and services in their manufacturing process development, including the production of some of the world’s bestselling and fastest growing drugs.

We create our products by applying our CodeEvolver^™ directed evolution technology platform which introduces genetic mutations into microorganisms, giving rise to changes in the enzymes which they produce. Once we identify potentially beneficial mutations, we test combinations of these mutations until we have created variant enzymes that exhibit marketable performance characteristics superior to competitive products. This process allows us to make continuous, efficient improvements to the performance of our enzymes.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include the accounts of 五星体育直播 and our wholly-owned subsidiaries. We have subsidiaries in United States, Brazil, Hungary, India, Mauritius, The Netherlands and Singapore. All significant intercompany balances and transactions have been eliminated in consolidation.

Significant Risks and Uncertainties

We incurred net losses of $16.6 million, $8.5 million and $20.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. We used $0.5 million, $16.4 million and $8.8 million of cash in operating activities for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, we had an accumulated deficit of $184.7 million and unrestricted cash and cash equivalents of $25.8 million. We may be required to seek additional funds through collaborations or public or private debt or equity financings, and may also seek to reduce expenses related to our operations. There can be no assurance that any financing will be available or at terms acceptable to us.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our management regularly assesses these estimates which primarily affect revenue recognition, the valuation of marketable securities and accounts receivable, intangible assets and goodwill arising out of business acquisitions, inventories, accrued liabilities, common stock, and stock options and the valuation allowances associated with deferred tax assets. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Foreign Currency Translation

The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional currencies into U.S. dollars at the exchange rates in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded in accumulated other comprehensive income (loss) in the consolidated statements of stockholders’ equity (deficit). Revenues and expense amounts are translated at average rates during the period. Accumulated other comprehensive income (loss) included cumulative translation adjustment losses of $165,000 and $162,000 at December 31, 2011 and 2010, respectively.

Where the U.S. dollar is the functional currency, nonmonetary assets and liabilities originally acquired or assumed in other currencies are recorded in U.S. dollars at the exchange rates in effect at the date they were acquired or assumed. Monetary assets and liabilities denominated in other currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expense amounts are generally translated at the average rates during the period. Translation adjustments are recorded in interest expense and other, net in the accompanying consolidated statements of operations. Gains and losses realized from transactions, including intercompany balances not considered as permanent investments, denominated in currencies other than an entity’s functional currency, are included in interest expense and other, net in the accompanying consolidated statements of operations.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable and restricted cash. Cash and cash equivalents, marketable securities and restricted cash are invested through banks and other financial institutions in the United States, as well as in other foreign countries. Such deposits may be in excess of insured limits.

Credit risk with respect to accounts receivable exists to the full extent of amounts presented in the consolidated financial statements. We periodically require collateral to support credit sales. We estimate an allowance for doubtful accounts through specific identification of potentially uncollectible accounts receivable based on an analysis of our accounts receivable aging. Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows.

Customers with accounts receivables balance of 10% or more of our total receivables balance consist of the following (in thousands):


	Percentage of accounts receivable as of December 31,
	2011			2010
Customers
Pharmaceutical Customer A		17	%		*
Shell		15	%		31	%
Pharmaceutical Customer B		11	%		14	%
Pharmaceutical Customer C		10	%		13	%
Pharmaceutical Customer D		10	%		*

*	Represents less than 10% of total accounts receivable

We do not believe the accounts receivable from these customers represent a significant credit risk based on past collection experiences and the general creditworthiness of these customers.

Fair Value of Financial Instruments

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, marketable securities, restricted cash, accounts receivable and accounts payable, approximate fair value due to their short maturities.

Fair value is considered to be the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on or derived from observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

Cash, Cash Equivalents and Marketable Securities

We consider all highly liquid investments with maturity dates of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds. The majority of cash and cash equivalents are maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits. Marketable securities included in current assets are comprised of corporate bonds, commercial paper, government-sponsored enterprise securities and U.S. Treasury obligations. Marketable securities included in non-current assets are comprised of corporate bonds and government-sponsored enterprise securities that have a maturity date greater than 1 year. Our investment in common shares of CO₂ Solutions Inc. (“CO₂ Solutions”) is included in non-current marketable securities.

We perform separate evaluations of impaired debt and equity securities to determine if the unrealized losses as of the balance sheet date are other-than-temporary.

For our investments in equity securities, our evaluation considers a number of factors including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and our management’s ability and intent to hold the securities until fair value recovers. The assessment of the ability and intent to hold these securities to recovery focuses on our current and forecasted liquidity requirements, our capital requirements and securities portfolio objectives. Based on our evaluation, we concluded that as of December 31, 2011, the unrealized losses related to equity securities are temporary.

For our investments in debt securities, our management determines whether we intend to sell or if it is more-likely-than-not that we will be required to sell impaired securities. This determination considers our current and forecasted liquidity requirements, our capital requirements and securities portfolio objectives. For all impaired debt securities for which there was no intent or expected requirement to sell, the evaluation considers all available evidence to assess whether it is likely the amortized cost value will be recovered. We conduct a regular assessment of our debt securities with unrealized losses to determine whether the securities have other-than-temporary impairment considering, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral and market conditions. Based on our evaluation, we concluded that as of December 31, 2011, the unrealized losses related to debt securities are temporary.

Our investments in debt and equity securities are classified as available-for-sale and are carried at estimated fair value. Unrealized gains and losses are reported on the Statement of Comprehensive Income. Amortization of purchase premiums and accretion of purchase discounts, realized gains and losses of debt securities and declines in value deemed to be other than temporary, if any, are included in interest income or interest expense and other, net. The cost of securities sold is based on the specific-identification method. There were no significant realized gains or losses from sales of marketable securities during the years ended December 31, 2011, 2010, and 2009.

Accounts Receivable

Accounts receivable represent amounts owed to us under our collaborative research and development agreements, product revenues and government grants. Our allowance for doubtful accounts was $17,000 and $58,000 as of December 31, 2011 and 2010, respectively. Specific accounts written off against the established reserve were $12,000, $0, and $0 during the years ended December 31, 2011, 2010 and 2009, respectively.

Inventories

Inventories consist of biocatalysts, which are enzymes or microbes that facilitate chemical reactions, and pharmaceutical intermediates. Internally produced biocatalysts only qualify as commercial inventory after they have achieved specifications that are required for selling the materials. Inventories held at our contract manufacturers are accepted as finished goods after achieving specifications stated in our purchase orders. Inventories are carried at the lower of cost or market. Cost is determined using the first-in first-out method or the specific identification method depending on location. Inventories, based on demand and age, are written down as excess and obsolete materials, if necessary.

Property and Equipment

Property and equipment, including the cost of purchased software, are stated at cost, less accumulated depreciation and amortization. Property and equipment also includes equipment that has been received but not yet placed in service. Depreciation is calculated using the straight-line method over the following estimated ranges of useful lives:


Asset classification		Estimated useful life
Laboratory equipment		5 years

Computer equipment and software		3 to 5 years

Office equipment and furniture		5 years

Leasehold improvements		Lesser of useful life or lease term

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill is presumed to have an indefinite life and is not subject to annual amortization. We review goodwill for impairment at the company level, which is the sole reporting unit, on at least an annual basis and at any interim date whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The annual test for goodwill impairment is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates an impairment, then the loss is measured as the excess of recorded goodwill over its implied fair value. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. No impairment charges were recorded during the years ended December 31, 2011, 2010, and 2009.

Intangible Assets and Impairment of Long-Lived Assets

Intangible assets consist of customer relationships, developed core technology and trade names, arising out of the Maxygen IP purchase in 2010, the Jülich Fine Chemicals (“JFC”) acquisition in 2005 and our acquisition of BioCatalytics, Inc. in 2007. Intangible assets are recorded at their fair values at the date of the acquisition and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives, which range from one to seven years.

We periodically review our intangible and other long-lived assets for possible impairment, whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amounts of the assets, an impairment loss is recorded to write the assets down to their estimated fair values. No impairment charges were recorded during the years ended December 31, 2011, 2010, and 2009.

Restricted Cash

Restricted cash was invested in money market accounts primarily for purposes of securing a standby letter of credit as collateral for our Redwood City, California facility lease agreement and for securing a working capital line of credit. During the year ended December 31, 2011, restricted cash increased by $45,000 due to changes in our facility lease agreement and our working capital line of credit. During the year ended December 31, 2010, restricted cash increased by $0.7 million due to a working capital line of credit.

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for multiple-element revenue arrangements (“ASU 2009-13”) to:

•

provide updated guidance on whether multiple deliverables exist, how the elements in an arrangement should be separated, and how the consideration should be allocated;

•

eliminate the use of the residual method and require a vendor to allocate revenue using the relative selling price method.

We adopted the above accounting guidances on January 1, 2011, for applicable arrangements entered into or materially modified after January 1, 2011 (the beginning of our fiscal year). We have determined that adoption of this new guidance did not have a material impact on our results of operations, cash flows or financial position. The potential future impact of ASU 2009-13 and ASU 2010-17 guidance will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future.

Collaborative research and development revenues related to the arrangements with Shell consisted of the following (in thousands):


	Years Ended December 31,
	2011		2010		2009
License, technology access and exclusivity fees	$	4,084	$	4,084	$	4,521
Services		53,541		54,664		53,535
Milestones		5,554		7,400		4,600

Shell collaborative research and development revenues	$	63,179	$	66,148	$	62,656

Other collaborative research and development revenues consisted of the following (in thousands):


	Years Ended December 31,
	2011		2010		2009
License, technology access and exclusivity fees	$	686	$	186	$	186
Services		5,804		2,695		897
Milestones		—		420		—
Royalties		1,699		747		569

Other collaborative research and development revenues	$	8,189	$	4,048	$	1,652

For each source of collaborative research and development revenues, product revenues and grant revenues, we apply the following revenue recognition criteria:

•

Product revenues are recognized once passage of title and risk of loss has occurred and contractually specified acceptance criteria have been met, provided all other revenue recognition criteria have also been met. Product revenues consist of sales of biocatalysts, intermediates, active pharmaceutical ingredients and Codex Biocatalyst Panels and Kits. Cost of product revenues includes both internal and third party fixed and variable costs including amortization of purchased technology, materials and supplies, labor, facilities and other overhead costs associated with our product revenues.

•

Customer Concentration

Customers with revenues of 10% or more of our total revenues consist of the following:


	Percentage of Total Revenues For The Years Ended December 31,
	2011			2010			2009
Customers
Shell		51	%		62	%		76	%
Merck		10	%		10	%		*

*	Represents less than 10% of total revenues

Concentrations of Supply Risk

We rely on a limited number of suppliers for our products. We believe that other vendors would be able to provide similar products; however, the qualification of such vendors may require substantial start-up time. In order to mitigate any adverse impacts from a disruption of supply, we attempt to maintain an adequate supply of critical single-sourced materials. For certain materials, our vendors maintain a supply for us. We outsource a portion of the manufacturing of our products to contract manufacturers with facilities in Austria, India and Italy.

Research and Development Expenses

Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities. These costs include direct and research-related overhead expenses, which include salaries, stock-based compensation and other personnel-related expenses, facility costs, supplies, depreciation of facilities and laboratory equipment, as well as research consultants and the cost of funding research at universities and other research institutions, and are expensed as incurred. Costs to acquire technologies that are utilized in research and development that have no alternative future use, are expensed when incurred.

Advertising

Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. Advertising costs were $113,000, $55,000, and $167,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

Income Taxes

We use the liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss (NOL) carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criterion, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We recognize the financial statement effects of an uncertain tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.

Stock-Based Compensation

Effective January 1, 2006, we began recognizing compensation expense related to share-based transactions, including the awarding of employee stock options, based on the estimated fair value of the awards granted. All awards granted, modified or settled after January 1, 2006 have been accounted for based on the fair value of the awards granted. We are using the straight-line method to allocate stock-based compensation expense to the appropriate reporting periods.

We account for stock options issued to non-employees based on their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of the options granted to non-employees is remeasured as they vest, and the resulting change in value, if any, is recognized as an increase or decrease in stock compensation expense during the period the related services are rendered.

Net Loss per Share of Common Stock

Basic net loss per share of common stock is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share of common stock is computed by giving effect to all potential common shares, consisting of stock options, warrants and redeemable convertible preferred stock, to the extent dilutive. Basic and diluted net loss per share of common stock was the same for each period presented as the inclusion of all potential common shares outstanding was anti-dilutive.

The following table presents the calculation of basic and diluted net loss per share of common stock (in thousands, except per share amounts):


	Years Ended December 31,
	2011			2010			2009
Numerator:
Net loss	$	(16,550	)	$	(8,541	)	$	(20,289	)

Denominator:
Weighted-average shares of common stock outstanding		35,674			24,597			2,633
Weighted-average shares of common stock subject to repurchase		—			(3	)		(11	)

Weighted-average shares of common stock used in computing net loss per share of common stock, basic and diluted		35,674			24,594			2,622

Net loss per share of common stock, basic and diluted	$	(0.46	)	$	(0.35	)	$	(7.74	)

The following redeemable convertible preferred stock, common stock subject to repurchase, options to purchase common stock, restricted stock units, warrants to purchase redeemable convertible preferred stock and warrants to purchase common stock were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have had an anti-dilutive effect (in thousands):


	Years Ended December 31,
	2011		2010		2009
Redeemable convertible preferred stock		—		—		25,240
Common stock subject to repurchase		—		—		5
Options to purchase common stock		7,904		7,796		7,887
Restricted stock units		546		—		—
Warrants to purchase redeemable convertible preferred stock		—		—		288
Warrants to purchase common stock		266		266		39

Total		8,716		8,062		33,459

Reclassifications

Certain amounts in prior period financial statements related to Shell including related party collaboration revenue (see Notes 3 and 7), related party receivable, related party deferred revenue, have been reclassified to the corresponding non-related party account. Our investment in CO₂ Solutions (See Note 4), has been reclassified from non-current other assets to non-current marketable securities and the composition of our deferred tax assets have been reclassified to conform to the current period presentation.

Accounting Guidance Update

Recently Adopted Accounting Guidance

In June 2011, the FASB issued ASU 2011-05 that eliminates the option to present items of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity, and instead requires either, OCI presentation and net income in a single continuous statement in the statement of operations, or as a separate statement of comprehensive income. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted this update in the fourth quarter of 2011. The adoption of this accounting guidance did not have a material impact on our financial statements.

In April 2010, the FASB issued ASU 2010-17 on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.

Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon the achievement of milestone events. An entity may only recognize consideration that is contingent upon the achievement of a milestone in its entirety in the period the milestone is achieved only if the milestone meets certain criteria. We adopted this guidance effective January 1, 2011 and it did not materially impact our financial statements. The potential future impact of this guidance will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future. Refer to Note 2 in the Notes to Consolidated Financial Statements for information related to our evaluation of revenue arrangements with milestones.

In January 2010, the FASB issued ASU 2010-06 that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. This amended guidance requires disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers in and out of Levels 1 and Levels 2 fair value measurements and disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of the accounting guidance had no material impact to our financials or disclosures.

In October 2009, the FASB issued ASU 2009-13 updating accounting standards for revenue recognition for multiple-deliverable arrangements. The stated objective of the update was to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The guidance provides amended methodologies for separating consideration in multiple-deliverable arrangements and expands disclosure requirements. We adopted this guidance for revenue arrangements entered into or materially modified after January 1, 2011 and it did not have a material impact on our financial statements or disclosures to date. The potential future impact of this guidance will depend on the nature of any new arrangements or material modifications of existing arrangements that are entered into in the future. Refer to Note 2 in the Notes to Consolidated Financial Statements for information related to our evaluation of revenue arrangements with multiple-deliverables.

Recent Accounting Guidance Not Yet Effective

In September 2011, the FASB issued ASU 2011-08 that simplifies goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. We will adopt this accounting standard upon its effective date for periods beginning after December 15, 2011, and do not anticipate that this adoption will have a significant impact on our financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04 that clarifies and changes some fair value measurement principles and disclosure requirements. Among them is the clarification that the concepts of highest and best use and valuation premise in a fair value measurement, should only be applied when measuring the fair value of nonfinancial assets. Additionally, the new guidance requires quantitative information about unobservable inputs, and disclosure of the valuation processes used and narrative descriptions with regard to fair value measurements within the Level 3 categorization of the fair value hierarchy. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. The adoption of this new guidance is not expected to have a material impact on our financial statements or disclosures.

3. Collaborative Research and Development Agreements

Shell and Raízen

In November 2006, we entered into a collaborative research agreement and a license agreement with Shell to develop biocatalysts and associated processes that use such biocatalysts.

In November 2007, we entered into a new and expanded five-year collaborative research agreement and a license agreement with Shell. In connection with the expanded collaborative research agreement and license agreement, Shell agreed to pay us (1) research funding at specified rates per FTE working on the project during the research term, (2) milestone payments upon the achievement of milestones and (3) royalties on future product sales. The agreement also specifies certain minimum levels of FTE services that we must allocate to the collaboration efforts that increase over the term of the agreement.

Shell has the right to terminate the collaborative research agreement upon nine months’ notice. The term of the agreement ends in October 2012, unless extended further by the parties. During the term of the agreement, we are required to act exclusively with Shell as it relates to the rights and research described in the arrangement and may not conduct research or contract to conduct research, for another party in the field of use. Under this agreement, we also have a right of first negotiation but not an obligation to manufacture any biocatalysts developed under the collaborative research agreement if Shell decides to out-source the manufacture of such biocatalysts.

In March 2009, we amended our collaborative research agreement and license agreement with Shell to further expand the scope of the collaboration and allow for additional purchases of the Company’s preferred stock by Shell. In connection with the amended collaborative research agreement and license agreement, Shell agreed to pay us (1) additional research funding at specified rates per FTE working on the project during the research term and (2) additional milestone payments upon the achievement of milestones. Shell has the right to reduce the number of funded FTEs, subject to certain limitations, with a required advance notice period ranging from 30 to 270 days and a subsequent period ranging from 90 to 360 days during which notices of further FTE reductions cannot be made by Shell. The length of these periods varies dependent on the number of funded FTEs reduced. Effective August 2011, Shell reduced the number of funded FTEs engaged in our research and development collaboration from 128 to 116 FTEs.

In accordance with our revenue recognition policy, the $20.0 million up-front exclusivity fee and the research funding fees to be received for FTE services are recognized in proportion to the actual research efforts incurred relative to the amount of total expected effort to be incurred by us over the five-year research period commencing November 2007. Milestones payments to be earned under this agreement have been determined to be at risk at the inception of the arrangement and substantive and are expected to be recognized upon achievement of the applicable milestone and when collectability of such payment is reasonably assured. We recorded milestone revenues of $5.6 million, $7.4 million and $4.6 million during the years ended December 31, 2011, 2010 and 2009, respectively. Under the agreements with Shell, we have the right to license technology from third parties that will assist us in meeting objectives under the collaboration. If third-party technology to be licensed is identified and mutually agreed upon by both parties, Shell is obligated to reimburse us for the licensing of the technology. Payments made by us to the third-party providers were recorded as research and development expenses related to our collaborative research agreement with Shell. We evaluate the acquired technology licenses to determine if they are expected to be used in products that will be sold within the next year and the phase of technological feasibility of the project. Shell reimbursed us for licensing costs of $199,000, $1.4 million, and $7.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. We record these reimbursements against the costs incurred.

In June 2011, Shell completed the transfer of all of its equity interests in us, together with the associated right to appoint one member to our board of directors, to Raízen Energia Participações S.A. (“Raízen”), Shell’s joint venture with Cosan S.A. Indústria e Comércio, (“Cosan”) in Brazil. As a result, Shell is no longer considered a related party. Notwithstanding the above, Shell did not transfer our collaborative research agreement to Raízen and we continue to collaborate with Shell. Additionally in September 2011, we entered into a joint development agreement directly with Raízen. Under the agreement, we will deploy our CodeEvolver^™ directed evolution technology platform to develop an improved process for producing first generation ethanol made from sugar.

Manufacturing Collaboration

In February 2010, we consolidated certain of the contractual terms in our then-existing agreements with Arch Pharmalabs, Ltd. (“Arch”) by simultaneously terminating all of our existing agreements with Arch, other than the Master Services Agreement with Arch entered into as of August 1, 2006, and entering into new agreements with Arch. The new agreements, among other things, provide for biocatalyst supply from us to Arch and intermediate supply from Arch to us. We sell the biocatalysts to Arch at an agreed upon price, and Arch manufactures the intermediates on our behalf. Arch sells the intermediates to us at a formula-based or agreed upon price. We then directly market and sell the intermediates to a specified group of customers in the generic pharmaceutical industry. Under the new agreements, Arch may also sell intermediates directly to other customers, and a license royalty is owed by Arch to us based on the volume of product they sell to us and their other customers. Royalties earned from Arch under this arrangement were $752,000 and $430,000 for the years ended December 31, 2011 and 2010, respectively.

4. Joint Development Agreement with CO₂ Solutions

On December 15, 2009, we entered into an exclusive joint development agreement with CO₂ Solutions, a company based in Quebec City, Quebec, Canada, whose shares are publicly traded in Canada on TSX Venture Exchange. The joint development agreement expired in January 2011. Under the agreement, we obtained a research license to CO₂ Solutions’s intellectual property and agreed to conduct research and development activities jointly with CO₂ Solutions with the goal of advancing the development of carbon capture technology. We also purchased 10,000,000 common shares (approximately 16.6% of the total common shares outstanding at the time of investment) of CO₂ Solutions in a private placement subject to a four-month statutory resale restriction. This restriction expired on April 15, 2010. In February 2010, Alan Shaw, our former Chief Executive Officer and an advisor to our board of directors, was appointed to the board of directors of CO₂ Solutions.

In January 2011, we extended our joint development agreement with CO₂ Solutions on essentially the same terms as the original agreement. The extended agreement will now expire on the later of June 30, 2012, or six months after the expiry of any third party collaborations.

We concluded that through December 31, 2011, we did not have the ability to exercise significant influence over CO₂ Solutions’s operating and financial policies. We consider our investment in CO₂ Solutions’s common shares as an investment in a marketable security that is available for sale, and carry it at fair value in non-current marketable securities, with changes in fair value recognized in the Statement of Comprehensive Income (loss). We have estimated the fair value of common shares as of December 31, 2011, as determined by trading on TSX Venture Exchange. Accordingly, we have classified our investment in CO₂ Solutions as a level 1 investment as discussed in Note 6.

5. Balance Sheets and Statements of Operations Details

Cash Equivalents, Marketable Securities and Other Investments

At December 31, 2011, cash equivalents, marketable securities and other investments consisted of the following (in thousands):


	December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Average Contractual Maturities
										(in days)
Money market funds	$	18,866	$	—	$	—		$	18,866	n/a
Commercial paper		1,999		—		—			1,999	55
Corporate bonds		30,908		29		(45	)		30,892	270
U.S. Treasury obligations		998		4		—			1,002	274
Government-sponsored enterprise securities		3,003		12		—			3,015	373
Common shares of CO₂ Solution		1,316		—		(155	)		1,161	n/a

Total	$	57,090	$	45	$	(200	)	$	56,935

The total cash and cash equivalents balance of $25.8 million as of December 31, 2011 was comprised of money market funds of $18.9 million and $6.9 million held as cash with major financial institutions worldwide. All marketable securities with an unrealized loss at December 31, 2011, have been in a loss position for less than 12 months.

At December 31, 2010, cash equivalents, marketable securities and other investments consisted of the following (in thousands):


	December 31, 2010
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Average Contractual Maturities
									(in days)
Money market funds	$	64,956	$	—	$	—	$	64,956	n/a
Common shares of CO₂ Solutions		1,316		334		—		1,650	n/a

Total	$	66,272	$	334	$	—	$	66,606

The total cash and cash equivalents balance of $72.4 million as of December 31, 2010 was comprised of money market funds of $65.0 million and $7.4 million held as cash with major financial institutions worldwide.

Inventories

Inventories, net consisted of the following (in thousands):


	December 31,
	2011		2010
Raw materials	$	2,779	$	1,963
Work in process		54		38
Finished goods		1,655		816

Total inventories	$	4,488	$	2,817

Property and Equipment, net

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


	December 31,
	2011			2010
Laboratory equipment	$	34,903		$	29,931
Leasehold improvements		13,058			10,961
Computer equipment and software		4,671			3,050
Office equipment and furniture		1,319			865
Construction in progress (1)		1,972			838

		55,923			45,645
Less: accumulated depreciation and amortization		(31,747	)		(24,193	)

Property and equipment, net	$	24,176		$	21,452

(1)	Construction in progress also includes equipment received but not yet placed into service pending installation.

Due to the extension of the lease period for certain currently occupied facilities, we re-evaluated the depreciable lives of existing leasehold improvements, totaling $2.3 million in net book value at the time of reassessment in February 2011. Since leasehold improvements are typically depreciated over the lesser of the assets’ useful life or the remaining lease period, the extension of contracted facilities leases through 2020 necessitated a change in our estimate of depreciable lives on leasehold improvements. While some lives have been shortened under this reassessment with the vacating of a portion of our facilities, the majority of depreciable lives have been extended up to as much as 5 years from the assets’ in service date, in accordance with our leasehold improvements’ standard useful lives. The net effect of this reassessment is lower monthly depreciation being recognized on leasehold improvements over a longer period of time. These changes’ net effect on depreciation expense recognized is not expected to be material on a quarterly or annual basis.

Intangible Assets

Intangible assets consisted of the following (in thousands):


	December 31, 2011							December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period
															(years)
Customer relationships	$	3,098	$	(3,040	)	$	58	$	3,098	$	(2,943	)	$	155		5
Developed and core technology		1,534		(1,457	)		77		1,534		(1,212	)		322		5
Maxygen intellectual property		20,244		(3,937	)		16,307		20,244		(563	)		19,681		6

Total	$	24,876	$	(8,434	)	$	16,442	$	24,876	$	(4,718	)	$	20,158		6

The estimated amortization expense through the year ending December 31, 2016 is as follows at December 31, 2011 (in thousands):


Year ending December 31:	Cost of Product Revenues		Research and Development		Selling, General and Administrative		Total
2012	$	77	$	3,374	$	57	$	3,508
2013		—		3,374		—		3,374
2014		—		3,374		—		3,374
2015		—		3,374		—		3,374
2016		—		2,812		—		2,812

	$	77	$	16,308	$	57	$	16,442

Goodwill

There were no changes in the carrying value of goodwill during 2011, 2010 and 2009.

Interest Expense and Other, Net

Interest expense and other, net consisted of the following (in thousands):


	Years Ended December 31,
	2011			2010			2009
Interest expense	$	—		$	529		$	1,413
Foreign exchange losses (gains)		706			314			(59	)
Remeasurement of redeemable convertible preferred stock warrant liabilities		—			677			627
Other		(31	)		(321	)		56

Interest expense and other, net	$	675		$	1,199		$	2,037

6. Fair Value

Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1 — Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table presents our financial instruments that were measured at fair value on a recurring basis at December 31, 2011 by level within the fair value hierarchy (in thousands):


	December 31, 2011
	Level 1		Level 2		Level 3		Total
Financial Assets
Money market funds	$	18,866	$	—	$	—	$	18,866
Commercial paper		—		1,999		—		1,999
Corporate bonds		—		30,892		—		30,892
U.S. Treasury obligations		—		1,002		—		1,002
Government-sponsored enterprise securities		—		3,015		—		3,015
Common shares of CO₂ Solutions		1,161		—				1,161

Total	$	20,027	$	36,908	$	—	$	56,935

The following table presents our financial instruments that were measured at fair value on a recurring basis at December 31, 2010 by level within the fair value hierarchy (in thousands):


	December 31, 2010
	Level 1		Level 2		Level 3		Total
Financial Assets
Money market funds	$	64,956	$	—	$	—	$	64,956
Common shares of CO₂ Solutions		1,650		—		—		1,650

Total	$	66,606	$	—	$	—	$	66,606

Our investment in 10,000,000 common shares of CO₂ Solution in a private placement was subjected to a four-month statutory resale restriction. At December 31, 2009, we estimated the fair value of restricted common shares using the fair value of unrestricted common shares as determined by trading on TSX Venture Exchange, discounted for lack of marketability of the shares and we estimated the value of the discount for lack of marketability using the Black-Scholes option pricing model. This restriction expired on April 15, 2010. Subsequently at December 31, 2010, we have estimated the fair value of common shares using the fair value as determined by trading on TSX Venture Exchange. Accordingly, we have reclassified our investment in CO₂ Solution, with a fair value of $1.8 million at the date of the transfer, from a level 3 to a level 1 investment.

At December 31, 2011, the estimated fair value of our investment in CO₂ Solutions common stock was $1.2 million and the unrealized loss of $155,000. At December 31, 2010, the estimated fair value of our investment in CO₂ Solutions common stock was $1.7 million and the unrealized gain was $334,000. The unrealized loss and

gain for the years ended December 31, 2011 and 2010, respectively are reflected on the Statement of Comprehensive Income, net of related tax expense of $149,000 recorded in 2010. No tax expense was recorded in 2011 as a result of the unrealized loss.

7. Related Party Transactions

Maxygen, Inc.

Maxygen, Inc. (“Maxygen”) was one of our stockholders until it distributed its holdings to its stockholders in December 2010, and so transactions between us and Maxygen prior to that time were considered related party transactions. In October of 2010, we acquired Maxygen’s directed evolution technology patent portfolio for net consideration of $20.2 million including $20.0 million paid to Maxygen, transaction costs of $0.7 million and a royalty payable extinguishment of $0.5 million. We recorded an intangible asset for $20.2 million (see Note 5). In conjunction with this transaction, we terminated our existing license agreement with Maxygen including terminating our obligation to pay biofuels royalties to Maxygen.

During the years ended December 31, 2010 and 2009 Maxygen provided to 五星体育直播 certain legal and administrative services, with total fees owed to Maxygen of $170,000 and $101,000, respectively. At December 31, 2011, we owed Maxygen $0 in connection with such services.

In August 2006, we had entered into an amendment to the license agreement with Maxygen. Under the amendment, we were required to pay Maxygen a fee based on a percentage of all consideration we receive from third parties related to the use of certain intellectual property owned or controlled by Maxygen in the specified field of biofuels.

We expensed all payments owed to Maxygen as they became due as collaborative research and development expenses, which we reported as research and development expenses in our consolidated statements of operations. We were also obligated to reimburse up to 20% of the costs incurred by Maxygen related to the prosecution and maintenance of the patents licensed from Maxygen relating to our core technology. We paid Maxygen a fee based on our collaborative research and development agreement with Shell (see Note 3). We expensed $1.2 million and $5.5 million during the years ended December 31, 2010 and 2009, respectively. No amounts were payable to Maxygen at December 31, 2010 or 2011, respectively.

Shell and Raízen

Prior to June 2011 Shell was considered a related party due to the size of its ownership interest. As discussed in Note 3, “Collaborative Research and Development Agreements”, Shell transferred full ownership of our common stock to Raízen, Shell’s joint venture with Cosan in Brazil. Based on our analysis and effective, as of July 1, 2011, Shell was no longer considered a related party. Before June 30, 2011, related party receivables, related party deferred revenue, and related party collaboration research and development revenue were primarily comprised of transactions under our five-year collaborative research agreement (currently set to expire in October 2012, unless extended by the parties) and a license agreement with Shell. The revenues earned from Shell are included in the collaborative research and development line on our consolidated statement of operations. Collaborative research and development revenue received from Shell accounted for 51%, 62% and 76% of our revenues for the years ended December 31, 2011, 2010 and 2009, respectively.

At the time of the transfer, Raízen owned 5.6 million shares of our common stock and has the right to appoint a member to our board of directors. In September 2011, we entered into a joint development agreement with Raízen to develop an improved first generation ethanol process with enhanced economics. There has been no material financial activity with Raízen through December 31, 2011.

Exela PharmaSci, Inc.

We signed a license agreement with Exela PharmaSci, Inc. (“Exela”) in 2007. A member of our board of directors is also on the board of directors of Exela. Under the terms of the agreement, Exela would pay us a royalty based on their achievement of certain commercial goals.

During the year ended December 31, 2011, we recognized $450,000 of revenue related to this arrangement, shown in our consolidated statement of operations as collaborative research and development revenue. We did not recognize any revenue from Exela prior to 2011. As of December 31, 2011, we had no amounts owed from Exela.

8. Commitments and Contingencies

Operating Leases

Our headquarters are located in Redwood City, California where we occupy approximately 107,000 square feet of office and laboratory space in four buildings. On March 16, 2011, we entered into a Fifth Amendment to Lease (the “Fifth Amendment”) with Metropolitan Life Insurance Company (“MetLife”) with respect to our offices located at 200 and 220 Penobscot Drive, Redwood City, California, (the “Penobscot Space”), 400 Penobscot Drive, Redwood City, California (the “Building 2 Space”) and 640 Galveston Drive, Redwood City, California (the “Galveston Space”), and with respect to approximately 29,921 square feet of additional space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw Space”). Under the Fifth Amendment, the term of the lease of the Penobscot Space, the Building 2 Space and the Saginaw Space lasts until January 31, 2020, and we have options to extend for two additional five year periods. Pursuant to the Fifth Amendment, we surrendered the Galveston Space in August 2011. The Fifth Amendment provides a number of incentives to us including forgiveness of rent payments for the initial two months of the lease term, a tenant improvement allowance (“TIA”) of $2.4 million and an additional $0.8 million special allowances for certain HVAC costs. We intend to apply TIA funds toward capital improvements to the expanded facility as well as upgrades and reconfiguration of existing lab and office space. A portion of the TIA may be utilized by us to pay costs for furniture, furnishings and equipment. As of December 31, 2011 we have incurred $2.9 million of capital improvement costs related to the facilities. During the fourth quarter of 2011 we requested and received $1.8 million of reimbursements from the landlord out of the TIA for the completed construction. We expect to request reimbursement for the remaining TIA when construction is completed in the second quarter of 2012. The TIA is recognized when cash is received and on a straight-line basis over the term of the lease as a reduction in rent expense. Additionally, the Fifth Amendment waived our existing asset retirement obligations for the impacted buildings, resulting in a $0.3 million decrease of our obligation which in turn resulted in $0.1 million gain on extinguishment of asset retirement obligations recorded in our consolidated statement of operation as sales, general and administrative expenses.

We also lease space in the 501 Chesapeake Drive, Redwood City, California (the “501 Chesapeake Space”). The lease for the 501 Chesapeake Space was not extended with the Fifth Amendment and will expire as per the original agreement in January 2013, with an option for an additional term of up to two years.

Rent expense is recognized on a straight-line basis over the term of the lease. In accordance with the terms of the lease agreement, we exercised our right to deliver a letter of credit in lieu of a security deposit. The letters of credit in the amounts of $707,000 and $562,000 as of December 31, 2011 and 2010, respectively, are collateralized by a deposit balances held by the bank. These deposits are recorded as restricted cash on the consolidated balance sheets.

We also rent facilities in Singapore and Hungary. Rent expense is being recognized on a straight-line basis over the respective terms of these leases.

As of December 31, 2011 and 2010 we had asset retirement obligations of $579,000 and $881,000, respectively from operating leases, whereby we must restore the facilities that we are renting to their original form. We incurred $39,000 and $146,000 of accretion expense related to our asset retirement obligations in 2011 and 2010, respectively. Additionally, we incurred $290,000 of additional asset retirement obligation during 2010. We are expensing the asset retirement obligation over the terms of the respective leases. We review the estimated obligation each period and we make adjustments if our estimates change.

Future minimum payments under noncancellable operating leases are as follows at December 31, 2011 (in thousands):


	Lease Payments
Years ending December 31,
2012	$	3,268
2013		2,909
2014		2,731
2015		2,808
2016		2,812
2017 and beyond		8,447

Total	$	22,975

Litigation

We have been subject to various legal proceedings related to matters that have arisen during the ordinary course of business. Although there can be no assurance as to the ultimate disposition of these matters, we have determined, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Indemnifications

We are required to recognize a liability for the fair value of any obligations we assume upon the issuance of a guarantee. We have certain agreements with licensors, licensees and collaborators that contain indemnification provisions. In such provisions, we typically agree to indemnify the licensor, licensee and collaborator against certain types of third party claims. The maximum amount of the indemnifications is not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnification issues for any periods presented.

Other contingencies

In November 2009, one of our foreign subsidiaries sold intellectual property to us. Under the local laws, the sale of intellectual property to a nonresident legal entity is deemed an export and is not subject to value added tax. However, there is uncertainty regarding whether the items sold represented intellectual property or research and development services, which would subject the sale to value added tax. We believe that the uncertainty results in an exposure to pay value added tax that is more than remote but less than likely to occur and, accordingly, have not recorded an accrual for this exposure. Should the sale be deemed a sale of research and development services, we could be obligated to pay an estimated amount of $0.6 million.

9. Warrants

Our outstanding warrants are exercisable for common stock at any time during their respective terms. During the year ended December 31, 2010, 61,600 warrants were exercised in a net share transaction to acquire 42,217 shares of our common stock. No warrants were exercised during 2011.

At December 31, 2011, the following warrants were issued and outstanding:


Issue Date	Shares Subject to warrants		Exercise Price per Share		Expiration
October 25, 2005		6,066	$	1.05	October 25, 2012
May 25, 2006		184,895		5.96	May 25, 2013
July 17, 2007		2,384		12.45	February 9, 2016
September 28, 2007		72,727	$	8.25	September 28, 2017

10. Stockholders’ Equity

In 2002, we adopted the 2002 Stock Plan (the “2002 Plan”), pursuant to which our board of directors issued incentive stock options, non-statutory stock options (options that do not qualify as incentive stock options) and restricted stock to our employees, officers, directors or consultants. In March, 2010, our board of directors and stockholders approved the 2010 Equity Incentive Award Plan (the “2010 Plan”), which became effective upon the completion of our IPO in April 2010. A total of 1,100,000 shares of common stock were initially reserved for future issuance under the 2010 Plan and any shares of common stock reserved for future grant or issuance under our 2002 Plan that remained unissued at the time of completion of the IPO became available for future grant or issuance under the 2010 Plan. In addition, the shares reserved for issuance pursuant to the exercise of any outstanding awards under the 2002 Plan that expire unexercised will also become available for future issuance under the 2010 Plan. The 2010 Plan also provides for automatic annual increases in the number of shares reserved for future issuance, and during the year ended December 31, 2011 an additional 1,393,142 shares were reserved under the 2010 plan as a result of this provision. As of December 31, 2011, we had a total of 9,957,140 shares of common stock reserved for issuance under our Plans and no shares available for issuance under the 2002 Plan.

Options granted under the 2002 Plan and 2010 Plan expire no later than 10 years from the date of grant. For incentive stock options and nonstatutory stock options, the option price shall be at least 100% and 85%, respectively, of the fair value of the common stock on the date of grant, as determined by the board of directors. If, at the time of a grant, the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all of our outstanding capital stock, the exercise price for these options must be at least 110% of the fair value of the underlying common stock. Options typically vest over a four-year period at a rate of no less than 25% per year but may be granted with different vesting terms.

A summary of stock option activity is as follows:


				Options Outstanding
	Shares Available for Grant			Number of Options			Weighted Average Exercise Price per Share
December 31, 2009		1,553,873			7,886,532		$	5.25
Authorized		1,100,000			—			—
Grants		(1,210,698	)		1,210,698			10.74
Exercises		—			(809,700	)		1.97
Early exercised options repurchased		418			—			1.63
Forfeited/Cancelled		491,831			(491,837	)		7.93

December 31, 2010		1,935,424			7,795,693			6.27
Authorized		1,393,142			—
Granted options		(1,751,506	)		1,751,506			9.33
Granted RSUs		(578,267	)		—			—
Exercises		—			(1,167,119	)		2.21
Forfeited/Cancelled options		476,458			(476,458	)		9.51
Forfeited/Cancelled RSUs		32,048			—			—

December 31, 2011		1,507,299			7,903,622		$	7.35

The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:


	Options Outstanding						Options Exercisable
Exercise Prices	Number of Options		Weighted Average Remaining Contractual Term (Years)		Weighted Average Exercise Price per Share		Number of Options		Weighted Average Exercise Price per Share
$0.60 - $5.20		2,012,975		4.50	$	2.04		1,858,875	$	1.78
$5.37 - $8.63		2,052,069		6.71		7.29		1,391,629		7.07
$8.69 - $10.50		1,985,817		7.97		9.52		857,705		9.72
$10.51 - $11.87		1,852,761		8.00		10.88		780,931		11.09

		7,903,622		6.77	$	7.35		4,889,140	$	6.16

The following table summarizes information about stock options that are vested and are expected to vest as of December 31, 2011:


	Number of Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In Thousands)
Vested		4,853,723	$	6.14		5.60	$	6,551
Expected to vest		2,925,559		9.29		8.60		19

Total vested and expected to vest		7,779,282	$	7.32		6.73	$	6,570

We granted 578,267 restricted stock units (“RSU”) during the year ended December 31, 2011. The RSUs vest over four years with 25% of the RSUs vesting annually. The fair value of the RSUs was calculated based on the NASDAQ quoted stock price on the date of the grant with the expense recognized over the vesting period. For the year ended December 31, 2011, we recorded $1.1 million of stock compensation expense related to the RSUs. During the year, 32,048 RSUs were cancelled. At December 31, 2011, there were 546,219 outstanding RSUs with an average remaining life of 3.1 years, a weighted average grant price of $9.54 and an unamortized expense of $4.1 million.

The weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $5.19, $7.06, and $5.39, respectively.

At December 31, 2011, exercisable options had a weighted average exercise price of $6.16 per share and an intrinsic value of $6.6 million. The aggregate intrinsic value of exercised stock options was $9.0 million, $6.6 million, and $418,000 during the years ended December 31, 2011, 2010, and 2009, respectively. The intrinsic value of stock options outstanding, exercised, exercisable and expected-to-vest is calculated based on the difference between the exercise price and the fair value of our common stock.

Stock-based compensation costs capitalized during the years ended December 31, 2011, 2010, and 2009 were insignificant. There were no stock-based compensation tax benefits during the years ended December 31, 2011, 2010, and 2009.

At December 31, 2011, there was $16.3 million of unrecognized stock-based compensation cost which is expected to be recognized over an average period of 1.8 years.

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Stock-Based Compensation Expense

We estimate the fair value of stock-based awards granted to employees and directors using the Black- Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the expected life of the option and expected volatility of the underlying stock over the expected life of the related grants. As a newly traded public entity, sufficient company specific historical volatility data is not available. As a result, we estimate the expected volatility based on the historical volatility of a group of unrelated public companies within our industry. We will continue to consistently apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available. Due to our limited history of grant activity, the expected life of options granted to employees is calculated using the “simplified method” permitted by the SEC as the average of the total contractual term of the option and its vesting period. The risk-free rate assumption was based on U.S. Treasury instruments whose terms were consistent with the terms of our stock options. The expected dividend assumption was based on our history and expectation of dividend payouts.

The following assumptions were used to estimate the fair value of our employee option grants:


	Years Ended December 31,
	2011			2010			2009
Weighted-average expected life (years)		6.1			6.5			6.3
Weighted-average expected volatility		58	%		73	%		74	%
Weighted-average risk free interest rate		2.2	%		2.6	%		2.6	%
Expected dividend yield		0.0	%		0.0	%		0.0	%

During the year ended December 31, 2011, we did not grant any options to purchase shares of common stock to non-employees. During the years ended December 31, 2010 and 2009 we granted options to purchase 20,000 and 86,666 shares of common stock, respectively, to non-employees. The 20,000 options granted in 2010 were cancelled in 2010 prior to any vesting of the option grant. For options granted to non-employees, the Black-Scholes option-pricing model was applied using the following assumptions during the years ended December 31, 2011, 2010, and 2009:


	Years Ended December 31,
	2011			2010	2009
Remaining contractual option life (years)		8.4		0.3 - 10	6 - 10
Volatility		60	%	49% - 87%	73% - 89%
Risk-free interest rate		2.5	%	0.1% - 3.9%	2.3% - 3.9%
Expected dividend yield		0.0	%	0.0%	0.0%

The following table presents stock-based compensation expense included in the consolidated statements of operations (in thousands):


	Years Ended December 31,
	2011		2010		2009
Research and development	$	3,311	$	3,352	$	2,318
Sales, general and administrative		6,120		5,385		2,504

	$	9,431	$	8,737	$	4,822

Stock-based compensation expense attributable to cost of goods sold was immaterial.

Redeemable Convertible Preferred Stock

On April 27, 2010, we completed our initial public offering of common stock (“IPO”) selling 6,000,000 shares at an offering price of $13.00 per share, resulting in net proceeds of approximately $67.7 million, after deducting underwriting discounts, commissions and other related transaction costs.

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Upon the closing of the IPO, our then outstanding shares of redeemable convertible preferred stock were automatically converted into 25,307,446 shares of common stock and the related redeemable convertible preferred stock was reclassified to common stock and additional paid-in capital, our outstanding preferred stock warrants were automatically converted into common warrants to purchase a total of 288,438 shares of common stock and the related redeemable convertible preferred stock warrant liability was reclassified to additional paid-in capital.

Shares Reserved

The following table presents common stock reserved for issuance for the following equity instruments (in thousands):


	December 31,
	2011		2010
Warrants to purchase common stock		266		266
Restricted stock units		546		—
Stock options:
Outstanding		7,904		7,796
Reserved for future grants		1,507		1,935

Total common stock reserved for future issuance		10,223		9,997

11. Income Taxes

Our loss before provision for income taxes was as follows (in thousands):


	Years Ended December 31,
	2011			2010			2009
United States	$	(17,474	)	$	(7,837	)	$	(18,940	)
Foreign		1,165			(320	)		(1,283	)

Loss before provision for income taxes	$	(16,309	)	$	(8,157	)	$	(20,223	)

The tax provision for the years ended December 31, 2011, 2010 and 2009 consists primarily of taxes attributable to foreign operations. The components of the provision for income taxes are as follows (in thousands):


	Years Ended December 31,
	2011		2010			2009
Current provision (benefit):
Federal	$	3	$	289		$	70
State		7		2			5
Foreign		82		(17	)		489

Total current provision (benefit)	$	92	$	274		$	564

Deferred provision (benefit):
Federal	$	—	$	(122	)	$	—
State		—		(26	)		—
Foreign		149		258			(498	)

Total deferred provision (benefit)	$	149	$	110		$	(498	)

Total provision for income taxes	$	241	$	384		$	66

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Reconciliation of the provision for income taxes calculated at the statutory rate to our provision for income taxes is as follows (in thousands):


	Years Ended December 31,
	2011			2010			2009
Tax benefit at federal statutory rate	$	(5,708	)	$	(2,858	)	$	(7,078	)
State taxes		(1,421	)		(245	)		(526	)
Research and development credits		(83	)		56			(269	)
Foreign operations taxed at different rates		(252	)		117			1,347
Stock-based compensation		1,241			1,020			823
Other nondeductible items		650			630			835
Change in valuation allowance		5,814			1,664			4,934

Provision for income taxes	$	241		$	384		$	66

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):


	December 31,
	2011			2010
Deferred tax assets:
Federal, state and foreign net operating loss carryforwards	$	45,595		$	40,517
Federal and state credits		2,711			2,598
Deferred contract revenues		2,066			3,784
Stock compensation		5,327			4,094
Accrued compensation		2,251			2,402
Acquired intangible assets		3,101			2,448
Other		2,256			1,807

Total deferred tax assets:		63,307			57,650
Deferred tax liabilities:
Other		(5	)		(1	)

Total deferred tax liabilities:		(5	)		(1	)
Valuation allowance		(63,128	)		(57,315	)

Net deferred tax assets	$	174		$	334

ASC Topic 740 requires that the tax benefit of NOL, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, has provided a valuation allowance. Accordingly, the net deferred tax assets in the United States, and Hungary have been fully reserved by a valuation allowance. The net valuation allowance increased by $5.8 million, $1.6 million and $4.9 million during the years ended December 31, 2011, 2010 and 2009, respectively. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

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The following table sets forth our federal, state and foreign NOL carryforwards and federal research and development tax credits as of December 31, 2011 (in thousands):


	December 31, 2011
	Amount		Expiration Years
Net operating losses, federal	$	125,784	2022-2031
Net operating losses, state		106,221	2015-2031
Tax credits, federal		3,402	2022-2031
Tax credits, state		3,653	Do not expire
Net operating losses, foreign		6,247	Various
Tax credits, foreign	$	12	Various

Current federal and California tax laws include substantial restrictions on the utilization of NOLs and tax credit carryforwards in the event of an ownership change of a corporation. Accordingly, our ability to utilize NOLs and tax credit carryforwards may be limited as a result of such ownership changes. Such a limitation could result in the expiration of carryforwards before they are utilized.

The Company has not provided for U.S. federal and state income taxes on all of the non-U.S. subsidiaries’ undistributed earnings as of December 31, 2011, because such earnings are intended to be indefinitely reinvested. As of December 31, 2011, cumulative un-remitted foreign earnings that are considered to be permanently invested outside the United States and on which no U.S. taxes have been provided were approximately $0.8 million. The residual U.S. tax liability, if such amounts were remitted, would be nominal.

We adopted ASC Topic 740’s provision for accounting for uncertainty in income taxes on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	December 31,
	2011			2010		2009
Balance at beginning of year	$	6,492		$	5,899	$	5,123
Additions based on tax positions related to current year		470			593		1,143
Additions to tax provision of prior years		4			—		—
Reductions to tax provision of prior years		(262	)		—		—
Lapse of the applicable statute of limitations		(93	)		—		(367	)

Balance at end of year	$	6,611		$	6,492	$	5,899

We recognize interest and penalties in income tax expense. Total interest and penalties recognized in the consolidated statement of operations was $39,000, $75,000 and $76,000 respectively in 2011, 2010 and 2009. Total penalties and interest recognized in the balance sheet was $239,000 and $202,000 respectively in 2011 and 2010. The total unrecognized tax benefits that, if recognized currently, would impact our effective tax rate were $1.4 million and $1.7 million as of December 31, 2011 and 2010, respectively. We expect $200,000 of unrecognized tax benefits to be recognized within the next 12 months. We are not subject to examination by U.S. federal or state tax authorities for years prior to 2002 and foreign tax authorities for years prior to 2006.

12. 401(k) Plan

In January 2005, we implemented a 401(k) Plan covering certain employees. Currently, all of our U.S. based employees over the age of 18 are eligible to participate in the 401(k) Plan. Under the 401(k) Plan, eligible employees may elect to reduce their current compensation up to a certain annual limit and contribute these amounts to the 401(k) Plan. We may make matching or other contributions to the 401(k) Plan on behalf of eligible employees. In the years ended December 31, 2011, 2010 and 2009, we did not make any contributions to the 401(k) Plan on behalf of eligible employees.

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13. Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer and our board of directors. The Chief Executive Officer and our board of directors review financial information presented on a consolidated basis, accompanied by information about revenues by geographic region, for purposes of allocating resources and evaluating financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results beyond revenue goals or plans for levels or components below the consolidated unit level. Accordingly, we have a single reporting segment. Operations outside of the United States consist principally of research and development and sales activities.

Geographic revenues are identified by the location of the customer and consist of the following (in thousands):


	Years Ended December 31,
	2011		2010		2009
Revenues
Americas (1)	$	72,355	$	72,920	$	65,713
Europe		34,759		9,867		7,028
Asia		16,751		24,317		10,167

	$	123,865	$	107,104	$	82,908

(1)	Primarily United States

Geographic presentation of identifiable long-lived assets below shows those assets that can be directly associated with a particular geographic area and consist of the following (in thousands):


	December 31,
	2011		2010		2009
Long-lived assets
Americas (1)	$	34,817	$	37,023	$	19,439
Europe		4,395		3,980		3,911
Asia		2,380		3,398		4,332

	$	41,592	$	44,401	$	27,682

(1)	Primarily United States

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14. Selected Quarterly Financial Data (Unaudited)

The following table provides the selected quarterly financial data for 2011 and 2010 (in thousands):

五星体育直播

Condensed Consolidated Statements of Operations

(Unaudited)

(In Thousands, Except Per Share Amounts)


	Quarter Ended
	December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011			December 31, 2010			September 30, 2010			June 30, 2010			March 31, 2010
Revenues:
Product	$	15,493		$	12,199		$	8,397		$	12,932		$	8,586		$	9,491		$	8,484		$	6,275
Collaborative R&D		17,296			19,201			17,385			17,486			20,746			17,243			15,504			16,703
Government grants		705			1,882			273			616			479			379			492			2,722

Total revenues		33,494			33,282			26,055			31,034			29,811			27,113			24,480			25,700

Costs and operating expenses:
Cost of product revenues		13,067			9,958			7,106			11,650			8,126			8,563			6,075			5,218
Research and development		15,548			16,786			14,965			13,750			13,349			13,070			13,004			12,982
Selling, general and administrative		9,782			8,871			9,276			9,013			8,649			7,940			8,652			8,600

Total costs and operating expenses		38,397			35,615			31,347			34,413			30,124			29,573			27,731			26,800

Loss before provision (benefit) for income taxes		(5,123	)		(2,668	)		(5,205	)		(3,313	)		(434	)		(2,434	)		(3,859	)		(1,430	)

Net loss	$	(5,297	)	$	(2,742	)	$	(5,040	)	$	(3,471	)	$	(494	)	$	(2,732	)	$	(3,946	)	$	(1,369	)

Net loss per share of common stock, basic and diluted	$	(0.15	)	$	(0.08	)	$	(0.14	)	$	(0.10	)	$	(0.01	)	$	(0.08	)	$	(0.15	)	$	(0.50	)

Weighted average common shares used in computing net loss per share of common stock, basic and diluted (1)		35,965			35,919			35,685			35,116			34,452			34,200			26,557			2,714

(1)	The full year net loss per share of common stock, basic and diluted, may not equal the sum of the quarters due to weighting of outstanding shares.

106

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our disclosure committee, Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011 at the reasonable assurance level.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. We reviewed the results of management’s assessment with our Audit Committee.

The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in Part IV, Item 15 of this Annual Report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Interim Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide

107

reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B. OTHER INFORMATION

None.

108

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item concerning our directors, executive officers, compliance with Section 16 of the Exchange Act, our code of ethics and our Nominating and Corporate Governance Committee, and our Audit Committee is incorporated by reference from the information that will be set forth in the sections under the headings “Election of Directors,” “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance Matters” in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2012 (the “2012 Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item concerning executive compensation is incorporated by reference from the information that will be set forth in the 2012 Proxy Statement under the headings “Executive Compensation,” and “Corporate Governance Matters”.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item concerning securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management is incorporated by reference from the information that will be set forth in the 2012 Proxy Statement under the headings “Executive Compensation—Equity Compensation Plan Information” and “Information Concerning Voting and Solicitation—Security Ownership of Certain Beneficial Owners and Management.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,

AND DIRECTOR INDEPENDENCE

The information required by this item concerning transactions with related persons and director independence is incorporated by reference from the information that will be set forth in the 2012 Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Corporate Governance Matters.”

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from the information that will be set forth in the 2012 Proxy Statement under the heading “Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”

109

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1.	Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K

2.	Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

110

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


	CODEXIS, INC.

Date: March 5, 2012	By:	/s/ PETER M. STRUMPH
		Peter M. Strumph Interim President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Peter M. Strumph and Douglas T. Sheehy, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


SIGNATURE	TITLE	DATE

/s/ PETER M. STRUMPH Peter M. Strumph	Interim President and Chief Executive Officer (Principal Executive Officer)	Date: March 5, 2012

/s/ ROBERT J. LAWSON Robert J. Lawson	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	Date: March 5, 2012

/s/ THOMAS R. BARUCH Thomas R. Baruch	Chairman of the Board of Directors	Date: March 5, 2012

/s/ Byron L. Dorgan Byron L. Dorgan	Director	Date: March 5, 2012

/s/ ALEXANDER A. KARSNER Alexander A. Karsner	Director	Date: March 5, 2012

/s/ BERNARD J. KELLEY Bernard J. Kelley	Director	Date: March 5, 2012

/s/ PEDRO I. MIZUTANI Pedro I. Mizutani	Director	Date: March 5, 2012

/s/ DENNIS P. WOLF Dennis P. Wolf	Director	Date: March 5, 2012

111

EXHIBIT INDEX


Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of 五星体育直播 filed with the Secretary of the State of the State of Delaware on April 27, 2010 and effective as of April 27, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 28, 2010).

3.2		Amended and Restated Bylaws of 五星体育直播 effective as of April 27, 2010 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 28, 2010).

4.1*		Form of the Registrant’s Common Stock Certificate.

4.2*		Fourth Amended and Restated Investor Rights Agreement dated November 13, 2007.

4.4*		Warrant to purchase shares of Common Stock issued to Oxford Finance Corporation dated October 25, 2005.

4.5*		Form of Warrant to purchase shares of Series D preferred stock issued in connection with the Bridge Loan Agreement dated as of May 25, 2006.

4.6*		Form of Warrant to purchase shares of Series D preferred stock issued in connection with the Loan and Security Agreement dated as of September 28, 2007.

4.7*		Warrant to purchase shares of Common Stock issued to Alexandria Equities, LLC.

4.8*		Registration Rights Agreement among the Company, Jülich Fine Chemicals GmbH and the other parties named therein, dated February 11, 2005.

4.9*		Fifth Amended and Restated Voting Agreement dated March 4, 2009.

4.10*		Amendment to Fifth Amended and Restated Voting Agreement dated February 25, 2010.

10.2A†*		Amended and Restated Collaborative Research Agreement by and between the Company and Equilon Enterprises LLC dba Shell Oil Products US effective as of November 1, 2006.

10.2B†*		Amendment to the Amended and Restated Collaborative Research Agreement by and between the Company and Equilon Enterprises LLC dba Shell Oil Products US effective as of March 4, 2009.

10.2C†*		Amendment No. 2 to the Amended and Restated Collaborative Research Agreement, by and between the Company and Equilon Enterprises LLC dba Shell Oil Products US effective as of February 23, 2010.

10.3A†*		Amended and Restated License Agreement by and between the Company and Equilon Enterprises LLC dba Shell Oil Products US effective as of November 1, 2006.

10.3B*		Amendment to the Amended and Restated License Agreement by and between the Company and Equilon Enterprises LLC dba Shell Oil Products US effective as of March 4, 2009.

10.4†*		Collaborative Research and License Agreement by and among the Company, Iogen Energy Corporation and Equilon Enterprises LLC dba Shell Oil Products US effective as of July 10, 2009.

10.5†*		License Agreement by and among the Company, Dyadic International (USA), Inc. and Dyadic International, Inc. effective as of November 14, 2008.

10.6A†*		Product Supply Agreement by and between 五星体育直播 Laboratories India Private Limited and Arch Pharmalabs Limited, effective as of February 16, 2010.


Exhibit No.		Description

10.6B†*		Enzyme and Product Supply Agreement by and between the Company and Arch Pharmalabs Limited, effective as of February 16, 2010.

10.6C†*		Memorandum of Understanding for Transfer Pricing and Royalty Calculation by and between the Company and Arch Pharmalabs Limited, effective as of February 16, 2010.

10.6D†*		Memorandum of Understanding for Transfer Pricing by and between 五星体育直播 Laboratories India Private Limited and Arch Pharmalabs Limited, effective as of February 16, 2010.

10.6E		Letter Amendment to the Enzyme and Product Supply Agreement by and between the Company and Arch Pharmalabs Limited dated as of April 22, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.6F		Letter Amendment to the Product Supply Agreement by and between 五星体育直播 Laboratories India Private Limited and Arch Pharmalabs Limited dated as of April 22, 2011 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.6G†		Amendment No. 1 to the Memorandum of Understanding for Transfer Pricing and Royalty Calculation by and between the Company and Arch Pharmalabs Limited effective as of April 25, 2011 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.6H†		Amendment No. 1 to the Memorandum of Understanding for Transfer Pricing by and between 五星体育直播 Laboratories India Private Limited and Arch Pharmalabs Limited effective as of April 25, 2011 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.6I†		Omnibus Letter Amendment to the Enzyme and Product Supply Agreement by and between the Company and Arch Pharmalabs Limited and the Product Supply Agreement by and between 五星体育直播 Laboratories India Private Limited and Arch Pharmalabs Limited dated as of August 17, 2011 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.6J		Amendment No.1 to Enzyme and Product Supply Agreement by and between the Company and Arch Pharmalabs Limited dated as of January 4, 2012.

10.7A*		Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of February 1, 2004.

10.7B*		Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of June 1, 2004.

10.7C*		Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 9, 2007.

10.7D*		Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 31, 2008.

10.7E		Fourth Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of September 17, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 4, 2010).

10.7F		Fifth Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 16, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed on May 6, 2011).


Exhibit No.		Description

10.9+*		五星体育直播 2002 Stock Plan, as amended, and Form of Stock Option Agreement.

10.10+*		五星体育直播 2010 Equity Incentive Award Plan and Form of Stock Option Agreement.

10.11A+*		Offer Letter Agreement by and between the Company and Alan Shaw dated as of July 29, 2003.

10.11B+		Transition and Separation Agreement by and between the Company and Alan Shaw dated as of February 17, 2012.

10.12A+*		Separation Agreement by and between the Company and Robert S. Breuil dated as of June 30, 2009.

10.12B+*		Amendment to Separation Agreement by and between the Company and Robert S. Breuil effective as of September 25, 2009.

10.13+*		Offer Letter Agreement by and between the Company and Douglas T. Sheehy dated as of February 26, 2007.

10.14+*		Offer Letter Agreement by and between Company and David L. Anton dated as of February 15, 2008.

10.15+*		Employment Contract by and between the Company and Peter Seufer-Wasserthal dated as of March 6, 2006.

10.16+*		Consulting Agreement by and between the Company and Alexander A. Karsner dated as of December 14, 2009.

10.17*		Form of Indemnification Agreement between the Company and each of its directors, as currently in effect.

10.18*		Form of Indemnification Agreement between the Company and each of its directors, officers and certain employees.

10.19+*		Offer Letter Agreement by and between the Company and Robert J. Lawson dated as of October 16, 2009.

10.20+*		Form of Change of Control Severance Agreement between the Company and certain of its officers.

10.21A†*		Letters of Offer and Acceptance, dated as of September 28, 2009, by and between 五星体育直播 Laboratories Singapore Pte Ltd and the Economic Development Board of Singapore regarding the grant for the development of the 五星体育直播 Gene Shuffling Centre of Excellence.

10.21B†		Letters of Amendment and Acknowledgment, effective as of August 30, 2011, by and between 五星体育直播 Laboratories Singapore Pte Ltd and the Economic Development Board of Singapore regarding the grant from the development of the 五星体育直播 Gene Shuffling Centre of Excellence (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 7, 2011).

10.22+*		Offer Letter Agreement by and between the Company and Joseph J. Sarret, M.D. dated as of January 24, 2007.

10.23		Asset Purchase Agreement, dated October 28, 2010, by and among the Company, 五星体育直播 Mayflower Holdings, LLC and Maxygen, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on October 28, 2010).

10.24†		Manufacture and Supply Agreement, dated May 16, 2011, by and between the Company and Lactosan GmbH & Co. KG (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed on August 3, 2011).

10.25+		Offer Letter Agreement by and between the Company and Peter Strumph dated as of June 2, 2010.


Exhibit No.		Description

21.1		List of Subsidiaries.

23.1		Consent of independent registered public accounting firm

24.1		Power of Attorney (see signature page to the this Annual Report on Form 10-K).

31.1		Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

101**		The following materials from Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Consolidated Balance Sheets at December 31, 2011 and December 31, 2010, (ii) Consolidated Statements of Income for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, (iii) Consolidated Statements of Comprehensive income for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, (v) Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 and (vi) Notes to Condensed Consolidated Financial Statements.

+	Indicates a management contract or compensatory plan or arrangement.

†	Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the Securities and Exchange Commission.

*	Filed as exhibits to the registrant’s Registration Statement on Form S-1 (File No. 333-164044), effective April 21, 2010, and incorporated herein by reference.

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.