Verenium Corporation Q2 2009 Earnings Call Transcript

| About: Verenium Corporation (VRNM)

Verenium Corporation (NASDAQ:VRNM)

Q2 2009 Earnings Call

August 10, 2009 5:00 pm ET

Executives

Kelly Lindenboom - Vice President of Corporate Communications

Carlos A. Riva - President and Chief Executive Officer

Jamie Levine - Executive Vice President and Chief Financial Officer

Jeff Black - Chief Accounting Officer

Analysts

Sanjay Shrestha - Lazard Capital Markets

Amanda Seguin - Jefferies & Company

David Woodburn - ThinkEquity

Pamela Bassett - Cantor Fitzgerald

[Shuping Lee] - Tenor Capital Management

Operator

Welcome to Verenium's second quarter financial results 2009 conference call. (Operator Instructions)

At this time I would like to introduce your host for today's call, Kelly Lindenboom. Please proceed.

Kelly Lindenboom

Thank you for joining Verenium's second quarter 2009 financial results conference call.

I'm Kelly Lindenboom, Vice President of Corporate Communications. With me today are Carlos Riva, Verenium's President and Chief Executive Officer, and Jamie Levine, our Executive Vice President and Chief Financial Officer. Jeff Black, our Chief Accounting Officer, will be available for Q&A.

The agenda for today's call is as follows: First Carlos will review the company's key accomplishments and business highlights in the second quarter of 2009, then Jamie will provide a summary of our financial results for the second quarter, and finally we will open the call up for your questions.

Before we begin I would like to advise you that this discussion will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements involve a high degree of risks and uncertainty and relate to matters such as the company's strategy, future operating plans, markets for the company's product, partnering and collaboration activities, public policy and financing activities, technical and business outlook. Such statements are only predictions and actual events or results may differ materially from those projected in such forward-looking statements. Factors that could cause or contribute to differences include but are not limited to risks related to the company's IP, partners, competitors and regulatory and market forces.

Certain of these factors and others are more described in the company's filings with the SEC, including but not limited to the company's report on Form 10-K for the year ended December 31st and subsequent quarterly filings.

I will now turn the call over to Carlos.

Carlos A. Riva

Thank you, Kelly. Good afternoon, everyone, and thank you for joining us on today's call.

Over the course of the second quarter of 2009 we have continued to make significant progress on many fronts. Since the start of the year we've worked diligently toward achieving our corporate goals and have put a very strong team in place dedicated to this effort.

Let me begin by touching on some recent corporate highlights. First and very importantly given the prevailing economic climate, we've continued our aggressive expense management initiatives to control operating expenses and to conserve cash. We've done so carefully and thoughtfully, lowering our operating costs without compromising our company's progress. Similarly, on the financial front we have achieved the important step of amending our remaining 8% convertible notes to eliminate some of their onerous restrictions as a means of both simplifying our capital structure as well as giving us additional financial flexibility for the future. Jamie will address both these items in a few moments, but I want to emphasize that as our organization moves forward achieving financial strength and flexibility remain a prime corporate priority.

Turning to the biofuels industry, despite the significant challenges the ethanol industry had endured over the last three years, government support for biofuels remains strong as our government leaders realize that an overdependence on imported oil remains a critical weakness in our economy. Over the last several months there have been a number of important developments on the public policy front that continue to demonstrate mounting support for alternative energy generally and the cellulosic biofuels agenda in particular.

First of all, in May the government announced the formation of a biofuels interagency task force to include the Department of Energy, U.S. Department of Agriculture and Environmental Protection Agency, along with a directive from President Obama to Agriculture Secretary Vilsack to jump start implementation of the bioenergy provisions of the 2008 farm bill. This White House announcement reflects the seriousness of the Obama administration's intention to continue and to prioritize the push to make low carbon advanced biofuels a meaningful alternative to imported oil.

Next, in June of this year the U.S. House of Representatives passed historic energy and climate change legislation. This marks the first time that either chamber of Congress has approved legislation that would put a mandatory cap on carbon emissions. Over time this has the potential to translate into additional sources of value for producers like Verenium of low carbon biofuels.

With passage of the House bill legislative action now moves to the Senate. Notably, in testimony urging prompt Senate action on energy and climate legislation, Energy Secretary Chu encouraged passage of a bill which would drive investment in advanced biofuels from grasses and agricultural waste. We were very encouraged by the commentary of Secretary Chu and believe it may signal a shift in DOE's thinking in favor of Verenium's model of using purpose-grown high-yield biomass energy crops as the basis for major commercial cellulosic ethanol facilities.

Finally, the U.S. Department of Agriculture has issued proposed rules to implement the Biomass Crop Assistance Program or BCAP contained in the 2008 farm bill. Just over a week ago they announced that biomass conversion facilities can begin signing up to participate in this program. The BCAP program will provide assistance to producers to collect, harvest, store and transport eligible materials to biomass conversion facilities. We plan to apply under this program for support for our Louisiana demonstration plant and the Highlands project in Florida.

With respect to our Biofuels business, we have continued to make important progress on a number of fronts. In June we were very pleased to announce that Vercipia Biofuels - our newly named project development joint venture with BP - had been selected to move forward with due diligence on a DOE loan guarantee for our first commercial project in Highlands County, Florida scheduled to break ground in 2010. This guarantee could extend the project debt covering up to 80% of eligible costs. The Vercipia team has already begun work to meet the necessary DOE requirements and we expect this to continue over the next few months.

We're continuing to progress the optimization phase at our demonstration plant in Jennings, Louisiana and have now operated the facility on both sugarcane bagasse and energy cane. In the coming months we will continue to drive toward meeting our predefined performance targets as we aim to become a low-cost producer of cellulosic ethanol.

A key component of the work currently being done at the demo plant is the integrated on-site production of enzymes, which we're currently on target with. The invaluable information and know-how currently being derived from the operation of our demo plant is critical input to the ongoing efforts to design our first 36 million gallon per year commercial scale unit in Florida.

I'd now like to turn to our Specialty Enzyme business. Our focus with Specialty Enzyme is to build a profitable business through the development, manufacture and sale of high-value tailored enzyme products to serve strategic industrial markets. An important element of our strategy for the continued growth of this business is to pursue corporate partnership opportunities that allow us to expand our customer base and to address adjacent markets where we can supply other industries with our current enzyme products. Over the last quarter we've continued to develop these adjacent market opportunities, create new partnerships and accelerate new customer growth in existing products and uses.

In June we announced a partnership with Add Food Service of Germany for the distribution of Fuelzyme and Veretase. Under the agreement, Add Foods will distribute Fuelzyme and Veretase in Europe and selected areas outside North America. In addition, we will be working with Add Foods to pursue jointly the development of additional enzymes for starch processing and the starch-based ethanol industry.

As we briefly discussed last quarter, we recently launched Veretase, a high-performance enzyme for food and beverage applications. Veretase alpha amylase is specifically designed to improve economics and efficiency in sweetener and beverage alcohol production. We began marketing and selling Veretase during the first quarter of 2009 and are beginning to see good traction. We estimate the addressable global market for Veretase for sweeteners and beverage alcohol production to be in excess of $80 million.

As also mentioned last quarter, we announced a collaboration with Alfa Laval, a leading provider of heat transfer separation and fluid handling technologies to jointly market enzymatic degumming of vegetable oils using Verenium's Purifine enzyme and Alfa Laval's engineering services and equipment.

Through this agreement Alfa Laval is able to market Purifine packaged with their process engineering equipment, together with services to customers processing vegetable oils for edible and biodiesel use. Verenium maintains the right to conduct independent marketing and sales activities; however, this collaboration provides us the opportunity to reach out to a new customer base through a credible service provider who may already have an existing relationship with key clients. Collaborations such as this provide Verenium with an important avenue for expanding our existing commercial base and market share.

Finally, I'd like to touch on our products and then Jamie will get into more detail on revenue and margin. Phyzyme remains our lead product, though demand for this enzyme has softened as has demand in the poultry industry, its principal customer base. Fuelzyme and Veretase continue to make progress despite the difficulties in the U.S. corn ethanol industry, and we continue to successfully demonstrate the value proposition of our product and to secure new customers. Purifine, now fully demonstrated to improve yields and oil seed processing at processing at commercial scale, has shown positive momentum, with multiple major soybean crushers.

Overall, we remain optimistic that the markets for our products will stabilize and improve as economic activity recovers. Despite softening market conditions affecting revenues, we continue to focus on improving product profitability through manufacturing excellence.

To some up, I'm very pleased with Verenium's accomplishments in the second quarter. I believe we're at a very exciting and pivotal time in our development. I continue to be most encouraged by the ongoing support from our federal government for advanced alternative fuels, by the commitment of our partners in both the biofuels and enzyme sectors, and by our own team's ability to execute and make critical progress on the path to bringing cellulosic ethanol to commercial markets in the near term.

I'd like to now turn the call over to Jamie Levine, our Chief Financial Officer, to review our second quarter financial results.

Jamie Levine

Thank you, Carlos.

I'd like to start my remarks with a few high level observations about our financial performance in the second quarter.

I'll begin with the performance of our Specialty Enzyme business. While our dollar gross margin was lower in the second quarter versus the first quarter of 2009 and versus the second quarter of last year, a significant portion of the decline was due to our focus on managing inventory and therefore cash to appropriate levels. We, like most other enzyme companies, are facing a challenging economic environment as part of the broader economic cycle and are acting appropriately.

Secondly, for our Biofuels business we were pleased to announce in June that Vercipia, our joint venture with BP, was invited to begin negotiations for the next phase of the Department of Energy's loan guarantee program. The loan guarantee is a critical step for the financing of our commercial scale cellulosic ethanol activities.

And finally, excluding restricted cash and cash attributable to our consolidated joint venture with BP, we ended the quarter with $9.9 million in cash. In addition, on July 2nd we received a payment of $14 million from BP as part of the Galaxy joint venture agreement announced in August of 2008. Together, this $24 million allows the company to continue to develop our strategy.

I'd now like to provide some detail on the quarterly performance. As noted in our press release, we ended the second quarter with a decrease in product revenue primarily due to global economic challenges that impact the sectors targeted by our enzyme business.

Regarding our main products, following a year of substantial growth in revenues and related market share of our Phyzyme enzyme, we and our partner, Genencor, a division of Danisco, have seen a softening in the phytase animal feed market attributed to a recessionary decline in consumer consumption of protein, including poultry, which is the primary market for our enzyme, and a reduction in chicken stock by some large high-intensity poultry producers to release cash in the second quarter.

Demand for Fuelzyme has continued to be impacted by challenges in the corn ethanol industry, which has seen significant distress over the last year due to high corn prices and low ethanol prices. While we added new Fuelzyme customers during Q2, there was a decline in enzyme consumption versus Q1 by many customers in this segment.

One of our initial targets for Purifine is the soybean oil processing market in Latin America, which has suffered challenging market conditions since early 2008. As a result, adoption of Purifine has been delayed. While we anticipate a ramp up in Purifine revenues by the end of 2009 based on current discussions with potential purchasers, it's slower than initially expected.

Our net product revenue for the second quarter declined compared to the second quarter of 2008, but it's important to note that the majority of this decrease is attributed to a change in revenue recognition for Phyzyme product sales. As we've discussed in the past, Genencor, our distribution partner for Phyzyme, is manufacturing some of the product. For sales of Phyzyme manufactured by Genencor, we do not recognize product sales; we only recognize revenue equal to the net profit share received from Genencor for the use of our enzyme. In fact, gross product sales including both manufacturing sources increased 7% for the first half of 2009, and Fuelzyme sales increased significantly, reflecting gains in market share.

Another contributing factor to the year-over-year revenue decline relates to two product lines - Bayovac-SRS and Quantum - which we discontinued in early 2008.

Because of this shift in product revenue recognition treatment for Phyzyme, we think it is more meaningful to focus on the gross margin dollars as opposed to net revenues as this is a better indication of the net cash contribution from our product sales.

During the second quarter of 2009, our gross margin decreased for $3.8 million in 2008 to $3 million in 2009. Sequentially, our gross margin in the second quarter decreased from $4.8 million in the first quarter. And for the first half of 2009, our gross margin dollars improved to $7.9 million from $7.1 million in the first half of '08.

The decrease in our second quarter product gross margin was due primarily to a strategic decision to reduce inventory, resulting in lower production volumes and a related decrease in fixed manufacturing capacity utilization. This decision achieved the benefits of bringing inventory to an appropriate level and conserving cash but had a negative impact on product gross margin as the fixed manufacturing costs associated with the unused capacity were expensed in the quarter rather than being allocated to inventory.

In terms of our operating expenses, excluding cost of sales, our gross operating expenses during the second quarter of 2009 increased on a year-over-year basis from roughly $24 million to about $27 million. This reflects our increased investment to develop our Biofuels business.

However, keep in mind that the gross operating expenses on our income statement do not reflect the fact that a portion of these expenses are paid through our joint ventures with BP. BP funded $8.9 million in expenses during our second quarter and $16.8 million in the first half of 2009. This cost reimbursement is included below the operating expenses line in the caption entitled, Loss Attributed to Non-Controlling Interests in Consolidated Entities.

In fact, on a non-GAAP pro forma basis after considering the impact of BP's cost reimbursement, our net operating expenses for the two quarters of 2009 have actually decreased by more than $11 million over 2008. On a sequential basis, our second quarter gross operating expense of $27 million has remained flat versus the first quarter and net of BP's reimbursements has actually decreased by $1 million. This reflects our overall efforts towards focusing our investments.

With regards to the impact of the rather complex accounting related to our 8% notes, we think it's important to understand our net loss on a non-GAAP basis excluding the non-cash impact of the convertible debt accounting.

On a non-GAAP basis, our pro forma net loss was $12.5 million in the second quarter of 2009 compared to a non-GAAP pro forma net loss of $17.6 million for the second quarter of 2008. This decrease is consistent with our ongoing expense management efforts and BP's reimbursement of a portion of our costs through our Galaxy and Vercipia joint ventures.

Finally, I'd like to highlight a few items on our balance sheet. First, as I mentioned earlier, we ended our second quarter with unrestricted cash and cash equivalents totaling $14.8 million, of which $4.9 million was held by Vercipia to be used solely for the operations of Vercipia. And subsequent to June 30th we received our scheduled payment of $14 million from BP, which was the third installment of the transaction fee due to us as part of the Galaxy biofuels agreement.

Secondly, in the first half of 2009 the face value of our 8% notes has decreased from just under $59 million on January 1st to approximately $30 million on June 30th, resulting from conversions by note holders in exchange for common stock.

As we announced in July, we have entered into amendment agreements with holders of the necessary majority of the 8% notes required to remove or modify several restrictions that limited our financial and operational flexibility. We believe this was the first of several potential steps we can take to build a capital structure appropriate to support our strategy to be a leader in the commercialization of cellulosic ethanol and specialty enzymes.

Carlos?

Carlos A. Riva

Thanks, Jamie.

Let me close by acknowledging all of the groundbreaking being done here at Verenium by a world class team. I'd also like to recognize our partners, including BP, our customers and our shareholders for their continued commitment and support for Verenium and our vision for advanced biofuels.

At this point I'd like to turn it back to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sanjay Shrestha - Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

A couple of quick questions since it's probably on everyone's mind about the DOE loan guarantee, which is obviously a big positive and you guys certainly have gone through a lot of due diligence. So what is the next step or the milestones, if you would, or what are the next things we ought to be looking for before it really turns from actually the due diligence to the actual award?

Carlos A. Riva

Let me just start by saying we submitted our application in February. We were told at the end of March that within 90 days we would - sorry, at the end of February that we were in fact compliant and complete as an application and then within 90 days they would inform us whether we'd take the next step to go to due diligence. And almost to the day, 90 days later at the end of June we were told by DOE congratulations, you're moving into the due diligence phase.

And so we've have a meeting with them to plan out what needs to be done. I'll turn it over to Jaime because he was there at that meeting, but I think I can say that we're very, very encouraged with the very enthusiastic reception that we've gotten from DOE. It's a process that they want to issue the loan guarantees in a very deliberate way to replicate nonrecourse project financing, but it's very much in a timeframe which meets our need to begin construction in the first quarter of next year.

Jamie Levine

Just maybe a couple of points to think about in the future.

There are really two steps going forward for the loan guarantee. The first would be a signed term sheet which represents a condition commitment subject to certain conditions precedent by the DOE, and then the second would be financial close. So I think in terms of the overall process that's really what it looks like going forward.

As Carlos said, the meeting that we had in July with the DOE was very interactive, very favorable in terms of setting up a process, but we do have diligence to go through and we have a term sheet to negotiate, so that is a process that's going to take some months in order to move forward.

So I don't think that we can predict exactly how we're going to move forward under a timeframe, but thinking about when we're going to be approaching construction in the first quarter of 2010, we think that overall the DOE timeframe should fit well with that process.

And the second thing is it appears that we are likely the first biofuel company going through this process and so therefore I think there's a bit of a learning process that needs to go on on the DOE's side just to understand exactly how our process works as we're not just slotting into an existing program for businesses like ours as they try to understand the nature of the credit.

Sanjay Shrestha - Lazard Capital Markets

So basically then it's really more about not like any major hurdle that has yet to be; it's really more the timing of the process, and you feels comfortable about getting the money on time to move forward with, as you guys just mentioned, by some time in the early part of 2010?

Jamie Levine

That's how we look at it. We want to make sure that the project is - right now it seems nicely that the project will fit in line with the government's timetable, that the government is moving forward, as it does, very deliberately and is going through the process now.

Sanjay Shrestha - Lazard Capital Markets

I know it's probably premature at this point in time to really get into more specifics of the process economics, but it certainly seems like you guys are also making some quite good progress here at the Jennings 1.4 million gallon plant, you know, sugarcane and energy cane. What can you guys tell us with your experience at this point in time? I mean, is it better than expected from the process economics learning curve standpoint? Is it in line with your expectation or can you tell us as to sort of the future path of where that project's economics can go?

Carlos A. Riva

Well, it's clearly complicated, but I think one of the things that I mentioned in my comments was relative to the enzyme production. As you know, enzymes are one of the more involved production steps in the cellulosic process and we've been very pleased to see our progress there, not only in the expression of, that is, the production of our enzymes but also in their effectiveness. There's a lot of ongoing work there, really across the board of the different components of the whole process.

But it's important that this is feeding into our design for the first commercial unit and, again, we continue to make good progress.

Operator

Your next question comes from Amanda Seguin - Jefferies & Company.

Amanda Seguin - Jefferies & Company

On the Specialty Enzyme business, are there any products in the pipeline there that might reach commercialization in the near term?

Jamie Levine

I think for the most part what we're focused on is really the products that we have and ensuring that we're targeting the additional client base that we can target as well as the adjacencies that Carlos mentioned. It's about taking the products that we have and moving them into new commercial uses or new geographies. So I think that tends to be where we're looking for the kind of near-term growth on the SEBU business.

And obviously we do continue to develop the pipeline, but I think as we look towards near-term growth it's more going to come from what we call adjacencies rather than entirely new products.

Carlos A. Riva

Right. I think the biggest area of new product development for us relates to the cellulosic enzymes, which I think is potentially the largest market that we'll be looking to address in the future. But, of course, that market needs to develop at a pace independent of our own product development. But we're working on those products not only for use in our own facilities but also to serve a broader market.

Amanda Seguin - Jefferies & Company

Any further details we could get on the JV with BP regarding what percent of equity Verenium would contribute and total capital cost - any sort of details that you could give us at this point?

Carlos A. Riva

Well, the Vercipia partnership is a 50/50 joint venture and so we'll each be contributing our 50% share of the overall equity. Again, we've estimated in the past that the total cost would be in the region of $300 million and we have applied for loan guarantees that could fund up to 80% of the eligible cost, so it's kind of easy to derive a range of what our equity share would be on a per-project basis.

Operator

Your next question comes from David Woodburn - ThinkEquity.

David Woodburn - ThinkEquity

Can you give us an idea, Carlos, what's the environment like down at Jennings right now? Are the production runs every couple of weeks, once a month? Is it near continuous?

Carlos A. Riva

Sorry. I chuckled because the environment is hot and sticky and wet.

But we haven't really given any details on that and I can't really do it other than to say that we continue to work on operations there, on unit operations and integrating the unit operations in order to find the optimal ways to operate. For instance, we have done a lot of work over the last I guess about six weeks or so in using energy cane. You know, previously we did most of our work on sugarcane bagasse, but as you move to a new feedstock you need to learn all about that feedstock and its operating points and how it responds to different conditions of moisture and the like.

So I think from that respect, we're quite busy but learning an awful lot.

David Woodburn - ThinkEquity

And then in terms of the Specialty Enzyme business, particularly with Fuelzyme, we've seen some of the corn ethanol plants start up, some of them under new ownership. Are they like just getting by with not changing the process or not being amenable to new products or are some of the new owners actually more amenable to new technologies and new enzymes to help them increase their efficiency off the bat?

Jamie Levine

As I said in my comments, what we're finding is that we are signing up new clients, but at the end of the day what it really takes is, as you say, their operational level and their utilization levels to come up in order to see that product return to growth.

So we think that the fact that we are signing up new folks means that the trials that we're doing have resulted in some successful results and so therefore people see the value of our product. And so, frankly, as we start to see gasoline prices tick up our assumption is that that will flow through to ethanol prices and therefore could be a positive for the corn ethanol business and that will hopefully be reflected in our future Fuelzyme performance.

David Woodburn - ThinkEquity

And then one last quick one on the DOE grant. If they surprised you - and actually if they surprised all of us - and gave you the go ahead and closed the loan or you were to close the loan in Q4, would that make a difference on your timing at all?

Carlos A. Riva

Probably not because we're in a parallel process to fully permit the site. And the schedule has us getting all of those permits by year end, but I don't think that we would necessarily begin, I mean, if it were early in Q4 we would still need to complete that permitting process before we could start. So first quarter is really the time that makes sense to us, as well as a number of other things that we're doing to prepare to start construction on the first commercial unit. We'll need to continue to finalize the decision, select a builder, and negotiate those contracts and the like. So I think that the current schedule is in line with our timing.

Jamie Levine

If you think about it, that schedule was actually out well before we even entered into the DOE loan guarantee process, so even if they're faster, we weren't looking to move faster than what we've already talked about.

Operator

Your next question comes from Pamela Bassett - Cantor Fitzgerald.

Pamela Bassett - Cantor Fitzgerald

I wonder if you can share with us a little bit more about what you've learned in the process at Jennings? It sounds like a lot of the focus is on the enzyme part. Is there anything else that you're focused on that will translate into changes at the first plant, the first commercial plant?

Carlos A. Riva

Well, certainly the enzyme piece of it. I think the other part's that we've learned an awful lot from the handling of feedstock, particularly energy cane because, as you may recall, our first project in Florida is going to be based on mostly energy cane.

And there's a lot involved in the handling of these large volumes of biomass, including how they're stored, how they're fed into the system, what the moisture content is because these things vary very much over time. These large volumes will not have a - it might be all the same feedstock, but the nature of that feedstock in terms of its sugar content and moisture content is quite variable. And so we've needed to characterize those in order to design a robust system that's able to take that feedstock year round as it varies. So that element of it.

Also about the fermentation and what some of the optimal nutrient packages are for our fermentation organisms; I think we've mentioned this in the past. That represents a considerable element of the cost basis and so we've been working on developing new nutrient packages for those organisms that in fact we can verify in the demonstration plant. And then there's many different elements, including the front-end treatment, the hydrolyzer, how to optimize the utilities there and the like.

So we're really learning a lot about how these different elements will fit together and how best to take the current design and then enhance it when we scale it up by roughly a factor of 20.

Pamela Bassett - Cantor Fitzgerald

And then remind me, will there be still two fermenters or one?

Carlos A. Riva

There'll be two separate types of fermentation - a C5 and a C6 fermentation - at least in the first several projects that we build.

The long term plan is over time to work on developing organisms, a single organism, that can take both streams of sugar - C5 and C6 - and ferment them in a single vessel. We call it internally one pot. And I know that there are a number of people working on that, as are we. But that's not yet ready for commercial development.

Pamela Bassett - Cantor Fitzgerald

So you're looking at that into the future maybe three to five years, is that fair?

Carlos A. Riva

That kind of timeframe.

Pamela Bassett - Cantor Fitzgerald

And is there a thought that there may be a new energy crop that has specific traits that lend themselves to a new kind of fermentation process at that stage? I just wondered if you're considering those kinds of new energy crops with specific beneficial traits that may be available in three to five years. Is that part of your thinking and your planning?

Carlos A. Riva

It's certainly part of our thinking. We're in continuous dialogue with the people that are working on adjusted types of energy crops, some of which are going to be higher yielding crops and others that are going to be different types of grasses that will allow us to extend our geography economically beyond the Gulf Coast region. These are the switch grasses and things of that sort. So these are going to be very important developments that the technology can be applied to in terms of new feed stocks.

Jamie Levine

Just one quick comment on your previous question about the next generation and this kind of single pot fermentation. When we say that it's a three to five-year type timeframe, that's not when we're starting work. In fact, we're applying for grants from the Department of Energy now to start looking at moving that technology into the pilot phase and that's in the next year, we would hope. And then after that comes the demo plant, a very similar process to what we've seen with the two-stage fermentation.

So when we think about commercialization we're actually already talking about the work that needs to go on to reconfigure our pilot plant in order to be able to mimic a commercial scale one-pot fermentation system. So there's a lot of work going on around that as well.

Pamela Bassett - Cantor Fitzgerald

And then what about the second site? Are you starting to work on that site as well, the second commercial site?

Carlos A. Riva

We haven't announced it but, as you know, we have been working on alternate sites for quite awhile and I think that we would like to be able to be more definitive about that second site.

There is another program for loan give us a guarantees that the DOE has announced and our next site would be a candidate for that or we would hope it would be a candidate for that.

Operator

(Operator Instructions) Your next question comes from [Shuping Lee] - Tenor Capital Management.

Shuping Lee - Tenor Capital Management

I just wanted to ask just for the Specialty Enzyme business, are you operating income breakeven at this point?

Jamie Levine

I think that what we talk about for the Specialty Enzymes business is the gross margin because when you move below that and you look at our R&D and SG&A expense, that's expense that isn't broken out and frankly is very difficult to break out between our Specialty Enzymes and our Biofuels business.

So we can't really talk about what's going on at the operating level because we have a facility in San Diego that supports both businesses and so therefore we can't try to define what part of the research and development activity is supporting enzymes that will go into our own process versus enzymes that we may sell to someone else. So when we talk about the Specialty Enzyme business, that's why we remain at the gross margin level to give a sense for contribution.

Shuping Lee - Tenor Capital Management

I just also want to ask on the cash balance number, can you kind of go through the sources and uses of cash for the second half of the year?

Jamie Levine

Oh, going forward? We're not giving guidance on the second half of this year. I think I can make the broad statement that as we look at our cash balance at the end of the second quarter and then in addition the $14 million that we received from BP that we referenced after the end of the quarter, which was on July 2nd, I think that we certainly see that we have sufficient cash to fund our operations through the end of the year and into 2010. But we haven't given any more specific guidance than that in terms of burn rates or sources of funds.

Shuping Lee - Tenor Capital Management

And if you have to raise more liquidity beyond the second half of this year, what will be the sources or what will be the channels that you can go to to raise additional cash?

Jamie Levine

I think what we can say about that is that we're looking at all the channels that are available to us and looking to try to move separate options forward. And in the end, when we have something to announce, we'll look to announce it. But it's certainly clearly something that I, as CFO, am very focused on. And our needs are going to be significant, but I think at the end of the day we do see several potential sources like our partnerships that we've mentioned, additional DOE grants, obviously the loan guarantee is a material source of capital.

So there are a whole series of options that we're looking into even beyond the three that I mentioned, and at the end of the day we'll have to look at what's most attractive to the company and its shareholders.

Shuping Lee - Tenor Capital Management

Also on the DOE process and the fact that you have been selected into the due diligence process, how does that relate to the final - you get approval to get the DOE's guarantee?

Jamie Levine

I think at the end of the day the diligence process is a very real diligence process. The DOE is hiring its advisers very shortly and those will be technical engineers, that'll be legal advisers, that'll be market advisers to understand the nature of the cellulosic ethanol market. It's going to be a very thorough due diligence process.

I think one of the things that put us in good stead was the fact that our application, which was, I think, almost 1,000 pages, was a very detailed analysis on the nature of our project, on the science underlying it, the markets we're looking to address. So a lot of thought and care has gone into the interaction that we've had with the DOE as part of this whole process, and I think that's one of the things that's, frankly, gotten us prepared to move as quickly as we're able to move in this diligence process.

But I don't think you can judge anything about the outcome of the process from the fact that we've been invited into due diligence. I think, as I commented before, the fact that we seem to be the first if not one of the earliest players going through I think speaks to the confidence that the DOE has in our project and in our ability through Verenium and through BP to bring the necessary skills to actually bring it to commercialization.

Shuping Lee - Tenor Capital Management

Do you know how many people applied for the DOE guarantee and how many people have been selected into the due diligence process?

Carlos A. Riva

As far as we know there were approximately 50 companies that submitted into the February round of this year. Of those, something on the order of two-thirds were ultimately deemed sort of complete and compliant and so they would be in the process of evaluation.

We're not aware of any other biofuels company that is in the due diligence mode at this point. We believe we're the first and we're not aware of any others.

I should say when I talked about those 50 that was strictly for advanced biofuels. Obviously, there are a number of other players looking at other renewable energy projects. But of the advanced biofuels we believe that there were 50 that applied.

Shuping Lee - Tenor Capital Management

Fifty applied and two-thirds, their applications were deemed to be complete?

Jamie Levine

Yes.

Shuping Lee - Tenor Capital Management

And you're the only one that's started the due diligence process?

Carlos A. Riva

As far as we know we're the first. And, again, DOE hasn't made public commentary on this, so we don’t have further information.

Shuping Lee - Tenor Capital Management

When do you think the DOE will give approval for the guarantee? Do they give approval first and then you move onto the stage of negotiating the term sheet?

Jamie Levine

No, this process would involve both the DOE doing due diligence on the project as well as negotiating a term sheet. So, as I said, the overall process is we'll get to a conditional commitment, which is a signed term sheet, and then the next stage is financial close. I don't think there'll be any interim steps that we can refer to or we'll talk about going forward. So the whole diligence and term sheet negotiation process is all going on in lockstep.

Shuping Lee - Tenor Capital Management

So let's say you agree on the terms. Whatever term they put out, you agree to that. Does that mean you will get approval? If you don't have any problem with the terms, does that imply that you will get approval?

Jamie Levine

Well, I don't think that we can, as we sit here today, try to judge what those terms are going to be. A conditional commitment means that it will be subject to various conditions precedent and our ability to meet those conditions precedent is obviously something that, if we're going to sign up to a term sheet, we'd like to think that we're going to meet them. But that's the nature of the process.

We'll have to see what conditions the DOE is looking to offer us a loan guarantee on and then we'll have to decide if we can meet those conditions. Given the early stage that we're in right now, I don't think we understand all of DOE's expectations and so we can't comment as to whether we're likely to meet them.

Shuping Lee - Tenor Capital Management

Is there a scenario that you were not even presented a term sheet after the due diligence process?

Jamie Levine

At this stage I think we've said everything we can about the process. Whether anything happens or not is not something I can judge. We've told you the process as we see it going forward, so I think that's what we know as we sit here.

Operator

With no further questions in the queue, I would now like to turn the call back over to Kelly Lindenboom for closing remarks. You may proceed.

Kelly Lindenboom

We'd just like to thank you for your participation today and we look forward to providing you future updates on Verenium's continued progress. Have a nice evening.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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