Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Organization and Summary of Significant Accounting Policies [Abstract]

Organization and Summary of Significant Accounting Policies

1.    Organization and Summary of Significant Accounting Policies

The Company

Verenium Corporation (“Verenium” or the “Company”) was incorporated in Delaware in 1992. The Company is an industrial biotechnology company that develops and commercializes high performance enzymes for a broad array of industrial processes to enable higher productivity, lower costs, and improved environmental outcomes. The Company operates in one business segment with four main product lines: animal health and nutrition, grain processing, oilfield services and other industrial processes.

Basis of Presentation

Upon the completion of the sale of the ligno cellulosic business (“LC business”) in September 2010, BP Biofuels North America, or BP, acquired all of the capital stock of the Company’s wholly-owned subsidiary, Verenium Biofuels Corporation, and became the sole investor in Galaxy Biofuels LLC, or Galaxy, and Vercipia Biofuels LLC, or Vercipia, the two joint ventures previously formed by the Company and BP. As a result, the Company’s continuing operations reflect only the financial statements of Verenium Corporation, and all results for Vercipia and Galaxy are reflected within discontinued operations on the Company’s consolidated financial statements. During 2010 through the date of the sale to BP, the Company consolidated the financial statements of Galaxy and accounted for Vercipia under the equity method.

The results of operations and assets and liabilities associated with the sale of the Company’s LC business in September 2010 have been reclassified and presented as discontinued operations in the accompanying consolidated statements of comprehensive income 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 and balance sheets for the current period and all prior periods presented.

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.

Cash and Cash Equivalents

The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from the date of purchase.

Restricted Cash

As more fully described in Note 10, the Company has $2.5 million of cash in escrow pursuant to the terms of the sale of the LC business to BP, which is reflected as restricted cash within current assets on the Company’s Consolidated Balance Sheet as of December 31, 2012.

Inventories

Inventories are valued at the lower of cost or market value. Cost is determined by the first-in, first-out method, and includes material, labor, and factory overhead. If necessary, the Company adjusts its inventories by an estimated allowance for excess and obsolete inventories. The determination of the need for an allowance is based on management’s review of inventories on hand compared to estimated future usage and sales, as well as judgments, quality control testing data, and assumptions about the likelihood of obsolescence. The Company maintained a valuation allowance of $0.9 million and $0.2 million at December 31, 2012 and 2011.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company limits its exposure to cash credit risk by placing its cash with high credit quality financial institutions. The Company generally invests its excess cash in U.S. Treasury and government agency.

The Company’s accounts receivable consist of amounts due from customers for the sale of products and amounts due from corporate partners under various collaboration agreements. The Company regularly assesses the need for an allowance for potentially uncollectible accounts receivable arising from its customers’ inability to make required payments. The Company has a limited number of accounts receivable and uses the specific identification method as well as an overall reserve percentage as a basis for determining this estimate.

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally three to five years) using the straight-line method, or the lease term for leasehold improvements. The Company’s leased corporate headquarters and laboratory building in San Diego is capitalized and included in property and equipment based upon authoritative accounting guidance, pursuant to which the Company is the deemed owner of the building for accounting purposes. Building and building improvements are depreciated over a useful life of 40 years.

For the years ended December 31, 2012, 2011 and 2010, the Company recorded depreciation expense from continuing operations of $2.2 million, $1.3 million and $1.7 million.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

Derivative Financial Instruments

The Company’s warrants issued in October 2009 in connection with the sale of 2.2 million shares of the Company’s common stock (Note 11) and the warrants issued on December 7, 2012 to Athyrium (Note 5) have been accounted for in accordance with applicable authoritative guidance for derivative instruments which required identification of certain embedded features to be bifurcated and accounted for as derivative assets or liabilities. The warrants issued in October 2011 in conjunction with the Comerica credit facility contained a provision that allowed for price protection within six months of the warrants issuance date, or April 19, 2012 (Note 5). As a result of this provision, the warrants were required to be accounted for as a derivative liability. Upon the expiration of the provision on April 19, 2012, the fair market value of the warrants was reclassified to stockholders’ equity.

Additionally, prior to the repurchase of the 8% Senior Convertible Notes due April 1, 2012, or 2008 Notes, during the year ended December 31, 2010 and the 9% Convertible Senior Secured Notes due April 2027, or 2009 Notes, during the year ended December 31, 2011, certain provisions and warrants were accounted for as derivative financial instruments of the 2008 Notes and 2009 Notes.

The derivative assets and liabilities associated with the warrants described above were initially recorded at fair value and then at each reporting date, the change in fair value was recorded in the statement of comprehensive income.

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 tax 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 year ended December 31, 2012, a provision of $0.2 million was recorded for alternative minimum tax, or AMT, liability equal to approximately 2% (federal and California) of estimated year-to-date taxable income. The provision is primarily attributable to the $31.3 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.

Segment Reporting

The Company operates in one operating segment, industrial enzymes, with four product lines: animal health and nutrition, grain processing, oilfield services and other industrial processes. The animal health and nutrition product line includes the Company’s Phyzyme ^® XP phytase enzyme. The grain processing product line includes the Company’s Fuelzyme ^® alpha-amylase, Veretase^® alpha-amylase, Xylathin™ and DELTAZYM^® GA L-E5 enzymes. The oilfield services product line includes the Company’s Pyrolase^® cellulase, Pyrolase ^® HT Cellulase and Eradicake™ aplha-amylase enzymes. The Company also generates nominal product revenue from its oilfield services and industrial processes product lines, for use in other specialty industrial processes.

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 December 31, 2012 and December 31, 2011 (in thousands):

	December 31, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents (1)	$	37,375	$	0	$	0	$	37,375	$	36,959	$	0	$	0	$	36,959
Liabilities:
Derivative—warrants (2)	$	0	$	0	$	3,909	$	3,909	$	0	$	0	$	347	$	347

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

(2) Represents warrants issued in February 2008 related to the 2008 Notes, October 2009 related to the public offering, October 2011 related to the Comerica credit facility and December 2012 related to the Athyrium credit agreement, all of which qualified for liability accounting.

• The warrants issued in 2008 had a fair value of zero as of December 31, 2012 and December 31, 2011, calculated using the Black-Scholes Merton methodology using significant unobservable inputs consistent with the inputs used for the Company’s share-based compensation expense adjusted for the warrants’ expected life (Level 3)

• The warrants issued in 2009 had a fair value of less than $0.1 million as of December 31, 2012 and December 31, 2011, and were classified within other long term liabilities, calculated using the Black-Scholes Merton methodology using significant unobservable inputs consistent with the inputs used for the Company’s share-based compensation expense adjusted for the warrants’ expected life (Level 3).

• The warrants issued in October 2011 in conjunction with the Comerica credit facility 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 required to be accounted for as a derivative liability. The warrants had a fair value of $0.3 million as of December 31, 2011, and were classified within other long term liabilities, using the Black-Scholes Merton methodology using significant unobservable inputs consistent with the inputs used for the Company’s share-based compensation expense adjusted for the warrants expected life (Level 3). Black-Scholes Merton methodology was deemed appropriate as the probability of the Company triggering the provision to a non-affilitate was deemed de minimis. Upon the expiration of the provision on April 19, 2012, the fair market value of the warrants of $0.7 million was reclassed to stockholders’ equity.

• The warrants issued in December 2012 had a fair value of $3.9 million as of December 31, 2012, and are included in long term debt carrying value. The warrants are valued using a risk-neutral Monte Carlo valuation model, in order to capture the warrants’ anti-dilution protection features. 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 warrants. The expected life of the warrants is based on their remaining contractual term. 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. In order to take into account the warrants’ anti-dilution provisions, Management’s expectations regarding the potential timing and likelihood of future financings are incorporated in the model.

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 December 31, 2012 (in thousands):

	Derivative Liability – Warrants
Balance at January 1, 2012	$	347
Issuance of derivative liability (1)		3,758
Adjustment for change in classification from liability to stockholders’ equity (2)		(744	)
Adjustment to fair value included in earnings (3)		548
Balance at December 31, 2012	$	3,909

(1) Represents the warrants issued to Athyrium as part of credit agreement entered into on December 7, 2012.

(2) Represents the reclassification of warrants issued to Comerica into stockholders’ equity upon the expiration of price based anti-dilution protection provision on April 19, 2012.

(3) The derivatives were revalued at the end of each reporting period and the resulting difference is included in the results of operations. 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 consolidated statements of comprehensive income.

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 December 31, 2012, the Company had $2.2 million in current and long-term deferred revenue, of which $1.8 million related to funding from collaborative partners and $0.4 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.

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.

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.

Research and Development

Research and development expenses, including direct and allocated expenses, consist of independent research and development costs, as well as costs associated with sponsored research and development. Research and development costs are expensed as incurred.

Cost of Product Revenue

Cost of product revenue includes both internal and third-party fixed and variable costs including materials and supplies, labor, facilities, idle capacity charges and other overhead costs associated with its product and contract manufacturing revenues. The Company expenses the cost of idle manufacturing capacity to cost of product revenue as incurred. Shipping and handling costs are included in cost of product revenue.

Share-Based Compensation

The Company’s share-based compensation policy requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statement of comprehensive income based on their fair values.

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 years ended December 31, 2012 was as follows (in thousands):

	2012			2011			2010
	As Restated
Numerator
Net income (loss) from continuing operations	$	18,269		$	5,630		$	(14,166	)
Net income (loss) from discontinued operations	$	(56	)	$	(112	)	$	8,816
Net income attributed to Verenium Corporation	$	18,213		$	5,518		$	19,933
Denominator
Weighted average shares outstanding during the period		12,693			12,612			12,325
Less: Weighted average unvested restricted shares outstanding		0			(4	)		(4	)
Weighted average shares used in computing basic net income (loss) per share		12,693			12,608			12,321
Net income (loss) per share, basic:
Continuing operations	$	1.44		$	0.45		$	(1.15	)
Discontinued operations	$	0.00		$	(0.01	)	$	0.72
Attributed to Verenium Corporation	$	1.43		$	0.44		$	1.62

In accordance with the treasury stock method, for the years ended December 31, 2011 and 2010, 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 year ended December 31, 2011 and 2010. Computation of diluted net income per share for the year ended December 31, 2012 was as follows (in thousands):

	Year Ended December 31, 2012
Numerator
Net income from continuing operations	$	18,269
Net loss from discontinued operations	$	(56	)
Net income attributed to Verenium Corporation	$	18,213
Denominator
Weighted average shares used in computing basic net income per share		12,693
Plus: Effect of dilutive potential common shares from:
Stock options, awards and warrants		240
Diluted weighted average common shares outstanding		12,933
Net income per share, diluted:
Continuing operations	$	1.41
Discontinued operations	$	0.00
Attributed to Verenium Corporation	$	1.41

For the year ended December 31, 2012, potentially dilutive securities covering 3.7 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 had exercise prices less than the market value of the Company’s common stock, and therefore would be antidilutive.