Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Organization and Summary of Significant Accounting Policies [Abstract]

Recent Developments

Recent Developments

Credit Facility

As further described in Note 11, on October 5, 2012 the Company entered into a $10 million revolving credit facility with Comerica Bank (“Comerica”). The credit facility has a maturity date of October 5, 2014. This credit facility will allow the Company to borrow up to $8.4 million against certain eligible foreign and domestic receivables and will cover an existing $1.6 million letter of credit commitment to the Company’s landlord. The credit facility also immediately frees up $1.6 million in restricted cash which had previously secured the letter of credit. Advances under the credit facility bear interest at a daily adjusting London Interbank Offered Rate (“LIBOR”) plus a margin of 4.75%.

Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) on March 5, 2012.

Excluding the one-time gain on sale of the oilseed processing business, the Company had a loss from operations of $7.0 million for the nine months ended September 30, 2012 and had an accumulated deficit of $578.5 million as of September 30, 2012. Based on the Company’s operating plan, which includes expanded research and development investment in pipeline products, its existing working capital may not be sufficient to meet the cash requirements to fund the Company’s planned operating expenses, capital expenditures and working capital requirements through 2013 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern through 2013. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

The Company’s plan to address the expected shortfall of working capital is to generate additional financing through any of the following: raising debt financing, including through the issuance of debt or convertible debt securities, the issuance of equity securities, corporate partnerships and collaborations, financing of assets, and incremental product sales or strategic transactions. The Company will also continue to consider other financing alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

The results of operations and assets and liabilities associated with the sale of the Company’s ligno cellulosic business (“LC business”) in September 2010 have been reclassified and presented as discontinued operations in the accompanying consolidated statements of comprehensive income (loss) and balance sheets for current and all prior periods presented. The results of operations and assets and liabilities associated with the sale of the oilseed processing business to DSM Food Specialties B.V. (“DSM”) in March 2012 are included in continuing operations in the accompanying consolidated statements of comprehensive income (loss) and balance sheets for the current period and all prior periods presented.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, discontinued operations, and related disclosures. On an ongoing basis, the Company evaluates these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities and income taxes. These estimates are based on historical experience, on information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The applicable authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 (in thousands):

	September 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents (1)	$	18,038	$	0	$	0	$	18,038	$	36,959	$	0	$	0	$	36,959
Liabilities:
Derivative—warrants (2)		0		0		170		170		0		0		78		78
Equity:
Warrants (3)		0		0		0		0		0		0		209		209
	$	0	$	0	$	170	$	170	$	0	$	0	$	287	$	287

(1) Included in cash and cash equivalents and restricted cash on the accompanying condensed consolidated balance sheets.

(2) Represents warrants issued in February 2008 and October 2009, both of which qualified for liability accounting. The warrants issued in 2008 had a fair value of zero as of September 30, 2012 and December 31, 2011, using significant unobservable inputs (Level 3). The warrants issued in 2009 had a fair value of $0.2 million and $0.1 million calculated using the Black-Scholes Merton methodology, and were classified within other long term liabilities at September 30, 2012 and December 31, 2011, using significant unobservable inputs (Level 3). Inputs for the Black-Scholes Merton methodology were consistent with the inputs used for the Company’s share based compensation expense adjusted for the warrants’ expected life.

(3) Represents warrants issued in October 2011 in conjunction with credit facilities, which qualified for equity accounting. The warrants issued had a fair value of $0.2 million as of December 31, 2011 calculated using the Black-Scholes Merton methodology, and were classified within stockholders’ equity at December 31, 2011, using significant unobservable inputs (Level 3).

The following table presents a reconciliation of the assets and liabilities measured at fair value on a quarterly basis using significant unobservable inputs (Level 3) from January 1, 2012 to September 30, 2012 (in thousands):

	Derivative Liability – Warrants
Balance at January 1, 2012	$	78
Adjustment to fair value included in earnings (1)		324
Balance at March 31, 2012		402
Adjustment to fair value included in earnings (1)		(232	)
Balance at June 30, 2012	$	170
Adjustment to fair value included in earnings (1)		0
Balance at September 30, 2012	$	170

(1) The derivatives were revalued at the end of the reporting period and the resulting difference is included in the results of operations. For the three and nine months ended September 30, 2012, the net adjustment to fair value is included in “Gain (loss) on net change in fair value of derivative assets and liabilities” on the accompanying condensed consolidated statements of comprehensive income (loss).

Revenue Recognition

Revenue Recognition

The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.

Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of September 30, 2012, the Company had $2.2 million in current and long-term deferred revenue, of which $1.7 million related to funding from collaborative partners and $0.5 million related to product sales.

Product Revenue

The Company recognizes product revenue at the time of shipment to the customer, provided all other revenue recognition criteria have been met. The Company recognizes product revenues upon shipment to distributors, provided that (i) the price is substantially fixed or determinable at the time of sale; (ii) the distributor’s obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

The Company recognizes revenue from royalties calculated as a share of profits from DuPont Nutrition Biosciences ApS (“DuPont”), a division of E. I. du Pont de Nemours and Company, during the quarter in which such revenue is earned. DuPont markets products based on the Company’s Phyzyme ^® XP phytase enzyme. Revenue from royalties calculated as a share of operating profit, as defined in the agreement, is recognized generally upon shipment of Phyzyme ^® XP phytase by DuPont to their customers, based on information provided by DuPont. Revenue from royalties is included in product revenue in the consolidated statements of comprehensive income (loss).

The Company records revenue equal to the full value of the manufacturing costs plus royalties for the Phyzyme^® XP phytase product it manufactures through its contract manufacturing agreement with Fermic S.A. (“Fermic”) in Mexico City. The Company has contracted with Genencor, a subsidiary of DuPont, to serve as a second-source manufacturer of the Company’s Phyzyme ^® XP phytase product. Genencor maintains all manufacturing, sales and collection risk on all inventories produced and sold from its facilities. A set royalty based on profit is paid to the Company on all sales. As such, revenue associated with product manufactured for the Company by Genencor is recognized on a net basis equal to the royalty on operating profit received from DuPont, as all the following conditions of reporting net revenue are met: (i) the third party is the obligor; (ii) the amount earned is fixed; and (iii) the third party maintains inventory risk.

Collaborative and License Revenue

The Company’s collaboration and license revenue consists of license and collaboration agreements that contain multiple elements, including non-refundable upfront fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred relative to total labor hours estimated under the contract.

The Company recognizes consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration is commensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.

Prior to the revised multiple element guidance adopted by the Company on January 1, 2011, upfront, nonrefundable payments for license fees, grants, and advance payments for sponsored research revenues received in excess of amounts earned were classified as deferred revenue and recognized as income over the contract or development period. If and when the Company enters into a new collaboration or materially modifies an existing collaboration, the Company will be required to apply the new multiple element guidance. Estimating the duration of the development period includes continual assessment of development stages and regulatory requirements.

Revenue Arrangements with Multiple Deliverables

The Company occasionally enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements entered into or existing agreements materially modified after December 31, 2010, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.

The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.

Income Taxes

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates applicable to future years. The Company establishes a valuation allowance against its net deferred tax assets to reduce them to the amount expected to be realized.

The Company assesses the recoverability of its deferred tax assets on an ongoing basis. In making this assessment the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion or all of its net deferred assets will be realized in future periods. This assessment requires significant judgment. The Company does not recognize current and future tax benefits until it is more likely than not that its tax positions will be sustained. In general, any realization of its net deferred tax assets will reduce its effective rate in future periods.

During the three and nine months ended September 30, 2012, a tax benefit of $0.1 million and a provision of $0.6 million was recorded for alternative minimum tax, or AMT, liability equal to approximately 2.67% (federal and California) of estimated year-to-date taxable income. The provision is primarily attributable to the $37 million taxable gain from the sale of the oilseed processing business to DSM. The Company currently believes it has available federal and California net operating loss carryforwards, or NOLs, to fully offset its taxable income for regular tax purposes; however, AMT still applies as a result of limitations on the ability to utilize AMT NOLs to offset AMT taxable income.

From 2008 through 2011, California tax legislation has suspended the use of NOL carryforwards. Under current tax code, California allows the utilization of NOL carryforwards to offset taxable income in 2012. If California suspends the use of NOLs in 2012, the Company could have a total 2012 tax liability of approximately $3.0 million.

Computation of Net Income (Loss) per Share

Computation of Net Income (Loss) per Share

Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. For purposes of the computation of basic net income (loss) per share, unvested restricted shares are considered contingently returnable shares and are not considered outstanding common shares for purposes of computing basic net income (loss) per share until all necessary conditions are met that no longer cause the shares to be contingently returnable. The impact of these contingently returnable shares on weighted average shares outstanding has been excluded for purposes of computing basic net income (loss) per share.

Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period increased to include dilutive potential common shares calculated using the treasury stock method for outstanding stock options and warrants and the “if converted” method for outstanding convertible debt. Under the treasury stock method, the following amounts are assumed to be used to repurchase shares: the amount that must be paid to exercise stock options and warrants; the amount of compensation expense for future services that the Company has not yet recognized for stock options; and the amount of tax benefits that will be recorded in additional paid-in capital when the expenses related to respective awards become deductible. Under the “if converted” method the convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance, if later), and interest charges applicable to the convertible debt are added back to net income and adjusted for the income tax effect. In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted net income per share if the effect would be antidilutive. Convertible debt is antidilutive whenever its interest (net of tax) per common share obtainable on conversion exceeds basic net income per share.

Computation of basic net income (loss) per share for the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator
Net income (loss) from continuing operations	$	(5,234	)	$	5,822		$	22,435		$	8,106
Net income (loss) from discontinued operations	$	(23	)	$	(24	)	$	(49	)	$	37
Net income (loss) attributed to Verenium Corporation	$	(5,257	)	$	5,798		$	22,386		$	8,143
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Denominator
Weighted average shares outstanding during the period		12,765			12,612			12,664			12,612
Less: Weighted average unvested restricted shares outstanding		0			(5	)		0			(5	)
Weighted average shares used in computing basic net income (loss) per share		12,765			12,607			12,664			12,607
Net income (loss) per share, basic:
Continuing operations	$	(0.41	)	$	0.46		$	1.77		$	0.64
Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00
Attributed to Verenium Corporation	$	(0.41	)	$	0.46		$	1.77		$	0.65

In accordance with the treasury stock method, for the nine months ended September 30, 2011, convertible debt was deemed to be antidilutive as its interest per common share obtainable on conversion exceeds basic net income per share, and the average stock price was below the price of outstanding options and outstanding warrants, and so the outstanding options and warrants were deemed to be antidilutive. As such, diluted net income per share equaled basic net income per share for the nine months ended September 30, 2011. Computation of diluted net income per share for the nine months ended September 30, 2012 was as follows (in thousands):

	Nine Months Ended September 30, 2012
Numerator
Net income from continuing operations	$	22,435
Plus: Income impact of assumed conversions (Interest on convertible debt)		479
Net income from continuing operations plus assumed conversions	$	22,914
Net (loss) income from discontinued operations	$	(49	)
Net income attributed to Verenium Corporation	$	22,386
Plus: Income impact of assumed conversions (Interest on convertible debt)		479
Net income attributed to Verenium Corporation plus assumed conversions	$	22,865
Denominator
Weighted average shares used in computing basic net income per share		12,664
Plus: Effect of dilutive potential common shares from:
Stock options, awards and warrants		309
Convertible debt		151
Diluted weighted average common shares outstanding		13,124
Net income per share, diluted:
Continuing operations	$	1.75
Discontinued operations	$	0.00
Attributed to Verenium Corporation	$	1.74

For the nine months ended September 30, 2012, potentially dilutive securities covering 3.3 million shares related to warrants and 1.7 million shares related to stock options to purchase our common stock were not included in the diluted net income per share calculations because they would be antidilutive.