UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No.: 001-34705
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Codexis, Inc.
(Exact name of Registrant as specified in its charter)
______________________________________
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
200 Penobscot Drive,
Redwood City, California
(Address of Principal Executive Offices)
71-0872999
(I.R.S. Employer
Identification No.)
94063
(Zip Code)
Registrant’s telephone number, including area code: (650) 421-8100
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
Common Stock, par value $0.0001 per share
Name of Each Exchange on which Registered:
The NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None.
_______________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
Non-accelerated filer
☐
☐
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of voting common stock held by non-affiliates of Codexis as of June 30, 2016 was approximately $114.2 million based upon
the closing price reported for such date on The NASDAQ Global Select Market.
As of February 28, 2017, there were 41,382,691 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s
2017 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive
Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended
December 31, 2016. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be
filed as part of this Form 10-K.
Codexis, Inc.
Annual Report on Form 10-K
For The Year Ended December 31, 2016
INDEX
PART I
PART II
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Signatures
Exhibits, Financial Statement Schedules
PART IV
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4
15
31
31
32
32
33
35
36
50
51
85
85
85
86
86
86
86
86
87
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear
elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), particularly in Part I, Item 1: “Business,” Part I, Item 1A: “Risk Factors” and Part
2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are often identified by the use of
words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations.
All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to: any projections of financial
information; any statements about historical results that may suggest trends for our business; any statements of the plans, strategies, and objectives of
management for future operations; any statements of expectation or belief regarding future events, technology developments, our products, product sales,
expenses, liquidity, cash flow, market growth rates or enforceability of our intellectual property rights and related litigation expenses; and any statements of
assumptions underlying any of the foregoing. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Accordingly, we
caution you not to place undue reliance on these statements. For a discussion of some of the factors that could cause actual results to differ materially from
our forward-looking statements, see the discussion on risk factors that appear in Part I, Item 1A: “Risk Factors” of this Annual Report on Form 10-K and
other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission (“SEC”). The forward-looking
statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. We anticipate that subsequent events
and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we
have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as
representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.
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COMPANY OVERVIEW
PART I
ITEM 1. BUSINESS
We discover, develop and sell proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast untapped source of value-
creating materials, and we are using our proven technologies, which have been continuously improved over our fifteen year history, to commercialize an
increasing number of novel proteins, both as proprietary Codexis products and in partnership with our customers.
Many companies have historically used naturally occurring proteins to produce or enhance goods used in everyday life. Despite the growing number of
commercial applications of naturally occurring proteins across many industries, the inherent limitations of naturally-occurring proteins frequently restrict their
commercial use. Through the application of our proprietary CodeEvolver® protein engineering technology platform, we are able to engineer novel proteins to
overcome these restrictions, thereby adding value or opening up new prospects for our potential clients’ products, processes or businesses. We have developed
new proteins that are significantly more stable and/or active in our commercial applications than proteins derived from nature.
We are a pioneer in the harnessing of computational technologies to drive biology advancements. Over the last fifteen years, we have made substantial
investments in the development of our CodeEvolver® protein engineering technology platform, the primary source of our competitive advantage. Our
technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine our large and continuously growing
library of protein variants’ performance attributes. These computational outputs enable increasingly reliable predictions for next generation protein variants to
be engineered, enabling delivery of targeted performance enhancements in a time-efficient manner. In addition to its computational prowess, our
CodeEvolver® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and
genomic sequencing, organic chemistry and process development which are all coordinated to create our novel protein innovations.
OUR STRATEGY
Our strategy is to grow our revenues, profits, and stockholder value by leveraging our CodeEvolver® protein engineering technology platform in the
following ways:
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Licensing our CodeEvolver® protein engineering technology platform. We intend to continue to pursue opportunities to license our CodeEvolver®
protein engineering technology platform to third parties so they can create cost-saving protein catalyst solutions utilizing their own in-house protein
engineering capability.
Growing our pharmaceutical protein catalysts business. We intend to continue to pursue opportunities in the pharmaceutical market to use our
protein catalysis products and services to reduce the costs for manufacturing small molecule drugs. We intend to increase the number of
pharmaceutical customers and processes that utilize and benefit from our novel, cost-saving protein catalyst solutions.
Growing our fine chemicals protein catalysts business. We intend to continue to pursue opportunities in the fine chemicals market to use protein
catalysis products and services to reduce the costs for manufacturing in adjacent markets like food and food ingredients. We intend to increase the
number of fine chemical customers and processes who utilize and benefit from our novel, cost-saving protein catalyst solutions.
Creating and advancing novel biotherapeutic drug candidates. We intend to continue to pursue opportunities to apply our protein engineering
capabilities to the creation and development of novel biotherapeutic drug candidates, both in partnership with customers and as proprietary Codexis
drug candidates. We intend to continue to advance our own novel enzyme biotherapeutic candidate for the potential treatment of phenylketonuria
("PKU") disease. We have also invested in research and development in an effort to generate additional early stage novel biotherapeutic candidates.
Developing high-performance enzymes for use in diagnostic applications. We intend to offer high-performance enzymes to customers using next
generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular diagnosis applications.
In this Annual Report, the “Company,” “we,” “us” and “our” refer to Codexis, Inc. and its subsidiaries on a consolidated basis.
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OUR MARKET OPPORTUNITIES
Pharmaceutical Market
We believe the pharmaceutical industry represents a significant market opportunity for us and is our primary business focus. Pharmaceutical companies are in
constant search for new drugs to offer to their customers, and are under significant competitive pressure both to reduce costs and to increase the speed to
market for their products. To meet these pressures, pharmaceutical companies are discovering and developing novel protein-based drug products, as well as
seeking manufacturing processes for their new and existing drugs that reduce overall costs, simplify production and increase efficiency and product yield,
while not affecting drug safety and efficacy. Cost reduction is even more important to developers (known as innovators) of patent-protected pharmaceutical
products when the patents for those products expire and such innovators are forced to compete with manufacturers of generic drugs.
The pharmaceutical product lifecycle begins with the discovery of new chemical entities and continues through preclinical and clinical development, product
launch, commercial scale-up and, ultimately, patent expiration and the transition from branded to generic products. As innovators develop, produce and then
market products, manufacturing priorities and processes evolve. Historically, innovators have focused on production cost reduction in the later stages of
clinical development and have been reluctant to make process changes after a product has been launched. However, as pressures to reduce costs have
increased, innovators have pursued cost reduction measures much earlier in the pharmaceutical product lifecycle and are increasingly looking for
opportunities to improve their operating margins, including making manufacturing process changes for marketed products after the products have been
launched if these changes can result in significant cost reductions. As a result, innovators are investing in new technologies, including our CodeEvolver®
protein engineering technology platform, to improve their manufacturing productivity and efficiency or outsourcing the manufacture of their intermediates
and active pharmaceutical ingredients (APIs).
Our Solutions for the Pharmaceutical Market
Small Molecule Manufacturing Cost Reduction
Our pharmaceutical customers, which include a majority of the largest global pharmaceutical companies, use our technology, products and services in their
manufacturing processes and process development. Our CodeEvolver® protein engineering technology platform enables us to deliver solutions to our
customers in this market by developing and delivering optimized protein catalysts that perform chemical transformations at a lower cost and improve the
efficiency and productivity of manufacturing processes. We provide value throughout the pharmaceutical product lifecycle. Our products and services allow
us to provide benefits to our pharmaceutical customers in a number of cost saving ways, including any - and sometimes all - of the following:
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reducing the use of raw materials and reagents;
eliminating multiple steps in the manufacturing process;
improving purity, productivity and yield;
using water as a primary solvent;
eliminating hazardous inputs;
enabling the use of simple equipment and reducing the need for capital expenditure;
reducing energy requirements;
reducing the generation of chemical byproducts or waste; and
reducing the need for late-stage purifications.
Early in a pharmaceutical product’s lifecycle, pharmaceutical manufacturers can use our protein catalyst products and services to reduce manufacturing costs.
If an innovator incorporates our products or processes into an approved product, we expect the innovator to continue to use our products or processes at least
over the patent life of the marketed drug.
Pharmaceutical manufacturers can also use our products and services to reduce manufacturing costs after a product is launched. At this stage, changes in the
manufacturing process originally approved by the drug regulator may require additional regulatory review. Typically, pharmaceutical companies will only
seek regulatory approval for a manufacturing change if substantial cost savings are realizable. We believe that the cost savings associated with our products
may lead our customers to change their manufacturing processes for approved products and, if necessary, seek regulatory approval of the new processes
which incorporate our proteins. Moreover, we believe these cost savings are attractive to generics manufacturers, who compete primarily on price.
In addition, manufacturing processes that utilize our protein catalysts can frequently enable processes that are more sustainable and environmentally friendly
compared to alternative, traditional manufacturing approaches. This has led Codexis to earn three
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US EPA Presidential Green Chemistry Challenge awards for improved pharmaceutical manufacturing processes over the last eleven years. All three of these
awards were associated with blockbuster drug products.
Discovery and Development of Biotherapeutic Drug Candidates
We are also targeting new opportunities in the pharmaceutical industry to discover or improve biotherapeutic drug candidates for our customers. We believe
that our CodeEvolver® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases
that are in need of improved therapeutic interventions. Similarly, we believe that we can deploy our platform technology to improve specific characteristics of
a customer’s pre-existing biotherapeutic drug candidate. For example, we may be able to use our technology to improve the activity, stability or
immunogenicity of a customer’s biotherapeutic drug candidate.
Partner-funded Biotherapeutic Product Development
We are using our platform technology to improve characteristics of our customers’ pre-existing biotherapeutic drug candidates. In July 2016, we successfully
completed our obligations under a collaborative research and development agreement with a leading global biopharmaceutical company. Under that
agreement, we employed our CodeEvolver protein engineering platform technology to develop a novel enzyme for use in our partner’s preclinical therapeutic
development program. During this project, we earned success fees, associated milestone payments and research and development service revenues. In
November 2016, we announced that our biopharmaceutical partner had exercised its option to secure a non-exclusive license to the novel enzyme developed
by Codexis. As a result, Codexis could receive additional annual license fees from our biopharmaceutical partner. We continue to pursue this and other
customers who could benefit by applying our CodeEvolver® protein engineering platform technology to improve the discovery and/or development of other
biotherapeutics in partnership with Codexis
Self-funded Biotherapeutic Product Development
We are also using our platform technology to develop our own early stage, novel enzyme therapeutic product candidates. Our lead product candidate is an
enzyme which we have engineered to be orally administered and are developing as a potential treatment of PKU in humans. PKU is an inborn metabolic
disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. As a result, phenylalanine accumulates to toxic
levels in the brain, causing serious neurological problems including intellectual disability, seizures and cognitive and behavioral problems. To avoid toxic
levels of phenylalanine in their blood, individuals with PKU must follow a strict, life-long diet that is low in phenylalanine and supplement their diet with a
synthetic phenylalanine-free formula to provide them with sufficient nutrients. Maintaining a strict, life-long diet can be challenging for individuals with
PKU. There are an estimated 50,000 people with PKU in the developed world.
We continue to invest in the development of our preclinical therapeutic enzyme product candidate as a potential treatment of PKU. We have filed patent
applications covering the composition of matter for our therapeutic enzymes and the use of these enzymes as a treatment for PKU. In addition to the PKU
program, we have previously made, and expect to continue to make, modest additional investments with the aim of generating additional product candidates
targeting other therapeutic areas.
Fine Chemicals Markets
Beyond the pharmaceutical industry, our CodeEvolver® protein engineering platform technology has enabled cost-savings for our partners in the fine
chemicals markets, and the food industry in particular. In December 2016, we entered into an exclusive agreement with Tate & Lyle, a market-leading food
ingredients company, to supply a proprietary enzyme for use in Tate & Lyle’s food ingredient production. We are seeking to expand our protein catalyst
offerings in the fine chemicals market within and beyond the food industry, including, for example, to the agricultural chemicals and flavors and fragrances
markets.
Molecular Biology and In Vitro Diagnostic Enzymes
We believe that our Codexis protein engineering capability can also be deployed to commercialize novel enzymes as improvements to enzymes consumed by
customers in many industrial sectors. As our first effort in this strategy, we have developed an enzyme for customers using NGS and PCR/qPCR for in vitro
molecular diagnostic applications. Our first proprietary enzyme for this market will target improved library preparation for NGS users and is expected to be
available in beta-test format in the second quarter of 2017.
Licensing Our CodeEvolver® Protein Engineering Technology Platform
Our CodeEvolver® protein engineering technology platform enables rapid development of custom-designed enzymes that are highly optimized for efficient
manufacturing processes. We intend to continue to enter into license arrangements with third parties that will allow them to use our CodeEvolver® protein
engineering technology platform to discover and develop novel
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proteins for their internal use. To date, we have entered into platform technology licensing agreements with each of GlaxoSmithKline and Merck.
GlaxoSmithKline
We entered into our first CodeEvolver® protein engineering technology Platform Technology Transfer, Collaboration and License Agreement (“GSK
CodeEvolver® Agreement”) on July 10, 2014 with GlaxoSmithKline Intellectual Property Development Limited, a subsidiary of GlaxoSmithKline plc
(collectively, “GSK”).
The GSK CodeEvolver® Agreement allows GSK to use our proprietary CodeEvolver® protein engineering technology platform in the field of human
healthcare.
Under the terms of the GSK CodeEvolver® Agreement, we granted to GSK a non-exclusive, worldwide license to use our CodeEvolver® protein engineering
technology platform to develop novel enzymes for (a) the manufacture and commercialization of compounds, molecules and products for the treatment of any
human disease or medically treatable human condition, (b) the prophylaxis, diagnosis or treatment of any human disease or medically treatable human
condition, and (c) the research and development of compounds, molecules and products for the treatment of any human disease or medically treatable human
condition (the “Field”). This license to GSK is exclusive for the use of our CodeEvolver® protein engineering technology platform to develop novel enzymes
for the synthesis of small-molecule compounds owned or controlled by GSK (the “GSK Exclusive Field”). GSK has the right to grant sublicenses to affiliates
of GSK and, in certain limited circumstances, to third parties. We also granted a license to GSK to make or have made products developed using our
CodeEvolver® protein engineering technology platform, with a right to grant sublicenses solely to affiliates of GSK, contract manufacturing organizations and
contract research organizations. This manufacturing license is exclusive in the GSK Exclusive Field and otherwise non-exclusive in the Field. The licenses
granted by us to GSK are subject to certain limitations based on pre-existing contractual obligations that apply to the technology and intellectual property that
is the subject of the license grants. In addition, GSK is prohibited from using our CodeEvolver® protein engineering technology platform to develop or
produce any enzymes or other compounds for or on behalf of any third party except that GSK can exercise its license rights in connection with certain
research and development programs jointly performed with a bona fide third party collaborator so long as GSK uses our CodeEvolver® protein engineering
technology platform independently from the third party collaborator and complies with all of the other restrictions and obligations under the GSK
CodeEvolver® Agreement.
Under the GSK CodeEvolver® Agreement, we transferred our CodeEvolver® protein engineering technology platform to GSK over a twenty-one-month
period that began on July 10, 2014, the effective date of the GSK CodeEvolver® Agreement. As a part of this technology transfer, we provided to GSK our
proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of our and GSK
scientists participated in technology training sessions and collaborative research projects at our laboratories in Redwood City, California and at GSK’s
laboratories in Upper Merion, Pennsylvania. The technology transfer was completed in April 2016 and our CodeEvolver® protein engineering technology
platform has been installed at GSK’s Upper Merion, Pennsylvania site.
The licenses to GSK were granted under certain patents, patent applications and know-how that we owned or controlled as of the effective date of the GSK
CodeEvolver® Agreement and that cover our CodeEvolver® protein engineering technology platform and certain enzymes useful in the Field. Any
improvements to our CodeEvolver® protein engineering technology platform during the technology transfer period were included in the license grants from
us to GSK.
Under the GSK CodeEvolver® Agreement, GSK owns (the “GSK-Owned Technology”) (a) any enzyme technology that was developed during a project under
the GSK CodeEvolver® Agreement that used our CodeEvolver® protein engineering technology platform during the technology transfer period and (b) the
methods of use of any Project Enzyme in compound synthesis that were developed during the technology transfer period. GSK granted to us a worldwide,
non-exclusive, fully paid-up, royalty-free license, with the right to grant sublicenses, to use outside of the GSK Exclusive Field, the GSK-Owned Technology
that was developed during the technology transfer period.
Until July 10, 2019 (the “Embargo Period”), GSK is prohibited from using the CodeEvolver® protein engineering technology platform for the use, research or
development (whether in vitro or in vivo) or commercialization of any enzyme or enzyme fusion protein that (a) effects a chemical transformation in humans
or (b) facilitates, assists, transports or enables the action, dispersion, absorption or bioavailability of a molecule, biologic agent, drug product, therapeutic
agent or other compound in humans (the “Embargo Field”). GSK is permitted to use our CodeEvolver® protein engineering technology platform during the
Embargo Period to develop and use an enzyme or enzyme fusion protein that (x) is used by GSK solely as a research reagent or a research tool within the
Embargo Field, (y) is used to synthesize a small-molecule compound owned or controlled by GSK or (z) facilitates, assists, transports or enables the action,
dispersion, absorption or bioavailability of a small-molecule compound that is owned or controlled by GSK.
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The term of the GSK CodeEvolver® Agreement continues, unless earlier terminated, until the expiration of all payment obligations under the GSK
CodeEvolver® Agreement. GSK can terminate the GSK CodeEvolver® Agreement by providing 90 days written notice to us.
In 2015, we completed Wave 1 and Wave 2 of the transfer of our CodeEvolver® protein engineering technology platform to GSK. In addition to the $6.0
million upfront payment and $5.0 million Wave 1 technology transfer milestone payment received from GSK in 2014, in 2015 we received a $6.5 million
technology transfer milestone payment from GSK for the successful completion of Wave 2. In April 2016, we completed the full transfer of the
CodeEvolver® protein engineering platform technology and earned Wave 3 milestone revenue of $7.5 million. We also have the potential to receive additional
contingent payments that range from $5.75 million to $38.5 million per project based on GSK's successful application of the licensed technology.
In the third quarter of 2016, we earned the first milestone under the agreement related to the development of an enzyme for an already-commercialized
product. In addition, we are eligible to receive royalties based on net sales, if any, of a limited set of products developed by GSK using the CodeEvolver®
protein engineering technology platform.
Merck
On August 3, 2015, we entered into a CodeEvolver® platform technology transfer and license agreement (the “Merck CodeEvolver® Agreement”) with Merck
Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc. (collectively, “Merck”).
The Merck CodeEvolver® Agreement allows Merck to use our proprietary CodeEvolver® protein engineering platform technology in the field of human and
animal healthcare.
Under the terms of the Merck CodeEvolver® Agreement, we granted to Merck a non-exclusive worldwide license to use the CodeEvolver® protein
engineering technology platform to research, develop and manufacture novel enzymes for use by Merck in its internal research programs (“Merck Non-
Exclusive Field”). The license to Merck is exclusive for the research, development and manufacture of novel enzymes for use by Merck in the chemical
synthesis of therapeutic products owned or controlled by Merck (“Merck Exclusive Field”). Merck has the right to grant sublicenses to affiliates of Merck
and, in certain limited circumstances, to third parties. We also granted to Merck a license to make or have made products manufactured using the
CodeEvolver® protein engineering technology platform with a right to grant sublicenses solely to affiliates of Merck, contract manufacturing organizations
and contract research organizations. The manufacturing license is exclusive in the Merck Exclusive Field and non-exclusive in the Merck Non-Exclusive
Field. The licenses are subject to certain limitations based on pre-existing contractual obligations that apply to the technology and intellectual property that
are the subject of the license grants. The licenses do not permit the use of the CodeEvolver® protein engineering technology platform to discover any
therapeutic enzyme, diagnostic product or vaccine. In addition, Merck is prohibited from using the CodeEvolver® protein engineering technology platform to
develop or produce enzymes or any other compounds for or on behalf of any third parties except in a very limited manner when Merck divests a therapeutic
product that is manufactured using an enzyme developed using the CodeEvolver® protein engineering technology platform.
Under the terms of the Merck CodeEvolver® Agreement, Merck paid us $18.0 million in technology transfer up-front and milestone payments over the
technology transfer period of 15 months from August 3, 2015, the effective date of the Merck CodeEvolver® Agreement. We also have the potential to receive
product-related payments of up to $15.0 million for each API that is manufactured by Merck using one or more enzymes that have been developed or are in
development using the CodeEvolver® protein engineering technology platform during the 10-year period that begins on the conclusion of the 15-month
technology transfer period. These product-related payments, if any, will be paid by Merck to us for each quarter that Merck manufactures API using a
CodeEvolver®-developed enzyme. The payments will be based on the total volume of API produced using the CodeEvolver®-developed enzyme. We have the
right to conduct an annual audit to confirm that all payments that are owed to us have been paid in full and on time.
Under the Merck CodeEvolver® Agreement, we transferred the CodeEvolver® protein engineering technology platform to Merck over the period from August
2015 through September 2016. As part of this technology transfer, we provided to Merck our proprietary enzymes, proprietary protein engineering protocols
and methods, and proprietary software algorithms. We provided additional enzyme evolution services to Merck at our laboratories in Redwood City through
November 2016. The remaining deferred revenue relating to the upfront payment was recognized upon completion of the additional enzyme evolution
services.
The licenses to Merck are granted under patents, patent applications and know-how that we owned or controlled as of the effective date of the Merck
CodeEvolver® Agreement and that cover the CodeEvolver® protein engineering technology platform. Any improvements to the CodeEvolver® protein
engineering technology platform during the technology transfer period are also included in the license grants from Codexis to Merck. Following the
technology transfer period, Merck can exercise annual options that, upon payment of certain option fees, would extend Merck’s license to include certain
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improvements to the CodeEvolver® protein engineering technology platform that arise during the three-year period that begins at the end of the technology
transfer period.
Under the Merck CodeEvolver® Agreement, we own any improvements to our protein engineering methods, processes and algorithms that arose and any
enzyme technology or process technology that are developed during an evolution program or additional services. Merck owns (the “Merck-Owned
Technology”) (a) any enzyme technology that is developed solely by Merck under the Merck CodeEvolver® Agreement using the CodeEvolver® protein
engineering technology platform (a “Project Enzyme”) and (b) the methods of use of any Project Enzyme or any enzyme developed jointly by Merck and us
using the CodeEvolver® protein engineering technology platform. Merck granted to us a worldwide, non-exclusive, fully paid-up, royalty-free license, with
the right to grant sublicenses, to use the Merck-Owned Technology outside of the Merck Exclusive Field.
For each API that Merck manufactures using an enzyme developed with the CodeEvolver® protein engineering technology platform, we will have a right of
first refusal to supply Merck with the enzyme used to manufacture the API if Merck outsources the supply of the enzyme. Our right of first refusal applies
during the period that begins on the completion of a phase III clinical trial for the product containing the API and ends five years following regulatory
approval for such product.
The Merck CodeEvolver® Agreement has a term that continues, unless earlier terminated, until the expiration of all payment obligations under the agreement.
Merck may terminate the Merck CodeEvolver® Agreement by providing 90 days written notice to us. We can terminate the Merck CodeEvolver® Agreement
by providing 30 days written notice to Merck if we determine, pursuant to our contractual audit rights under the Merck CodeEvolver® Agreement, that Merck
has repeatedly failed to make required payments to us and/or materially underpaid us an amount due under the Merck CodeEvolver® Agreement. In the event
the Merck CodeEvolver® Agreement is terminated earlier by Merck, or by us due to an uncured material breach by Merck, or if Merck sells or transfers to a
third party any Merck business or facility that includes any of our proprietary materials, information or technology, we have the right to conduct an audit of
Merck’s facilities to confirm that all of our proprietary materials, information and technology have been destroyed. The Merck CodeEvolver® Agreement
contains indemnification provisions under which Merck and we have agreed to indemnify each other against certain third party claims.
As of December 31, 2015, we completed Wave 1 of the transfer of our CodeEvolver® protein engineering technology platform to Merck. In 2015, we received
from Merck a $5.0 million upfront payment and a $5.0 million Wave 1 technology transfer milestone payment. In September 2016, we completed the full
transfer of the engineering platform technology and earned milestone revenue of $8.0 million. We received the $8.0 million milestone payment in the fourth
quarter of 2016.
Protein Catalyst Products and Services
Our protein catalyst products and services can deliver value to our customers in multiple potential ways:
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manufacture their products at lower cost
manufacture their products with lower fixed capital investment
reduce the cost of development of complex chemical synthesis processes
enable their products to achieve higher product purity
reduce the risk of adverse effects arising from product impurities
allow the removal of entire steps from chemical production
flexibility to apply at any point across their product’s lifecycle
Our products include protein catalysts, chemical intermediates and Codex® Biocatalyst Panels and Kits. We sell our products primarily through our directed
sales and business development force in the United States and Europe.
In addition to products, we also offer R&D services to our customers. These R&D service agreements often contain service fee payments and intellectual
property provisions under which we screen and/or engineer protein catalysts for customers in connection with their process development efforts. In these
collaborations, we typically receive consideration in the form of one or more of the following: up-front payments, milestone payments, payments for
screening and engineering services, licensing fees and royalties.
Protein Catalysts
We often sell protein catalysts (also referred to as biocatalysts or enzymes), by the gram or kilogram, that have been already been engineered, scaled up, and
installed in a customer’s commercial process. For example, we sell protein catalysts to Merck
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for their manufacture of sitagliptin, the active ingredient in Januvia®. We also sell protein catalysts which are in developmental stages. These are enzymes that
are sold in batches or by the gram or kilogram that are in the process of being engineered or scaled up by Codexis, or are in the process of being trialed or
approved for use in the customer’s process. We may sell batches of specific protein catalysts that are in the middle of our protein engineering efforts to test
their performance at a larger customer scale. We also may sell batches of specific protein catalysts for use in customer’s developmental products (for example,
to trial in a customer’s Phase II drug candidate process). Finally, we may sell batches of specific protein catalysts as a customer performs trials for approval in
their commercial manufacturing operations.
Chemical Intermediates
In some cases, we sell intermediate chemicals products that are produced in a process that uses our protein catalysts. These chemical intermediates are then
used by our customer for further chemical processing.
®
Codex
Biocatalyst Panels and Kits
We sell kits and panels of our protein catalysts. These kits and panels assemble a relevant subset of our engineered enzymes to enable customers to perform
chemistry screening on their own. These kits and panels are organized by specific types of chemical reactions that are widely applicable in the pharmaceutical
and fine chemical markets.
Protein Catalyst Screening Services
If a customer prefers, rather than purchasing our Codex® Biocatalyst Panels or Kits to use for their own screening, they can send us their starting materials
and desired chemical reaction, and we will test against our existing libraries of enzymes on an R&D service fee basis. If we detect desired activity in a
specific enzyme, we can supply the customer with this enzyme or perform engineering services to improve the performance of the enzyme.
Protein Engineering Services
We work with our customers throughout their product development lifecycle to optimized enzymes that have been engineered specifically to perform a
desired process according to a highly selective set of specifications. We typically charge customers on an R&D services basis by project or project-month.
These are typically larger R&D service fees than screening services.
The protein engineering process starts by identifying genes that code for enzymes known to have the general type of catalytic reactivity for a desired chemical
reaction. Typically, we identify gene sequences from our extensive in-house collection or from published databases and then synthesize candidate genes
having those sequences. Using a variety of biotechnology tools, we diversify these genes by introducing mutations, giving rise to changes in the enzymes for
which they encode. The methods for diversifying these genes, and types of diversity being tested, often vary over the course of a protein engineering program.
For finding initial diversity, methods typically include random mutagenesis and site-directed (included computational structure-guided) mutagenesis. We also
test mutational variations from related enzymes found in different organisms.
Once we have identified potentially beneficial mutations, we create libraries of thousands of variants with combinations of these mutations. With our
proprietary genetic manipulation tools, we generate libraries of genes that have programmed and random combinations of the mutations for testing. The pool
of genes is used to transform host cells, which entails introducing the various genes into host cells. These cells are then grown into colonies. Cells from
individual colonies are cultured in high throughput to produce the enzyme encoded by the genetic variant in those cells. The enzymes expressed by these cells
are then screened in high throughput using test conditions relevant to the desired process. The screening results allow us to identify and catalog individual
genes that produce improved enzymes with beneficial mutations as well as enzymes having detrimental ones. Using specifically developed test conditions and
analytical methods, we can identify variant enzymes that exhibit various improved performance characteristics, such as stability, activity and selectivity, under
conditions relevant to the desired chemical process.
In the next step in our optimization process, we use our proprietary bioinformatics software to analyze protein sequence-activity relationships. Our software
and algorithms relate the screening results to the mutations and ranks the individual and interacting protein sequence mutations with regard to their degree of
benefit or detriment, relative to the process parameter(s) tested. Using this information, we can create a select pool of mutational diversity in the next iteration
to further the accumulation of beneficial diversity and cancel out detrimental diversity in the individual genes in the resulting library. The gene that codes for
the best performing enzyme in one iteration is used as the starting gene for the next iteration of recombination and screening. As the enzymes improve over
these iterations, the screening conditions are made increasingly more stringent. In this way, the protein catalyst is rapidly optimized until all in-process
performance requirements have been achieved and the economic objectives for the desired process have been met.
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INTELLECTUAL PROPERTY
Our success depends in large part on our ability to protect our proprietary products and technology under patent, copyright, trademark and trade secret laws.
We also rely heavily on confidential disclosure agreements for further protection of our proprietary products and technologies. Protection of our technologies
is important for us to offer our customers and partners proprietary services and products that are not available from our competitors, and to exclude our
competitors from practicing technology that we have developed or exclusively licensed from other parties. For example, our ability to supply innovator
pharmaceutical manufacturers depends on our ability to supply proprietary enzymes or methods for making pharmaceutical intermediates or APIs that are not
available from our competitors. Likewise, in the generic pharmaceutical area, proprietary protection, through patent, trade secret or other protection of our
enzymes and methods of producing a pharmaceutical product is important for us and our customers to maintain a lower cost production advantage over
competitors.
As of December 31, 2016, we owned or controlled approximately 600 issued patents and approximately 280 pending patent applications in the United States
and in various foreign jurisdictions. These patents and patent applications include many that are directed to our enabling technologies and specific methods
and products that support our business in the pharmaceutical markets. Our current intellectual property rights have terms that expire between 2017 and 2036.
Our United States intellectual property rights directed to the CodeEvolver® proprietary enabling technology platform developed internally by us have terms
that expire between 2029 to 2034. Our current intellectual property rights also include patents, trademarks, copyrights, software and certain assumed contracts
that we acquired from Maxygen, Inc. (“Maxygen”) in October 2010, which are associated with directed evolution technology, known as the
MolecularBreeding™ technology platform developed by Maxygen. The intellectual property rights and assets that we acquired from Maxygen continue to be
subject to existing exclusive and non-exclusive license rights granted by Maxygen to third parties. We continue to file new patent applications, for which
terms generally extend 20 years from the non-provisional filing date in the United States.
We will continue to file and prosecute patent applications and maintain trade secrets in an ongoing effort to protect our intellectual property. It is possible that
our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part. It is also possible that we may
not obtain issued patents from our pending patent applications or other inventions we seek to protect. We sometimes permit certain intellectual property to
lapse or go abandoned under appropriate circumstances. Due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are
rejected and we subsequently abandon them. It is also possible that we may develop proprietary products or technologies in the future that are not patentable
or that the patents of others will limit or altogether preclude our ability to conduct business. In addition, any patent issued to us may provide us with little or
no competitive advantage, in which case we may abandon such patent or license it to another entity.
As of December 31, 2016, we owned and used the following registered, pending, and common law trademarks in the United States, with some trademarks
also registered or pending in foreign jurisdictions: Codexis®, Codex®, CodeEvolver®, Mosaic®, Sage™, Microcyp®, MYCP®, ProSAR™, Transform Your
Thinking™, and a Codexis design mark (i.e., the Codexis logo).
Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar to
ours or that compete with ours. Patent, trademark, and trade secret laws afford only limited protection for our technology platform and products. The laws of
many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary
rights, unauthorized parties have in the past attempted, and may in the future attempt, to operate under aspects of our intellectual property or products or to
obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected
technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or technology is
covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our technology
platform and products do not infringe patents held by others or that they will not in the future.
Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims. For example, in February 2016, we filed a complaint
against EnzymeWorks, Inc., a California corporation, EnzymeWorks, Inc., a Chinese corporation, and Junhua “Alex” Tao (collectively, the “Defendants”),
alleging that the Defendants have engaged in willful patent infringement, trade secret misappropriation, breach of contract, intentional interference with
contractual relations, intentional interference with prospective economic relations and statutory and common law unfair competition. The outcome of the case
and the timing of its resolution are uncertain. For further information regarding this litigation, see Item 3, “Legal Proceedings.” Our litigation against the
Defendants and any other such litigation could result in substantial costs and diversion of our resources. Moreover, any settlement of or adverse judgment
resulting from litigation relating to intellectual property could require us to obtain a license to continue to make, use or sell the products or technology that is
the subject of the claim, or otherwise restrict or prohibit our use of the technology.
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COMPETITION
Overview
We face differing forms of competition in the small molecule pharmaceuticals, biotherapeutics, and fine chemicals markets, as set forth below.
Small Molecule Pharmaceuticals
We market our protein catalyst products and services to manufacturers of small molecule pharmaceutical intermediates and APIs. Our primary competitors in
that market are companies marketing either conventional, non-enzymatic catalysts or alternative protein catalyst products and services. We also face
competition sometimes from existing in-house technologies (both biocatalysts and conventional catalysts) within our client and potential client companies.
The principal methods of competition and competitive differentiation in this market are price, product quality and performance, including manufacturing
yield, safety and environmental benefits and speed of delivery of product. Pharmaceutical manufacturers that use biocatalytic processes can face increased
competition from manufacturers that use more conventional processes and/or manufacturers that are based in regions (such as India and China) with lower
regulatory, safety and environmental costs.
The market for the manufacture and supply of APIs and intermediates is large with many established companies. These companies include many of our large
innovator and generic pharmaceutical customers, such as Merck, GSK, Pfizer, Bristol Myers Squibb and Teva Pharmaceutical Industries Ltd., which have
significant internal research and development efforts directed at developing processes to manufacture APIs and intermediates. The processes used by these
companies include classical conventional organic chemistry reactions, chemo catalytic reactions, biocatalytic, reactions or combinations thereof. Our protein
catalyst based manufacturing processes must compete with these internally developed routes.
Companies developing and marketing conventional catalysts include Solvias AG, BASF, Johnson-Mathey, and Takasago International Corporation.
The market for supplying enzymes for use in pharmaceutical manufacturing is quite fragmented. There is competition from large industrial enzyme
companies, such as Novozymes, as well as subsidiaries of larger contract research/contract manufacturing organizations (“CRO/CMO”), such as Royal DSM
N.V. (“DSM”), Cambrex Corporation and Almac Group Ltd. There is also competition in the customized and optimized enzyme area from several smaller
companies, such as BRAIN AG, c-LEcta GmbH, Gingko Bioworks and evocatal GmbH.
We believe that our principal advantage is our ability to rapidly deliver customized protein catalysts for existing and new intermediates and APIs in the
pharmaceutical manufacturing market. This capability has allowed us to create a breadth of protein catalysts with improved performance characteristics
including, for example, better activity, stability, and activity on a range of substrates, compared to traditional chemistry-based manufacturing processes and
naturally occurring (and thus not optimized) biocatalysts. We believe that our CodeEvolver® protein engineering platform technology provides substantially
superior results, in shorter time frames, than companies offering competing biocatalyst development services.
Biotherapeutics
There are numerous companies that participate in the biotherapeutics market generally and the PKU market specifically. Many of these companies are large,
successful and well-capitalized. BioMarin Pharmaceutical Inc. (“BioMarin”) and Daiichi Sankyo Company market Kuvan® in the United States, Europe and
Japan for the treatment of a certain type of PKU. BioMarin has also recently completed a phase III clinical trial for an injectable enzyme substitution therapy
for the potential treatment of PKU. Shire Plc, Genzyme / Sanofi S.A. and other companies market or are actively developing new biotherapeutics. There are
numerous companies that are developing other forms of therapeutics, such as small molecules and gene therapy, which could compete with biotherapeutics.
Fine Chemicals
We entered the fine chemicals market in 2013 by applying our protein engineering technology in the food market. We face similar forms of competition in
this market as in the small molecule pharmaceutical markets, with the exception that the risk of losing opportunities to larger competitors in fine chemicals is
greater given the larger scale of opportunities available in the fine chemicals market compared to the pharmaceutical market. Our significant competitors in
the fine chemicals markets include companies that have been in these marketplaces for many years, such as Dupont Industrial Biosciences (Dupont
Genencor), DSM, Novozymes and A.B. Enzymes. These companies have greater resources in these markets than we do and have long-term supply
arrangements already in place with customers. Our ability to compete in these markets may be limited by our relatively late entrance. We also face
competition in both the fine chemicals and small molecule pharmaceutical markets from emerging companies offering whole cell metabolic pathway
approaches to these markets.
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Core Technology
We are a leader in the field of protein engineering to create novel biocatalysts. Both our pharmaceuticals and fine chemicals businesses rely on our core
technology. We are aware that other companies, organizations and persons have developed technologies that appear to have some similarities to our patented
proprietary technologies. For example, we are aware that other companies, including DSM and BASF, have alternative methods for obtaining and generating
genetic diversity or use mutagenesis techniques to produce genetic diversity. In addition, academic institutions such as the California Institute of Technology,
the Max Planck Institute and the Austrian Centre of Industrial Biotechnology are also working in this field. This field is highly competitive with companies
and academic and research institutions actively seeking to develop technologies that could be competitive with our technologies.
Technological developments by others may result in our products and technologies, as well as products manufactured by our customers using our biocatalysts,
becoming obsolete. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate
appropriate courses of action in relation to these developments.
Many of our competitors have substantially greater manufacturing, financial, research and development, personnel and marketing resources than we do. As a
result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that
competition over a longer period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological advances
or entirely different approaches developed by one or more of our competitors.
OPERATIONS
Our corporate headquarters is located in Redwood City, California and provides general administrative support to our business and is the center of our
research, development and business operations. We have limited internal manufacturing capacity at our headquarters in Redwood City. We expect to rely on
third-party manufacturers for commercial production of our biocatalysts for the foreseeable future. Our in-house manufacturing is dedicated to producing both
Codex® Biocatalyst Panels and Kits and enzymes for use by our customers in pilot scale production. We also supply initial commercial quantities of
biocatalysts for use by our collaborators to produce pharmaceutical intermediates and manufacture biocatalysts that we sell. Please see Note 15 to our
consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-K for a description of our revenue and long-lived assets both within
and outside of the United States.
Our research and development operations include efforts directed towards engineering protein catalysts, bioprocess development, cellular engineering,
biocatalyst screening, metabolites, strain improvement, fermentation development and process engineering. We conduct enzyme evolution, enzyme
production development, microbial bioprocess development, cellular engineering, microbial evolution and process engineering evaluations and design
primarily at our headquarters in Redwood City, California. For more information on our research and development expenditures, see Item 8 of this Annual
Report on Form 10-K. Manufacturing of our enzymes is conducted primarily in two locations, at our in-house facility in Redwood City, California and at a
third-party contract manufacturing organization, Lactosan, GmbH & Co. KG (“Lactosan”), in Kapfenberg, Austria. In late 2015, we commenced
manufacturing certain enzymes at another third-party contract manufacturing organization in Western Europe. Generally, we perform smaller scale
manufacturing in-house and outsource the larger scale manufacturing and a large percentage of our production of novel enzymes to contract manufacturing
organizations.
CUSTOMERS
We rely on a limited number of key customers for the majority of our revenues. Customers that provided 10% or more of our total revenues in any of the past
three fiscal years consist of the following:
Customers:
Merck
GSK
Exela
* Percentage was less than 10%
Percentage of Total Revenues
For The Years Ended December 31,
2016
2015
2014
47%
22%
*
29%
20%
12%
24%
17%
21%
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EMPLOYEES
As of December 31, 2016, we had 106 full-time employees and two part-time employees worldwide. Of these employees, 61 were engaged in research and
development, 16 were engaged in operations and quality control, and 29 were engaged in selling, general and administrative activities. None of our
employees are represented by a labor union, and we consider our employee relations to be good.
CORPORATE & AVAILABLE INFORMATION
Our principal corporate offices are located at 200 Penobscot Drive, Redwood City, California 94063 and our telephone number is (650) 421-8100. We were
incorporated in Delaware in January 2002. Our internet address is www.codexis.com. The information on, or that can be accessed through, our website is not
incorporated by reference into this Annual Report on Form 10-K or any other filings we make with the U.S. Securities and Exchange Commission (the
“SEC”).
We make available on or through our website certain reports and amendments to those reports that we file with, or furnish to, the SEC in accordance with the
Exchange Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our
website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. Copies of this information
may be obtained at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and
other information regarding our filings, at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the references to website
URLs are intended to be inactive textual references only.
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You should carefully consider the risks described below together with the other information set forth in this Annual Report on Form 10-K, which could
materially affect our business, financial condition or future results. The risks described below are not the only risks facing our company. Risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition
and/or operating results.
ITEM 1A. RISK FACTORS
Risks Relating to Our Business and Strategy
We have a limited operating history and have recently experienced significant changes to our business, which may make it difficult to evaluate our
current business and predict our future performance.
Our company has been in existence since January 2002. From 2002 until 2005, our operations focused on organizing and staffing our company and
developing our technology platform. In 2005, we recognized our first revenues from product sales. Since 2005, we have continued to generate revenues, but
because our revenue growth has occurred in recent periods, our limited operating history may make it difficult to evaluate our current business and predict our
future performance. Additionally, from 2006 to August 2012, a major portion of our business revolved around our research and development collaboration
with Shell with respect to advanced biofuels. The Shell collaboration was terminated in August 2012 and did not contribute to our revenues after the
termination. As a result of the termination of the Shell collaboration, we undertook a significant restructuring of our operations and refocused our business on
the biocatalysis market. In November 2013, we announced that we had begun to wind down our CodeXyme® cellulase enzymes program, and that we had
stopped further development of our CodeXol® detergent alcohols program in the third quarter of 2013. As a result of these changes in our business and any
changes to our business focus that we may make as we move forward, our operating history in past periods may not provide a basis to evaluate our current
business or be indicative of our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by
young companies in rapidly changing industries. If we do not address these risks successfully, our business will be harmed.
Our quarterly or annual operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or
investors, which could cause our stock price to decline.
Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the
future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the
following factors, as well as other factors described elsewhere in this report:
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our ability to achieve or maintain profitability;
our relationships with, and dependence on, collaborators in our principal markets;
our dependence on a limited number of customers;
our dependence on a limited number of products in our biocatalysis business;
our reliance on a limited number of contract manufacturers for large scale production of substantially all of our enzyme products;
our ability to develop and successfully commercialize new products for the biocatalysis market(s);
our ability to deploy our technology platform in the fine chemicals market;
the success of our customers’ pharmaceutical products in the market and the ability of such customers to obtain regulatory approvals for products
and processes;
our ability to deploy our technology platform in the in vitro molecular diagnostics market;
our ability to compete if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights;
our ability to avoid infringing the intellectual property rights of third parties;
our involvement in lawsuits to protect or enforce our patents or other intellectual property rights;
our ability to enforce our intellectual property rights throughout the world;
our dependence on, and the need to attract and retain, key management and other personnel;
our ability to prevent the theft or misappropriation of our biocatalysts, the genes that code for our biocatalysts, know-how or technologies;
our ability to protect our trade secrets and other proprietary information from disclosure by employees and others;
our ability to obtain substantial additional capital that may be necessary to expand our business;
our ability to find a partner for or otherwise advance our biotherapeutic program;
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our customers’ ability to pay amounts owed to us in a timely manner;
our ability to avoid charges to earnings as a result of any impairment of goodwill, intangible assets or other long-lived assets;
our ability to implement and maintain effective internal control over financial reporting;
our dependency on information technology systems, infrastructure and data;
our ability to control and to improve product gross margins;
our ability to protect against risks associated with the international aspects of our business;
the cost of compliance with European Union chemical regulations;
our or our customers’ ability to obtain regulatory approval for the sale and manufacturing of food products using our enzymes;
potential advantages that our competitors and potential competitors may have in securing funding or developing products;
our ability to accurately report our financial results in a timely manner;
results of regulatory tax examinations;
business interruptions, such as earthquakes and other natural disasters;
public concerns about the ethical, legal and social ramifications of genetically engineered products and processes;
our ability to integrate our current business with any businesses that we may acquire in the future;
our ability to properly handle and dispose of hazardous materials in our business;
potential product liability claims; and
our ability to use our net operating loss carryforwards to offset future taxable income.
Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our
future operating performance.
We have a history of net losses and we may not achieve or maintain profitability.
We have incurred net losses since our inception, including losses of $8.6 million in 2016, $7.6 million in 2015 and $19.1 million in 2014. As of December 31,
2016 and 2015, we had an accumulated deficit of $292.1 million and $283.5 million, respectively. If we are unable to expand our biocatalysis business,
through new or expanded collaborations, development of new products or services, or increased sales of existing products and services, our net losses may
increase and we may never achieve profitability. In addition, some of our collaboration agreements provide for milestone payments and/or future royalty
payments, which we will only receive if we and our collaborators develop and commercialize products. We also may fund development of additional
proprietary biocatalysis and/or biotherapeutic products. There can be no assurance that any of these products will become commercially viable or that we will
ever achieve profitability on a quarterly or annual basis. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we
anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
We are dependent on our collaborators, and our failure to successfully manage these relationships could prevent us from developing and commercializing
many of our products and achieving or sustaining profitability, and could lead to disagreements with our current or former collaborators.
Our ability to maintain and manage collaborations in our markets is fundamental to the success of our business. We currently have license agreements,
research and development agreements, supply agreements and/or distribution agreements with various collaborators. For example, we have ongoing
collaborations with GSK and Merck that are important to our business and financial results. We may have limited or no control over the amount or timing of
resources that any collaborator is able or willing to devote to our partnered products or collaborative efforts. Any of our collaborators may fail to perform its
obligations. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in
a timely manner. Further, our collaborators may not develop products arising out of our collaborative arrangements or devote sufficient resources to the
development, manufacture, marketing or sale of these products. Moreover, disagreements with a collaborator could develop, and any conflict with a
collaborator could lead to litigation and could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one
or more existing collaborators. If any of these events occur, especially if they occur in our collaborations with GSK or Merck, or if we fail to maintain our
agreements with our collaborators, we may not be able to commercialize our existing and potential products, grow our business or generate sufficient
revenues to support our operations, and we may be involved in litigation. Our collaboration opportunities could be harmed and our financial condition and
results of operations could be negatively affected if:
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we do not achieve our research and development objectives under our collaboration agreements in a timely manner or at all;
we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;
our collaborators and/or our contract manufacturers do not receive the required regulatory and other approvals necessary for the commercialization
of the applicable product;
we disagree with our collaborators as to rights to intellectual property that are developed during the collaboration, or their research programs or
commercialization activities;
we are unable to manage multiple simultaneous collaborations;
our collaborators or licensees are unable or unwilling to implement or use the technology or products that we provide or license to them;
our collaborators become competitors of ours or enter into agreements with our competitors;
our collaborators become unable or less willing to expend their resources on research and development or commercialization efforts due to general
market conditions, their financial condition or other circumstances beyond our control; or
our collaborators experience business difficulties, which could eliminate or impair their ability to effectively perform under our agreements.
Even after collaboration relationships expire or terminate, some elements of the collaboration may survive. For instance, certain rights, licenses and
obligations of each party with respect to intellectual property and program materials may survive the expiration or termination of the collaboration.
Disagreements or conflicts between and among the parties could develop even though the collaboration has ended. These disagreements or conflicts could
result in expensive arbitration or litigation, which may not be resolved in our favor.
Finally, our business could be negatively affected if any of our collaborators or suppliers undergo a change of control or were to otherwise assign the rights or
obligations under any of our agreements.
We are dependent on a limited number of customers.
Our current revenues are derived from a limited number of key customers. For the year ended December 31, 2016, customers that each individually
contributed 10% or more of our net revenue accounted for 69% of our total revenues. For the year ended December 31, 2015, customers that each contributed
10% or more of our net revenue accounted for 61% of our total revenues. We expect a limited number of customers to continue to account for a significant
portion of our revenues for the foreseeable future. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating
results. The loss or reduction of business from one or a combination of our significant customers could, materially adversely affect our revenues, financial
condition and results of operations.
We are dependent on a limited number of products in our protein catalysts business.
Our current product sales are derived from a limited number of protein catalyst products. We expect a limited number of protein catalyst products to continue
to account for a significant portion of our product sales for the foreseeable future. This product concentration increases the risk of quarterly fluctuations in our
revenues and operating results. The loss or reduction of business of one or a combination of our significant products could materially adversely affect our
revenues, financial condition and results of operations. In addition, our revenue sharing arrangement, which is based on sales of the anticoagulant drug
argatroban by our revenue sharing partner Exela PharmSci, Inc. (“Exela”), has declined in recent years and may decline in future periods due to increased
competition resulting from the expiration of a third party patent related to the production of argatroban in June 2014.
We are dependent on a limited number of contract manufacturers for large scale production of substantially all of our enzymes.
Manufacturing of our enzymes is conducted primarily in two locations: our in-house facility in Redwood City, California; and at a third-party contract
manufacturing organization, Lactosan, GmbH & Co. KG ("Lactosan"), in Kapfenberg, Austria. In late 2015, we commenced manufacturing certain enzymes
at another third-party contract manufacturing organization in Western Europe. Generally, we perform smaller scale manufacturing in-house and outsource the
larger scale manufacturing to these contract manufacturers. We have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the
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performance and capacity of third-party manufacturers for the larger scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals
business.
Accordingly, we face risks of difficulties with, and interruptions in, performance by third party manufacturers, the occurrence of which could adversely
impact the availability, launch and/or sales of our enzymes in the future. We have experienced manufacturing delays at Lactosan in the past, including as
recently as the second half of 2014. Manufacturing delays at a contract manufacturer could negatively affect our business, reputation, results of operations and
financial condition. The failure of any contract manufacturer to supply us enzymes on a timely basis, or to manufacture our enzymes in compliance with our
specifications or applicable quality requirements or in volumes sufficient to meet demand, would adversely affect our ability to sell pharmaceutical and fine
and complex chemicals products, could harm our relationships with our collaborators or customers and could negatively affect our revenues and operating
results. We may be forced to secure alternative sources of supply, which may be unavailable on commercially acceptable terms, and could cause delays in our
ability to deliver products to our customers, increase our costs and decrease our profit margins.
We currently have supply agreements in place with Lactosan and one other contract manufacturer. In the absence of a supply agreement, a contract
manufacturer will be under no obligation to manufacture our enzymes and could elect to discontinue their manufacture at any time. If we require additional
manufacturing capacity and are unable to obtain it in sufficient quantity, we may not be able to increase our product sales, or we may be required to make
substantial capital investments to build that capacity or to contract with other manufacturers on terms that may be less favorable than the terms we currently
have with our suppliers. If we choose to build our own additional manufacturing facility, it could take two years or longer before our facility is able to
produce commercial volumes of our enzymes. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense
of other potentially more profitable opportunities. In addition, if we contract with other manufacturers, we may experience delays of several months in
qualifying them, which could harm our relationships with our collaborators or customers and could negatively affect our revenues or operating results.
If we are unable to develop and commercialize new products for the pharmaceutical, fine chemicals, biotherapeutics and molecular diagnostics markets,
our business and prospects will be harmed.
We plan to launch new products for the pharmaceutical, fine chemicals, therapeutics and molecular diagnostics markets. These efforts are subject to numerous
risks, including the following:
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customers in these markets may be reluctant to adopt new manufacturing processes that use our enzymes;
we may be unable to successfully develop the enzymes or manufacturing processes for our products in a timely and cost-effective manner, if at
all;
we may face difficulties in transferring the developed technologies to our customers and the contract manufacturers that we may use for
commercial scale production of intermediates and enzymes in these markets;
the contract manufacturers that we may use may be unable to scale their manufacturing operations to meet the demand for these products and we
may be unable to secure additional manufacturing capacity;
customers may not be willing to purchase these products for these markets from us on favorable terms, if at all;
we may face product liability litigation, unexpected safety or efficacy concerns and product recalls or withdrawals;
changes in laws or regulations relating to the pharmaceutical industry or the industries into which we sell our fine chemicals products, including
the food industry, could cause us to incur increased costs of compliance or otherwise harm our business;
our customers’ products may experience adverse events or face competition from new products, which would reduce demand for our products;
we may face pressure from existing or new competitive products; and
we may face pricing pressures from existing or new competitors, some of which may benefit from government subsidies or other incentives.
Our efforts to deploy our technology platform in the fine chemicals market may fail.
We have recently begun to use our CodeEvolver® protein engineering technology platform to develop new products in the fine chemicals markets. We do not
know if we can successfully compete in this new market. This new market is well established and consists of numerous large, well-funded entrenched market
participants who have long and established track records and customer relationships. We have currently developed products in the food sector of this market
and these products, or any other products that we may develop in the future for the fine chemicals market may not succeed in displacing current products. If
we succeed in commercializing new products for the fine chemicals market, we may not generate significant revenue and cash
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flows from these activities. The failure to successfully deploy products in the fine chemicals space may limit our growth and have a material adverse effect on
our financial condition, operating results and business prospects.
Our business could be adversely affected if our customers’ products are not received well in the market, if their products, or the processes used by our
customers to manufacture their final products, fail to be approved, or if our customers discontinue their development activities for any reason.
Our enzymes are used by our pharmaceutical customers in the manufacture of intermediates and APIs which are then used in the manufacture of final
pharmaceutical products by our existing and potential branded and generic drug customers, and by our fine chemicals customers to manufacture food
ingredients. Our business could be adversely affected if these final products do not perform in the market as well as expected, or if our customers encounter
competition from new entrants into the market with competing, and possibly superior, products. Additionally, these pharmaceutical and food products must be
reviewed and approved by the FDA in the United States and similar regulatory bodies in other markets prior to commercialization. If our customers who sell
branded drugs, which we refer to as innovators, fail to receive regulatory approval for the drugs, fail to receive regulatory approval for new manufacturing
processes for previously approved drugs, or decide for business or other reasons to discontinue their drug development activities, our revenues and prospects
will be negatively impacted. The process of producing these drugs, and their generic equivalents, is also subject to regulation by the FDA in the United States
and equivalent regulatory bodies in other markets. Similarly, if Tate & Lyle decides to delay or discontinue developing its food ingredient product for which
we signed an enzyme supply agreement in December 2016, our revenues and prospects will be negatively impacted. If any pharmaceutical or food
manufacturing process that uses our enzymes or enzyme technology does not receive required approval by the appropriate regulatory body or if customers
decide not to pursue approval, our business could be adversely affected.
Our efforts to deploy our technology in the in vitro molecular diagnostics market may fail.
We have recently begun to use our CodeEvolver® protein engineering technology platform to develop new products for customers using NGS and PCR/qPCR
for in vitro molecular diagnostic applications. We do not know if we can successfully compete in this new market. This new market is well established and
consists of numerous large, well-funded entrenched market participants who have long and established track records and customer relationships. Our first
proprietary enzyme for this market, which is designed to improve library preparation for NGS users, and any products that we may develop in the future for
this market, may not succeed in displacing current products. If we succeed in commercializing new products for this market, we may not generate significant
revenue and cash flows from these activities. The failure to successfully and timely deploy products in this space may limit our growth and have a material
adverse effect on our financial condition, operating results and business prospects.
Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights.
Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products
and potential products in the United States and other countries. We have adopted a strategy of seeking patent protection in the United States and in foreign
countries with respect to certain of the technologies used in or relating to our products and processes. As such, as of December 31, 2016, we owned or
controlled approximately 600 issued patents and approximately 280 pending patent applications in the United States and in various foreign jurisdictions. Our
intellectual property rights, as of December 31, 2016, have terms that expire between 2017 and 2036. We also have license rights to a number of issued
patents and pending patent applications in the United States and in various foreign jurisdictions. Our owned and licensed patents and patent applications
include those directed to our enabling technologies and to the methods and products that support our business in the pharmaceuticals manufacturing and
complex chemistry markets. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.
Numerous patents in our portfolio involve complex legal and factual questions and, therefore, enforceability cannot be predicted with any certainty. Issued
patents and patents issuing from pending applications may be challenged, invalidated, or circumvented. Moreover, the United States Leahy-Smith America
Invents Act (“AIA”), enacted in September 2011, brought significant changes to the United States patent system, which include a change to a “first to file”
system from a “first to invent” system and changes to the procedures for challenging issued patents and disputing patent applications during the examination
process, among other things. While interference proceedings are possible for patent claims filed prior to March 16, 2013, many of our filings will be subject
to the post- and pre-grant proceedings set forth in the AIA, including citation of prior art and written statements by third parties, third party pre-issuance
submissions, ex parte reexamination, inter partes review, post-grant review, and derivation proceedings. We may need to utilize the processes provided by the
AIA for supplemental examination or patent reissuance. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if
successful,
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any interference may result in loss of certain claims. Any litigation or proceedings could divert our management's time and efforts. Even unsuccessful claims
filed by third parties could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties
resulting from initiation and continuation of any patent or related litigation could harm our ability to compete. We have not assessed the applicability of the
AIA and new regulations on our patent portfolio. These changes could increase the costs and uncertainties surrounding the prosecution of our patent
applications and the enforcement or defense of our patent rights.
Additional uncertainty may result from legal precedent handed down by the United States Federal Circuit Court and Supreme Court as they determine legal
issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. Accordingly, we cannot
ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other
companies' patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that: (i) we were the first to invent the
inventions covered by each of our pending applications, (ii) we were the first to file patent applications for these inventions, or (iii) the proprietary
technologies we develop will be patentable. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover,
third parties could practice our inventions in territories where we do not have patent protection. Such third parties may then try to import products made using
our inventions into the United States or other territories. If competitors are able to use our technology, our ability to compete effectively could be harmed. In
addition, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may
need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause harm to our business.
Third parties may claim that we are infringing their intellectual property rights or other proprietary rights, which may subject us to costly and time
consuming litigation and prevent us from developing or commercializing our products.
Our commercial success also depends in part on our ability to operate without infringing patents and proprietary rights of third parties, and without breaching
any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot ensure that patents have not
been issued to third parties that could block our ability to obtain patents or to operate as we would like. There may be patents in some countries that, if valid,
may block our ability to make, use or sell our products in those countries, or import our products into those countries, if we are unsuccessful in circumventing
or acquiring rights to these patents. There also may be claims in patent applications filed in some countries that, if granted and valid, may also block our
ability to commercialize products or processes in these countries if we are unable to circumvent or license them.
The industries in which we operate and the biotechnology industry, in particular, are characterized by frequent and extensive litigation regarding patents and
other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage.
Our involvement in litigation or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights or as
a result of alleged infringement of the rights of others, may divert our management’s time from focusing on business operations and could cause us to spend
significant amounts of money. Any potential intellectual property litigation also could force us to do one or more of the following:
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stop selling or using our products or technologies that use the subject intellectual property;
pay monetary damages or substantial royalties;
grant cross-licenses to third parties relating to our patents or proprietary rights;
obtain from the third party asserting its intellectual property rights a license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
redesign those products or processes that use any allegedly infringing technology, or relocate the operations relating to the allegedly infringing
technology to another jurisdiction, which may result in significant cost or delay to us, could be technically infeasible or could prevent us from
selling some of our products in the United States or other jurisdictions.
We are aware of some patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. We cannot assure you that if
this third party intellectual property is asserted against us that we would ultimately prevail.
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We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our intellectual property rights or those of our licensors. To prevent infringement or unauthorized use, we may be required to file
infringement claims, which can be expensive and time-consuming. For example, in February 2016, we filed a complaint against EnzymeWorks, Inc., a
California corporation, EnzymeWorks, Inc., a Chinese corporation, and Junhua “Alex” Tao (collectively, the “Defendants”), alleging that the Defendants have
engaged in, among other things, willful patent infringement, trade secret misappropriation and breach of confidence. In addition, in a patent infringement
proceeding, a court may decide that a patent we own or in-license is not valid, is unenforceable and/or is not infringed. In legal proceedings against a third
party to enforce a patent directed at one of our technologies or products (including our litigation against the Defendants), the defendant could counterclaim
that our patent is invalid and/or unenforceable in whole or in part. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or
unenforceability are commonplace. Grounds for a validity challenge include an alleged failure to meet any of several statutory requirements, including lack of
novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of
the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims
before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable, and prior
art could render our patents or those of our licensors invalid. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would
lose at least part, and perhaps all, of the patent protection on such product. Such a loss of patent protection would have a material adverse impact on our
business.
Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights may cause us to incur significant expenses, and
could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of
hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our expenses and reduce the resources
available for operations and research and development activities. We may not have sufficient financial or other resources to conduct such litigation or
proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of
their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our
ability to compete in the marketplace. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries where we do business do not protect intellectual property rights to the same extent as the laws of the United States. Many
companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of
certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property, particularly those relating
to biotechnology and/or bioindustrial technologies. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.
This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Additionally,
proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our
business.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel as needed in the future, it could
disrupt the operation of our business, delay our product development programs, harm our research and development efforts, and/or impact our ability to
pursue and build collaborations.
Our business involves complex, global operations across a variety of markets and requires a management team and employee workforce that is
knowledgeable in the many areas in which we operate. The loss of any key members of our management team or the failure to attract or retain other key
employees who possess the requisite expertise for the conduct of our business could prevent us from developing and commercializing our products for our
target markets and entering into collaborations or licensing arrangements to execute on our business strategy.
In addition, the loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing and
commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We may
not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other
technology-based businesses or due to the availability of personnel with the qualifications or experience necessary for our business. If we are not able to
attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect
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our ability to meet the demands of our collaborators and customers in a timely fashion or to support our internal research and development programs.
Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our
ability to do so on acceptable terms. All of our employees are at-will employees, which mean that either the employee or we may terminate their employment
at any time.
Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our
technology platform or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require
the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or
to develop the necessary expertise could impair our ability to grow our business.
If our protein catalysts, or the genes that code for our protein catalysts, are stolen, misappropriated or reverse engineered, others could use these
biocatalysts or genes to produce competing products.
Third parties, including our contract manufacturers, customers and those involved in shipping our protein catalysts, often have custody or control of our
protein catalysts. If our protein catalysts, or the genes that code for our protein catalysts, were stolen, misappropriated or reverse engineered, they could be
used by other parties who may be able to reproduce these protein catalysts for their own commercial gain. If this were to occur, it may be difficult for us to
challenge this type of use, especially in countries with limited intellectual property protection or in countries in which we do not have patents covering the
misappropriated biocatalysts.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect.
We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require employees and
consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally
require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship
with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the
course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse
engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to
our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain
or maintain trade secret protection could adversely affect our competitive business position.
We may need additional capital in the future in order to expand our business.
Our future capital requirements may be substantial, particularly as we continue to develop our business. Although we believe that, based on our current level
of operations, our existing cash, cash equivalents and marketable securities will provide adequate funds for ongoing operations, planned capital expenditures
and working capital requirements for at least the next 12 months, we may need additional capital if our current plans and assumptions change. Our need for
additional capital will depend on many factors, including the financial success of our biocatalysis business, our spending to develop and commercialize new
and existing products and the amount of collaboration funding we may receive to help cover the cost of such expenditures, the effect of any acquisitions of
other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, including opportunities in
the fine chemicals markets, and the filing, prosecution, enforcement and defense of patent claims. If our capital resources are insufficient to meet our capital
requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or
commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and
complete the commercialization of products, if any, resulting from our technologies. In addition, we may choose to raise additional capital due to market
conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We may seek to obtain such
additional capital through equity offerings, debt financings, credit facilities and/or strategic collaborations. If future financings involve the issuance of equity
securities, our existing stockholders would suffer dilution. If we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants
that limit our ability to conduct our business. Strategic collaborations may also place restrictions on our business. We may not be able to raise sufficient
additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross
margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or
otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate
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research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through
collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If
adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.
Our biotherapeutic programs are early stage, highly regulated and expensive. Our ability to obtain development partners for the programs, to advance our
product candidates to clinical trials and to ultimately receive regulatory approvals is highly uncertain.
We are developing novel biotherapeutic candidates, in particular our novel oral enzyme product candidate for the treatment of PKU. Our efforts to advance
our PKU program are subject to numerous risks, including the following:
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Our efforts to use CodeEvolver® protein engineering technology platform to generate new lead biotherapeutic candidates may not be successful in
creating candidates of value.
The successful development of biotherapeutic candidates is full of risk and uncertainty, requires long timelines and may lead to uncertain results,
is highly regulated and may require expertise and capital resources we do not currently possess.
If we are not successful in obtaining a partner to assist us with the funding and development of our PKU program, we may not have sufficient
funds or expertise to advance development of the program on our own.
To obtain regulatory approval to market our product candidate, preclinical studies and costly and lengthy clinical trials are required, and the
results of the studies and trials are highly uncertain. A failure of one or more pre-clinical or clinical trials can occur at any stage, and many
companies that have believed their drug candidates performed satisfactorily in pre-clinical and clinical testing have nonetheless failed to obtain
marketing approval of their product candidates.
• We do not have experience in drug development or regulatory matters related to drug development. As a result, we rely or will rely on third
parties to conduct our pre-clinical studies, assist us with drug manufacturing and formulation and perform other tasks for us. If these third parties
do not successfully carry out their responsibilities or comply with regulatory requirements, we may receive lower quality products or services,
suffer reputational harm and not be able to obtain regulatory approval for our product candidate.
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The results of animal studies of our product candidate may not be predictive of future study results.
If we begin clinical trials for our product candidate, we may find it difficult to enroll patients in our clinical trials given the limited number of
patients that have PKU. Any enrollment difficulties could delay clinical trials and any potential product approval.
Drug development is a highly regulated process. In particular, the regulatory approval process of the FDA and comparable foreign authorities is
lengthy, time consuming and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidate, our
business will be harmed.
• We will be exposed to potential product liability risks through the testing of experimental therapeutics in humans, which may expose us to
substantial uninsured liabilities.
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Third parties may develop intellectual property that could limit our ability to develop, market and commercialize our PKU product candidate, if
approved.
Changes in methods of treatment of disease, such as gene therapy, could cause us to stop development of our product candidate or reduce or
eliminate potential demand for our product candidate, if approved.
Our revenues, financial condition and results of operations may also be adversely affected if one or more of our customers is delayed in paying, or
becomes unable to pay, for our delivered products on a timely basis.
Certain of our customers may become subject to financial and other challenges that affect their cash flow. If these customers fail to pay us on a timely basis it
may cause our financial results to fluctuate. Failure by such customers to pay us on timely basis, or at all, would adversely impact our financial condition.
If goodwill or other long-lived assets become impaired we may be required to record a significant charge to earnings.
Our total assets reflect goodwill of $3.2 million and other long-lived assets of $2.4 million as of December 31, 2016. Under accounting principles generally
accepted in the United States (“GAAP”), we review goodwill for impairment on at least an annual basis and at any interim date whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. We review our long lived assets with finite lives for impairment whenever events or
changes in circumstances
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indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances (i.e., information that indicates an impairment
might exist) could include: a significant decrease in the market price of our common stock; current period cash flow losses or operating losses combined with
a history of losses or a forecast of continuing losses associated with the use of the assets; slower growth rates in our industry; significant adverse changes in
the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the
assets; loss of significant customers or partners; or the current expectation that the assets will more likely than not be sold or disposed of significantly before
the end of their estimated useful life. We tested long-lived assets for impairment as of December 31, 2016. Based on our analysis, we determined that the fair
value of the assets exceeded their carrying value and that no impairment was necessary as of December 31, 2016. Nevertheless, we may experience additional
events or changes in circumstances in the future that we determine to be indicators of impairment, and that may in turn require us to undertake impairment
analysis in future periods. Depending on the circumstances and judgments made at such future time, the outcome of the analysis may require us to recognize
impairment.
We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or other
long-lived assets is determined, resulting in an adverse impact on our financial position and results of operations.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial
reporting may be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their disclosure controls and procedures over
financial reporting. At the end of each fiscal year, we must perform an evaluation of our disclosure controls and procedures over financial reporting, include
in our annual report the results of the evaluation, and have our external auditors publicly attest to such evaluation.
We have identified material weaknesses and other control deficiencies in the past, and while the material weaknesses have since been remediated, we cannot
assure you that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If other deficiencies are
discovered in the future, our ability to accurately and timely report our financial position, results of operations or cash flows could be impaired, which could
result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock
price, suspension or delisting of our common stock by The NASDAQ Stock Market, or other material adverse effects on our business, reputation, results of
operations, financial condition or liquidity.
We are dependent on information technology systems, infrastructure and data.
We are dependent upon information technology systems, infrastructure and data. The multitude and complexity of our computer systems make them
inherently vulnerable to service interruption or destruction, malicious intrusion and random attack. Likewise, data privacy or security breaches by employees
or others may pose a risk that sensitive data, including our intellectual property, trade secrets or personal information of our employees, customers or other
business partners may be exposed to unauthorized persons or to the public. Cyberattacks are increasing in their frequency, sophistication and intensity.
Cyberattacks could include the deployment of harmful malware, denial-of-service, social engineering and other means to affect service reliability and threaten
data confidentiality, integrity and availability. Our business partners face similar risks and any security breach of their systems could adversely affect our
security posture. While we have invested, and continue to invest, in the protection of our data and information technology infrastructure, there can be no
assurance that our efforts will prevent service interruptions, or identify breaches in our systems, that could adversely affect our business and operations and/or
result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm to us. In addition, our liability
insurance may not be sufficient in type or amount to cover us against claims related to security breaches, cyberattacks and other related breaches.
Our product gross margins are variable and may decline from quarter to quarter.
Our product gross margins have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a
variety of factors, including product mix, pricing pressure from our pharmaceutical customers and competition from other products or technologies. This
variability may have a material adverse impact on our operating results and financial condition and cause our stock price to decline.
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We face risks associated with our international business.
While we have a limited number of employees located outside of the United States, we are and will continue to be dependent upon contract manufacturers
located outside of the United States. In addition, we have customers and partners located outside of the United States. Conducting business internationally
exposes us to a variety of risks, including:
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changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, repatriate profits to the United States
or operate our foreign-located facilities;
the imposition of tariffs;
the imposition of limitations on, or increase of, withholding and other taxes on remittances and other payments by foreign subsidiaries or joint
ventures;
the imposition of limitations on genetically-engineered products or processes and the production or sale of those products or processes in foreign
countries;
currency exchange rate fluctuations;
uncertainties relating to foreign laws, regulations and legal proceedings including tax, import/export, anti-corruption and exchange control laws;
the availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us;
increased demands on our limited resources created by our operations may constrain the capabilities of our administrative and operational
resources and restrict our ability to attract, train, manage and retain qualified management, technicians, scientists and other personnel;
economic or political instability in foreign countries;
difficulties associated with staffing and managing foreign operations; and
the need to comply with a variety of United States and foreign laws applicable to the conduct of international business, including import and
export control laws and anti-corruption laws.
Compliance with European Union chemical regulations could be costly and adversely affect our business and results of operations.
Some of our products are subject to the European Union regulatory regime known as The Registration, Evaluation and Authorization of Chemicals
(“REACH”). REACH mandates that certain chemicals manufactured in, or imported into, the European Union be registered and evaluated for their potential
effects on human health and the environment. Under REACH, we and our contract manufacturers located in the European Union are required to register
certain of our products based on the quantity of such product imported into or manufactured in the European Union and on the product’s intended end-use.
The registration, evaluation and authorization process under REACH can be costly and time consuming. Problems or delays in the registration, evaluation or
authorization process under REACH could delay or prevent the manufacture of some of our products in, or the importation of some of our products into, the
European Union, which could adversely affect our business and results of operations. In addition, if we or our contract manufacturers fail to comply with
REACH, we may be subject to penalties or other enforcement actions, which could have a material adverse effect on our business and results of operations.
We or our customers may not be able to obtain regulatory approval for the use of our products in food and food ingredients, if required, and, even if
approvals are obtained, complying on an ongoing basis with the numerous regulatory requirements applicable to these products will be time-consuming
and costly.
The product for which we signed a supply agreement with Tate & Lyle is, and any other products that we may develop for the food and food ingredients
market will likely be, subject to regulation by various government agencies, including the FDA, state and local agencies and similar agencies outside the
United States, as well as religious compliance certifying organizations. Food ingredients are regulated by the FDA either as food additives or as substances
generally recognized as safe (“GRAS”). A substance can be listed or affirmed as GRAS by the FDA or self-affirmed by its manufacturer upon determination
that independent qualified experts would generally agree that the substance is GRAS for a particular use. While we generally self-affirm GRAS status for the
products that we develop for the food market, our customer(s) will need to submit a GRAS Notice of Determination for its final commercial product. There
can be no assurance that our customer(s) will not receive any objections from the FDA to their Notice of Determination. If the FDA were to disagree with our
customer’s determination, they could ask our customer to voluntarily withdraw the final commercial product from the market or could initiate legal action to
halt its sale. Such actions by the FDA could have an adverse effect on our business, financial condition, and results of our operations. Food ingredients that
are not GRAS are regulated as food additives and require FDA approval prior to
25
commercialization. The food additive petition process is generally expensive and time consuming, with approval, if secured, potentially taking years.
Changes in regulatory requirements, laws and policies, or evolving interpretations of existing regulatory requirements, laws and policies, may result in
increased compliance costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.
We expect to encounter regulations in most if not all of the countries in which we may seek to sell our products which are used in food and food ingredients,
and we cannot be sure that we or our customers will be able to obtain necessary approvals in a timely manner or at all. If our existing and future products
which are used in food and food ingredients do not meet applicable regulatory requirements in a particular country or at all, then we may not be able to
commercialize them and our business will be adversely affected. The various regulatory schemes applicable to our products which are used in food and food
ingredients will continue to apply following initial approval for sale, including FDA requirements for food safety, mandatory labeling, and certain nutrient
content or health claims made about the product. Monitoring regulatory changes and ensuring our ongoing compliance with applicable requirements will be
time-consuming and may affect our results of operations. If we fail to comply with such requirements on an ongoing basis, we may be subject to fines or other
penalties, or may be prevented from selling our products which are used in food and food ingredients and our business may be harmed.
Competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours
obsolete or may use their greater resources to gain market share at our expense.
The biocatalysis industry and each of our target markets are characterized by rapid technological change. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. In addition, as we enter new markets, we will face new competition and will need to
adapt to competitive factors that may be different from those we face today.
We are aware that other companies, including DSM, BASF, and Novozymes have alternative methods for obtaining and generating genetic diversity or use
mutagenesis techniques to produce genetic diversity. Academic institutions such as the California Institute of Technology, the Max Planck Institute and the
Austrian Centre of Industrial Biotechnology are also working in this field. Technological development by others may result in our products and technologies,
as well as products developed by our customers using our biocatalysts, becoming obsolete.
Our primary competitors in the biocatalysis for pharmaceutical products are companies marketing either conventional, non-enzymatic processes or
biocatalytic enzymes to manufacturers of pharmaceutical intermediates and APIs, and also existing in-house technologies (both biocatalysts and conventional
catalysts) within our client and potential client companies. The principal methods of competition and competitive differentiation in this market are price,
product quality and performance, including manufacturing yield, safety and environmental benefits, and speed of delivery of product. Pharmaceutical
manufacturers that use biocatalytic processes can face increased competition from manufacturers that use more conventional processes and/or manufacturers
that are based in regions (such as India and China) with lower regulatory, safety and environmental costs.
The market for the manufacture and supply of APIs and intermediates is large with many established companies. These companies include many of our large
innovator and generic pharmaceutical customers, such as Merck, GSK, Pfizer, Bristol Myers, Squibb and Teva Pharmaceutical Industries Ltd., which have
significant internal research and development efforts directed at developing processes to manufacture APIs and intermediates. The processes used by these
companies include classical conventional organic chemistry reactions, chemo catalytic reactions, biocatalytic reactions or combinations thereof. Our
biocatalytic based manufacturing processes must compete with these internally developed routes. Additionally, we also face competition from companies
developing and marketing conventional catalysts such as Solvias Inc., BASF and Takasago International Corporation.
The market for supplying enzymes for use in pharmaceutical manufacturing is quite fragmented. There is competition from large industrial enzyme
companies, such as Novozymes, as well as subsidiaries of larger CRO/CMOs, such as Royal DSM, N.V. (“DSM”), Cambrex Corporation and Almac Group
Ltd. There is also competition in the customized and optimized enzyme area from several smaller companies, such as BRAIN AG, c-LEcta GmbH, Gingko
Bioworks and evocatal GmbH.
We entered the fine chemicals market in 2013, by applying our protein engineering technology in the food market. We face similar forms of competition in
this market as in the pharmaceutical markets with the exception that the risk of losing opportunities to larger competitors in fine chemicals is greater given the
larger scale of opportunities available in the fine chemicals market compared to the pharmaceutical market. Our significant competitors in the fine chemicals
markets include companies that have been in these marketplaces for many years, such as Dupont Industrial Biosciences (Dupont Genencor),
26
DSM, Novozymes and A.B. Enzymes. These companies have greater resources in these markets than we do and have long-term supply arrangements already
in place with customers. Our ability to compete in these markets may be limited by our relatively late entrance. We also face competition in both the fine
chemicals and pharmaceutical markets from emerging companies offering whole cell metabolic pathway approaches to these markets.
There are numerous companies that participate in the biotherapeutics market generally and the PKU market specifically. Many of these companies are large,
successful and well-capitalized. BioMarin Pharmaceutical Inc. (“BioMarin”) and Daiichi Sankyo Company market Kuvan® in the United States, Europe and
Japan for the treatment of a certain type of PKU. BioMarin has also recently completed a phase III clinical trial for an injectable enzyme substitution therapy
for the potential treatment of PKU. Shire Plc, Genzyme / Sanofi S.A. and other companies market or are actively developing new biotherapeutics. There are
numerous companies that are developing other forms of therapeutics, such as small molecules and gene therapies, which could compete with biotherapeutics.
Our ability to compete successfully in any of these markets will depend on our ability to develop proprietary products that reach the market in a timely
manner and are technologically superior to and/or are less expensive than other products on the market. Many of our competitors have substantially greater
production, financial, research and development, personnel and marketing resources than we do. They also started developing products earlier than we did,
which may allow them to establish blocking intellectual property positions or bring products to market before we can. In addition, certain of our competitors
may also benefit from local government subsidies and other incentives that are not available to us. As a result, our competitors may be able to develop
competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we
could. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one
or more of our competitors. We cannot be certain that any products we develop in the future will compare favorably to products offered by our competitors or
that our existing or future products will compare favorably to any new products that are developed by our competitors. As more companies develop new
intellectual property in our markets, the possibility of a competitor acquiring patent or other rights that may limit our products or potential products increases,
which could lead to litigation.
Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive
pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position, and prevent us
from obtaining or maintaining profitability.
We must rely on our suppliers, contract manufacturers and customers to deliver timely and accurate information in order to accurately report our
financial results in the time frame and manner required by law.
We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely
basis. We rely on suppliers and certain contract manufacturers to provide us with timely and accurate information regarding our inventories and
manufacturing cost information, and we rely on current and former collaborators to provide us with product sales and cost saving information in connection
with royalties owed to us. Any failure to receive timely information from one or more of these third parties could require that we estimate a greater portion of
our revenues and other operating performance metrics for the period, which could cause our reported financial results to be incorrect. Moreover, if the
information that we receive is not accurate, our financial statements may be materially incorrect and may require restatement, and we may not receive the full
amount of revenues that we are entitled to under these arrangements. Although we typically have audit rights with these parties, performing such an audit
could be harmful to our collaborative relationships, expensive and time consuming and may not be sufficient to reveal any discrepancies in a timeframe
consistent with our reporting requirements.
Our results of operations may be adversely affected by the results of regulatory tax examinations.
We are subject to value added tax, customs tax, sales and use tax, withholding tax, payroll tax, income tax and other taxes in connection with the operation of
our business. Regulators from the various jurisdictions in which we operate periodically perform audits, and we are regularly subject to, and are currently
undergoing, audits and assessments by tax authorities in the United States and foreign jurisdictions for prior tax years. Although we believe our tax estimates
are reasonable, and we intend to defend our positions if necessary, the final outcome of tax audits and related proceedings is inherently uncertain and could be
materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial
additional taxes and/or fines or penalties relating to ongoing or future audits. The adverse resolution of any audits or related proceedings could have an
adverse effect on our financial position and results of operations.
27
Business interruptions could delay us in the process of developing our products and could disrupt our sales.
Our headquarters is located in the San Francisco Bay Area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We
are also vulnerable to other types of natural disasters and other events that could disrupt our operations, such as riot, civil disturbances, war, terrorist acts,
flood, infections in our laboratory or production facilities or those of our contract manufacturers and other events beyond our control. We do not carry
insurance for earthquakes and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages
we incur could have a material adverse effect on our cash flows and success as an overall business.
Ethical, legal and social concerns about genetically engineered products and processes could limit or prevent the use of our products, processes, and
technologies and limit our revenues.
Some of our products and processes are genetically engineered or involve the use of genetically engineered products or genetic engineering technologies. If
we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to genetic engineering, our products and processes may
not be accepted. Any of the risks discussed below could result in increased expenses, delays, or other impediments to our programs or the public acceptance
and commercialization of products and processes dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our
technologies, products, or processes could be limited by the following factors:
•
•
•
public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and
processes, which could influence public acceptance of our technologies, products and processes;
public attitudes regarding, and potential changes to laws governing ownership of genetic material, which could harm our intellectual property
rights with respect to our genetic material and discourage collaborators from supporting, developing, or commercializing our products, processes
and technologies; and
governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of
genetic research and derivative products. The subject of genetically modified organisms has received negative publicity, which has aroused public
debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products. The protein
catalysts that we develop have significantly enhanced characteristics compared to those found in naturally occurring enzymes or microbes. While
we produce our biocatalysts only for use in a controlled industrial environment, the release of such biocatalysts into uncontrolled environments
could have unintended consequences. Any adverse effect resulting from such a release could have a material adverse effect on our business and
financial condition, and we may have exposure to liability for any resulting harm.
If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and
operations.
We have made acquisitions in the past, and if appropriate opportunities become available, we expect to acquire additional businesses, assets, technologies, or
products to enhance our business in the future. For example, in October 2010, we acquired substantially all of the patents and other intellectual property rights
associated with Maxygen’s directed evolution technology.
In connection with any future acquisitions, we could:
•
•
•
•
issue additional equity securities, which would dilute our current stockholders;
incur substantial debt to fund the acquisitions;
use our cash to fund the acquisitions; or
assume significant liabilities including litigation risk.
Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other
liabilities, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with current and/or prospective
collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key
employees. We do not have extensive experience in managing the integration process and we may not be able to successfully integrate any businesses, assets,
products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if
at all. The integration process could divert management’s time from focusing on operating our business, result in a decline in employee morale and cause
retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require
us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential
28
periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write offs and restructuring and
other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient
internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our
integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial
condition may be adversely affected.
We use hazardous materials in our business and we must comply with environmental laws and regulations. Any claims relating to improper handling,
storage or disposal of these materials or noncompliance of applicable laws and regulations could be time consuming and costly and could adversely affect
our business and results of operations.
Our research and development and commercial processes involve the use of hazardous materials, including chemical, radioactive, and biological materials.
Our operations also produce hazardous waste. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state, local and foreign laws and regulations govern the use, manufacture, storage, handling and disposal of, and human exposure to,
these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may
exceed our total assets. Although we believe that our activities comply in all material respects with environmental laws, there can be no assurance that
violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes.
Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws could result in
the imposition of fines, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of
production, or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws can be joint and several and without
regard to comparative fault. Environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties
associated with violations, which could impair our research, development or production efforts and harm our business. In addition, we may have to indemnify
some of our customers or suppliers for losses related to our failure to comply with environmental laws, which could expose us to significant liabilities.
We may be sued for product liability.
The design, development, manufacture and sale of our products involve an inherent risk of product liability claims and the associated adverse publicity. For
example, we may be named directly in product liability suits relating to drugs that are produced using our enzymes or that incorporate our intermediates and
APIs. The biocatalysts, pharmaceutical intermediates and APIs that we produce or are produced for us by our manufacturing partners could be subject to
quality control or contamination issues of which we are not aware. Claims could be brought by various parties, including customers who are purchasing
products directly from us, other companies who purchase products from our customers or by the end users of the drugs. We could also be named as co-parties
in product liability suits that are brought against our contract manufacturers who manufacture our enzymes, pharmaceutical intermediates and APIs. Insurance
coverage is expensive and may be difficult to obtain, and may not be available in the future on acceptable terms, or at all. We cannot assure you that any
contract manufacturer that we have used in the past or shall use in the future has or will have adequate insurance coverage to cover against potential claims. In
addition, although we currently maintain product liability insurance for our products in amounts we believe to be commercially reasonable, if the coverage
limits of these insurance policies are not adequate, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on
our business, results of operations, financial condition and cash flows. This insurance may not provide adequate coverage against potential losses, and if
claims or losses exceed our liability insurance coverage, we may go out of business. Moreover, we have agreed to indemnify some of our customers for
certain claims that may arise out of the use of our products, which could expose us to significant liabilities.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to
utilize its pre-change net operating loss carryforwards (“NOLs”), to offset future taxable income. If the Internal Revenue Service challenges our analysis that
our existing NOLs are not subject to limitations arising from previous ownership changes, our ability to utilize NOLs could be limited by Section 382 of the
Internal Revenue Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under
Section 382 of the Internal Revenue Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to
limitations. For these reasons, we may not be able to utilize a material portion of the NOLs reflected in our financial statements, even if we attain profitability.
29
Risks Related to Owning our Common Stock
We are subject to anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law that could delay or prevent an
acquisition of our company, even if the acquisition would be beneficial to our stockholders.
Provisions in our amended and restated certificate of incorporation and our bylaws may delay or prevent an acquisition of us. Among other things, our
amended and restated certificate of incorporation and bylaws provide for a board of directors which is divided into three classes, with staggered three-year
terms and provide that all stockholder action must be effected at a duly called meeting of the stockholders and not by a consent in writing, and further provide
that only our board of directors, the chairman of the board of directors, our chief executive officer or president may call a special meeting of the stockholders.
In addition, our amended and restated certificate of incorporation allows our board of directors, without further action by our stockholders, to issue up to
5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These provisions may also
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, who are responsible for appointing the members of our management team. Furthermore, because we are incorporated in
Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which prohibits, with some exceptions, stockholders
owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice
requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we
believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors,
they would apply even if an offer to acquire our company may be considered beneficial by some stockholders.
Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing
significant corporate decisions and depress our stock price.
Based on the number of shares outstanding as of December 31, 2016, our officers, directors and stockholders who hold at least 5% of our stock together
beneficially own approximately 45% of our outstanding common stock. If these officers, directors, and principal stockholders or a group of our principal
stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring
stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this
concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal
stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of
ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. As of
December 31, 2016, two stockholders beneficially owned approximately 26% of our common stock in the aggregate.
Our share price may be volatile which may cause the value of our common stock to decline and subject us to securities class action litigation.
The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others
beyond our control, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our financial condition and operating results;
the position of our cash, cash equivalents and marketable securities;
actual or anticipated changes in our growth rate relative to our competitors;
actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
announcements of technological innovations by us, our collaborators or our competitors;
announcements by us, our collaborators or our competitors of significant acquisitions or dispositions, strategic partnerships, joint ventures or
capital commitments;
additions or losses of one or more significant pharmaceutical products;
announcements or developments regarding pharmaceutical products manufactured using our protein catalysts and intermediates;
the entry into, modification or termination of collaborative arrangements;
additions or losses of customers;
additions or departures of key management or scientific personnel;
competition from existing products or new products that may emerge;
issuance of new or updated research reports by securities or industry analysts;
30
•
•
•
•
•
•
•
•
fluctuations in the valuation of companies perceived by investors to be comparable to us;
disputes or other developments related to proprietary rights, including patent litigation and our ability to obtain patent protection for our
technologies;
contractual disputes or litigation with our partners, customers or suppliers;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders or our other stockholders;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
general market conditions in our industry; and
general economic and market conditions, including the recent financial crisis.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of shares of our common stock. In the past, companies that have experienced volatility in the
market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our
business.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price
and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock in a
negative manner, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on
us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance
initiatives.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform
and Consumer Protection Act, as well as related rules implemented by the Securities and Exchange Commission and The NASDAQ Stock Market, impose
various requirements on public companies that require our management and other personnel to devote a substantial amount of time to compliance initiatives.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls
and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management
and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant
management time on compliance-related issues. Moreover, if we are not able to maintain compliance with the requirements of Section 404, our stock price
could decline, and we could face sanctions, delisting or investigations by The NASDAQ Global Market, or other material adverse effects on our business,
reputation, results of operations, financial condition or liquidity.
Not applicable.
Facilities
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our headquarters are located in Redwood City, California, where we lease approximately 107,200 square feet of office and laboratory space.
31
Our lease with Metropolitan Life Insurance Company (“MetLife”) includes approximately 28,200 square feet of space located at 200 and 220 Penobscot
Drive, Redwood City, California (the “Penobscot Space”), approximately 37,900 square feet of space located at 400 Penobscot Drive, Redwood City,
California (the “Building 2 Space”), and approximately 29,900 square feet of space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw
Space”). The term of the lease of the Penobscot Space, the Building 2 Space and the Saginaw Space lasts until January 31, 2020, and we have options to
extend for two additional five year periods. In February 2014, we agreed to sublease approximately 26,500 square feet of the Saginaw Space to a subtenant
for a period of three years. The subtenant has exercised an option to extend the sublease term until April 14, 2018, and the subtenant has one more option to
extend the sublease term for an additional period of one year. In January 2015, we agreed to sublease approximately 3,400 square feet of the Saginaw Space
to a subtenant for a period ending May 31, 2017 and the subtenant has an option to extend the sublease term for such portion of the Saginaw Space until
September 30, 2019. In October 2015, we agreed to sublease approximately 20,200 square feet of the Penobscot Space to a subtenant through November 30,
2019.
We also lease approximately 11,200 square feet of space located at 501 Chesapeake Drive, Redwood City, California (the “501 Chesapeake Space”). In
September 2012, we entered into a Sixth Amendment to Lease (the “Sixth Amendment”) with MetLife with respect to the 501 Chesapeake Space to extend
the term of the lease of the 501 Chesapeake Space to January 31, 2017. Pursuant to the Sixth Amendment, we have two consecutive options to extend the
term of the lease for the 501 Chesapeake Space for an additional period of five years per option. In October 2016, we entered into the Seventh Amendment to
Lease pursuant to which we exercised the first of our options to extend the term of the lease for the 501 Chesapeake Space for an additional five years,
commencing on February 1, 2017 and expiring on January 31, 2022.
We believe that the facilities that we currently lease in California are adequate for our needs for the immediate future and that, should it be needed, additional
space can be leased to accommodate any future growth.
ITEM 3. LEGAL PROCEEDINGS
On February 19, 2016, we filed a complaint against EnzymeWorks, Inc., a California corporation, EnzymeWorks, Inc., a Chinese corporation, and Junhua
“Alex” Tao (collectively, the “Defendants”) in the United States District Court for the Northern District of California. The complaint alleges that the
Defendants have engaged in willful patent infringement, trade secret misappropriation, breach of confidence, intentional interference with contractual
relations, intentional interference with prospective economic relations and statutory and common law unfair competition. We have sought injunctive relief,
monetary damages, treble damages, restitution, punitive damages and attorneys’ fees. On May 13, 2016, the Defendants filed a Partial Motion to Dismiss the
claims for breach of contract, intentional interference with contractual relations, intentional interference with prospective economic relations, statutory unfair
competition, and common law unfair competition in the First Amended Complaint. We opposed the Defendant’s Partial Motion to Dismiss. On August 11,
2016, the judge issued an order that denied the Defendants’ Partial Motion to Dismiss with respect to all five claims and in all relevant parts, and granted the
motion with respect to certain underlying arguments. We are unable to determine when this litigation will be resolved or its ultimate outcome.
Other than our litigation against the Defendants, we are not currently a party to any material litigation or other material legal proceedings.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock is quoted on The NASDAQ Global Select Market (“NASDAQ”), under the symbol “CDXS.” The following table sets forth the high and
low sales prices per share of the common stock as reported on NASDAQ. Such quotations represent inter dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
4.50 $
4.34
4.63
5.25
High
Low
4.59 $
5.65
4.62
4.50
2.93
3.00
3.87
4.31
2.50
3.62
3.02
3.02
As of February 28, 2017, there were approximately 140 stockholders of record. A substantially greater number of stockholders may be “street name” or
beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and currently do not plan to declare dividends on shares of our common stock in the
foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The payment of cash dividends in
the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall
financial condition and any other factors deemed relevant by our board of directors.
Stock Price Performance Graph
The following tabular information and graph compare our total common stock return with the total return for (i) the NASDAQ Composite Index and (ii) the
NASDAQ Biotechnology Index for the period December 31, 2011 through December 31, 2016. The figures represented below assume an investment of $100
in our common stock at the closing price on December 31, 2011 and in the NASDAQ Composite Index and the NASDAQ Biotechnology Index on December
31, 2011 and the reinvestment of dividends into shares of common stock. The comparisons in the table and graph are required by the SEC and are not
intended to forecast or be indicative of possible future performance of our common stock. The tabular information and graph shall not be deemed “soliciting
material” or to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to
be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.
$100 investment in stock or index
Ticker
2011
2012
2013
2014
2015
2016
Codexis, Inc.
Nasdaq Composite Index
Nasdaq Biotechnology Index
CDXS $
IXIC
NBI
$
$
100.00 $
100.00 $
41.70 $
117.45 $
100.00 $
131.91 $
26.42 $
164.57 $
218.45 $
47.55 $
188.84 $
292.93 $
79.81 $
201.98 $
327.40 $
86.79
219.89
257.51
December 31,
33
34
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The
selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical
results are not necessarily indicative of our future results.
We derived the consolidated statements of operations data for the fiscal years ended December 31, 2016, 2015, and 2014 and the consolidated balance sheets
data as of December 31, 2016 and 2015 from our audited consolidated financial statements appearing elsewhere in this filing. The consolidated statements of
operations data for the fiscal years ended December 31, 2013 and 2012 and the consolidated balance sheets data as of December 31, 2014, 2013 and 2012
have been derived from our audited consolidated financial statements not included in this filing. The data should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
2016
2015
2014
2013
2012
(In Thousands, Except Per Share Amounts)
Consolidated Statements of Operations Data:
Revenues:
Product sales
Research and development revenues
Revenue sharing arrangement
Government awards
Total revenues
Costs and operating expenses:
Cost of product sales
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expense
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share, basic and diluted
$
15,321 $
11,376 $
13,064 $
20,423 $
31,316
2,200
—
48,837
9,753
22,229
25,419
57,401
(8,564)
60
(94)
(8,598)
(40)
25,599
4,829
—
41,804
6,586
20,673
22,315
49,574
(7,770)
19
(168)
(7,919)
(338)
14,945
7,298
—
35,307
9,726
22,755
21,937
54,418
6,868
4,631
—
31,922
14,554
31,606
26,908
73,068
(19,111)
(41,146)
18
(234)
(19,327)
(256)
60
(304)
(41,390)
(30,587)
(87)
270
35,924
49,977
150
2,247
88,298
30,647
56,785
31,379
118,811
(30,513)
252
(326)
$
$
(8,558) $
(7,581) $
(19,071) $
(41,303) $
(30,857)
(0.21) $
(0.19) $
(0.50) $
(1.08) $
(0.84)
Weighted average common shares used in computing net loss
per share, basic and diluted
40,629
39,438
38,209
38,231
36,768
2016
2015
2014
2013
2012
December 31,
Consolidated Balance Sheets Data:
(In Thousands)
Cash, cash equivalents and short-term investments
$
19,240 $
23,273 $
26,487 $
25,135 $
Working capital
Total assets
Total liabilities
Total stockholders’ equity
17,998
44,647
21,768
22,879
19,272
48,122
21,811
26,311
24,582
58,840
17,357
41,483
14,860
35,648
16,549
19,099
35
45,527
43,486
99,965
21,525
78,440
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear
elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E
of the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,”
“should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other
factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set
forth in Part I, Item 1A of this Annual Report on Form 10-K and elsewhere in this report. The forward-looking statements in this Annual Report on Form 10-
K represent our views as of the date of this Annual Report on Form 10-K. We anticipate that subsequent events and developments will cause our views to
change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except
to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date
subsequent to the date of this Annual Report on Form 10-K.
Business Overview
We discover, develop and sell proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast untapped source of value-
creating materials, and we are using our proven technologies, which have been continuously improved over our fifteen year history, to commercialize an
increasing number of novel proteins, both as proprietary Codexis products and in partnership with our customers.
Many companies have historically used naturally occurring proteins to produce or enhance goods used in everyday life. Despite the growing number of
commercial applications of naturally occurring proteins across many industries, the inherent limitations of naturally-occurring proteins frequently restrict their
commercial use. Through the application of our proprietary CodeEvolver® protein engineering technology platform, we are able to engineer novel proteins to
overcome these restrictions, thereby adding value or opening up new prospects for our potential clients’ products, processes or businesses. We have developed
new proteins that are significantly more stable and/or active in our commercial applications than proteins derived from nature.
We are a pioneer in the harnessing of computational technologies to drive biology advancements. Over the last fifteen years, we have made substantial
investments in the development of our CodeEvolver® protein engineering technology platform, the primary source of our competitive advantage. Our
technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine our large and continuously growing
library of protein variants’ performance attributes. These computational outputs enable increasingly reliable predictions for next generation protein variants to
be engineered, enabling delivery of targeted performance enhancements in a time-efficient manner. In addition to its computational prowess, our
CodeEvolver® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and
genomic sequencing, organic chemistry and process development which are all coordinated to create our novel protein innovations.
We use our CodeEvolver® protein engineering technology platform to engineer custom enzymes. Most of our custom enzymes are intended for use as
biocatalysts or protein catalysts. In simple terms, our protein catalysts can accelerate and/or improve yields of chemical reactions. We use our CodeEvolver®
protein engineering technology platform to develop novel enzymes that enable industrial biocatalytic reactions and fermentations. Our technology platform
has enabled commercially viable products and processes for the manufacture of pharmaceutical intermediates and active ingredients and fine chemicals.
Our approach to develop commercially viable biocatalytic manufacturing processes begins by conceptually designing the most cost-effective and practical
process for a targeted product. We then develop optimized protein catalysts to enable that process design, using our CodeEvolver® protein engineering
platform technology. Engineered protein catalyst candidates - many thousands for each protein engineering project - are then rapidly screened and validated in
high throughput under relevant manufacturing operating conditions. This approach results in an optimized protein catalyst enabling cost-efficient processes
that typically are relatively simple to run in conventional manufacturing equipment. This also allows for the efficient technical transfer of our process to our
manufacturing partners.
The successful embodiment of our CodeEvolver® protein engineering technology platform in commercial manufacturing processes requires well-integrated
expertise in a number of technical disciplines. In addition to those directly involved in practicing our CodeEvolver® protein engineering platform technology,
such as molecular biology, enzymology, microbiology,
36
cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput analytical chemistry, our process development projects also
involve integrated expertise in organic chemistry, chemical process development, chemical engineering, fermentation process development and fermentation
engineering. Our integrated, multi-disciplinary approach to biocatalyst and process development is a critical success factor for our company.
We initially commercialized our CodeEvolver® protein engineering technology platform and products in the pharmaceuticals market, which remains our
primary business focus. Our customers, which include several large global pharmaceutical companies, use our technology, products and services in their
manufacturing processes and process development.
We have also used the technology to develop protein catalysts for use in the fine chemicals market. The fine chemicals market consists of several large market
verticals, including food and food ingredients, animal feed, flavors, fragrances, and agricultural chemicals.
More recently, we are also using the CodeEvolver® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates,
both for our customers and for our own business, most notably our lead program for the potential treatment of PKU in humans. PKU is an inherited metabolic
disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient.
We have also used our technology to develop an enzyme for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and genomic research
applications.
Results of Operations Overview
Revenues were $48.8 million in 2016, an increase of 17% from $41.8 million in 2015. Product sales, which consist primarily of sales of protein catalysts,
pharmaceutical intermediates, and Codex® Biocatalyst Panels and Kits, were $15.3 million in 2016, an increase of 35% compared with $11.4 million in 2015.
The increase was primarily due to higher customer demand in 2016 as compared to 2015.
Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and
optimization and screening fees, totaled $31.3 million in 2016, an increase of 22%, compared with $25.6 million in 2015. The increase was primarily due to
the completion of the second and final milestone in the transfer of our proprietary CodeEvolver® protein engineering platform technology to Merck under the
Merck CodeEvolver® Agreement, which resulted in recognition of an $8.0 million milestone, the achievement of the third and final milestone in the transfer
of our proprietary CodeEvolver® protein engineering platform technology to GSK under the GSK CodeEvolver® Agreement which resulted in revenue
recognition of a $7.5 million milestone payment, and an increase of $4.0 million in revenue recognition from the early completion of the technology transfer
for both Merck and GSK. The revenue increases in 2016 were partially offset by 2015 revenues from a $6.5 million milestone under the GSK
CodeEvolver® Agreement, a $5.0 million milestone under the Merck CodeEvolver® Agreement and a $3.1 million final settlement of a royalty-related
arrangement by a customer.
Revenue sharing arrangement was $2.2 million in 2016, a decrease of 54%, compared with $4.8 million in 2015. The decline resulted from the expiration of
the formulation patent for argatroban in June 2014, allowing for increased generic competition in the subsequent quarters after the expiration of the patent.
Research and development expenses were $22.2 million in 2016, an increase of 8% from $20.7 million in 2015. The increase was primarily due to higher
consulting fees related to the evaluation of potential new drug development targets, higher outside services related to intellectual property, and increased costs
associated with higher headcount.
Selling, general and administrative expenses were $25.4 million in 2016, an increase of 14% compared to $22.3 million in 2015. The increase was primarily
due to higher legal expenses relating to intellectual property, higher consulting fees relating to exploration of new business development opportunities and
increased costs associated with higher headcount.
Net loss was $8.6 million, or a net loss of $0.21 per share, in 2016 compared to a net loss of $7.6 million, or a net loss of $0.19 per share, in 2015. The
increases in net loss and net loss per share are primarily due to higher research and development expense and general and administrative expense as noted
above.
Cash and cash equivalents decreased to $19.2 million as of December 31, 2016 compared to $23.3 million as of December 31, 2015. In addition, net cash
used in operations was $2.7 million in 2016, as compared to net cash used in operations of $0.4 million in 2015.
37
We are actively collaborating with new and existing customers in the pharmaceutical, fine chemicals and other markets and we believe that we can utilize our
products and services, and develop new products and services, to increase our revenue and gross margins in future periods. We believe that, based on our
current level of operations, our existing cash, cash equivalents and marketable securities will provide adequate funds for ongoing operations, planned capital
expenditures and working capital requirements for at least the next 12 months.
GSK Platform Technology Transfer, Collaboration and License Agreement
In July 2014, we entered into the GSK CodeEvolver® Agreement. Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the
CodeEvolver® Platform Technology to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products.
We received a $6.0 million up-front license fee upon execution of the GSK CodeEvolver® Agreement and subsequently a $5.0 million non-creditable, non-
refundable milestone payment upon achievement of the first milestone in 2014. In September 2015, we achieved the second milestone and recognized the
related milestone payment of $6.5 million. In April 2016, we completed the transfer of the CodeEvolver® protein engineering platform technology to GSK
and earned milestone revenue of $7.5 million, for which payment was received in June 2016. In the third quarter of 2016, we earned the first contingent
payment under the agreement related to the development of an enzyme for an already-commercialized GSK product. We also have the potential to receive
additional contingent payments that range from $5.75 million to $38.5 million per project based on GSK’s successful application of the licensed technology.
The up-front license fee of $6.0 million was being recognized ratably over the three-year technology transfer period beginning in July 2014. As the
technology transfer was completed earlier than anticipated, we recognized license fees of $3.0 million and $2.0 million, respectively, in 2016 and 2015, as
research and development revenue. As of December 31, 2015, we had deferred revenue from GSK related to the up-front license of $3.0 million. As of
December 31, 2016, all deferred revenue from GSK has been recognized upon completion of the technology transfer.
See Item 1, “Business-Our Strategy-Licensing Our CodeEvolver® Protein Engineering Technology Platform-GlaxoSmithKline” for a more detailed
description of the GSK CodeEvolver® Agreement.
Merck Platform Technology Transfer and License Agreement
In August 2015, we entered into a CodeEvolver® platform technology transfer and license agreement (the "Merck CodeEvolver® Agreement") with Merck,
which allows Merck to use the CodeEvolver® protein engineering technology platform in the field of human and animal healthcare.
We received a $5.0 million up-front license fee upon execution of the Merck CodeEvolver® Agreement, which was being recognized ratably over the
estimated two-year platform technology transfer period. In September 2015, we achieved the first milestone under the Merck CodeEvolver® Agreement and
earned milestone revenue of $5.0 million. In September 2016, we completed the transfer of the engineering platform technology and earned milestone
revenue of $8.0 million. We received the $8.0 million milestone payment in the fourth quarter of 2016. As the technology transfer was completed earlier than
anticipated, we recognized license fees of $4.0 million and $1.0 million, respectively, in 2016 and 2015, as research and development revenue. As of
December 31, 2015, we had deferred revenue related to the Merck CodeEvolver® Agreement license fees of $4.0 million. As of December 31, 2016, all
deferred revenue from Merck has been recognized upon completion of the technology transfer.
Following the completion of the technology transfer, we may be eligible to receive payments of up to a maximum of $15.0 million for each commercial API
that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver® protein engineering technology platform.
See Item 1, “Business-Our Strategy-Licensing Our CodeEvolver® Protein Engineering Technology Platform-Merck” for a more detailed description of the
Merck CodeEvolver® Agreement.
38
Results of Operations
The following table shows the amounts from our consolidated statements of operations for the periods presented (in thousands):
Revenues:
Product sales
Research and development revenues
Revenue sharing arrangement
Total revenues
Costs and operating expenses:
Cost of product sales
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expense
Loss before income taxes
Benefit from income taxes
Net loss
Revenues
Years Ended December 31,
% of Total Revenues
2016
2015
2014
2016
2015
2014
$
15,321 $
11,376 $
31,316
2,200
48,837
9,753
22,229
25,419
57,401
(8,564)
60
(94)
(8,598)
(40)
25,599
4,829
41,804
6,586
20,673
22,315
49,574
(7,770)
19
(168)
(7,919)
(338)
13,064
14,945
7,298
35,307
9,726
22,755
21,937
54,418
(19,111)
18
(234)
(19,327)
(256)
$
(8,558) $
(7,581) $
(19,071)
31 %
64 %
5 %
100 %
20 %
46 %
52 %
118 %
(18)%
— %
— %
(18)%
— %
(18)%
27 %
61 %
12 %
100 %
16 %
49 %
53 %
118 %
(19)%
— %
— %
(19)%
(1)%
(18)%
37 %
42 %
21 %
100 %
28 %
64 %
62 %
154 %
(54)%
— %
(1)%
(55)%
(1)%
(54)%
Our revenue is comprised of product sales, research and development revenues, and a revenue sharing arrangement.
• Product sales consist of sales of enzymes, chemical intermediates, and Codex® Biocatalyst Panels and Kits.
• Research and development revenues include license, technology access and exclusivity fees, research services fees for full time employee (“FTE”),
milestone payments, royalties, and optimization and screening fees.
• Revenue sharing arrangement is recognized based upon receipt of information regarding the sales of licensed products by Exela.
Years Ended December 31,
2016
2015
Change
(In Thousands)
Product sales
2016
15,321 $
2015
11,376 $
2014
13,064 $
$
Research and development revenues
Revenue sharing arrangement
31,316
2,200
25,599
4,829
14,945
7,298
$
3,945
5,717
(2,629)
%
35 % $
22 %
(54)%
$
(1,688)
10,654
(2,469)
Total revenues
$
48,837 $
41,804 $
35,307 $
7,033
17 % $
6,497
%
(13)%
71 %
(34)%
18 %
Revenues typically fluctuate on a quarterly basis due to the variability in our customers' manufacturing schedules and the timing of our customers' clinical
trials. In addition, we have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the performance and capacity of third party
manufacturers for the commercial scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals businesses.
We accept purchase orders for deliveries covering periods from one day up to approximately one year from the date on which the order is placed. However,
purchase orders can generally be revised or cancelled by the customer without penalty. Considering these industry practices and our experience, we do not
believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future
periods.
39
2016 compared to 2015
Total revenues increased $7.0 million in 2016 to $48.8 million, as compared to 2015. The increase was driven by an increase of $5.7 million in research and
development revenues, plus growth in product sales of $3.9 million, partially offset by a decrease of $2.6 million in revenue sharing arrangement.
Product sales, which consist primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex® Biocatalyst Panels and Kits, were $15.3 million
in 2016, an increase of 35% compared with $11.4 million in 2015. The increase was primarily due to higher customer demand in 2016 as compared to 2015,
in particular higher sales of enzymes for Merck’s manufacture of sitagliptin.
Research and development revenues increased $5.7 million in 2016 to $31.3 million, as compared to 2015. The increase was primarily due to the completion
of the second and final phase in the transfer of our proprietary CodeEvolver® protein engineering platform technology to Merck under the Merck
CodeEvolver® Agreement, which resulted in revenue recognition of an $8.0 million milestone and an increase of $3.0 million in revenue recognition from the
early completion of the technology transfer, and the achievement of the third and final milestone in the transfer of our proprietary CodeEvolver® protein
engineering platform technology to GSK under the GSK CodeEvolver® Agreement which resulted in revenue recognition of a $7.5 million milestone
payment and an increase of $1.0 million in revenue recognition from the early completion of the technology transfer. The revenue increases in 2016 were
partially offset by 2015 revenues from a $6.5 million milestone under the GSK CodeEvolver® Agreement, a $5.0 million milestone under the Merck
CodeEvolver® Agreement and a $3.1 million final settlement of a royalty-related arrangement by a customer.
Revenue sharing arrangement decreased $2.6 million in 2016 to $2.2 million, as compared to 2015. The decrease is the result of the expiration of the
formulation patent for argatroban in June 2014, allowing for generic competition in the subsequent quarters. We expect that revenue sharing arrangement may
continue to decline in future periods.
2015 compared to 2014
Total revenue increased $6.5 million in 2015 to $41.8 million, as compared to 2014. The increase was driven by an increase in research and development
revenues, partially offset by decreases in product sales and revenue sharing arrangement with Exela.
Product sales decreased $1.7 million in 2015 to $11.4 million, as compared to 2014. The decreases were primarily due to the timing of customer demand
which is dependent upon the timing of their clinical trials and inventory level in 2015 as compared to 2014.
Research and development revenues increased $10.7 million in 2015 to $25.6 million, as compared to 2014. The increase was primarily due to the
achievement of a $5.0 million milestone under the Merck CodeEvolver® Agreement, $1.5 million increase in milestone related revenue recognized under the
GSK CodeEvolver® Agreement, $3.1 million final settlement of a royalty related arrangement by a customer, and $1.5 million in research and development
revenues relating to the project we initiated with the leading biopharmaceutical company in 2015.
Revenue sharing arrangement decreased $2.5 million in 2015 to $4.8 million, as compared to 2014. The decrease was the result of the expiration of the
formulation patent for argatroban in June 2014, allowing for generic competition in the subsequent quarters.
Cost and Operating Expenses
(In Thousands)
Cost of product sales
Research and development
Selling, general and administrative
Total operating expenses
Cost of Product Sales
Change
Years Ended December 31,
2016
2015
2016
2015
2014
$
$
9,753 $
6,586 $
9,726 $
22,229
25,419
20,673
22,315
22,755
21,937
57,401 $
49,574 $
54,418 $
$
3,167
1,556
3,104
7,827
%
48% $
8%
14%
$
(3,140)
(2,082)
378
16% $
(4,844)
%
(32)%
(9)%
2 %
(9)%
Cost of product sales comprises both internal and third-party fixed and variable costs, including amortization of purchased technology, materials and supplies,
labor, facilities and other overhead costs associated with our product sales.
40
2016 compared to 2015
Cost of product sales increased $3.2 million in 2016 to $9.8 million, as compared to 2015. The increase was primarily due to higher product sales. Product
gross margin decreased to 36% in 2016 compared to 42% in 2015 due to an increase in lower margin sales of enzymes to Merck for sitagliptin manufacturing
and a decrease in higher margin sales to a customer in the fine chemicals market.
2015 compared to 2014
Cost of product sales decreased $3.1 million in 2015 to $6.6 million, as compared to 2014. The decrease was primarily due to a favorable product sales mix
resulting in a product gross margin improvement from 26% in 2014 to 42% in 2015.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities.
These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based
compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, depreciation of facilities and laboratory equipment and
amortization of acquired technologies, and (iii) external costs. Research and development expenses are expensed when incurred.
2016 compared to 2015
Research and development expenses increased $1.6 million in 2016 to $22.2 million, as compared to 2015. The increase was primarily due to higher
consulting fees related to the evaluation of potential new drug development targets, higher outside services related to enzyme biotherapeutic product
development projects, and increased costs associated with higher headcount, which were partially offset by lower amortization of intangibles.
2015 compared to 2014
Research and development expenses decreased $2.1 million in 2015 to $20.7 million, as compared to 2014. Research and development expenses in 2014
included $2.7 million of non-recurring non-cash impairment charges, of which $1.8 million was related to the write down of assets associated with our
CodeXol® detergent alcohols program and the remainder related to the changes in fair value of assets held for sale. In addition, research and development
expenses in 2014 included a $0.8 million gain from the sale of our former Hungarian subsidiary. Excluding the aforementioned non-recurring charges,
research and development expenses decreased $0.3 million in 2015 compared to 2014. The decrease was primarily driven by a decrease in depreciation
expenses resulting from the aforementioned impairment charges and the sale of our Hungarian subsidiary in 2014, partially offset by a $0.6 million increase
in employee-related expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of employee-related costs, which include salaries and other personnel-related expenses (including stock-
based compensation), hiring and training costs, consulting and outside services expenses (including audit and legal counsel related costs), marketing costs,
building lease costs, and depreciation and amortization expenses.
2016 compared to 2015
Selling, general and administrative expenses were $25.4 million in 2016 compared to $22.3 million 2015, an increase of $3.1 million or 14%. The increase
was primarily due to higher legal expenses relating to intellectual property and higher consulting fees relating to exploration of new business development
opportunities, and increased costs associated with higher headcount, partially offset by lower facilities costs due to sublease income received in 2016.
2015 compared to 2014
Selling, general and administrative expenses were $22.3 million in 2015 compared to $21.9 million in 2014, an increase of $0.4 million or 2%. The increase
was primarily due to increases in personnel-related expenses, including an increase in stock-based compensation, partially offset by decreases in legal and
contractor expenses.
41
Other Income (Expense), net
(In Thousands)
Interest income
Other expense
Total other income (expense), net
Interest Income
Years Ended December 31,
2016
2015
2016
2015
2014
$
%
$
%
$
$
60 $
(94)
(34) $
19 $
18 $
(168)
(234)
(149) $
(216) $
41
(74)
(115)
216 % $
(44)%
(77)% $
1
(66)
(67)
6 %
(28)%
(31)%
Change
Interest income increased by $41 thousand in 2016 compared to 2015, driven primarily by higher interest rates on our cash and short-term investments
portfolio, and was relatively flat in 2015 compared to 2014.
Other Expense
Other expense decreased $74 thousand in 2016 compared to 2015 and decreased $66 thousand in 2015 compared to 2014. The changes were primarily due to
fluctuations in foreign currency.
Benefit from Income Taxes
Years Ended December 31,
2016
2015
Change
(In Thousands)
Benefit from income taxes
2016
2015
2014
$
(40) $
(338) $
(256) $
$
(298)
%
$
%
(88)% $
82
32%
The benefit from income taxes for 2016 is primarily related to a reduction in the deferred tax liability for accrued future withholding taxes on dividends. The
benefit from income taxes for 2015 is primarily related to unrealized gains from changes in the fair value of our investment in CO2 Solutions. The benefit
from income taxes for 2014 primarily consisted of income tax benefit attributable to foreign operations offset by foreign country taxes, and accrued future
withholding taxes on dividends. In 2014, we recognized approximately $0.4 million of previously unrealized tax benefits related to our operations in
Singapore. We continue to maintain a full valuation allowance against our net deferred tax assets as we believe that it is more likely than not that the majority
of our deferred tax assets will not be realized.
Liquidity and Capital Resources
Liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures. Our sources of cash include operations and, to a
lesser extent, stock option exercises. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet
our working capital needs. The majority of our cash and investments are held in U.S. banks, and our foreign subsidiaries maintain a limited amount of cash in
their local banks to cover their short-term operating expenses.
The following summarizes our cash and cash equivalents balance and working capital as of December 31, 2016, 2015 and 2014:
(In Thousands)
Cash and cash equivalents
Working capital
December 31,
2016
2015
2014
$
19,240 $
14,860
23,273 $
17,998
26,487
19,272
In addition to our existing cash and cash equivalents, we are eligible to earn milestone and other contingent payments for the achievement of defined
collaboration objectives and certain royalty payments under our collaboration agreements. Our ability to earn these milestone and contingent payments and
the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at
this time. In the third quarter of 2016, we completed the final phase in the transfer of CodeEvolver® technology to Merck under the Merck CodeEvolver®
Agreement. Following the completion of the technology transfer to Merck, we are now eligible to receive payments of up to $15.0 million for each
commercial API that is manufactured by Merck using one or more novel enzymes developed by Merck using
42
the CodeEvolver® technology. In addition, depending upon GSK's successful application of the licensed technology, we have the potential to receive
additional contingent payments that range from $5.75 million to $38.5 million per project.
We are actively collaborating with new and existing customers in the pharmaceutical and food industries. We believe that we can utilize our current products
and services, and develop new products and services, to increase our revenue and gross margins in future periods.
We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to
our protein engineering technology platform, and expand our business development and collaboration with new customers. Our cash flows from operations
will continue to be affected principally by sales and gross margins from licensing our technology to major pharmaceutical companies, product sales and
collaborative research and development services provided to customers, as well as our headcount costs, primarily in research and development. Our primary
source of cash flows from operating activities is cash receipts from licensing our technology to major pharmaceutical companies, and our customers for
purchases of products and/or collaborative research and development services. Our largest uses of cash from operating activities are for employee-related
expenditures, rent payments, inventory purchases to support our product sales and non-payroll research and development costs.
We believe that, based on our current level of operations, our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned
capital expenditures and working capital requirements for at least the next 12 months. However, we may need additional capital if our current plans and
assumptions change. Our need for additional capital will depend on many factors, including the financial success of our business, the spending required to
develop and commercialize new and existing products, the effect of any acquisitions of other businesses, technologies or facilities that we may make or
develop in the future, our spending on new market opportunities, and the potential costs for the filing, prosecution, enforcement and defense of patent claims,
if necessary.
If our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain collaborations with partners that are able
or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the
development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. In addition, we may
choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future
operating plans. We may seek to obtain such additional funding through equity offerings, debt financings, credit facilities and/or strategic collaborations. If
future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we raise debt financing or enter into credit
facilities, we may be subject to restrictive covenants that limit our ability to conduct our business. Strategic collaborations may also place restrictions on our
business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to
generate sufficient revenue to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic
opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be
forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease
operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms
that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.
On December 9, 2016, we filed a registration statement on Form S-3 with the SEC, under which we may sell an aggregate of up to $80.0 million of common
stock, preferred stock, debt securities, warrants, purchase contract and/or units. The SEC declared the registration statement effective on January 10, 2017.
Cash Flows
The following is a summary of cash flows for the years ended December 31, 2016, 2015 and 2014:
(In Thousands)
Net cash (used in) provided by operating activities
Net cash (used in) provided by investing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Years Ended December 31,
2016
2015
2014
$
$
(2,701) $
(842)
(490)
(433) $
(1,257)
(1,524)
(4,033) $
(3,214) $
321
4,647
(611)
4,357
43
Cash Flows from Operating Activities
Cash used in operating activities was $2.7 million in 2016, which resulted from a net loss of $8.6 million adjusted for non-cash depreciation and amortization
of $4.5 million and stock-based compensation of $5.7 million, as well as changes in operating assets and liabilities. The net change in operating assets and
liabilities included decreases in deferred revenue of $6.4 million primarily related to revenue recognition on the achievement of milestones from collaborative
arrangements with Merck and GSK, an increase of $0.8 million in restricted cash reflecting the funding of a reserve to satisfy the funding obligations of our
India subsidiary, partially offset by a decrease in accounts receivable of $1.4 million, and increases in accrued compensation of $1.0 million primarily due to
higher payroll costs and higher accounts payable of $0.9 million due to the timing of payment of invoices.
Cash used in operating activities was $0.4 million in 2015, which resulted from a net loss of $7.6 million adjusted for non-cash depreciation and amortization
of $5.4 million and stock-based compensation of $5.1 million, as well as changes in operating assets and liabilities. The net change in operating assets and
liabilities included increases in accounts receivable of $3.5 million due primarily to an accrual of a settlement payment from a customer relating to past-due
payments and a buy-out of future payments, increases in deferred revenue of $1.9 million due mainly to the CodeEvolver® technology transfer to Merck, and
decreases in accounts payable of $1.3 million due to the timing of payment of invoices.
Cash Flows from Investing Activities
Cash used in investing activities was $0.8 million in 2016 primarily due to the purchase of property and equipment. We expect capital spending for 2017 to be
approximately $1.0 million primarily for replacement and upgrades of lab equipment.
Cash used in investing activities was $1.3 million in 2015, primarily due to the purchase of property and equipment.
Cash provided by investing activities was $4.6 million in 2014, which mainly resulted from the maturities of our marketable securities of $3.0 million and
proceeds from the sale of our Hungarian subsidiary of $1.5 million.
Cash Flows from Financing Activities
Cash used in financing activities was $0.5 million in 2016, which was the result of the payment of taxes related to the net share settlement of equity awards,
partially offset by the proceeds from the exercises of employee stock options.
Cash used in financing activities was $1.5 million in 2015, which was the result of the payment of taxes related to the net share settlement of equity awards,
partially offset by the proceeds from the exercises of employee stock options.
Cash used in financing activities was $0.6 million in 2014, which was the result of the payment of taxes related to the net share settlement of equity awards,
partially offset by the proceeds from the exercises of employee stock options.
Contractual Obligations and Commitments
The following table summarizes our significant contractual obligations at December 31, 2016 (in thousands):
Contractual Obligations
Operating leases obligations (1)
Purchase obligations (2)
Total (3)
Total
Less than 1
year
1 to 3 years
4 to 5 years
$
$
10,785 $
3,077 $
6,465 $
1,202 $
1,800
—
—
—
12,585 $
3,077 $
6,465 $
1,202 $
More than 5
years
41
1,800
1,841
(1) Represents future minimum lease payments under non-cancelable operating leases in effect as of December 31, 2016 for our facilities in Redwood City,
California. The minimum lease payments above do not include common area maintenance charges or real estate taxes. In addition, amounts have not
been reduced by future minimum sublease rentals of $1.8 million to be received under non-cancellable subleases.
(2) Represents a purchase commitment from a manufacture and supply agreement that resulted in a total commitment up to $1.8 million, with payment to be
made in December 2022 or after.
(3) Excludes $0.7 million of uncertain tax liabilities for which we cannot make a reasonably reliable estimate of the period of cash settlement.
44
Off-Balance Sheet Arrangements
As of December 31, 2016, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The
consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our
accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to make
estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and
judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and
judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those
reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated
financial statements are described below.
Revenue Recognition
We recognize revenue from the sale of our products, collaborative research and development agreements and revenue sharing arrangements. Revenue is
recognized when the related costs are incurred and the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue
recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria of revenue recognition are
met.
We account for revenues from multiple element arrangements, such as license and platform technology transfer agreements in which a licensee may purchase
several deliverables, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-25,
“Multiple Element Arrangements.” For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the
arrangement and each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following
criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of
return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Revenue
allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each element.
Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a
collaborative arrangement, they are recorded as deferred revenue and recognized as revenue ratably over the term of our estimated performance period under
the agreement. We determine the estimated performance periods, and they are periodically reviewed based on the progress of the related program. The effect
of any change made to an estimated performance period and, therefore, to revenue recognized, would occur on a prospective basis in the period that the
change was made.
Product Sales
Product sales consist of sales of biocatalyst enzymes, chemical intermediates, and Codex® Biocatalyst Panels and Kits. Product sales are recognized once
passage of title and risk of loss has occurred and contractually specified acceptance criteria, if any, have been met, provided all other revenue recognition
criteria have also been met. Shipping and handling costs charged to customers are recorded as revenue.
Research and Development Revenues
Collaborative research and development agreements typically provide us with multiple revenue streams, including: research services fees for FTE research
services, up-front license fees, technology access, contingent payments upon achievement of contractual criteria, and royalty fees based on the licensee’s
product sales or cost savings achieved by our customers.
45
We perform collaborative research and development activities as specified in each respective customer agreement. Payments for services received are not
refundable. Certain research agreements are based on a contractual reimbursement rate per FTE working on the project. We recognize revenue from research
services as those services are performed over the contractual performance periods. When up-front payments are combined with FTE services in a single unit
of accounting, we recognize the up-front payments using the proportionate performance method of revenue recognition based upon the actual amount of
research labor hours incurred relative to the amount of the total expected labor hours to be incurred by us, up to the amount of cash received. In cases where
the planned levels of research services fluctuate substantially over the research term, we are required to make estimates of the total hours required to perform
our obligations.
We recognize research and development revenues from non-refundable, up-front license fees or technology access payments that are not dependent on any
future performance by us when such amounts are earned. If we have continuing obligations to perform under the arrangement, such fees are recorded as
deferred revenues and recognized over the estimated period of continuing performance. Estimated performance periods are periodically reviewed based on
the progress of the related program. The effect of any change made to an estimated performance period, and therefore to revenue recognized, would occur on
a prospective basis in the period that the change was made.
A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A
milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting
from our performance, (ii) for which there is, as of the date the arrangement is entered into, substantive uncertainty that the event will be achieved and (iii)
results in additional payments being due to us. Milestones are considered substantive when the consideration earned from the achievement of the milestone (i)
is commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome
resulting from its performance, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverable and payment terms in the arrangement.
We recognize revenue from other contingent payments based on passage of time or when earned as the result of a customer’s performance in accordance with
the contractual terms and when such payments can be reasonably estimated and collectability of such payments is reasonably assured.
We recognize revenue from royalties based on licensees’ sales of our products or products using our technologies. Royalties are recognized as earned in
accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. For the majority of our
royalty revenue, estimates are made using notification of the sale of licensed products from the licensees.
Revenue Sharing Arrangement
We recognize revenues from a revenue sharing arrangement based upon sales of licensed products by our revenue sharing partner Exela (see Note 14 -
Related Party Transactions to our consolidated financial statements). We recognize revenues net of product and selling costs upon notification from our
revenue sharing partner of our portion of net profit based on the contractual percentage from the sale of licensed product.
Allowances
Allowances against receivable balances primarily relate to product returns and prompt pay sales discounts, and are recorded in the same period that the related
revenue is recognized, resulting in a reduction in product sales and the reporting of accounts receivable net of allowances.
We estimate an allowance for doubtful accounts through specific identification of potentially uncollectible accounts receivable based on an analysis of our
accounts receivable aging. Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have
been exhausted. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our
consolidated financial position, results of operations, and cash flows.
Stock-Based Compensation
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans. The Black-Scholes-
Merton option pricing model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We have, due
to insufficient historical data, used the “simplified method,” as described in Staff Accounting Bulletin No. 107, “Share-Based Payment,” to determine the
expected term of all stock options granted from the inception of our equity plans through the first half of 2015. Beginning in the third quarter of 2015, we
believe
46
we have sufficient historical data to calculate expected terms for stock options granted. Thus, the expected term was based on historical exercise behavior on
similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. We used historical volatility to
estimate expected stock price volatility. The risk-free rate assumption was based on United States Treasury instruments whose terms were consistent with the
expected term of the stock options. The expected dividend assumption was based on our history and expectation of dividend payouts.
Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) and performance-contingent restricted stock units (“PSUs”) were measured based on the
fair market values of the underlying stock on the dates of grant. PSUs awarded may be conditional upon the attainment of one or more performance objectives
over a specified period. At the end of the performance period, if the goals are attained, the awards are granted.
Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The estimated annual forfeiture rates for stock options,
RSUs, PSUs, and RSAs are based on our historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs is expensed on a straight-line basis over the vesting term of the grant and the estimated fair value
of PSUs is expensed using an accelerated method over the term of the award once management has determined that it is probable that performance objective
will be achieved. Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is probable that
the shares awarded are expected to vest. Management assesses the probability of the performance milestones being met on a continuous basis.
We have not recognized, and do not expect to recognize in the near future, any excess income tax benefits related to employee stock-based compensation
expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to net operating loss carryforwards.
Impairment of Long-Lived Assets
Our intangible assets are finite-lived and consist of developed core technology and the intellectual property (“IP”) rights associated with the acquisition of
Maxygen directed evolution technology in 2010. Intangible assets were recorded at their fair values at the date we acquired the assets and, for those assets
having finite useful lives, are amortized using the straight-line method over their estimated useful lives. Our long-lived assets include property and equipment,
and other non-current assets.
We determined that we have a single entity wide asset group (”Asset Group”). The directed evolution technology patent portfolio acquired from Maxygen
(“Core IP”) is the most significant component of the Asset Group since it is the base technology for all aspects of our research and development activities, and
represents the basis for all of our identifiable cash flow generating capacity. Consequently, we do not believe that identification of independent cash flows
associated with our long-lived assets is currently possible at any lower level than the Asset Group.
The Core IP became fully amortized in 2016 and there are no finite-lived intangible assets with a net carrying value on our consolidated balance sheet as of
December 31, 2016.
The carrying value of our long-lived assets in the Asset Group may not be recoverable based upon the existence of one or more indicators of impairment
which could include: a significant decrease in the market price of our common stock; current period cash flow losses or operating losses combined with a
history of losses or a forecast of continuing losses associated with the use of the assets; slower growth rates in our industry; significant adverse changes in the
business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the
assets; loss of significant customers or partners; or the current expectation that the assets will more likely than not be sold or disposed of significantly before
the end of their estimated useful life.
We evaluate recoverability of intangible assets based on the sum of the undiscounted cash flows expected to result from the use, and the eventual disposal of,
the Asset Group. We make estimates and judgments about the future undiscounted cash flows over the remaining useful life of the Asset Group. Our
anticipated future cash flows include our estimates of existing or in process product sales, production and operating costs, future capital expenditures,
working capital needs, and assumptions regarding the ultimate sale of the Asset Group at the end of the life of the primary asset. The useful life of the Asset
Group was based on the estimated useful life of the Core IP, the primary asset at the time of acquisition. There has been no change in the estimated useful life
of the Asset Group. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant judgment involved in
determining the cash flows attributable to the Asset Group over its estimated remaining useful life.
47
As a result of our decision to terminate the detergent alcohol program during 2014, we performed an analysis to estimate cash flows from equipment used in
potential strategic transactions with respect to our CodeXyme® cellulase enzymes and CodeXol® detergent alcohol programs. Based on this analysis we
determined there were no future cash flows and recognized a $1.8 million impairment charge in 2014, which is reflected in research and development
expense.
As of December 31, 2016, there were no events or changes in circumstances which indicated that the carrying amount of our Asset Group might not be
recoverable. We concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed. No impairment charges for long-
lived assets were recorded during the year ended December 31, 2016.
Valuation of Goodwill
We determined that we operate in one segment and reporting unit under the criteria in ASC 280, “Segment Reporting.” Accordingly, our review of goodwill
impairment indicators is performed at the consolidated level. We review goodwill impairment annually at each fiscal year end and whenever events or
changes in circumstances indicate the carrying value of goodwill may not be recoverable.
The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares
the fair value of the reporting unit to carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired, and the second step of the impairment test is not required.
We use our market capitalization as an indicator of fair value. We believe that since our reporting unit is publicly traded, the ability of a controlling
stockholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of our reporting unit as a whole to exceed
its market capitalization. Therefore, we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of
our common stock, but also can consider the impact of a control premium in measuring the fair value of our reporting unit.
If we were to use an income approach, it would establish a fair value by estimating the present value of our projected future cash flows expected to be
generated from our business. The discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of
ownership and the associated risks of realizing the stream of projected future cash flows. Our discounted cash flow methodology would consider projections
of financial performance for a period of several years combined with an estimated residual value. The most significant assumptions we would use in a
discounted cash flow methodology are the discount rate, the residual value and expected future revenue, gross margins and operating costs, along with
considering any implied control premium.
Should our market capitalization be less than the total stockholders’ equity as of our annual test date or as of any interim impairment testing date, we would
also consider market comparables, recent trends in our stock price over a reasonable period and, if appropriate, use an income approach to determine whether
the fair value of its reporting unit is greater than the carrying amount.
The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount
of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Implied fair value is the
excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. We base our fair value estimates on assumptions we
believe to be reasonable. Actual future results may differ from those estimates.
Goodwill amounts have been recorded as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair
value, by applying the acquisition method. Goodwill is not subject to amortization. Goodwill was tested for impairment at fiscal year end of 2016 and
concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed. During 2016, 2015 and 2014, we did not record
impairment charges related to goodwill.
Income Taxes
We use the liability method of accounting for income taxes, whereby deferred tax asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount that will more likely than not be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and
48
liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and financial statement purposes. Significant changes to
these estimates may result in an increase or decrease to our tax provision in a subsequent period.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be
realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future.
We have recorded a valuation allowance against these deferred tax assets in jurisdictions where ultimate realization of deferred tax assets is more likely than
not to occur. As of December 31, 2016, we maintain a full valuation allowance in all jurisdictions against the net deferred tax assets as we believe that it is
more likely than not that the majority of deferred tax assets will not be realized.
Effective December 31, 2015, we elected to early adopt Accounting Standards Update ("ASU") 2015-17 “Income Taxes (Topic 740), Balance Sheet
Classification of Deferred Taxes” on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax asset to the net
non-current deferred tax asset in our consolidated balance sheets as of December 31, 2015. No prior periods were retrospectively adjusted.
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the
actual amounts differ from our estimates, the amount of our valuation allowance may be materially impacted. Any adjustment to the deferred tax asset
valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.
We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We consider
many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate
actual outcomes.
The Tax Reform Act of 1986 and similar state provisions limit the use of net operating loss carryforwards in certain situations where equity transactions result
in a change of ownership as defined by Internal Revenue Code Section 382. In the event we should experience an ownership change, as defined, utilization of
our federal and state net operating loss carryforwards could be limited.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2 to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form
10-K.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $19.2 million at December 31, 2016. These amounts were invested primarily in money market funds
and are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have material exposure
to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest
rates fell by 10% in 2016, our results of operations and cash flows would not be materially affected.
Foreign Currency Risk
We have sales activities outside the United States with foreign currency denominated assets and liabilities, primarily in Euro and Indian rupee. Our results of
operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the United States dollar declines in
value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into United States
dollars. Although substantially all of our sales are denominated in United States dollars, future fluctuations in the value of the United States dollar may affect
the price competitiveness of our products outside the United States. The effect of a 10% unfavorable change in exchange rates on foreign denominated
receivables and cash as of December 31, 2016 would have had foreign exchange losses of approximately $0.1 million recognized as a component of other
expense in our consolidated statement of operations. We did not engage in hedging transactions in 2016, 2015 and 2014.
Equity Price Risk
As described further in Note 5 to the Consolidated Financial Statements, we have an investment in common shares of CO2 Solutions Inc., a company based in
Quebec, Canada (“CO2 Solutions”), whose shares are publicly traded in Canada on the TSX Venture Exchange. As of December 31, 2016, the fair value of
our investment in CO2 Solutions’ common stock was $1.1 million with an unrealized gain of $0.6 million.
This investment is exposed to fluctuations in both the market price of CO2 Solutions’ common shares and changes in the exchange rates between the United
States dollar and the Canadian dollar. The effect of a 10% adverse change in the market price of CO2 Solutions’ common shares as of December 31, 2016
would have been an unrealized loss of approximately $0.1 million, recognized as a component of our consolidated statement of comprehensive loss. The
effect of a 10% unfavorable change in the exchange rates between the United States dollar and the Canadian dollar as of December 31, 2016 would have been
an unrealized loss of approximately $0.1 million, recognized as a component of our consolidated statements of comprehensive loss.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Codexis, Inc.
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
51
52
54
55
56
57
58
59
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Codexis, Inc.
Redwood City, California
We have audited the accompanying consolidated balance sheets of Codexis, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of
operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Codexis, Inc. at
December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Codexis, Inc.’s internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 9, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, California
March 9, 2017
52
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Board of Directors and Stockholders
Codexis, Inc.
Redwood City, California
We have audited Codexis, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Codexis, Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Codexis, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Codexis, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2016 and our report dated March 9, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
San Jose, California
March 9, 2017
53
Codexis, Inc.
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $421 at December 31, 2016 and 2015
Inventories
Prepaid expenses and other assets, current
Total current assets
Restricted cash
Marketable securities
Property and equipment, net
Intangible assets, net
Goodwill
Other assets, non-current
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued compensation
Other accrued liabilities
Deferred revenues
Total current liabilities
Deferred revenues, net of current portion
Lease incentive obligation, net of current portion
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000 shares authorized, none issued and outstanding
Common stock, $0.0001 par value per share; 100,000 shares authorized; 41,255 and 40,343 shares issued and
outstanding at December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Accompanying Notes to Consolidated Financial Statements
54
$
$
December 31,
2016
2015
$
19,240 $
5,924
825
1,238
27,227
1,624
1,142
2,155
—
3,241
259
23,273
7,329
992
1,245
32,839
787
1,549
3,109
2,812
3,241
310
35,648 $
44,647
4,232 $
4,314
2,111
1,710
12,367
1,066
885
2,231
16,549
—
4
311,164
—
(292,069)
19,099
3,399
3,331
2,013
6,098
14,841
3,120
1,310
2,497
21,768
—
4
305,981
405
(283,511)
22,879
44,647
$
35,648 $
Codexis, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Revenues:
Product sales
Research and development revenues
Revenue sharing arrangement
Total revenues
Costs and operating expenses:
Cost of product sales
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expense
Loss before income taxes
Benefit from income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common shares used in computing net loss per share, basic and diluted
Years Ended December 31,
2016
2015
2014
$
15,321 $
11,376 $
31,316
2,200
48,837
9,753
22,229
25,419
57,401
(8,564)
60
(94)
(8,598)
(40)
25,599
4,829
41,804
6,586
20,673
22,315
49,574
(7,770)
19
(168)
(7,919)
(338)
$
$
(8,558) $
(7,581) $
(0.21) $
40,629
(0.19) $
39,438
13,064
14,945
7,298
35,307
9,726
22,755
21,937
54,418
(19,111)
18
(234)
(19,327)
(256)
(19,071)
(0.50)
38,209
See Accompanying Notes to Consolidated Financial Statements
55
Codexis, Inc.
Consolidated Statements of Comprehensive Loss
(In Thousands)
Net loss
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax (1)
Other comprehensive income (loss)
Total comprehensive loss
Years Ended December 31,
2016
2015
2014
(8,558) $
(7,581) $
(19,071)
(405)
(405)
547
547
(110)
(110)
(8,963) $
(7,034) $
(19,181)
$
$
(1) Net of benefit from income taxes of $0, $314, and $0 in 2016, 2015 and 2014, respectively.
See Accompanying Notes to Consolidated Financial Statements
56
December 31, 2013
Exercise of stock options
Cancellation of shares
Release of stock awards
Employee stock-based compensation
Non-employee stock-based compensation
Total comprehensive loss
December 31, 2014
Exercise of stock options
Cancellation of shares
Release of stock awards
Employee stock-based compensation
Non-employee stock-based compensation
Total comprehensive loss
December 31, 2015
Exercise of stock options
Cancellation of shares
Release of stock awards
Employee stock-based compensation
Total comprehensive loss
December 31, 2016
Codexis, Inc.
Consolidated Statements of Stockholders’ Equity
(In Thousands)
Common Stock
Shares
38,351 $
Amount
4 $
Additional
Paid-in
Capital
298,370 $
Accumulated
Other
Comprehensive
Income (Loss)
(32) $
Accumulated
Deficit
(256,859) $
Total
Stockholders’
Equity
41,483
146
(456)
1,522
—
—
—
39,563
172
(444)
1,052
—
—
—
40,343
398
(397)
911
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
4
—
—
—
—
—
195
(806)
—
4,608
12
—
302,379
289
(1,813)
—
5,122
4
—
305,981
1,034
(1,524)
—
5,673
—
—
—
—
—
—
(110)
(142)
—
—
—
—
—
547
405
—
—
—
—
—
—
—
—
—
195
(806)
—
4,608
12
(19,071)
(19,181)
(275,930)
—
—
—
—
—
(7,581)
(283,511)
—
—
—
—
26,311
289
(1,813)
—
5,122
4
(7,034)
22,879
1,034
(1,524)
—
5,673
(8,963)
19,099
(405)
(8,558)
41,255 $
4 $
311,164 $
— $
(292,069) $
See Accompanying Notes to Consolidated Financial Statements
57
Codexis, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Years Ended December 31,
2016
2015
2014
$
(8,558)
$
(7,581) $
(19,071)
Amortization of intangible assets
Depreciation and amortization of property and equipment
Stock-based compensation
Accretion of premium on marketable securities
Loss (gain) on disposal of property and equipment
Impairment of property and equipment
Gain on sale of Hungarian subsidiary
Loss on disposal and exchange of assets held for sale, net
Change in fair value of assets held for sale
Income tax benefit related to marketable securities
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Restricted cash
Other assets
Accounts payable
Accrued compensation
Other accrued liabilities
Deferred revenues
Net cash (used in) provided by operating activities
Investing activities:
Purchase of property and equipment
Proceeds from disposal of property and equipment
Proceeds from sale of Hungarian subsidiary
Proceeds from sale of assets held for sale
Proceeds from sale of marketable securities
Change in restricted cash
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from exercises of stock options
Proceeds from issuance of common stock, net of issuance costs
Taxes paid related to net share settlement of equity awards
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Supplemental cash flow disclosures:
Cash paid for income taxes
Equipment in property and equipment transferred from assets held for sale
2,812
1,734
5,673
—
(42)
—
—
—
—
—
1,405
167
7
(841)
52
942
983
(593)
(6,442)
(2,701)
(888)
42
—
—
—
4
(842)
1,034
—
(1,524)
(490)
(4,033)
23,273
19,240
$
$
5
— $
3,374
2,035
5,126
—
32
—
—
—
—
(314)
(3,459)
403
10
—
(16)
(1,274)
385
(1,062)
1,908
(433)
(1,199)
18
—
—
—
(76)
(1,257)
289
—
(1,813)
(1,524)
(3,214)
26,487
23,273 $
8 $
— $
3,374
3,311
4,620
2
24
1,841
(760)
87
698
—
1,587
92
(339)
—
(78)
713
(530)
555
4,195
321
(302)
167
1,500
282
3,000
—
4,647
195
9
(815)
(611)
4,357
22,130
26,487
15
(333)
$
$
$
See Accompanying Notes to Consolidated Financial Statements
58
Codexis, Inc.
Notes to Consolidated Financial Statements
Note 1. Description of Business
In these notes to the consolidated financial statements, the “Company,” “we,” “us,’” and “our” refers to Codexis, Inc. and its subsidiaries on a consolidated
basis.
We discover, develop and sell proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast untapped source of value-
creating materials, and we are using our proven technologies, which have been continuously improved over our fifteen year history, to commercialize an
increasing number of novel proteins, both as proprietary Codexis products and in partnership with our customers.
Many companies have historically used naturally occurring proteins to produce or enhance goods used in everyday life. Despite the growing number of
commercial applications of naturally occurring proteins across many industries, the inherent limitations of naturally-occurring proteins frequently restrict their
commercial use. Through the application of our proprietary CodeEvolver® protein engineering technology platform, we are able to engineer novel proteins to
overcome these restrictions, thereby adding value or opening up new prospects for our potential clients’ products, processes or businesses. We have developed
new proteins that are significantly more stable and/or active in our commercial applications than proteins derived from nature.
We are a pioneer in the harnessing of computational technologies to drive biology advancements. Over the last fifteen years, we have made substantial
investments in the development of our CodeEvolver® protein engineering technology platform, the primary source of our competitive advantage. Our
technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine our large and continuously growing
library of protein variants’ performance attributes. These computational outputs enable increasingly reliable predictions for next generation protein variants to
be engineered, enabling delivery of targeted performance enhancements in a time-efficient manner. In addition to its computational prowess, our
CodeEvolver® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and
genomic sequencing, organic chemistry and process development which are all coordinated to create our novel protein innovations.
We use our CodeEvolver® protein engineering technology platform to engineer custom enzymes. Most of our custom enzymes are intended for use as
biocatalysts or protein catalysts. In simple terms, our protein catalysts can accelerate and/or improve yields of chemical reactions. We use our CodeEvolver®
protein engineering technology platform to develop novel enzymes that enable industrial biocatalytic reactions and fermentations. Our technology platform
has enabled commercially viable products and processes for the manufacture of pharmaceutical intermediates and active ingredients and fine chemicals.
Our approach to develop commercially viable biocatalytic manufacturing processes begins by conceptually designing the most cost-effective and practical
process for a targeted product. We then develop optimized protein catalysts to enable that process design, using our CodeEvolver® protein engineering
platform technology. Engineered protein catalyst candidates - many thousands for each protein engineering project - are then rapidly screened and validated in
high throughput under relevant manufacturing operating conditions. This approach results in an optimized protein catalyst enabling cost-efficient processes
that typically are relatively simple to run in conventional manufacturing equipment. This also allows for the efficient technical transfer of our process to our
manufacturing partners.
The successful embodiment of our CodeEvolver® protein engineering technology platform in commercial manufacturing processes requires well-integrated
expertise in a number of technical disciplines. In addition to those directly involved in practicing our CodeEvolver® protein engineering platform technology,
such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput
analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical
engineering, fermentation process development and fermentation engineering. Our integrated, multi-disciplinary approach to biocatalyst and process
development is a critical success factor for our company.
We initially commercialized our CodeEvolver® protein engineering technology platform and products in the pharmaceuticals market, which remains our
primary business focus. Our customers, which include several large global pharmaceutical companies, use our technology, products and services in their
manufacturing processes and process development.
We have also used the technology to develop protein catalysts for use in the fine chemicals market. The fine chemicals market consists of several large market
verticals, including food and food ingredients, animal feed, flavors, fragrances, and agricultural chemicals.
59
More recently, we are also using the CodeEvolver® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates,
both for our customers and for our own business, most notably our lead program for the potential treatment of PKU in humans. PKU is an inherited metabolic
disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient.
We have also used our technology to develop an enzyme for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and genomic research
applications.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Codexis, Inc. and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. We regularly assess these estimates which primarily affect revenue recognition, accounts receivable, inventories, the
valuation of marketable securities, assets held for sale, intangible assets, goodwill arising out of business acquisitions, accrued liabilities, stock awards and the
valuation allowances associated with deferred tax assets. Actual results could differ from those estimates and such differences may be material to the
consolidated financial statements.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker
is our Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating
financial performance. We have one business activity and there are no segment managers who are held accountable for operations, operating results beyond
revenue goals or plans for levels or components below the consolidated unit level. Accordingly, we have a single reporting segment.
Foreign Currency Translation
The United States dollar is the functional currency for our operations outside the United States. Accordingly, nonmonetary assets and liabilities originally
acquired or assumed in other currencies are recorded in United States dollars at the exchange rates in effect at the date they were acquired or assumed.
Monetary assets and liabilities denominated in other currencies are translated into United States dollars at the exchange rates in effect at the balance sheet
date. Translation adjustments are recorded in other expense in the consolidated statements of operations. Gains and losses realized from non-U.S. dollar
transactions, including intercompany balances not considered as permanent investments, denominated in currencies other than an entity’s functional currency,
are included in other expense in the consolidated statements of operations.
Revenue Recognition
We recognize revenue from the sale of our products, collaborative research and development agreements and revenue sharing arrangements. Revenue is
recognized when the related costs are incurred and the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue
recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria of revenue recognition are
met.
We account for multiple element arrangements, such as license and platform technology transfer agreements in which a licensee may purchase several
deliverables, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-25, “Multiple
Element Arrangements.” For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the arrangement and
each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met:
(1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to
the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and
60
substantially in our control. Revenue allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each
element.
Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a
collaborative arrangement, they are recorded as deferred revenue and recognized as revenue ratably over the term of our estimated performance period under
the agreement. We determine the estimated performance periods, and they are periodically reviewed based on the progress of the related program. The effect
of any change made to an estimated performance period and, therefore, to revenue recognized, would occur on a prospective basis in the period that the
change was made.
Product Sales
Product sales consist of sales of protein catalysts, pharmaceutical intermediates, and Codex® Biocatalyst Panels and Kits. Product sales are recognized once
passage of title and risk of loss has occurred and contractually specified acceptance criteria, if any, have been met, provided all other revenue recognition
criteria have also been met. Shipping and handling costs charged to customers are recorded as revenue.
Research and Development Revenues
Research and development agreements typically provide us with multiple revenue streams, including: research services fees for full time employee (“FTE”)
research services, up-front licensing fees, technology access, contingent payments upon achievement of contractual criteria, and royalty fees based on the
licensee’s product sales or cost savings achieved by our customers. We perform research and development activities as specified in each respective customer
agreement. Payments for services received are not refundable. Certain research agreements are based on a contractual reimbursement rate per FTE working
on the project. We recognize revenue from research services as those services are performed over the contractual performance periods. When up-front
payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using the proportionate performance method of
revenue recognition based upon the actual amount of research labor hours incurred relative to the amount of the total expected labor hours to be incurred by
us, up to the amount of cash received. In cases where the planned levels of research services fluctuate substantially over the research term, we are required to
make estimates of the total hours required to perform our obligations.
We recognize revenue from non-refundable, up-front license fees or technology access payments that are not dependent on any future performance by us
when such amounts are earned. If we have continuing obligations to perform under the arrangement, such fees are recognized over the estimated period of
continuing performance obligation. Estimated performance periods are periodically reviewed based on the progress of the related program. The effect of any
change made to an estimated performance period, and therefore to revenue recognized, would occur on a prospective basis in the period that the change was
made.
A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A
milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting
from our performance, (ii) for which there is, as of the date the arrangement is entered into, substantive uncertainty that the event will be achieved and (iii)
results in additional payments being due to us. Milestones are considered substantive when the consideration earned from the achievement of the milestone (i)
is commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome
resulting from its performance, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverable and payment terms in the arrangement.
We recognize revenue from other payments received which are contingent solely upon the passage of time or the result of a customer’s performance when
earned in accordance with the contract terms and when such payments can be reasonably estimated and collectability of such payments is reasonably assured.
We recognize revenue from royalties based on licensees’ sales of our products or products using our technologies. Royalties are recognized as earned in
accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. For the majority of our
royalty revenue, estimates are made using notification of the sale of licensed products from the licensees.
Revenue Sharing Arrangement
We recognize revenue from a revenue sharing arrangement based upon sales of licensed products by our revenue sharing partner Exela PharmSci, Inc.
(“Exela”) (see Note 14 - Related Party Transactions). We recognize revenue net of product and selling costs upon notification from our revenue sharing
partner of our portion of net profit based on the contractual percentage from the sale of licensed product.
61
Sales Allowances
Sales allowances primarily relate to product returns and prompt pay sales discounts, and are recorded in the same period that the related revenue is
recognized, resulting in a reduction in product sales.
Cost of Product Sales
Cost of product sales comprises both internal and third party fixed and variable costs including materials and supplies, labor, facilities and other overhead
costs associated with our product sales. Shipping costs are included in our cost of product sales. Such charges were not significant in any of the periods
presented.
Cost of Research and Development Services
Research and development expenses related to FTE services under the research and development agreements approximate the research funding over the term
of the respective agreements and are included in research and development expense.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities.
These costs include our direct and research-related overhead expenses, which include salaries and other personnel-related expenses (including stock-based
compensation), occupancy-related costs, supplies, depreciation of facilities and laboratory equipment and amortization of acquired technologies, as well as
external costs, and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future
use are expensed when incurred.
Advertising
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.
Advertising costs were $0.5 million in 2016, $0.3 million in 2015 and $0.3 million in 2014.
Stock-Based Compensation
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under our equity incentive plans. The Black-Scholes-
Merton option pricing model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We have, due
to insufficient historical data, used the “simplified method,” as described in Staff Accounting Bulletin No. 107, “Share-Based Payment,” to determine the
expected term of all stock options granted from the inception of our equity plans through the first half of 2015. Beginning in the third quarter of 2015, we
believe we have sufficient historical data to calculate expected terms for stock options granted. Thus, the expected term was based on historical exercise
behavior on similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. We used historical
volatility to estimate expected stock price volatility. The risk-free rate assumption was based on United States Treasury instruments whose terms were
consistent with the expected term of the stock options. The expected dividend assumption was based on our history and expectation of dividend payouts.
Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) and performance-contingent restricted stock units (“PSUs”) were measured based on the
fair market values of the underlying stock on the dates of grant. PSUs awarded may be conditional upon the attainment of one or more performance objectives
over a specified period. At the end of the performance period, if the goals are attained, the awards are granted.
Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The estimated annual forfeiture rates for stock options,
RSUs, PSUs, and RSAs are based on historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs is expensed on a straight-line basis over the vesting term of the grant and the estimated fair value
of PSUs is expensed using an accelerated method over the term of the award once management has determined that it is probable that the performance
objective will be achieved. Compensation expense is recorded over the requisite service period based on management’s best estimate as to whether it is
probable that the shares awarded are expected to vest. Management assesses the probability of the performance milestones being met on a continuous basis.
We have not recognized, and do not expect to recognize in the near future, any income tax benefit related to employee stock-based compensation expense as a
result of the full valuation allowance on our deferred tax assets including deferred tax assets related to our net operating loss carryforwards.
62
Restructuring Costs
We apply applicable accounting guidance on accounting for costs associated with restructuring, including exit or disposal activities, which requires that a
liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. Our restructuring
activities have primarily been related to severance, benefits and related personnel costs and facility closing costs.
Cash and Cash Equivalents
We consider all highly liquid investments with maturity dates of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents
consist of cash on deposit with banks and money market funds. The majority of cash and cash equivalents is maintained with major financial institutions in
North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits. Cash and cash equivalents totaled
$19.2 million and was comprised of cash of $8.1 million and money market funds of $11.2 million at December 31, 2016. Cash and cash equivalents totaled
$23.3 million and were comprised of cash of $12.2 million and money market funds of $11.1 million at December 31, 2015.
Restricted Cash
In 2016, we began the process of liquidating our India subsidiary. The local legal requirements for liquidation required us to maintain our subsidiary's cash
balance in an account managed by a legal trustee to satisfy our financial obligations. This balance is recorded as non-current restricted cash on the
consolidated balance sheets and totaled $0.8 million at December 31, 2016.
In addition, pursuant to the terms of the lease agreement for our Redwood City, CA facilities, our letters of credit are collateralized by deposit balances
of $0.8 million as of December 31, 2016 and 2015, which is recorded as non-current restricted cash on the consolidated balance sheets (see Note 13,
"Commitments and Contingencies" for details).
Marketable Securities
We invest in equity securities and we classify those investments as available-for-sale. These securities are carried at estimated fair value (see Note 5 - Cash
Equivalents and Marketable Securities) with unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity. Available-
for-sale equity securities with remaining maturities of greater than one year or which we currently do not intend to sell are classified as long-term.
We review several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: the intent and ability to retain the
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value, the length of time and the extent to which the
market value of the investment has been less than cost and the financial condition and near-term prospects of the issuer. Unrealized losses are charged against
“Other expense” when a decline in fair value is determined to be other-than-temporary. No charge for the other-than-temporary impairment has been recorded
in any of the periods presented.
Amortization of purchase premiums and accretion of purchase discounts and realized gains and losses of debt securities are included in interest income. The
cost of securities sold is based on the specific-identification method.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible and we consider counterparty credit risk in our assessment of fair value. Carrying amounts of financial instruments,
including cash equivalents, marketable investments, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the
balance sheet dates because of their generally short maturities.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources
(observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, giving the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are
described below:
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•
•
•
Level 1: Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Inputs that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date
and for the duration of the instrument’s anticipated life.
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 and
which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
See Note 6 - Fair Value Measurements to our consolidated financial statements.
Accounts Receivable and Allowance for Doubtful Accounts
We currently sell primarily to pharmaceutical companies throughout the world by the extension of trade credit terms based on an assessment of each
customer’s financial condition. Trade credit terms are generally offered without collateral and may include a discount for prompt payment for specific
customers. To manage our credit exposure, we perform ongoing evaluations of our customers’ financial conditions. In addition, accounts receivable includes
amounts owed to us under our collaborative research and development agreements. We recognize accounts receivable at invoiced amounts and we maintain a
valuation allowance for doubtful accounts.
We estimate an allowance for doubtful accounts through specific identification of potentially uncollectible accounts receivable based on an analysis of our
accounts receivable aging. Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have
been exhausted. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our
consolidated financial position, results of operations, and cash flows.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable,
marketable securities, and restricted cash. Cash that is not required for immediate operating needs is invested principally in money market funds. Cash and
cash equivalents are invested through banks and other financial institutions in the United States, India and Netherlands. Such deposits in those countries may
be in excess of insured limits.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using a weighted-average approach, assuming full absorption of direct and
indirect manufacturing costs, based on our product capacity utilization assumptions. If inventory costs exceed expected market value due to obsolescence or
lack of demand, reserves are recorded for the difference between the cost and the estimated market value. These reserves are determined based on significant
estimates.
Concentrations of Supply Risk
We rely on a limited number of suppliers for our products. We believe that other vendors would be able to provide similar products; however, the qualification
of such vendors may require substantial start-up time. In order to mitigate any adverse impacts from a disruption of supply, we attempt to maintain an
adequate supply of critical single-sourced materials. For certain materials, our vendors maintain a supply for us. We outsource the large scale manufacturing
of our products to contract manufacturers with facilities in Austria and Italy.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization and depreciated using the straight-line
method over their estimated useful lives as follows:
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Asset classification
Laboratory equipment
Computer equipment and software
Office equipment and furniture
Estimated useful life
5 years
3 to 5 years
5 years
Leasehold improvements
Lesser of useful life or lease term
Property and equipment classified as construction in process includes equipment that has been received but not yet placed in service. Normal repairs and
maintenance costs are expensed as incurred.
Intangible Assets
Our intangible assets are finite-lived and consist of customer relationships, developed core technology, and the intellectual property (“IP”) rights associated
with the acquisition of Maxygen Inc.’s (“Maxygen”) directed evolution technology in 2010. Intangible assets were recorded at their fair values at the date we
acquired the assets and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives.
Impairment of Long-Lived Assets
Our long-lived assets include property and equipment and intangible assets. We determined that we have a single entity wide asset group ("Asset Group").
The directed evolution technology patent portfolio acquired from Maxygen ("Core IP") is the most significant component of the Asset Group since it is the
base technology for all aspects of our research and development activities, and represents the basis for all of our identifiable cash flow generating capacity.
Consequently, we do not believe that identification of independent cash flows associated with long-lived assets is currently possible at any lower level than
the Asset Group.
The carrying value of our long-lived assets in the Asset Group may not be recoverable based upon the existence of one or more indicators of impairment
which could include: a significant decrease in the market price of our common stock; current period cash flow losses or operating losses combined with a
history of losses or a forecast of continuing losses associated with the use of the assets; slower growth rates in our industry; significant adverse changes in the
business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the
assets; loss of significant customers or partners; or the current expectation that the assets will more likely than not be sold or disposed of significantly before
the end of their estimated useful life.
We evaluate recoverability of intangible assets based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of
the Asset Group. We make estimates and judgments about the future undiscounted cash flows over the remaining useful life of the Asset Group. Our
anticipated future cash flows include our estimates of existing or in process product sales, production and operating costs, future capital expenditures,
working capital needs, and assumptions regarding the ultimate sale of the Asset Group at the end of the life of the primary asset. The useful life of the Asset
Group was based on the estimated useful life of the Core IP, the primary asset at the time of acquisition. There has been no change in the estimated useful life
of the Asset Group. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant judgment involved in
determining the cash flows attributable to the Asset Group over its estimated remaining useful life.
The Core IP became fully amortized in 2016 and there are no finite-lived intangible assets with a net carrying value on our consolidated balance sheet as of
December 31, 2016.
As a result of our decision to terminate the detergent alcohol program during 2014, we performed an analysis to estimate cash flows from equipment used in
potential strategic transactions with respect to our CodeXyme® cellulase enzymes and CodeXol® detergent alcohol programs. Based on this analysis we
determined there were no future cash flows and recognized a $1.8 million impairment charge in 2014, which is reflected in research and development
expense.
Goodwill
We determined that we operate in one operating segment and reporting unit under the criteria in ASC 280, “Segment Reporting.” Accordingly, our review of
goodwill impairment indicators is performed at the consolidated level. We review goodwill impairment annually at each fiscal year end and whenever events
or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
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The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares
the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired, and the second step of the impairment test is not required.
We use our market capitalization as an indicator of fair value. We believe that since our reporting unit is publicly traded, the ability of a controlling
stockholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of our reporting unit as a whole to exceed
its market capitalization. In addition, we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of
our common stock, but also can consider the impact of a control premium in measuring the fair value of its reporting unit.
If we were to use an income approach, it would establish a fair value by estimating the present value of our projected future cash flows expected to be
generated from our business. The discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of
ownership and the associated risks of realizing the stream of projected future cash flows. Our discounted cash flow methodology would consider projections
of financial performance for a period of several years combined with an estimated residual value. The most significant assumptions we would use in a
discounted cash flow methodology are the discount rate, the residual value and expected future revenue, gross margins and operating costs, along with
considering any implied control premium.
Should our market capitalization be less than total stockholders’ equity as of our annual test date or as of any interim impairment testing date, we would also
consider market comparables, recent trends in our stock price over a reasonable period and, if appropriate, use an income approach to determine whether the
fair value of our reporting unit is greater than the carrying amount.
The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount
of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Implied fair value is the
excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. We base our fair value estimates on assumptions we
believe to be reasonable. Actual future results may differ from those estimates.
Goodwill represents the excess of cost over the fair value of net assets acquired in a business combination. Goodwill is not amortized. We tested goodwill for
impairment at December 31, 2016 and concluded that the fair value of the reporting unit exceeded the carrying value and therefore no impairment existed.
During 2016, 2015 and 2014, we did not record impairment charges related to goodwill.
Income Taxes
We account for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax
rates and tax laws in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided against deferred tax
assets that are not likely to be realized.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of
recognition of revenue and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to
our tax provision in a subsequent period.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be
realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future.
We have recorded a valuation allowance against these deferred tax assets in jurisdictions where ultimate realization of deferred tax assets is deemed more
likely than not to occur. As of December 31, 2016, we maintain a full valuation allowance in all jurisdictions against the net deferred tax assets as we believe
that it is more likely than not that the majority of deferred tax assets will not be realized.
We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the
actual amounts differ from our estimates, the amount of our valuation allowance may be materially impacted. Any adjustment to the deferred tax asset
valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.
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We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We consider
many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate
actual outcomes. We recognize interest and penalties as a component of our income tax expense.
The Tax Reform Act of 1986 and similar state provisions limit the use of net operating loss carryforwards in certain situations where equity transactions result
in a change of ownership as defined by Internal Revenue Code Section 382. In the event we should experience such a change of ownership, utilization of
Codexis’ federal and state net operating loss carryforwards could be limited.
We maintain a full valuation allowance against net deferred tax assets as we believe that it is more likely than not that the majority of deferred tax assets will
not be realized.
Recently Issued and Adopted Accounting Guidance
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified
effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on
our consolidated financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." The standard
outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current
revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method.
In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers by one
year the effective date of ASU 2014-09. The standard becomes effective for the Company beginning January 1, 2018, but allows the Company to adopt the
standard one year earlier if it so chooses. In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which requires an entity to determine whether the nature of its promise is to
provide a good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party
(i.e., the entity is an agent). In April, 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing," which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the
licensing implementation guidance. In May, 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients," which clarifies guidance in certain narrow areas and adds some practical expedients. The above updates do not
change the core principles of the guidance in ASU 2014-09. The amendments have the same effective date and transition requirements as the new revenue
recognition standard. We are currently in the early stages of evaluating the effect that the standard and subsequent updates will have on our consolidated
financial statements and related disclosures.
In August 2014, the FASB issued Accounting Standards Update ("ASU") 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." ASU 2014-15 defines management's responsibility to evaluate whether
there is substantial doubt about an organization's ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual
reporting periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. We do not expect the
adoption of ASU 2014-15 will have a material impact on our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which simplifies the subsequent
measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling
price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for
public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We do not expect the adoption of
ASU 2015-11 will have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which replaces prior lease guidance (Topic 840.) The new guidance requires lessees
to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance also
eliminates today’s real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type
and direct financing leases. Entities
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are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the
financial statements. Entities have the option to use certain practical expedients. Full retrospective application is prohibited. This ASU is effective for public
business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are
currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting," changing certain aspects of accounting for
share-based payments to employees (Topic 718), as well as affecting the accounting classification within the statement of cash flows. The new guidance will
require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It will allow a policy election to account
for forfeitures as they occur and will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without
triggering liability accounting. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 will have a material impact on our consolidated
financial statements and related disclosures and we expect to continue the application of a forfeiture rate to estimate the number of awards that are expected to
vest.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,"
which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the "current
expected credit loss model") that is based on expected losses rather than incurred losses. ASU 2016-13 is effective for annual reporting periods ending after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The adoption of ASU 2016-13 is not expected to have a material impact on our consolidated financial
statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which
provides the FASB's guidance on certain cash flow statements items. ASU 2016-15 is effective for fiscal reporting periods beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The adoption of ASU 2016-15
is not expected to have a material impact on our consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230) Restricted Cash a consensus of the FASB Emerging Issues
Task Force." The standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash
flows. The new standard is expected to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early
adoption permitted. We are currently evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and related disclosures.
Note 3. Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding, less RSAs subject to
forfeiture. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding, less RSAs
subject to forfeiture, plus all additional common shares that would have been outstanding, assuming dilutive potential common shares had been issued for
other dilutive securities. For all periods presented, diluted and basic net loss per share were identical since potential common shares were excluded from the
calculation, as their effect was anti-dilutive.
Anti-Dilutive Securities
In periods of net loss, the weighted average number of shares outstanding related to potentially dilutive securities, prior to the application of the treasury stock
method, are excluded from the computation of diluted net loss per common share because including such shares would have an anti-dilutive effect.
The following shares were not included in the computation of diluted net loss per share (in thousands):
Shares issuable under Equity Incentive Plan
Shares issuable upon the conversion of warrants
Total anti-dilutive securities
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Years Ended December 31,
2016
2015
2014
5,567
73
5,640
5,932
75
6,007
6,193
75
6,268
Note 4. Collaborative Arrangements
GSK Platform Technology Transfer, Collaboration and License Agreement
In July 2014, we entered into a CodeEvolver® platform technology transfer collaboration and license agreement (the “GSK CodeEvolver® Agreement”) with
GlaxoSmithKline (“GSK”). Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver® protein engineering
technology platform to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products.
We received a $6.0 million up-front licensing fee upon signing the GSK CodeEvolver® Agreement and subsequently a $5.0 million non-creditable, non-
refundable milestone payment upon achievement of the first milestone in 2014. In September 2015, we achieved the second milestone of the agreement and
earned milestone revenue of $6.5 million. In April 2016, we completed the full transfer of the CodeEvolver® protein engineering platform technology and
earned milestone revenue of $7.5 million, for which payment was received in June 2016. We also have the potential to receive additional contingent payments
that range from $5.75 million to $38.5 million per project based on GSK’s successful application of the licensed technology. The contingent payments are not
deemed substantive milestones due to the fact that the achievement of the event underlying the payment predominantly relates to GSK’s performance of
future development and commercialization activities.
In the third quarter of 2016, we earned and recognized the first contingent payment under the agreement related to the development of an enzyme for an
already-commercialized product. In addition, we are eligible to receive royalties based on net sales, if any, of a limited set of products developed by GSK
using the CodeEvolver® protein engineering technology platform.
The term of the GSK CodeEvolver® Agreement continues, unless earlier terminated, until the expiration of all payment obligations under the GSK
CodeEvolver® Agreement. GSK can terminate the GSK CodeEvolver® Agreement by providing 90 days written notice to us.
Under the GSK CodeEvolver® Agreement, the significant deliverables were determined to be the license, platform technology transfer, and contingent
obligation to supply GSK with enzymes manufactured by us at GSK’s expense. We determined that the license did not have stand-alone value. In addition, we
determined that the license and the platform technology transfer and our participation in joint steering committee activities in connection with the platform
technology transfer represent a single unit of accounting. Our participation in the joint steering committee does not represent a separate unit of accounting
because GSK could not negotiate for and/or acquire these services from other third parties and our participation on the joint steering committee is
coterminous with the technology transfer period. Amounts to be received under the supply arrangement, if any, described above will be recognized as revenue
to the extent GSK purchases enzymes from us.
The up-front license fee of $6.0 million was being recognized ratably over the technology transfer period of three years since July 2014. As the technology
transfer was completed earlier than anticipated, we recognized license fees of $3.0 million and $2.0 million, respectively, in 2016 and 2015, as collaborative
research and development revenue. As of December 31, 2015, we had deferred revenue from GSK related to the up-front license of $3.0 million. As of
December 31, 2016, all of the deferred revenue from GSK has been recognized upon completion of technology transfer.
Merck Platform Technology Transfer and License Agreement
In August 2015, we entered into a CodeEvolver® platform technology transfer and license agreement (the "Merck CodeEvolver® Agreement") with Merck.
The Merck CodeEvolver® Agreement allows Merck to use the CodeEvolver® protein engineering technology platform in the field of human and animal
healthcare.
We received a $5.0 million up-front license fee upon execution of the Merck CodeEvolver® Agreement, which was being recognized ratably over the
estimated platform technology transfer period of two years. In September 2015, we achieved the first milestone under the Merck CodeEvolver® Agreement
and earned milestone revenue of $5.0 million. In September 2016, we completed the full transfer of the engineering platform technology and earned milestone
revenue of $8.0 million. We received the $8.0 million milestone payment in the fourth quarter of 2016. We also have the potential to receive payments of up
to a maximum of $15.0 million for each commercial active pharmaceutical ingredient ("API") that is manufactured by Merck using one or more novel
enzymes developed by Merck using the CodeEvolver® protein engineering technology platform.
Under the terms of the Merck CodeEvolver® Agreement, we granted to Merck a non-exclusive worldwide license to use the CodeEvolver® protein
engineering technology platform to research, develop and manufacture novel enzymes for use by Merck in its internal research programs ("Merck Non-
Exclusive Field"). The license to Merck is exclusive for the research, development and manufacture of novel enzymes for use by Merck in the chemical
synthesis of therapeutic products owned or controlled by Merck ("Merck Exclusive Field"). Merck has the right to grant sublicenses to affiliates of Merck
and, in certain limited circumstances, to third parties. We also granted to Merck a license to make or have made products manufactured using
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the CodeEvolver® protein engineering technology platform with a right to grant sublicenses solely to affiliates of Merck, contract manufacturing
organizations and contract research organizations. The manufacturing license is exclusive in the Merck Exclusive Field and non-exclusive in the Merck Non-
Exclusive Field. The licenses are subject to certain limitations based on pre-existing contractual obligations that apply to the technology and intellectual
property that are the subject of the license grants. The licenses do not permit the use of the CodeEvolver® protein engineering technology platform to discover
any therapeutic enzyme, diagnostic product or vaccine. In addition, Merck is prohibited from using the CodeEvolver® protein engineering technology
platform to develop or produce enzymes or any other compounds for or on behalf of any third parties except in a very limited manner when Merck divests a
therapeutic product that is manufactured using an enzyme developed using the CodeEvolver® protein engineering technology platform.
Under the Merck CodeEvolver® Agreement, we transferred the CodeEvolver® protein engineering technology platform to Merck over the period from August
2015 through September 2016. As part of this technology transfer, we provided to Merck our proprietary enzymes, proprietary protein engineering protocols
and methods, and proprietary software algorithms.
The licenses to Merck are granted under patents, patent applications and know-how that we own or control as of the effective date of the Merck
CodeEvolver® Agreement and that cover the CodeEvolver® protein engineering technology platform. Any improvements to the CodeEvolver® protein
engineering technology platform during the technology transfer period are also included in the license grants from Codexis to Merck. Following the
technology transfer period, Merck can exercise annual options that, upon payment of certain option fees, would extend Merck's license to include certain
improvements to the CodeEvolver® protein engineering technology platform that arise during the three-year period that begins at the end of the technology
transfer period.
Under the Merck CodeEvolver® Agreement, we own any improvements to our protein engineering methods, processes and algorithms that arise and any
enzyme technology or process technology that are developed during a technology transfer project, an evolution program or additional services. Merck owns
(the "Merck-Owned Technology") (a) any enzyme technology that is developed solely by Merck under the Merck CodeEvolver® Agreement using the
CodeEvolver® protein engineering technology platform (a "Project Enzyme") and (b) the methods of use of any Project Enzyme or any enzyme developed
jointly by Merck and us using the CodeEvolver® protein engineering technology platform. Merck granted to us a worldwide, non-exclusive, fully paid-up,
royalty-free license, with the right to grant sublicenses, to use the Merck-Owned Technology outside of the Merck Exclusive Field.
For each API that Merck manufactures using an enzyme developed with the CodeEvolver® protein engineering technology platform, we will have a right of
first refusal to supply Merck with the enzyme used to manufacture the API if Merck outsources the supply of the enzyme. Our right of first refusal applies
during the period that begins on the completion of a phase III clinical trial for the product containing the API and ends five years following regulatory
approval for such product.
The Merck CodeEvolver® Agreement has a term that continues, unless earlier terminated, until the expiration of all payment obligations under the agreement.
Merck may terminate the Merck CodeEvolver® Agreement by providing 90 days written notice to us. We can terminate the Merck CodeEvolver® Agreement
by providing 30 days written notice to Merck if we determine, pursuant to our contractual audit rights under the Merck CodeEvolver® Agreement, that Merck
has repeatedly failed to make required payments to us and/or materially underpaid us an amount due under the Merck CodeEvolver® Agreement. In the event
the Merck CodeEvolver® Agreement is terminated earlier by Merck, or by us due to an uncured material breach by Merck, or if Merck sells or transfers to a
third party any Merck business or facility that includes any of our proprietary materials, information or technology, we have the right to conduct an audit of
Merck's facilities to confirm that all of our proprietary materials, information and technology have been destroyed. The Merck CodeEvolver® Agreement
contains indemnification provisions under which Merck and we have agreed to indemnify each other against certain third party claims.
The up-front license fee of $5.0 million was being recognized ratably over a two-year period since August 2015. As the technology transfer was completed
earlier than anticipated, we recognized license fees of $4.0 million and $1.0 million in 2016 and 2015, respectively, as collaborative research and development
revenues. As of December 31, 2015, we had deferred revenue related to the Merck CodeEvolver® Agreement license fees of $4.0 million. As of
December 31, 2016, all of deferred revenue from Merck has been recognized upon completion of technology transfer.
Merck Sitagliptin Catalyst Supply Agreement
In February 2012, we entered into a five-year Sitagliptin Catalyst Supply Agreement (“Sitagliptin Catalyst Supply Agreement”) with Merck whereby Merck
may obtain commercial scale substance for use in the manufacture of Januvia®, its product based on the active ingredient sitagliptin. In December 2015,
Merck exercised its option under the terms of the Sitagliptin Catalyst Supply Agreement to extend the agreement for an additional five years through
February 2022. Effective as of January 2016, we and Merck amended the Sitagliptin Catalyst Supply Agreement to prospectively provide for variable pricing
based on the c
70
umulative volume of sitagliptin purchased by Merck under the Sitagliptin Catalyst Supply Agreement and to allow Merck to purchase a percentage of its
requirements for sitagliptin from a specified third-party supplier. Merck has the right to terminate the Sitagliptin Catalyst Supply Agreement at any time after
January 1, 2018 by giving us 24 months’ advance written notice.
The Sitagliptin Catalyst Supply Agreement requires Merck to pay an annual license fee for the rights to the sitagliptin technology each year for the term of the
agreement. Amounts of annual license fees are based on contractually agreed prices and are on a declining scale. Prior to December 2015, the aggregate
license fee for the initial five year period was being recognized ratably over the initial five year term of the Sitagliptin Catalyst Supply Agreement as
collaborative research and development revenue. Due to the amendment entered in December 2015 as noted above, we revised our performance period in
December 2015 and began recognizing the remaining unamortized portion of the license fee and the aggregate license fees for the second five year period
over the revised period on a straight line basis.
We recognized license fees of $1.3 million, $1.9 million and $2.0 million in 2016, 2015 and 2014, respectively, as collaborative research and development
revenue. As of December 31, 2016 and 2015, we had deferred revenue of $1.3 million and $1.0 million, respectively, from Merck related to the license fee. In
addition, pursuant to the terms of the agreement, Merck may purchase supply from us for a fee based on contractually stated prices and we recognized $5.6
million, $1.6 million and $2.5 million, respectively, in 2016, 2015 and 2014 in product sales under this agreement.
Collaborative Development Agreement
In May 2015, we entered into a collaborative development agreement with a leading global biopharmaceutical company. Under the terms of the agreement,
we used our CodeEvolver® protein engineering platform technology to develop a novel enzyme for use in our partner’s therapeutic development program. We
recognized revenues of $1.8 million and $1.5 million in 2016 and 2015, respectively, as collaborative research and development revenues. Under the
agreement, we have the potential to receive additional milestone payments and annual license fees.
Supply Agreement
In November 2016, we entered into a supply agreement whereby our customer may purchase quantities of our proprietary enzyme for use in its commercial
manufacture of a product. Pursuant to the supply agreement, we received in December 2016 an upfront payment of $750,000, which we accordingly recorded
as deferred revenues. Under the agreement, we have the potential to receive additional payments for quantities of enzyme sold to our customer.
Note 5. Cash Equivalents and Marketable Securities
Cash equivalents and marketable securities at December 31, 2016 and 2015 consisted of the following (in thousands):
Money market funds
Common shares of CO2 Solutions
Total
Money market funds
Common shares of CO2 Solutions
Total
Adjusted Cost
Gross
Unrealized
Gains
December 31, 2016
Gross
Unrealized
Losses
Estimated
Fair Value
11,172 $
563
11,735 $
— $
579
579 $
— $
—
— $
11,172
1,142
12,314
Adjusted Cost
Gross
Unrealized
Gains
December 31, 2015
Gross
Unrealized
Losses
Estimated
Fair Value
11,120 $
563
11,683 $
— $
986
986 $
— $
—
— $
11,120
1,549
12,669
$
$
$
$
Average
Contractual
Maturities
(in days)
n/a
n/a
Average
Contractual
Maturities
(in days)
n/a
n/a
As of December 31, 2016, the total cash and cash equivalents balance of $19.2 million was comprised of money market funds of $11.2 million and cash of $8
million held with major financial institutions worldwide. As of December 31, 2015, the total
71
cash and cash equivalents balance of $23.3 million as of December 31, 2015 was comprised of money market funds of $11.1 million and cash of $12.2
million held with major financial institutions worldwide.
In December 2009, we purchased 10,000,000 common shares of CO2 Solutions, a company based in Quebec, Canada, whose shares are publicly traded in
Canada on TSX Venture Exchange. Our purchase represented approximately 16.6% of CO2 Solutions’ total common shares outstanding at the time of
investment and was made in a private placement subject to a four-month statutory resale restriction. This restriction expired on April 15, 2010. Our
investment in CO2 Solutions is classified as available for sale and is recorded at its fair value (See Note 6 - Fair Value Measurements). Through December 31,
2016, we concluded that we did not have the ability to exercise significant influence over CO2 Solutions’ operating and financial policies.
As of December 31, 2016 and 2015, we had no marketable securities in an unrealized loss position.
Note 6. Fair Value Measurements
We determine the fair value of Level 1 assets using quoted prices in active markets for identical assets. We classify our investment in CO2 Solutions as Level
2 assets due to the volatile and low trading volume on TSX Venture Exchange in Canada. See also Note 5 - Cash Equivalents and Marketable Securities.
There were no transfers between Level 1 and Level 2 securities in the periods presented.
The following table presents the financial instruments that were measured at fair value on a recurring basis at December 31, 2016 and 2015 by level within
the fair value hierarchy (in thousands):
Financial Assets
Money market funds
Common shares of CO2 Solutions (1)
Total
Financial Assets
Money market funds
Common shares of CO2 Solutions (1)
Total
Level 1
Level 2
Level 3
Total
December 31, 2016
11,172 $
—
11,172 $
— $
1,142
1,142 $
— $
—
— $
December 31, 2015
Level 1
Level 2
Level 3
Total
11,120
$
—
11,120 $
— $
1,549
1,549 $
— $
—
— $
11,172
1,142
12,314
11,120
1,549
12,669
$
$
$
$
(1) We calculated the fair value of our investment in 10,000,000 common shares of CO2 Solutions using the market value of common shares as determined
by trading on the TSX Venture Exchange.
Note 7. Balance Sheets Details
Accounts receivable
The following is a summary of activity in our allowance for doubtful accounts for the periods presented (in thousands):
Allowance - beginning of period
Provision for bad debts
Recoveries from bad debts
Write-offs and other
Allowance - end of period
December 31,
2016
2015
2014
$
(421) $
(428) $
—
—
—
—
7
—
$
(421) $
(421) $
(460)
(11)
—
43
(428)
72
Inventories
Inventories consisted of the following (in thousands):
Raw materials (1)
Work in process (2)
Finished goods (2)
Total
December 31,
2016
2015
118 $
59
648
825 $
262
—
730
992
$
$
(1) Raw materials include active pharmaceutical ingredients and other raw materials.
(2) Work-in-process and finished goods include third party manufacturing costs and labor and indirect costs we incur in the production process.
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
Laboratory equipment (1)
Leasehold improvements
Computer equipment and software
Office equipment and furniture
Construction in progress (2)
Property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2016
2015
18,849 $
10,395
3,267
1,171
124
33,806
(31,651)
2,155 $
20,503
10,369
3,271
1,178
3
35,324
(32,215)
3,109
$
$
(1) Fully depreciated laboratory equipment with a cost of $2.3 million was retired during 2016.
(2) Construction in progress includes equipment received but not yet placed into service pending installation.
Intangible Assets
Intangible assets consisted of the following (in thousands):
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
1,534 $
(1,534) $
20,244
(20,244)
21,778 $
(21,778) $
— $
—
— $
1,534 $
(1,534) $
20,244
(17,432)
21,778 $
(18,966) $
—
2,812
2,812
Weighted-
Average
Amortization
Period
(in years)
5
6
Developed and core technology
Maxygen intellectual property
Total
Goodwill
There were no changes in the carrying value of goodwill of $3.2 million during 2016 and 2015.
73
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
Accrued purchase (1)
Accrued professional and outside service fees
Deferred rent
Lease incentive obligation
Other
Total
December 31,
2016
2015
67 $
746
168
425
705
430
498
143
425
517
2,111 $
2,013
$
$
(1) Amount represents products and services received but have not been billed as of December 31, 2016 and 2015.
Note 8. Assets Held for Sale and Sale of Former Hungarian Subsidiary
In the fourth quarter of 2013, we announced we would begin winding down Codexis’ CodeXyme® cellulase enzyme program. We performed a detailed
review of our excess research and development equipment and determined their estimated net sales price, less selling costs, was below their carrying value,
reduced the value of held for sale assets to their estimated fair market value net of selling expenses and reclassified the adjusted carrying value to assets held
for sale as of December 31, 2013.
In March 2014, we entered into an agreement with Intrexon Corporation to sell 100% of our equity interests in our Hungarian subsidiary, Codexis
Laboratories Hungary Kft, as well as all assets of such subsidiary that were classified as held for sale. We received cash proceeds of $1.5 million from the
sale. In connection with the sale, we reduced the carrying value of assets held for sale by $0.8 million and recognized a gain of $0.8 million, which was
included in research and development expenses. As part of the purchase, the buyer obtained all of the Hungarian assets held for sale and assumed all
employment and facility lease related contract obligations. There were no transaction related costs incurred other than legal fees, which were recorded in
selling, general and administrative expenses.
Prior to the sale of our Hungarian subsidiary in March 2014, we transferred certain of the subsidiary's equipment to another of our European subsidiaries and
incurred a reclaimable VAT liability of approximately $0.4 million. We paid this VAT amount in July 2014 and recorded a receivable, which is reflected in
prepaid expenses and other current assets in our consolidated balance sheets at December 31, 2015. In 2016, we wrote off the receivable due to the
uncertainty of collection of the reclaimable VAT.
In 2014, we expedited the disposition of assets held for sale in the United States by selling these assets through auction. As a result, we recognized a change
in estimated fair value of $0.7 million in 2014, which is reflected in research and development expense. In addition, we revised our plan to sell certain U.S.
research and development equipment. As part of the revised plan, certain equipment was put back to operational use. We also exchanged certain of the U.S.
research and development equipment for more suitable and newer equipment that was classified as property and equipment. The combined transfer of U.S.
research and development equipment from assets held for sale to property and equipment was $0.3 million. We recognized a net loss on the disposition and
exchange of assets held for sale of less than $0.1 million in 2014.
As of December 31, 2016 and 2015, we had no assets classified as held for sale.
Note 9. Stock-based Compensation
Equity Incentive Plans
In March 2010, our board of directors (the "Board") and stockholders approved the 2010 Equity Incentive Award Plan (the "2010 Plan"), which became
effective upon the completion of our initial public offering (“IPO”) in April 2010. The number of shares of our common stock available for issuance under the
2010 Plan is equal to 1,100,000 shares plus any shares of common stock reserved for future grant or issuance under the Company’s 2002 Stock Plan (the
“2002 Plan”) that remained unissued at the time of completion of the IPO. The 2010 Plan also provides for automatic annual increases in the number of shares
reserved for future issuance. All grants will reduce the 2010 Plan reserve by one share for every share granted. As of December 31, 2016, total shares
remaining available for issuance under the 2010 Plan were approximately 7.8 million shares.
The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock award (“RSA”), restricted stock unit (“RSU”),
performance-based awards, stock appreciation rights, and stock purchase rights to our employees, non-employee directors and consultants.
74
Incentive stock options may be granted with an exercise price of not less than the fair value of our common stock on the date of grant, and the nonstatutory
stock options may be granted with an exercise price of not less than 85% of the fair value of our common stock on the date of grant, as determined by the
Board. Stock options granted to a stockholder owning more than 10% of our voting stock must have an exercise price of not less than 110% of the fair value
of the common stock on the date of grant. Stock options are granted with terms of up to 10 years and generally vest over a period of 4 years.
RSAs, RSUs and Performance-Contingent RSUs (“PSUs”) may be granted for no consideration (other than par value of a share of common stock). The fair
values of RSAs, RSUs and PSUs are based upon the closing price of our common stock on the date of grant. RSAs generally vest over one to three years.
RSUs generally vest over three to four years. PSUs generally vest over two years and are conditional upon the attainment of one or more performance
objectives over a specified period.
Stock-Based Compensation Expense:
Stock-based compensation expense is included in the consolidated statements of operations as follows (in thousands):
Research and development
Selling, general and administrative
Grant Award Activities:
Years Ended December 31,
2016
2015
2014
$
$
1,033 $
4,640
5,673 $
935 $
4,191
5,126 $
953
3,667
4,620
Stock Option Awards
We estimated the fair value of stock options using the Black-Scholes-Merton option-pricing model based on the date of grant. The following summarize the
ranges of weighted-average assumptions used to estimate the fair value of employee stock options granted:
Expected life (years)
Volatility
Risk-free interest rate
Expected dividend yield (1)
Years Ended December 31,
2016
2015
2014
5.3
64.2%
1.3%
0.0%
6.1
66.1%
1.7%
0.0%
6.0
65.0%
1.9%
0.0%
(1) We do not currently pay dividends, and thus the dividend rate variable in the Black-Scholes-Merton option-pricing model is zero.
The following table summarizes stock option activity in 2016:
Balance at January 1, 2016
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Vested and expected to vest at December 31, 2016
Number
of
Shares
(in thousands)
Weighted
Average
Exercise Price Per
Share
Weighted
Average
Remaining
Contractual Term
Aggregate Intrinsic
Value
(in years)
(in thousands)
3,918 $
971 $
(398) $
(601) $
3,890 $
2,477 $
3,693 $
75
4.49
4.16
2.60
5.76
4.40
4.84
4.42
6.54 $
4,494
5.31 $
6.40 $
3,138
4,381
The weighted average grant date fair value per share of stock options granted in 2016, 2015 and 2014 was $2.32, $2.09 and $1.20, respectively. The total
intrinsic value of options exercised in 2016, 2015 and 2014 was $0.6 million, $0.4 million and $57 thousand, respectively.
As of December 31, 2016, there was $2.1 million unrecognized stock-based compensation cost related to non-vested options, which we expect to recognize
over a weighted average period of 2.7 years.
Restricted Stock Awards
The following table summarizes the RSAs activity in 2016:
Non-vested balance at January 1, 2016
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2016
Number
of
Shares
(in thousands)
Weighted Average
Grant Date
Fair Value
Per Share
480 $
185 $
(435) $
— $
230 $
3.29
4.21
3.40
—
3.82
The weighted average grant date fair value per share of RSAs granted in 2016, 2015 and 2014 was $4.21, $4.10 and $1.64, respectively. The total fair value of
RSAs vested in fiscal 2016, 2015 and 2014 was $1.8 million, $2.3 million and $0.7 million respectively.
As of December 31, 2016, there was $0.4 million unrecognized stock-based compensation cost related to non-vested RSAs, which we expect to recognize
over a weighted average period of 0.6 years.
Restricted Stock Units
The following table summarizes the RSUs activity in 2016:
Non-vested balance at January 1, 2016
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2016
Number
of
Shares
(in thousands)
Weighted Average
Grant Date
Fair Value
Per Share
545 $
330 $
(243) $
(15) $
617 $
3.15
4.10
3.11
2.74
3.69
The weighted average grant date fair value per share of RSUs granted in 2016, 2015 and 2014 was $4.10, $3.65 and $2.14, respectively. The total fair value of
RSUs vested in fiscal 2016, 2015 and 2014 was $1.0 million, $2.9 million and $1.9 million respectively.
As of December 31, 2016, there was $1.1 million unrecognized stock-based compensation cost related to non-vested RSUs, which we expect to recognize
over a weighted average period of 1.5 years.
76
Performance-Contingent RSUs
The following table summarizes the PSUs activity in 2016:
Non-vested balance at January 1, 2016
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2016
Number
of
Shares
(in thousands)
Weighted Average
Grant Date
Fair Value
Per Share
989 $
629 $
(482) $
(305) $
831 $
2.94
4.10
2.89
2.82
3.88
The weighted average grant date fair value per share of PSUs granted in 2016, 2015 and 2014 was $4.10, $3.45 and $2.00, respectively. The total fair value of
PSUs vested in fiscal 2016 and 2015 were $1.8 million and $0.8 million, respectively. We had no PSUs vest in 2014.
As of December 31, 2016, there was $1.1 million unrecognized stock-based compensation cost related to non-vested PSUs, which we expect to recognize
over a weighted average period of 0.5 years.
Note 10. Capital Stock
Warrants
The Company’s outstanding warrants are exercisable for common stock at any time during their respective terms. No warrants were exercised during 2016,
2015 or 2014.
The following warrants were issued and outstanding at December 31, 2016:
Issue Date
September 28, 2007
Note 11. 401(k) Plan
Shares Subject
to warrants
Exercise Price
per Share
Expiration
72,727 $
8.25 September 28, 2017
In January 2005, we implemented a 401(k) Plan covering certain employees. Currently, all of our United States based employees over the age of 18 are
eligible to participate in the 401(k) Plan. Under the 401(k) Plan, eligible employees may elect to reduce their current compensation up to a certain annual limit
and contribute these amounts to the 401(k) Plan. We may make matching or other contributions to the 401(k) Plan on behalf of eligible employees. We
recorded employer matching contributions expense of $0.4 million, $0.5 million and $0.4 million, respectively, in 2016, 2015 and 2014.
Note 12. Income Taxes
Our loss before provision for income taxes was as follows (in thousands):
United States
Foreign
Loss before provision for income taxes
Years Ended December 31,
2016
2015
2014
$
$
(8,174) $
(424)
(8,598) $
(7,641) $
(278)
(7,919) $
(20,980)
1,653
(19,327)
77
The tax provision for the years ended December 31, 2016, 2015 and 2014 consists primarily of taxes attributable to foreign operations and the tax effect of
unrealized gains on our available for sale securities. The components of the provision for income taxes are as follows (in thousands):
Current provision (benefit):
Federal
State
Foreign
Total current provision (benefit)
Deferred provision (benefit):
Federal
State
Foreign
Total deferred provision (benefit)
Total benefit from income taxes
Years Ended December 31,
2016
2015
2014
$
— $
5
(14)
(9)
—
—
(31)
(31)
— $
5
(13)
(8)
(293)
(21)
(16)
(330)
$
(40) $
(338) $
—
5
(371)
(366)
—
—
110
110
(256)
Reconciliation of the provision for income taxes calculated at the statutory rate to our provision for (benefit from) income taxes is as follows (in thousands):
Tax benefit at federal statutory rate
State taxes
Research and development credits
Foreign operations taxed at different rates
Stock-based compensation
Other nondeductible items
Change in valuation allowance
Benefit from income taxes
Years Ended December 31,
2016
2015
2014
$
(2,924) $
127
(161)
30
327
660
1,901
(40) $
$
(2,693) $
1,126
(85)
31
77
(43)
1,249
(338) $
(6,571)
249
(57)
447
(2)
(364)
6,042
(256)
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
78
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Net operating losses
Credits
Deferred revenues
Stock-based compensation
Reserves and accruals
Depreciation
Intangible assets
Capital losses
Unrealized gain/loss
Other assets
Total deferred tax assets:
Deferred tax liabilities:
Other
Total deferred tax liabilities:
Valuation allowance
Net deferred tax liabilities
December 31,
2016
2015
$
72,588 $
70,005
5,016
1,025
3,750
2,952
2,516
5,536
933
277
110
4,671
3,357
3,460
2,713
2,377
5,127
933
126
98
94,703
92,867
(103)
(103)
(94,663)
$
(63) $
(199)
(199)
(92,762)
(94)
ASC Topic 740 requires that the tax benefit of NOL, temporary differences and credit carryforwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income
within the carryforward period. Because of our history of operating losses, management believes that recognition of the deferred tax assets arising from the
above-mentioned future tax benefits is currently not more likely than not to be realized and, therefore, has provided a valuation allowance against our deferred
tax assets. Accordingly, the net deferred tax assets in all the Company’s jurisdictions have been fully reserved by a valuation allowance. The net valuation
allowance increased by $1.9 million, $1.2 million and $5.2 million during the years ended December 31, 2016, 2015 and 2014, respectively. At such time as it
is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.
The following table sets forth the Company’s federal, state and foreign NOL carryforwards and federal research and development tax credits as of
December 31, 2016 (in thousands):
Net operating losses, federal
Net operating losses, state
Tax credits, federal
Tax credits, state
Net operating losses, foreign
Tax credits, foreign
December 31, 2016
Amount
$
213,061
Expiration
Years
2022-2036
120,234
2017-2036
5,634
2022-2036
7,048
Do not expire
627
10
Various
Various
Current federal and California tax laws include substantial restrictions on the utilization of NOLs and tax credit carryforwards in the event of an ownership
change of a corporation. Accordingly, the Company's ability to utilize NOLs and tax credit carryforwards may be limited as a result of such ownership
changes. Such a limitation could result in the expiration of carryforwards before they are utilized.
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued
operations and other comprehensive income. An exception is provided in ASC 740 when there is aggregate income from categories other than continuing
operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the
loss from continuing operations reduces
79
the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax
assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from available-for-sale
securities recorded as a component of other comprehensive income, is considered when determining whether sufficient future taxable income exists to realize
the deferred tax assets. For the year ended December 31, 2016, the Company did not record a tax expense in other comprehensive income related to available-
for-sale securities.
In 2014, we determined that the undistributed earnings of our India subsidiary will be repatriated to the United States, and accordingly, we have provided a
deferred tax liability totaling $0.1 million as of December 31, 2016. We have not provided for U.S. federal and state income taxes on all of the remaining non-
U.S. subsidiaries’ undistributed earnings as of December 31, 2016 as the remaining foreign jurisdictions are in a cumulative loss position.
We adopted ASC Topic 740’s provision for accounting for uncertainty in income taxes on January 1, 2007. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year
Additions based on tax positions related to current year
Additions to tax provision of prior years
Reductions to tax provision of prior years
Lapse of the applicable statute of limitations
Balance at end of year
Rollforward Table (at Gross): As of
December 31,
2016
2015
2014
8,152 $
7,838 $
459
—
(45)
—
368
—
(54)
—
8,566 $
8,152 $
8,306
346
—
(814)
—
7,838
$
$
We recognize interest and penalties as a component of our income tax expense. Total interest and penalties recognized in the consolidated statement of
operations was $35,000, $24,000 and $(47,000), respectively, in 2016, 2015 and 2014. Total penalties and interest recognized in the balance sheet was
$292,000 and $257,000, respectively, in 2016 and 2015. The total unrecognized tax benefits that, if recognized currently, would impact the Company’s
effective tax rate were $0.4 million and $0.4 million as of December 31, 2016 and 2015, respectively. We do not expect any material changes to our uncertain
tax positions within the next 12 months. We are not subject to examination by United States federal or state tax authorities for years prior to 2002 and foreign
tax authorities for years prior to 2010.
Note 13. Commitments and Contingencies
Operating Leases
Our headquarters are located in Redwood City, California where we occupy approximately 107,200 square feet of office and laboratory space in four
buildings within the same business park from Metropolitan Life Insurance Company (“MetLife”). We entered into the initial lease with Met-Life for a portion
of this space in 2004 and the lease has been amended numerous times since then to adjust space and amend the terms of the lease, with the latest amendment
being in October 2016. The various terms for the spaces under the lease have expiration dates that range from January 2020 through January 2022. Beginning
in February 2014, we have subleased office space to different subtenants with separate options to extend the subleases and if all options to extend were
exercised, these agreements would expire at various dates through November 2019.
We received certain lease incentives from MetLife in 2011 and 2012, which have been amortized on a straight line basis over the term of the lease as a
reduction in rent expense. As of December 31, 2016 and 2015, we have an unamortized lease incentive obligation of $1.3 million and $1.7 million,
respectively, of which the non-current portion of $0.9 million and $1.3 million, respectively, is included in lease incentive obligation on the consolidated
balance sheets. Rent expense for the Redwood City properties is recognized on a straight-line basis over the term of the lease. Rent expense was $3.4 million
in 2016, $3.4 million in 2015 and $3.4 million in 2014, partially offset by sublease income of $1.2 million in 2016, $0.6 million in 2015 and $0.4 million in
2014.
We are required to restore certain of the Redwood City facilities that we are renting to their original form. We are expensing the asset retirement obligation
over the terms of the respective leases. We review the estimated obligation each reporting period and makes adjustments if our estimates change. As of
December 31, 2016 and 2015, we have assets retirement obligations of $0.4 million, which is included in other liabilities on the consolidated balance sheets
80
Pursuant to the terms of the amended lease agreement, we exercised our right to deliver a letter of credit in lieu of a security deposit. The letters of credit are
collateralized by deposit balances held by the bank in the amount of $0.8 million as of December 31, 2016 and 2015. These deposits are recorded as restricted
cash on the consolidated balance sheets.
Future minimum payments under non-cancellable operating leases are as follows at December 31, 2016 (in thousands):
Years ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total minimum payments (1)
Lease Payments
$
$
3,077
3,185
3,280
712
490
41
10,785
(1) Minimum payments have not been reduced by future minimum sublease rentals of $1.8 million to be received under non-cancellable subleases.
Other Commitments
In April 2016, we entered into a new manufacture and supply agreement that resulted in a total commitment up to $1.8 million, with payment to be made in
December 2022 or after.
In October 2016, we entered into a services agreement with a third party supplier for the development of a manufacturing process. The services agreement
may result in an additional total commitment of up to $1.4 million. We may terminate the services agreement, at our discretion, with 60 days' notice to the
supplier and shall be obligated to a reduced additional total commitment equal to the contractual amount due during this 60 day period for those stages of
development (i) already in progress as of the date of the notice of termination and (ii) scheduled to have commenced within 60 days after the date of the
notice of termination.
In December 2016, we entered into a financing lease agreement with a third party supplier for the purchase of laboratory equipment for approximately $0.5
million. The effective date of the lease is upon delivery of the equipment, which occurred in February 2017 and the term of the lease is three years. This
financing agreement will be accounted for as a capital lease due to the bargain purchase option at the end of the lease.
Legal Proceedings
On February 19, 2016, we filed a complaint against EnzymeWorks, Inc., a California corporation, EnzymeWorks, Inc., a Chinese corporation, and Junhua
“Alex” Tao (collectively, the “Defendants”) in the United States District Court for the Northern District of California. The complaint alleges that the
Defendants have engaged in willful patent infringement, trade secret misappropriation, breach of confidence, intentional interference with contractual
relations, intentional interference with prospective economic relations and statutory and common law unfair competition. We have sought injunctive relief,
monetary damages, treble damages, restitution, punitive damages and attorneys’ fees. On May 13, 2016, the Defendants filed a Partial Motion to Dismiss the
claims for breach of contract, intentional interference with contractual relations, intentional interference with prospective economic relations, statutory unfair
competition, and common law unfair competition in the First Amended Complaint. We opposed the Defendant’s Partial Motion to Dismiss. On August 11,
2016, the judge issued an order that denied the Defendants’ Partial Motion to Dismiss with respect to all five claims and in all relevant parts, and granted the
motion with respect to certain underlying arguments. We are unable to determine when this litigation will be resolved or its ultimate outcome.
Other than our litigation against the Defendants, we are not currently a party to any material litigation or other material legal proceedings.
Indemnifications
We are required to recognize a liability for the fair value of any obligations we assume upon the issuance of a guarantee. We have certain agreements with
licensors, licensees and collaborators that contain indemnification provisions. In such provisions, we typically agree to indemnify the licensor, licensee and
collaborator against certain types of third party claims. The
81
maximum amount of the indemnifications is not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably
estimated. There were no accruals for expenses related to indemnification issues for any periods presented.
Note 14. Related Party Transactions
Exela PharmSci, Inc.
We signed a commercialization agreement with Exela PharmSci, Inc. (“Exela”) in 2007, whereby Exela agreed to pay to us a contractual percentage share of
Exela’s net profit from the sales of licensed products.
Thomas R. Baruch, one of our directors, serves on the board of directors of Exela and is a retired general partner in Presidio Partners 2007, L.P., which owns
more than 10% of Exela’s outstanding capital stock. As such, Mr. Baruch has an indirect pecuniary interest in the shares of Exela held by Presidio Partners
2007, L.P. Mr. Baruch is also a general partner in CMEA Ventures Life Sciences 2000, L.P., which owned 7.4% of our common stock until November 10,
2014, at which time the shares were purchased by Presidio Partners 2014, L.P. Mr. Baruch has no direct or indirect pecuniary interest in any shares of our
common stock owned by Presidio Partners 2014, L.P.
We recognized $2.2 million in 2016, $4.8 million in 2015 and $7.3 million in 2014, shown in the consolidated statement of operations as revenue sharing
arrangement. We had no receivables from Exela at December 31, 2016 and 2015.
AstraZeneca PLC
Pam P. Cheng, a member of our board of directors, joined AstraZeneca PLC as Executive Vice President, Operations and Information Technology in June
2015. We sell biocatalyst product to AstraZeneca and, in addition, we also sell biocatalyst products to Alfa Aesar, which is a purchasing agent of
AstraZeneca.
In 2016, we recognized de minimis revenue from AstraZeneca and $0.4 million as product revenue from Alfa Aesar. In 2015, we recognized $0.1 million
revenue from AstraZeneca and no product revenue from Alfa Aesar. We had $0.4 million in accounts receivable at December 31, 2016 from Alfa Aesar and
no receivables from AstraZeneca PLC at December 31, 2016 and 2015.
Note 15. Significant Customer and Geographic Information
Significant Customers
Customers that each contributed 10% or more of our net revenue were as follows:
Merck
GSK
Exela
* Percentage was less than 10%
Percentage of Total Revenues
For The Years Ended December 31,
2016
2015
2014
47%
22%
*
29%
20%
12%
Customers that each accounted for 10% or more of our accounts receivable balance for the period presented were as follows:
Customer A (1)
Customer B
Customer C
Customer D (2)
(1) This customer also contributed 10% or more of our net revenue in 2016, 2015 and 2014.
82
Percentage of Accounts Receivables
As Of December 31,
2016
2015
54%
16%
—%
—%
24%
17%
21%
12%
*
22%
40%
(2) This represents a $3.1 million final settlement relating to past-due payments and settlement of future payments associated with our royalty business with
a non-core customer as of December 31, 2015. We collected the full amount in February 2016.
Geographic Information
Geographic revenues are identified by the location of the customer and consist of the following (in thousands):
Revenues
United States
Europe
Asia
India
Singapore
Others
Others
Total
Years Ended December 31,
2016
2015
2014
$
21,309 $
17,138
24,795 $
14,151
3,578
3,836
1,159
1,817
1,026
963
864
5
16,136
15,067
919
1,435
1,637
113
$
48,837 $
41,804 $
35,307
Geographic presentation of identifiable long-lived assets below shows those assets that can be directly associated with a particular geographic area and consist
of the following (in thousands):
Long-lived assets
United States
83
December 31,
2016
2015
$
2,414 $
6,231
The following table provides the selected quarterly financial data for 2016 and 2015 (in thousands):
Selected Quarterly Financial Data (Unaudited)
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Quarter Ended (1)
December 31, 2016
(3)
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
$
$
$
$
$
$
$
$
Revenues:
Product sales
Research and
development revenues
Revenue sharing
arrangement
Total revenues
Costs and operating expenses:
Cost of product sales
Research and
development
Selling, general and
administrative
Total costs and operating
expenses
Income (loss) before income
taxes
Net income (loss)
Net income (loss) per share,
basic
Net income (loss) per share,
diluted
Weighted average common
shares used in computing net
loss per share, basic (2)
Weighted average common
shares used in computing net
loss per share, diluted (2)
4,249 $
4,052 $
3,280 $
3,740 $
4,462 $
1,818 $
2,020 $
3,076
5,345
10,373
12,064
3,534
6,352
14,517
2,533
2,197
375
445
658
722
773
1,066
1,465
9,969 $
14,870
16,002
7,996 $
11,587 $
17,401 $
6,018 $
1,525
6,798
2,287 $
2,756 $
2,221 $
2,489 $
2,578 $
1,302 $
1,250 $
1,456
5,964
5,467
5,112
5,686
5,216
4,994
5,170
5,293
6,968
5,229
6,420
6,802
6,026
5,415
5,296
5,578
15,219 $
13,452 $
13,753 $
14,977 $
13,820 $
11,711 $
11,716 $
12,327
(5,285) $
(5,260) $
1,437 $
2,213 $
1,437 $
2,239 $
(6,963) $
(6,974) $
(2,247) $
(2,053) $
5,668 $
5,394 $
(5,790) $
(5,360) $
(5,550)
(5,562)
(0.13) $
0.04 $
0.06 $
(0.17) $
(0.05) $
0.14 $
(0.14) $
(0.14)
(0.13) $
0.03 $
0.05 $
(0.17) $
(0.05) $
0.13 $
(0.14) $
(0.14)
41,002
40,940
40,495
40,072
39,840
39,767
39,301
38,779
41,002
42,134
41,568
40,072
39,840
40,970
39,301
38,779
(1) The 2016 and 2015 amounts were computed independently for each quarter, and the sum of the quarters may not total the
annual amounts.
(2) The full year net loss per share of common stock, basic and diluted, may not equal the sum of the quarters due to
weighting of outstanding shares.
(3) PSUs and cash bonus awards are granted to certain employees and are subject to our performance in achieving pre-
determined criteria approved by our board of directors. Based on the actual achievement of the annual goals, we updated
the calculation of the annual expense in the fourth quarter which resulted in an additional true-up charge of approximately
$0.3 million, primarily in operating expense.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Evaluation of Disclosure Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer and with the participation of our disclosure committee,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2016 at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with United States generally accepted accounting
principles.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the guidelines established in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of
our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2016. We reviewed the results
of management’s assessment with our Audit Committee.
Our internal control over financial reporting as of December 31, 2016 has been audited by BDO USA, LLP, an independent registered public accounting firm,
as stated in their report which is included in Item 8 of this Annual Report.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, even if determined effective
and no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives to prevent or detect
misstatements. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is
required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with the
evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act, which occurred during the fourth fiscal quarter of the year ended December 31,
2016, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
ITEM 9B. OTHER INFORMATION
85
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item concerning our directors, executive officers, compliance with Section 16 of the Exchange Act, our code of ethics and
our Nominating and Corporate Governance Committee, and our Audit Committee is incorporated by reference from the information that will be set forth in
the sections under the headings “Election of Directors,” “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate
Governance Matters” in our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of
Stockholders to be held in 2017 (the “2017 Proxy Statement”).
The information required by this item concerning executive compensation is incorporated by reference from the information that will be set forth in the 2017
Proxy Statement under the headings “Executive Compensation,” and “Corporate Governance Matters.”
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item concerning securities authorized for issuance under equity compensation plans and security ownership of certain
beneficial owners and management is incorporated by reference from the information that will be set forth in the 2017 Proxy Statement under the headings
“Executive Compensation—Equity Compensation Plan Information” and “Information Concerning Voting and Solicitation—Security Ownership of Certain
Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The information required by this item concerning transactions with related persons and director independence is incorporated by reference from the
information that will be set forth in the 2017 Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Corporate
Governance Matters.”
The information required by this item is incorporated by reference from the information that will be set forth in the 2017 Proxy Statement under the heading
“Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
86
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1.
2.
Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K
Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.
None.
ITEM 16. FORM 10-K SUMMARY
87
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 9, 2017
By:
/s/ John J. Nicols
CODEXIS, INC.
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints John J. Nicols, Gordon T. B. Sangster, and Richard A. Sabalot, and
each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent
to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file
any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each
and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ John J. Nicols
John J. Nicols
/s/ Gordon T. B. Sangster
Gordon T. B. Sangster
/s/ Bernard J. Kelley
Bernard J. Kelley
/s/ Thomas R. Baruch
Thomas R. Baruch
/s/ Pam P. Cheng
Pam P. Cheng
/s/ Byron L. Dorgan
Byron L. Dorgan
/s/ Kathleen S. Glaub
Kathleen S. Glaub
/s/ David V. Smith
David V. Smith
/s/ Dennis P. Wolf
Dennis P. Wolf
/s/ Patrick Y. Yang
Patrick Y. Yang
President, Chief Executive Officer and Director (Principal
Executive Officer)
Date: March 9, 2017
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 9, 2017
Chairman of the Board of Directors
Date: March 9, 2017
Chairman Emeritus, Director
Date: March 9, 2017
Director
Director
Director
Director
Director
Director
88
Date: March 9, 2017
Date: March 9, 2017
Date: March 9, 2017
Date: March 9, 2017
Date: March 9, 2017
Date: March 9, 2017
Exhibit
No.
3.1
3.2
3.3
4.1
4.2*
4.3*
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of Codexis, Inc. filed with the Secretary of the State of the State of Delaware on
April 27, 2010 and effective as of April 27, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010, filed on May 28, 2010).
Certificate of Designations of Series A Junior Participating Preferred Stock of Codexis, Inc., filed with the Secretary of State of the State
of Delaware on September 4, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
September 4, 2012).
Amended and Restated Bylaws of Codexis, Inc. effective as of April 27, 2010 (incorporated by reference to Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 28, 2010).
Form of the Registrant’s Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report for the
quarter ended June 30, 2012, filed on August 9, 2012).
Form of Warrant to purchase shares of Series D preferred stock issued in connection with the Bridge Loan Agreement dated as of May
25, 2006.
Form of Warrant to purchase shares of Series D preferred stock issued in connection with the Loan and Security Agreement dated as of
September 28, 2007.
4.4*
Warrant to purchase shares of Common Stock issued to Alexandria Equities, LLC.
10.1A*
Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of February 1, 2004.
10.1B*
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of June 1, 2004.
10.1C*
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 9, 2007.
10.1D*
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 31, 2008.
10.1E
10.1F
10.1G
10.1H
Fourth Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of September
17, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2010, filed on November 4, 2010).
Fifth Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 16,
2011 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011,
filed on May 6, 2011).
Sixth Amendment to Lease by and between the Company and Metropolitan Life Insurance Company dated as of September 27, 2012
(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012,
filed on November 7, 2012).
Seventh Amendment to Lease by and between the Company and Metropolitan Life Insurance Company dated as of October 17, 2016
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016,
filed on November 8, 2016).
10.2+*
Codexis, Inc. 2002 Stock Plan, as amended, and Form of Stock Option Agreement.
10.3+*
Codexis, Inc. 2010 Equity Incentive Award Plan and Form of Stock Option Agreement.
10.4*
Form of Indemnification Agreement between the Company and each of its directors, officers and certain employees.
89
Exhibit
No.
10.5A+*
10.5B+
10.6
10.7A†
10.7B
10.8A+
10.8B+
10.8C+
10.8D+
10.9A†
10.9B†
10.9C
10.9D
10.9E
10.10A†
10.10B†
Form of Change of Control Severance Agreement between the Company and certain of its officers.
Description
Form of Amended and Restated Change of Control Severance Agreement by and between Codexis, Inc. and certain of its officers
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on October 13, 2016).
Asset Purchase Agreement, dated October 28, 2010, by and among the Company, Codexis Mayflower Holdings, LLC and Maxygen,
Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on October 28, 2010).
Manufacture and Supply Agreement, dated May 16, 2011, by and between the Company and Lactosan GmbH & Co. KG (incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed on August 3,
2011).
Amendment No. 1 to the Manufacture and Supply Agreement by and between the Company and Lactosan GmbH & Co. KG dated as of
March 9, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2012, filed on May 10, 2012).
Employment Agreement by and between the Company and John Nicols effective as of May 28, 2012 (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed on August 9, 2012).
John Nicols Stock Option Grant Notice and Stock Option Agreement dated June 13, 2012 between John J. Nicols and the Company
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed
on August 9, 2012).
John Nicols Restricted Stock Grant Notice and Restricted Stock Agreement dated June 13, 2012 between John J. Nicols and the
Company (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2012, filed on August 9, 2012).
Amendment to Employment Agreement between the Company and John Nicols, dated April 21, 2016 (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).
Sitagliptin Catalyst Supply Agreement by and between Merck Sharp and Dohme Corp. and the Company dated as of February 1, 2012
(incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed
on April 2, 2013).
Amendment to Sitagliptin Catalyst Supply Agreement between Merck Sharp and Dohme Corp. and the Company dated as of October 1,
2013 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2013, filed on November 12, 2013).
Amendment No. 2 to Sitagliptin Catalyst Supply Agreement between Merck Sharp and Dohme Corp. and the Company dated as of
February 25, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015, filed on May 7, 2015).
Amendment No. 3 to Sitagliptin Catalysts Supply Agreement between Merck Sharp and Dohme Corp. and the Company dated as of
December 17, 2015.
Amendment No. 4 to Sitagliptin Catalysts Supply Agreement, effective as of January 1, 2016, by and between the Company and Merck
Sharp and Dohme Corp. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2016, filed on November 8, 2016).
License Agreement by and between Exela PharmSci, Inc. and the Company effective as of September 18, 2007 (incorporated by
reference to Exhibit 10.26A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on April
2, 2013).
Amendment No. 1 to the License Agreement between Exela PharmSci, Inc. and the Company effective as of December 28, 2009
(incorporated by reference to Exhibit 10.26B to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012,
filed on April 2, 2013) .
90
Exhibit
No.
10.11†
10.12+
10.13†
10.14+
12.1
21.1
23.1
24.1
31.1
31.2
32.1**
101
Platform Technology Transfer, Collaboration and License Agreement by and between the Company and GlaxoSmithKline Intellectual
Property Limited, effective as of July 10, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 31, 2014, filed on November 6, 2014).
Description
Offer Letter Agreement by and between the Company and Gordon Sangster effective as of July 11, 2014 (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2014, filed on November 6, 2014).
Platform Technology Transfer and License Agreement by and between the Company and Merck Sharp & Dohme Corp., dated as of
August 3, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 31, 2015, filed on November 6, 2015).
Offer Letter, dated as of October 12, 2016, by and between the Company and Michael Aldridge (incorporated by reference to Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016).
Statement Regarding the Computation of Ratio of Earnings to Fixed Charges
List of Subsidiaries.
Consent of BDO USA, LLP, independent registered public accounting firm
Power of Attorney (see signature page to this Annual Report on Form 10-K).
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. §1350.
The following materials from Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, formatted in
Extensible Business Reporting Language (XBRL) includes: (i) Consolidated Balance Sheets at December 31, 2016 and December 31,
2015, (ii) Consolidated Statements of Income for the years ended December 31, 2016, December 31, 2015 and December 31, 2014,
(iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, December 31, 2015 and December 31,
2014, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and December 31, 2014,
(v) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, December 31, 2015 and December 31,
2014 and (vi) Notes to Consolidated Financial Statements.
+
†
*
Indicates a management contract or compensatory plan or arrangement.
Confidential treatment has been granted for certain information contained in this exhibit. Such information has been omitted and filed separately
with the Securities and Exchange Commission.
Filed as exhibits to the registrant’s Registration Statement on Form S-1 (File No. 333-164044), effective April 21, 2010, and incorporated herein by
reference.
**
Pursuant to Item 601(b)(32) of Regulation S-K this exhibit is furnished rather than filed with this report.
91
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CODEXIS, INC.
(In Thousands)
Exhibit 12.1
Fixed charges:
Interest Expense
Total Fixed Charges
Earnings (deficiency) available for fixed
charges:
Pre-tax income(loss) from continuing
operations
add: Fixed Charges
Earnings(deficiency of earnings)
available to cover fixed charges
Years Ended December 31,
2012
2013
2014
2015
2016
$
— $
—
13 $
13
— $
—
— $
—
14
14
(30,587)
—
(41,390)
13
(19,327)
—
(7,919)
—
(8,598)
14
$ (30,587) $ (41,377) $ (19,327) $
(7,919) $
(8,584)
Ratio of earnings to fixed charges (1)
N/A
N/A
N/A
N/A
N/A
Our earnings were inadequate to cover fixed charges for the years ended December 31, 2012
through December 31, 2016.
(1)
Subsidiaries of Codexis, Inc.
Exhibit 21.1
Name of Subsidiary
Codexis Mayflower Holdings LLC
State or Jurisdiction in which
Incorporated or Organized
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-210022, 333-202596, 333-194524, 333-187711,
333-179903, 333-172166, and 333-167752) and the Registration Statement on Form S-3 (No. 333-215025) of Codexis, Inc. of our reports dated March 9,
2017, relating to the consolidated financial statements, and the effectiveness of Codexis, Inc.’s internal control over financial reporting, which appear in this
Form 10-K.
/s/ BDO USA, LLP
San Jose, California
March 9, 2017
Exhibit 31.1
I, John J. Nicols, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Codexis, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 9, 2017
/s/John J. Nicols
John J. Nicols
President and Chief Executive Officer
Exhibit 31.2
I, Gordon Sangster, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Codexis, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 9, 2017
/s/Gordon Sangster
Gordon Sangster
Senior Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Codexis, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2016, as filed with the
Securities and Exchange Commission (the “Report”), John J. Nicols, President and Chief Executive Officer of the Company and Gordon Sangster, Senior
Vice President and Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
•
•
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 9, 2017
/s/John J. Nicols
John J. Nicols
President and Chief Executive Officer
/s/Gordon Sangster
Gordon Sangster
Senior Vice President and Chief Financial Officer