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Commitment and Contingencies
12 Months Ended
Dec. 31, 2012
Commitment and Contingencies [Abstract]  
Commitment and Contingencies

10.    Commitment and Contingencies

As described in Note 3, as of September 2010, BP assumed the lease of the Company’s research and development facilities in San Diego, California, and the parties entered into a sublease agreement dated September 2, 2010 for a portion of the San Diego facilities which the Company occupied, rent free, through June 2012.

As a result of the lease accounting for the Company’s San Diego lease, described below, rent expense for the year ended December 31, 2012 was $0.2 million. Total cash rental payments made under the lease was $1.3 million for the year ended December 31, 2012, of which $1.0 million was accounted for as interest expense, $0.1 million as principal payments for the lease financing obligation and $0.2 million as rent expense.

Lease Financing Obligation

On June 24, 2011, the Company signed a lease agreement for 59,199 square feet of new office and laboratory space in San Diego for a term of 126 months commencing in June 2012. Upon lease commencement, rent is approximately $192,000 a month, which includes both base rent and a tenant improvement allowance. The rent will be increased by 3% on each annual anniversary of the first day of the first full month during the lease term. Further, the lease agreement allows for a “free rent” term starting with the seventh full month in the lease through the end of the sixteenth month. In addition to the tenant allowance incorporated in the lease payment, an additional tenant improvement allowance of $1.5 million was granted, which must be paid back in monthly payments at a 9% interest rate over the term of the lease. The lease provides the Company with two consecutive options to extend the term of the lease for five years each, which may be exercised with 12 months prior written notice. In the event the Company chooses to extend the term of the lease, the minimum monthly rent payable for the additional term will be determined according to the then-prevailing market rate.

 

Based on the terms of the lease agreement, the Company had substantially all of the construction period risks during the construction period and was deemed the owner of the building (for accounting purposes only) during the construction period. Accordingly, the Company recorded an asset of $23.3 million, representing the total costs of the building and improvements, including the costs paid by the lessor (the legal owner of the building), with corresponding liabilities. Upon completion of construction of the building, the Company did not meet the sale-leaseback criteria for de-recognition of the building assets and liabilities. Therefore the lease is accounted for as a financing obligation. The assets will be depreciated over the term of the lease, and rental payments will be treated as principal and interest payments on the lease financing obligation. The lease financing obligation balance at the end of the lease term will approximate the net book value of the building to be relinquished to the lessor.

At December 31, 2012, the lease financing obligation balance was $22 million and recorded in long term liabilities on the consolidated balance sheets. The remaining future minimum payments under the lease financing obligation are $27.3 million. The lease financing obligation balance at the end of the lease term will be approximately $13.8 million which approximates the net book value of the buildings to be relinquished to the lessor.

At December 31, 2012, the Company’s minimum commitments under the San Diego lease were as follows (in thousands):

 

         
    San Diego
Gross
Rental
Payments (1)
 

Fiscal year 2013

  $ 622  

Fiscal year 2014

    2,652  

Fiscal year 2015

    2,731  

Fiscal year 2016

    2,813  

Fiscal year 2017

    2,898  

Thereafter

    15,561  
   

 

 

 

Total minimum lease payments

  $ 27,277  
   

 

 

 

 

(1) In addition to the tenant allowance included in the base rent, a second tenant allowance option of $1.5 million was exercised which must be paid back in monthly payments at a 9% interest rate over term of the lease. These payments are included in the above amounts.

Cambridge Lease

The Company has a lease obligation for approximately 21,000 square feet of office space in a building in Cambridge, Massachusetts. The offices are leased to the Company under an operating lease with a term through December 2013. On March 31, 2011, the Company terminated its operations in Cambridge. Subsequently, the Company completed a sublease agreement in May 2011 for the full Cambridge facility, which will give the Company additional sublease income of approximately $0.7 million through the remainder of 2013. At December 31, 2012, the Company’s minimum rental commitment, net of sublease payments, under the Cambridge lease is $0.1 million through the lease term ending in December 2013.

Letter of Credit

Pursuant to the Company’s new facilities lease for office and laboratory space in San Diego, as of December 31, 2012 the Company was required to maintain a letter of credit of $1.6 million on behalf of its landlord. The letter of credit expires on December 31, 2012, and will be automatically extended annually without amendment through December 31, 2022. The letter of credit will not be increased at any time but can be reduced based on certain financial and market capitalization requirements.

 

BP Indemnification Claim

Pursuant to the terms of the sale of the LC business to BP in September 2010, $5.0 million of the purchase price was placed in escrow and is subject to the terms of an escrow agreement, to cover the Company’s indemnification obligations for potential liabilities and breaches of representations and warranties made by the Company in the asset purchase agreement, most of which survived for a period of 18 months following the closing, or March 2, 2012. With respect to some claims, the Company is not required to make any indemnification payments until aggregate claims exceed $2.0 million, and then only with respect to the amount by which claims exceed that amount, and the Company’s maximum indemnification liability is generally capped at $10.0 million with respect to most representations and warranties. However, some indemnification claims are not subject to the deductible amount or the cap on aggregate liability. BP has provided notice of a potential claim for indemnification by the Company pursuant to the escrow agreement in connection with a claim made by University of Florida Research Foundation, Inc. (“UFRF”), against BP relating to a license granted by UFRF to a successor of Verenium Biofuels Corporation (now known as BP Biofuels Advanced Technology, Inc.), which was acquired by BP in the 2010 transaction. BP filed an action in the United States District Court for the Northern District of Florida against UFRF on March 5, 2012, for a judgment declaring that the UFRF allegations regarding the license are without merit. Of the $5 million held in escrow, the escrow agent disbursed $2.5 million to the Company during the first quarter 2012 and the remaining $2.5 million will remain in escrow pending resolution of the UFRF claim against BP. The Company believes that the UFRF claim against BP, and the potential claim by BP against the Company for indemnity pertaining to the UFRF claim, are without merit. The remaining $2.5 million in escrow is reflected as restricted cash within current assets on the Company’s balance sheet as of December 31, 2012.

Legal Proceedings

From time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless, that the Company’s consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

Manufacturing Commitments

The Company has a manufacturing agreement with Fermic to provide the capacity to produce commercial quantities of enzyme products, pursuant to which it pays Fermic a fixed monthly rent for minimum committed manufacturing capacity. Under the terms of the agreement, the Company can cancel its commitment with 30 months’ notice. As of December 31, 2012, under this agreement minimum commitments to Fermic are approximately $49.5 million over the next two and half years.

In addition, under the terms of the agreement, the Company funds, in whole or in part, capital expenditures for certain equipment required for fermentation and downstream processing of the Company’s enzyme products. Since inception through December 31, 2012, the Company has incurred costs of approximately $23.2 million for property and equipment related to this agreement, of which $0.7 million was funded in 2012.

In 2008, the Company contracted with Genencor, a subsidiary of DuPont, to serve as a second-source manufacturer for Phyzyme® XP phytase. Its supply agreement with DuPont for Phyzyme ® XP phytase contains provisions which allow DuPont, with six months’ advance notice, to assume the right to manufacture Phyzyme® XP phytase. If DuPont were to exercise this right, the Company may experience excess capacity at Fermic. If DuPont assumed the right to manufacture Phyzyme® XP phytase and the Company was unable to absorb or otherwise reduce the excess capacity at Fermic with other products, its results of operations and financial condition would be adversely affected.