Verenium Corporation Q2 2008 Earnings Call Transcript

Sep.20.08 | About: Verenium Corporation (VRNM)

Verenium Corporation (NASDAQ:VRNM)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Kelly Lindenboom – Vice President of Corporate Communications

Carlos A. Riva – President, Chief Executive Officer

John A. McCarthy, Jr. – Chief Financial Officer

Analysts

Ron Oster – Broadpoint Capital

Lucy Watson – Jefferies & Co.

Silke Kueck – J.P. Morgan

Pamela Bassett – Cantor Fitzgerald

David Woodburn – ThinkPanmure

Operator

Welcome to the second quarter 2008 Verenium Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Kelly Lindenboom, Vice President of Corporate Communications.

Kelly Lindenboom

With me today are Carlos Riva, Verenium’s President and Chief Executive Officer and John McCarthy, our Chief Financial Officer.

On today’s call we will cover the following. First we will discuss the overall progress the company has made with second quarter and first half of 2008, including the partnership we announced yesterday with BP. Next we will provide you with the summary of our second quarter financial results and John will provide an overall update on our financials. And finally we will review anticipated milestones.

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 Exchange Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. These statements involve a high degree of risk and uncertainty and relate to matters such as the company’s strategy, future operating plans, markets for the company’s products, strategic partnering and collaboration activities, public policy initiatives, 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 can cause or contribute to differences include but are not limited to the risks related to the company’s intellectual property, strategic partners and collaborators, competitors, and regulatory and market forces.

Certain of these factors and others are more fully described in the company’s filings with the SEC, including but not limited to the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2008. The forward-looking statements that speak only as if the day care of and the company expressly disclaims any intent or obligation to update these forward-looking statements. I will now turn the call over to Carlos.

Carlos A. Riva

Good morning everyone and thanks for joining our call today. Let me begin by stating how pleased we are with the significant progress we’ve made towards our 2008 goals during the second quarter and throughout the first half of this year.

Our teams have continued to work very hard to insure that we are delivering against the objectives that we set out for ourselves for the year, and I believe the milestone that we have achieved over the last six months are a true testament to that effort. During the second quarter we were able to begin the start up phase and move into a comprehensive commissioning phase at our 1.4 million gallons per year cellulosic ethanol demonstration plant in Jennings, Louisiana.

We also continued to see strong growth in both product sales and product gross margins in our specialty enzyme business. And critically important, as you are now also aware, we delivered on a major 2008 goal of bringing on board a strategic corporate partner, BP, to help us accelerate our technology and project development efforts as we continue to focus on the near term commercialization of cellulosic ethanol.

I’d like to begin by recapping our recent announced corporate partnership with BP. This alliance marks a major accomplishment, and is a transformational event for Verenium. The collaboration not only brings $90 million of non-dilutive capital to Verenium over the next 18 months, but also gives us a solid foundation to accelerate our efforts at pilot and demo scale plants in Jennings. And to move toward the next phase of our development, which will include the rapid build out of a portfolio of commercial cellulosic ethanol facilities.

We believe this collaboration also represents a watershed moment for the entire second generation ethanol industry. It’s the first major collaboration between a key international energy company and a U.S. cellulosic ethanol pioneer. Importantly, Verenium and BP hold a shared vision for the broad build out of the multi-million dollar cellulosic ethanol market and are equally committed to rapidly advancing its development.

This partnership brings together Verenium’s proprietary cellulosic ethanol technology and know-how, with BP’s process engineering, logistics marketing and supply chain strengths, effectively positioning both companies to be among the first movers to deliver commercial, cellulosic ethanol to the market at a time when the world very much needs alternative fuel sources.

John will go into more of the financial terms of the partnership with BP. But I want to reiterate how excited we are to be working with BP, a proven international leader in energy who understands the importance and need for alternative energy sources such as cellulosic ethanol, and shares the same goal of making low cost renewable cellulosic ethanol a commercial reality in the near future.

I’d now like to turn to a discussion of Verenium’s progress and achievements over the last quarter. Turning first to our Biofuels business unit, activities at our production facilities in Jennings continue to progress at a steady pace. In April we announced the transition to the start up phase of our 1.4 million gallon per year demonstration scale facility, which we are now more than 70% completed. And in May we began our comprehensive commissioning phase, which we are already 20% complete.

We recently achieved a key milestone as part of this process having just over a week ago produced the first few gallons of cellulosic ethanol from the demo plant. Following the commission phase, we will continue to work to make progress and process improvements and to optimize the facility as we seek to ensure the reliable and cost effective operation of the plant.

The overall commissioning and optimization phase is expected to continue through the end of this year. At that point we expect to have a clearer picture of our process economics and be in a position to validate the cost and performance assumptions of our technology. And to begin the scale up and design process that will position us to move forward with construction on our first commercial scale facility which as we’ve previously discussed is planned to begin construction in 2009.

This facility, the first of many we expect to construct in the coming years will represent a significant milestone for both our company and the industry as a whole. On the development front, further progress continues on advancing our pipeline of commercial sites in Florida, Texas and Louisiana. And we have begun to explore sites in Alabama and Mississippi.

Project level progress continues and we are engaged in detailed discussion and negotiation with land owners, feed stock providers, engineering contractors, and state and local officials. We expect to be able to provide additional details around these discussions later this year.

Finally in Biofuels, in July Verenium was awarded two grants, one from the Department of Energy to support additional work at our demo plant and the second from the New Zealand Foundation for Research, Science and Technology that awarded Verenium along with our research partner Scion a three year, $5.4 million grant for further work on ligno-cellulosic enzyme development.

These grants, along with the recent passage of the Farm Bill and its key provisions to help speed the development of cellulosic ethanol, together with proposed legislation such as the Open Fuel Standard Act to reduce America’s dependence on foreign oil, and the recent passage of a gas tax exemption for cellulosic ethanol by Governor Patrick here in Massachusetts, the first state to pass this legislation, further indicate the strong and growing federal and now state government support for cellulosic ethanol.

I’d now like to update you on the progress within our specialty enzyme business unit. As most of you are aware, we’re focusing on building a leading specialty enzyme business, to the development, manufacture and sale of tailored enzyme products to strategic industrial markets. While this business unit is generating revenue from multiple sources, including technology licenses, collaborations and government grants, the primary thrust of the business is now product sales.

As in the first quarter of the year and during the second quarter, we continued to see significant progress and momentum in this part of the business. John will go into more of the financial specifics, but of note to the second quarter of 2008, we’re pleased to report that the second quarter is now the highest single quarter of revenue ever reported for the specialty enzyme business, with total combined revenue of $18 million.

Overall product sales were up 121% over the same period last year. Phyzyme, the lead product in our portfolio, continues to show strong growth of 46% over the first quarter of 2008, and nearly triple the levels of the second quarter of 2007. And we expect to see continued strength as that market grows and product dosages increase due to high phosphate prices.

And finally, we experienced continued success with Fuelzyme, demonstrating economic benefit to our customers in the grain ethanol industry. Overall, we’re very pleased with our expanding base of products and sales. With a strong market leader in Phyzyme, balanced by emerging but up and coming new products including Phyzyme and Purifine.

I’d like to now turn the call over to John McCarthy, our CFO to review our second quarter financial results and updated financial guidance for 2008.

John A. McCarthy, Jr.

We’re quite pleased to be with everyone today to provide an overview of our solid Q2 performance, and most importantly outline again for our investors our exciting corporate partnership with BP, announced yesterday morning. Recall that when we announced the merger of Diversa and Celulnol back in February ’07, we committed to two main corporate objectives.

First, to establish our Biofuel business unit as a major differentiated player in the cellulosic ethanol market by aligning our business with a world class corporate partner who shares our vision for the future. And secondly, to rapidly focus our specialty enzymes business from an R&D oriented organization into a commercially focused, product driven competitor in the industrial enzyme market place.

While much work remains, we’re pleased to be able to report today the strong progress we’ve made over the past 17 months towards the achievement of these two mission critical objectives, and now feel that we have the solid foundation for future growth across both of our business units. Let me now provide a brief summary of the financial highlights for the quarter.

Total revenues for Q2 and first six months of ’08 grew nearly 65% and 50% to $18.3 million and $33.5 million respectively, compared to $11.1 and $22.4 million for the same periods last year. More importantly however the portfolio mix for first half ’08 represent a continued progress being made to accelerate the commercial traction of our product portfolio.

While collaborative revenue declined in Q2 and first half ’08 as planned due to our early ’07 restructured Syngenta Agreement, product revenue in these periods increased 121% and 116% to $13.4 and $24.6 million from comparable periods in ’07, due in large part to continued strong growth in the market for Phyzyme.

Of total product revenues, sales of Phyzyme which is sold through the company’s partnership with Danisco Animal Nutrition, grew approximately 186% and 140% in Q2 and first half ’08 respectively, to $10.5 million and $17.9 million over the prior ’07 periods. As Phyzyme’s differentiated product characteristics continue to expand its worldwide phytase position in the animal feed industry.

In addition to the strong progress being made with Phyzyme, other products within the portfolio made solid progress in the quarter, including most importantly Fuelzyme-LF, which is the company’s alpha amylase enzyme used in grain based ethanol production. Since we began selling Fuelzyme through our own dedicated sales force early last year, we’re quite pleased with performance in important trials and early adoption into commercial production.

We expect to provide more specific highlights of our progress throughout the year for Fuelzyme, as well as our recently introduced Purifine product which is sold into the highly concentrated, multi-billion dollar edible oil industry. Of note, first half ’08 also included roughly $2.4 million in product revenue from two discontinued products, those being Bayovac and Quantum, which will not occur in future quarters.

Product gross margin was 28% and 29% in Q2 and first half ’08 respectively, versus 30% and 20% last year again consistent with our expectation as we grow our product portfolio volume and introduce higher gross margin products. In terms of operating expenses, first recall that Q2 ’07 financial results represented historical diverse stand alone financials only for all but ten days of the quarter, as the Celunol merger closed on June 20.

Having said this, R&D expenses for Q2 and first half ’08 total $14.9 million and $29.8 million respectively versus $11.1 and $22.8 million for the comparable periods in ’07, primarily related to the inclusion of Celunol operating expenses in the ’08 periods.

SG&A expense in Q2 and first half ’08 totaled $9.1 million and $18.7 million respectively, versus $7.9 and $13.3 million in ’07. The ’08 year-over-year increases related primarily to the inclusion of Celunol SG&A expenses in the ’08 periods, as well as approximately $900,000 in incremental legal expenses incurred in Q2 ’08. They aren’t expected to continue during the balance of the year.

Included in both R&D and SG&A expense for all periods is non-cash, stock based compensation expense in a rough 40%, 60% proportion. For Q2 and first half ’08 stock based compensation totaled $2.7 million, $6.2 million respectively versus $2.3 million and $3.3 million for the same period last year, resulting primarily from additional option grants in connection with the Celunol merger as well as several new senior level hires and company wide grants since that time.

Recall last quarter I described a process undertaken by the company to finalize the accounting treatment on the $71 million of face convertible bond notes issued in February. Having finalized the rather complicated accounting treatment for the convertible bonds last quarter, our financial statements now reflect the dynamic nature of certain components of the debt instrument, many of which require quarterly revaluations that will produce non-cash interest expense as well as gains and losses on our P&L for the duration of the bonds.

While the details of this complicated accounting are more explicitly described in our second quarter 10-Q to be filed on Monday of next week, the more relevant cash interest expense related to our convertible debt instruments remains the same as provided in our most recent guidance. That being approximately $11 million on an annualized basis, assuming all of the bonds remaining outstanding.

Turning now to some more specific details surrounding the BP partnership transaction, before I turn the call back to Carlos and then open up the line for questions. As detailed in yesterday’s conference call and related communications materials, the initial phase of our BP partnership calls for $90 million of total funding to Verenium over the next 18 months in two components. $45 million in unconditional payments over the next 12 months for broad access to our technology, production assets and employees through its licensing rights, payable as follows: $24.5 million at closing, $6.5 million on January 2, 2009, and $14 million on July 2, 2009.

The second component represents BP’s commitment to fund our Biofuels program with $2.5 million per month over the next 18 months in order to accelerate and further develop our broad technology platform.

For the remaining five months of ’08, Verenium will accrue the $2.5 million per month earned over the five month period onto its balance sheet until January 2, 2009, at which time BP will pay Verenium a total of $21.5 million; $12.5 for the five month accrual, $2.5 million for the month of January and $6.5 million for the second of the three payments related to its partnership participation rights.

Thereafter, from February ’09 through and including January, 2010, BP will pay the $2.5 million monthly technology funding payment on the first of every month. Given some of the structural complexity of the partnership, we’re working closely with our two accounting firms to finalize the accounting treatment of the 18 month funding commitments, and expect to communicate a financial statement treatment and impact on ’08 guidance on our Q3 conference call.

More importantly, however, we believe the capital from this first phase alone of our BP partnership provides us adequate working capital funding through much of fiscal 2009, now that the demonstration plant in Jennings is in the start up and commissioning phase, and therefore substantially funded. As we discussed in yesterday’s deal announcement, we expect to begin negotiation as soon as practical.

A second phase of our partnership with BP which will be focused on the development of a joint commercial plan and will include incremental co-funding commitments from BP. As a result, depending on the timing and breadth of this second phase of the partnership, we will have to judge at that time the incremental capital requirements on Verenium’s part to co-fund what we expect to be a robust commercial development plan with BP.

Having said this, we will also evaluate the many other options that may present themselves over the next 24 months to provide the company with the requisite capital to support a healthy and ambitious commercial development plan and partnership with BP. I’d like to now turn the call back to Carlos for a few closing remarks, and then we’ll open up the line for questions. Carlos.

Carlos A. Riva

I’d now like to turn to the milestones that we anticipate to be able to update you on over the coming months. As I mentioned previously, we hope to be updating you on the development of commercial project level progress over the coming months.

We also expect to provide updates on the ongoing progress at our demonstration plant in Jennings, Louisiana, including progress on commissioning and movement into the optimization phase. And to provide initial updates on our recently announced partnership with BP, and the progress toward our joint vision to build, own and operate a portfolio of commercial cellulosic facilities.

In closing, I’d like to reiterate that Verenium remains committed to building a leading industrial Biotechnology company, and we believe that our achievements over the last several months have placed us on the path to delivering on our vision of developing and [commercializing] advanced environmentally superior, next generation Biofuels and specialty enzyme products. 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 Ron Oster – Broadpoint Capital.

Ron Oster – Broadpoint Capital

First I was wondering if you were going to provide an update with regards to revenue guidance. Looks like if you just look at the first half of the year, you’re going to be well ahead of the expected the last time you gave guidance. And also on the cost side of the equation, too, with regards to guidance there.

John A. McCarthy, Jr.

At this point, we’re not planning on providing additional guidance. As you said, we’re quite pleased with the first half of the year. You know, it implies that we’re on a pace, you know, to exceed the guidance but, you know, it’s – with Phyzyme being such a significant piece of our product mix at this point in time, and having two new products in our portfolio, I think we’re erring on trying to be a little conservative here. And so as a result we’re not changing the guidance, but again we’re quite pleased with what we’ve seen the first half of the year.

Ron Oster – Broadpoint Capital

I guess then on the Phyzyme side, those sales were well ahead of our expectations. What can we – can you give us any color with regards to what we can expect going forward? Was the growth we saw sequentially sustainable or is it going to fall off a bit to more sustainable levels? Or what should we be looking for there on the Phyzyme portion of that?

John A. McCarthy, Jr.

Well you know I think, Ron, probably the safest thing is quarter over quarter, or I should say sequential quarters, you know, can be a little bit misleading because there are a lot of commodity movements in the marketplace that have positively impacted the Phyzyme market. The continuation of the kind of rather substantial increases that we’ve seen are probably not sustainable over the long term.

We continue to get greater and greater insight from Danisco into how they see the long term growth of the marketplace, and they are – they remain very optimistic. But it’s one of the reasons we don’t want to alter the guidance at this point in time, because its – you know, like a lot of other commodity related marketplaces, it’s subject to a fair bit of volatility.

Ron Oster – Broadpoint Capital

And then moving on to – I was wondering if you could provide some more detail with regards to your cash burn rate for this quarter and CapEx guidance for this quarter as well as the rest of the year?

John A. McCarthy, Jr.

As I said in the comments and in the press release, we’re not revising our guidance for the balance of this year other than obviously the inclusion one can do from the cash that we’re being paid from BP. The – I think most importantly, we said that we expect to bring the demonstration plant in as a total cost number of $79 million, and we remain with that number. We are substantially complete with that program, and as you know we’re in the start up and commissioning phase.

So we’re not changing guidance at this point in time. Again, to a great degree, as a function of not being able to provide you explicit insight into the accounting treatment for the BP deal, but certainly from a cash perspective I think, you know, we tried to outline in this call and in the press release more details that gave you some insight into sort of what the implications from a cash and balance sheet are at least for the balance of this year.

Ron Oster – Broadpoint Capital

Is there anything you can tell us about CapEx aside from the BP funds you’re going to be getting? CapEx for Verenium from a stand alone basis for the rest of the year? Is there anything you can give us there?

John A. McCarthy, Jr.

Well I think what we’ve said in prior calls is that aside from the demonstration plant capital expenditure program, the capital expenditure baseline for our business is rather de minimis, and I think we’ve described that as something in the $3 to $5 million range. You know, it was sort of a maintenance capital expenditure. So, you know, again with the vast preponderance of the demonstration plant completed and funded, maintenance capital expenditures are rather small in the overall scheme of things.

Ron Oster – Broadpoint Capital

Has the $79 million for the demo plant, has all that been incurred? Or is some of that going to spill over into 3Q?

John A. McCarthy, Jr.

Some of it, from just a payment perspective it is spilling into Q3 but it’s not a significant number.

Operator

Your next question comes from Lucy Watson – Jefferies & Co.

Lucy Watson – Jefferies & Co.

Just going back to the enzymes for a minute. Can you give any more detail on, I guess, the market adoption of Fuelzyme for the ethanol industry?

Carlos A. Riva

Well, we’ve been successful in a number of trials that have been run at potential client facilities, and those have been converted into several new clients. So it’s – the market adoption has been very, very positive.

John A. McCarthy, Jr.

And Lucy I’ll just add Janet Roemer, who I think we’ve mentioned in prior calls, who joined us earlier this year as the General Manager for our enzyme business has been working hard with the team on really evolving more substantive commercial plan for Fuelzyme and we’re making great progress. And that’s what we said that we expect to, you know, provide further specific guidance on our progress by the end of this year. But we’re quite pleased with what we’ve seen.

Lucy Watson – Jefferies & Co.

And then on – further on Fuelzyme, will the IP related to the Fuelzyme be licensed toward the BP partnership?

Carlos A. Riva

No that’s totally separate.

Lucy Watson – Jefferies & Co.

And on Phyzyme is that profitable on a stand alone basis?

John A. McCarthy, Jr.

Well it’s profitable from a gross margin perspective. And I don’t think we’ve disclosed the specific gross margin for Phyzyme. So it, yes it contributes a meaningful amount of cash to our enzyme business.

Lucy Watson – Jefferies & Co.

Have your discussions with BP led to any, I guess, material changes in your perspective on process economics?

John A. McCarthy, Jr.

No, no, it’s actually been quite supportive of, you know, of what we’ve been doing in the Biofuels business.

Carlos A. Riva

I think when we said that BP has a shared vision, I think that that shared vision includes a view on our general approach of enzymatic hydrolysis and biological fermentation, as well as the use of grass based energy crops as the way to get the best near term process economics.

So as John said their independent view has reinforced our position and our view of how to move forward. I think what we’re expecting, though , is that they have some very significant skills in the areas of process engineering and project management, as well as understanding marketing and the distribution end of the product that can help us in, as we figure commercial scale projects to make our projects more efficient and profitable.

Operator

Your next question comes from Silke Kueck – J.P. Morgan.

Silke Kueck – J.P. Morgan

I have a couple questions. The first one on Phyzyme. When we look at the suppliers of like the phosphate into the animal feed markets, the commentary is that the prices on phosphate will continue to rise and all things being equal, that would mean that probably, you know, Phyzyme business should do very well. So is there anything outside of prices that would, you know, change the growth rate in Phyzyme for the you know, I don’t know, the next few quarters?

John A. McCarthy, Jr.

Not that we can see, Silke. The product characteristics of Phyzyme are quite good. So we’re benefiting from some of the dynamics that you just described, but again the characteristics of Phyzyme relative to the competitive products are quite good. So we remain optimistic and I think Danisco who is, you know, obviously closer to the front lines of what’s happening remains quite optimistic.

Silke Kueck – J.P. Morgan

Secondly on the BP collaboration, I understand that there are various ways the proceeds that you get may be, you know, may flow with your income statement whether it’s revenue or offset to R&D or, you know, capital contributions. But in very general terms should one view this as some revenue stream that will be, you know, of $90 million that will be amortized just over six quarters?

John A. McCarthy, Jr.

Well yes. I think as a directional proposition, Silke, there will be revenue and there will be offset to expenses here. And the issues that were – that the accountants are grappling with is a complex area called [Fin 46] which is minority interest accounting. And it’s, you know, whenever a company does a joint partnership or a joint venture, companies get trapped into really looking at a very complex set of accounting issues.

And so yes there will be revenue. Yes there will be offset to our expenses. And the question really more than anything else has to do with what’s the period over which these revenues have to be amortized notwithstanding when we get paid the cash.

Silke Kueck – J.P. Morgan

So all of that is not clear yet either?

John A. McCarthy, Jr.

There are opinions on it. We have two different accounting firms that are working with us to make sure that this whole area is – that we’re doing this the correct way. But, you know, we’ll resolve it over the next 30 days and as I said we’ll provide the more specific commentary, you know, in our next quarter earnings call so that, you know, we are able to give more specificity around the revenue implications.

Silke Kueck – J.P. Morgan

Will the $90 million be absolute proceeds to Verenium? Or will there be any, you know, costs that, you know, we have to account for like the net proceeds, some smaller amount?

John A. McCarthy, Jr.

No. The gross and net are the same here, so over the next 18 months the $90 million is incremental to Verenium.

Silke Kueck – J.P. Morgan

Will there be any incremental expenses that you may incur with the joint venture with BP that will be like an offset to the proceeds that you receive?

John A. McCarthy, Jr.

Well over time as we and they are planning – as we’re executing this first phase of our partnership and we are embarking on the negotiation and ultimately the finalization of the second phase of the partnership, our expense structure will be modified for each of those plans. As we sit here today, the first phase of this partnership is meant to be, you know, purely additive to the basis of our business today. In other words, we’ve got a commercial development plan. We’ve got, you know, Jennings operation and R&D, you know, a rather substantial R&D group, etc.

So the funding that BP is providing as we described in this first phase is incremental and in offset to the plan that we already have in place. So for the foreseeable future, we don’t expect to modify our expense structure. That said, over the next 12 to 18 months, and this will come more as we’re giving guidance for next year, you know, certainly things will change as a function of our desire with BP to accelerate certain programs. But we’ll be able to provide greater guidance on that by, certainly by the end of this year.

Silke Kueck – J.P. Morgan

And then if I can ask the last question just on the grant. The most recent grant related to the, you know, to help advance development of demonstration scale plans, I think the grant was a $40 million grant and I believe one other company received $30 million of that. So is Verenium receiving $10 million? And when do you think you will receive that amount?

Carlos A. Riva

Well it’s still unclear what the full value of the grant is. We know that the program under which it was issued was $40 million, and one of the other parties received $30 million. But we had applied for $30 million and there’s been additional funding that’s gone back to the D.O.E. from projects that weren’t able to move forward. So today we’re not able to say specifically how much the grant is going to be. As to the timing of it, again that’s all subject to negotiation but our expectation is that it would be over the course of the next two years.

Silke Kueck – J.P. Morgan

And if I understood that right you said that, you know, you think at a minimum you expect to receive $10 million but you think it may be more because there may be additional funding available under this program.

Carlos A. Riva

Well we have yet to sit down and begin the negotiations with the Department, so we can’t really comment. But again we have applied for more than – we have applied for $30 million and we think we have a very compelling story to tell D.O.E. but we just don’t know what the ultimate amount is going to be at this point.

Silke Kueck – J.P. Morgan

And the New Zealand grant, is the way to think about it is that you have to split that half, you know, 50-50 with your partner? And then that would mean that you’d actually probably get, I don’t know, $200,000 a quarter for the next three years?

Carlos A. Riva

I think that the relative contribution of the warp between us is going to be roughly equal. But the precise amounts aren’t fully disclosed and negotiated. But roughly speaking, I think it will be an equal contribution from us and Scion.

Silke Kueck – J.P. Morgan

And on the last grant I remember is the grant that was – an $8.5 million grant over 22 months. It would help fund enzyme development. Have you begun to collect on that? And if yes, how much or how do you expect to collect the $8.5 million over the next 22 months?

Carlos A. Riva

Yes, that will be a second half of 2008 and moving into next year activity and funding.

Operator

Your next question comes from Pamela Bassett – Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Carlos at the beginning in your opening remarks, you mentioned a completion I think around the demo plant, 70% and 20%? Could you repeat that for me?

Carlos A. Riva

Yes, it’s a little confusing. The demonstration plant is largely constructed other than there’s still ongoing punch list activities. But there’s the construction phase, then we had the start up phase, and then we have the commissioning phase. The start up phase is one where we start to check out and move water and the like, test each of some 80 different individual components of the project, and that process is about 70% complete. Then we have the commissioning phase where we start to introduce the feed stock and the biological elements to it, as well as frankly have the operating staff be run through the process – operating processes.

And that’s a more involved part of the whole start up and commissioning process. And that’s roughly 20% complete now. And we’re going to be continuing that with a view towards finishing that up later in the fall. And then entering into what would be the operating phase, where we’re actually running the plant as intended, full time and producing ethanol.

Pamela Bassett – Cantor Fitzgerald

With respect to the $90 million from BP, I understand $45 million is irrevocable and the other

$45 million I assume is tied to milestones, like technical milestones?

John A. McCarthy, Jr.

Well no the $2.5 million is our commitment of monthly co-funding –

Pamela Bassett – Cantor Fitzgerald

I’m sorry John. I was breaking this into two big chunks, $45 million which you discussed in the call and then the other $45 million of the $90.

John A. McCarthy, Jr.

Yes exactly. Yes. So I think as we described in the press release, unfortunately you have two

$45 million numbers here, but the first $45 million piece for the broad technology package is unconditional payments over the next 12 months as we highlighted. The second $45 million in total funding over the 18 month period of time or $2.5 million per month is co-funding of our Biofuels business.

And while we and BP have established certain milestones that we and they expect to hit during this 18 month period of time, and we haven’t described what those are – those are all confidential – you know we do have certain milestones that we and they expect to hit, so you know, but the $2.5 million is, you know, is a co-funding payment from them to us on a monthly basis.

Pamela Bassett – Cantor Fitzgerald

Is the entire $90 million unconditional? Or just $45?

John A. McCarthy, Jr.

The first $45 million is unconditional, as you would expect when you do a joint venture and a partnership, there are terms and conditions that allow parties to, you know, exit. We haven’t described what those are so there’s nothing unusual about this partnership. Those are few and far between.

We haven’t disclosed what those are, but you know the second $45 million, the

$2.5 million per month is not what you would, you know, consider guaranteed or unconditional. But we feel extremely comfortable as does BP with, you know, the way we structured this so that we think it is most certain funding.

Pamela Bassett – Cantor Fitzgerald

And to what extent will meeting these milestones drive the second phase negotiation?

John A. McCarthy, Jr.

They’re really separate, Pamela. The thing about the milestones as being things that we’re already working on. So these aren’t additive to our business as we know it today and we’ve described to you over the past year. They merely are benchmarks for what we’ve already had in place.

The phase two piece of this that we’ll start negotiating with BP is really related to developing a more robust and explicit commercial plan for taking the technologies that we’ve got, and the learning’s from the demonstration plant, and accelerating those and scaling those into a development plan for not only the first commercial facility but others as well. That’s really the primary focus of the phase two. And as part of the phase two, you know, there’s incremental spending from BP and us, you know, for the program. So that’s part of the second phase of the negotiation.

Pamela Bassett – Cantor Fitzgerald

So it sounds like this negotiation is very strategic commercialization and focused and strategic in nature and agreement.

John A. McCarthy, Jr.

Well it’s strategic in nature, it’s also, you know, quite operational in nature because its focused on the development of commercial plants. But, you know, I think it’s a fair assessment to make that despite the fact that we have certainly spent most of our time on this phase one, that we and BP have contemplated, you know, broadly speaking, you know, what would likely be in a phase two. We just haven’t sat down to negotiate that.

The ultimate goal here obviously for us and them is commercial development. And so it, you know, it sort of gets – it goes through all the discussions that we’ve had with them, you know, for the past six to 12 months.

Operator

Your next question comes from David Woodburn – ThinkPanmure.

David Woodburn – ThinkPanmure

Quick question on SG&A. It looked like over the past three or four quarters SG&A has started to trend down. Are we seeing, you know, merger synergies there? And have you essentially used those up? Or is there something else going on? I know you mentioned some legal expenses in the press release.

Carlos A. Riva

David, there really are no merger synergies, per se. I think the way to think about for either sequential quarter, you know, quarter over quarter or year-over-year is that a lot of transactions have occurred, you know, since we officially merged these two businesses back about a year ago, back in June of last year.

And, you know, we had the convertible – we had two convertible debt financings since. We had the merger related expenses. We – so we’ve encountered and we’ve had some legal expenses related to, for example, the settlement of one particular suit that we were involved with and, you know, we had good resolution of that.

So we had sort of one time transaction related expenses almost all of which run through our SG&A, so most of that, you know, is sort of behind us. Obviously we’re going to incur additional, you know, legal expenses related to closing this transaction. So it’s just been a busy 12 months, you know, since we officially merged the companies.

David Woodburn – ThinkPanmure

And if I can, a quick one on gross profit. If I look, you know gross profits or product gross profit has been relatively flat. Can I assume that most of the increase in the enzymes business has come from volume, from increased volume and not just price increases?

John A. McCarthy, Jr.

Yes. Well, it’s actually the gross margin, if you go back over the past 12 to 15 months, you’ll see a rather significant expansion in gross margin. And we guided to a gross margin for the full year of 28 to 30% and we’re quite pleased with where we’ve been able to get the gross margin to. But I think your point is accurate, that the improvement in the gross margin over the past year has been primarily a function of increased volume.

We’ve got the enzyme business has what’s considered operating leverage in it. In other words, a base of fixed costs, and so to the extent that we’re able to drive the continued increase in volume, we’re able to get expanding gross and gross profit margins in the product portfolio. As Phyzyme continues to grow, as Fuelzyme and Purifine continue to grow, you know, we hope and expect that gross margin would continue to expand.

Operator

This concludes the question-and-answer session.

Kelly Lindenboom

Thank you all for your participation today and we look forward to providing you with future updates on Verenium’s continued progress.

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