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Equity Incentive Plans and Warrants

12 Months Ended

Dec. 31, 2012

Equity Incentive Plans and Warrants [Abstract]

11. Equity Incentive Plans and Warrants

Equity Incentive Plans

Celunol Equity Incentive Plan

As a part of the merger on June 20, 2007, each outstanding and unexercised option to purchase shares of Celunol common stock, whether vested or unvested, was assumed by Verenium and became an option to acquire shares of Verenium common stock, under the same terms and conditions that existed in the Celunol plan prior to the merger. Options granted under this plan generally vest over a four year period and expire 10 years from the date of the grant. The number of shares of Celunol common stock that was subject to each option prior to the effective time was converted into Verenium common stock based on the exchange ratio determined pursuant to the merger agreement. The Company’s stockholders approved the Celunol Equity Incentive Plan on June 20, 2007. A total of 3,998 shares of Verenium common stock are reserved for issuance under the Celunol Equity Incentive Plan and 3,998 options to purchase shares remain outstanding as of December 31, 2012.

2010 Equity Incentive Plan

In April 2010, the Board of Directors adopted the 2010 Equity Incentive Plan, or the 2010 Plan. The 2010 Equity Incentive Plan is the successor to the 2007 Equity Incentive Plan, or the 2007 Plan. The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance cash awards and other forms of equity compensation. Stock awards granted under this plan generally vest over a four year period and expire 10 years from the date of the grant. The Company’s stockholders approved the 2010 Plan on June 14, 2010. A total of 1,827,254 shares are reserved for issuance under the 2010 Plan and 1,359,840 options to purchase shares remain outstanding as of December 31, 2012.

2007 Equity Incentive Plan

In March 2007, the Board of Directors adopted the 2007 Equity Incentive Plan, and effective May 7, 2007, amended the 2007 Plan. The 2007 Equity Incentive Plan is the successor to the Diversa Corporation 1997 Equity Incentive Plan, or the 1997 Plan. The 2007 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance cash awards and other forms of equity compensation. Stock awards granted under this plan generally vest over a four year period and expire 10 years from the date of the grant. The Company’s stockholders approved the 2007 Plan, as amended, on June 20, 2007. A total of 723,884 shares are reserved for issuance under the 2007 Plan and 553,555 options to purchase shares remain outstanding as of December 31, 2012.

2005 Non-Employee Directors’ Equity Incentive Plan

In March 2005, the Board of Directors of the Company, or Board, adopted the Company’s 2005 Non-Employee Directors’ Equity Incentive Plan, or Directors’ Plan, and reserved a total of 50,000 shares for issuance thereunder. The Directors’ Plan replaced the 1999 Non-Employee Directors’ Stock Option Plan. The number of shares available for issuance under the Directors’ Plan will automatically increase on the first trading day of each calendar year, beginning with the 2006 calendar year and continuing through and including calendar year 2015, by an amount equal to the excess of (i) the number of shares subject to stock awards granted during the preceding calendar year, over (ii) the number of shares added back to the share reserve during the preceding calendar year pursuant to expirations, terminations, cancellations, forfeitures and repurchases of previously granted awards. However this automatic annual increase shall not exceed 20,833 shares in any calendar year.

The Board adopted the Directors’ Plan as the primary equity incentive program for the Company’s non-employee directors in order to secure and retain the services of such individuals, and to provide incentives for such persons to exert maximum efforts for the success of the Company. Stock awards granted under this plan generally vest monthly over a three year period and expire 10 years from the date of the grant. As of December 31, 2012, there were approximately 80,482 options to purchase shares outstanding under the Directors’ Plan and 75,888 shares outstanding.

Employee Stock Option and Stock Purchase Plans

1999 Employee Stock Purchase Plan

In December 1999, the Board of Directors adopted the 1999 Employee Stock Purchase Plan (the “Purchase Plan”). The plan was suspended effective the first quarter of 2009.

1997 Equity Incentive Plan

In August 1997, the Company adopted the 1997 Equity Incentive Plan, or the 1997 Plan, which provides for the granting of incentive or non-statutory stock options, stock bonuses, and rights to purchase restricted stock to employees, directors, and consultants as administered by the Board of Directors. The 1997 Plan was terminated by the Board of Directors at the time of the merger on June 20, 2007.

The incentive and non-statutory stock options were granted with an exercise price of not less than 100% and 85%, respectively, of the estimated fair value of the underlying common stock as determined by the Board of Directors. The 1997 Plan allowed the purchase of restricted stock at a price that is not less than 85% of the estimated fair value of the Company’s common stock as determined by the Board of Directors.

Options granted under the 1997 Plan vest over periods ranging up to four years and are exercisable over periods not exceeding ten years. As of December 31, 2012, the aggregate number of shares awarded under the 1997 Plan is approximately 1,183,000, with no shares available for grant. A total of 425 options to purchase shares remain outstanding as of December 31, 2012 for the plan.

Share-Based Compensation Expense

The Company recognized in continuing operations $1.1 million, $1.3 million and $1.1 million in share-based compensation expense for its share-based awards for years ended December 31, 2012, 2011 and 2010. Share-based compensation expense was allocated among the following expense categories (in thousands):


	Years Ended December 31,
	2012		2011		2010
*Continuing Operations:*
Cost of product and contract manufacturing revenue	$	76	$	0	$	0
Research and development		191		280		0
Selling, general and administrative		801		484		1,091
Restructuring charges		0		583		0

	$	1,068	$	1,347	$	1,091

*Discontinued Operations:*
Research and development	$	0	$	0	$	16
Selling, general and administrative		0		90		213

	$	0	$	90	$	229

	$	1,068	$	1,437	$	1,320

In conjunction with the closure of the Cambridge office, as described in Note 7, two executives separated from the Company. Pursuant to their employment agreements, an additional 24 months of option vesting was accelerated for these executives as of their separation dates. This additional stock option expense attributable to the acceleration was classified as restructuring expense on the Company’s consolidated financial statements during the year ended December 31, 2011.

The Company has determined its share-based compensation expense for the three years ended December 31, 2012 as follows:

Valuation of Stock Options

Share-based compensation related to stock options includes the amortization of the fair value of options determined using the multiple option approach under the Black-Scholes Merton, or BSM valuation model. The fair value of options determined under authoritative accounting guidance is amortized to expense over the vesting periods of the underlying options, generally four years. The Company has elected the accelerated method of expense for all stock options.

At least annually, typically upon material option grants or material Company events, the Company performs a review and assessment of all valuation input assumptions used to compute share based payment expense to ensure they remain accurate and indicative of current Company trends. The assessment is conducted by evaluating historical trends, future expectations as well as a comparison to peers. In conjunction with a non-executive company-wide grant completed during the third quarter of 2012, the Company performed an analysis and determined the assumptions were still reasonable.

The fair value of stock option awards for the three years ended December 31, 2012 was estimated on the date of grant using the assumptions in the following table. The expected volatility in this model is based on the historical volatility of the Company’s stock since the merger date along with the historical volatility of peer companies due to the limited Company history since the merger date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time awards are granted, based on maturities which approximate the expected life of the options. The expected life of the options granted is estimated using the historical exercise behavior of employees along with peer companies. The expected dividend rate takes into account the absence of any historical dividends paid by the Company and management’s intention to retain all earnings for future operations and expansion.


	December 31,
	2012	2011	2010
Risk-free interest rate	0.97% to 1.67%	1.4% to 3.0%	1.9% to 3.2%
Dividend Yield	0%	0%	0%
Volatility	66.91%	66.91% to 135%	135%
Expected Life	6 years	6 years	6 years

Valuation of Non-Restricted and Restricted Stock Awards

The fair value of non-restricted and restricted stock awards is equal to the closing market price of the Company’s common stock at the date of grant. The fair value of non-restricted awards is charged to share-based compensation upon grant. The fair value of restricted awards is amortized to share-based compensation expense over the vesting period of the underlying awards, ranging from two years to four years.

Forfeiture Rate for Options and Restricted Stock Awards

The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate changes for all share-based awards when significant events occur. The Company considers its historical experience of pre-vesting option forfeitures and peers as the basis to arrive at its estimated pre-vesting option forfeiture rate. As a result of an analysis of peer companies in the industrial enzyme industry and the Company’s historical and expected rates, the forfeiture rate remained consistent at 5% for the year ended December 31, 2012 and 2011 for all future grants, and was previously 10% for the 2010 for all share-based awards.

Unrecognized Share-Based Compensation Expense

As of December 31, 2012, there was approximately $1.8 million of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the equity incentive plans. All employees with outstanding unvested options that were assumed by BP as part of the sale of the LC business were cancelled. This remaining expense is expected to be recognized over a weighted-average period of 1.7 years as follows (in thousands):


Fiscal Year 2013	$	1,013
Fiscal Year 2014		512
Fiscal Year 2015		216
Fiscal Year 2016		61
Thereafter		22

	$	1,824

Equity Incentive Awards Activity

Stock Options

Information with respect to all of the Company’s stock option plans is as follows (in thousands, except per share data):


	Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2010		787		$	15.75
Granted		784		$	2.90
Exercised		(11	)	$	1.37
Cancelled		(351	)	$	22.62

Outstanding at December 31, 2010		1,209		$	5.56
Granted		884		$	2.20
Exercised		(2	)	$	0.72
Cancelled		(272	)	$	11.30

Outstanding at December 31, 2011		1,819		$	3.07
Granted		551		$	4.08
Exercised		(174	)	$	2.86
Cancelled		(203	)	$	3.12

Outstanding at December 31, 2012		1,993		$	3.36		8.4	$	257

Exercisable at December 31, 2012		715		$	3.76		7.7	$	81

The weighted-average estimated fair values of options granted, as determined by the BSM valuation model, were $2.42, $1.68, and $2.62 per share for the years ended December 31, 2012, 2011 and 2010. The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $87,000, $8,000, and $27,000 respectively, which was determined as of the date of exercise.

At December 31, 2012, options to purchase 0.7 million shares with an aggregate intrinsic value of approximately $81,000 were exercisable, and approximately 0.6 million shares remain available for grant. At December 31, 2011, options to purchase 0.6 million shares with an aggregate intrinsic value of approximately $8,000 were exercisable, and approximately 1.0 million shares remain available for grant.

Non-Restricted and Restricted Share Awards

Information with respect to all of the Company’s non-restricted and restricted share awards is as follows (in thousands, except per share data):


	Shares			Weighted Average Fair Value
Non-vested awards outstanding at January 1, 2010		8		$	15.62
Granted		10		$	3.05
Vested		(6	)	$	14.51
Forfeited and cancelled		(2	)	$	14.64

Non-vested awards outstanding at December 31, 2010		10		$	3.67
Granted		0		$	0.00
Vested		(6	)	$	3.87
Forfeited and cancelled		0		$	0.00

Non-vested awards outstanding at December 31, 2011		4		$	3.35
Granted		0		$	0.00
Vested		(4	)	$	3.05
Forfeited and cancelled		0		$	0.00

Non-vested awards outstanding at December 31, 2012		0		$	0

Warrants

Information with respect to all of the Company’s outstanding warrants as of December 31, 2012 is as follows (in thousands, except per share data):


Warrant Holder	Shares		Exercise Price		Issue Date	Expiration Date
Athyrium Opportunities Fund		2,936	$	2.49	December 2012	December 2019
Comerica Bank		246	$	2.64	October 2011	October 2016
Various (Public offering)		900	$	7.59	October 2009	October 2014
Various (Celunol)		28	$	22.44	various	December 2016
Various (2008 Notes)		1,193	$	29.72	February 2008	August 2013
Convertible hedge–Upper Call (2008 Notes)		1,107	$	61.92	February 2008	October 2014
Syngenta		108	$	208.73	February 2003	February 2018

Total		6,518

In connection with the Athyrium credit agreement the Company issued to Athyrium warrants to purchase up to 2.9 million shares of the Company’s common stock at a price of $2.49 per share. The warrant is immediately exercisable and has a term of seven years. The warrant is subject to price-based anti-dilution adjustments in the event of certain issuances by the Company of equity or equity-linked securities at effective prices per share of less than $2.12, subject to a floor exercise price per share for the warrant following any such anti-dilution adjustments of $2.12 per share. Pursuant to the terms of the warrant, in no event can the warrant be exercisable for more than 2.6 million shares of the Company’s common stock unless and until the Company has received shareholder approval for issuances of common stock under the warrant in excess of such amount. The Company has agreed to use commercially reasonable efforts to obtain such shareholder approval at the Company’s shareholders’ meetings that occur before July 1, 2014. In connection with issuing the warrant, the Company also entered into a registration rights agreement with Athyrium whereby the Company agreed to register the shares of common stock issuable pursuant to the warrant under the Securities Act of 1933, as amended, under certain circumstances upon demand of holders thereof or at their request to the extent the Company seeks to register other equity securities for sale.

As a result of these anti-dilution provisions, at inception the warrants, in accordance with authoritative guidance, were required to be bifurcated and accounted separately as a derivative liability. Since the Company has the intent and the ability to settle the warrants in shares of common stock, the asserted derivative liability is included in long term debt carrying value on its consolidated balance sheet at December 31, 2012. The derivative liability is marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the consolidated statement of comprehensive income.

In connection with the Comerica credit lines entered into on October 2011, the Company’s issued warrants to purchase 0.2 million shares of common stock with an exercise price of $2.64 per share. The warrants have an exercise period commencing on April 19, 2012 and are exercisable for five years ending October 19, 2016. The warrants contained a provision that allowed for identical price-based anti-dilution protection to any equity-based security of the Company issued to any non-affiliate of the Company within six months of the warrants issuance date, or April 19, 2012. As a result of this provision, the warrants were deemed to qualify for liability accounting, which requires the change in fair value of the instrument to be recorded each reporting period. Upon the expiration of the provision on April 19, 2012, the fair market value of the warrants of $0.7 million was reclassified to stockholders’ equity.

In connection with the October 2009 sale of 2.2 million shares of the Company’s common stock, warrants to purchase an additional 0.9 million shares of common stock were also issued. Each unit consists of one share of common stock and a warrant to purchase 0.40 of a share of common stock. The warrants have an exercise price of $7.59 per share that are exercisable for five years starting October 9, 2009. As the warrants are required to be issued in registered shares, the warrants were deemed to qualify for liability accounting, which requires the change in fair value of the instrument to be recorded each reporting period.

In connection with the completion of the June 20, 2007 merger transaction with Celunol, the Company assumed 28,000 warrants to purchase common stock at $22.44 per share that expire in December 2016.

In connection with the 2008 Notes issuance in February 2008, the Company issued 0.7 million warrants to purchase common stock at $53.28 per share that expire in August 2013. The exercise price and the number of shares of the Company’s common stock issuable upon exercise of the warrants are subject to weighted average anti-dilution protection. As a result of anti-dilution provisions triggered by the 2009 Notes exchange in September 2009, public offering of common stock and warrants in October 2009, warrants issued as part of the credit facility in October 2011, and warrants issued to Athyrium in December 2012 the number of shares issuable upon exercise of the warrants increased to approximately 1.2 million shares of the Company’s common stock and the exercise price was $29.72. Additionally, the Company entered into a convertible hedge transaction, whereby the Company issued warrants to purchase 1.1 million shares of common stock at $61.92 per share. The warrants are exercisable on three dates staggered in six month intervals beginning on October 1, 2013.

In connection with the closing of a series of transactions with Syngenta Participations AG in February 2003, the Company issued to Syngenta a warrant to purchase 0.1 million shares of common stock at $264 per share that is exercisable for ten years starting in 2008. The exercise price per share of the warrant is subject to downward adjustment in the event of certain dilutive issuances or deemed issuances of stock by the Company, and is currently exercisable at $208.73 per share.

As of December 31, 2012, none of the above warrants have been exercised.

Common Stock Reserved for Future Issuance

At December 31, 2012, the Company has reserved shares of common stock for future issuance as follows (in thousands):


	Shares
Equity Incentive Plans		2,636
Warrants (including shares issuable under the convertible hedge transaction)		6,518

		9,154