Stock-Based Compensation

Stock Plans

In 2002, Codexis adopted the 2002 Stock Plan (the “2002 Plan”), pursuant to which its board of directors issued incentive stock options, non-statutory stock options and stock purchase rights to its employees, officers, directors and consultants. In March 2010, Codexis' board of directors and stockholders approved the 2010 Equity Incentive Award Plan (the “2010 Plan”), which became effective upon the completion of its initial public offering ("IPO") in April 2010. The 2010 Plan is similar to the 2002 Plan but allows for issuance of additional awards, such as a RSU, PSU, RSA, deferred stock award and stock appreciation rights. A total of 1,100,000 shares of common stock were initially reserved for future issuance under the 2010 Plan and any shares of common stock reserved for future grant or issuance under Codexis' 2002 Plan that remained unissued at the time of completion of the IPO became available for future grant or issuance under the 2010 Plan. In addition, the shares reserved for issuance pursuant to the exercise of any outstanding awards under the 2002 Plan that expire unexercised will also become available for future issuance under the 2010 Plan. The 2010 Plan also provides for automatic annual increases in the number of shares reserved for future issuance. As of September 30, 2014, total shares remaining available for issuance were approximately 5.6 million.

Performance-contingent Restricted Stock Units

Codexis awarded 835,000 PSUs in the nine months ended September 30, 2014, and 523,048 PSUs in the nine months ended September 30, 2013, under the 2010 Plan, based upon the achievement of certain cash flow performance goals for each respective year. These PSUs vest such that one-half of the PSUs subject to the award vest one year following the grant, and the remainder of the PSUs vest two years following the grant, subject to Codexis achieving the performance goals and the recipient’s continued service to Codexis on each vesting date. If the performance goal is achieved at the threshold level, the number of shares issuable in respect of the PSUs would be equal to half the number of PSUs granted. If the performance goal is achieved at the target level, the number of shares issuable in respect of the PSUs would be equal to the number of PSUs granted. If the performance goal is achieved at the superior level, the number of shares issuable in respect of the PSUs would be equal to two times the number PSUs granted. The number of shares issuable upon achievement of the performance goal at the levels between the threshold and target levels or target level and superior levels is determined using linear interpolation. Achievement below the threshold level results in no shares being issuable in respect of the PSUs.

During the third quarter of 2014, we concluded that it was not probable that the performance objective would be achieved at the target level of 100%. As a result, we revised our estimate of achieving the performance goal to a linear point between the threshold level and the target level. Accordingly, during the third quarter of 2014, we reduced stock-based compensation expense to reflect this lower level of estimated achievement compared to the first half of 2014.

During 2013, we revised our estimate of forecasted performance criteria and concluded that the performance target would not likely be achieved for the PSUs that were granted in 2013. The 358,308 outstanding PSUs that were granted in 2013 were canceled in February 2014 when we determined that we had not attained the threshold performance target for the 2013 awards.

Stock-Based Compensation Expense

The following table presents total stock-based compensation expense by functional areas included in the condensed consolidated statements of operations for the three months and nine months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Research and development (1)	$	227	$	97	$	734	$	989
Selling, general and administrative	828		529		2,896		2,372
Total	$	1,055	$	626	$	3,630	$	3,361

(1) Stock-based compensation expense associated with cost of biocatalyst product sales is included in research and development. Amounts were immaterial for all periods presented.

The following table presents total stock-based compensation expense by security types included in the condensed consolidated statements of operations for the three months and nine months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014		2013
Stock options	$	247	$	397		$	843	$	1,538
RSUs and RSAs	722		527			2,383		1,823
PSUs	86		(298		)	404		—
Total	$	1,055	$	626		$	3,630	$	3,361

As of September 30, 2014, unrecognized stock-based compensation expense, net of expected forfeitures, was $1.7 million related to unvested employee stock options, $3.1 million related to unvested RSUs and RSAs and $0.7 million related to unvested PSUs.

Valuation Assumptions

The ranges of weighted-average assumptions used to estimate the fair value of employee stock options granted were as follows:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Expected term (in years)	6.0			6.0			6.0			6.0
Volatility	0.676 - 0.679			0.640			0.639 - 0.679			0.640 - 0.652
Risk-free interest rate	1.90% - 2.13%			1.81		%	1.90% - 2.13%			1.07% - 1.81%
Dividend yield	—		%	—		%	—		%	—		%
Weighted-average estimated fair value of stock options granted	$	1.21		$	1.17		$	1.16		$	1.34