A N N U A L R E P O R T
2020
2 0 2 0
Y E A R I N
R E V I E W
Corporate Highlights
Focus Areas
Sustainable Manufacturing
Life Science Tools
Biotherapeutics
Diversity, Equity and Inclusion (DEI)
Social Responsibility
Letter to Shareholders
Form 10-K
Corporate Highlights
F I S C A L Y E A R 2020
TOTA L R E V E N U E
$69m
P R O D U C T R E V E N U E
P R O D U C T G R O S S M A R G I N
$30m
55%
3
New enzymes developed
for life science tools
11
Patented and generic on-the-
market drugs manufactured
with Codexis enzymes
8
Products in life science
tools innovation pipeline
7
Projects in oral biologics
30
Sustainable manufacturing
products & processes being
developed
5
Projects in gene therapies
In a wide range of chemical industries,
we continue to be a pioneer and leading
partner in developing sustainable
manufacturing processes
S U S TA I N A B L E M A N U FA C T U R I N G
For many industrial products, using enzymes and proteins as processing aids or functional
ingredients is a path to sustainability. In a wide range of chemical industries, we continue to
be a pioneer and leading partner in developing sustainable manufacturing processes.
The landmark collaboration with Merck for the “cascade synthesis” of the investigational
HIV drug islatravir (MK-8591) shows our protein engineering platform continues to be used
to design enzymatic processes that generates less waste and increases yield.
In the food, beverage, and nutrition space, we apply our technology to develop new enzyme-
based processes that can not only replace traditional chemistries with a more sustainable
alternative, but also improve the performance of the manufactured ingredient.
We continue to explore new industrial applications that can benefit from engineered
enzymes (either for efficient bio-production or as differentiated products), including waste
processing and recycling, consumer care, and other market segments, towards a more
sustainable future.
codexis.com/pharma-mfg
codexis.com/food-and-nutrition
codexis.com/industrial-applications
S U S TA I N A B L E M A N U FA C T U R I N G
Enzyme products and processes that benefit the triple bottom
line – social, environmental and financial
PHARMA MANUFACTURING
Biocatalysis as the go-to process technology
• Improving product revenues, with growing commercial enzyme supply
to Allergan, Kyorin and others
• Now 11 commercial installations in API synthesis
FOOD, BEVERAGE & NUTRITION
Sustainable, clean label, high purity products
• TASTEVA® M Stevia Sweetener: Growing demand following
commercialization of novel enzyme cascade in 2018 (just 2 years after
ideation)
• Undisclosed collaborations on other food ingredient programs
INDUSTRIAL APPLICATIONS
Innovate and execute in new verticals
• New programs in waste reduction, biomaterial production and other
industrial applications
Next generation enzymes for next
generation life science tools
L I F E S C I E N C E TO O L S
Enzymes are already widely used in life sciences but, in general, have not been fully
optimized for their applications. We see great potential to leverage protein engineering to
create more effective life science tools and are building a pipeline of differentiated products
spanning diverse segments and applications. We are applying our technology to create a
portfolio of next generation enzymes for next generation life science tools.
In 2020, we scaled up three enzymes to be commercialized for life science applications,
including: a high-fidelity DNA polymerase for next-generation sequencing, an RNA polymerase
with significantly improved co-transcriptional capping, and a reverse transcriptase to
address an ongoing supply shortage within point-of-care diagnostics.
In addition to a growing pipeline of sequencing-focused enzymes, we are developing new,
differentiated enzymes for enzymatic nucleic acid synthesis. In partnership with Molecular
Assemblies, Inc., we are working on a competitive, scalable process for enzymatic DNA
synthesis to overcome known limitations of phosphoramidite chemistry and enable its
commercialization in new and existing markets.
Another focus area is next generation, wearable biosensors. From generating timely alerts to
accurately measuring metabolite profiles, enzymes are crucial for reliable sensor function,
and we are engineering enzymes targeted to improve specific biosensor performance
attributes.
codexis.com/life-sciences
L I F E S C I E N C E TO O L S
Enabling the future of life science
A G
C T
SEQUENCING & DETECTION
Improve NGS and diagnostic workflows
Codex® HiFi DNA polymerase for NGS
• Amplifies DNA with enhanced fidelity and reduced bias
DNA & RNA SYNTHESIS
Improve oligonucleotide synthesis
Codex® HiCap RNA polymerase for mRNA synthesis
• >5x capping efficiency over native enzyme, improving yield and
reducing ‘cap’ usage
New enzyme for enzymatic DNA synthesis
• In partnership with Molecular Assemblies, Inc. developing a
competitive, scalable process
HEALTH MONITORING
Enable novel biosensors for human and environmental health
Alcohol sensing enzyme
• For blood alcohol sensing applications, we increased enzyme
operational life from 2 to 85 days
New biosensor programs
• Multiple new programs with diagnostics partners to evolve enzymes
for new biosensor technology
The ability to precisely engineer proteins
for desired properties opens new
possibilities to discover effective biologic
therapeutics for patients
B I O T H E R A P E U T I C S
Traditional biologic drug discovery relies predominantly on natural protein sequences
which may be suboptimal in treating target diseases. Apart from antibodies, proteins do not
naturally evolve to treat disease and may be less efficacious, safe, and manufacturable than
desired when used as a therapeutic product. The capability to precisely engineer protein
structures for desired properties opens countless possibilities to develop more effective
therapeutics and remove the risks and limitations of current treatments.
We have pursued this strategy with the development of CDX-6114, an orally delivered,
gastrointestinal (GI)-active enzyme for the potential treatment of the orphan metabolic
disorder phenylketonuria (PKU). CDX-6114 was optimized to be stable and active in the
harsh environment of the gastrointestinal tract to enable oral administration of the drug
candidate with the goal of removing phenylalanine that is generated in the intestines by
natural food digestion. Since concluding its first successful clinical trial, CDX-6114 has been
licensed to Nestlé Health Science for its global development.
Besides engineering novel protein variants with higher stability and efficacy, we are also
applying our CodeEvolver® technology platform to enhance the efficacy of gene therapies.
Lead candidates for both Fabry and Pompe Disease formed the basis of a strategic
collaboration and license agreement with Takeda Pharmaceuticals and are demonstrating
the potential of our discovery platform to advance novel protein sequences as transgenes
and enable the development of next-generation gene therapies.
codexis.com/therapeutics
B I O T H E R A P E U T I C S
Rapidly building a high-value pipeline of safe and effective
protein and gene therapy candidates
ORAL BIOLOGICS
Optimized proteins enabling safe and efficacious treatments
GI-active therapies
• Driving a pipeline of non-systemically delivered proteins locally active
for treatment of genetic metabolic and gastrointestinal disorders
• Targeting best-in-class safety and efficacy
GENE THERAPIES
Enhanced transgenes and delivery vectors
Liver-depot or tissue-expressed therapies
• Engineered transgenes to enable best-in-class gene therapies for
lysosomal storage disorders, hematologic diseases, and other inborn
errors in metabolism
• Optimized viral vectors for enhanced delivery and manufacturability
Diversity, Equity
& Inclusion (DEI)
In our work, molecular diversity is the base of our pipeline success. In the workplace, our age,
race, ethnic background, religion, gender identity, gender expression, sexual orientation, and
many other differentiating aspects make each of us unique. This diversity makes us stronger as
a high-performing team. We respect differences and encourage everyone to contribute to each
person’s fullest potential. Diversity in people, experiences, opinions, and ideas is how we innovate,
and cultivating equality as well as eliminating unconscious bias with our entire community –
employees, partners, industries, neighbors, and more – are foundational for our success.
U N D E R R E P R E S E N T E D
E T H N I C G R O U P S *
14%
W O M E N I N L E A D E R S H I P
P O S I T I O N S
33%
W O M E N I N
T E C H N I C A L R O L E S
57%
W O M E N O N B O A R D
O F D I R E C T O R S
30%
*Hispanic/Latino, Black/African American, Native Hawaiian and other
Pacific Islander, Native American, and two or more races
95%
95%
91%
CODEXIS
SAN FRANCISCO BAY AREA
NATIONAL
Based on employee survey results relating to teamwork, cooperation, diversity and inclusion,
we are proud to have been recognized over four consecutive years as one of the nation’s Best &
Brightest Companies To Work For®.
Social Responsibility
We take our social responsibility towards the community and environment we operate in
seriously. In 2020, we effectively responded to COVID-19 to allow Codexis to remain essentially
fully functional through the pandemic. During the same time, we launched a video-based, online
science program to encourage virtual-learning, joined a mentoring program for local students,
and continued our support and commitment to build rare disease awareness.
To reduce and control our overall energy consumption per employee, we are making a significant
investment in the new San Carlos, CA facility while improving existing Redwood City, CA
headquarters.
COVID-19 RESPONSE
Implemented safety
measures to prevent
transmission
Infrastructure modifications
including HVAC fresh air
intake
Upgraded IT infrastructure to
support remote employees
The safety of our employees, our customers, and the local community is our top priority. Our
COVID-19 Task Force, established in March 2020, evolved over the course of the year in response
to changing conditions and guidance, and as a result, successfully managed Codexis through
the crisis to enable workflows approaching full operation in May 2020.
BUILDING RARE DISEASE AWARENESS
Today an estimated 7,000 rare diseases affect 1 in every 10 people living in
the US, an estimated 30 million Americans. We support the Rare Disease
Community by sharing our professionals at worldwide conferences, and
hosting rare disease awareness events for staff to directly correspond with
patients, clinicians, and advocacy leaders.
Social Responsibility
NURTURING FUTURE SCIENTISTS
With most students learning virtually during the pandemic, we put together scientific video
content to help educate students about the various aspects of enzymes that shape our daily
life, and how protein engineering applies to improving human health and environmental
sustainability. www.futureproteinengineers.com
Millie Muir
1st Place Winner
MENTORING PROGRAM FOR LOCAL STUDENTS
Just before the COVID-19 pandemic, many of our employees volunteered
time to mentor local students from the Carlmont High School Biotechnology
Institute Program in Belmont, CA. The mentoring program pairs students
with professionals to discuss both academic and career goals for a future
in research, engineering, programming, and business development in
biotechnology.
www.carlmontbti.org/mentor-or-volunteer/
Letter to Shareholders
Dear fellow shareholders, partners & employees:
After more than ten years as a public company, this is our first letter
to shareholders. This was spawned by our belief that we are at an
inflection point for the corporation, and it is our desire to begin a
new conversation, to help articulate our strategic plans and provide
a different insight into the performance and planned growth of the
company.
When I joined Codexis more than eight years ago, the company was suffering the effects of a
major global reset in the outlook for what had, only a year or two earlier, been a thriving biofuels
market. The task at hand was to perform a challenging turnaround. Many things attracted me to
the role of CEO and President, but two factors, in particular, stood out:
• The untapped potential of the platform technology to make dramatic and meaningful
improvements in the performance of biological and chemical systems.
• The passion of the employee base – both in their belief in the CodeEvolver® technology
and in their desire to make an impact on the world.
These continue to be the core foundations of Codexis’ success and growth, today.
The past year will, no doubt, go down as one of the most difficult in human history. COVID-19 has
challenged us all – as individuals, families, employees, and as corporations. As CEO of Codexis,
I could not be more proud of how our great team has dealt with everything that the global
pandemic has thrown at them. In 2020, we achieved major wins and milestones:
• We grew both top line revenue and product sales, despite the headwinds of
global uncertainty and resourcing constraints imposed by COVID-19.
• We have successfully onboarded critical new leaders and signed landmark agreements in
both our core business units.
• We completed a very successful fund raise in the 4th quarter, to stage us for future
investment and growth.
We entered 2021 with a deeper and broader pipeline than we have ever had, and the largest and
fastest growing team we have had in a decade.
Five years ago, we placed a strategic focus on leveraging the CodeEvolver® platform technology
into the discovery of Biotherapeutics. Three years ago, we saw the potential to do the same to
deliver high-performing enzymes as Life Science Tools. We have made tremendous progress
in these emerging verticals this year. In addition to growing our more established Sustainable
Manufacturing business, we continue to broaden beyond the pharmaceuticals market into other
high value and high volume segments.
•
•
In our Biotherapeutics Business, the investments over the past few years in developing
lead candidates for the potential treatment of rare genetic disorders enabled a landmark
gene therapy deal with Takeda. In addition, we have continued to progress in our
partnership with Nestlé Health Science, moving multiple candidates for a range of
therapeutic indications towards the clinic.
In Life Science Tools, we have brought differentiated products to the point of
commercialization in Next Generation Sequencing and in nucleic acid manufacturing, and
inked multiple partnering deals where our technology is the enabling or transformative
element.
• Our pharmaceutical manufacturing and food ingredient collaborations continue to
broaden, and the growing pipeline of projects and products is an ongoing driver of
sustainable product revenue growth.
With Dr. Jennifer Aaker, Dr. Alison Moore, and Dr. Stephen Dilly joining our board mid-year in
2020, as well as the confirmation of the recruitment of Dr. Esther Martinborough in early 2021,
we brought exceptional experience in biotherapeutics development and commercialization, and
further enhanced the diversity of the Board of Directors.
The launch of the SynBio Innovation Accelerator in the 4th quarter provides us new opportunities
to engage early-stage companies with disruptive technology platforms or unique product
development capabilities, and to both enable and benefit from the long term success of their
endeavors.
Reflecting on the key numbers for 2020:
• We delivered our 7th consecutive year of year-over-year revenue growth in 2020.
• Top line revenues were USD 69M.
• Product gross margin of 55% - an increase from 47% in 2019.
With $149M in cash at the start of 2021 and no debt, we are well-positioned for continued,
strong growth and to maintain a leading role in driving synthetic biology into the mainstream for
product discovery and development across Sustainable Manufacturing, Life Science Tools and
Biotherapeutics. By remaining true to our vision of striving to improve the health of people and
the planet, I am confident that Codexis will continue to deliver value for all stakeholders.
On behalf of Codexis’ leadership team, our employees and our Board of Directors, I thank you
for your continued support.
John Nicols,
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2020
FORM 10-K
☐ 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
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)
Title of Each Class:
Common Stock, par value $0.0001 per share
Registrant’s telephone number, including area code: (650) 421-8100
Securities Registered Pursuant to Section 12(b) of the A:
Trading Symbols(s):
CDXS
Securities Registered Pursuant to Section 12(g) of the Act: None
Name of Each Exchange on which Registered:
The Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See
the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Yes ☒
Yes ☐
Yes ☒
Yes ☒
No ☐
No ☒
No ☐
No ☐
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued
its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☒
Yes ☐
☐ ☐
☐
☐ ☐
No ☐
No ☒
The aggregate market value of voting and non-voting common stock held by non-affiliates of Codexis as of June 30, 2020 was approximately $ 655.8 million based upon the closing price
reported for such date on the Nasdaq Global Select Market.
As of February 25, 2021, there were 64,400,716 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.
______________________________________
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2021 Annual Meeting of
Stockholders (the "Proxy Statement"), 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, 2020. 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.
DOCUMENTS INCORPORATED BY REFERENCE
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
Item 16
Codexis, Inc.
Annual Report on Form 10-K
For The Year Ended December 31, 2020
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 Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
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
PART III
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
2
4
27
64
64
65
65
66
68
70
98
99
152
152
153
154
154
154
154
154
155
161
162
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 or performance; 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 and product candidates, product sales, revenues, 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.
3
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We discover, develop and sell enzymes and other proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast, largely untapped source of
value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing
number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.
®
We are a pioneer in harnessing computational technologies to drive biology advancements. Since 2002, 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 the structural and performance attributes of our large and continuously growing library of protein variants. These
computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted
®
performance enhancements. 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 bioprocess development which are all coordinated to rapidly innovate novel, fit-
for-purpose products.
The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex
chemicals. It begins by conceptually designing the most cost-effective and practical process for a targeted product. We then develop optimized biocatalysts to enable the
designed process, using our CodeEvolver platform. Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated
using high throughput methods under process-relevant operating conditions. This approach results in an optimized biocatalyst that enables cost-efficient processes that are
relatively simple to run in conventional manufacturing equipment allowing for efficient technical transfer of our processes to our manufacturing partners. This also allows for
efficient technical transfer of our processes 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 competencies directly integrated in our CodeEvolver protein engineering platform, 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, bioprocess development and fermentation engineering.
Our integrated, multi-disciplinary approach to product and process development is a critical success factor for the Company.
®
®
®
We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals, which remains a
primary business focus. Our customers, which include many large, global pharmaceutical companies, use our technology, products and services in their process development
and in manufacturing. Additionally, we have licensed our proprietary CodeEvolver protein engineering technology platform to global pharmaceutical companies enabling
them to use this technology, in house, to engineer enzymes for their own businesses. Most recently, in May 2019, we entered into a Platform Technology Transfer and License
Agreement (the “Novartis CodeEvolver Agreement”) with Novartis Pharma AG (“Novartis”). The Novartis CodeEvolver Agreement (Codexis’ third such agreement with
large pharma companies) allows Novartis to use our proprietary CodeEvolver protein engineering platform technology in the field of human healthcare.
®
®
®
®
As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for
use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals. In addition, we are using our technology to
develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular
diagnostic and genomic research applications. In December 2019, we entered into a license agreement to provide Roche Sequencing Solutions, Inc. ("Roche") with our first
enzyme for this target market: the Company’s EvoT4™ DNA ligase. In June 2020, we entered into a co-marketing and enzyme supply collaboration agreement with Alphazyme
LLC for the production and co-marketing of enzymes for life science applications including, initially, high-fidelity DNA polymerase, T7 RNA polymerase and reverse
transcriptase enzymes. In June 2020, we also entered into a Master Collaboration and Research Agreement with Molecular Assemblies, Inc. ("MAI") (the “MAI Agreement”)
pursuant to which we are leveraging our CodeEvolver platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA
®
4
synthesis. Concurrently with the MAI Agreement, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A
preferred stock for $1.0 million and, in connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.
®
Approximately five years ago, we began using the CodeEvolver protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both
in partnership with customers and for our own proprietary Codexis drug candidates. Our first program was for the potential treatment of phenylketonuria ("PKU") in humans.
PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we entered into a
Global Development, Option and License Agreement (the “Nestlé License Agreement”) with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd. (“Nestlé Health
Science”) to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU. In February 2019, Nestlé Health Science exercised its option
to obtain an exclusive license to develop and commercialize CDX-6114. Also in October 2017, we entered into a strategic collaboration agreement with Nestle Health Science
(“Nestlé SCA”) in which we and Nestlé Health Science are collaborating to leverage the CodeEvolver platform technology to develop other novel enzymes for Nestlé Health
Science’s established Consumer Care and Medical Nutrition business areas. In January 2020, we entered into a development agreement with Nestlé Health Science to advance a
new lead candidate discovered under the Nestlé SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder.
In parallel, the Nestlé SCA was extended through December 2021 to support the discovery of therapeutic candidates for additional disorders. In March 2020, we entered into a
Strategic Collaboration and License Agreement (“Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical
Company Limited (“Takeda”), for the research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders
and a blood factor deficiency.
®
BUSINESS SEGMENTS
We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 15, “Segment, Geographical and Other Revenue Information”
in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Performance Enzymes
®
We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this
continues to be our largest market served. Our customers, which include many 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 customized enzymes for use in other industrial markets. These markets consist
of several large industrial verticals, including food, feed, consumer care, and fine chemicals. We also use our technology in the life sciences markets to develop enzymes for
customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring
applications.
Novel Biotherapeutics
®
We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. 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,
such as its activity, stability or immunogenicity. Our first lead program was for the potential treatment of hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans.
PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we announced a
global development, option and license agreement with Nestlé Health Science to advance CDX-6114, our own novel orally administrable enzyme therapeutic candidate for the
potential treatment of PKU. In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, which was
conducted in Australia. The initiation of the trial triggered a $4.0 million milestone payment from Nestlé Health Science. The
$1.0 million milestone payment that was triggered by the achievement of a formulation relating to CDX-6114 was received in February 2019. In January 2019, we received
notice from the U.S. Food and Drug Administration ("FDA") that it had completed its review of our investigational new drug application ("IND") for CDX-6114 and concluded
that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the United States. In February 2019, Nestlé Health Science exercised its
option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU.
As a result of the option exercise, we earned a
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milestone and recognized $3.0 million in revenues in the first quarter of 2019. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical
development and commercialization of CDX-6114.
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In October 2017, we separately entered into the Nestlé SCA with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to leverage the
CodeEvolver platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. In January
2020, we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance into pre-clinical and
early clinical studies a lead candidate targeting a gastro-intestinal disorder, CDX-7108, discovered through the Nestlé SCA. The Nestlé SCA was extended through December
2021. During 2020, we, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in
2021. Additionally, the parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder.
In March 2020, we entered into the Takeda Agreement with Takeda pursuant to which we are collaborating to research and develop protein sequences for use in gene therapy
products for certain disease indications in accordance with the respective program plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency. In
March 2020, we received a one-time, non-refundable cash payment of $8.5 million. Of these programs, the Fabry disease program is the most advanced, with multiple
sequences, including CDX-6311, having been provided to Takeda.
BUSINESS UPDATE REGARDING COVID-19
We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent
to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are
highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new
information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international
markets.
To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our manufacturing
and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers. Furthermore, our
ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our
customers with whom we collaborate. We believe that these disruptions had a negative impact on our revenue for the year ended December 31, 2020, although we are unable to
fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues. The extent to which the pandemic may impact our
business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.
In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of
our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-March 2020 through
the end of April 2020 in accordance with these Orders. In May 2020, we re-initiated limited R&D operations and have ramped up operations such that we are currently utilizing
the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees. Additionally, we resumed small
scale manufacturing at our Redwood City pilot plant in May 2020.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain
disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.
The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain.
For additional information on the various risks posed by the COVID-19 pandemic, see “Risk Factors” set forth in Item 1A of this Annual Report on Form 10-K.
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RECENT INVESTING AND FINANCING ACTIVITIES
In June 2020, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million. In
connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors. Concurrently with our initial equity investment,
we entered into the MAI Agreement pursuant to which we are performing services utilizing our CodeEvolver protein engineering platform technology to improve DNA
polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock. We received 714,171 shares of MAI's Series A preferred
stock from research and development activities in the year ended December 31, 2020, and recognized $0.9 million in research and development revenue from these activities
with MAI in the year ended December 31, 2020. At December 31, 2020, we had $0.5 million of financial assets due from MAI for services rendered.
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In November 2020, we announced the SynBio Innovation Accelerator (“Accelerator”) collaboration with Casdin Capital, LLC ("Casdin"). The goal of the Accelerator is to fund
the early-stage companies with disruptive technology platforms or unique product development capabilities in the field of synthetic and industrial biotechnology. The first
investment by Codexis associated with the Accelerator collaboration was made in Arzeda Corp., a privately-held computational protein design company that focuses on
computational approaches to designing novel enzyme functionality. We invested $1.0 million in Arzeda and received a convertible subordinated note issued by Arzeda Corp.
The note is an available-for-sale non-marketable interest-bearing debt security which will mature within one year.
In December 2020, we completed an underwritten public offering of 4,928,572 shares of our common stock, including the exercise in full by the underwriters of their option to
purchase an additional 642,857 of our shares, at a public offering price of $17.50 per share. After deducting the underwriting discounts, commissions, and estimated offering
expenses, net proceeds were approximately $80.8 million.
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 biocatalyst solutions utilizing their own in-house protein engineering capability.
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Growing our pharmaceutical biocatalysts 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 biocatalyst 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 have also
invested in research and development in an effort to generate additional early stage novel biotherapeutic candidates.
Extending our biocatalysts and industrial enzymes business into new markets. We intend to continue to pursue opportunities to use biocatalyst products and services
to reduce the costs and improve sustainability for manufacturing in markets such as food and food ingredients. We intend to increase the number of customers and
industrial verticals that utilize and benefit from our novel performance enzyme solutions.
Developing high-performance enzymes for use in diagnostic applications. We intend to offer high-performance enzymes to customers using NGS and PCR/qPCR
for in vitro molecular diagnostic 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, regulatory review and
approval, commercial scale-up, product launch, 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 APIs.
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Our Solutions for the Pharmaceutical Market
Small Molecule Manufacturing Cost Reduction
Our pharmaceutical customers, which include many large 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 biocatalysts 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 biocatalyst 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
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incorporate our biocatalyst products. Moreover, we believe these cost savings are potentially attractive to generics manufacturers, who compete primarily on price.
In addition, manufacturing processes that utilize our biocatalysts can frequently enable processes that are more sustainable and environmentally friendly compared to
alternative, traditional manufacturing approaches. This has led us to earn three U.S. EPA Presidential Green Chemistry Challenge awards for improved pharmaceutical
manufacturing processes since we were founded. All three of these awards were associated with blockbuster drug products.
Biotherapeutic Discovery and Development Partnerships
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, such as its activity, stability or immunogenicity.
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We approach biopharmaceutical companies to collaborate and utilize our platform technology for the discovery of specific novel biotherapeutic candidates. We currently have
one such biotherapeutic discovery partnership in progress under the Nestlé SCA with Nestlé Health Science. We continue to pursue 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 us.
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Biotherapeutic Product Discovery and Development
We are also using our platform technology to self-fund the development of our own early stage, novel enzyme therapeutic product candidates. The lead product candidate is
CDX-6114, an enzyme which we have engineered to be orally administered and is being developed 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.
In addition to the PKU program, we have focused our self-funded biotherapeutic investments with aim to discover therapeutic solutions for four additional rare disease
conditions. Two of those programs are targeting potential enzyme replacement treatments for patients with inborn errors of amino acid metabolism diseases. The other two
programs are targeting potential treatments for patients with lysosomal storage diseases. We expect to continue to make additional investments with the aim of generating
additional product candidates targeting these, and potentially other therapeutic areas.
Nestlé Health Science
In October 2017, we entered into the Nestlé License Agreement with Nestlé Health Science pursuant to which we granted to Nestlé Health Science, under certain of our patent
rights and know-how: (i) an option to obtain an exclusive, worldwide, royalty-bearing, sublicensable license to develop and commercialize certain products (each, a “Product”)
based on CDX-6114 and our other therapeutic enzyme product candidates covered by specified patent applications for the treatment of HPA, and (ii) an exclusive right of first
negotiation (the “Right of First Negotiation”) for a period of five years to obtain an exclusive worldwide license to develop and commercialize up to two enzymes discovered by
us for use in the field of the prevention, diagnosis, treatment and management of inborn errors of amino acid metabolism. We are not under any obligation to undertake any
research and development activities relating to inborn errors of amino acid metabolism. HPA (also referred to as PKU) is a medical condition characterized by elevated
concentrations of the amino acid phenylalanine in the blood. PKU can result in severe HPA.
In February 2019, Nestlé Health Science exercised its option to receive an exclusive license to further develop and commercialize CDX-6114 and our other therapeutic enzyme
product candidates covered by specified patent applications for the treatment of PKU (each, a “Compound”). Under the terms of the Nestlé License Agreement, upon option
exercise, Nestlé Health Science received a license to the Compound, other than any enzyme that has other clinically significant, specified activity against another molecule,
unless that enzyme’s specified activity against phenylalanine is ten times greater than its activity against such other molecule (in which case it is not excluded). Furthermore, we
generally will retain the right to use any enzyme as a biocatalyst, provided that preclinical development of such enzyme has not commenced. The first Compound to be
developed under the Nestlé License Agreement was our enzyme CDX-6114.
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The Nestlé License Agreement also sets forth the parties’ respective obligations for development, commercialization, regulatory and manufacturing and supply activities for
CDX-6114 and Product containing CDX-6114. Prior to Nestlé Health Science exercising its option to receive an exclusive license to CDX-6114, we were generally responsible
for development activities, including conducting a Phase 1a clinical study. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical
development and commercialization of CDX-6114, with the exception of the completion of an extension study, CDX-6114-004, which was substantially completed in the fourth
quarter of 2019. Our development activities were governed by a development plan and overseen by a joint steering committee. The parties established a patent committee to
discuss strategies and coordinate activities for the patents related to CDX-6114 and product containing CDX-6114, and we will jointly own all inventions and information that
result from each party’s activities performed under the Nestlé License Agreement. The Nestlé License Agreement also contains customary representations and warranties by the
parties, intellectual property protection provisions, certain indemnification rights in favor of each party and customary confidentiality provisions and limitations of liability.
Nestlé Health Science paid us an upfront cash payment of $14.0 million in 2017. In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a
dose-escalation trial with CDX-6114 which was conducted in Australia. In November 2018, we announced top-line results from the Phase 1a study in healthy volunteers with
CDX-6114. The $4.0 million milestone payment that was triggered by the initiation of the trial was received in September 2018 and the $1.0 million milestone payment that was
triggered by the achievement of a formulation relating to CDX-6114 was received in February 2019. In January 2019, we received notice from the U.S. Food and Drug
Administration (the “FDA”) that it had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose
study in healthy volunteers in the United States. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive license for the global development and
commercialization of CDX-6114 for the management of PKU. The exercise of the option triggered a $3.0 million milestone payment.
Other potential payments from Nestlé Health Science to us under the Nestlé License Agreement include (i) development and approval milestones of up to $85.0 million, (ii)
sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties,
at percentages ranging from the middle single digits to low double-digits, of net sales of products containing an enzyme covered by the agreement as its sole active ingredient.
In October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver protein engineering
technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. The Nestlé SCA has been
extended through December 2021.
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In January 2020, we entered into a development agreement with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to advance a lead
candidate targeting a gastro-intestinal disorder discovered through the Nestlé SCA into pre-clinical and early clinical studies.
Shire Human Genetic Therapies/Takeda Pharmaceutical
In March 2020, we entered into the Takeda Agreement with Takeda under which we will research and develop protein sequences for use in gene therapy products for certain
diseases (each, a “Field”) in accordance with each applicable program plan (each, a “Program Plan”). We received an upfront nonrefundable cash payment of $8.5 million and
we initiated activities under three Program Plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency, respectively (the “Initial Programs”). We are
primarily responsible for the research and development of protein sequences under the Program Plans (the “Protein Sequences”) and we are eligible to earn up to $15.4 million
of research and development fees and pre-clinical milestone payments for the Initial Programs. Takeda has the right, but not the obligation, to develop, manufacture and
commercialize gene therapy products that include nucleic acid sequences that encode the Protein Sequences (“Products”) at their expense. Takeda has the right to a certain
number of additional disease indications (“Reserved Target Indications”) for a limited time period during which Takeda may initiate a Program Plan for one or more Reserved
Target Indications (“Additional/Option Program,” with Initial Programs, the “Programs”), provided, (a) if Takeda elects to initiate an Additional/Option Program while the
parties are collaborating on three other Programs at the time of such election, or (b) if Takeda elects to initiate an Additional/Option Program using the last remaining Reserved
Target Indication, then Takeda must pay us an option exercise fee to initiate such Additional/Option Program. We will own all rights to the Protein Sequences and
corresponding nucleic acid sequences and related intellectual property rights and Takeda will own all rights to Products and related intellectual property rights.
We granted to Takeda an exclusive, worldwide, royalty-bearing, sublicensable license to use the Protein Sequences and their corresponding nucleic acid sequences to develop,
manufacture and commercialize the applicable Products in the applicable Field. We also granted to Takeda a limited non-exclusive, worldwide, sublicensable license (a) to
research the Protein Sequences within or outside the applicable Fields and (b) to research the Products outside of the applicable Fields, which such
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rights exclude Takeda's right to perform any Investigational New Drug-enabling activities. The licenses to research the Protein Sequences expire after a pre-determined period
of time.
The term of the Takeda Agreement begins on the effective date of the Takeda Agreement and continues on a Product-by-Product and country-by-country basis, until the
expiration of Takeda’s obligation to pay royalties to the Company with respect to that Product in that country. The Takeda Agreement expires in its entirety upon the expiration
of Takeda’s obligation to pay royalties to the Company with respect to the Products in all countries worldwide. Subject to the terms of the Takeda Agreement, and after the first
anniversary of the Effective Date with respect to the Initial Programs or after the first anniversary of confirmation of the applicable Program Plan by the parties with respect to
the Additional/Option Programs, Takeda may terminate a Program upon specified prior written notice to the Company. Subject to the terms of the Takeda Agreement, Takeda
may terminate the Takeda Agreement, at will, on a Product-by-Product basis upon specified prior written notice to the Company and the Takeda Agreement in its entirety upon
specified prior written notice to the Company. Subject to the terms of the Takeda Agreement, Takeda may terminate the Takeda Agreement on a Product-by-Product basis for
safety reasons upon specified prior written notice to the Company. Either party may terminate the Takeda Agreement for an uncured material breach by the other party, or the
other party’s insolvency or bankruptcy. We are eligible to receive certain development and commercialization milestone payments up to $100.0 million per target gene, the
modulation of which would lead to the treatment of the disease indications by the applicable Product. We are also eligible to receive tiered royalties based on net sales of
Products at percentages ranging from the middle-single digits to low single-digits.
Licensing Our CodeEvolver Protein Engineering Technology Platform
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Licensing our CodeEvolver protein engineering technology platform to pharmaceutical companies enables them to rapidly develop custom-designed enzymes that are highly
optimized for efficient manufacturing processes. To date, we have entered into platform technology licensing agreements with each of GlaxoSmithKline Intellectual Property
Development Limited, a subsidiary of GlaxoSmithKline plc ("GSK"), Merck, Sharp & Dohme ("Merck") and Novartis Pharma AG ("Novartis"), and 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 proteins
for their internal use.
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GlaxoSmithKline
We entered into our first CodeEvolver protein engineering Platform Technology Transfer, Collaboration and License Agreement (“GSK CodeEvolver Agreement”) in July
2014 with GlaxoSmithKline Intellectual Property Development Limited, a subsidiary of GSK, pursuant to which we granted GSK a non-exclusive, worldwide license to use our
CodeEvolver protein engineering technology platform in the field of human healthcare for its internal development purposes.
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Under the GSK CodeEvolver Agreement, we transferred our CodeEvolver protein engineering technology platform to GSK over a twenty-one-month period that began in
July 2014. 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. We 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.
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We are also eligible to receive royalties based on net sales, if any, of a limited set of products developed by GSK using our CodeEvolver protein engineering technology
platform.
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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.
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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.
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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.
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In 2019, we received a $2.0 million milestone payment on the advancement of an enzyme developed by GSK using our CodeEvolver protein engineering platform technology.
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Merck
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 our proprietary CodeEvolver protein engineering platform technology in the field of human and animal healthcare.
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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.
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Under the terms of the Merck CodeEvolver Agreement, Merck paid us upfront technology transfer and license fees and milestone payments over the technology transfer period
of 15 months from August 2015. 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
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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.
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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 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.
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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.
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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 3 clinical trial for the product containing the API and ends five years following regulatory approval for such product.
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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.
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In September 2016, we completed the full transfer of the engineering platform technology. In October 2018, we entered into an amendment to the Merck CodeEvolver
Agreement whereby we amended certain licensing provisions and one exhibit. In January 2019, we entered into an amendment to the Merck CodeEvolver Agreement whereby
we installed certain CodeEvolver protein engineering technology upgrades into Merck’s platform license installation. We will maintain those upgrades for a multi-year term
expiring in January 2022.
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Novartis
In May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver Agreement”) with Novartis.
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The Novartis CodeEvolver Agreement allows Novartis to use our proprietary CodeEvolver protein engineering platform technology (the “CodeEvolver Platform
Technology”) in the field of human healthcare. The CodeEvolver Platform Technology enables rapid development of custom-designed enzymes that are highly optimized for
efficient manufacturing processes. The CodeEvolver Platform Technology, which is comprised of proprietary methods for the design and generation of diverse genetic
libraries, automated screening techniques, algorithms for the interpretation of screening data and predictive modelling, is covered by more than 250 issued patents and patent
applications worldwide.
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Under the Novartis CodeEvolver Agreement, Codexis will transfer its CodeEvolver Platform Technology to Novartis over approximately 20 months starting with the date on
which Codexis commences the technology transfer (the “Technology Transfer Period”). As a part of this technology transfer, Codexis will provide to Novartis Codexis’
proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of Codexis and Novartis scientists will
participate in technology training sessions and collaborative research projects at Codexis’ laboratories in Redwood City, California and at a designated Novartis laboratory in
Basel, Switzerland. Upon completion of technology transfer, Novartis will have CodeEvolver Platform Technology installed at its designated laboratory.
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Under the terms of the Novartis CodeEvolver Agreement, Codexis granted to Novartis a worldwide license to use Codexis’ CodeEvolver Platform Technology to research,
develop and manufacture novel enzymes for use by or on behalf of Novartis as biocatalysts in the chemical synthesis of small molecule and bioconjugate active pharmaceutical
ingredients (“API”). The license to Novartis is exclusive for the research, development and manufacture of novel enzymes for use by Novartis as biocatalysts in the chemical
synthesis of API owned or controlled by Novartis (“Novartis Exclusive Field”) and non-exclusive for the research, development and manufacture of novel enzymes for use by
Novartis in the chemical synthesis of API not owned or controlled by Novartis or any third party (“Novartis Non-Exclusive Field”). Novartis has the right to grant sublicenses to
affiliates of Novartis and, in certain limited circumstances, to third parties. Codexis has also granted to Novartis a license to make or have made enzymes engineered using the
CodeEvolver Platform Technology for use in the manufacture of therapeutic products or API with a right to grant sublicenses solely to affiliates of Novartis, contract
manufacturing organizations and contract research organizations. The manufacturing license is exclusive in the Novartis Exclusive Field and non-exclusive in the Novartis 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 Platform Technology to discover any biologic, therapeutic enzyme, diagnostic product or
vaccine. In addition, Novartis is prohibited from using the CodeEvolver Platform Technology to develop or produce enzymes or any other compounds for or on behalf of any
third parties except in a very limited manner when Novartis divests an API that is manufactured using an enzyme developed using the CodeEvolver Platform Technology.
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Novartis will pay Codexis up to $14.0 million over approximately the period through March 2021, of which $5.0 million was received shortly after the effective date of the
Novartis CodeEvolver Agreement. In the second quarter of 2020, we completed the second technology milestone transfer under the agreement and became eligible to receive a
milestone payment of $4.0 million, which we subsequently received in July 2020. We have also billed $3.4 million for partial completion of the third technology milestone and
we expect to receive payment in the first quarter of 2021. In addition to this payment, we are eligible
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for an additional payment of $1.6 million for completion of the third technology milestone transfer, which would bring total cash payment for this milestone to $5 million as
specified in the Novartis CodeEvolver Agreement. In consideration for the continued disclosure and license of improvements to our technology and materials during a multi-
year period that begins on the conclusion of the Technology Transfer Period (“Improvements Term”), Novartis will pay us annual payments which amount to an additional $8.0
million. Codexis also has the potential to receive quantity-dependent, usage payments for each API that is manufactured by Novartis using one or more enzymes that have been
developed or are in development using the CodeEvolver Platform Technology during the period that begins on the conclusion of the Technology Transfer Period and ends on
the expiration date of the last to expire licensed patent. These product-related usage payments, if any, will be paid by Novartis to Codexis for each quarter that Novartis
manufactures API using a CodeEvolver
-developed enzyme. The usage payments will be based on the total volume of API produced using the CodeEvolver -developed
enzyme. These usage payments can begin in clinical stage and will extend throughout the commercial life of each API. Codexis has the right to conduct an annual audit to
confirm that all payments that are owed to Codexis have been paid in full and on time.
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The licenses to Novartis are granted under patents, patent applications and know-how that Codexis owns or controls as of the effective date and that cover the CodeEvolver
Platform Technology. Any improvements to the CodeEvolver Platform Technology during the Technology Transfer Period will also be included in the license grants from
Codexis to Novartis.
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Under the Novartis CodeEvolver Agreement, Codexis will own any improvements to Codexis’ protein engineering methods, processes and algorithms that arise and any
enzyme technology or process technology that is developed during the Technology Transfer Period or during the Improvements Term. Novartis will own (a) any enzyme
technology that is developed solely by Novartis or jointly by Novartis and Codexis under an enzyme evolution project using the CodeEvolver Platform Technology (a “Project
Enzyme”) and (b) the methods of use of any Project Enzyme or any enzyme developed solely by Novartis or jointly by Novartis and Codexis under an enzyme evolution project
using the CodeEvolver Platform Technology (“Process Technology”). Novartis granted to Codexis a worldwide, exclusive, fully paid-up, royalty-free license, with the right to
grant sublicenses, to use Project Enzymes outside of the Novartis Exclusive Field. Novartis also granted to Codexis a worldwide, non-exclusive, fully paid-up, royalty-free
license, with the right to grant sublicenses, to use the Process Technology outside of the Novartis Exclusive Field.
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For each Novartis-controlled API that Novartis manufactures using an enzyme developed using the CodeEvolver Platform Technology, Codexis will have a right of first
refusal to supply Novartis with the enzyme used to manufacture the API, once Novartis’s requirement for such enzyme exceeds a certain quantity, if Novartis self-produces or
outsources the supply of the enzyme. Codexis’ right of first refusal applies during the period that begins on the completion of a Phase 1 clinical trial for the first therapeutic
product containing the API and ends on the earlier of five years following regulatory approval for such product and termination of the Novartis CodeEvolver Agreement.
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The Novartis CodeEvolver Agreement has a term that begins on its effective date and continues unless and until terminated under the Novartis CodeEvolver Agreement. At
any time following the first technology transfer stage, Novartis may terminate the Novartis CodeEvolver Agreement by providing 90 days written notice to Codexis. If
Novartis exercises this termination right prior to making the first technology transfer milestone payment, Novartis will make a one-time termination payment of $9.0 million to
Codexis. If Novartis exercises this termination right after making the first technology transfer milestone payment but prior to making the second technology transfer milestone
payment, Novartis will make a one-time termination payment of $5.0 million to Codexis. In addition, either party may terminate the Novartis CodeEvolver Agreement for the
other party’s uncured material breach or insolvency or bankruptcy. In the event the Novartis CodeEvolver Agreement is terminated by Novartis, or by Codexis due to an
uncured material breach by Novartis or insolvency or bankruptcy of Novartis, or if Novartis sells or transfers to a third party any Novartis business or facility that includes any
Codexis proprietary materials, information or technology, Codexis has the right to conduct an audit of Novartis’s facilities to confirm that all proprietary Codexis materials,
information and technology have been destroyed. The Novartis CodeEvolver Agreement also contains indemnification provisions under which Novartis and Codexis
indemnify each other against certain third party claims.
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Fine Chemicals and Industrial Enzyme 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 November 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. In March 2017, we entered into a multi-year research and development agreement with Tate & Lyle for the
development of a second ingredient for the food ingredient industry. We engineered a suite of enzymes that enable Tate & Lyle’s novel bioconversion route for the manufacture
of their newly-launched zero-calorie TASTEVA M Stevia sweetener.
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We are seeking to expand our enzyme offerings in the fine chemical and industrial enzyme markets within and beyond the food
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industry, including, for example, to the animal feed, agricultural chemicals, consumer care, flavors and fragrances markets.
Molecular Biology and In Vitro Diagnostic Enzymes
We believe that our 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 enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic applications. In
December 2019, we entered into a license agreement to provide Roche with our EvoT4™ DNA ligase high-performance molecular diagnostic enzyme. This enzyme was
developed using our proprietary CodeEvolver protein engineering platform and is expected to be incorporated into Roche’s NGS library preparation kits and other sequencing
products. We are also currently working on a second enzyme independently of Roche, a DNA polymerase, which is being prepared for beta testing.
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Biocatalyst Products and Services
Our biocatalyst products and services can deliver value to our customers in multiple potential ways:
• manufacture their products at lower cost;
• manufacture their products with lower fixed capital investment;
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reduce the cost of development of complex chemical synthesis processes;
enable their products to achieve higher product purity;
allow the removal of entire steps from chemical production; and
provide flexibility to apply at any point across their product’s lifecycle.
Our products include biocatalysts, chemical intermediates and Codex biocatalyst panels and kits. We sell our products worldwide primarily through our direct sales and
business development force in the United States and Europe.
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In addition to products, we also offer research and development services to our customers. These research and development service agreements often contain service fee
payments and intellectual property provisions under which we screen and/or engineer biocatalysts 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: upfront payments, milestone payments, payments for screening and engineering
services, licensing fees and royalties.
Biocatalysts
We often sell biocatalysts, by the gram or kilogram, that have already been engineered, scaled up, and installed in a customer’s commercial process. For example, we sell
biocatalysts to Merck for their manufacture of sitagliptin, the active ingredient in Januvia . We also sell biocatalysts which are in developmental stages. These are enzymes that
are sold by the batch 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 biocatalysts that are in the midst of protein engineering efforts, in order to test their performance at a larger scale or to
accelerate a customer’s process development. We may also sell batches of specific biocatalysts for use in a customer’s developmental products (for example, for use in the
manufacture of a customer’s Phase 2 drug candidate). Finally, we may sell batches of specific biocatalysts as a customer performs trials for approval in their commercial
manufacturing operations.
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Chemical Intermediates
In some cases, we sell intermediate chemicals products that are produced in a process that uses our biocatalysts. These chemical intermediates are then used by our customer for
further chemical processing.
Codex Biocatalyst Panels and Kits
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We sell kits and panels of our biocatalysts. 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.
Biocatalyst Screening Services
If a customer prefers, rather than purchasing our Codex Biocatalyst Panels or Kits to use for its own screening, it may send us its starting materials and desired chemical
reaction, and we will test against our existing libraries of enzymes on a research and development 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.
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Protein Engineering Services
We work with our customers throughout their product development lifecycle to optimize enzymes that have been engineered specifically to perform a desired process according
to a highly selective set of specifications. We typically charge customers for research and development services by project or project-month. These are typically larger research
and development 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 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
application. 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 rank 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 biocatalyst is rapidly optimized until all in-process performance requirements have been achieved and the economic objectives for the desired process have been met.
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, 2020, we owned or controlled approximately 1,635 issued patents and pending patent applications in the United States and in various foreign jurisdictions,
many of which are directed to our enabling technologies and specific methods and products that support our business in the pharmaceutical markets. In addition, our portfolio
includes patents and pending patent applications that support our businesses in the biotherapeutics, molecular diagnostics, food and other markets. Our patents and pending
patent applications, if issued, have terms that expire between 2021 and approximately 2041. Our United States patents and pending patent applications directed to the
CodeEvolver proprietary enabling technology platform developed internally by us have terms that expire between 2029 and approximately 2034. It is possible that some US
patents may be entitled to patent term extensions and/or patent term adjustments, which would extend the protection beyond these expiration dates. It is also possible that some
patents in other jurisdictions will be entitled to additional patent term. 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
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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.
As of December 31, 2020, we owned approximately 110 trademark registrations in the United States and foreign jurisdictions, as well as many common law trademarks. These
include, but are not limited to: Codexis , Codex , CodeEvolver , Mosaic , Sage , Microcyp , MCYP , ProSAR , Unlock the Power of Proteins , the Codexis Protein
Engineering Experts logo, Strategist™, Continuity ™, Ameli™, Forager ™, Analogene ™, Harvester ™, Atoms ™, Riptide ™, APS™ and a Codexis design mark (i.e.,
the stylized Codexis logo).
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COMPETITION
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 biocatalyst 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 biocatalyst products and services. We also sometimes face competition 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, Novartis, Pfizer Inc. ("Pfizer"), Bristol-Myers Squibb Company ("Bristol-Myers"), KYORIN Pharmaceutical Co., Ltd.
("Kyorin"), Urovant Sciences GmbH ("Urovant"), and Teva Pharmaceutical Industries Limited ("Teva"), 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 biocatalyst based manufacturing processes must compete with these internally developed routes.
Companies developing and marketing conventional catalysts include Solvias AG, BASF, Johnson-Matthey 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 and Dupont, as well as subsidiaries of larger contract research/contract manufacturing organizations (“CRO/CMO”), such as Royal DSM N.V. (“DSM”), Cambrex
Corporation, Lonza, WuXi STA and Almac Group Ltd. Some fermentation pathway design companies, like Ginkgo Bioworks and Zymergen, whose traditional focus has been
to design microorganisms that express small molecule chemicals, could extend into designing organisms that express enzymes. There is also competition in the enzyme
customization and optimization area from several smaller companies, such as BRAIN AG, Arzeda, c-LEcta GmbH and Evocatal GmbH.
We believe that our principal advantage is our ability to rapidly deliver customized biocatalysts for existing and new intermediates and APIs in the pharmaceutical
manufacturing market. This capability has allowed us to create a breadth of biocatalysts 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.
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Biotherapeutics
There are other 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. In addition, BioMarin had gained FDA approval in May 2018 and began the commercial sales of Palynziq , an injectable enzyme substitution therapy to address
different options for care in the treatment of PKU. Subsequently in May 2019, BioMarin obtained marketing authorization for Palynziq from the European Commission.
Several companies, including Synlogic,
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Homology Medicines and Rubius have reported clinical efforts to develop biotherapeutic candidates for PKU. Beyond targeting PKU, Takeda, Genzyme / Sanofi S.A.,
BioMarin, and other companies market or are actively developing enzyme therapeutics. There are numerous companies that are developing other forms of therapeutics, such as
small molecules, gene therapy, as well as therapies based on gene editing, which could compete with biotherapeutics.
Fine Chemicals
We entered the fine chemicals market in 2013 by applying our protein engineering technology in the manufacture of food ingredients. 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, like
Zymergen and Gingko Bioworks, who offer engineered microbe metabolic pathway approaches to these markets.
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, Bayer 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 are located in Redwood City, California and provide general administrative support to our business and are 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. In the first quarter of 2021, we entered into an arrangement with a lessor to lease a facility in San Carlos, California to serve as additional
office and research and development laboratory space which we expect to occupy in November 2021. Please see Note 15, “Segment, Geographical and Other Revenue
Information” in the Notes to our Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for a description of our revenues and long-lived
assets both within and outside of the United States. Please see Note 15, “Segment, Geographical and Other Revenue Information” for a description of our revenues and long-
lived assets both within and outside of the United States, and with respect to the San Carlos facility, please see Note 17, “Subsequent Events” in the Notes to our Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
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Our research and development operations include efforts directed towards engineering biocatalysts, 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
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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 three locations, at our in-house facility in Redwood City, California and at third-party contract manufacturing organizations, Lactosan GmbH & Co. KG
(“Lactosan”) in Kapfenberg, Austria and DPhar S.p.A. (“DPhar”) in Anagni, Italy. 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.
GOVERNMENT REGULATION
In the United States, the FDA extensively regulates, among other things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness,
labeling, packaging, storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring, and post-approval reporting of drug and
biologic products under the Federal Food, Drug and Cosmetic Act, its implementing regulations and other laws, including, in the case of biologics, the Public Health Service
Act. Our biotherapeutic product candidates are subject to regulation by the FDA as biologics. Biologics require the submission of a biologics license application (“BLA”) and
licensure, which constitutes approval, by the FDA before being marketed in the United States. We, along with third-party contractors and our collaborators, will be required to
navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the countries in which we wish to conduct studies or
seek approval or licensure of our product candidates. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and
foreign statutes and regulations require the expenditure of substantial time and financial resources.
The process required by the FDA before a biologic product may be marketed in the United States generally involves the following:
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completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s good laboratory practice (“GLP”) regulations;
submission to the FDA of an IND, which must become effective before clinical trials in the United States may begin;
approval by an institutional review board (“IRB”), or ethics committee at each clinical site before the trial is commenced;
performance of adequate and well-controlled human clinical trials to establish the safety, purity, and potency of the product candidate for each proposed indication,
conducted in accordance with the FDA’s good clinical practice (“GCP”) regulations;
preparation and submission to the FDA of a BLA after completion of all pivotal clinical trials:
satisfactory completion of an FDA Advisory Committee review, if applicable;
a determination by the FDA within 60 days of its receipt of a BLA to file the application for review;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good
manufacturing practice (“cGMP”) regulations and to assure that the facilities, methods and controls are adequate to preserve the biological product’s continued
safety, purity and potency, and of selected clinical investigation sites to assess compliance with Good Clinical Practices, or GCPs; and
FDA review and approval of the BLA prior to any commercial marketing, sale or distribution of the product.
Preclinical and Clinical Trials
Once a product candidate is identified for development, it enters the preclinical testing stage. Preclinical studies include laboratory evaluations of drug chemistry, formulation
and stability, as well as studies to evaluate toxicity in animals, which must be conducted in accordance with GLP requirements. The results of preclinical studies, together with
manufacturing information and analytical data, are submitted to the FDA as part of an IND. An IND is a request for authorization from the FDA to administer an investigational
new drug to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for clinical studies. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns
that human research subjects will be exposed to unreasonable health risks, and imposes a clinical hold. In such a case, the IND sponsor and the FDA must resolve any
outstanding concerns before the clinical trial can begin.
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A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development, and the FDA must grant permission,
either explicitly or implicitly by not objecting, before each clinical trial can begin. Progress reports detailing the results of the clinical trials, among other information, must be
submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events,
findings from other studies or animal or in vitro testing that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected
adverse reaction over that listed in the protocol or investigator brochure.
Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified investigators in accordance with GCPs, which include the
requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among
other things, the objectives of the clinical trial and the parameters and criteria to be used in monitoring safety and evaluating effectiveness. Each protocol must be submitted to
the FDA as part of the IND. An independent IRB for each investigator site proposing to participate in a clinical trial must also review and approve the clinical trial and its
informed consent form before it can begin at that site, and the IRB must monitor the clinical trial until it is completed. The FDA, the IRB, or the sponsor may suspend or
discontinue a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to
meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety
monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may
halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements
governing the reporting of ongoing clinical studies and clinical study results to public registries.
For purposes of BLA approval, clinical trials are typically conducted in three sequential phases, which may overlap or be combined.
•
•
•
Phase 1-Phase 1 clinical trials involve initial introduction of the investigational product into healthy human subjects or patients with the target disease or condition.
These studies are typically designed to test the safety, dosage tolerance, absorption, metabolism and distribution of the investigational product in humans, the side
effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.
Phase 2-Phase 2 clinical trials typically involve administration of the investigational product to a limited patient population with a specified disease or condition to
evaluate the preliminary efficacy, optimal dosage and dosing schedule and to identify possible adverse side effects and safety risks.
Phase 3-Phase 3 clinical trials typically involve administration of the investigational product to an expanded patient population to further evaluate dosage, to
provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These
clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval and physician
labeling.
In some cases, the FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the biologic’s safety and effectiveness
after BLA approval. Such post-approval clinical trials are typically referred to as Phase 4 clinical trials. Concurrent with clinical trials, companies usually complete additional
animal studies and must also develop additional information about the chemistry and physical characteristics of the biologic and finalize a process for manufacturing the
biologic in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product
candidate and manufacturers must develop, among other things, methods for testing the identity, strength, quality and purity of the final biological product. Additionally,
appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable
deterioration over its shelf life.
Although most clinical research performed in the United States in support of a BLA must be authorized in advance by the FDA, under the IND regulations and procedures
described above, there are certain circumstances under which clinical trials can be conducted without submission of an IND. For example, a sponsor who wishes to conduct a
clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND.
BLA Submission and FDA Review
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of preclinical studies and clinical trials, together
with other detailed information, including extensive manufacturing information and information on the composition of the biologic, are submitted to the FDA in the form of a
BLA requesting approval to market the biologic for one or more specified indications. The BLA must include all relevant data available from preclinical and
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clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing,
controls, and proposed labeling, among other things. Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of the
product, or from a number of alternative sources, including studies initiated by investigators. The submission of a BLA requires payment of a substantial user fee unless a
waiver is granted. Each BLA submitted to the FDA is reviewed for administrative completeness and reviewability within 60 days of the FDA’s receipt of the application. If the
BLA is found to be complete, the FDA will file the BLA, triggering a full substantive review of the application. The FDA may refuse to file any BLA that it deems incomplete
or not properly reviewable at the time of submission.
Once a BLA has been accepted for filing under the Prescription Drug User Fee Act, the FDA has a goal of reviewing BLAs within ten months of the 60-day filing date for
BLAs designated for standard review or six months for priority review, but the overall timeframe is often extended by FDA requests for additional information or clarification.
The FDA reviews a BLA to determine, among other things, whether the biological product is safe, pure and potent and whether the facility or facilities in which it is
manufactured meet standards designed to assure the product’s continued safety, purity and potency. The FDA may refer the application to an advisory committee for review,
evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally
follows such recommendations.
Before approving a BLA, the FDA will inspect the facility or the facilities at which the biologic product is manufactured, and will not license the product unless cGMP
compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance with GCP requirements, and will not license
the biologic unless compliance with such requirements is satisfactory. If the FDA determines that the application, manufacturing process or manufacturing facilities are not
acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
After the FDA evaluates a BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may
issue an approval letter or a Complete Response Letter (“CRL”). An approval letter authorizes commercial marketing of the product with specific prescribing information for
specific indications. A CRL will describe all of the deficiencies that the FDA has identified in the BLA, except that where the FDA determines that the data supporting the
application are inadequate to support approval, the FDA may issue the CRL without first conducting required inspections, testing submitted product lots, and/or reviewing
proposed labeling. In issuing the CRL, the FDA may recommend actions that the applicant might take to place the BLA in condition for approval, including requests for
additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied, require additional testing or
information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product
may be marketed. For example, the FDA may approve the BLA with a Risk Evaluation and Mitigation Strategy (“REMS”), to ensure the benefits of the product outweigh its
risks. A REMS is a safety strategy implemented to manage a known or potential serious risk associated with a product and to enable patients to have continued access to such
medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution
methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of
adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained
or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the
product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.
Expedited Development and Review Programs
The FDA maintains several programs intended to facilitate and expedite development and review of new drugs and biologics to address unmet medical needs in the treatment of
serious or life-threatening diseases or conditions.
For example a product candidate is eligible for Fast Track designation if it is intended to treat a serious or life-threatening disease or condition and demonstrates the potential to
address unmet medical needs for such disease or condition. Fast Track designation applies to the combination of the product candidate and the specific indication for which it is
being studied. Fast Track designation provides increased opportunities for sponsor meetings with the FDA during preclinical and clinical development, in addition to the
potential for rolling review once a marketing application is filed, meaning that the FDA may review portions of the marketing application before the sponsor submits the
complete application, if the sponsor provides a schedule for the submission of the sections of the BLA, the FDA agrees to accept sections of the BLA and determines that the
schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the BLA.,
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In addition, a product candidate may be eligible for Breakthrough Therapy designation if it is intended to treat a serious or life-threatening disease or condition and preliminary
clinical evidence indicates that the product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. Breakthrough Therapy designation provides all the features of Fast Track designation in addition to
intensive guidance on an efficient development program beginning as early as Phase 1, and FDA organizational commitment to expedited development, including involvement
of senior managers and experienced review staff in a cross-disciplinary review, where appropriate.
Any product candidate submitted to the FDA for approval, including a product candidate with Fast Track or Breakthrough Therapy designation, may also be eligible for
additional FDA programs intended to expedite the review process, including Priority Review designation and Accelerated Approval. A BLA is eligible for Priority Review if the
product candidate is designed to treat a serious or life-threatening disease or condition, and if approved, would provide a significant improvement in safety or effectiveness in
the treatment, diagnosis or prevention of a serious disease or condition.
Additionally, product candidates studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive Accelerated Approval if they
can be shown to have an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or an effect on a clinical endpoint that can be measured earlier than
an effect on irreversible morbidity or mortality which is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account
the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally require
the sponsor to perform adequate and well-controlled post-marketing clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other
clinical benefit. Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required post-marketing studies
or if such studies fail to verify the predicted clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional
materials, which could adversely impact the timing of the commercial launch of the product.
Fast Track designation, Breakthrough Therapy designation, Priority Review designation and Accelerated Approval do not change the standards for approval but may expedite
the development or review process. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for
qualification or decide that the time period for FDA review or approval will not be shortened.
Orphan drug designation and exclusivity
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, defined as a disease or condition with a
patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 individuals in the United States and when there is no
reasonable expectation that the cost of developing and making available the drug or biologic in the United States will be recovered from sales in the United States for that drug
or biologic. Orphan drug designation must be requested before submitting a BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent
and its potential orphan use are disclosed publicly by the FDA.
If a product candidate that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such
designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full BLA, to market the same
biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the
FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients
with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug or biologic for the same
disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research
and a waiver of the BLA application user fee.
A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In
addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or, as
noted above, if a second applicant demonstrates that its product is clinically superior to the approved product with orphan exclusivity or the manufacturer of the approved
product is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.
Post-Approval Requirements
Licensed biologics that are manufactured and distributed in the United States are subject to pervasive and continuing regulation by the FDA, including, among other things,
requirements relating to recordkeeping, periodic reporting, product distribution,
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advertising and promotion and reporting of adverse experiences with the product. There is also a continuing, annual prescription drug program user fee.
Any biologics manufactured or distributed pursuant to FDA approvals remain subject to ongoing regulation by the FDA. Manufacturers and their subcontractors are required to
register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance
with ongoing regulatory requirements, including cGMP, which impose extensive procedural and documentation requirements. Failure to comply with statutory and regulatory
requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, product seizures, injunctions, civil penalties
or criminal prosecution.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to
comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information, requirements for post-market studies or clinical trials to
assess new safety risks, imposition of distribution or other restrictions under a REMS. Other potential consequences include, among other things:
•
•
•
•
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters, untitled letters, or holds on post-approval clinical trials;
refusal of the FDA to approve applications or supplements to approved applications, or suspension or revocation of product approvals;
product seizure or detention, or refusal to permit the import or export of products;
• mandated modification of promotional materials and labeling and the issuance of corrective information;
•
•
the issuance of safety alerts, Dear Healthcare Provider letters, press releases and other communications containing warnings or other safety information about the
product; or
injunctions or the imposition of civil or criminal penalties.
The FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion,
industry-sponsored scientific and educational activities, and promotional activities involving the internet and social media. A company can make only those claims relating to
safety and efficacy that are approved by the FDA. Physicians may prescribe legally available biologics for uses that are not described in the product’s labeling and that differ
from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best
treatment for many patients in varied circumstances.
The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications
regarding off-label use. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal
penalties.
Biosimilars and Regulatory Exclusivity
As part of the Patient Protection and Affordable Care Act enacted in 2010, as amended by the Health Care and Education Reconciliation Act of 2010, the Biologics Price
Competition and Innovation Act (“BPCIA”) established an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The abbreviated
regulatory pathway provides legal authority for the FDA to review and approve biosimilar biologics based on their similarity to an existing brand product, referred to as a
reference product, including the possible designation of a biosimilar as interchangeable with a brand product.
Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency,
can be shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the
product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered
multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks
or risks of diminished efficacy relative to exclusive use of the reference biologic.
Under the BPCIA, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed.
Moreover, the extent to which a biosimilar, once approved, will be substituted for a reference product in a way that is similar to traditional generic substitution for non-
biological drug products is not yet clear and will depend on a number of marketplace and regulatory factors that are still developing. In addition, the period of exclusivity
provided by the BPCIA only operates against third parties seeking approval via the abbreviated pathway, but would not prevent third parties from pursuing approval via the
traditional BLA approval pathway.
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In addition, a biological product can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity
periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion
of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. The BPCIA is complex and continues to be interpreted and implemented by the
FDA.
Other Healthcare Laws
Pharmaceutical companies are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in
which they conduct their business and may constrain the financial arrangements and relationships through which we and our partners research, sell, market and distribute any
products for which we obtain marketing approval. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, data privacy and security
and transparency laws regarding drug pricing and payments and other transfer of value to physicians and other healthcare providers. If their operations are found to be in
violation of any of such laws or any other governmental regulations that apply, they may be subject to penalties, including, without limitation, administrative, civil and criminal
penalties, damages, fines, disgorgement, the curtailment or restructuring of operations, integrity oversight and reporting obligations, exclusion from participation in federal and
state healthcare programs and individual imprisonment.
Coverage and Reimbursement
Sales of any product depend, in part, on the extent to which such product will be covered by third-party payors, such as federal, state, and foreign government healthcare
programs, commercial insurance and managed healthcare organizations, and the level of reimbursement for such product by third-party payors. Decisions regarding the extent
of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. These third-party payors are increasingly reducing reimbursements for medical
products, drugs and services. In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including
price controls, restrictions on coverage and reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and
adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit sales of any product. Decreases in third-party reimbursement for any
product or a decision by a third-party payor not to cover a product could reduce physician usage and patient demand for the product and also have a material adverse effect on
sales.
Healthcare Reform
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, each as amended (collectively known as the
“ACA”), was enacted, which substantially changed the way healthcare is financed by both governmental and private insurers, and significantly affected the pharmaceutical
industry. The ACA contained a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement adjustments and changes to fraud
and abuse laws. For example, the ACA:
•
•
•
•
increased the minimum level of Medicaid rebates payable by manufacturers of brand name drugs from 15.1% to 23.1% of the average manufacturer price;
required collection of rebates for drugs paid by Medicaid managed care organizations;
required manufacturers to participate in a coverage gap discount program, under which they must agree to offer 70 percent point-of-sale discounts off negotiated
prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under
Medicare Part D; and
imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federal government
programs.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA.
The U.S. Supreme Court is currently reviewing the constitutionality of the ACA in its entirety, and it is unclear how the Supreme Court will rule.
Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted, including aggregate reductions of Medicare payments to providers of 2%
per fiscal year, which was temporarily suspended from May 1, 2020 through March 31, 2021, and reduced payments to several types of Medicare providers. Moreover, there
has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional
inquiries, proposed and enacted legislation and executive orders issued by the President designed to, among other things, bring more transparency to product pricing, review the
relationship between pricing and
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manufacturer patient programs, and reform government program reimbursement methodologies for drug products. Individual states in the United States have also become
increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions
on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing.
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
Nestlé Health Science
Novartis
Tate & Lyle
Takeda
* Percentage was less than 10%
HUMAN CAPITAL RESOURCES
Percentage of Total Revenues
For the Years Ended December 31.
2020
2019
2018
26 %
11 %
*
*
19 %
28 %
15 %
23 %
*
*
29 %
22 %
*
13 %
*
As of December 31, 2020, we had 181 full-time employees and part-time employees worldwide. Of these employees, 105 were engaged in research and development, 24 were
engaged in operations and quality control and 52 were engaged in selling, general and administrative activities. None of our employees is represented by a labor union.
Supported by our annual employee survey, we believe our relationship with our employees to be generally good. Our scientists, bioinformatics experts and other professionals
work collaboratively as interdisciplinary teams to unlock and advance technological innovation.
Compensation, benefits and development
Our goal is to attract, motivate and retain talent with a focus on encouraging performance, promoting accountability and adhering to our company values. We offer competitive
compensation and benefit programs including a company-matched 401(k) Plan, stock options for eligible employees, health savings and flexible spending accounts, paid time
off, education and training programs, and employee assistance programs. We believe it is important to help build community and enabling our employees actively participate in
community service projects and in company-sponsored philanthropic activities.
Diversity, inclusion and belonging
We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports the global workforce and the communities we serve. We
recruit the best people for the job regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws applicable to discrimination in the
workplace. Our diversity, equity and inclusion principles are also reflected in our employee training and policies. We continue to enhance our diversity, equity and inclusion
policies which are guided by our executive leadership team.
Health and safety
We are committed to maintain a safe and healthy workplace for our employees. Our policies and practices are intended to protect our employees and surrounding communities
in which we operate.
In 2020, in response to the COVID-19 pandemic, we implemented safety protocols and new procedures to protect our employees. These protocols include complying with
social distancing and other health and safety standards as required by state and local government agencies, taking into consideration guidelines of the Centers for Disease
Control and Prevention and other public health authorities. In addition, we modified the way we conduct many aspects of our business including the practice of social
distancing, wearing face coverings mandated by state and local regulations, and maintaining a quarantine for employees determined to be in close contact with a COVID-19
case. For example, we implemented day-time shift hours in our
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R&D and small scale manufacturing at our Redwood City pilot plant to minimize the number of employees in close proximity to each other and we have significantly expanded
the use of virtual interaction whenever possible in our business. For a detailed discussion of the impact of the COVID-19 pandemic on our human capital resources, see “Risk
Factors" Item 1A of this Form 10-K.
We also launched the Employee-Requested Work from Home Policy in late 2020. This policy establishes the process and criteria to enable Redwood City employees to request
permission to work from home on a regular basis.
CORPORATE & AVAILABLE INFORMATION
We were incorporated in Delaware in January 2002 as a wholly-owned subsidiary of Maxygen, Inc. We commenced independent operations in March 2002, after licensing core
enabling technology from Maxygen, Inc. Our principal corporate offices are located at 200 Penobscot Drive, Redwood City, California 94063 and our telephone number is
(650) 421-8100. 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 website 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
RISK FACTORS SUMMARY
The following is a summary of the principal factors that cause an investment in the company to be speculative or risky:
•
•
•
The ongoing COVID-19 pandemic has adversely affected and may continue in the future to, directly or indirectly, adversely affect our business, results of
operations and financial condition.
During our operating history, the markets in which we have participated have changed significantly, which may make it difficult to evaluate our current business
and predict our future performance.
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.
• We have a history of net losses and we may not achieve or maintain profitability.
• 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.
• We are dependent on a limited number of customers.
•
Our product supply agreements with customers have finite duration, may not be extended or renewed and generally do not require the customer to purchase any
particular quantity or quantities of our products.
• With respect to customers purchasing our products for the manufacture of active pharmaceutical products (API) for which they have exclusivity due to patent
protection, the termination or expiration of such patent protection and any resulting generic competition may materially and adversely affect our revenues, financial
condition or results of operations.
• We are dependent on a limited number of products in our biocatalysts business.
• We are dependent on a limited number of contract manufacturers for large scale production of substantially all of our enzymes.
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•
If we are unable to develop and commercialize new products for the pharmaceutical, fine chemicals, biotherapeutics, diagnostics and life science tools markets, our
business and prospects will be harmed.
Our biotherapeutic programs are early stage, highly regulated and expensive. Our ability to obtain additional development partners for the programs, to advance our
product candidates to clinical trials and to ultimately receive regulatory approvals is highly uncertain.
If either Nestlé Health Science or Takeda terminate their development programs under their respective license agreements with us, any potential revenue from those
license agreements will be significantly reduced or non-existent, and our results of operations and financial condition will be materially and adversely affected.
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.
• 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.
•
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•
Our efforts to deploy our technology in the life science tools markets may fail.
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately
unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
Clinical trials are difficult to design and implement, expensive, time-consuming and involve an uncertain outcome, and the inability to successfully conduct clinical
trials and obtain regulatory approval for our product candidates would substantially harm our business.
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•
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Results of preclinical studies and early clinical trials of product candidates may not be predictive of results of later studies or trials. Our product candidates may not
have favorable results in later clinical trials, if any, or receive regulatory approval.
If any of our product candidates do not work as intended or cause undesirable side effects, it could hinder or prevent receipt of regulatory approval or realization of
commercial potential for them or our other product candidates and could substantially harm our business.
Even if we obtain regulatory approval for any products that we develop alone or with collaborators, such products will remain subject to ongoing regulatory
requirements, which may result in significant additional expense.
Our efforts to prosecute and protect our intellectual property may not be successful.
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.
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.
• We may be involved in lawsuits to protect or enforce our intellectual property rights, which could be expensive, time-consuming and unsuccessful.
• We may not be able to enforce our intellectual property rights throughout the world.
•
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If our biocatalysts, or the genes that code for our biocatalysts, are stolen, misappropriated or reverse engineered, others could use these biocatalysts or genes to
produce competing products.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
• We may need additional capital in the future in order to expand our business.
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If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely
affected.
• We are dependent on information technology systems, infrastructure and data, and any failure of these systems could harm our business. Security breaches, loss of
data, and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to
liability, which could adversely affect our business, results of operations and financial condition.
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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.
Business interruptions resulting from disasters or other disturbances could delay us in the process of developing our products and could disrupt our sales. Our
business continuity and disaster recovery plans may not adequately protect us from a serious disaster or other disturbance.
Epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Risks Relating to Our Business and Strategy
The ongoing COVID-19 pandemic has adversely affected and may continue in the future to, directly or indirectly, adversely affect our business, results of operations and
financial condition.
In the United States, the COVID-19 pandemic has and may continue in the future to, directly or indirectly, adversely affect our business, results of operations and financial
condition, including as a result of compliance with governmental orders governing the operation of businesses during the pandemic, the temporary closure of our Redwood City,
California facilities and disruption of our research and development operations. We believe that these disruptions have had a negative impact on revenue for the twelve months
ended December 31, 2020, although we are unable to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues.
In the future, our business could be materially adversely affected, directly or indirectly, by the widespread outbreak of contagious disease, including the ongoing COVID-19
pandemic. National, state and local governments in affected regions have implemented and may continue to implement safety
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precautions, including quarantines, border closures, increased border controls, travel restrictions, governmental orders and shutdowns, business closures, cancellations of public
gatherings and other measures. Organizations and individuals are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work.
These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets
worldwide.
The potential impact and duration of COVID-19 or another pandemic or public health crisis has had and could continue to have, significant repercussions across regional,
national and global economies and financial markets, and could trigger a period of regional, national and global economic slowdown or regional, national or global recessions.
The outbreak of COVID-19 in many countries continues to adversely impact regional, national and global economic activity and has contributed to significant volatility and
negative pressure in financial markets. As a result, we may experience difficulty accessing debt and equity capital on attractive terms, or at all, due to the severe disruption and
instability in the global financial markets. In addition, our customers may terminate or amend their agreements for the purchase of our products or services due to bankruptcy,
lack of liquidity, lack of funding, operational failures, or other reasons.
We continue to monitor our operations and applicable government recommendations, and we have made modifications to our normal operations because of the COVID-19
pandemic, including requiring most office-based employees to work remotely. Notwithstanding these measures, the COVID-19 pandemic could affect the health and
availability of our workforce as well as those of the third parties we rely on taking similar measures. If members of our management and other key personnel in critical
functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and/or
our operations may be negatively impacted. We may also experience limitations in employee resources, including because of sickness of employees or their families or the
desire of employees to avoid contact with individuals or large groups of people. In addition, we have experienced and will continue to experience disruptions to our business
operations resulting from quarantines, self-isolations and other restrictions on the ability of our employees to perform their jobs.
The COVID-19 pandemic has disrupted, and may continue to disrupt, our business operations. The extent and severity of the impact on our business and clinical trials will be
determined largely by the extent of disruptions in the supply chains for our products and product candidates; disruptions in access by patients to therapies for which our products
are components of the supply chain; delays in the performance of R&D service work, and delays in current and future clinical trials that we or our collaboration partners may
conduct. In addition, the impact of the COVID-19 pandemic on the operations of the FDA and other health authorities may delay potential approvals of product candidates for
which our products are components of the supply chain.
While it is not possible at this time to estimate the entirety of the impact that the COVID-19 pandemic will have on our business, operations, employees, customers, suppliers or
our collaboration partners, continued spread of COVID-19, measures taken by governments, actions taken to protect employees and the broad impact of the pandemic on all
business activities may materially and adversely affect our business, results of operations and financial condition.
During our operating history, the markets in which we have participated have changed significantly, 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. 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. Our Novel Biotherapeutics business is relatively new to Codexis. 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.
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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
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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 product supply agreements with customers have finite duration, may not be extended or renewed and generally do not require the customer to purchase any
particular quantity or quantities of our products.
with respect to customers purchasing our products for the manufacture of active pharmaceutical products (API) for which they have exclusivity due to patent
protection, the termination or expiration of such patent protection and any resulting generic competition may materially and adversely affect our revenues, financial
condition or results of operations;
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 obtain additional development partners for our biotherapeutic programs;
potential of Nestlé Health Science or Takeda terminating any development program under their license agreements with us;
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 or our customers’ ability to obtain regulatory approval for the sale and manufacturing of food products using our enzymes;
our ability to deploy our technology platform in life science tools markets;
our ability to successfully achieve domestic and foreign regulatory approval for product candidates;
our ability to successfully design and execute clinical testing at a reasonable cost and on an acceptable time-frame;
our dependence on product candidates which could unexpectedly fail at any stage of preclinical or clinical development;
our dependence on product candidates which may lack the ability to work as intended or cause undesirable side effects;
our dependency on third parties to conduct clinical trials, research, and preclinical studies;
our ability to successfully prosecute and protect our intellectual property;
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 comply with the terms of our credit facility;
our ability to timely pay debt service obligations;
our customers’ ability to pay amounts owed to us in a timely manner;
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our ability to avoid charges to earnings as a result of any impairment of goodwill, intangible assets or other long-lived assets;
changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations;
our ability to 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;
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 due to natural disasters, disease outbreaks or other events beyond our control;
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;
changes to tax law and related regulations could materially affect our tax obligations and effective tax rate; 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 $24.0 million in 2020, $11.9 million in 2019 and $10.9 million in 2018. As of December 31, 2020 and
2019, we had an accumulated deficit of $366.4 million and $342.4 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, including our collaboration with Nestlé Health Science and Takeda, 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, Merck,
Novartis, Nestlé Health Science and Takeda 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
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with one or more existing collaborators. If any of these events occur, especially if they occur in our collaborations with GSK, Merck, Novartis, Nestlé Health Science or Takeda,
or if we fail to maintain our agreements with our collaborators, we may not be able to commercialize our existing and potential products or grow our business or generate
sufficient revenues to support our operations, we may not receive contemplated milestone payments and royalties under the collaboration, 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;
we, 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 undergoes 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 years ended December 31, 2020 and 2019, customers that each individually contributed 10%
or more of our total revenue accounted for 56% and 66% of our total revenues in 2020 and 2019, respectively. 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.
Our product supply agreements with customers have finite duration, may not be extended or renewed and generally do not require the customer to purchase any particular
quantity or quantities of our products.
Our product supply agreements with customers generally have a finite duration, may not be extended or renewed and generally do not require the customer to purchase any
particular quantity or quantities of our products. While our products are not considered commodities and may not be easily substituted for by our customers, particularly when
our products are used in the manufacture of active pharmaceutical ingredients, our customers may nevertheless terminate or fail to renew their product supply agreements with
us or significantly curtail their purchases thereunder under certain circumstances. Any such termination or reduction could materially adversely affect our revenues, financial
condition and results of operations. For the year ended December 31, 2020, we derived a majority of our product revenue from these product supply agreements.
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With respect to customers purchasing our products for the manufacture of active pharmaceutical products (API) for which they have exclusivity due to patent protection,
the termination or expiration of such patent protection and any resulting generic competition may materially and adversely affect our revenues, financial condition or
results of operations.
With respect to customers purchasing our products for the manufacture of API for which exclusivity due to patent protection has or is about to expire, we can expect that the
quantity of our products sold to such customers for such products may decline as generic competition for the API increases. While we anticipate that we may, in some cases,
also be able to sell products to these generic competitors for the manufacture of these APIs, the overall effect on our revenues, financial condition and results of operations could
be materially adverse.
We are dependent on a limited number of products in our biocatalysts business.
Our current product sales are derived from a limited number of biocatalyst products. We expect a limited number of biocatalyst 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.
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 three locations: our in-house facility in Redwood City, California, and at two third-party contract manufacturing
organizations, Lactosan GmbH & Co. KG (“Lactosan”), in Kapfenberg, Austria, and DPhar S.p.A. (“DPhar”), in Anagni, Italy. 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 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. 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 DPhar. 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, diagnostics and other life science tools markets, our
business and prospects will be harmed.
We plan to launch new products for the pharmaceutical, fine chemicals, biotherapeutics, diagnostics and other life science tools 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;
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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 biotherapeutic programs are early stage, highly regulated and expensive. Our ability to obtain additional 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 and have developed novel biotherapeutic candidates, including CDX-6114, the novel oral enzyme product candidate for the treatment of PKU that we
licensed to Nestlé Health Science. We are also developing protein sequences for use in gene therapy products for Fabry Disease, Pompe Disease, and an undisclosed blood
factor for Takeda. The successful development of biotherapeutic candidates involves many risks and uncertainties, requires long timelines and may lead to uncertain results. In
addition, drug development is highly regulated and requires areas of expertise and capital resources we do not currently possess. In order to market a biologic product in the
United States, we must undergo the following process required by the FDA:
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completion of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with GLP requirements;
submission to the FDA of an IND, which must become effective before human clinical studies may begin in the United States;
approval by an independent IRB representing each clinical site before the clinical study may be initiated at the site;
performance of adequate and well-controlled human clinical studies (generally divided into three phases) in accordance with GCP requirements to establish the
safety and efficacy of the product candidate for each proposed indication;
preparation of and submission to the FDA of a BLA after completion of all clinical studies;
potential review of the product candidate by an FDA advisory committee;
satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities where the product candidate is produced to assess compliance with cGMP
requirements; and
FDA review and approval of a BLA prior to any commercial marketing or sale of the product in the United States.
If we fail to comply with applicable FDA or other regulatory requirements at any time during the drug development process, clinical testing, the approval process or after
approval, we may become subject to administrative or judicial penalties, including the FDA’s refusal to approve a pending application, withdrawal of an approval, warning
letters, product recalls, and additional enforcement actions.
Our efforts to advance our biotherapeutic candidates that we develop are subject to numerous risks, including the following:
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The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and the results are inherently unpredictable. If we are
ultimately unable to obtain regulatory approval for biotherapeutic product candidates, our business will be harmed. To obtain regulatory approval to market any
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,
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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 may find it difficult to enroll patients in our clinical trials for product candidates. Any enrollment difficulties could delay clinical trials and any potential product
approval.
• We may experience difficulty or delay in obtaining the FDA’s acceptance of an IND for product candidates we may seek to enter into clinical development, which
would delay initiation of Phase 1 clinical testing. Delays in the commencement or completion of clinical testing could significantly affect our product development
costs or the product development costs of our present and any future collaborators. We do not know whether planned clinical trials will begin on time or be
completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons. For example, a clinical trial may be
suspended or terminated by us, by the IRB of the institution in which such trial is being conducted, or by the FDA due to a number of factors, including unforeseen
safety issues, changes in governmental regulations or lack of adequate funding to continue the clinical trial.
• We have limited 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 and 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 product candidates.
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Our efforts to use CodeEvolver protein engineering technology platform to generate new lead biotherapeutic candidates, whether under our collaborations with
Nestlé Health Science, Takeda or otherwise, may not be successful in creating candidates of value.
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• 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 product candidates.
Changes in methods of treatment of disease, such as gene therapy, could cause us to stop development of our product candidates or reduce or eliminate potential
demand for CDX-6114, if approved, or any other product candidates that we may develop in the future.
If either Nestlé Health Science or Takeda terminate their development programs under their respective license agreements with us, any potential revenue from those license
agreements will be significantly reduced or non-existent, and our results of operations and financial condition will be materially and adversely affected.
We have invested significant time and financial resources in the development of CDX-6114 and other product candidates for the treatment of HPA now included in the Nestlé
License Agreement as well as in the development of candidates for the treatment of Fabry disease and Pompe disease which are now included in the Takeda Agreement.
Under the Nestlé License Agreement, we are eligible to receive from Nestlé Health Science development and approval milestones of up to $85.0 million, sales-based milestones
of up to $250.0 million, and tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of products containing a licensed Compound
as its sole active ingredient. Under the Takeda Agreement, we are eligible to earn up to $15.4 million of research and development fees and pre-clinical milestone payments
from Takeda for the Initial Programs. We are eligible to receive certain development and commercialization milestone payments up to $100.0 million per target gene, the
modulation of which would lead to the treatment of the disease indications by the applicable Product. We are also eligible to receive tiered royalties based on net sales of
Products at percentages ranging from the middle-single digits to low single-digits. While we have received milestone payments under the Nestlé License Agreement to date
there is no guarantee that we will receive further milestone payments under the Nestlé Agreement or Takeda Agreement in the future.
Under the Nestle Agreement and the Takeda Agreement, either Nestlé Health Science and Takeda, as applicable, may each terminate the entire agreement or specified programs
thereunder at will under certain circumstances as described in more detail under “Item 1. Business--Our Market Opportunities--Pharmaceutical Market--Our Solutions for the
Pharmaceutical Market--Biotherapeutic Product Discovery and Development” in this Annual Report on Form 10-K.
If Nestlé Health Science terminates its rights and obligations with respect to the Nestlé License Agreement and/or Takeda terminates its rights and obligations with respect to the
Takeda Agreement, then depending on the timing of such event:
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the development of our product candidates subject to the respective agreements may be terminated or significantly delayed;
our cash expenditures could increase significantly if it is necessary for us to hire additional employees and allocate scarce resources to the development and
commercialization of product candidates;
we would bear all of the risks and costs related to the further development and commercialization of product candidates that were previously the subject of the
respective agreements, including the reimbursement of third parties; and
in order to fund further development and commercialization of new product candidates or programs, we may need to seek out and establish alternative collaboration
arrangements with third-party partners; this may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case it may be
necessary for us to limit the size or scope of one or more of our programs or increase our expenditures and seek additional funding by other means.
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 revenues and cash 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.
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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, many of 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 our food ingredient product and other fine chemical customers were to delay or
discontinue development on their products, 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.
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 products that we develop for our food and food ingredient customers are, 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
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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 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.
Our efforts to deploy our technology in the life science tools markets may fail.
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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. In December 2019, we licensed our first proprietary
enzyme for this market, EvoT4™ DNA ligase, which is designed to improve library preparation for NGS users, to Roche. This enzyme, 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
revenues and cash flows from these activities. The failure to successfully deploy products on timely basis in this space may limit our growth and have a material adverse effect
on our financial condition, operating results and business prospects.
Interim “top-line” and preliminary data from studies or trials that we announce or publish from time to time may change as more data become available and are subject to
audit and verification procedures that could result in material changes in the final data.
From time to time, we may publish interim “top-line” or preliminary data from preclinical studies or clinical trials. Interim data are subject to the risk that one or more of the
outcomes may materially change as more data become available. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we
may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results that we report may differ from future results of the same
studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Preliminary or “top-line” data also
remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result,
interim and preliminary data should be viewed with caution until the final data are available. Additionally, interim data from clinical trials that we may complete are subject to
the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between
preliminary or interim data and final data could significantly harm our business prospects.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the
importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and
our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive
information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure. Any information we
determine not to disclose may ultimately be deemed significant by you or others with respect to future decisions, conclusions, views, activities or otherwise regarding a
particular product candidate or our business. If the topline data that we report differ from actual results, or if others, including regulatory authorities, disagree with the
conclusions reached, our ability to obtain approval for, and commercialize, product candidates may be harmed, which could significantly harm our business prospects.
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The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately
unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
We and any collaborators are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the
FDA. Foreign regulatory authorities impose similar requirements. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, but
typically takes many years following the commencement of clinical trials and depends upon numerous factors, including substantial discretion of the regulatory authorities. In
addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical
development and may vary among jurisdictions. To date, neither we nor our collaborators have submitted a BLA to FDA or similar drug approval submissions to comparable
foreign regulatory authorities for any product candidate. We and any collaborators must complete additional preclinical or nonclinical studies and clinical trials to demonstrate
the safety and efficacy of our product candidates in humans to the satisfaction of the regulatory authorities before we will be able to obtain these approvals. Our product
candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our or our collaborators’ clinical trials;
we or our collaborators may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and
effective for its proposed indication;
the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;
we or our collaborators may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical studies or clinical trials;
the data collected from clinical trials of product candidates may not be sufficient to support the submission of a BLA to obtain regulatory approval in the United
States or elsewhere;
the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or
our collaborators contract for clinical and commercial supplies;
the FDA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with collaborators; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our or our
collaborators’ clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product
candidates, which would significantly harm our business, results of operations and prospects. In addition, even if we were to obtain approval, regulatory authorities may
approve any of our product candidates for fewer or more limited indications than we request, may impose significant limitations in the form of narrow indications, warnings, or
a REMS. Regulatory authorities may not approve the price we or our collaborators intend to charge for products we may develop, may grant approval contingent on the
performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the
successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
Clinical trials are difficult to design and implement, expensive, time-consuming and involve an uncertain outcome, and the inability to successfully conduct clinical trials
and obtain regulatory approval for our product candidates would substantially harm our business.
Clinical testing is expensive and usually takes many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process,
and product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial
clinical trials. We do not know whether planned clinical trials will begin on time, need to be redesigned, recruit and enroll patients on time or be completed on schedule, or at all.
Clinical trials can be delayed, suspended or terminated for a variety of reasons, including in connection with:
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the inability to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of clinical trials;
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applicable regulatory authorities disagreeing as to the design or implementation of the clinical trials;
obtaining regulatory authorization to commence a trial;
reaching an agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to
extensive negotiation and may vary significantly among different CROs and trial sites;
obtaining IRB approval at each site;
developing and validating the companion diagnostic to be used in a clinical trial, if applicable;
insufficient or inadequate supply or quality of product candidates or other materials necessary for use in clinical trials, or delays in sufficiently developing,
characterizing or controlling a manufacturing process suitable for clinical trials;
recruiting and retaining enough suitable patients to participate in a trial;
having enough patients complete a trial or return for post-treatment follow-up;
adding a sufficient number of clinical trial sites;
inspections of clinical trial sites or operations by applicable regulatory authorities, or the imposition of a clinical hold;
clinical sites deviating from trial protocol or dropping out of a trial;
the inability to demonstrate the efficacy and benefits of a product candidate;
discovering that product candidates have unforeseen safety issues, undesirable side effects or other unexpected characteristics;
addressing patient safety concerns that arise during the course of a trial; receiving untimely or unfavorable feedback from applicable regulatory authorities regarding
the trial or requests from regulatory authorities to modify the design of a trial;
non-compliance with applicable regulatory requirements by us or third parties or changes in such regulations or administrative actions;
suspensions or terminations by IRBs of the institutions at which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by
the FDA or other regulatory authorities due to a number of factors, including those described above;
third parties being unable or unwilling to satisfy their contractual obligations to us; or
changes in our financial priorities, greater than anticipated costs of completing a trial or our inability to continue funding the trial.
In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or
completing our planned and ongoing clinical trials. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately
lead to the denial of regulatory approval of our product candidates. Additionally, we or our collaborators may experience unforeseen events during or resulting from clinical
trials that could delay or prevent receipt of marketing approval for or commercialization of product candidates. For example, clinical trials of product candidates may produce
negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon development programs.
Regulators may also revise the requirements for approving the product candidates, or such requirements may not be as we anticipate. If we or our collaborators are required to
conduct additional clinical trials or other testing of product candidates beyond those that we or our collaborators currently contemplate, if we or our collaborators are unable to
successfully complete clinical trials or other testing of such product candidates, if the results of these trials or tests are not positive or are only modestly positive or if there are
safety concerns, we may:
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incur unplanned costs;
be delayed in obtaining or fail to obtain marketing approval for product candidates;
obtain marketing approval in some countries and not in others;
obtain marketing approval for indications or patient populations that are not as broad as intended or desired;
obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
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be subject to additional post-marketing testing requirements;
be subject to changes in the way the product is administered;
have regulatory authorities withdraw or suspend their approval of the product or impose restrictions on its distribution;
be sued; or
experience damage to our reputation.
If we or our collaborators experience delays in the commencement or completion of our clinical trials, or if we or our collaborators terminate a clinical trial prior to completion,
we may experience increased costs, have difficulty raising capital and/or be required to slow down the development and approval process timelines. Furthermore, the product
candidates that are the subject of such trials may never receive regulatory approval, and their commercial prospects and our ability to generate product revenues from them
could be impaired or not realized at all.
We or our collaborators may experience delays or difficulties in enrolling patients in clinical trials, which could delay or prevent receipt of regulatory approvals.
We or our collaborators may not be able to initiate or continue clinical trials on a timely basis or at all for any product candidates we or our collaborators identify or develop if
we or our collaborators are unable to locate and enroll a sufficient number of eligible patients to participate in the trials as required by applicable regulations or as needed to
provide appropriate statistical power for a given trial. Additionally, some of our competitors may have ongoing clinical trials for product candidates that would treat the same
indications as one or more of our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in our competitors’ clinical trials.
Patient enrollment may also be affected by many factors, including:
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severity and difficulty of diagnosing of the disease under investigation;
size of the patient population and process for identifying subjects;
eligibility and exclusion criteria for the trial in question;
our or our collaborators’ ability to recruit clinical trial investigators with the appropriate competencies and experience;
design of the trial protocol;
availability and efficacy of approved medications or therapies, or other clinical trials, for the disease or condition under investigation;
perceived risks and benefits of the product candidate under trial or testing, or of the application of genome editing to human indications;
efforts to facilitate timely enrollment in clinical trials;
patient referral practices of physicians;
ability to obtain and maintain subject consent;
risk that enrolled subjects will drop out before completion of the trial;
ability to monitor patients adequately during and after treatment; and
proximity and availability of clinical trial sites for prospective patients.
Disruptions caused by the COVID-19 pandemic may increase the likelihood that we or our collaborators encounter such difficulties or delays in enrolling patients in clinical
trials. In addition, we expect that some of our product candidates will focus on diseases with limited patient pools from which to draw for enrollment in clinical trials. The
eligibility criteria of our clinical trials will further limit the pool of available trial participants. In addition to the factors identified above, patient enrollment in any clinical trials
we or our collaborators may conduct may be adversely impacted by any negative outcomes our competitors may experience, including adverse side effects, clinical data
showing inadequate efficacy or failures to obtain regulatory approval. Enrollment delays in clinical trials may result in increased development costs for any of our product
candidates, which may cause the value of our company to decline and limit our ability to obtain additional financing. If we or our collaborators have difficulty enrolling a
sufficient number of patients to conduct clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which may have an adverse
effect on our results of operations and prospects.
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Results of preclinical studies and early clinical trials of product candidates may not be predictive of results of later studies or trials. Our product candidates may not have
favorable results in later clinical trials, if any, or receive regulatory approval.
Preclinical and clinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the
preclinical study or clinical trial process. Despite promising preclinical or clinical results, any product candidate can unexpectedly fail at any stage of preclinical or clinical
development. The historical failure rate for product candidates in our industry is high. The results from preclinical studies or early clinical trials of a product candidate may not
be predictive of the results from later preclinical studies or clinical trials, and interim results of a clinical trial are not necessarily indicative of final results. Product candidates in
later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through preclinical studies and initial clinical trials.
Many companies in the biopharmaceutical and biotechnology industries have suffered significant setbacks at later stages of development after achieving positive results in early
stages of development, and we may face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were
underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible
to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless
failed to obtain regulatory approval. Even if any product candidates progress to clinical trials, these product candidates may fail to show the safety and efficacy in clinical
development required to obtain regulatory approval, despite the observation of positive results in animal studies. Our or our collaborators’ failure to replicate positive results
from early research programs and preclinical or greenhouse studies may prevent us from further developing and commercializing those or other product candidates, which
would limit our potential to generate revenues from them and harm our business and prospects.
For the foregoing reasons, we cannot be certain that any ongoing or future preclinical studies or clinical trials will be successful. Any safety or efficacy concerns observed in any
one of our preclinical studies or clinical trials in a targeted area could limit the prospects for regulatory approval of product candidates in that and other areas, which could have
a material adverse effect on our business and prospects.
If any of our product candidates do not work as intended or cause undesirable side effects, it could hinder or prevent receipt of regulatory approval or realization of
commercial potential for them or our other product candidates and could substantially harm our business.
Our product candidates may be associated with serious adverse events, undesirable side effects or unexpected characteristics. Results of clinical trials could reveal severe or
recurring side effects, toxicities or unexpected events. In addition to serious adverse events or side effects caused by product candidates we develop alone or with collaborators,
the administration process or related procedures may also cause undesirable side effects. If any such events occur, clinical trials or commercial distribution of any product
candidates or products we develop alone or with collaborators could be suspended or terminated, and our business and reputation could suffer substantial harm. Treatment-
related side effects could affect patient recruitment and the ability of enrolled patients to complete the trial or result in potential liability claims. Regulatory authorities could
order us or our collaborators to cease further development of, deny approval of or require us to cease selling any product candidates or products for any or all targeted
indications. If we or our collaborators elect, or are required, to delay, suspend or terminate any clinical trial or commercialization efforts, the commercial prospects of such
product candidates or products may be harmed, and our ability to generate product revenues from them or other product candidates that we develop may be delayed or
eliminated.
Additionally, if we successfully develop a product candidate alone or with collaborators and it receives marketing approval, the FDA could require us to adopt a REMS to
ensure that the benefits of treatment with such product candidate outweigh the risks for each potential patient, which may include, among other things, a communication plan to
health care practitioners, patient education, extensive patient monitoring or distribution systems and processes that are highly controlled, restrictive and more costly than what is
typical for the industry. We or our collaborators may also be required to adopt a REMS or engage in similar actions, such as patient education, certification of health care
professionals or specific monitoring, if we or others later identify undesirable side effects caused by any product that we develop alone or with collaborators. Such identification
could also have several additional significant negative consequences, such as:
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regulatory authorities may suspend, withdraw or limit approvals of such product, or seek an injunction against its manufacture or distribution;
regulatory authorities may require additional warnings on the label, including “boxed” warnings, or issue safety alerts, Dear Healthcare Provider letters, press
releases or other communications containing warnings or other safety information about the product;
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we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;
we may be required to change the way a product is administered or conduct additional trials;
the product may become less competitive;
we or our collaborators may decide to remove the product from the marketplace;
we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
we could be sued and be held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us or our collaborators from achieving or maintaining market acceptance of any potential product.
Even if we obtain regulatory approval for any products that we develop alone or with collaborators, such products will remain subject to ongoing regulatory requirements,
which may result in significant additional expense.
Even if products we develop alone or with collaborators receive regulatory approval, they will be subject to ongoing regulatory requirements for manufacturing, labeling,
packaging, distribution, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, among other things. Any
regulatory approvals received for such products may also be subject to limitations on the approved indicated uses for which they may be marketed or to the conditions of
approval, or contain requirements for potentially costly post-marketing testing and surveillance studies. For example, the holder of an approved BLA in the United States is
obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. In the United States, the holder of an approved BLA must also
submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Similar provisions
apply in the European Union. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable
federal and state laws. Similarly, in the European Union any promotion of medicinal products is highly regulated and, depending on the specific jurisdiction involved, may
require prior vetting by the competent national regulatory authority. In addition, product manufacturers and their facilities are subject to payment of user fees and continual
review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the BLA or
foreign marketing application.
If we, our collaborators or a regulatory agency discovers previously unknown problems with a product such as adverse events of unanticipated severity or frequency or
problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory agency may impose
restrictions relative to that product, the manufacturing facility or us or our collaborators, including requiring recall or withdrawal of the product from the market or suspension
of manufacturing.
Moreover, if any of our product candidates are approved, our product labeling, advertising, promotion and distribution will be subject to regulatory requirements and continuing
regulatory review. The FDA strictly regulates the promotional claims that may be made about drug products. In particular, a product may not be promoted for uses that are not
approved by the FDA as reflected in the product’s approved labeling. If we or our collaborators fail to comply with applicable regulatory requirements following approval of
any potential products we may develop, authorities may:
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issue an untitled enforcement letter or a warning letter asserting a violation of the law;
seek an injunction, impose civil and criminal penalties, and impose monetary fines, restitution or disgorgement of profits or revenues;
suspend or withdraw regulatory approval;
suspend or terminate any ongoing clinical trials or implement requirements to conduct post-marketing studies or clinical trials;
refuse to approve a pending BLA or comparable foreign marketing application (or any supplements thereto) submitted by us or our collaborators;
restrict the labeling, marketing, distribution, use or manufacturing of products;
seize or detain products or otherwise require the withdrawal or recall of products from the market;
refuse to approve pending applications or supplements to approved applications that we or our collaborators submit;
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refuse to permit the import or export of products; or
refuse to allow us or our collaborators to enter into government contracts.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The
occurrence of any event or penalty described above may inhibit our or our collaborators’ ability to commercialize products and our ability to generate revenues.
In addition, the FDA’s policies, and policies of foreign regulatory agencies, may change, and additional regulations may be enacted that could prevent, limit or delay regulatory
approval of product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive
action, either in the United States or abroad. For example, the results of the 2020 U.S. Presidential Election may impact our business and industry. Namely, the Trump
administration took several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay,
the FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing
applications. It is difficult to predict whether or how these orders will be implemented, or whether they will be rescinded and replaced under the Biden administration. The
policies and priorities of the new administration are unknown and could materially impact the regulations governing our product candidates. If we are slow or unable to adapt to
changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement
action and we may not achieve or sustain profitability.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key
leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, which could
negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory and
policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform
routine functions. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research
and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time
necessary for new biologics or modifications to approved biologics to be reviewed and/or approved by necessary government agencies, which could adversely affect our
business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain
regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and
products, and on March 18, 2020 the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the
FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this
risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to
resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19
pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular
inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our or our
collaborators’ regulatory submissions, which could have a material adverse effect on our business.
Our product candidates for which we intend to seek approval as a biologic products may face competition sooner than anticipated.
The BCPIA enacted in the Patient Protection and Affordable Care Act, signed into law on March 23, 2010, created an abbreviated approval pathway for biological products that
are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the
FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by
the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a
competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and
well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The law is complex and is still being interpreted and implemented by the FDA. As a
result, its ultimate impact, implementation, and meaning are subject to uncertainty.
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We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that
this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product candidates to be reference products for competing
products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity
provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in
a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are
still developing.
Our business operations and future relationships with investigators, healthcare professionals, consultants, third-party payors, patient organizations and customers will be
subject to applicable healthcare regulatory laws, which could expose us to penalties.
Our business operations and future arrangements with investigators, healthcare professionals, consultants, third-party payors, patient organizations and customers, may expose
us to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through
which we will conduct our operations, including how we research, market, sell and distribute our product candidates, if approved. Such laws include:
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the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or
providing any remuneration (including any kickback, bribe, or certain rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in
return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be
made, in whole or in part, under U.S. federal and state healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation;
the U.S. federal false claims laws, including the civil False Claims Act, which, among other things, impose criminal and civil penalties, including through civil
whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the U.S. federal government, claims for
payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent
claim, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the U.S. federal government. In addition, the
government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the False Claims Act;
the U.S. federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which imposes criminal and civil liability for, among other things,
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing
or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services;
similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to
have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and its implementing regulations, which also imposes
certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health
information without appropriate authorization by covered entities subject to the rule, such as health plans, healthcare clearinghouses and healthcare providers as well
as their business associates that perform certain services involving the use or disclosure of individually identifiable health information;
the U.S. federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable
under Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to the government information related to certain payments and other
transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare professionals beginning in
2022, and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members;
analogous U.S. state laws and regulations, including: state anti-kickback and false claims laws, which may apply to our future business practices, including but not
limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payor, including
private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s
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voluntary compliance guidelines and the relevant compliance guidance promulgated by the U.S. federal government, or otherwise restrict payments that may be
made to healthcare providers and other potential referral sources; state laws and regulations that require drug manufacturers to file reports relating to pricing and
marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities; and state laws
governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts; and
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similar healthcare laws and regulations in the EU and other jurisdictions, including reporting requirements detailing interactions with and payments to healthcare
providers and laws governing the privacy and security of certain protected information, such as the General Data Protection Regulation (“GDPR”), which imposes
obligations and restrictions on the collection and use of personal data relating to individuals located in the European Economic Area (“EEA”) (including health
data).
Ensuring that our internal operations and future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It
is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law
involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other
governmental laws and regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines,
exclusion from government-funded healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, disgorgement, individual
imprisonment, contractual damages, reputational harm, diminished profits and the curtailment or restructuring of our operations.
The successful commercialization of product candidates developed by us or our partners will depend in part on the extent to which governmental authorities and health
insurers establish adequate coverage, reimbursement levels and pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for such product
candidates, if approved, could limit our or our partners’ ability to market those products and decrease our ability to generate revenue.
The availability and adequacy of coverage and reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health insurers and other third-
party payors are essential for most patients to be able to afford prescription medications such as our product candidates, assuming FDA approval. Our ability to achieve
acceptable levels of coverage and reimbursement for products by governmental authorities, private health insurers and other organizations will have an effect on our ability to
successfully commercialize our product candidates. Assuming we obtain coverage for our product candidates by a third-party payor, the resulting reimbursement payment rates
may not be adequate or may require co-payments that patients find unacceptably high. We cannot be sure that coverage and reimbursement in the United States, the EU or
elsewhere will be available for our product candidates or any product that we may develop, and any reimbursement that may become available may be decreased or eliminated
in the future.
Third-party payors increasingly are challenging prices charged for pharmaceutical products and services, and many third-party payors may refuse to provide coverage and
reimbursement for particular drugs or biologics when an equivalent generic drug, biosimilar or a less expensive therapy is available. It is possible that a third-party payor may
consider our product candidates as substitutable and only offer to reimburse patients for the less expensive product. Even if we show improved efficacy or improved
convenience of administration with our product candidates, pricing of existing third-party therapeutics may limit the amount we will be able to charge for our product
candidates. These payors may deny or revoke the reimbursement status of a given product or establish prices for new or existing marketed products at levels that are too low to
enable us to realize an appropriate return on our investment in our product candidates. For products administered under the supervision of a physician, obtaining coverage and
adequate reimbursement may be particularly difficult because of the higher prices often associated with such drugs. Additionally, separate reimbursement for the product itself
or the treatment or procedure in which the product is used may not be available, which may impact physician utilization. If reimbursement is not available or is available only at
limited levels, we may not be able to successfully commercialize our product candidates, and may not be able to obtain a satisfactory financial return on our product candidates.
No uniform policy for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage and reimbursement for products can
differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific
and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or
obtained in the first instance. Furthermore, rules and regulations regarding reimbursement change frequently, in some cases on short notice, and we believe that changes in these
rules and regulations are likely.
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Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing
emphasis on cost-containment initiatives in Europe and other countries have and will continue to put pressure on the pricing and usage of our product candidates. In many
countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. Other countries allow companies to fix their own
prices for medical products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we
are able to charge for our product candidates. Accordingly, in markets outside the United States, the reimbursement for our product candidates may be reduced compared with
the United States and may be insufficient to generate commercially-reasonable revenue and profits.
Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit
both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. We
expect to experience pricing pressures in connection with the sale of our product candidates due to the trend toward managed health care, the increasing influence of health
maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and biologics and surgical
procedures and other treatments, has become intense. As a result, increasingly high barriers are being erected to the entry of new products.
Enacted and future healthcare legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and may
affect the prices we may set.
In the United States, the EEA and other jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes and proposed
changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and
state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended
by the Health Care and Education Reconciliation Act, or collectively the ACA, was enacted, which substantially changed the way healthcare is financed by both governmental
and private insurers. Among the provisions of the ACA, those of greatest importance to the pharmaceutical and biotechnology industries include the following:
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an annual, non-deductible fee payable by any entity that manufactures or imports certain branded prescription drugs and biologic agents (other than those designated
as orphan drugs), which is apportioned among these entities according to their market share in certain government healthcare programs;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts off negotiated prices of applicable brand
drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer
price for branded and generic drugs, respectively;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled,
implanted or injected;
extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; and
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or
below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. The U.S. Supreme Court is currently reviewing the constitutionality of
the ACA, although it is unclear when a decision will be made or how the Supreme Court will rule. It is also unclear how this decision or other efforts, if any, to challenge,
repeal, or replace the ACA will impact the law, our business or financial condition.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, the Budget Control Act of 2011 resulted in
aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute,
will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional action is taken by Congress. In
January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers,
including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from
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three to five years. These new laws or any other similar laws introduced in the future may result in additional reductions in Medicare and other health care funding, which could
negatively affect our future customers and accordingly, our financial operations.
Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, CMS may develop new payment and delivery
models, such as bundled payment models. In addition, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their
marketed products. We expect that additional U.S. federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that the U.S. federal
government will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological
product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures,
and, in some cases, designed to encourage importation from other countries and bulk purchasing. Legally-mandated price controls on payment amounts by third-party payors or
other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are
increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs.
This could reduce the ultimate demand for our product candidates or put pressure on our product pricing.
We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action in the United States or any other
jurisdiction. If we or any third parties we may engage are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or
such third parties are not able to maintain regulatory compliance, our product candidates may lose any regulatory approval that may have been obtained and we may not
achieve or sustain profitability.
We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their
contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on
our business and prospects.
We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. As a result, we are and expect to remain dependent on third parties to
conduct clinical trials of our product candidates. Specifically, we expect CROs, clinical investigators, and consultants to play a significant role in the conduct of these trials and
the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of
our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not
relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and
comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic
inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs or clinical trial sites fail to comply with applicable GCP requirements,
the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials
before approving our marketing applications. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these
regulations may require us to stop and/or repeat clinical trials, which would delay the marketing approval process.
There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development
activities or perform as contractually required. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements,
otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development
activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in
such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. In addition, clinical trial investigators
for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If
these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or comparable foreign regulatory authorities concludes that the
financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of
the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit by the FDA or any comparable foreign regulatory
authority. Any such delay or rejection could prevent us from commercializing our product candidates.
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We contract with third parties for the manufacturing and supply of product candidates for use in preclinical testing and clinical trials and related services, which supply
may become limited or interrupted or may not be of satisfactory quality and quantity.
We do not have any manufacturing facilities. We produce in our laboratory relatively small quantities of products for evaluation in our research programs. We rely, and expect
to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our product
candidates are approved. We currently have limited manufacturing arrangements and expect that each of our product candidates will only be covered by single source suppliers
for the foreseeable future. This reliance increases the risk that we will not have sufficient quantities of our product candidates or products, if approved, or such quantities at an
acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.
Furthermore, all entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturers for our product
candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in
accordance with cGMP requirements. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of
quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of
contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract
manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s cGMP regulations enforced by the FDA through its
facilities inspection program. Comparable foreign regulatory authorities may require compliance with similar requirements. The facilities and quality systems of our third-party
contractor manufacturers must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our product candidates. We
do not control the manufacturing activities of, and are completely dependent on, our contract manufacturers for compliance with cGMP regulations.
In the event that any of our manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of
components or other materials becomes limited or interrupted for other reasons, we may be forced to manufacture the materials ourselves, for which we currently do not have
the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on commercially reasonable terms, if at all. In particular, any
replacement of our manufacturers could require significant effort and expertise because there may be a limited number of qualified replacements. In some cases, the technical
skills or technology required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty transferring such
skills or technology to another third party and a feasible alternative may not exist. In addition, certain of our product candidates and our own proprietary methods have never
been produced or implemented outside of our company, and we may therefore experience delays to our development programs if and when we attempt to establish new third
party manufacturing arrangements for these product candidates or methods. These factors would increase our reliance on such manufacturer or require us to obtain a license
from such manufacturer in order to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason, we will be required
to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays
associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.
Our or a third party’s failure to execute on our manufacturing requirements, do so on commercially reasonable terms and comply with cGMP could adversely affect our business
in a number of ways, including:
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an inability to initiate or continue clinical trials of our product candidates under development;
delay in submitting regulatory applications, or receiving marketing approvals, for our product candidates;
loss of the cooperation of future collaborators;
subjecting third-party manufacturing facilities or our manufacturing facilities to additional inspections by regulatory authorities;
requirements to cease development or to recall batches of our product candidates; and
in the event of approval to market and commercialize our product candidates, an inability to meet commercial demands for our product or any other future product
candidates.
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Our efforts to prosecute and protect our intellectual property may not be successful.
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 patents or patent applications 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 or to our licensor may provide us with little or no competitive advantage, in which case we may abandon such patent or license it to
another entity, or terminate the license agreement.
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, copyright and trade secret laws afford only limited protection for our technology platform, services 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, technology, services 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, services and products less valuable, if the
design around is favorably received in the marketplace. In addition, if any of our products, services 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, services 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.
Any 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, product or services.
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, services and 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 services, products and processes. As such, as of December 31, 2020, we owned or controlled approximately 1,635 issued patents and
pending patent applications in the United States and in various foreign jurisdictions. Our patents and patent applications, if issued, as of December 31, 2020, have terms that
expire between 2021 and approximately 2041. 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 biotherapeutics, molecular diagnostics, food and other markets. We intend to continue to apply for patents relating to our technologies, methods, services and
products as we deem appropriate.
Issuance of claims in patent applications and enforceability of such claims once issued involve complex legal and factual questions and, therefore, we cannot predict with any
certainty whether any of our issued patents will survive invalidity claims asserted by third parties. 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, any
interference may result in loss of certain claims. Any litigation or proceedings could divert our management's time and efforts. Even unsuccessful claims brought 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
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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 countries. 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, services, 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.
We may be involved in lawsuits to protect or enforce our intellectual property rights, 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 have in the past filed, and may in the future
be required to file, infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that the intellectual
property that we own or in-
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license is not valid, is unenforceable and/or is not infringed. In addition, in legal proceedings against a third party to enforce a patent directed at one of our technologies,
services or products, 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 patent 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 United States Patent and Trademark Office (“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 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
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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 biocatalysts, or the genes that code for our biocatalysts, 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 biocatalysts, often have custody or control of our biocatalysts. If our
biocatalysts, or the genes that code for our biocatalysts, were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce
these biocatalysts 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 and confidentiality protection to protect our confidential and proprietary information and processes. However, trade secrets and confidential
information are difficult to protect. We have taken measures to protect our trade secrets and confidential 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 confidential and proprietary information may be disclosed, third parties could reverse engineer our biocatalysts and others
may independently develop substantially equivalent confidential and 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 confidential and 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 equity 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 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.
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If we are unable to comply with the terms of our credit facility, our business and financial condition would be materially and adversely affected.
On June 30, 2017 we entered into a credit facility (“Credit Facility”) financing arrangement with Western Alliance Bank which is secured by a lien on substantially all of our
personal property other than our intellectual property. Although we have made no loans or draws under the Credit Facility as of December 31, 2020, the Credit Facility includes
affirmative and negative covenants including, among others, covenants requiring us to achieve consolidated product revenues at minimum levels and restricting our ability to
transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens and sell assets.
The Credit Facility also includes events of default including, among other things, our failure to pay any amounts due under the Credit Facility, a breach of covenants under the
Credit Facility, our insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than $250,000 and a final
judgment against us in an amount greater than $250,000. If an event of default occurs, it could cause our obligations to become immediately due and payable and our lender
would be entitled to foreclose against the collateral securing the indebtedness, including our cash. If our indebtedness were to be accelerated, we may be unable to repay such
debt and, therefore, such acceleration could materially and adversely affect our business and financial condition. For more information regarding our compliance with our
financial covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Debt service obligation may place us at a competitive disadvantage in our industry.
Draws under the Credit Facility would create debt service obligations for us. Although we have not drawn on the Credit Facility to date, any future draws under the Credit
Facility and the related debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business
opportunities. For example, the Credit Facility presents the following risks, certain of which apply regardless of whether we draw on the Credit Facility:
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we may be required to use a portion of our cash flow from operations to make debt service payments, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures, product development efforts, research and development, and other general corporate requirements;
our interest expense could increase if prevailing interest rates increase, because a portion of draws which could be made under the Credit Facility bear interest at
floating rates;
the Credit Facility could reduce our flexibility to adjust to changing business conditions or obtain additional financing to fund working capital, capital expenditures,
product development efforts, research and development, and other general corporate requirements; and
restrictive covenants in our Credit Facility, which apply regardless of whether we draw down under the facility, limit our ability to, among other things, transfer
collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens and sell assets.
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 $31.2 million as of December 31, 2020. 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 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 goodwill for impairment as of December 31, 2020. Based on
our analysis, we determined that the fair value of goodwill at the reporting unit level exceeded their carrying value and that no impairment was necessary as of December 31,
2020. Nevertheless, we may experience additional events or changes
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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.
We have investments in non-marketable securities, which may subject us to significant impairment charges.
We have investments in illiquid non-marketable equity and debt securities acquired in private transactions. At December 31, 2020, 1.1% of our consolidated assets were
comprised of investment securities, which are illiquid investments. Investments in illiquid, or non-marketable, securities are inherently risky and difficult to value. We account
for our non-marketable equity securities under the measurement alternative. Under the measurement alternative, the carrying value of our non-marketable equity investments is
adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Adjustments are determined primarily based on a market
approach as of the transaction date and are recorded as a component of other income (expense), net. We measure investments in non-marketable equity securities without a
readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus changes resulting from
observable price changes on a non-recurring basis. We measure available for sale investments in non-marketable debt at fair value. Unrealized gains and losses on these
securities are recognized in other comprehensive income until realized. We evaluate our investment in non-marketable securities when circumstances indicate that we may not
be able to recover the carrying value. We may impair these securities and establish an allowance for a credit loss when we determine that there has been an “other-than-
temporary” decline in estimated fair value of the debt or equity security compared to its carrying value. The impairment analysis requires significant judgment to identify events
or circumstances that would likely have a material adverse effect on the fair value of the investment. Because a portion amount of our assets are comprised of non-marketable
investment securities, any future impairment charges from the write down in value of these securities could have a material adverse effect on our financial condition or results of
operations.
If we are unable to 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 report our financial position, results of operations or cash flows on timely basis 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, and any failure of these systems could harm our business. Security breaches, loss of data,
and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which
could adversely affect our business, results of operations and financial condition.
Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we
do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing
inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do not
effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or
human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any
such impairment could materially and adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our internal and
external operating results.
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Our business may require us to use and store customer, employee, and business partner personally identifiable information (“PII”). This may include names, addresses, phone
numbers, email addresses, contact preferences, tax identification numbers, and payment account information. We require usernames and passwords in order to access our
information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be
compromised as a result of security breaches by unauthorized persons, employee error, malfeasance, faulty password management, or other irregularity, and result in persons
obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing usernames, passwords, or other
sensitive information, which may in turn be used to access our information technology systems. For example, our employees have received “phishing” emails and phone calls
attempting to induce them to divulge passwords and other sensitive information.
In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to employees and other individuals, our confidential or
proprietary information or confidential information we hold on behalf of third parties. If the unauthorized persons successfully hack into or interfere with our connected
products or services, they may create issues with product functionality that could pose a risk of loss of data. We have programs in place to detect, contain, and respond to data
security incidents, and we make ongoing improvements to our information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory
standards. However, because the techniques used to obtain unauthorized access to or sabotage systems change frequently and may be difficult to detect, we may not be able to
anticipate and prevent these intrusions or mitigate them when and if they occur.
We also rely on external vendors to supply and/or support certain aspects of our information technology systems. The systems of these external vendors may contain defects in
design or manufacture or other problems that could unexpectedly compromise information security of our own systems, and we are dependent on these third parties to deploy
appropriate security programs to protect their systems.
While we devote significant resources to network security, data encryption, and other security measures to protect our systems and data, these security measures cannot provide
absolute security. We may experience a breach of our systems and may be unable to protect sensitive data. The costs to us to eliminate or alleviate network security problems,
bugs, viruses, worms, malicious software programs, and security vulnerabilities could be significant. Our efforts to address these problems may not be successful and could
result in unexpected interruptions, delays, cessation of service, and harm to our business operations. Moreover, if a computer security breach affects our systems or results in the
unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease. We would also be exposed to a risk of
loss or litigation and potential liability, which could have a material adverse impact on our business, financial condition, results of operations, or cash flows.
Our business is subject to complex and evolving laws and regulations regarding privacy, data protection and other matters relating to information collection.
There are numerous state, federal and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure
and protection of different types of personal data and personal information (“Personal Information”) and other personal, customer, or other data, the scope of which is
continually evolving and subject to differing interpretations. We may be subject to significant consequences, including penalties and fines, for any failure to comply with such
laws, regulations and directives.
For example, the GDPR is in effect across the EEA, which imposes several stringent requirements for controllers and processors of personal data and increased our obligations,
for example, by imposing higher standards when obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals,
strengthening individual data rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of information, increasing requirements
pertaining to health data as well as pseudonymized (i.e., key-coded) data, and imposing additional obligations when we contract third-party processors in connection with the
processing of personal data. The GDPR provides that European Union member states may make their own further laws and regulations limiting the processing of genetic,
biometric, or health data, which could limit our ability to use and share personal data or could cause our costs to increase and harm our business and financial condition. Failure
to comply with the requirements of the GDPR and the applicable national data protection laws of the European Union member states may result in fines of up to the greater of
EUR20 million and 4% of the total worldwide annual turnover of the preceding financial year and other administrative penalties. If we are required to comply with the new data
protection rules imposed by GDPR, such compliance may be onerous and adversely affect our business, financial condition, and results of operations.
To the extent applicable to our business, compliance with the new data protection rules imposed by GDPR may be onerous and adversely affect our business, financial
condition, and results of operations.
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In addition, recent legal developments in Switzerland and Europe have created complexity and compliance uncertainty regarding certain transfers of information from
Switzerland and the European Union to the United States. For example, the EU-US Privacy Shield Framework is regularly reviewed, and there is current litigation challenging
the adequacy of EU-specified standard contractual clauses (another data transfer mechanism). It is uncertain whether the Privacy Shield Framework and/or the standard
contractual clauses will be invalidated by the European courts or legislature. We rely on a mixture of mechanisms to transfer personal data from our European Union business to
the U.S. and could be impacted by changes in law as a result of a future review of these transfer mechanisms by European regulators under the GDPR as well as current
challenges to these mechanisms in the European courts. If one or more of the legal bases for transferring Personal Information from Europe to the U.S. is invalidated, or if we
are unable to transfer Personal Information between and among countries and regions in which we operate, it could affect the manner in which we provide our services or could
adversely affect our financial results.
California has also recently passed the California Consumer Privacy Act (the “CCPA”), which is the most far-reaching data privacy law introduced in the United States to date,
and introduces new compliance burdens on organizations doing business in California who collect Personal Information about California residents. The CCPA’s definition of
Personal Information is very broad and specifically includes biometric information. It went into effect in 2020 and allows for fines on a dramatic scale, as well as a private right
of action from individuals in relation to certain security breaches. The CCPA is also prompting a wave of similar legislative developments in other U.S. states and creating the
potential for a patchwork of overlapping but different laws. These developments increase our compliance burden and our risk, including risks of regulatory fines, litigation and
associated reputational harm.
Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state or international privacy,
data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities
or others, a loss of customer confidence, damage to our brand and reputation and a loss of customers, any of which could have an adverse effect on our business. In addition,
various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection
issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business or our reputation
with customers. For example, some countries have adopted laws mandating that some Personal Information regarding customers in their country be maintained solely in their
country. Having to maintain local data centers and redesign product, service and business operations to limit Personal Information processing to within individual countries
could increase our operating costs significantly.
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.
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;
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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.
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 Royal DSM, N.V. (“DSM”), BASF, Bayer 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, Novartis, Pfizer, Bristol-Myers, Kyorin, Urovant and Teva 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, and Dupont, as well as subsidiaries of larger contract research/contract manufacturing organizations (“CRO/CMO”), such as DSM, Cambrex Corporation, Lonza,
WuXi STA, and Almac Group Ltd. Some fermentation pathway design companies, like Ginkgo Bioworks and Zymergen, whose traditional focus has been to design
microorganisms that express small molecule chemicals, could extend into designing organisms that express enzymes.
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There is also competition in the enzyme customization and optimization area from several smaller companies, such as BRAIN AG, Arzeda, c-LEcta GmbH 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), 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
as an injectable enzyme substitution therapy for the
certain type of PKU. In addition, BioMarin gained US FDA approval in 2018 and began commercial sales of Palynziq
potential treatment of PKU. Several companies, i.e., Synlogic, Homology Medicines, and Rubius have reported clinical efforts to develop biotherapeutic candidates for PKU.
Beyond targeting PKU, Takeda (who recently acquired Shire Plc), Genzyme / Sanofi S.A., BioMarin, and other companies market or are actively developing new enzyme
therapeutics. There are numerous companies that are developing other forms of therapeutics, such as small molecules, gene therapies, as well as therapies based on gene editing,
which could compete with biotherapeutics.
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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
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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.
Business interruptions resulting from disasters or other disturbances could delay us in the process of developing our products and could disrupt our sales. Our business
continuity and disaster recovery plans may not adequately protect us from a serious disaster or other disturbance.
Our headquarters and other facilities are located in the San Francisco Bay Area, which in the past has experienced both severe earthquakes and wildfires. Earthquakes, wildfires
or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. We
are also vulnerable to other types of disasters and other events that could disrupt our operations, such as riot, civil disturbances, war, terrorist acts, infections in our laboratory or
production facilities or those of our customers or contract manufacturers and other events beyond our control. If a natural disaster or other event occurred that prevented us from
using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and
enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of
time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar
event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans. 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 biocatalysts 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.
59
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
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
60
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 of 1986, as amended (the “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 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 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.
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, 2020, our officers, directors and stockholders who hold at least 5% of our stock together beneficially own
approximately 39% 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, 2020, one stockholder beneficially owned approximately 9% of our common stock.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could
decline. As of December 31, 2020, we had approximately 64.3 million shares of common stock outstanding. Of those shares, approximately 1.7 million shares were held by
current directors, executive officers and other affiliates, or may otherwise be subject to Rule 144 under the Securities Act of 1933, or the Securities Act.
61
As of December 31, 2020, approximately 0.3 million shares of common stock issuable upon vesting of outstanding restricted stock units and performance stock units and up to
approximately 4.6 million shares of common stock issuable upon exercise of outstanding options were eligible for sale in the public market to the extent permitted by the
provisions of the applicable vesting schedules, and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are issued and sold, or if it is
perceived that they will be sold, in the public market, the trading price of our common stock could decline.
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 equity 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 biocatalysts 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;
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.
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.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.
Our operating results and cash flows are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign currency
exchange rates relates to cash denominated in currencies other than the United States dollar ("USD"). The weakening of foreign currencies relative to the USD adversely affects
our foreign currency-denominated cash. In periods when the USD declines in value as compared to the foreign currencies in which we incur
62
expenses, our foreign-currency based cash decrease when translated into United States dollars. Conversely, the strengthening of foreign currencies relative to the USD will
generally be beneficial to our foreign currency-denominated cash when translated into USD.
The effect of a 10% unfavorable change in exchange rates on foreign denominated receivables and cash as of December 31, 2020 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 do not engage in foreign currency hedging transactions, and as a result, unfavorable movements in foreign currency exchange rates may have an adverse financial impact,
which could materially adversely affect our financial condition or results of operations. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for
additional discussion on the impact of foreign exchange risk.
General Risk Factors
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
Financial accounting standards may change or their interpretation may change. A change in accounting standards or practices can have a significant effect on our reported
results and may even affect our reporting of transactions completed before the change becomes effective. Changes to existing rules or the re-examining of current practices may
adversely affect our reported financial results or the way we conduct our business. In particular, in order to be able to comply with the requirements of the revenue recognition
standard under Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606) and related amendments (“ASC 606”), we have updated and
enhanced our internal accounting processes and our internal controls over financial reporting. This has required, and will continue to require, additional investments by us, and
may require incremental resources that could increase our operating costs in future periods. Further, the timing of recognition for our product sales under certain license and
supply agreements and research and development revenues, on or after January 1, 2018, have been changed as a result of ASC 606.
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.
We may also be subject to more stringent state law requirements. For example, in September 2018, California Governor Jerry Brown signed into law Senator Bill 826 (SB 826),
which generally requires public companies with principal executive offices in California to have a minimum number of females on the company's board of directors. As of
December 31, 2019, each public company with principal executive offices in California was required to have at least one female on its board of directors. By December 31,
2021, each public company will be required to have at least two females on its board of directors if the company has at least five directors, and at least three females on its
board of directors if the company has at least six directors. The new law does not provide a transition period for newly listed companies. Similarly, in January 2020, New York
enacted a new law that mandates a study on the number of female directors on the board of corporations doing business in New York.
Additionally, on September 30, 2020, California Governor Gavin Newsom signed into law Assembly Bill 979 (AB 979), which generally requires public companies with
principal executive offices in California to include specified numbers of directors from "underrepresented communities." A director from an "underrepresented community"
means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian,
bisexual or transgender. By December 31, 2021, each public company with principal executive offices in California is
63
required to have at least one director from an underrepresented community. By December 31, 2022, a public company with more than four but fewer than nine directors will be
required to have a minimum of two directors from underrepresented communities, and a public company with nine or more directors will need to have a minimum of three
directors from underrepresented communities. Similar to SB 826, AB 979 does not provide a transition period for newly listed companies.
If we fail to comply with either SB 826 or AB 979, we could be fined by the California Secretary of State, with a $100,000 fine for the first violation and a $300,000 fine for
each subsequent violation of either law, and our reputation may be adversely affected.
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.
Epidemic diseases, or the perception of their effects, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Outbreaks of epidemic, pandemic, or contagious diseases, such as the COVID-19 pandemic or, historically, the Ebola virus, Middle East Respiratory Syndrome, Severe Acute
Respiratory Syndrome or the H1N1 virus, could disrupt our business. Business disruptions could include disruptions or restrictions on our ability to travel or to distribute our
products, as well as temporary closures of the facilities of our customers, partners, suppliers or contract manufacturers. Any disruption of our customers, partners, suppliers or
contract manufacturers would likely impact our sales and operating results. In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human
population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that
could affect demand for our products and services. Any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash
flows.
Not applicable.
Facilities
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our headquarters are located in Redwood City, California, where we lease approximately 77,300 square feet of office and laboratory space.
Our lease (“RWC 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 “200/220 Penobscot Space”), approximately 37,900 square feet of space located at 400 Penobscot Drive, Redwood City, California (the “400
Penobscot Space”) (the 200/220 Penobscot Space and the 400 Penobscot Space are collectively referred to as the “Penobscot Space”), and approximately 11,200 square feet of
space located at 501 Chesapeake Drive, Redwood City, California (the “Chesapeake Space”). Until the end of January 2020, we also leased approximately 29,900 square feet of
space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw Space”). During January 2020, we subleased approximately 26,500 square feet of the Saginaw
Space to Minerva Surgical, Inc. Both the lease and sublease for the Saginaw Space expired at the end of January 2020. From February through April 2020, we subleased
approximately 3,400 square feet 101 Saginaw Drive from Minerva Surgical, Inc. The sublease expired at the end of April 2020.
64
We entered into the initial lease with MetLife for our facilities in Redwood City in 2004 and the RWC lease has been amended multiple times since then to adjust the leased
space and terms of the RWC Lease. In February 2019, we entered into an Eighth Amendment to the RWC Lease (the “Eighth Amendment”) with MetLife with respect to the
Penobscot Space and the 501 Chesapeake Space to extend the term of the RWC Lease for additional periods. Pursuant to the Eighth Amendment, the term of the lease of the
Penobscot Space has been extended through May 2027. The lease term for the 501 Chesapeake Space has been extended to May 2029. We have one (1) option to extend the
term of the lease for the Penobscot Space for five (5) years, and one (1) separate option to extend the term of the lease for the 501 Chesapeake Space for five (5) years.
In the first quarter of 2021, we entered into lease agreement with ARE-San Francisco No. 63, LLC (“ARE”) to lease a portion of a facility comprising approximately 36,593
rentable square feet in San Carlos, California to serve as additional office and research and development laboratory space (the “San Carlos Space”). We expect to commence
occupancy of the San Carlos Space in November 2021 once tenant improvements are substantially completed by ARE in accordance with the construction plan.
We believe that the facilities that we currently lease in Redwood City, California and the San Carlos, California facility we plan to lease 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.
We are not currently a party to any material pending litigation or other material legal proceedings.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
65
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.”
As of February 26, 2021, there were approximately 130 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 we 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. In addition, unless waived, the terms of our Credit Facility prohibit
us from paying any cash dividends or making other distributions. 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.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item concerning securities authorized for issuance under equity compensation plans is incorporated by reference from the information that will
be set forth in the Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in
2021 (the “2021 Proxy Statement”) under the heading “Executive Compensation—Equity Compensation Plan Information.”
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, 2015 through December 31, 2020. The figures represented below assume an investment of $100 in our common stock at the closing price on
December 31, 2015 and in the Nasdaq Composite Index and the Nasdaq Biotechnology Index on December 31, 2015 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
Codexis, Inc.
Nasdaq Composite Total Return
Nasdaq Biotechnology (Total Return) Index
Ticker
CDXS
XCMP
XNBI
2015
2016
2017
2018
2019
2020
$
$
$
100.00 $
100.00 $
100.00 $
108.75 $
108.87 $
78.65 $
197.40 $
141.13 $
95.67 $
394.80 $
137.12 $
87.19 $
378.01 $
187.44 $
109.08 $
516.08
271.64
137.90
December 31,
66
Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the year ended December 31, 2020, we did not issue or sell any unregistered securities not previously disclosed in a Quarterly Report on Form 10-Q or in a Current
Report on Form 8-K.
Issuer Purchases of Equity Securities
None.
67
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, 2020, 2019, and 2018 and the consolidated balance sheets data as of
December 31, 2020 and 2019 from our audited Consolidated Financial Statements appearing elsewhere in this filing. The consolidated statements of operations data for the
fiscal years ended December 31, 2017 and 2016 and the consolidated balance sheets data as of December 31, 2018, 2017 and 2016 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
2020
(1) (2)
2019
Year Ended December 31,
2018
2017
2016
(1) (2)
(1)
(In Thousands, Except Per Share Amounts)
Consolidated Statements of Operations Data:
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expenses, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common stock shares used in computing net loss per
share, basic and diluted
$
$
$
30,220 $
38,836
69,056
13,742
44,185
35,049
92,976
(23,920)
405
(156)
(23,671)
339
(24,010) $
(0.40) $
29,465 $
38,993
68,458
15,632
33,873
31,502
81,007
(12,549)
1,287
(656)
(11,918)
17
(11,935) $
(0.21) $
25,590 $
35,004
60,594
12,620
29,978
29,291
71,889
(11,295)
671
(291)
(10,915)
(37)
(10,878) $
(0.21) $
26,685 $
23,339
50,024
14,327
29,659
29,008
72,994
(22,970)
147
(92)
(22,915)
81
(22,996) $
(0.50) $
59,360
56,525
52,205
46,228
15,321
33,516
48,837
9,753
22,229
25,419
57,401
(8,564)
60
(94)
(8,598)
(40)
(8,558)
(0.21)
40,629
(1)
Financial results for years ended December 31, 2020, 2019 and 2018 as compared to the years ended December 31, 2017 and 2016 reflect the effects of adopting Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments (“ASC 606”), which provided a new basis of accounting for our revenue arrangements beginning in the 2018
fiscal year 2018 and continuing thereafter. The adoption of ASC 606 limits the comparability of revenue and certain expenses, including revenues and costs and operating expenses, presented in the results
of operations for the years ended December 31, 2020, 2019 and 2018 when compared to the years ended December 31, 2017 and 2016.
(2)
Lease costs for the years ended December 31, 2020 and 2019 as compared to years ended December 31, 2018, 2017 and 2016 reflect the effects of adopting ASU 2016-02 and the related amendments,
Leases (Topic 842)(“ASC 842”) which provided a new basis of accounting for leases beginning in our 2019 fiscal year. The adoption of ASC 842 limited the comparability of lease costs included in
operating expenses, presented in the results of operations for the years ended December 31, 2020 and 2019 when compared to the years ended December 31, 2018, 2017 and 2016.
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Consolidated Balance Sheets Data:
Cash, cash equivalents and restricted cash
Working capital
Total assets
Total liabilities
Total stockholders’ equity
2020
(1) (2)
2019
(1) (2)
December 31,
2018
(1)
(In Thousands)
2017
2016
$
150,817 $
159,442
221,646
51,543
170,103
92,221 $
98,817
149,073
43,556
105,517
54,485 $
50,085
79,283
22,977
56,306
32,776 $
20,087
53,625
29,078
24,547
20,864
14,860
35,648
16,549
19,099
(1)
Financial results for years ended December 31, 2020, 2019 and 2018 as compared to the years ended December 31, 2017 and 2016 reflected the effects of adopting ASU 2014-09, Revenue from Contracts
with Customers (“ASC 606”), which provided a new basis of accounting for our revenue arrangements during our 2020, 2019 and 2018 fiscal years. We recognized the cumulative effect of applying ASC
606 and recognized a $4.1 million increase to the opening balance of the accumulated deficit in 2018. The comparative information for the years ended December 31, 2017 and 2016 has not been restated
and continues to be reported under the accounting standards in effect for the periods presented.
(2)
Financial results for years ended December 31, 2020 and 2019 as compared to the years ended December 31, 2018, 2017 and 2016 reflected the effects of adopting ASU 2016-02 and the related
amendments, Leases (Topic 842) (“ASC 842”), which established a right-of-use (“ROU”) model requiring lessees to record a ROU asset and lease obligations on the balance sheet for all leases with terms
longer than 12 months. On adoption of ASC 842 in 2019, for operating leases, we recognized $26.6 million of ROU assets and $27.6 million of lease obligations, and for finance leases, we recognized $0.5
million of ROU assets and $0.3 million of lease obligations in our consolidated balance sheet.
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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 enzymes and other proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast, largely untapped source of
value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing
number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.
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We are a pioneer in harnessing computational technologies to drive biology advancements. Since 2002, 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 the structural and performance attributes of our large and continuously growing library of protein variants. These
computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted
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performance enhancements. 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 bioprocess development which are all coordinated to rapidly innovate novel, fit-
for-purpose products.
The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex
chemicals. It begins by conceptually designing the most cost-effective and practical process for a targeted product. We then develop optimized biocatalysts to enable the
designed process, using our CodeEvolver platform. Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated
using high throughput methods under process-relevant operating conditions. This approach results in an optimized biocatalyst that enables cost-efficient processes that are
relatively simple to run in conventional manufacturing equipment. This also allows for efficient technical transfer of our processes to our manufacturing partners.
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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 competencies directly integrated in our CodeEvolver protein engineering platform, 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, bioprocess development and fermentation engineering.
Our integrated, multi-disciplinary approach to product and process development is a critical success factor for the Company.
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We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals, which remains a
primary business focus. Our customers, which include many large, global pharmaceutical companies, use our technology, products and services in their process development
and in manufacturing. Additionally, we have licensed our proprietary CodeEvolver protein engineering technology platform to global pharmaceutical companies enabling
them to use this technology, in house, to engineer enzymes for their own businesses. Most recently, in May 2019, we entered into a Platform Technology Transfer and License
Agreement (the “Novartis CodeEvolver Agreement”) with Novartis. The Novartis CodeEvolver Agreement (Codexis’ third such agreement with large pharma companies)
allows Novartis to use our proprietary CodeEvolver protein engineering platform technology in the field of human healthcare.
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As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for
use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals. In addition, we are using our technology to
develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular
diagnostic and genomic research applications. In December 2019, we entered into a license agreement to provide Roche Sequencing Solutions, Inc. with our first enzyme for
this target market: the Company’s EvoT4™ DNA ligase.
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In June 2020, we also entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”) pursuant to which we are leveraging our CodeEvolver
platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis. Concurrently with the MAI Agreement, we entered into a Stock
Purchase Agreement with Molecular Assemblies, Inc ("MAI") pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and, in
connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.
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Approximately five years ago, we began using the CodeEvolver protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both
in partnership with customers and for our own proprietary Codexis drug candidates. Our first program was for the potential treatment of phenylketonuria ("PKU") in humans.
PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we entered into a
Global Development, Option and License Agreement (the “Nestlé License Agreement”) with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd. (“Nestlé Health
Science") to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU. In February 2019, Nestlé Health Science exercised its option
to obtain an exclusive license to develop and commercialize CDX-6114. Also in October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science
are collaborating to leverage the CodeEvolver platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical
Nutrition business areas. In January 2020, we entered into a development agreement with Nestlé Health Science to advance a new lead candidate discovered under the Nestlé
SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder. In parallel, the Nestlé SCA was extended
through December 2021 to support the discovery of therapeutic candidates for additional disorders. In March 2020, we entered into a Strategic Collaboration and License
Agreement (“Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), for the
research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and a blood factor deficiency.
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Business Segments
We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 15, “Segment, Geographical and Other Revenue Information”
in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Performance Enzymes
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We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this
continues to be our largest market served. Our customers, which include many 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 customized enzymes for use in other industrial markets. These markets consist
of several large industrial verticals, including food, feed, consumer care, and fine chemicals. We also use our technology in the life sciences markets to develop enzymes for
customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring
applications.
Novel Biotherapeutics
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We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. 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,
such as its activity, stability or immunogenicity. Our first lead program was for the potential treatment of hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans.
PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we announced a
global development, option and license agreement with Nestlé Health Science to advance CDX-6114, our own novel orally administrable enzyme therapeutic candidate for the
potential treatment of PKU. In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, which was
conducted in
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Australia. The initiation of the trial triggered a $4.0 million milestone payment from Nestlé Health Science. The $1.0 million milestone payment that was triggered by the
achievement of a formulation relating to CDX-6114 was received in February 2019. In January 2019, we received notice from the FDA that it had completed its review of our
IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the United States. In February 2019,
Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-
6114 for the management of PKU. As a result of the option exercise, we earned a milestone and recognized $3.0 million in revenues in the first quarter of 2019. Upon exercising
its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114. During 2020, Nestlé Health Science
completed a safety, tolerability and PK/PD study of CDX-6114 in PKU patients that demonstrated CDX-6114 was well tolerated and safe at all doses tested. In addition, an
increase in blood levels of cinnamic acid, a biomarker of enzyme activity, was observed which is consistent with the intended mode of action for CDX-6114.
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In October 2017, we separately entered into the Nestlé SCA with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to leverage the
CodeEvolver platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. In January
2020, we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance into pre-clinical and
early clinical studies a lead candidate targeting a gastro-intestinal disorder, CDX-7108, discovered through the Nestlé SCA. The Nestlé SCA was extended through December
2021. During 2020, we, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in
2021. Additionally, the parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder.
In March 2020, we entered into the Takeda Agreement with Takeda pursuant to which we are collaborating to research and develop protein sequences for use in gene therapy
products for certain disease indications in accordance with the respective program plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency. In
March 2020, we received a one-time, non-refundable cash payment of $8.5 million. Of these programs, the Fabry disease program is the most advanced, with multiple
sequences, including CDX-6311, having been provided to Takeda.
For further description of our business segments, see Note 15, “Segment, Geographical and Other Revenue Information,” in the Notes to Consolidated Financial Statements set
forth in Item 8 of this Annual Report on Form 10-K.
Business Update Regarding COVID-19
We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent
to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are
highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new
information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international
markets.
To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our manufacturing
and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers. Furthermore, our
ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our
customers with whom we collaborate. We believe that these disruptions have had a negative impact on revenue for the year ended December 31, 2020, although we are unable
to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues. The extent to which the pandemic may impact our
business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.
In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of
our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-March 2020 through
the end of April 2020 in accordance with these Orders. In May 2020, we re-initiated limited R&D operations and have ramped up operations such that we are currently utilizing
the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees. Additionally, we resumed small
scale manufacturing at our Redwood City pilot plant in May 2020.
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Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain
disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.
The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain.
For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this Annual Report on Form 10-K.
Recent Investing Activities
In June 2020, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million. In
connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors. Concurrently with our initial equity investment,
we entered into the MAI Agreement, pursuant to which we are performing services utilizing our CodeEvolver protein engineering platform technology to improve DNA
polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock. We received 714,171 shares of MAI's Series A preferred
stock from research and development activities in the year ended December 31, 2020, and recognized $0.9 million in research and development revenue from these activities
with MAI in the year ended December 31, 2020. At December 31, 2020, we had $0.5 million of financial assets due from MAI for services rendered.
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In November 2020, we announced the SynBio Innovation Accelerator (“Accelerator”) collaboration with Casdin Capital, LLC ("Casdin"). The goal of the Accelerator is to fund
the early-stage companies with disruptive technology platforms or unique product development capabilities in the field of synthetic and industrial biotechnology. There is no
commitment under the Accelerator collaboration for either party to make any specific investments or any volume of investments. The first investment by Codexis associated
with the Accelerator collaboration was made in Arzeda Corp., a privately-held computational protein design company that focuses on computational approaches to designing
novel enzyme functionality. We invested $1.0 million in Arzeda and received a convertible subordinated note issued by Arzeda Corp. The note is an available-for-sale non-
marketable interest-bearing debt security which will mature in July 2021.
In December 2020, we completed an underwritten public offering of 4,928,572 shares of our common stock, including the exercise in full by the underwriters of their option to
purchase an additional 642,857 of our shares, at a public offering price of $17.50 per share. After deducting the underwriting discounts, commissions, and estimated offering
expenses, net proceeds were approximately $80.8 million.
Results of Operations Overview
Revenues were $69.1 million in 2020, a 1% increase from $68.5 million in 2019. Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical
intermediates, and Codex biocatalyst panels and kits, was $30.2 million in 2020, an increase of 3% compared with $29.5 million in 2019. The increase in product revenue was
primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products.
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Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and
screening fees, totaled $38.8 million in 2020, with a nominal decrease compared with $39.0 million in 2019. The decrease in research and development revenue was primarily
due to lower revenues from Novartis CodeEvolver Agreement, a prior year functional license fee revenue from Nestlé Health Science, and a prior year milestone payment
from GSK under GSK CodeEvolver Agreement, partially offset by the recognition of license fees from Takeda under the Takeda Agreement, and recognition of functional
license fees revenue from Porton.
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Our products’ profitability is affected by many factors including the margin of profit on products we sell. Our profit margins are affected by many factors including the costs of
internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs. Profit margin data is used as a management
performance measure to provide additional information regarding our results of operations on a consolidated basis. Product gross margins increased to 55% in 2020, compared
to 47% in 2019 due to improved product mix due to higher demand for enzymes for the manufacture of branded pharmaceutical products.
Research and development expenses were $44.2 million in 2020, an increase of 30% from $33.9 million in 2019. The increase was primarily due to an increase in costs
associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher headcount, higher allocable expenses, higher
outside services, higher in depreciation expense and were partially offset by lower lab supply expenses.
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Selling, general and administrative expenses were $35.0 million in 2020, an increase of 11% compared to $31.5 million in 2019. The increase was primarily due to an increase
in costs associated with headcount, stock compensation expense, consultants, legal and accounting fees, facilities, outside and temporary services, and licensed technology,
which were partially offset by lower allocable expenses and travel expenses.
Net loss was $24.0 million, or a net loss of $0.40 per share, in 2020 compared to a net loss of $11.9 million, or a net loss of $0.21 per share, in 2019. The increase in net loss was
primarily related to higher operating expenses composed of increases in costs associated headcount, higher outside services, higher stock compensation expenses, and higher
facility expense.
Cash and cash equivalents increased to $149.1 million as of December 31, 2020 compared to $90.5 million as of December 31, 2019. In addition, net cash used in operations
was $16.5 million in 2020, as compared to net cash used in operations of $12.6 million in 2019. 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.
In June 2017, we entered into a loan and security agreement with Western Alliance Bank that allows us to borrow up to $10.0 million under a term loan, and up to $5.0 million
under a revolving credit facility with 80% of certain eligible accounts receivable as a borrowing base (the “Credit Facility”). Obligations under the Credit Facility are secured by
a lien on substantially all of our personal property other than our intellectual property. In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby
we may draw on the term debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively. Draws on the term debt are subject to
customary conditions for funding including, among others, that no event of default exists. As of December 31, 2020, no amounts were borrowed under the Credit Facility and
we were in compliance with the covenants for the Credit Facility. See Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set
forth in Item 8 of this Annual Report on Form 10-K.
Below is an overview of our results of operations by business segments:
Performance Enzymes
Revenues decreased by $10.1 million, or 17%, to $48.1 million in 2020, compared to $58.2 million in 2019. The increase in product revenue of $0.8 million, or 3%, to $30.2
million in 2020, compared to $29.5 million in 2019 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products. The
decrease in research and development revenue of $10.8 million, or 38%, to $17.9 million in 2020, compared to $28.7 million in 2019 was primarily due to lower revenues from
Novartis CodeEvolver Agreement, a prior year milestone payment from GSK under the GSK CodeEvolver Agreement, and lower license fees and revenues from Merck,
partially offset by the recognition of functional license fees revenue from Porton.
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Product gross margins were 55% in 2020, compared to 47% in the corresponding period in 2019. The increase in product gross margins was primarily due to improved product
mix due to higher demand for enzymes for the manufacture of branded pharmaceutical products.
Research and development expense increased $1.5 million, or 8%, to $20.9 million in 2020, compared to $19.4 million in 2019, The increase was primarily due to an increase in
costs associated with higher headcount, higher stock compensation expense, and higher repairs and maintenance expense, which were partially offset by lower lab supply
expenses and lower allocable expenses.
Selling, general and administrative expense increased by $1.1 million, or 13%, to $9.6 million in 2020, compared to $8.5 million in 2019, due primarily to an increase in costs
associated with licensed technology, outside services, stock compensation expense, and higher allocable expenses which were partially offset by lower travel expenses.
Novel Biotherapeutics
Research and development revenue increased by $10.6 million, or 103%, to $21.0 million in 2020, compared to $10.3 million in 2019. The increase in research and
development revenue was primarily due to recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior year functional license
fee revenue from Nestlé Health Science.
Research and development expense increased $8.4 million, or 63%, to $21.7 million in 2020, compared to $13.3 million in 2019. The increase was primarily due to an increase
in costs associated with outside services relating to CMC and regulatory expenses for CDX-7108 which we are developing pursuant to our development agreement with Nestlé
Health Science, higher headcount, higher outside services, and higher allocable expenses which were partially offset by lower expenses for lab supplies and consultants.
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Selling, general and administrative expense increased by $0.1 million, or 6%, to $2.4 million in 2020, compared to $2.2 million in 2019. The increase was primarily due to an
increase in costs associated with headcount, licensed technology, consultants and stock compensation expense which were partially offset by lower allocable expenses, outside
services, and travel expenses.
GSK Platform Technology Transfer, Collaboration and License Agreement
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In July 2014, we entered into a CodeEvolver protein engineering platform technology transfer collaboration and license agreement (the “GSK CodeEvolver Agreement”) with
GSK. Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver protein engineering platform technology to develop novel
enzymes for use in the manufacture of GSK's pharmaceutical and health care products. We received an upfront fee upon the execution of the agreement in July 2014 and
milestone payments in each of the years from 2014 through April 2016. We completed the transfer of the CodeEvolver protein engineering platform technology to GSK in
April 2016 and all revenues relating to the technology transfer have been recognized as of April 2016. We have the potential to receive additional cumulative contingent
payments that range from $5.75 million to $38.5 million per project based on GSK’s successful application of the licensed technology. We are also eligible to receive royalties,
based on net sales of GSK’s sales of licensed enzyme products, that are currently not being recognized.
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In 2019, we received a $2.0 million milestone payment relating to the advancement of an enzyme developed by GSK using our CodeEvolver protein engineering platform
technology. We recognized research and development revenue of nil, $2.0 million and nil in 2020, 2019, and 2018, respectively.
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Merck Platform Technology Transfer and License Agreement
In August 2015, we entered into a CodeEvolver platform technology transfer collaboration and license agreement (the “Merck CodeEvolver Agreement”) with Merck, Sharp
& Dohme (“Merck”) which allows Merck to use the CodeEvolver protein engineering technology platform in the field of human and animal healthcare.
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We received an upfront license fee upon execution of the Merck CodeEvolver Agreement, and milestone payments in September 2015 and in September 2016, when we
completed the transfer of the engineering platform technology. Additionally, we recognized research and development revenues of $3.1 million, $4.0 million, and $4.1 million
in the years ended December 31, 2020, 2019 and 2018, respectively, for various research projects under our collaborative arrangement.
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We 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. The API payments are based on the quantity of API
developed and manufactured by Merck and will be recognized as usage-based royalties.
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In October 2018, we entered into an amendment to the Merck CodeEvolver Agreement whereby we amended certain licensing provisions and one exhibit. In January 2019, we
entered into an amendment to the Merck CodeEvolver Agreement whereby we installed certain CodeEvolver protein engineering technology upgrades into Merck’s platform
license installation and we will maintain those upgrades for a multi-year term expiring in January 2022. The license installation was completed in 2019 and we recognized $0.9
million as license fee revenue accordingly in 2019 under the amendment. Pursuant to the agreement, Merck has options to future technology enhancements for a specified fee.
As of December 31, 2020, Merck has not exercised its option for technology enhancements. We recognized $0.1 million and $0.9 million in research and development revenues
under the terms of the amendment in the years ended December 31, 2020 and 2019, respectively.
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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 enzyme 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.
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Effective as of January 2016, we and Merck amended the Sitagliptin Catalyst Supply Agreement to prospectively provide for variable pricing based on the cumulative volume
of sitagliptin catalyst purchased by Merck and to allow Merck to purchase a percentage of its requirements for sitagliptin catalyst from a specified third-party supplier. Merck
received a distinct, functional license to manufacture a portion of its demand beginning January 1, 2018, which we recognized as research and development revenue. We
recognized research and development revenues of nil, nil and $1.3 million of research and development revenues in the years ended December 31, 2020, 2019 and 2018,
respectively.
We have determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin catalyst purchased by Merck, provides Merck material
rights and we are recognizing product revenues using the alternative method.
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Under the alternative approach, we estimate the total expected consideration and allocate it proportionately with the expected sales.
The Sitagliptin Catalyst Supply Agreement requires Merck to pay an annual fee for the rights to the sitagliptin technology each year for the term of the Sitagliptin Catalyst
Supply Agreement. Amounts of annual license fees are based on contractually agreed prices and are on a declining scale over the term of the contract.
Pursuant to the terms of the Sitagliptin Catalyst Supply Agreement, Merck may purchase supply from us for a fee based on contractually stated prices. We recognized $13.4
million, $15.1 million and $12.3 million in product revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Revenues from Merck under the Sitagliptin
Catalyst Supply Agreement comprised 19%, 22%, and 22% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
The Sitagliptin Catalyst Supply Agreement will terminate in February 2022 unless extended and we have not received an amendment to extend the agreement.
As of December 31, 2020, we recorded revenue of $6.8 million from sitagliptin products that were recognized over time based on the progress of the manufacturing process.
These products will be shipped within the six month period following the end of the quarter. The contract asset balances were partially offset by contract liabilities as they are
under the same contract.
Global Development, Option and License Agreement and Strategic Collaboration Agreement
In October 2017, we entered into the Nestlé License Agreement with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd. (“Nestlé Health Science”) and, solely for
the purpose of the integration and the dispute resolution clauses of the Nestlé License Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme
biotherapeutic product candidate for the potential treatment of PKU.
We received an upfront cash payment of $14.0 million upon the execution of the Nestlé License Agreement, a $4.0 million milestone payment after dosing the first subjects in a
first-in-human Phase 1a dose-escalation trial with CDX-6114, and a $1.0 million milestone payment upon achievement of a milestone relating to formulation of CDX-6114. The
$4.0 million milestone payment that was triggered by the initiation of the trial was received in September 2018 and the $1.0 million milestone payment that was triggered by the
achievement of a formulation relating to CDX-6114 was received in February 2019. The upfront payment and the variable consideration relating to the progress payment of $4.0
million and milestone payment of $1.0 million were recognized over time as the development work was performed. Revenue was recognized using a single measure of progress
that depicted our performance in transferring control of the services, which was based on the ratio of level of effort incurred to date compared to the total estimated level of
effort required to complete all performance obligations under the agreement. We recognized development fees of $13 thousand, $1.9 million, and $9.9 million in research and
development revenue in 2020, 2019, and 2018, respectively.
In January 2019, we received notice from the FDA that it had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b
multiple ascending dose study in healthy volunteers in the United States. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide,
royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU. The option payment of $3.0 million was
recognized in the first quarter of 2019 as research and development revenue. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical
development and commercialization of CDX-6114. We are also eligible to receive payments from Nestlé Health Science under the Nestlé License Agreement that include (i)
development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net
sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of product.
In October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver protein engineering
technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. Under the Strategic Collaboration
Agreement, we received an upfront payment of $1.2 million in 2017 and an incremental $0.6 million payment in September 2018 for additional services. The Nestlé SCA has
been extended through December 2021.
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In January 2020, we entered into a development agreement with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to advance a lead
candidate, CDX-7108, targeting a gastro-intestinal disorder discovered through our Nestlé SCA into pre-clinical and early clinical studies.
76
Under the Nestlé SCA and the development agreement, we recognized research and development fees of $7.9 million, $5.4 million, and $3.6 million in 2020, 2019 and 2018
respectively.
Strategic Collaboration Agreement
In April 2018, we entered into a Strategic Collaboration Agreement (the “Porton Agreement”) with Porton Pharma Solutions Ltd. (“Porton”) to license key elements of our
biocatalyst technology for use in Porton’s global custom intermediate and API development and manufacturing business. Under the Porton Agreement, we are eligible to receive
annual collaboration fees and research and development revenues. We received initial collaboration payments of $0.5 million within 30 days of the effective date of the Porton
Agreement, $1.5 million upon the first anniversary of the effective date of the agreement, and $1.0 million upon the second anniversary of the effective date of the agreement
and we are eligible to receive $1.0 million on the third anniversary of the effective date of the agreement. We completed the technical transfer in the fourth quarter of 2018 and
recognized $2.8 million in research and development revenue. We recognized revenue related to the functional license provided to Porton at a point in time when control of the
license was transferred to the customer. We recognized research and development revenue related to the Porton Agreement of $1.1 million, nil, and $2.8 million in 2020, 2019
and 2018, respectively.
Platform Technology Transfer and License Agreement
In May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver Agreement”) with Novartis. The Agreement allows
Novartis to use our proprietary CodeEvolver protein engineering platform technology in the field of human healthcare. Under the Novartis CodeEvolver Agreement, we are
transferring our proprietary CodeEvolver protein engineering platform technology to Novartis over approximately 25 months starting with the date on which we commenced
the technology transfer (the “Technology Transfer Period”). As a part of this technology transfer, the Company provided to Novartis our proprietary enzymes, proprietary
protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of the Company and Novartis scientists participated in technology training
sessions and collaborative research projects at our laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland. Upon completion of
technology transfer, Novartis will have the CodeEvolver protein engineering platform technology installed at its designated laboratory.
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Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver Agreement. In the second quarter of
2020, we completed the second technology milestone transfer under the agreement and became eligible to receive a milestone payment of $4.0 million, which we subsequently
received in July 2020.
We have also billed $3.4 million for partial completion of the third technology milestone and we expect to receive payment in the first quarter of 2021. In addition to this
payment we are eligible for an additional payment of $1.6 million for completion of the third technology milestone transfer, which would bring total cash payment for this
milestone to $5 million as specified in the Novartis CodeEvolver Agreement. In consideration for the continued disclosure and license of improvements to the our technology
and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period (“Improvements Term”), Novartis will pay Codexis annual payments
which amount to an additional $8.0 million. The Company also has the potential to receive quantity-dependent, usage payments for each API that is manufactured by Novartis
using one or more enzymes that have been developed or are in development using the CodeEvolver protein engineering platform technology during the period that begins on
the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire licensed patent. These product-related usage payments, if any, will be paid
by Novartis to the Company for each quarter that Novartis manufactures API using a CodeEvolver -developed enzyme. The usage payments will be based on the total volume
of API produced using the CodeEvolver -developed enzyme. These usage payments can begin in the clinical stage and will extend throughout the commercial life of each API.
Revenue for the combined initial license and technology transfer performance obligation, which is expected to occur over twenty-three months, is being recognized using a
single measure of progress that depicts our performance in transferring control of the services, which is based on the ratio of level of effort incurred to date compared to the total
estimated level of effort required to complete the performance obligation relating to the combined initial license and technology transfer. Revenue allocated to future
improvements will be recognized during the Improvement Term. We recognized $6.2 million and $11.3 million in research and development revenue in 2020 and 2019,
respectively, from the Novartis CodeEvolver Agreement.
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Strategic Collaboration and License Agreement
In March 2020, we entered into a Strategic Collaboration and License Agreement (the “Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned
subsidiary of Takeda Pharmaceutical Co. Ltd. (“Takeda”), under which we are collaborating to research and develop protein sequences for use in gene therapy products for
certain diseases. On execution of the Takeda Agreement, we received an upfront non-refundable cash payment of $8.5 million. Revenue relating to the functional licenses
provided to Takeda was recognized at a point in time when the control of the license transferred to the customer.
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Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical approval milestones for initial programs to earn
$15.4 million, (ii) development and commercialization-based milestones, per target gene, of up to $100.0 million, the modulation of which leads to treatment of certain diseases
by the applicable product, and (iii) tiered royalties based on net sales of applicable products at percentages ranging from the middle-single digits to low single-digits. We
recognized research and development revenue related to the Takeda Agreement of $13.2 million in 2020. As of December 31, 2020, we had $1.5 million in deferred revenue.
Master Collaboration and Research Agreement and Stock Purchase Agreement
In June 2020, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc. (“MAI”) pursuant to which we purchased 1,587,050 shares of MAI's Series A
preferred stock for $1.0 million. In connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors. Concurrently
with our initial equity investment, we entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”), pursuant to which we are performing
services utilizing our CodeEvolver protein engineering platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional
shares of MAI's Series A preferred stock. Based on these services, the Company is eligible to earn additional shares of MAI's Series A preferred stock. MAI will combine its
advanced chemistries with our enzymes to drive the process to commercialization. We are eligible to earn such non-monetary payments over ten to thirteen months, and any
such shares would be issued thirty days in arrears after each calendar quarter-end. We are also eligible to receive amounts for bonuses, targets and milestones on achievement of
timeline and project goals specified in the statement of work ("SOW"). Payments for bonuses, targets and milestones on achievement of timeline and project goals are to be
issued thirty days after the Company provides notification of completion. We recognized research and development revenue of $0.9 million in 2020.
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Recent Accounting Pronouncements
For information on recent accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies”, in the Notes to the Consolidated Financial Statements set
forth in Item 8 of this Annual Report on Form 10-K.
78
Results of Operations
The following table shows the amounts from our consolidated statements of operations for the periods presented (in thousands, except percentages):
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expense, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Revenues
Year Ended December 31,
2019
2020
2018
2020
% of Total Revenues
2019
2018
$
$
30,220 $
38,836
69,056
13,742
44,185
35,049
92,976
(23,920)
405
(156)
(23,671)
339
(24,010) $
29,465 $
38,993
68,458
15,632
33,873
31,502
81,007
(12,549)
1,287
(656)
(11,918)
17
(11,935) $
25,590
35,004
60,594
12,620
29,978
29,291
71,889
(11,295)
671
(291)
(10,915)
(37)
(10,878)
44 %
56 %
100 %
20 %
64 %
51 %
135 %
(35)%
1 %
— %
(34)%
— %
(34)%
43 %
57 %
100 %
23 %
49 %
46 %
118 %
(18)%
2 %
(1)%
(17)%
— %
(17)%
42 %
58 %
100 %
21 %
50 %
48 %
119 %
(19)%
1 %
— %
(18)%
— %
(18)%
Our revenues are comprised of product revenue and research and development revenue as follows:
• Product revenue consist of sales of biocatalysts, pharmaceutical intermediates, and Codex biocatalyst panels and kits.
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• Research and development revenue include license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and
screening fees.
Revenues are as follows (in thousands, except percentages):
Product revenue
Research and development revenue
Total revenues
Year Ended December 31,
2019
2020
Change
2020
2019
2018
$
%
$
%
$
$
30,220 $
38,836
69,056 $
29,465 $
38,993
68,458 $
25,590 $
35,004
60,594 $
755
(157)
598
3 % $
— %
1 % $
3,875
3,989
7,864
15 %
11 %
13 %
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 business.
We accept purchase orders for deliveries covering periods from one day up to approximately 14 months from the date on which the order is placed. However, a majority of the
purchase orders can 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.
79
2020 compared to 2019
Total revenues increased by $0.6 million in 2020 to $69.1 million, as compared to 2019. The increase was driven by growth in product revenue of $0.8 million, or 3%, offset by
decrease in research and development revenue of $157 thousand, or nominal percent.
Product revenue, which consist primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex biocatalyst panels and kits, were $30.2 million in 2020, an increase
of 3% compared with $29.5 million in 2019. The increase in product revenue is primarily due to higher customer demand for enzymes for the manufacture of branded
pharmaceuticals products.
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Research and development revenue decreased by $157 thousand in 2020 to $38.8 million, or nominal percent compared with $39.0 million in 2019, primarily due to lower
revenues from the Novartis CodeEvolver Agreement, a prior year functional license fee revenue from Nestlé Health Science, and a prior year milestone payment from GSK
under the GSK CodeEvolver Agreement, partially offset by the recognition of license fees from Takeda under the Takeda Agreement, and recognition of functional license fees
revenue from Porton.
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2019 compared to 2018
Total revenues increased by $7.9 million in 2019 to $68.5 million, as compared to 2018. The increase was driven by growth in product revenue of $3.9 million, or 15%, and
research and development revenue of $4.0 million, or 11%.
Product revenue, which consist primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex biocatalyst panels and kits, were $29.5 million in 2019, an increase
of 15% compared with $25.6 million in 2018. The increase in product revenue is primarily due to higher customer demand for enzymes for the manufacture of both branded and
generic pharmaceuticals products.
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Research and development revenue increased by $4.0 million in 2019 to $39.0 million, or 11% compared with $35.0 million in 2018, primarily due to revenues from Novartis
under the Novartis CodeEvolver Agreement and a milestone payment from GSK under the GSK CodeEvolver Agreement partially offset by lower revenue from Tate & Lyle
due to the prior year completion of services and lower development fees from Nestlé Health Science.
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Cost and Operating Expenses (in thousands, except percentages):
Cost of product revenue
Research and development
Selling, general and administrative
Total costs and operating expenses
Year Ended December 31,
2019
2020
2018
$
$
13,742 $
44,185
35,049
92,976 $
15,632 $
33,873
31,502
81,007 $
12,620 $
29,978
29,291
71,889 $
Change
2020
2019
$
(1,890)
10,312
3,547
11,969
%
$
%
(12)% $
30 %
11 %
15 % $
3,012
3,895
2,211
9,118
24 %
13 %
8 %
13 %
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Cost of Product Revenue and Product Gross Margin
Our revenues from product revenue are derived entirely from our Performance Enzymes segment. Revenues from the Novel Biotherapeutics segment are from collaborative
research and development activities and not from product revenue.
The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our consolidated statements of
operations for the years ended (in thousands, except percentages):
Product revenue
Cost of product revenue
(1)
Product gross profit
Product gross margin (%)
(2)
$
$
Year Ended December 31,
2019
2020
29,465
15,632
13,833
30,220
13,742
16,478
$
$
Change
$
755
(1,890)
2,645
$
$
%
3 % $
(12)%
19 % $
Year Ended December 31,
2018
2019
25,590
12,620
12,970
29,465
15,632
13,833
$
$
Change
$
3,875
3,012
863
$
$
%
15 %
24 %
7 %
55 %
47 %
47 %
51 %
(1)
Cost of product revenue comprises both internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs associated with our product revenue.
(2)
Product gross margin is used as a performance measure to provide additional information regarding our results of operations on a consolidated basis.
2020 compared to 2019
Cost of product revenue decreased by $1.9 million in 2020 to $13.7 million, as compared to 2019. The decrease was primarily due to lower costs compared to costs associated
with prior year product revenue. Product gross margin increased to 55% in 2020 as compared to 47% in 2019 due to improved product mix.
2019 compared to 2018
Cost of product revenue increased by $3.0 million in 2019 to $15.6 million, as compared to 2018. The increase was primarily due to an increase in costs associated with the
higher level of product revenue. Product gross margin decreased to 47% in 2019 as compared to 51% in 2018 due to the variations in product mix.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects as well as 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 (iii) external costs. Research and development expenses are expensed when incurred.
2020 compared to 2019
Research and development expenses were $44.2 million in 2020 compared to $33.9 million in 2019, an increase of $10.3 million, or 30%. The increase was primarily due to
$5.0 million in costs associated with outside services relating to CMC and regulatory expenses, $3.4 million in costs associated with higher headcount, $1.5 million in higher
allocable expenses which include occupancy-related costs and supplies, $0.4 million in higher outside services, $0.3 million in higher depreciation expense and were partially
offset by a decrease of $0.4 million in lab supply expenses.
2019 compared to 2018
Research and development expenses were $33.9 million in 2019 compared to $30.0 million in 2018, an increase of $3.9 million, or 13%. The increase was primarily due to $2.1
million in costs associated with higher headcount, $2.1 million in higher allocable expenses which include occupancy-related costs and supplies, and increases of $0.8 million in
lab supplies, which were partially offset by a decrease of $0.5 million in outside services and a decrease of $0.6 million in stock compensation expense.
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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 expenses and amortization expense.
2020 compared to 2019
Selling, general and administrative expenses were $35.0 million in 2020 compared to $31.5 million in 2019, an increase of $3.5 million, or 11%. The increase was primarily due
to increases of $1.7 million in salaries and personnel costs associated with higher headcount, $0.6 million in stock compensation expense, $0.8 million in consultants, $0.8
million in legal and accounting fees, $0.7 million in facilities, $0.7 million in outside and temporary services, $0.4 million in licensed technology, which were partially offset by
decreases of $1.6 million in allocable expenses and $0.8 million in travel expenses.
2019 compared to 2018
Selling, general and administrative expenses were $31.5 million in 2019 compared to $29.3 million in 2018, an increase of $2.2 million, or 8%. The increase was primarily due
to increases of $2.2 million in facility expense, $2.6 million in salaries and personnel costs associated with higher headcount, which were partially offset by decreases of $2.1
million in allocable expenses and $0.5 million in outside services.
Other Income (Expense), net (in thousands, except percentages):
Interest income
Other expense, net
Total other income (expense), net
Interest Income
Year Ended December 31,
2019
2020
2018
2020
2019
$
%
$
%
$
$
405 $
(156)
249 $
1,287 $
(656)
631 $
671 $
(291)
380 $
(882)
500
(382)
(69)% $
76 %
(61)% $
616
(365)
251
92 %
(125)%
66 %
Change
Interest income decreased by $0.9 million in 2020 compared to 2019, primarily due to lower average interest rates on declining average cash balances. Interest income increased
by $0.6 million in 2019 compared to 2018, primarily due to higher interest rates on higher levels of cash and cash equivalents.
Other Expense
Other expense decreased by $0.5 million in 2020 compared to 2019 primarily due to prior year write-down of $0.5 million of our investment in CO Solutions and fluctuations
in foreign currency. Other expense increased by $0.4 million in 2019 compared to 2018, primarily due to $0.5 million write-down in the fair value of our investment in CO
Solutions partially offset by gains from fluctuations in foreign currency.
2
2
Provision for (benefit from) Income Taxes (in thousands, except percentages):
Provision for (benefit from) income taxes
$
339 $
17 $
(37)
$
322
1,894 % $
54
146 %
Year Ended December 31,
2019
2018
2020
2020
2019
$
%
$
%
Change
The provision for income taxes for 2020 was primarily due to foreign withholding taxes on certain sales to non-U.S. customers. The provision for income taxes in 2019 was
primarily due to the accrual of interest and penalties on historic uncertain tax positions. The benefit from income taxes in 2018 was primarily related to a net loss from our
foreign operations and a reduction in the deferred tax liability for accrued future withholding taxes on dividends.
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Net Loss
Net loss for 2020 was $24.0 million, or a net loss per basic and diluted share of $0.40. This compared to a net loss of $11.9 million, or a net loss per basic and diluted share of
$0.21 for 2019. The increase in net loss was primarily related to increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount,
higher consultants, higher stock compensation expenses and higher facility expense.
The net loss for 2019 was $11.9 million, or a net loss per basic and diluted share of $0.21, for 2019. This compared to a net loss of $10.9 million, or a net loss per basic and
diluted share of $0.21 for 2018. The increases in net loss was primarily attributable to higher operating expenses due to increases in costs associated with headcount, outside
services, higher allocable expenses, and higher facility expense.
Results of Operations by Segment (in thousands, except percentages)
Revenues by segment
Year Ended December 31, 2020
Year Ended December 31, 2019
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
$
%
$
%
30,220 $
17,886
48,106 $
—
$
30,220 $
29,465 $
—
$
29,465 $
755
3%
20,950
20,950
$
38,836
69,056 $
28,691
58,156 $
10,302
10,302
$
38,993
68,458 $
(10,805)
(10,050)
(38)%
(17)%
$
$
—
—%
10,648
10,648
103%
103%
Year Ended December 31, 2019
Year Ended December 31, 2018
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
$
%
$
%
29,465 $
28,691
58,156 $
—
$
29,465 $
25,590 $
—
$
25,590 $
3,875
15%
10,302
10,302
$
38,993
68,458 $
21,483
47,073 $
13,521
13,521
$
35,004
60,594 $
7,208
11,083
34%
24%
$
$
—
—%
(3,219)
(3,219)
(24)%
(24)%
Revenues:
Product revenue
Research and development
revenue
Total revenues
Revenues:
Product revenue
Research and development
revenue
Total revenues
$
$
$
$
2020 compared to 2019
Revenues from the Performance Enzymes segment decreased by $10.1 million, or 17%, to $48.1 million in 2020, compared to $58.2 million in 2019. The increase in product
revenue of $0.8 million, or 3%, to $30.2 million in 2020, compared to $29.5 million in 2019 was primarily due to higher customer demand for enzymes for the manufacture of
branded pharmaceuticals products. The decrease in research and development revenue of $10.8 million, or 38%, to $17.9 million in 2020, compared to $28.7 million in 2019
was primarily due to lower revenues from Novartis CodeEvolver Agreement, a prior year milestone payment from GSK under the GSK CodeEvolver Agreement, and lower
license fees and revenues from Merck, partially offset by the recognition of functional license fees revenue from Porton.
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Revenues from the Novel Biotherapeutics segment increased by $10.6 million, or 103%, to $21.0 million in 2020, compared to $10.3 million in 2019. The increase in revenue
was primarily due to recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé
Health Science.
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2019 compared to 2018
Revenues from the Performance Enzymes segment increased by $11.1 million, or 24%, to $58.2 million in 2019, compared to $47.1 million in 2018. The increase in product
revenue was primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products. The increase in research and
development revenues was primarily due to revenues from Novartis under the Novartis CodeEvolver Agreement and a milestone payment from GSK under the GSK
CodeEvolver Agreement, partially offset by less revenue due to the prior year completion of services to Tate & Lyle.
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Revenues from the Novel Biotherapeutics segment decreased by $3.2 million, or 24%, to $10.3 million in 2019, compared to $13.5 million in 2018. Revenues in the Novel
Biotherapeutics segment are derived entirely from research and development revenue from Nestlé Health Science relating to the development of the CDX-6114 product
candidate under the Nestlé License Agreement and to services under the Nestlé SCA. The decrease was primarily due to lower development fees from Nestlé Health Science as
an extension study was substantially completed in 2019.
Costs and operating expenses by segment
Year Ended December 31, 2020
Year Ended December 31, 2019
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
(1)
$
$
(1)
Cost of product revenue
Research and development
Selling, general and
administrative
Total segment costs and
operating expenses
Corporate costs
Depreciation and
amortization
Total costs and operating
expenses
13,742
20,923
$
—
21,705
$
13,742
42,628
9,597
2,355
11,952
44,262
$
24,060
68,322
22,555
2,099
$
92,976
$
$
15,632
19,380
$
—
13,278
$
15,632
32,658
8,462
2,222
10,684
43,474
$
15,500
58,974
20,255
1,778
$
81,007
$
(1,890)
1,543
%
(12)%
8%
$
$
—
8,427
%
—%
63%
1,135
13%
133
6%
788
2%
$
8,560
55%
$
$
(1)
Research and development expenses and Selling, general and administrative expenses exclude depreciation and amortization of finance leases.
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Year Ended December 31, 2019
Year Ended December 31, 2018
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
(1)
Cost of product revenue
Research and development
Selling, general and
administrative
Total segment costs and
operating expenses
Corporate costs
Depreciation and
amortization
Total costs and operating
expenses
$
(1)
15,632
19,380
$
—
13,278
$
15,632
32,658
8,462
2,222
10,684
$
43,474
$
15,500
58,974
20,255
1,778
$
81,007
$
$
12,620
18,924
$
—
10,185
$
$
12,620
29,109
$
3,012
456
%
24%
2%
$
$
—
3,093
%
—%
30%
7,538
771
8,309
924
12%
1,451
188%
39,082
$
10,956
50,038
20,704
1,147
$
71,889
$
4,392
11%
$
4,544
41%
(1)
Research and development expenses and Selling, general and administrative expenses exclude depreciation.
For a discussion of product cost of revenue, see “Results of Operations”.
2020 compared to 2019
Research and development expense in the Performance Enzymes segment increased by $1.5 million, or 8%, to $20.9 million in 2020, compared to $19.4 million in 2019. The
increase was primarily due to an increase in costs associated with higher headcount, higher stock compensation expense, higher repairs and maintenance expense, and were
partially offset by lower lab supply expenses and lower allocable expenses.
Selling, general and administrative expense in the Performance Enzymes segment increased by $1.1 million, or 13%, to $9.6 million in 2020, compared to $8.5 million in 2019.
The increase was primarily due to an increase in costs associated with licensed technology, outside services, stock compensation expense, and higher allocable expenses which
were partially offset by lower travel expenses.
Research and development expense in the Novel Biotherapeutics segment increased by $8.4 million, or 63%, to $21.7 million in 2020, compared to $13.3 million in 2019. The
increase was primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses for CDX-7108 which we are developing pursuant to
our development agreement with Nestlé Health Science, higher headcount, higher outside services, and higher allocable expenses and were partially offset by lower lab supply
expenses and consultant expense.
Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million, or 6%, to $2.4 million in 2020, compared to $2.2 million in 2019.
The increase was primarily due to an increase in costs associated with headcount, licensed technology, consultants and stock compensation expense which were partially offset
by lower allocable expenses, outside services, and travel expenses.
2019 compared to 2018
Research and development expense in the Performance Enzymes segment increased by $0.5 million, or 2%, to $19.4 million in 2019, compared to $18.9 million in 2018. The
increase was primarily due to $2.2 million associated with higher headcount which was partially offset by a decrease of $1.2 million in allocable expenses, which included
occupancy-related costs, supplies, and depreciation expense, and a decrease of $0.5 million in stock compensation expense.
85
Selling, general and administrative expense in the Performance Enzymes segment increased by $0.9 million, or 12%, to $8.5 million in 2019, compared to $7.5 million in 2018.
The increase was primarily due to $0.5 million in higher costs associated with increased headcount, $0.2 million in higher stock compensation expense, and $0.1 million in
higher allocable expenses.
Research and development expense in the Novel Biotherapeutics segment increased by $3.1 million, or 30%, to $13.3 million in 2019, compared to $10.2 million in 2018. The
increase was primarily due to $3.2 million increase in allocable expenses which was partially offset by a decrease of $0.1 million in stock compensation expense.
Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $1.5 million, or 188%, to $2.2 million in 2019, compared to $0.8 million in
2018. The increase was primarily due to an increase of $1.0 million in higher costs associated with increased headcount and $0.5 million in higher stock compensation expense.
Income (loss) from operations by segment
Year Ended December 31, 2020
Year Ended December 31, 2019
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
Income (loss) from
operations
$
3,844 $
(3,110)
$
734 $
14,682 $
(5,198)
$
9,484 $
(10,838)
(74)%
$
2,088
$
%
$
%
40%
Year Ended December 31, 2019
Year Ended December 31, 2018
Change
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
Performance Enzymes
Novel Biotherapeutics
Income (loss) from
operations
$
14,682 $
(5,198)
$
9,484 $
7,991 $
2,565
$
10,556 $
6,691
$
%
84%
$
%
$
(7,763)
(303)%
2020 compared to 2019
Income from operations in the Performance Enzymes segment decreased by $10.8 million, or 74%, to $3.8 million, in 2020, compared to $14.7 million in 2019. The decrease in
income from operations was primarily due to decrease in research and development revenue and increases in research and development costs and selling, general and
administrative expense.
Loss from operations in the Novel Biotherapeutics segment decreased by $2.1 million, or 40%, to $3.1 million in 2020 compared to a loss from operations of $5.2 million in
2019. The decrease in loss from operations was primarily due to the recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior
year functional license fee revenue from Nestlé Health Science, an increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount,
higher outside services, and higher allocable expenses.
2019 compared to 2018
Income from operations in the Performance Enzymes segment increased $6.7 million, or 84%, to $14.7 million, in 2019, compared to $8.0 million in 2018. The increase in
income from operations was primarily due to increases in product revenue and research and development revenue and were partially offset by increases in product costs,
research and development costs and selling, general and administrative expense.
Loss from operations in the Novel Biotherapeutics segment increased $7.8 million, or 303%, to $5.2 million in 2019 compared to an income from operations of $2.6 million in
2018. The decrease in income from operation was primarily due to a decrease of $3.2 million in revenue from the development of our CDX-6114 product candidate and the
Strategic Collaboration Agreement with Nestlé Health Science, and increase in the outside research and development services used in the CDX-6114 product candidate
development and selling, general and administrative expense.
86
Liquidity and Capital Resources
Liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures. We have historically funded our operations primarily through cash
generated from operations, stock option exercises and public and private offerings of our common stock. We also have the ability to borrow up to $15.0 million under our
Credit Facility. 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 cash equivalents 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, 2020, 2019 and 2018 (in thousands):
Cash and cash equivalents
Working capital
2020
149,117 $
159,442 $
$
$
December 31,
2019
90,498 $
98,817 $
2018
53,039
50,085
®
®
technology to Merck under the Merck CodeEvolver Agreement. Following the completion of the technology transfer to Merck, we
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
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 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. In May 2019, we entered into a Platform Technology Transfer and License Agreement with Novartis. The
Novartis CodeEvolver Agreement allows Novartis to use Codexis’ proprietary CodeEvolver protein engineering platform technology in the field of human healthcare.
Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver Agreement. In the second quarter of
2020, we completed the second technology milestone transfer under the agreement and became eligible to receive a milestone payment of $4.0 million, which we subsequently
received in July 2020. We have also recognized $3.4 million for partial completion of the third technology milestone and we expect to receive payment in the first quarter of
2021. Additionally, we are eligible to receive an additional $1.6 million upon satisfactory completion of the third technology transfer milestone. In consideration for the
continued disclosure and license of improvements to our technology and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period
(“Improvements Term”), Novartis will pay Codexis annual payments which amount to an additional $8.0 million.
®
®
®
®
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 revenues 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 CodeEvolver
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 our customers for purchases of products, collaborative research and development services, and licensing our technology to major pharmaceutical companies. 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.
In April 2018, we completed an underwritten public offering of 4.3 million shares of our common stock at a public offering price of $9.25 per share resulting in net proceeds of
approximately $37.5 million after deducting the underwriting discounts and commissions.
87
In June 2019, we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital, LLC (“Casdin”) pursuant to which we issued and sold to Casdin 3,048,780
shares of our common stock at a purchase price of $16.40 per share resulting in net proceeds of approximately $49.9 million after deducting related issuance costs.
In December 2020, we completed an underwritten public offering of approximately 4,928,572 shares of our common stock, par value $0.0001 per share, at an offering price of
$17.50 per share. The net proceeds to us were approximately $80.8 million after deducting offering costs and the underwriting discounts and commissions and other offering
expenses of $5.5 million.
In June 2017, we entered into the Credit Facility with Western Alliance Bank which consists of term debt for loans that allow us to borrow up to $10.0 million and a revolving
credit facility that allows us to borrow up to $5.0 million with a certain eligible accounts receivable borrowing base of 80% of eligible accounts receivable. In January 2019, we
entered into a Fifth Amendment to the Credit Facility to allow for Codexis to obtain a letter of credit of up to $1.1 million to secure its obligations under the Lease with MetLife.
In July 2019, we entered into a Sixth Amendment to the Credit Facility to increase permitted indebtedness to $0.7 million for financing insurance premiums in the ordinary
course of business. In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the Term Debt and the Revolving Line of Credit
at any time prior to October 1, 2021 and October 1, 2024, respectively, subject to customary conditions for funding including, among others, that no event of default exists.
Draws on the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. On October 1, 2024 loans drawn under the
Term Debt mature and the Revolving Line of Credit terminate. No amounts were drawn under the credit facility as of December 31, 2020. At December 31, 2020, we were in
compliance with the covenants for the Credit Facility. The Credit Facility requires us to maintain compliance with certain financial covenants including attainment of certain
lender-approved projections or maintenance of certain minimum cash levels. Restrictive covenants in the Credit Facility restrict the payment of dividends or other distributions.
For additional information about our contractual obligations, see Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in
Item 8 of this Annual Report on Form 10-K.
In October 2017, we entered into the Nestlé SCA with Nestlé Health Science. Pursuant to the Nestlé License Agreement, Nestlé Health Science paid us an upfront cash payment
of $14.0 million. In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 for the potential treatment of
PKU. The initiation of the trial triggered a $4.0 million milestone payment from Nestlé Health Science which was paid in September 2018 and the $1.0 million milestone
payment that was triggered by the achievement of a formulation relating to CDX-6114 was received in February 2019. In January 2019, we received notice from the FDA that it
had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the
United States. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global
development and commercialization of CDX-6114 for the management of PKU. The option payment of $3.0 million was recognized in the first quarter of 2019 as research and
development revenue. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114, with
the exception of the completion of an extension study, CDX-6114-004, which was substantially completed in the fourth quarter of 2019. Other potential payments from Nestlé
Health Science to us under the Nestlé License Agreement include (i) development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0
million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle
single digits to low double-digits, of net sales of Product.
We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent
to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are
highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new
information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international
markets. To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our
manufacturing and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers.
Furthermore, our ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in
operations of our customers with whom we collaborate. We believe that these disruptions had a negative impact on revenue for the year ended December 31, 2020, although we
are unable to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues. The extent to which the pandemic may
impact our business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with
confidence. In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary
closure of our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-
88
March 2020 through the end of April 2020 in accordance with these Orders. In May 2020, we re-initiated limited R&D operations and have ramped up operations such that we
are currently utilizing the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees.
Additionally, we have resumed small scale manufacturing at our Redwood City pilot plant in May 2020. Our future results of operations and liquidity could be adversely
impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any
initiatives or programs that we may undertake to address financial and operations challenges faced by our customers. While we believe we have adequate cash on hand to
manage through the disruptions being caused by the COVID-19 pandemic, the extent to which the pandemic may materially impact our financial condition, liquidity, or results
of operations in the future is uncertain. For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this
Annual Report on Form 10-K.
As of December 31, 2020, we had cash and cash equivalents of $149.1 million and $15.0 million available to borrow under our Credit Facility. Our liquidity is dependent upon
our cash and cash equivalents, cash flows provided by operating activities and the continued availability of borrowings under our Credit Facility. 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.
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. 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. 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 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.
Cash Flows
The following is a summary of cash flows for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
2020
Year Ended December 31,
2019
2018
$
$
(16,464) $
(5,748)
80,808
58,596 $
(12,560) $
(3,665)
53,961
37,736 $
(14,094)
(2,766)
38,569
21,709
Cash used in operating activities was $16.5 million in 2020, which resulted from a net loss of $24.0 million adjusted for non-cash depreciation of $2.0 million, right-of-use
("ROU") lease asset amortization expense of $2.6 million, stock-based compensation of $7.7 million, offset by equity securities earned from research and development activities
of $0.9 million as well as changes in operating assets and liabilities. The net change in operating assets and liabilities included decreases in other
89
long-term liabilities of $2.6 million and combined increases in financial assets of $8.7 million, prepaid expenses and other assets of $1.0 million, as well as accrued liabilities of
$6.2 million and deferred revenue of $2.7 million.
Cash used in operating activities was $12.6 million in 2019, which resulted from a net loss of $11.9 million adjusted for non-cash depreciation of $1.6 million, ROU lease asset
amortization expense of $3.0 million and stock-based compensation of $6.9 million, as well as changes in operating assets and liabilities. The net change in operating assets and
liabilities included decreases in deferred revenue of $6.2 million and in other long-term liabilities of $1.2 million, and combined increases in financial assets of $5.9 million,
prepaid expenses and other assets of $1.3 million, as well as accrued liabilities of $2.2 million.
Cash used in operating activities was $14.1 million in 2018, which resulted from a net loss of $10.9 million adjusted for non-cash depreciation of $1.1 million and stock-based
compensation of $7.9 million, as well as changes in operating assets and liabilities. The net change in operating assets and liabilities included decreases in deferred revenue of
$10.6 million primarily related to the Nestlé License Agreement, a decrease in other long-term liabilities of $0.9 million and a combined increase in financial assets of $1.4
million as well as accrued liabilities of $0.5 million.
Cash Flows from Investing Activities
Cash used in investing activities was $5.7 million in 2020 primarily due to the purchase of property and equipment of $3.7 million, and investments in non-marketable equity
securities of $1.0 million and in non-marketable debt security of $1.0 million. We expect our capital spending including replacement and upgrades of lab equipment and
information technology equipment will be higher in 2021 as compared to 2020.
Cash used in investing activities was $3.7 million in 2019 primarily due to the purchase of property and equipment of $3.7 million and partially offset by proceeds from sale of
CO investment securities of $62 thousand.
2
Cash used in investing activities was $2.8 million in 2018, primarily due to the purchase of property and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities was $80.8 million in 2020, primarily due to $80.8 million net proceeds from our offering of common stock after deducting underwriting
discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net
share settlement of equity awards.
Cash provided by financing activities was $54.0 million in 2019, primarily due to net proceeds from our private offering of common stock after deducting underwriting
discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net
share settlement of equity awards.
Cash provided by financing activities was $38.6 million in 2018, primarily due to net proceeds from our offering of common stock after deducting underwriting discounts and
commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net share settlement
of equity awards.
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2020 (in thousands):
Total
Less than 1 year
Payments due by period
1 to 3 years
4 to 5 years
Operating leases obligations
(1)
$
31,291 $
4,197 $
8,874 $
More than 5 years
8,626
9,594 $
(1)
Represents future minimum lease payments under non-cancellable operating leases in effect as of December 31, 2020 for our facilities in Redwood City, California. The minimum lease
payments above do not include common area maintenance charges or real estate taxes. In February 2019, we have entered into an Eighth Amendment to the Lease ( the “Eighth
Amendment”) with MetLife for our facilities, extending the lease terms from May 2027 to May 2029. For additional information see Note 13, “Commitments and Contingencies” in the
Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Other Commitments
We have other commitments related to supply and service arrangements entered into in the normal course of business. For additional information about other commitments, see
Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. Future minimum
payments reflect
90
amounts those obligations are expected to have on our liquidity and cash flows in future period and include obligations subject to risk of cancellation by us (in thousands):
Other Commitment Agreement Type
Manufacture and supply agreement with expected future payment date of December 2022
Development and manufacturing services agreements
Agreement Date
April 2016
September 2019
Total other commitments
Credit Facility
Future Minimum
Payment
$
$
320
2,341
2,661
In June 2017, we entered into a credit facility (“Credit Facility”) financing arrangement with Western Alliance Bank consisting of term loans (“Term Debt”) up to $10.0 million,
and advances (“Advances”) under a revolving line of credit (“Revolving Line of Credit”) up to $5.0 million with an accounts receivable borrowing base of 80% of eligible
accounts receivable. At December 31, 2020, we have not drawn from the Credit Facility. We may draw on the Term Debt and the Revolving Line of Credit at any time prior to
October 1, 2021 and October 1, 2024, respectively. Term loans drawn under the Term Debt mature and the Revolving Line of Credit terminates on October 1, 2024. Term loans
made under the Term Debt bear interest at variable rate through maturity at the greater of (i) 3.75% or (ii) the sum of (A) Index Rate (prime rate published in the Money Rates
section of the Western Edition of The Wall Street Journal plus (B) 0.50%. Advances made under the Revolving Line of Credit bear interest at a variable annual rate equal to the
greater of (i) 4.25% or (ii) the sum of (A) the prime rate plus (B) 1.00%.
Our obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. The Credit Facility includes a
number of customary covenants and restrictive financial covenants including meeting minimum product revenues levels and maintaining certain minimum cash levels with the
lender. The Credit Facility’s financial covenants restrict the ability of the Company to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay
dividends or make other distributions, make investments, create liens, sell assets, or sell certain assets held at foreign subsidiaries. A failure to comply with these covenants
could permit the lender to exercise remedies against us and the collateral securing the Credit Facility, including foreclosure of our properties securing the Credit Facilities and
our cash. At December 31, 2020, we were in compliance with the covenants for the Credit Facility.
For additional information about our credit facility, see Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of
this Annual Report on Form 10-K.
Subsequent Event
In the first quarter of 2021, we entered into a new lease facility agreement for 36,593 square feet in San Carlos, California to serve as additional office and research and
development laboratory space. The lease commences on or around November 1, 2021 once tenant improvements are substantially completed by the contractors in accordance
with the construction plan. For additional information see Note 17, “Subsequent Events” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual
Report on Form 10-K. The following table summarizes the estimated contractual obligation entered into after December 31, 2020 (in thousands):
Operating leases obligations
(1)
$
27,969 $
208 $
4,673 $
Total
Less than 1 year
Payments due by period
1 to 3 years
4 to 5 years
More than 5 years
17,690
5,398 $
(1)
Represents estimated future minimum lease payments under non-cancellable operating leases entered into after December 31, 2020 for additional facilities in San Carlos, California. The
estimated minimum lease payments above do not include common area maintenance charges or real estate taxes.
91
Off-Balance Sheet Arrangements
As of December 31, 2020, 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
Our revenues are derived primarily from product revenue and collaborative research and development agreements. The majority of our contracts with customers typically
contain multiple products and services. We account for individual products and services separately if they are distinct-that is, if a product or service is separately identifiable
from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our product revenue and collaborative research and development
agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are
performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy
each performance obligation.
The majority of our collaborative contracts contain multiple revenue streams such as upfront and/or annual license fees, research and development services, contingent
milestone payments upon achievement of contractual criteria, and royalty fees based on the licensees' product revenue or usage, among others. We determine the stand-alone
selling price (“SSP”) and allocate consideration to distinct performance obligations. Typically, we base our SSPs on our historical sales. If an SSP is not directly observable,
then we estimate the SSP taking into consideration market conditions, forecasted sales, entity-specific factors and available information about the customer. We estimate the
SSP for license rights by using a discounted cash flow method which includes the following key assumptions: the development timelines, revenue forecasts, commercialization
expenses, discount rate, and the probability of technical and regulatory success. For licenses that have been previously sold to other customers, we use historical information to
determine SSP.
We account for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the
contract has commercial substance and collectability of consideration is probable. Non-cancellable purchase orders received from customers to deliver a specific quantity of
product, when combined with our order confirmation, in exchange for future consideration, create enforceable rights and obligations on both parties and constitute a contract
with a customer.
We measure revenue based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected on behalf of government authorities.
We recognize revenue in a manner that best depicts the transfer of promised goods or services to the customer, when control of the product or service is transferred to a
customer. We make significant judgments when determining the appropriate timing of revenue recognition.
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The following is a description of principal activities from which we generate revenue:
Product Revenue
Product revenue consist of sales of biocatalysts, pharmaceutical intermediates and Codex biocatalyst panels and kits. A majority of our product revenue is made pursuant to
purchase orders or supply agreements and is recognized at a point in time when the control of the product has been transferred to the customer typically upon shipment. For
some of the products that we develop, we recognize revenue over time as the product is manufactured because we have a right to payment from the customer under a binding,
non-cancellable purchase order, and there is no alternate use of the product for us as it is specifically made for the customer’s use.
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Certain of our agreements provide options to customers which they can exercise at a future date, such as the option to purchase our product during the contract duration at
discounted prices and an option to extend their contract, among others. In accounting for customer options, we determine whether an option is a material right and this requires
us to exercise significant judgment. If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we
typically give for that product or service, or if the option provides the customer certain additional goods or services for free, the option may be considered a material right. If the
contract gives the customer the option to acquire additional goods or services at their normal SSPs, we would likely determine that the option is not a material right and,
therefore, account for it as a separate performance obligation when the customer exercises the option. We primarily account for options which provide material rights using the
alternative approach available under ASC 606, as we concluded we meet the criteria for using the alternative approach. Therefore, the transaction price is calculated as the
expected consideration to be received for all the goods and services we expect to provide. We update the transaction price for expected consideration, subject to constraint, each
reporting period if our estimate of future goods to be ordered by customers change.
Research and Development Revenues
We perform research and development activities as specified in each respective customer agreement. We identify each performance obligation in our research and development
agreements at contract inception. We allocate the consideration to each distinct performance obligation based on the estimated SSP of each performance obligation.
Performance obligations included in our research and services agreements typically include research and development services for a specified term, periodic reports and small
samples of enzyme produced.
The majority of our research and development agreements are based on a contractual rate per dedicated project team working on the project. The underlying product that we
develop for customers does not create an asset with an alternative use to us and the customer receives benefits as we perform the work towards completion. Thus, our
performance obligations are generally satisfied over time as the service is performed. We utilize an appropriate method of measuring progress towards the completion of our
performance obligations to determine the timing of revenue recognition. For each performance obligation that is satisfied over time, we recognize revenue using a single
measure of progress, typically based on hours incurred.
Our contracts frequently provide customers with rights to use or access our products or technology, along with other promises or performance obligations. Under ASC 606, we
must first determine whether the license is distinct from other promises, such as our promise to perform research and development services. If we determine that the customer
cannot benefit from the license without our services, the license will be accounted for as combined with the other performance obligations. If we determine that a license is
distinct, we would recognize an allocable portion of the transaction price when the license is transferred to the customer, and the customer can use and benefit from it. We
estimate the SSP for license rights by using historical information if licenses have been previously sold to customers and for new licenses, we consider multiple methods, a
discounted cash flow method which includes the following key assumptions: the development timelines, revenue forecasts, commercialization expenses, discount rate, and the
probability of technical and regulatory success. For licenses that have been previously sold to other customers, we use historical information to determine SSP.
At the inception of each arrangement that includes variable consideration such as development milestone payments, we evaluate whether the milestones are considered probable
of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would
not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee, such as regulatory approvals, are
not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone
selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we
re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any
such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.
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Our CodeEvolver platform technology transfer collaboration agreements typically include license fees, upfront fees, and variable consideration in the form of milestone
payments, and sales or usage-based royalties. We have recognized revenues from our platform technology transfer agreements over time.
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We also have an agreement under which we have granted a functional license to some elements of our biocatalyst technology. We will recognize revenues for the functional
license at a point in time when the control of the license transfers to the customer.
For license agreements that include sales or usage-based royalty payments to us for which the license is the predominant item to which the royalty relates, we do not recognize
revenue until the underlying sales of the product or usage has occurred. At the end of each reporting period, we estimate the royalty amount. We recognize revenue at the later
of (i) when the related sale of the product occurs, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially
satisfied.
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. The expected term is based on historical exercise
behavior on similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. We use historical volatility to
estimate expected stock price volatility. The risk-free rate assumption is based on United States Treasury instruments whose terms are consistent with the expected term of the
stock options. The expected dividend assumption is based on our history and expectation of dividend payouts.
Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) and performance-contingent restricted stock units (“PSUs”) are measured based on the fair market values
of the underlying stock on the dates of grant. Performance based options (“PBOs”) are measured using Black-Scholes-Merton option pricing model. The vesting of PBOs and
PSUs awarded is conditioned upon the attainment of one or more performance objectives over a specified period and upon continued employment through the applicable
vesting date. At the end of the performance period, shares of stock subject to the PBOs and PSUs vest based upon both the level of achievement of performance objectives
within the performance period and continued employment through the applicable vesting date.
Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated annual forfeiture rates for stock options, RSUs, PSUs, PBOs, and RSAs are
based on historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs are expensed on a straight-line basis over the vesting term of the grant and the estimated fair value of PSUs and
PBOs are 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.
Lease Accounting
We determine if an arrangement is a lease at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. At lease commencement, we
record a lease liability and corresponding ROU asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes
options to extend or terminate the lease when it is reasonably certain those options will be exercised. The present value of our lease liability is determined using our incremental
collateralized borrowing rate at lease inception. ROU assets represent our right to control the use of the leased asset during the lease and are recognized in an amount equal to
the lease liability for leases with an initial term greater than 12 months. Over the lease term we use the effective interest rate method to account for the lease liability as lease
payments are made and the ROU asset is amortized to consolidated statement of operations in a manner that results in straight-line expense recognition.
We elected to apply the practical expedient for short-term leases and accordingly do not apply lease recognition requirements for short-term leases. Instead, we recognize
payments related to these arrangements in the consolidated statement of operations as lease costs on a straight-line basis over the lease term.
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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 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, 2020, 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 statements of operations 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 (“ASC 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 (“NOL”) 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 our federal and state NOL
carryforwards could be limited. We performed an analysis in 2020 and determined that there was not a limitation that would result in the expiration of carryforwards before they
are utilized.
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.
Changes to Tax Law
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), P.L. 116-136 was passed into law, amending portions of certain relevant US tax
laws. The CARES Act included a number of federal income tax law changes, including, but not limited to: (i) permitting net operating loss carrybacks to offset 100% of taxable
income for taxable years beginning before 2021, (ii) accelerating alternative minimum tax credit refunds, (iii) temporarily increasing the allowable business interest deduction
from 30% to 50% of adjusted taxable income, and (iv) providing a technical correction for depreciation related to qualified improvement property. The CARES Act had no
impact on our consolidated financial statements.
Beginning in 2018, the global intangible low-taxed income (“GILTI”) provisions in the Federal Tax Cuts and Jobs Act ("Tax Act") required us to include, in our U.S. income
tax return, foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Per guidance issued by the FASB, companies can either
account for deferred taxes related to GILTI or treat tax arising from GILTI as a period cost. Both are acceptable methods subject to an accounting policy election. At December
31, 2018, we finalized our policy and elected to use the period cost method for GILTI. In 2020, we did not incur any GILTI inclusion as our foreign subsidiaries generated
losses. Due to losses incurred in the U.S., we will not be eligible for an Internal Revenue Code Section 250 deduction for foreign derived intangible income.
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The Base Erosion and Anti-Abuse Tax ("BEAT") provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign corporations and
imposed a minimum base erosion anti-abuse tax if greater than regular tax. In 2020, our company was not subject to BEAT as it did not meet the requirements to be subject to
BEAT.
Financial Assets and Allowances
We currently sell enzymes primarily to pharmaceutical and fine chemicals 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 an insignificant 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 include amounts owed to us
under our collaborative research and development agreements and we recognize accounts receivables at invoiced amounts. Our significant financial assets are comprised of
accounts receivable, contract assets, and unbilled receivables. We maintain a valuation allowance on our significant financial assets as follows:
Policy from January 1, 2019
Effective January 1, 2019, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which
amends guidance for impairment of financial instruments. The standard adds a new impairment model (known as the “current expected credit loss model” or “CECL”) based on
estimates and forecasts of future conditions requiring recognition of a lifetime of expected credit losses at inception on our financial assets measured at amortized costs. Our
significant financial assets measured at amortized costs are comprised of accounts receivable, contract assets, and unbilled receivables. We have determined that our financial
assets share similar risk characteristics including: (i) customer origination in the pharmaceutical and fine chemicals industry, (ii) similar historical credit loss pattern of
customers (iii) no meaningful trade receivable differences in terms, (iv) similar historical credit loss experience and (v) our belief that the composition of certain assets are
comparable to our historical portfolio used to develop loss history. As a result, we measured the allowance for credit loss (“ACL”) on a collective basis. Our ACL methodology
considers how long the asset has been past due, the financial condition of the customers, which includes ongoing quarterly evaluations and assessments of changes in customer
credit ratings, and other market data that we believe are relevant to the collectability of the assets. Nearly all financial assets are due from customers that are highly rated by
major rating agencies and have a long history of no credit loss. We derive our ACL by establishing an impairment rate attributable to assets not yet identified as impaired.
We derive our ACL by initially relying on our historical financial asset loss rate which contemplates the full contractual life of the assets sharing similar risk characteristics,
adjusted to reflect (i) the extent to which we have determined current conditions differ from the conditions that existed for the period over which historical loss information was
evaluated and (ii) by taking into consideration the changes in certain macroeconomic historical and forecasted information. We apply the ACL to past due financial assets and
record charges to the ACL as a provision to credit loss expense in the Statement of Operations. Financial assets we identify as uncollectible are also charged against the ACL.
We adjust the impairment rate to reflect the extent to which we have determined current conditions differ from the conditions that existed for the period over which historical
loss information was evaluated. Adjustments to historical loss information may be qualitative or quantitative in nature and reflect changes related to relevant data.
Policy before January 1, 2019
For periods prior to the adoption of ASU 2016-13, the allowances for doubtful accounts reflects our best estimates of probable losses inherent in our accounts receivable and
contract asset balances. The allowance determination is based on known troubled accounts, historical experience, and other currently available evidence. 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 were received.
Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows.
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Investment in Non-Marketable Securities
Investment in Non-Marketable Equity Securities
Our non-marketable equity securities are accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our non-marketable equity
investments is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Adjustments are determined primarily
based on a market approach as of the transaction date and are recorded as a component of other income (expense), net. We measure investments in non-marketable equity
securities without a readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus
changes resulting from observable price changes on a non-recurring basis. Gains and losses on these securities are recognized in other income and expenses.
Investment in Non-Marketable Debt Securities
We measure available for sale investments in non-marketable debt at fair value. Unrealized gains and losses on these securities are recognized in other comprehensive income
until realized. Non-marketable debt securities are classified as available-for-sale securities.
We classify non-marketable debt securities as Level 3 in the fair value hierarchy because we estimate the fair value based on a qualitative analysis using the most recent
observable transaction price and other significant unobservable inputs including volatility, rights, and obligations of the securities we hold. Significant changes to the
unobservable inputs may result in a significantly higher or lower fair value estimate. We may value these securities based on significant recent arms-length transactions with
sophisticated non-strategic unrelated new investors, providing the terms of these transactions are substantially similar to the terms between the company and us. The impact of
the difference in transaction terms on the market value of the investment may be difficult or impossible to quantify. See Note 7, “Fair Value Measurements” for additional
details.
We evaluate both equity and debt securities for impairment when circumstances indicate that we may not be able to recover the carrying value. We may impair these securities
and establish an allowance for a credit loss when we determine that there has been an “other-than-temporary” decline in estimated fair value of the debt or equity security
compared to its carrying value. We calculate the estimated fair value of these securities using information from the investee, which may include:
• Audited and unaudited financial statements;
• Projected technological developments of the company;
• Projected ability of the company to service its debt obligations;
•
If a deemed liquidation event were to occur;
• Current fundraising transactions;
• Current ability of the company to raise additional financing if needed;
• Changes in the economic environment which may have a material impact on the operating results of the company;
• Contractual rights, obligations or restrictions associated with the investment; and
• Other factors deemed relevant by our management to assess valuation.
• The valuation may be reduced if the company's potential has deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may
be readjusted.
Recent Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual
Report on Form 10-K for a full description of recent accounting standards, including the respective dates of adoption and effects on our consolidated financial position, results
of operations and cash flows.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Our unrestricted cash and cash equivalents total $149.1 million at December 31, 2020. We primarily invest these amounts in money market funds which are held for working
capital purposes. We do not enter into investments for trading or speculative purposes. As of December 31, 2020, the effect of a hypothetical 10% decrease in market interest
rates would have an immaterial impact on a potential loss in future interest income and cash flows.
In June 2017, we entered into a Credit Facility with Western Alliance Bank consisting of term loans up to $10.0 million, and advances under a revolving line of credit up to $5.0
million. Term loans made under the Term Debt bear interest at variable rate through maturity at the greater of (i) 3.75% or (ii) the sum of (A) Index Rate (prime rate published
in the Money Rates section of the Western Edition of The Wall Street Journal plus (B) 0.50%. Advances made under the Revolving Line of Credit bear interest at a variable
annual rate equal to the greater of (i) 4.25% or (ii) the sum of (A) the prime rate plus (B) 1.00%. Increases in these variable interest rates will increase our future interest
expense and decrease our results of operations and cash flows. No amounts were drawn under the Credit Facility as of December 31, 2020. Our exposure to interest rates risk
relates to our 2017 Credit Facility with variable interest rates, where an increase in interest rates may result in higher borrowing costs. Since we have no outstanding borrowings
under our 2017 Credit Facility as of December 31, 2020, the effect of a hypothetical 10% change in interest rates would not have any impact on our interest expense.
Foreign Currency Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the USD 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 USD may affect the price competitiveness of our products outside the United States. Our
most significant foreign currency exposure is due to non-functional currency denominated monetary assets, primarily currencies denominated in other than their functional
currency. These non-functional currency denominated monetary assets are subject to re-measurement which may create fluctuations in other expense, net, a component in our
consolidated statement of operations and in the fair value of the assets in the consolidated balance sheets. As of December 31, 2020, the effect of a hypothetical 10%
unfavorable change in exchange rates on currencies denominated in other than their functional currency would result in a potential loss in future earnings in our consolidated
statement of operations and a reduction in the fair value of the assets of approximately $0.1 million. We did not engage in hedging transactions in 2020, 2019 and 2018.
Investment in Non-Marketable Debt and Equity Securities
We own investments in non-marketable available-for-sale debt security and non-marketable equity securities without readily determinable fair values. To analyze the fair value
measurement of these debt securities, we perform a qualitative analysis using significant unobservable inputs. Significant changes to the unobservable inputs may result in a
significantly higher or lower fair value estimate.
We may value these equity securities based on significant recent arms-length equity transactions with sophisticated non-strategic unrelated investors, providing the terms of
these security transactions are substantially similar to the security transactions terms between the investors and us. The impact of the difference in transaction terms on the
market value of the portfolio company may be difficult or impossible to quantify.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Codexis, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Codexis, Inc.
Redwood City, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Codexis, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related Notes (collectively referred to as the
“Consolidated Financial Statements”). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company at
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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) (“PCAOB”), the Company's internal control over
financial reporting as of December 31, 2020, 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 1, 2021 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 13 to the consolidated financial statements, the Company has changed its accounting method for accounting for leases in fiscal year 2019 due to the
adoption of Topic 842: Leases using a modified retrospective approach.
Basis for Opinion
These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s Consolidated
Financial Statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated Financial
Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it
relates.
Revenue Recognition
As described in Note 2 to the consolidated financial statements, the Company recognizes revenue in a manner that best depicts the transfer of promised goods or services to the
customer, when control of the product or service is transferred to a customer. The Company's contracts with customers include enzyme supply, licensing, and collaborative
research and development agreements. Contracts with customers may contain multiple performance obligations and may contain up-front or annual
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license fees, fees for full time employee research and development services, contingent milestone payments upon achievement of contractual criteria, and royalty fees based on
the licensees' product revenue or usage. The Company makes significant judgments in determining revenue recognition for customer contracts.
We identified management’s significant judgments and estimates related to revenue recognition for contracts with customers as a critical audit matter. Auditing the evaluation of
distinct performance obligations, determination and estimation of material rights, determination of standalone selling prices, determination of the pattern of transfer of control
for each distinct performance obligation and estimation of variable consideration required significant audit effort and auditor subjectivity in evaluating management's judgments
and estimates.
The primary procedures we performed to address this critical audit matter included:
•
•
•
•
•
•
•
Testing the design and operating effectiveness of internal controls relating to the identification of distinct performance obligations and material rights, the determination
of the timing of revenue recognition, the estimation of standalone selling prices, and the estimation of variable consideration.
Examining a sample of revenue contracts and other source documents to test management's identification of significant terms for completeness, including the
identification of distinct performance obligations, material rights and variable consideration including sending confirmations to a sample of customers to confirm our
understanding of the parties’ rights and obligations.
Assessing the reasonableness of management's estimates and assumptions used in determining stand-alone selling prices for new products and services and those
products and services that are not sold separately.
Evaluating the reasonableness of management’s judgments and estimates used to assess the stand-alone selling prices for new functional licenses when granted to
customers as part of contracts containing multiple performance obligations.
Evaluating the reasonableness and accuracy of management’s judgments and estimates used in accounting for identified material rights, including transactions accounted
for under the alternative approach to estimating the standalone selling price of a material right. This includes testing management’s estimates of the expected
consideration from the customer’s exercise of options.
Assessing the reasonableness of management’s judgments and estimates to calculate variable consideration, and the timing of recognizing the related revenue subject to
any constraints.
Evaluating the appropriateness of management’s determination of whether identified performance obligations meet the criteria for over-time revenue recognition,
including whether certain products and services have alternative use.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
San Jose, California
March 1, 2021
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Codexis, Inc.
Redwood City, California
Opinion on Internal Control over Financial Reporting
We have audited Codexis, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the
Company as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2020 and the related Notes, and our report dated March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 the accompanying “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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ BDO USA, LLP
San Jose, California
March 1, 2021
102
Codexis, Inc.
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents
Restricted cash, current
Investment in non-marketable debt security
Financial assets:
Accounts receivable
Contract assets
Unbilled receivables
Total financial assets
Less: allowances
Total financial assets, net
Inventories
Prepaid expenses and other current assets
Total current assets
Restricted cash
Investment in non-marketable equity securities
Right-of-use assets - Operating leases, net
Right-of-use assets - Finance leases, net
Property and equipment, net
Goodwill
Other non-current assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued compensation
Other accrued liabilities
Current portion of lease obligations - Operating leases
Current portion of lease obligations - Finance leases
Deferred revenue
Total current liabilities
Deferred revenue, net of current portion
Long-term lease obligations, Operating leases
Other long-term 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; 64,283 and 58,877 shares issued and outstanding at
December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Accompanying Notes to Consolidated Financial Statements
103
$
$
$
$
149,117 $
638
1,000
13,894
4,526
10,942
29,362
(74)
29,288
964
3,416
184,423
1,062
1,450
21,382
119
9,675
3,241
294
221,646 $
2,970 $
7,288
10,272
2,627
—
1,824
24,981
2,967
22,324
1,271
51,543
—
—
6
536,516
(366,419)
170,103
221,646 $
90,498
661
—
9,063
1,027
10,099
20,189
(34)
20,155
371
2,520
114,205
1,062
—
23,837
268
6,282
3,241
178
149,073
2,621
5,003
6,540
1,107
60
57
15,388
1,987
24,951
1,230
43,556
—
—
6
447,920
(342,409)
105,517
149,073
Codexis, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
Total costs and operating expenses
Loss from operations
Interest income
Other expenses, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per share, basic and diluted
Weighted average common stock shares used in computing net loss per share, basic and diluted
2020
Year Ended December 31,
2019
2018
30,220 $
38,836
69,056
13,742
44,185
35,049
92,976
(23,920)
405
(156)
(23,671)
339
(24,010) $
29,465 $
38,993
68,458
15,632
33,873
31,502
81,007
(12,549)
1,287
(656)
(11,918)
17
(11,935) $
(0.40) $
(0.21) $
59,360
56,525
25,590
35,004
60,594
12,620
29,978
29,291
71,889
(11,295)
671
(291)
(10,915)
(37)
(10,878)
(0.21)
52,205
$
$
$
See Accompanying Notes to Consolidated Financial Statements
104
Codexis, Inc.
Consolidated Statements of Stockholders’ Equity
(In Thousands)
(1)
December 31, 2017
Exercise of stock options
Release of stock awards
Employee stock-based compensation
Non-employee stock-based compensation
Taxes paid related to net share settlement of equity awards
Issuance of common stock, net of issuance costs
Cumulative effect of change in accounting principles
Net Loss
December 31, 2018
Exercise of stock options
Release of stock awards
Employee stock-based compensation
Taxes paid related to net share settlement of equity awards
Issuance of common stock, net of issuance costs of $123
Short swing profit settlement
Net Loss
December 31, 2019
Exercise of stock options
Release of stock awards
Employee stock-based compensation
Non-employee stock-based compensation
Taxes paid related to net share settlement of equity awards
Issuance of common stock, net of issuance costs of $5,448
Net Loss
December 31, 2020
Common Stock
Shares
Amount
48,365 $
856
832
—
—
(301)
4,313
—
—
54,065
1,466
449
—
(152)
3,049
—
—
58,877
210
370
—
—
(103)
4,929
—
64,283 $
Additional
Paid-in
Capital
340,079 $
4,680
—
7,865
24
(3,190)
37,317
—
—
386,775
7,099
—
6,943
(2,850)
49,876
77
—
447,920
1,323
—
7,622
106
(1,257)
80,802
—
536,516 $
5 $
—
—
—
—
—
—
—
—
5
—
—
—
—
1
—
—
6
—
—
—
—
—
—
—
6 $
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
(472) $
—
—
—
—
—
—
472
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
(315,065) $
—
—
—
—
—
—
(4,531)
(10,878)
(330,474)
—
—
—
—
—
—
(11,935)
(342,409)
—
—
—
—
—
—
(24,010)
(366,419) $
24,547
4,680
—
7,865
24
(3,190)
37,317
(4,059)
(10,878)
56,306
7,099
—
6,943
(2,850)
49,877
77
(11,935)
105,517
1,323
—
7,622
106
(1,257)
80,802
(24,010)
170,103
(1)
Cumulative effect of change in accounting principles included: Accounting Standards Update 2014-9 (Topic 606), of $4.1 million and Accounting Standards Update 2016-01 (Subtopic
825-10), of $0.5 million.
See Accompanying Notes to Consolidated Financial Statements
105
Codexis, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Amortization expense - right-of-use assets - operating and finance leases
Stock-based compensation
Equity securities earned from research and development activities
Other non-cash items
Changes in operating assets and liabilities:
Financial assets, net
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued compensation and other accrued liabilities
Other long-term liabilities
Deferred revenue
Net cash used in operating activities
Investing activities:
Purchase of property and equipment
Proceeds from disposal of property and equipment
Proceeds from sale of investment securities
Investment in non-marketable securities
Net cash used in investing activities
Financing activities:
Proceeds from exercises of stock options
Proceeds from issuance of common stock in connection with public offering, net of underwriting discounts and
commission
Costs incurred in connection with public offering
Proceeds from issuance of common stock in connection with private offering
Costs incurred in connection with private placement
Payments of lease obligations - Finance leases
Recovery of short swing profit
Taxes paid related to net share settlement of equity awards
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Supplemental disclosure of cash flow information:
Interest paid
Income taxes
Supplemental non-cash investing and financing activities:
Capital expenditures incurred but not yet paid
Assets received for research & development revenue earned
Year Ended December 31,
2020
2019
2018
$
(24,010) $
(11,935) $
(10,878)
1,950
2,604
7,728
(900)
55
(8,723)
(593)
(1,012)
101
6,175
(2,586)
2,747
(16,464)
(3,748)
—
—
(2,000)
(5,748)
1,323
86,250
(5,448)
—
—
(60)
—
(1,257)
80,808
58,596
92,221
150,817 $
52 $
312 $
1,750 $
900 $
1,570
2,987
6,943
—
525
(5,867)
217
(1,324)
(428)
2,205
(1,210)
(6,243)
(12,560)
(3,730)
3
62
—
(3,665)
7,099
—
—
50,000
(123)
(242)
77
(2,850)
53,961
37,736
54,485
92,221 $
49 $
5 $
140 $
— $
1,147
—
7,889
—
91
(1,424)
447
191
(524)
502
(904)
(10,631)
(14,094)
(2,768)
2
—
—
(2,766)
4,680
37,497
(180)
—
—
(238)
—
(3,190)
38,569
21,709
32,776
54,485
84
5
300
—
$
$
$
$
$
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the total of the same such amounts
shown above (in thousands):
Cash and cash equivalents
Restricted cash, current and non-current
Total cash, cash equivalents and restricted cash at the end of the period
2020
Year Ended December 31,
2019
2018
$
$
149,117 $
1,700
150,817 $
90,498 $
1,723
92,221 $
53,039
1,446
54,485
See Accompanying Notes to Consolidated Financial Statements
106
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 enzymes and other proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast, largely untapped source of
value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing
number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.
®
We are a pioneer in harnessing computational technologies to drive biology advancements. Since 2002, 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 the structural and performance attributes of our large and continuously growing library of protein variants. These
computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted
®
performance enhancements. 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 bioprocess development which are all coordinated to rapidly innovate novel, fit-
for-purpose products.
The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex
chemicals. It begins by conceptually designing the most cost-effective and practical process for a targeted product. We then develop optimized biocatalysts to enable the
designed process, using our CodeEvolver platform. Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated
using high throughput methods under process-relevant operating conditions. This approach results in an optimized biocatalyst that enables cost-efficient processes that are
relatively simple to run in conventional manufacturing equipment. This also allows for efficient technical transfer of our processes 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 competences directly integrated in our CodeEvolver protein engineering platform, 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, bioprocess development and fermentation engineering.
Our integrated, multi-disciplinary approach to product and process development is a critical success factor for the Company.
®
®
®
We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals, which remains a
primary business focus. Our customers, which include many large, global pharmaceutical companies, use our technology, products and services in their process development
and in manufacturing. Additionally, we have licensed our proprietary CodeEvolver protein engineering technology platform to global pharmaceutical companies enabling
them to use this technology, in house, to engineer enzymes for their own businesses. Most recently, in May 2019, we entered into a Platform Technology Transfer and License
Agreement (the “Novartis CodeEvolver Agreement”) with Novartis. The Novartis CodeEvolver Agreement (Codexis’ third such agreement with large pharma companies)
allows Novartis to use our proprietary CodeEvolver protein engineering platform technology in the field of human healthcare.
®
®
®
®
As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for
use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals. In addition, we are using our technology to
develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular
diagnostic and genomic research applications. In December 2019, we entered into a license agreement to provide Roche Sequencing Solutions, Inc. with our first enzyme for
this target market: the Company’s EvoT4™ DNA ligase. In June 2020, we also entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”)
pursuant to which we are leveraging our CodeEvolver platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis.
Concurrently with the MAI Agreement, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc ("MAI") pursuant to which we purchased 1,587,050
shares of MAI's Series A preferred stock for
®
107
$1.0 million and, in connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.
®
Approximately five years ago, we began using the CodeEvolver protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both
in partnership with customers and for our own proprietary Codexis drug candidates. Our first program was for the potential treatment of phenylketonuria ("PKU") in humans.
PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we entered into a
Global Development, Option and License Agreement (the “Nestlé License Agreement”) with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd. (“Nestlé Health
Science”) to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU. In February 2019, Nestlé Health Science exercised its option
to obtain an exclusive license to develop and commercialize CDX-6114. Also in October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science
are collaborating to leverage the CodeEvolver platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical
Nutrition business areas. In January 2020, we entered into a development agreement with Nestlé Health Science to advance a new lead candidate discovered under the Nestlé
SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder. In parallel, the Nestlé SCA was extended
through December 2021 to support the discovery of therapeutic candidates for additional disorders. In March 2020, we entered into a Strategic Collaboration and License
Agreement (“Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), for the
research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and a blood factor deficiency.
®
Below are brief descriptions of our business segments:
Performance Enzymes
®
We initially commercialized our CodeEvolver protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this
continues to be our largest market served. Our customers, which include many 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 customized enzymes for use in other industrial markets. These markets consist
of several large industrial verticals, including food, feed, consumer care, and fine chemicals. We also use our technology in the life sciences markets to develop enzymes for
customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring
applications.
Novel Biotherapeutics
®
We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. 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,
such as its activity, stability or immunogenicity.
Our first lead program was for the potential treatment of hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans. PKU is an inherited metabolic disorder in which
the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we announced a global development, option and license agreement
with Nestlé Health Science to advance CDX-6114, our own novel orally administrable enzyme therapeutic candidate for the potential treatment of PKU. In July 2018, we
announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, which was conducted in Australia. The initiation of the trial
triggered a $4.0 million milestone payment from Nestlé Health Science. The $1.0 million milestone payment that was triggered by the achievement of a formulation relating to
CDX-6114 was received in February 2019. In January 2019, we received notice from the U.S. Food and Drug Administration that it had completed its review of our
investigational drug application for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the
United States.
In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and
commercialization of CDX-6114 for the management of PKU. As a result of the option exercise, we earned a milestone and recognized $3.0 million in revenues in the first
quarter of 2019. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114.
In October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver platform technology to
develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. In January 2020, we and Nestlé Health Science
entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance into pre-clinical and early clinical studies a lead
®
108
candidate targeting a gastro-intestinal disorder, CDX-7108, discovered through the Nestlé SCA. The Nestlé SCA was extended through December 2021. During 2020, we,
together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in 2021. Additionally, the
parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder.
®
Our most recent achievement in novel biotherapeutics came in March 2020, when we announced a strategic collaboration and license agreement with Takeda in which we will
collaborate with Takeda to research and develop protein sequences for use in gene therapy products for certain disease indications. Under the terms of the Takeda Agreement,
we have agreed to generate novel gene sequences encoding protein variants designed to enhance efficacy as a result of increased activity, stability, and cellular uptake using our
CodeEvolver protein engineering platform. Takeda will combine these improved transgenes with its gene therapy capabilities to generate novel candidates for the treatment of
rare genetic disorders. We are currently collaborating on three initial programs for the treatment of Fabry disease, Pompe disease, and an undisclosed blood factor deficiency.
The Company is responsible for the creation of novel enzyme sequences for advancement as gene therapies into pre-clinical development. Takeda is responsible for the pre-
clinical and clinical development and commercialization of gene therapy products resulting from the collaboration programs. Under the terms of the agreement, in addition to
the three initial programs, Takeda may initiate up to four additional programs for separate target indications. In March 2020, we began research and development activities
under the program plans and received a $8.5 million one-time, non-refundable cash payment.
We expect to continue to make additional investments in our pipeline with the aim of advancing additional product candidates targeting other therapeutic areas.
For additional discussion of our business segments, see Note 15, “Segment, Geographical and Other Revenue Information.”
Business Update Regarding COVID-19
We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent
to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are
highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new
information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international
markets.
To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our manufacturing
and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers. Furthermore, our
ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our
customers with whom we collaborate. We believe that these disruptions have had a negative impact on revenue for the year ended December 31, 2020, although we are unable
to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues. The extent to which the pandemic may impact our
business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.
In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of
our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-March 2020 through
the end of April in accordance with these Orders. In May 2020, we re-initiated limited R&D operations and have ramped up operations such that we are currently utilizing the
majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees. Additionally, we resumed small scale
manufacturing at our Redwood City pilot plant in May 2020.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain
disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.
As of the date of issuance of our Consolidated Financial Statements, the extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or
results of operations in the future is uncertain.
109
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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.
Certain prior year amounts have been reclassified to conform to 2020 presentation. In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance
requiring implementation of a new impairment model applicable to financial assets measured at amortized cost which, among other things required that accounts receivable,
contract assets, unbilled receivables and related allowances be reclassified as financial assets. The results of the year ended December 31, 2020 reflect the adoption of the
accounting standards including Accounting Standard Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments which added a new impairment model applicable to our financial assets measured at amortized cost. See “Recently adopted accounting pronouncements” for details
regarding the adoption of these standards. The consolidated financial statements include the accounts of Codexis, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Financial Statement Exclusion
The total net loss in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 is not different from our consolidated comprehensive loss.
The consolidated financial statements exclude the consolidated statements of comprehensive loss for the years ended December 31, 2020, 2019 and 2018.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that may affect the reported
amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. We regularly assess these estimates which primarily affect
revenue recognition, inventories, 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. The full extent to which the COVID-19
pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing,
research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, and may not be accurately predicted, including as
a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional,
national and international customers, markets and economies.
Segment Reporting
We report two business segments, Performance Enzymes and Novel Biotherapeutics, which are based on our operating segments. 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
(“CODM”), in deciding how to allocate resources, and in assessing performance. Our CODM is our Chief Executive Officer. Our business segments are primarily based on our
organizational structure and our operating results as used by our CODM in assessing performance and allocating resources for the Company. We do not allocate or evaluate
assets by segment.
The Novel Biotherapeutics segment focuses on new opportunities in the pharmaceutical industry to discover or improve 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, such as its activity, stability, or immunogenicity. The Performance Enzymes segment consists of biocatalyst products and
services with focus on pharmaceutical, food, molecular diagnostics, and other industrial markets.
Foreign Currency Translation
The USD 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 USD 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-USD 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 accompanying consolidated statements of operations.
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Revenue Recognition
Our revenues are derived primarily from product revenue and collaborative research and development agreements. The majority of our contracts with customers typically
contain multiple products and services. We account for individual products and services separately if they are distinct-that is, if a product or service is separately identifiable
from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our product revenue and collaborative research and development
agreements, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are
performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy
each performance obligation.
The majority of our collaborative contracts contain multiple revenue streams such as upfront and/or annual license fees, fees for research and development services, contingent
milestone payments upon achievement of contractual criteria, and royalty fees based on the licensees' product revenue or usage, among others. We determine the stand-alone
selling price (“SSP”) and allocate consideration to distinct performance obligations. Typically, we base our SSPs on our historical sales. If an SSP is not directly observable,
then we estimate the SSP taking into consideration market conditions, forecasted sales, entity-specific factors and available information about the customer. We estimate the
SSP for license rights by using historical information if licenses have been previously sold to customers and for new licenses, we consider multiple methods, including a
discounted cash flow method which includes the following key assumptions: the development timelines, revenue forecasts, commercialization expenses, discount rate, and the
probability of technical and regulatory success.
We account for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the
contract has commercial substance and collectability of consideration is probable. Non-cancellable purchase orders received from customers to deliver a specific quantity of
product, when combined with our order confirmation, in exchange for future consideration, create enforceable rights and obligations on both parties and constitute a contract
with a customer.
We measure revenue based on the consideration specified in the contract with each customer, net of any sales incentives and taxes collected on behalf of government authorities.
We recognize revenue in a manner that best depicts the transfer of promised goods or services to the customer, when control of the product or service is transferred to a
customer. We make significant judgments when determining the appropriate timing of revenue recognition.
The following is a description of principal activities from which we generate revenue:
Product Revenue
Product revenue consist of sales of biocatalysts, pharmaceutical intermediates and Codex biocatalyst panels and kits. A majority of our product revenue is made pursuant to
purchase orders or supply agreements and is recognized at a point in time when the control of the product has been transferred to the customer typically upon shipment. For
some of the products that we develop, we recognize revenue over time as the product is manufactured because we have a right to payment from the customer under a binding,
non-cancellable purchase order, and there is no alternate use of the product for us as it is specifically made for the customer’s use.
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Certain of our agreements provide options to customers which they can exercise at a future date, such as the option to purchase our product during the contract duration at
discounted prices and an option to extend their contract, among others. In accounting for customer options, we determine whether an option is a material right and this requires
us to exercise significant judgment. If a contract provides the customer an option to acquire additional goods or services at a discount that exceeds the range of discounts that we
typically give for that product or service for the same class of customer, or if the option provides the customer certain additional goods or services for free, the option may be
considered a material right. If the contract gives the customer the option to acquire additional goods or services at their normal SSPs, we would likely determine that the option
is not a material right and, therefore, account for it as a separate performance obligation when the customer exercises the option. We primarily account for options which
provide material rights using the alternative approach available pursuant to the applicable accounting guidance, as we concluded we meet the criteria for using the alternative
approach. Therefore, the transaction price is calculated as the expected consideration to be received for all the goods and services we expect to provide under the contract. We
update the transaction price for expected consideration, subject to constraint, each reporting period if our estimate of future goods to be ordered by customers change.
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Research and Development Revenues
We perform research and development activities as specified in each respective customer agreement. We identify each performance obligation in our research and development
agreements at contract inception. We allocate the consideration to each distinct performance obligation based on the estimated SSP of each performance obligation.
Performance obligations included in our research and services agreements typically include research and development services for a specified term, periodic reports and small
samples of enzyme produced.
The majority of our research and development agreements are based on a contractual rate per dedicated project team working on the project. The underlying product that we
develop for customers does not create an asset with an alternative use to us and the customer receives benefits as we perform the work towards completion. Thus, our
performance obligations are generally satisfied over time as the service is performed. We utilize an appropriate method of measuring progress towards the completion of our
performance obligations to determine the timing of revenue recognition. For each performance obligation that is satisfied over time, we recognize revenue using a single
measure of progress, typically based on hours incurred.
Our contracts frequently provide customers with rights to use or access our products or technology, along with other promises or performance obligations. We must first
determine whether the license is distinct from other promises, such as our promise to manufacture a product. If we determine that the customer cannot benefit from the license
without our manufacturing capability, the license will be accounted for as combined with the other performance obligations. If we determine that a license is distinct and has
significant standalone functionality, we would recognize revenues from a functional license at a point in time when the license is transferred to the customer, and the customer
can use and benefit from it. We estimate the SSP for license rights by using historical information if licenses have been previously sold to customers and for new licenses, we
consider multiple methods, including a discounted cash flow method which includes the following key assumptions: the development timelines, revenue forecasts,
commercialization expenses, discount rate, and the probability of technical and regulatory success. For licenses that have been previously sold to other customers, we use
historical information to determine SSP.
At the inception of each arrangement that includes variable consideration such as development milestone payments, we evaluate whether the milestones are considered probable
of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would
not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee, such as regulatory approvals, are
not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone
selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we
re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any
such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.
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Our CodeEvolver platform technology transfer collaboration agreements typically include license fees, upfront fees, and variable consideration in the form of milestone
payments, and sales or usage-based royalties. We have recognized revenues from our platform technology transfer agreements over time as our customer learns to use our
technology.
We also have an agreement under which we have granted a functional license to some elements of our biocatalyst technology. We recognize revenues for the functional license
at a point in time when the control of the license and technology transfers to the customer.
For license agreements that include sales or usage-based royalty payments to us, we do not recognize revenue until the underlying sales of the product or usage has occurred. At
the end of each reporting period, we estimate the royalty amount. We recognize revenue at the later of (i) when the related sale of the product occurs, or (ii) when the
performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially satisfied.
Practical Expedients, Elections, and Exemptions
We apply certain practical expedients available which permit us not to adjust the amount of consideration for the effects of a significant financing component if, at contract
inception, the expected period between the transfer of promised goods or services and customer payment is one year or less.
We perform monthly services under our research and development agreements and we use a practical expedient permitting us to recognize revenue at the same time that we
have the right to invoice our customer for monthly services completed to date.
We have elected to treat shipping and handling activities as fulfillment costs.
We have elected to record revenue net of sales and other similar taxes.
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Contract Assets
Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced. Contract assets are reclassified to
receivables when the rights become unconditional.
Contract Liabilities
Contract liabilities are recorded as deferred revenues and include payments received in advance of performance under the contract. Contract liabilities are realized when the
development services are provided to the customer or control of the products has been transferred to the customer. A portion of our contract liabilities relate to supply
arrangements that contain material rights that are recognized using the alternative method, under which the aggregate amount invoiced to the customer for shipped products,
including contractual fees, is higher than the amount of revenue recognized based on the transaction price allocated to the shipped products.
Contract Costs
We recognize a non-current asset for the incremental costs of obtaining a contract with a customer if the entity expects to recover such costs. Incremental costs are costs that
would not have been incurred if the contract had not been obtained. Examples of contract costs are commissions paid to sales personnel. We do not typically incur significant
incremental costs because the compensation of our salespeople are not based on contracts closed but on a mixture of company goals, individual goals, and sales goals. If a
commission paid is directly related to obtaining a specific contract, our policy is to capitalize and amortize such costs on a systematic basis, consistent with the pattern of
transfer of the good or service to which the asset relates. Contract costs are reported in other non-current assets.
Cost of Product Revenue
Cost of product revenue 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 revenue. Such charges were not significant in any of the periods presented.
Fulfillment costs, such as shipping and handling, are recognized at a point in time and are included in cost of product sales.
Cost of Research and Development Services
Cost of research and development services related to services under research and development agreements approximate the research funding over the term of the respective
agreements and is included in research and development expense. Costs of services provided under license and platform technology transfer agreements are included in research
and development expenses and are expensed in the periods in which such costs are incurred.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects and partner-funded collaborative research and development activities, as well as license and
platform technology transfer agreements, as mentioned above. 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, and depreciation of facilities and laboratory equipment, 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 $0.3
million, $0.5 million and $0.5 million in the years ended December 31, 2020, 2019 and 2018, respectively.
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. The expected term is based on historical exercise
behavior on similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. We use historical volatility to
estimate expected stock price volatility. The risk-free rate assumption is based on United States Treasury instruments whose terms are consistent with the expected term of the
stock options. The expected dividend assumption is based on our history and expectation of dividend payouts.
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Restricted Stock Units (“RSUs"), Restricted Stock Awards (“RSAs”) and performance-contingent restricted stock units (“PSUs”) are measured based on the fair market values
of the underlying stock on the dates of grant. Performance based options (“PBOs”) are measured using Black-Scholes-Merton option pricing model. The vesting of PBOs and
PSUs awarded is conditioned upon the attainment of one or more performance objectives over a specified period and upon continued employment through the applicable
vesting date. At the end of the performance period, shares of stock subject to the PBOs and PSUs vest based upon both the level of achievement of performance objectives
within the performance period and continued employment through the applicable vesting date.
Stock-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated annual forfeiture rates for stock options, RSUs, PSUs, PBOs, and RSAs are
based on historical forfeiture experience.
The estimated fair value of stock options, RSUs and RSAs are expensed on a straight-line basis over the vesting term of the grant and the estimated fair value of PSUs and
PBOs are 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.
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 the United States. Deposits with these
financial institutions may exceed the amount of insurance provided on such deposits. Cash and cash equivalents totaled $149.1 million and were comprised of cash of
$21.5 million and money market funds of $127.6 million at December 31, 2020. Cash and cash equivalents totaled $90.5 million, comprised of cash of $19.3 million and
money market funds of $71.2 million at December 31, 2019.
Restricted Cash
In 2016, we began the process of liquidating our Indian 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 current restricted cash on the consolidated balance sheets of $0.6 million as of
December 31, 2020 and $0.7 million as of December 31, 2019.
Pursuant to the terms of a lease agreement for our Redwood City, CA facilities, we obtained a letter of credit collateralized by cash deposit balances of $1.1 million as
of December 31, 2020 and 2019. These cash deposit balances are recorded as non-current restricted cash on the consolidated balance sheets. See Note 13, “Commitments and
Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
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, accounts receivable, accounts
payable, and accrued liabilities, approximate their fair values as of the balance sheet dates because of their 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:
•
Level 1: Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
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•
•
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 7, “Fair Value Measurements” for additional details.
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, contract assets,
non-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 the Netherlands. Such deposits in those countries may be in excess of insured limits.
Financial Assets and Allowances
We currently sell enzymes primarily to pharmaceutical and fine chemicals 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 an insignificant 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 include amounts owed to us
under our collaborative research and development agreements. We recognize accounts receivable at invoiced amounts and we maintain a valuation allowance as follows:
Allowance for credit losses from January 1, 2020
On and subsequent to January 1, 2020, our financial results reflect an impairment model (known as the “current expected credit loss model” or “CECL”) based on estimates and
forecasts of future conditions requiring recognition of a lifetime of expected credit losses at inception on our financing receivables measured at amortized costs which is
comprised of accounts receivable, contract assets, and unbilled receivables. We have determined that our financing receivables share similar risk characteristics including: (i)
customer origination in the pharmaceutical and fine chemicals industry, (ii) similar historical credit loss pattern of customers (iii) no meaningful trade receivable differences in
terms, (iv) similar historical credit loss experience and (v) our belief that the composition of certain assets are comparable to our historical portfolio used to develop loss
history. As a result, we measured the allowance for credit loss (“ACL”) on a collective basis. Our ACL methodology considers how long the asset has been past due, the
financial condition of the customers, which includes ongoing quarterly evaluations and assessments of changes in customer credit ratings, and other market data that we believe
are relevant to the collectability of the assets. Nearly all financing receivables are due from customers that are highly rated by major rating agencies and have a long history of
no credit loss. We derive our ACL by establishing an impairment rate attributable to assets not yet identified as impaired.
We derive our ACL by initially relying on our historical financing receivable loss rate which contemplates the full contractual life of the assets sharing similar risk
characteristics, adjusted to reflect (i) the extent to which we have determined current conditions differ from the conditions that existed for the period over which historical loss
information was evaluated and (ii) by taking into consideration the changes in certain macroeconomic historical and forecasted information. We apply the ACL to past due
financing receivables and record charges to the ACL as a provision to credit loss expense in the Statement of Operations. Financing receivables we identify as uncollectible are
also charged against the ACL. We adjust the impairment rate to reflect the extent to which we have determined current conditions differ from the conditions that existed for the
period over which historical loss information was evaluated. Adjustments to historical loss information may be qualitative or quantitative in nature and reflect changes related to
relevant data.
In the year ended December 31, 2020, inputs to our CECL forecast incorporated forward-looking adjustments associated with the COVID-19 pandemic which we believe are
appropriate to incorporate due to the uncertainty of the economic impact on cash flows from our financial assets.
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Allowance for credit losses before January 1, 2020
Prior to January 1, 2020, the allowances for doubtful accounts reflected our best estimates of probable losses inherent in our accounts receivable and contract assets balances.
The allowance determination was based on known troubled accounts, historical experience, and other currently available evidence. Uncollectible accounts receivable were
written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted. Recoveries were recognized when they were received.
Accounts Receivable
Trade credit terms are generally offered without collateral and may include an insignificant 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 include amounts owed to us under our collaborative research
and development agreements and we recognize accounts receivables at invoiced amounts.
Unbilled Receivable
The timing of revenue recognition may differ from the timing of invoicing to our customers. When we satisfy (or partially satisfy) a performance obligation, prior to being able
to invoice the customer, we recognize an unbilled receivable when the right to consideration is unconditional. As of December 31, 2020 and 2019, unbilled receivables of $10.9
million and $10.1 million, respectively, were included in our consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a weighted-average approach, assuming full absorption of direct and indirect
manufacturing costs, or based on cost of purchasing from our vendors. If inventory costs exceed expected net realizable value due to obsolescence or lack of demand, valuation
adjustments are recorded for the difference between the cost and the expected net realizable value.
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:
Asset classification
Laboratory equipment
Computer equipment and software
Office equipment and furniture
Leasehold improvements
Estimated useful life
5 years
3 to 5 years
5 years
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.
Impairment of Long-Lived Assets
We have not identified property and equipment by segment since these assets are shared or commingled. We evaluate the carrying values of long-lived assets, which include
property and equipment and right-of-use assets, whenever events, changes in business circumstances or our planned use of long-lived assets indicate that their carrying amounts
may not be fully recoverable or that their useful lives are no longer appropriate. If these facts and circumstances exist, we assess for recovery by comparing the carrying values
of long-lived assets with their future net undiscounted cash flows. If the comparison indicates that impairment exists, long-lived assets are written down to their respective fair
values based on discounted cash flows. Significant management judgment is required in the forecast of future operating results that are used in the preparation of unexpected
undiscounted cash flows.
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As of December 31, 2020 and 2019, there were no events or changes in circumstances which indicated that the carrying amount of our Asset Group might not be recoverable.
No impairment charges for long-lived assets were recorded during the years ended December 31, 2020, 2019 and 2018.
Investment in Non-Marketable Securities
Investment in Non-Marketable Equity Securities
Our non-marketable equity securities are accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our non-marketable equity
investments is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Adjustments are determined primarily
based on a market approach as of the transaction date and are recorded as a component of other income (expense), net. We measure investments in non-marketable equity
securities without a readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus
changes resulting from observable price changes on a non-recurring basis. Gains and losses on these securities are recognized in other income and expenses.
Investment in Non-Marketable Debt Securities
We measure available-for-sale investments in non-marketable debt at fair value. Unrealized gains and losses on these securities are recognized in other comprehensive income
until realized. Non-marketable debt securities are classified as available-for-sale securities.
We classify non-marketable debt securities as Level 3 in the fair value hierarchy because we estimate the fair value based on a qualitative analysis using the most recent
observable transaction price and other significant unobservable inputs including volatility, rights, and obligations of the securities we hold. Significant changes to the
unobservable inputs may result in a significantly higher or lower fair value estimate. We may value these securities based on significant recent arms-length transactions with
sophisticated non-strategic unrelated new investors, providing the terms of these transactions are substantially similar to the terms between the company and us. The impact of
the difference in transaction terms on the market value of the investment may be difficult or impossible to quantify. See Note 7, “Fair Value Measurements” for additional
details.
We evaluate both equity and debt securities for impairment when circumstances indicate that we may not be able to recover the carrying value. We may impair these securities
and establish an allowance for a credit loss when we determine that there has been an “other-than-temporary” decline in estimated fair value of the debt or equity security
compared to its carrying value. We calculate the estimated fair value of these securities using information from the investee, which may include:
• Audited and unaudited financial statements;
• Projected technological developments of the company;
• Projected ability of the company to service its debt obligations;
•
If a deemed liquidation event were to occur;
• Current fundraising transactions;
• Current ability of the company to raise additional financing if needed;
• Changes in the economic environment which may have a material impact on the operating results of the company;
• Contractual rights, obligations or restrictions associated with the investment; and
• Other factors deemed relevant by our management to assess valuation.
• The valuation may be reduced if the company's potential has deteriorated significantly. If the factors that led to a reduction in valuation are overcome, the valuation may
be readjusted.
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired and is assigned to reporting units. We test goodwill for
impairment considering amongst other things, whether there have been sustained declines in our share price. If we conclude it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, a quantitative fair value test is performed. We manage our business as two reporting units and we test goodwill for impairment at
the reporting unit level. We allocated goodwill to the two reporting units using a relative fair value allocation methodology that primarily relied on our estimates of revenue and
future earnings for each reporting unit. Using the relative fair value allocation methodology, we have determined that approximately $2.4 million, or 76%, of the goodwill
allocated to the Performance Enzymes segment and $0.8 million, or 24%, is assigned to the Novel Biotherapeutics segment. We test goodwill for impairment for each reporting
unit on an annual basis on the last day of the fourth fiscal quarter and, when
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specific circumstances dictate, between annual tests by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. During 2020, 2019 and 2018, we did not record impairment charges related to goodwill. We test for goodwill impairment as follows:
Goodwill impairment testing from January 1, 2020
We test for impairment annually on a reporting unit basis, on the last day of the fourth fiscal quarter, and between annual tests if events and circumstances indicate it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. The annual impairment test is completed using either: a qualitative “Step 0” assessment
based on reviewing relevant events and circumstances; or a quantitative “Step 1” assessment, which determines the fair value of the reporting unit. To the extent the carrying
amount of a reporting unit is less than its estimated fair value, an impairment charge is recorded. Using the relative fair value allocation methodology for assets and liabilities
used in both of our reporting units, we compare the allocated carrying amount of each reporting unit’s net assets and the assigned goodwill to its fair value. If the fair value of
the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. Any excess of the reporting unit’s carrying amount of goodwill over its
fair value is recognized as an impairment.
Since late 2019, the COVID-19 pandemic has spread worldwide. The COVID-19 pandemic has caused a decline in global and domestic macroeconomic conditions, the general
deterioration of the U.S. economy and other economies worldwide, all of which may negatively impact our overall financial performance, driving a reduction in our cash flows.
We believe that the impact of the COVID-19 pandemic was a triggering event that gave rise to a qualitative goodwill impairment test in the second quarter ended June 30, 2020.
We also conducted a qualitative impairment assessment as of December 31, 2020, which included an evaluation of our cash flow projections to reflect the current economic
environment, including the uncertainty surrounding the nature, timing, and extent of the impact of the pandemic in operating our business. We determined that it was more
likely than not that the fair value of each of the reporting units exceeded its respective carrying amount as of December 31, 2020. Therefore, a quantitative impairment test of
our goodwill at the reporting unit level was not required to be performed.
Goodwill impairment testing before January 1, 2020
Prior to January 1, 2020, the goodwill impairment test consisted of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment,
compared the fair value of each reporting unit to its carrying value. Using the relative fair value allocation methodology for assets and liabilities used in both of our reporting
units, we compared the allocated carrying amount of each reporting unit’s net assets and the assigned goodwill to its fair value. If the fair value of the reporting unit exceeded its
carrying amount, goodwill of the reporting unit was considered not impaired, and the second step of the impairment test was not required. The second step, if required, compared
the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. Implied fair value was the excess of the fair value of the reporting unit over the
fair value of all identified or allocated assets and liabilities. Any excess of the reporting unit’s carrying amount goodwill over the respective implied fair value was recognized as
an impairment.
Lease Accounting
We determine if an arrangement is a lease at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. At lease commencement, we
record a lease liability and ROU asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or
terminate the lease when it is reasonably certain those options will be exercised. The present value of our lease liability is determined using our incremental collateralized
borrowing rate at lease inception. ROU assets represent our right to control the use of the leased asset during the lease and are recognized in an amount equal to the lease
liability for leases with an initial term greater than 12 months. Over the lease term, we use the effective interest rate method to account for the lease liability as lease payments
are made and the ROU asset is amortized to the consolidated statement of operations in a manner that results in straight-line expense recognition. We do not apply lease
recognition requirements for short-term leases. Instead, we recognize payments related to these arrangements in the consolidated statement of operations as lease costs on a
straight-line basis over the lease term.
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 liabilities, which arise from differences in the timing of recognition of revenues and expenses for
tax and financial statement
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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, 2020, 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 statements of operations 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 ASU 2009-06, Income Taxes (Topic 740) Implementation Guidance on Accounting for Uncertainty
in Income Taxes and Disclosure Amendments for Nonpublic Entities, 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 (“NOL”) 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 our federal and state NOL
carryforwards could be limited.
We recognized income tax provision of $0.3 million, income tax provision of $17 thousand and income tax benefit of $37 thousand for the years ended December 31, 2020,
2019 and 2018, respectively. The provision for income taxes for 2020 was primarily due to foreign withholding taxes on certain sales to a non-U.S. customer. The provision for
income taxes in 2019 was primarily due to the accrual of interest and penalties on historic uncertain tax positions. The benefit from income taxes in 2018 was primarily related
to a net loss from our foreign operations and a reduction in the deferred tax liability for accrued future withholding taxes on dividends. 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.
Changes to Tax Law
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), P.L. 116-136, was passed into law, amending portions of certain relevant US tax
laws. The CARES Act included a number of federal income tax law changes, including, but not limited to: (i) permitting net operating loss carrybacks to offset 100% of taxable
income for taxable years beginning before 2021, (ii) accelerating alternative minimum tax credit refunds, (iii) temporarily increasing the allowable business interest deduction
from 30% to 50% of adjusted taxable income, and (iv) providing a technical correction for depreciation related to qualified improvement property. The CARES Act had no
impact on our consolidated financial statements.
Beginning in 2018, the global intangible low-taxed income (“GILTI”) provisions in the Tax Act required us to include, in our U.S. income tax return, foreign subsidiary
earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Per guidance issued by the FASB, companies can either account for deferred taxes related
to GILTI or treat tax arising from GILTI as a period cost. Both are acceptable methods subject to an accounting policy election. At December 31, 2018, we finalized our policy
and elected to use the period cost method for GILTI. In 2020, we did not incur any GILTI inclusion as our foreign subsidiaries generated losses. Due to losses incurred in the
U.S. we will not be eligible for an Internal Revenue Code Section 250 deduction for foreign derived intangible income.
The BEAT provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign corporations and imposed a minimum base erosion anti-
abuse tax if greater than regular tax. In 2020, our company was not subject to BEAT as it did not meet the requirements to be subject to BEAT.
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Accounting Pronouncements
Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 standard adds a new impairment
model, known as CECL, which replaces the probable loss model. The CECL impairment model is based on estimates and forecasts of future conditions which requires
recognition of a lifetime of expected credit losses at inception on financial assets measured at amortized costs. Our financial assets consist of non-marketable debt and equity
securities and financing receivable assets measured at amortized cost, comprised of accounts receivable, contract assets, and unbilled receivables . We adopted the new standard
in the first quarter of 2020 using a modified retrospective approach requiring a cumulative-effect adjustment to the opening accumulated deficit as of the date of adoption. The
ASU establishes a new valuation account “allowance for credit losses” replacing the “allowance for doubtful accounts” in the consolidated balance sheets, which is used to
adjust the amortized cost basis of assets in presentation of the net amount expected to be collected. The adoption required certain additional disclosures but had no other impact
on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment eliminates
Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit to its carrying amount.
An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting
unit should be considered when measuring the goodwill impairment loss, if applicable. The ASU eliminates the requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to
perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We adopted the ASU in the first quarter of 2020 using a
prospective approach. The adoption required certain additional disclosures but had no impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement. The primary focus of the standard is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies
that are required to include fair value measurement disclosures. The standard requires the use of the prospective method of transition for disclosures related to changes in
unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop fair value measurements categorized within Level 3 of the fair
value hierarchy, and narrative description of measurement uncertainty. All other amendments in the standard are required to be adopted retrospectively. We adopted the ASU in
the first quarter of 2020 and the adoption had no impact on our consolidated financial statements nor on our related disclosures.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606. ASU 2018-18
provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition
standard. The standard also provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. The ASU is to be
applied retrospectively to the date of the initial application of Topic 606 which also requires recognition of the cumulative effect of applying the amendments as an adjustment
to the opening balance of retained earnings of the later or the earliest annual period presented and the annual period inclusive of the initial application of Topic 606. We adopted
the ASU in the first quarter of 2020 and the adoption had no impact on our consolidated financial statements nor on our related disclosures.
Recently issued accounting pronouncements not yet adopted
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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is intended to simplify various aspects
related to accounting for income taxes. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption
permitted. The standard will be adopted upon the effective date for us beginning January 1, 2021 on a retrospective basis. We believe that the adoption of ASU 2019-12 will
have minimal impact on our consolidated financial Statements and related disclosures.
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In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard
provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions in which the reference LIBOR or another reference
rate are expected to be discontinued as a result of the Reference Rate Reform. The standard is effective for all entities. The standard may be adopted as of any date from the
beginning of an interim period that includes or is subsequent to March 12, 2020 through December 31, 2022, on a prospective basis. We will evaluate transactions or contract
modifications occurring as a result of reference rate reform and determine whether to elect the optional expedients for contract modification; however, we believe that the
adoption of ASU 2020-04 will have minimal impact on our consolidated financial statements and related disclosures.
In August 2020, FASB issued ASU No 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own
Equity (Subtopic 815-40) No. 2020-06 August 2020 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce the complexity and to simplify
the accounting for convertible debt instruments and convertible preferred stock, and the derivatives scope exception for contracts in an entity's own equity. In addition, the
guidance on calculating diluted earnings per share has been simplified and made more internally consistent. The standard is effective the for fiscal years beginning after
December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for fiscal periods beginning after December 15, 2020. The standard will be
adopted by us beginning January 1, 2021. Entities are allowed to adopt the standard using a either a modified retrospective method of transition or a fully retrospective method
of transition. We are currently evaluating the effects of the standard on our consolidated financial statements and related disclosures; however, we believe that the adoption of
ASU 2020-06 will have minimal impact on our consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. ASU 2020-10 provides amendments to a wide variety of topics in the FASB’s Accounting
Standards Codification, which applies to all reporting entities within the scope of the affected accounting guidance. The standard is effective for annual periods beginning after
December 15, 2020 with early adoption permitted. The standard will be adopted upon the effective date for us beginning January 1, 2021 on a retrospective basis. We are
currently evaluating the effects of the standard on our consolidated financial statements and related disclosures, however we believe that the adoption of ASU 2020-10 will have
no impact the our consolidated financial statements and related disclosures.
Note 3. Revenue Recognition
Disaggregation of Revenue
The following table provides information about disaggregated revenue from contracts with customers into the nature of the products and services, and geographic regions, and
includes a reconciliation of the disaggregated revenue with reportable segments. The geographic regions that are tracked are the Americas (United States, Canada, and Latin
America), EMEA (Europe, Middle East, and Africa), and APAC (Australia, New Zealand, Southeast Asia, and China).
Segment information for fiscal year 2020 is as follows (in thousands):
Performance Enzymes
Year Ended December 31, 2020
Novel Biotherapeutics
Total
Major products and service:
Product Revenue
Research and development revenue
Total revenues
Primary geographical markets:
Americas
EMEA
APAC
Total revenues
30,220
17,886
48,106
11,111
11,548
25,447
48,106
$
$
$
$
—
20,950
20,950
13,241
7,709
—
20,950
$
$
$
$
30,220
38,836
69,056
24,352
19,257
25,447
69,056
$
$
$
$
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Segment information for fiscal year 2019 is as follows (in thousands):
Major products and service:
Product Revenue
Research and development revenue
Total revenues
Primary geographical markets:
Americas
EMEA
APAC
Total revenues
Segment information for fiscal year 2018 is as follows (in thousands):
Major products and service:
Product Revenue
Research and development revenue
Total revenues
Primary geographical markets:
Americas
EMEA
APAC
Total revenues
Contract Balances
Performance Enzymes
Year Ended December 31, 2019
Novel Biotherapeutics
Total
$
$
$
$
$
$
$
$
29,465 $
28,691
58,156 $
13,039 $
26,831
18,286
58,156 $
—
10,302
10,302
—
10,302
—
10,302
Performance Enzymes
Year Ended December 31, 2018
Novel Biotherapeutics
25,590 $
21,483
47,073 $
15,332 $
8,878
22,863
47,073 $
—
13,521
13,521
38
13,483
—
13,521
$
$
$
$
$
$
$
$
Total
The following table presents balances of contract assets, unbilled receivables, contract costs, and contract liabilities (in thousands):
Contract assets
Unbilled receivables
Contract costs
Contract liabilities: deferred revenue
December 31, 2020
December 31, 2019
$
$
$
$
4,526 $
10,942 $
90 $
4,791 $
29,465
38,993
68,458
13,039
37,133
18,286
68,458
25,590
35,004
60,594
15,370
22,361
22,863
60,594
1,027
10,099
—
2,044
We recognize accounts receivable when we have an unconditional right to recognize revenue and have issued an invoice to the customer. Our payment terms are generally
between 30 and 90 days. We recognize unbilled receivables when we have an unconditional right to recognize revenue and have not issued an invoice to our customer. Unbilled
receivables, current are transferred to accounts receivable on issuance of an invoice. Unbilled receivables, non-current are transferred to accounts receivable on issuance of an
invoice; payment is expected from the customer thereon. Unbilled receivables are classified separately on the consolidated balance sheets as assets. We maintain a valuation
allowance on accounts receivables and unbilled receivables.
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Contract assets represent our right to recognize revenue for custom products with no alternate use and under binding non-cancellable purchase orders and are largely related to
our procurement of product. We recognize contract assets when we have a conditional right to recognize revenue. The delivery pattern of certain of products occurs in advance
of the invoicing process, which generates contract assets. In addition, we recognize a contract asset related to milestones not eligible for royalty accounting when we assess it is
probable of being achieved and there will be no significant reversal of cumulative revenues. Contract assets are classified separately on the consolidated balance sheets as an
asset and transferred to accounts receivable when our rights to payment become unconditional. We maintain a valuation allowance on contract assets.
Contract liabilities, or deferred revenue, represent our obligation to transfer a product or service to the customer, and for which we have received consideration from the
customer. We recognize a contract liability when we receive advance customer payments under development agreements for research and development services, upfront license
payments, and from upfront customer payments received under product supply agreements. Contract liabilities are classified as a liability on the consolidated balance sheet.
Contract costs relate to incremental costs of obtaining a contract with a customer. Contract costs are amortized along with the associated revenue over the term of the contract.
During the years ended December 31, 2020 and 2019, we had no asset impairment charges related to contract assets.
We recognized the following revenues (in thousands):
Revenue recognized in the period for:
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied
Changes in the period:
Changes in the estimated transaction price allocated to performance obligations satisfied in prior
periods
Performance obligations satisfied from new activities in the period - contract revenue
Total revenues
Performance Obligations
Year Ended December 31,
2020
2019
$
$
57
$
774
68,225
69,056
$
4,567
1,442
62,449
68,458
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end
of the reporting periods. The estimated revenue does not include contracts with original durations of one year or less, amounts of variable consideration attributable to royalties,
or contract renewals that are unexercised as of December 31, 2020.
The balances in the table below are partially based on judgments involved in estimating future orders from customers subject to the exercise of material rights pursuant to
respective contracts (in thousands):
Product Revenue
Research and development revenue
Total revenues
Note 4. Net Loss per Share
2021
2022
2023
2024 and Thereafter
Total
$
$
67 $
1,757
1,824 $
67 $
—
67 $
431 $
546
977 $
1,923 $
—
1,923 $
2,488
2,303
4,791
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding, less restricted stock awards (“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 shares outstanding, less RSAs
subject to forfeiture, plus all additional common shares that would have been outstanding, assuming dilutive potential common stock shares had been issued for other dilutive
securities. For periods presented, diluted and basic net loss per share are identical since potential common stock shares are excluded from the calculation, as their effect was
anti-dilutive.
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Anti-Dilutive Securities
In periods of net loss, the weighted average number of shares outstanding, prior to the application of the treasury stock method, excludes potentially dilutive securities 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 considered in the computation of diluted net loss per share because their effect was anti-dilutive (in thousands):
Shares issuable under the Equity Incentive Plan
5,348
4,763
6,339
2020
Year Ended December 31,
2019
2018
Note 5. Collaborative Arrangements
GSK Platform Technology Transfer, Collaboration and License Agreement
In July 2014, we entered into a CodeEvolver protein engineering platform technology transfer collaboration and license agreement (the “GSK CodeEvolver Agreement”) with
GSK. Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver protein engineering platform technology to develop novel
enzymes for use in the manufacture of GSK's pharmaceutical and health care products.
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We received an upfront fee upon the execution of the agreement in July 2014 and milestone payments in each of the years from 2014 through April 2016. We completed the
transfer of the CodeEvolver protein engineering platform technology to GSK in April 2016 and all revenues relating to the technology transfer have been recognized as of
April 2016. We have the potential to receive additional cumulative contingent payments that range from $5.75 million to $38.5 million per project based on GSK’s successful
application of the licensed technology. We are also eligible to receive royalties, based on net sales of GSK’s sales of licensed enzyme products, that are currently not being
recognized.
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In 2019, we received a $2.0 million milestone payment relating to the advancement of an enzyme developed by GSK using our CodeEvolver protein engineering platform
technology. We recognized research and development revenue of nil, $2.0 million, and nil in the year ended December 31, 2020, 2019, and 2018, respectively.
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Merck Platform Technology Transfer and License Agreement
In August 2015, we entered into a CodeEvolver platform technology transfer collaboration and license agreement (the “Merck CodeEvolver Agreement”) with Merck, Sharp
& Dohme (“Merck”) which allows Merck to use the CodeEvolver protein engineering technology platform in the field of human and animal healthcare.
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We received an upfront license fee upon execution of the Merck CodeEvolver Agreement and milestone payments in September 2015 and in September 2016, when we
completed the transfer of the engineering platform technology. We recognized research and development revenues of $3.1 million, $4.0 million, and $4.1 million in the years
ended December 31, 2020, 2019 and 2018, respectively, for various research projects under our collaborative arrangement.
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We 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. The API payments, which are currently not recognized
in revenue, are based on the quantity of API developed and manufactured by Merck and will be recognized as usage-based royalties.
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In October 2018, we entered into an amendment to the Merck CodeEvolver Agreement which amended certain licensing provisions and one exhibit. In January 2019, we
entered into an amendment to the Merck CodeEvolver Agreement to install certain CodeEvolver protein engineering technology upgrades into Merck’s platform license
installation and maintain those upgrades for a multi-year term expiring in January 2022. The license installation was completed in 2019 and we recognized $0.9 million as
license fee revenue accordingly under the amendment. Pursuant to the agreement, Merck has options to future technology enhancements for a specified fee. As of December 31,
2020, Merck has not exercised its option for technology enhancements. We recognized $0.1 million and $0.9 million in research and development revenues under the terms of
the amendment in 2020 and 2019, respectively.
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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 enzyme 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.
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Effective as of January 2016, we and Merck amended the Sitagliptin Catalyst Supply Agreement to prospectively provide for variable pricing based on the cumulative volume
of sitagliptin catalyst purchased by Merck and to allow Merck to purchase a percentage of its requirements for sitagliptin catalyst from a specified third-party supplier. Merck
received a distinct, functional license to manufacture a portion of its demand beginning January 1, 2018, which we recognized as research and development revenue. We
recognized no research and development revenues in the years ended December 31, 2020 and 2019 and $1.3 million of research and development revenues in the year ended
December 31, 2018.
We have determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin catalyst purchased by Merck, provides Merck material
rights and we are recognizing product revenues using the alternative method. Under the alternative approach, we estimate the total expected consideration and allocate it
proportionately with the expected sales.
The Sitagliptin Catalyst Supply Agreement requires Merck to pay an annual fee for the rights to the sitagliptin technology each year for the term of the Sitagliptin Catalyst
Supply Agreement. Amounts of annual license fees are based on contractually agreed prices and are on a declining scale over the term of the contract.
Pursuant to the terms of the Sitagliptin Catalyst Supply Agreement, Merck may purchase supply from us for a fee based on contractually stated prices. We recognized $13.4
million, $15.1 million and $12.3 million in product revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Revenues recognized by us under the
Sitagliptin Catalyst Supply Agreement comprised 19%, 22%, and 22% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
The Sitagliptin Catalyst Supply Agreement will terminate in February 2022 unless extended and we have not received an amendment to extend the agreement.
Enzyme Supply Agreement
In November 2016, we entered into a supply agreement whereby our customer may purchase quantities of one of our proprietary enzymes for use in its commercial manufacture
of a product. Pursuant to the supply agreement, we received an upfront payment in December 2016 which was recorded as deferred revenues. Such upfront payment will be
recognized over the period of the supply agreement as the customer purchases our proprietary enzyme. We additionally have determined that the volume discounts under the
supply agreement provides the customer material rights and we are recognizing revenues using the alternative method. As of December 31, 2020 and 2019, we had deferred
revenue balances from the supply agreement of $2.0 million.
Research and Development Agreement
In March 2017, we entered into a multi-year research and development services agreement with Tate & Lyle Ingredients Americas LLC (“Tate & Lyle”) to develop enzymes for
use in the manufacture of Tate & Lyle’s zero-calorie TASTEVA M Stevia sweetener. Under the agreement, we received an upfront payment of $3.0 million, which was
recognized ratably over the maximum term of the services period of 21 months . Beginning January 1, 2018, we are recognizing revenue using a single measure of progress that
depicts our performance in transferring the services. During the second quarter of 2018, Tate & Lyle opted to obtain additional development services that we completed by June
30, 2018 and we earned milestone payments upon completion of the services. We recognized nil, $0.1 million and $7.1 million in revenue in the years ended December 31,
2020, 2019 and 2018, respectively, in research and development services under the research and development services agreement.
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Commercial Agreement
In April 2019, we entered into a multi-year commercial agreement with Tate & Lyle under which Tate & Lyle has received an exclusive license to use a suite of Codexis novel
performance enzymes in the manufacture of Tate & Lyle’s zero-calorie stevia sweetener, TASTEVA M, and other stevia products. Under the agreement, we will supply Tate &
Lyle with its requirements for these enzymes over a multiple year period and receive royalties on stevia products. In November 2020, we amended the commercial agreement
based on Tate & Lyle's intent to use a specific Codexis novel performance enzyme in its production of TASTEVA M Stevia Sweetener and became eligible to receive
milestone payments of up to $1.1 million. In the fourth quarter of 2020, we became eligible to receive a milestone payment of $0.4 million, which we subsequently received in
the fourth
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quarter of 2020. We recognized $0.2 million in revenue in the year ended December 31, 2020. As of December 31, 2020, we had a deferred revenue balance of $0.2 million.
Global Development, Option and License Agreement and Strategic Collaboration Agreement
In October 2017, we entered into a Global Development, Option and License Agreement (the “Nestlé License Agreement”) with Société des Produits Nestlé (formerly known as
Nestec Ltd.) (“Nestlé Health Science”) and, solely for the purpose of the integration and the dispute resolution clauses of the Nestlé License Agreement, Nestlé Health Science
S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.
We received an upfront cash payment of $14.0 million in 2017 upon the execution of the Nestlé License Agreement, a $4.0 million milestone payment after dosing the first
subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, and a $1.0 million milestone payment upon achievement of a milestone relating to formulation of
CDX-6114. The $4.0 million milestone payment that was triggered by the initiation of the trial was received in 2018 and the $1.0 million milestone payment that was triggered
by the achievement of a formulation relating to CDX-6114 was received in February 2019. The upfront payment and the variable consideration relating to the progress payment
of $4.0 million and a milestone payment of $1.0 million were recognized over time as the development work was performed. Revenue was recognized using a single measure of
progress that depicted our performance in transferring control of the services, which was based on the ratio of level of effort incurred to date compared to the total estimated
level of effort required to complete all performance obligations under the agreement. We recognized $13 thousand, $1.9 million and $9.9 million in research and development
revenue in 2020, 2019 and 2018, respectively.
In January 2019, we received notice from the FDA that it had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b
multiple ascending dose study in healthy volunteers in the United States. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide,
royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU and paid us $3.0 million which we
recognized as research and development revenue in 2019. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and
commercialization of CDX-6114. Other potential payments from Nestlé Health Science to us under the Nestlé License Agreement include (i) development and approval
milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a
single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of product.
In October 2017, we entered into the “Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver protein engineering
technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. Under the Strategic Collaboration
Agreement, we received an upfront payment of $1.2 million in 2017 and an incremental payment of $0.6 million in September 2018 for additional services. The Nestlé SCA has
been extended through December 2021.
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In January 2020, we entered into a development agreement with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to advance a lead
candidate targeting a gastro-intestinal disorder discovered through our Nestlé SCA into pre-clinical and early clinical studies.
Under the Nestlé SCA and the development agreement, we recognized $7.9 million, $5.4 million and $3.6 million in research and development revenue in years ended
December 31, 2020, 2019, and 2018, respectively.
Strategic Collaboration Agreement
In April 2018, we entered into the Porton Agreement with Porton to license key elements of our biocatalyst technology for use in Porton’s global custom intermediate and API
development and manufacturing business. Under the Porton Agreement, we are eligible to receive annual collaboration fees and research and development revenues. We
received initial collaboration payments of $0.5 million and $0.5 million within 30 days of the effective date and on the first anniversary of the effective date of the Porton
Agreement, respectively. We also received annual collaboration payments of $1.0 million for each on the first and second anniversaries of the effective date of the Porton
Agreement, respectively. We are eligible to receive $1.0 million each annual collaboration payment on the third and fourth anniversaries of the effective date of the Porton
Agreement, respectively. We completed the technical transfer in the fourth quarter of 2018 and recognized $2.8 million in research and development revenue. We recognized
revenue related to the functional license provided to Porton at a point in time when control of the license was transferred to the customer. We recognized research and
development revenue related to the Porton Agreement of $1.1 million, nil and $2.8 million in the years ended December 31, 2020, 2019 and 2018, respectively. As of
December 31, 2020 and 2019, we had deferred revenue balances of $0.1 million and nil, respectively.
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Platform Technology Transfer and License Agreement
In May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver Agreement”) with Novartis. The Agreement allows
Novartis to use our proprietary CodeEvolver protein engineering platform technology in the field of human healthcare. Under the Novartis CodeEvolver Agreement, we are
transferring our proprietary CodeEvolver protein engineering platform technology to Novartis over approximately 25 months, starting with the date on which we commenced
the technology transfer (the “Technology Transfer Period”). As a part of this technology transfer, the Company provided to Novartis our proprietary enzymes, proprietary
protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of the Company and Novartis scientists participated in technology training
sessions and collaborative research projects at our laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland. Upon completion of
technology transfer, Novartis will have the CodeEvolver protein engineering platform technology installed at its designated laboratory.
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Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver Agreement. In the second quarter of
2020 we completed the second technology milestone transfer under the agreement and became eligible to receive a milestone payment of $4.0 million, which we subsequently
received in July 2020. We have also recognized $3.4 million for partial completion of the third technology milestone and we expect to receive payment in the first quarter of
2021. Additionally, we are eligible to receive an additional $1.6 million upon satisfactory completion of the third technology transfer milestone. In consideration for the
continued disclosure and license of improvements to our technology and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period
(“Improvements Term”), Novartis will pay Codexis annual payments which amount to an additional $8.0 million. The Company also has the potential to receive quantity-
dependent, usage payments for each API that is manufactured by Novartis using one or more enzymes that have been developed or are in development using the CodeEvolver
protein engineering platform technology during the period that begins on the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire
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licensed patent. These product-related usage payments, if any, will be paid by Novartis to the Company for each quarter that Novartis manufactures API using a CodeEvolver -
developed enzyme. The usage payments will be based on the total volume of API produced using the CodeEvolver -developed enzyme. These usage payments can begin in the
clinical stage and will extend throughout the commercial life of each API. Revenue for the combined initial license and technology transfer performance obligation, which is
expected to occur over twenty-three months, is being recognized using a single measure of progress that depicts our performance in transferring control of the services, which is
based on the ratio of level of effort incurred to date compared to the total estimated level of effort required to complete the performance obligation relating to the combined
initial license and technology transfer. Revenue allocated to future improvements will be recognized during the Improvement Term.
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We recognized $6.2 million and $11.3 million in research and development revenue in the year ended December 31, 2020 and 2019, respectively, from the Novartis
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CodeEvolver Agreement.
License Agreement
In December 2019, we entered a license agreement with Roche Sequencing Solutions, Inc. (“Roche”) to provide Roche with our EvoT4 DNA™ ligase high-performance
molecular diagnostic enzyme. The royalty bearing license grants Roche worldwide rights to include the EvoT4 DNA™ ligase in its nucleic acid sequencing products and
workflows. Under the license agreement, we received an initial collaboration fee payment of $0.8 million within 45 days of the effective date of the agreement, and we received
an additional $0.9 million milestone after the completion of technology transfer in October 2020. The agreement also contemplates milestone payments to Codexis upon the
achievement of various development and commercialization events and royalty payments from commercial sales of the enzyme. We recognized research and development fees
of $1.1 million and nil in the years ended December 31, 2020 and 2019.
Strategic Collaboration and License Agreement
In March 2020, we entered into a Strategic Collaboration and License Agreement (the “Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned
subsidiary of Takeda Pharmaceutical Co. Ltd. (“Takeda”) under which we are collaborating to research and develop protein sequences for use in gene therapy products for
certain diseases (each, a “Field”) in accordance with each applicable program plan (each, a “Program Plan”).
In March 2020, we received an upfront nonrefundable cash payment of $8.5 million and we initiated activities under three Program Plans for Fabry Disease, Pompe Disease,
and an undisclosed blood factor deficiency respectively (the “Initial Programs”). We are primarily responsible for the research and development of protein sequences under the
Program Plans (the “Protein Sequences”) and we are eligible to earn $15.4 million of research and development fees and pre-clinical milestone payments for the Initial
Programs. Takeda has the right, but not the obligation, to develop, manufacture and commercialize gene
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therapy products that include nucleic acid sequences that encode the Protein Sequences (“Products”) at their expense. Takeda has the right to a certain number of additional
disease indications (“Reserved Target Indications”) for a limited period in which Takeda may initiate a Program Plan for one or more Reserved Target Indications
(“Additional/Option Program,” with Initial Programs, the “Programs”), provided, (a) if Takeda elects to initiate an Additional/Option Program while the parties are
collaborating on three other Programs at the time of such election, or (b) if Takeda elects to initiate an Additional/Option Program using the last remaining Reserved Target
Indication, then Takeda must pay us an option exercise fee to initiate such Additional/Option Program. We will own all rights to the Protein Sequences and corresponding
nucleic acid sequences and related intellectual property rights and Takeda will own all rights to Products and related intellectual property rights.
We granted to Takeda an exclusive, worldwide, royalty-bearing, sublicensable license to use the Protein Sequences and their corresponding nucleic acid sequences to develop,
manufacture and commercialize the applicable Products in the applicable Field. We also granted to Takeda a limited non-exclusive, worldwide, sublicensable license (a) to
research the Protein Sequences within or outside the applicable Fields and (b) to research the Products outside of the applicable Fields, which such rights exclude Takeda's right
to perform any Investigational New Drug-enabling activities. The licenses to research the Protein Sequences expire after a pre-determined period of time.
The term of the Takeda Agreement begins on the Effective Date and continues on a Product-by-Product and country-by-country basis, until the expiration of Takeda’s obligation
to pay royalties to the Company with respect to that Product in that country. The Takeda Agreement expires in its entirety upon the expiration of Takeda’s obligation to pay
royalties to the Company with respect to the Products in all countries worldwide. Subject to the terms of the Takeda Agreement, and after the first anniversary of the Effective
Date with respect to the Initial Programs or after the first anniversary of confirmation of the applicable Program Plan by the parties with respect to the Additional/Option
Programs, Takeda may terminate a Program upon specified prior written notice to the Company. Subject to the terms of the Takeda Agreement, Takeda may terminate the
Takeda Agreement, at will, on a Product-by-Product basis upon specified prior written notice to the Company and the Takeda Agreement in its entirety upon specified prior
written notice to the Company. Subject to the terms of the Takeda Agreement, Takeda may terminate the Takeda Agreement on a Product-by-Product basis for safety reasons
upon specified prior written notice to the Company. Either party may terminate the Takeda Agreement for an uncured material breach by the other party, or the other party’s
insolvency or bankruptcy.
We are eligible to receive certain development and commercialization milestone payments up to $100.0 million per target gene, the modulation of which would lead to the
treatment of the disease indications by the applicable Product. We are also eligible to receive tiered royalties based on net sales of Products at percentages ranging from the
middle-single digits to low single-digits. We recognized research and development revenue related to the Takeda Agreement of $13.2 million in the year ended December 31,
2020. As of December 31, 2020, we had a deferred revenue balance of $1.5 million from Takeda.
Master Collaboration and Research Agreement and Stock Purchase Agreement
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In June 2020, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc. (“MAI”) pursuant to which we purchased 1,587,050 shares of MAI's Series A
preferred stock for $1.0 million. In connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors. Concurrently
with our initial equity investment, we entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”), pursuant to which we are performing
services utilizing our CodeEvolver protein engineering platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional
shares of MAI's Series A preferred stock. Based on these services, the Company is eligible to earn additional shares of MAI's Series A preferred stock. MAI will combine its
advanced chemistries with our enzymes to drive the process to commercialization. We are eligible to earn such non-monetary payments over ten to thirteen months, and any
such shares would be issued thirty days in arrears after each calendar quarter-end. We are also eligible to receive amounts for bonuses, targets and milestones on achievement of
timeline and project goals specified in the statement of work ("SOW"). Payments for bonuses, targets and milestones on achievement of timeline and project goals are to be
issued thirty days after the Company provides notification of completion. Under the MAI Agreement, we will have the right to use and sell the engineered enzymes to third
parties for any purpose other than for the synthesis of native DNA. Under the MAI Agreement, we would make a $0.5 million payment to MAI upon our achievement of a
milestone of $5.0 million in aggregate commercial sales to third parties of the engineered enzymes or any product incorporating or derived from the engineered enzymes for any
purpose other than the synthesis of native DNA. The MAI Agreement contemplates that we and MAI will enter into a Commercialization and Enzyme Supply Agreement (the
“CESA”) within six months following the completion of certain timelines specified in the SOW. In addition, we and MAI have agreed pursuant to the MAI Agreement to
certain terms to be contained within the CESA in the event that the CESA becomes executed in the future. Those include: (a) that MAI would receive an exclusive license to use
the DNA polymerase enzymes engineering by us under the MAI Agreement in the synthesis of native DNA and a non-exclusive license to use these enzymes for research and
development on the synthesis of non-native DNA, and (b) we would become the exclusive manufacturer of these enzymes for MAI, its affiliates and licensees.
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We received 714,171 shares of MAI's Series A preferred stock from research and development services in the year ended December 31, 2020, and recognized $0.9 million from
these services with MAI in the year ended December 31, 2020. At December 31, 2020, we had $0.5 million in contract asset due from MAI for services rendered. Payment for
the services rendered was subsequently received in form of additional MAI Series A preferred stock in the first quarter of 2021.
Note 6. Investments in Non-Marketable Securities
Non-Marketable Debt Securities
We classify non-marketable debt securities, which are accounted for as available-for-sale, within Level 3 in the fair value hierarchy because we estimate the fair value based on a
qualitative analysis using the most recent observable transaction price and other significant unobservable inputs including volatility, rights, and obligations of the securities we
hold.
We determine gains or losses on the sale or extinguishment of non-marketable debt securities using a specific identification method. Unrealized gains and losses on non-
marketable debt securities are recorded as a component of other comprehensive loss until realized. Realized gains or losses are recorded as a component of other expenses, net.
We recognized no unrealized or realized gains or losses during the year ended December 31, 2020. As of December 31, 2020 and 2019, the fair value of non-marketable debt
securities was $1.0 million and nil, respectively.
As of December 31, 2020, the adjusted cost, carrying value and fair value of non-marketable debt securities is the following (in thousands):
By contractual maturity:
Non-marketable debt securities due in 1 year or less
There were no investments in non-marketable debt securities at December 31, 2019.
Non-Marketable Equity Securities
December 31, 2020
Adjusted Cost and Carrying
value
Fair Value
$
1,000 $
1,000
Non-marketable equity securities are investments in privately held companies without readily determinable market values. We measure investments in non-marketable equity
securities without a readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus
changes resulting from observable price changes on a non-recurring basis. The fair value of non-marketable equity securities that have been remeasured due to impairment are
classified within Level 3. We adjust the carrying value of non-marketable equity securities which have been remeasured during the period and recognize resulting gains or
losses as a component of other expenses, net. We recognized no unrealized or realized gain or losses during the year ended December 31, 2020.
At December 31, 2020 and 2019, the carrying value of non-marketable equity securities is the following (in thousands):
Non-marketable equity securities
December 31,
2020
2019
$
1,450 $
—
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Note 7. Fair Value Measurements
The following tables present the financial instruments that were measured at fair value on a recurring basis at December 31, 2020 and 2019 by level within the fair value
hierarchy (in thousands):
Money market funds
Non-marketable debt securities
Total
Money market funds
December 31, 2020
Level 1
Level 2
Level 3
Total
$
$
$
127,567 $
— $
127,567 $
— $
— $
— $
— $
1,000 $
1,000 $
127,567
1,000
128,567
Level 1
Level 2
Level 3
$
71,248 $
—
$
—
$
Total
71,248
December 31, 2019
There were no investments in non-marketable debt and equity securities at December 31, 2019.
The fair value of non-marketable securities remeasured due to impairment would be classified within level 3.
During the year ended December 31, 2020, we did not recognize any significant other-than-temporary impairment losses. After the adoption of ASU 2016-13, we did not
recognize any significant credit losses.
Note 8. Balance Sheets Details
Cash Equivalents
Cash equivalents at December 31, 2020 and 2019 consisted of the following (in thousands):
Money market funds
(1) (2)
$
127,567 $
127,567 $
71,248 $
71,248
December 31, 2020
December 31, 2019
Adjusted Cost
Estimated Fair Value
Adjusted Cost
Estimated Fair Value
(1)
(2)
Money market funds are classified in cash and cash equivalents on our consolidated balance sheets.
Average Contractual Maturities (in days) is not applicable.
As of December 31, 2020, the total cash and cash equivalents balance of $149.1 million was comprised of money market funds of $127.6 million and cash of $21.5 million held
with major financial institutions worldwide. As of December 31, 2019, the total cash and cash equivalents balance of $90.5 million was comprised of money market funds of
$71.2 million and cash of $19.3 million held with major financial institutions worldwide.
Inventories
Inventories consisted of the following (in thousands):
Raw materials
Work in process
Finished goods
Inventories
December 31,
2020
2019
$
$
77 $
82
805
964 $
7
26
338
371
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Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
(1)
Laboratory equipment
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,
2020
2019
$
$
25,468 $
10,785
3,192
1,246
2,357
43,048
(33,373)
9,675 $
23,561
10,804
3,016
1,461
691
39,533
(33,251)
6,282
(1)
(2)
Fully depreciated property and equipment with a cost of $1.8 million and $1.0 million were retired during the years ended December 31, 2020 and 2019, respectively.
Construction in progress includes equipment received but not yet placed into service pending installation.
Depreciation expense included in the consolidated statements of operations as follows (in thousands):
Depreciation expense
Goodwill
Goodwill had a carrying value of approximately of $3.2 million as of December 31, 2020 and 2019.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
Accrued purchases
Accrued professional and outside service fees
Other
Total
Note 9. Stock-based Compensation
Equity Incentive Plans
2020
Year Ended December 31,
2019
2018
$
1,950 $
1,570 $
1,147
December 31,
2020
2019
$
$
7,170 $
2,589
513
10,272 $
4,386
1,802
352
6,540
In 2019, our board of directors (the “Board”) and stockholders approved the 2019 Incentive Award Plan (the “2019 Plan”). The 2019 Plan superseded and replaced in its
entirety our 2010 Equity Incentive Plan (the “2010 Plan”) which was effective in March 2010, and no further awards will be granted under the 2010 Plan; however, the terms
and conditions of the 2010 Plan will continue to govern any outstanding awards thereunder. The 2010 Plan provided for the grant of incentive stock options, non-statutory stock
options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”), performance-contingent
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restricted stock units (“PSUs”), performance based options (“PBOs”), stock appreciation rights, and stock purchase rights to our employees, non-employee directors and
consultants.
The number of shares of our common stock available for issuance under the 2019 Plan is equal to the sum of (i) 7,897,144 shares and (ii) any shares subject to awards granted
under the 2010 Plan that were outstanding as of April 22, 2019 and thereafter terminate, expire, lapse or are forfeited; provided that no more than 14,000,000 shares may be
issued upon the exercise of incentive stock options (“ISOs”). In June 2019, 8.1 million shares authorized for issuance under the 2019 Plan were registered under the Securities
Act of 1933, as amended (the “Securities Act”).
The 2019 Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, restricted
stock units, other stock or cash based awards and dividend equivalents to eligible employees and consultants of the Company or any parent or subsidiary, as well as members of
the Board.
As of December 31, 2020, total shares remaining available for issuance under the 2019 Plan were approximately 6.8 million shares.
Stock Options
The option exercise price for incentive stock options must be at least 100% of the fair value of our common stock on the date of grant and the option exercise price for non-
statutory stock options is 85% of the fair value of our common stock on the date of grant, as determined by the Board. If, at the time of a grant, the optionee directly or by
attribution owns stock possessing more than 10% of the total combined voting power of all of our outstanding capital stock, the exercise price for these options must be at least
110% of the fair value of the underlying common stock. Stock options granted to employees generally have a maximum term of ten years and vest over four years from the date
of grant, of which 25% vest at the end of one year, and 75% vest monthly over the remaining three years. We may grant options with different vesting terms from time to time.
Unless an employee's termination of service is due to disability or death, upon termination of service, any unexercised vested options will be forfeited at the end of three months
or the expiration of the option, whichever is earlier.
Restricted Stock Units (RSUs)
We also grant employees RSUs, which generally vest over either a three year period with one-third of the shares subject to the RSUs vesting on each yearly anniversary of the
vesting commencement date or over a four year period with 25% of the shares subject to the RSU vesting on each yearly anniversary of the vesting commencement date, in
each case contingent upon such employee’s continued service on such vesting date. RSUs are generally subject to forfeiture if employment terminates prior to the release of
vesting restrictions. We may grant RSUs with different vesting terms from time to time.
Performance-contingent Restricted Stock Units (PSUs) and Performance Based Options (PBOs)
The compensation committee of the Board approved, solely in respect of non-executive employees, delegated to our Chief Executive Officer the authority to approve grants of
PSUs. The compensation committee of the Board also approved grants of PBOs and PSUs to our executives. The PSUs and PBOs vest based upon both the successful
achievement of certain corporate operating milestones in specified timelines and continued employment through the applicable vesting date. When the performance goals are
deemed to be probable of achievement for these types of awards, recognition of stock-based compensation expense commences. Once the number of shares eligible to vest is
determined, those shares vest in two equal installments with 50% vesting upon achievement and the remaining 50% vesting on the first anniversary of achievement, in each
case, subject to the recipient’s continued service through the applicable vesting date. If the performance goals are achieved at the threshold level, the number of shares eligible
to vest in respect of the PSUs and PBOs would be equal to half the number of PSUs granted and one-quarter the number of shares underlying the PBOs granted. If the
performance goals are achieved at the target level, the number of shares eligible to vest in respect of the PSUs and PBOs would be equal to the number of PSUs granted and half
of the shares underlying the PBOs granted. If the performance goals are achieved at the superior level, the number of shares eligible to vest in respect of the PSUs would be
equal to two times the number of PSUs granted and equal to the number of PBOs granted. The number of shares issuable upon achievement of the performance goals at the
levels between the threshold and target levels for the PSUs and PBOs or between the target level and superior levels for the PSUs would be determined using linear
interpolation. Achievement below the threshold level would result in no shares being eligible to vest in respect of the PSUs and PBOs.
In 2020, we awarded PSUs (“2020 PSUs”) and PBOs (“2020 PBOs”), each of which commence vesting based upon the achievement of various weighted performance goals,
including corporate revenue, performance enzyme segment gross margin, major new biotherapeutics publicity events, strategic performance enzyme and biotherapeutics
deliverables, and strategic plan development. As of December 31, 2020, we estimated that the 2020 PSUs and 2020 PBOs performance goals would be achieved at 88% of the
target level, and recognized expenses accordingly.
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In 2019, we awarded PSUs (“2019 PSUs”) and PBOs (“2019 PBOs”), each of which commenced vesting based upon the achievement of various weighted performance goals,
including sustained revenue and performance enzyme growth, strategic advancement of biotherapeutics, cash balance and strategic plan development. In the first quarter of
2020, we determined that the 2019 PSUs and 2019 PBOs performance goals had been achieved at 84% of the target level, and recognized expenses accordingly. Accordingly,
50% of the shares underlying the 2019 PSUs and PBOs vested in the first quarter of 2020 and 50% of the shares underlying the 2019 PSUs and PBOs will vest in the first
quarter of 2021, in each case subject to the recipient’s continued service on each vesting date.
In 2018, we awarded PSUs (“2018 PSUs”) and PBOs (“2018 PBOs”), each of which commenced vesting based upon the achievement of various weighted performance goals,
including core business revenue growth, cash balance, new licensing collaborations, new research and development service revenue arrangements, technology advancement and
novel therapeutic enzymes advancement. In the first quarter of 2019, we determined that the 2018 PSUs and 2018 PBOs performance goals had been achieved at 118% of the
target level, and recognized expenses accordingly. Accordingly, 50% of the shares underlying the 2018 PSUs and PBOs vested in the first quarter of 2019 and in the first quarter
of 2020, respectively, in each case subject to the recipient’s continued service on each vesting date.
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
Total
2020
Year Ended December 31,
2019
2018
$
$
1,620 $
6,108
7,728 $
1,562 $
5,381
6,943 $
2,055
5,834
7,889
The following table presents total stock-based compensation expense by security type included in the consolidated statements of operations (in thousands):
Stock options
RSUs and RSAs
PSUs
PBOs
Total
Grant Award Activities:
Stock Option Awards
2020
Year Ended December 31,
2019
2018
$
$
2,381 $
2,231
1,160
1,956
7,728 $
2,149 $
1,805
1,087
1,902
6,943 $
1,975
1,770
1,511
2,633
7,889
We estimated the fair value of stock options using the Black-Scholes-Merton option-pricing model based on the date of grant. The following summarizes the weighted-average
assumptions used to estimate the fair value of employee and non-employee stock options granted:
Expected life (years)
Volatility
Risk-free interest rate
Expected dividend yield
2020
Year Ended December 31,
2019
2018
5.3
50.4 %
1.0 %
0.0 %
5.6
55.3 %
2.4 %
0.0 %
5.6
60.0 %
2.7 %
0.0 %
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The following summarizes the weighted-average assumptions used to estimate the fair value of 76,000 shares of stock options granted to non-employees during the year ended
December 31, 2020 for services valued at $0.4 million:
Expected life (years)
Volatility
Risk-free interest rate
Expected dividend yield
5.4
51.6 %
0.4 %
0.0 %
The weighted average grant date fair value per share of non-employee stock options granted in 2020 was $5.04. The Company did not grant shares of stock options to non-
employees during the years ended December 31, 2019 and 2018.
The following tables summarizes stock option activities:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2018
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2019
Granted
Exercised
Forfeited/Expired
Outstanding at December 31, 2020
Number
of
Shares
(In Thousands)
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Vested and expected to vest at December 31, 2020
3,385 $
2,569 $
3,279 $
7.19
5.09
6.96
Number
of
Shares
(In Thousands)
4,579
645
(772)
(340)
4,112
406
(1,045)
(326)
3,147
496
(210)
(48)
3,385
Weighted
Average
Exercise Price Per
Share
Weighted
Average
Remaining
Contractual Term
(In Years)
5.4
4.3
5.3
Weighted
Average
Exercise Price Per Share
$
$
$
$
$
$
$
$
$
$
$
$
$
4.40
9.56
5.56
6.66
4.81
20.68
4.50
11.01
6.31
13.30
6.30
16.71
7.19
Aggregate Intrinsic
Value
(In Thousands)
$
$
$
49,542
42,998
48,786
The weighted average grant date fair value per share of employee stock options granted in 2020, 2019 and 2018 were $6.03, $10.77 and $5.34, respectively. The total intrinsic
value of options exercised in 2020, 2019 and 2018 were $1.8 million, $13.6 million and $7.6 million, respectively.
As of December 31, 2020, there was $4.1 million of unrecognized stock-based compensation, net of expected forfeitures, related to unvested stock options, which we expect to
recognize over a weighted average period of 2.4 years.
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Restricted Stock Awards (RSAs)
The following table summarizes RSA activities:
Non-vested balance at December 31, 2017
Granted
Vested
Non-vested balance at December 31, 2018
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2019
Granted
Vested
Non-vested balance at December 31, 2020
Number
of
Shares
159
47
(151)
55
40
(56)
(4)
35
96
(35)
96
Weighted Average
Grant Date
Fair Value
Per Share
4.68
14.35
4.71
12.83
17.18
12.83
17.18
17.18
11.44
17.18
11.44
$
$
$
$
$
$
$
$
$
$
$
The total fair value, as of the vesting date, of RSAs vested in fiscal 2020, 2019 and 2018 were $0.4 million, $1.0 million and $2.1 million respectively.
As of December 31, 2020, there was $0.6 million of unrecognized stock-based compensation cost related to non-vested RSAs, which we expect to recognize over a weighted
average period of 1.6 years.
Restricted Stock Units (RSUs)
The following table summarizes RSU activities:
Non-vested balance at December 31, 2017
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2018
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2019
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2020
Number
of
Shares
(In Thousands)
560
86
(290)
(8)
348
72
(210)
(9)
201
156
(168)
(13)
176
Weighted Average
Grant Date
Fair Value
Per Share
4.08
10.56
4.09
4.73
5.66
19.19
5.03
13.60
10.76
14.22
10.05
15.16
14.17
$
$
$
$
$
$
$
$
$
$
$
$
$
The total fair value, as of the vesting date, of RSUs vested in fiscal 2020, 2019 and 2018 were $2.1 million, $4.1 million and $2.9 million respectively.
As of December 31, 2020, there was $1.4 million of unrecognized stock-based compensation cost related to non-vested RSUs, which we expect to recognize over a weighted
average period of 1.9 years.
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Performance-Contingent Restricted Stock Units (PSUs)
The following table summarizes PSU activities:
Non-vested balance at December 31, 2017
Granted
Vested
Non-vested balance at December 31, 2018
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2019
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2020
Number
of
Shares
(In Thousands)
429
306
(495)
240
95
(200)
(15)
120
124
(107)
(6)
131
Weighted Average
Grant Date
Fair Value
Per Share
4.20
6.71
7.16
7.48
14.98
6.58
15.58
13.88
13.59
11.28
21.80
15.34
$
$
$
$
$
$
$
$
$
$
$
$
The total fair value, as of the vesting date, of PSUs vested in the years ended December 31, 2020, 2019, and 2018 were $1.3 million, $3.8 million, and $5.4 million,
respectively.
As of December 31, 2020, there was $0.5 million of unrecognized stock-based compensation cost related to non-vested PSUs, which we expect to recognize over a weighted
average period of 0.6 years.
Performance Based Options (PBOs)
We estimated the fair value of PBO 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
2020
Year Ended December 31,
2019
2018
5.3
49.9 %
1.3 %
0.0 %
5.6
55.8 %
2.5 %
0.0 %
5.6
60.3 %
2.7 %
0.0 %
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The following tables summarizes PBO activities:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Granted
Forfeited
Outstanding at December 31, 2020
Number of Shares
(in thousands)
1,720
1,200
(84)
(1,254)
1,582
718
(422)
(618)
1,260
689
(389)
1,560
Exercisable at December 31, 2020
Vested and expected to vest at December 31, 2020
1,156 $
1,510 $
7.55
9.54
Number
of
Shares
(In Thousands)
Weighted
Average
Exercise Price Per
Share
Weighted
Average
Remaining
Contractual Term
(In Years)
Weighted Average Grant
Date Fair Value Per Share
$
$
$
$
$
$
$
$
$
$
$
$
2.54
5.02
2.54
3.73
3.47
11.44
3.17
10.34
4.75
6.37
6.42
5.05
Aggregate Intrinsic
Value
(In Thousands)
6.6 $
7.2 $
16,504
18,567
The total fair value of exercised PBOs were nil for 2020, $1.3 million for 2019 and $0.2 million for 2018. As of December 31, 2020, there was $1.1 million of unrecognized
stock-based compensation cost related to non-vested PBOs, which we expect to recognize over a weighted average period of 0.5 years.
Note 10. Capital Stock
Public Offerings
In December 2020, we completed an underwritten public offering in which we issued and sold 4,928,572 shares of our common stock, par value $0.0001 per share, at a
public offering price of $17.50 per share. We received gross proceeds of $86.3 million, net of underwriting discounts and commissions of $5.2 million and direct offering
expenses of $0.3 million for net proceeds of $80.8 million.
In April 2018, we completed an underwritten public offering of 4,312,500 shares of our common stock, par value $0.0001 per share, at a public offering price of $9.25 per
share. We received net proceeds after deducting the underwriting discounts and commissions and estimated offering expenses of approximately $37.3 million.
Private Placement
In June 2019, we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital, LLC (Casdin) pursuant to which we issued and sold to Casdin 3,048,780
shares of our common stock at a purchase price of $16.40 per share. After deducting issuance costs of $0.1 million from the Private Offering, our net proceeds were
$49.9 million. The Private Offering was exempt from registration pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2)
the Securities Act, and Regulation D under the Securities Act.
Note 11. 401(k) Plan
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
137
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 $0.8 million, $0.7 million, and $0.6 million in the years ended December 31,
2020, 2019, and 2018, respectively.
Note 12. Income Taxes
Our loss before provision for (benefit from) income taxes was as follows (in thousands):
United States
Foreign
Loss before provision for income taxes
2020
Year Ended December 31,
2019
2018
$
$
(23,452) $
(219)
(23,671) $
(11,751) $
(167)
(11,918) $
(10,653)
(262)
(10,915)
The tax provision (benefit from) for the years ended December 31, 2020, 2019 and 2018 consists primarily of taxes attributable to foreign operations. The components of the
provision for income taxes are as follows (in thousands):
Current provision (benefit):
State
Foreign
Total current provision (benefit)
Deferred provision (benefit):
Foreign
Total deferred provision (benefit)
Provision for (benefit from) income taxes
2020
Year Ended December 31,
2019
2018
$
$
5 $
342
347
(8)
(8)
339 $
5 $
18
23
(6)
(6)
17 $
5
(13)
(8)
(29)
(29)
(37)
Reconciliation of the provision for (benefit from) 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
Executive compensation
Change in valuation allowance
Provision for (benefit from) income taxes
2020
Year Ended December 31,
2019
2018
(4,971) $
(465)
(811)
2
132
69
24
6,359
339 $
(2,503) $
(1,120)
(693)
1
(3,606)
505
872
6,561
17 $
(2,292)
222
(499)
(17)
(2,587)
(3)
838
4,301
(37)
$
$
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.
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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
Lease liability
Other assets
Total deferred tax assets:
Valuation allowance
Deferred tax liabilities:
Right-of-use assets
Other
Total deferred tax liabilities:
Net deferred tax liabilities
December 31,
2020
2019
$
72,530 $
9,914
1,080
2,576
1,914
1,115
1,714
25
400
5,626
100
96,994
(92,126)
(4,848)
(52)
(4,900)
$
(32) $
68,422
8,494
468
2,338
1,545
1,358
2,159
26
406
5,974
92
91,282
(85,768)
(5,514)
(40)
(5,554)
(40)
ASC 740 requires that the tax benefit of NOLs, 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, accordingly, has provided a valuation allowance against our deferred tax assets. Accordingly, the net deferred tax assets in all our jurisdictions have
been fully reserved by a valuation allowance. The net valuation allowance increased by $6.4 million during the year ended December 31, 2020, increased by $6.5 million during
the year ended December 31, 2019, and increased by $5.2 million during the year ended December 31, 2018. 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 our federal, state and foreign NOL carryforwards and federal research and development tax credits as of December 31, 2020 (in thousands):
Net operating losses, federal
Net operating losses, federal
Net operating losses, state
Tax credits, federal
Tax credits, state
Net operating losses, foreign
December 31, 2020
Amount
224,475
82,931
127,317
10,654
11,977
778
$
$
$
$
$
$
Expiration
Years
2022-2037
Do not expire
2028-2040
2022-2040
Do not expire
Various
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Current U.S. 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. We performed an analysis in
2020 and determined that there was not a limitation that would 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 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 is considered when determining whether sufficient future taxable income exists to realize the
deferred tax assets.
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, 2020, for local taxes that would be incurred upon repatriation. 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, 2020 as the remaining foreign jurisdictions are in an accumulative loss position.
We apply the provisions of ASC 740 to account for uncertain income taxes. 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
Reductions to tax provision of prior years
Balance at end of year
2020
December 31,
2019
2018
$
$
11,330 $
1,357
(4)
12,683 $
9,980 $
1,362
(12)
11,330 $
9,422
1,087
(529)
9,980
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 $39
thousand, $32 thousand and $37 thousand, respectively, in 2020, 2019 and 2018. Total penalties and interest recognized in the balance sheet was $0.4 million in 2020 and 2019.
The total unrecognized tax benefits that, if recognized currently, would impact our company’s effective tax rate were $0.3 million as of December 31, 2020 and 2019. 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 2013.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided a measurement period of up to one year
from the enactment date of the Tax Cuts and Jobs Act of 2017 (the “Act”) for companies to complete the accounting for the Tax Act and its related impacts. In 2018, the
Company completed its accounting for the Tax Act. The income tax effects of the Tax Act for which the accounting was completed in 2018 include: the impact of the Transition
Tax, the revaluation of deferred tax assets and liabilities to reflect the 21% corporate tax rate, the impact to the aforementioned items on state income taxes. We completed our
accounting for the income tax effects under the Tax Cuts and Jobs Act (the “Act”) that are relevant to the Company and required to be recorded and disclosed pursuant to ASC
740. Accordingly, any and all provisional amounts previously recorded in accordance with SAB 118 were adjusted to reflect their final amounts.
Beginning in 2018, the global intangible low-taxed income (“GILTI”) provisions in the Tax Act required us to include, in our U.S. income tax return, foreign subsidiary
earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Per guidance issued by the FASB, companies can either account for deferred taxes related
to GILTI or treat tax arising from GILTI as a period cost. Both are acceptable methods subject to an accounting policy election. At December 31, 2018, we finalized our policy
and elected to use the period cost method for GILTI. In 2020, we did not incur any GILTI inclusion as our foreign subsidiaries generated losses.
140
The BEAT provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum base erosion anti-
abuse tax if greater than regular tax. In 2020, our company was not subject to BEAT as it did not meet the requirements to be subject to BEAT.
Note 13. Commitments and Contingencies
Operating Leases
Our headquarters are located in Redwood City, California, where we occupy approximately 77,300 square feet of office and laboratory space in four buildings within the same
business park of Metropolitan Life Insurance Company (“MetLife”). Our Lease agreement with MetLife ("RWC Lease") includes approximately 28,200 square feet of space
located at 200 and 220 Penobscot Drive, Redwood City, California (the “200/220 Penobscot Space”) and approximately 37,900 square feet of space located at 400 Penobscot
Drive, Redwood City, California (the “400 Penobscot Space”) (the 200/220 Penobscot Space and the 400 Penobscot Space are collectively referred to as the “Penobscot
Space”), and approximately 11,200 square feet of space located at 501 Chesapeake Drive, Redwood City, California (the “501 Chesapeake Space”).
Until the end of January 2020, we also leased approximately 29,900 square feet of space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw Space”).
During the period January 1, 2020 through January 31, 2020, we subleased approximately 26,500 square feet of the Saginaw Space to Minerva Surgical, Inc. The lease and
sublease for the Saginaw Space both expired at the end of January 2020. During the period from February 1, 2020 through April 30, 2020, we subleased approximately 3,400
square feet at 101 Saginaw Drive from Minerva Surgical, Inc. The sublease expired at the end of April 2020.
We entered into the initial lease with MetLife for our facilities in Redwood City in 2004 and the RWC lease has been amended multiple times since then to adjust the leased
space and terms of the Lease. In February 2019, we entered into an Eighth Amendment to the Lease (the “Eighth Amendment”) with MetLife with respect to the Penobscot
Space and the 501 Chesapeake Space to extend the term of the Lease for additional periods. Pursuant to the Eighth Amendment, the term of the lease of the Penobscot Space has
been extended through May 2027. The lease term for the 501 Chesapeake Space has been extended to May 2029. We have one (1) option to extend the term of the lease for the
Penobscot Space for five (5) years, and one (1) separate option to extend the term of the lease for the 501 Chesapeake Space for five (5) years.
We incurred $3.6 million of capital improvement costs related to the facilities leased from MetLife through December 31, 2012. During 2011 and 2012, we requested and
received $3.1 million of reimbursements from the landlord for the tenant improvement and HVAC allowances for the completed construction. The reimbursements were
recorded once cash was received. In those fiscal periods prior to January 1, 2019, we recorded reimbursements from the landlord for tenant improvements as liabilities in the
consolidated balance sheets and we amortized the reimbursements on a straight line basis over the term of the RWC Lease as a reduction to rent expense. On January 1, 2019 we
adopted ASU 2016-02 and related amendments, Leases (Topic 842) (“ASC 842”), which provided a new basis of accounting for leases. Under the provisions of ASC 842, we
reclassified lease incentive obligations as operating lease right-of-use assets in the consolidated balance sheets. Rent expense for the Redwood City properties is recognized on a
straight-line basis over the term of the RWC Lease.
We are required to restore certain areas 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 make adjustments if our estimates change. We recorded asset retirement obligations of
$0.2 million as of December 31, 2020 and 2019, which are included in other liabilities on the consolidated balance sheets. Accretion expense related to our asset retirement
obligations was nominal in 2020 and 2019.
Pursuant to the terms of the RWC Lease, we exercised our right to deliver a letter of credit in lieu of a security deposit. The letter of credit is collateralized by deposit balances
held by the bank in the amount of $1.1 million as of December 31, 2020 and 2019, and are recorded as non-current restricted cash on the consolidated balance sheets.
Finance Leases
In December 2016, we entered into a three-year financing lease agreement with a third party supplier for the purchase of laboratory equipment that was partially financed
through a finance lease of approximately $0.4 million. The lease became effective upon delivery of the equipment, in February 2017 and term of the three-year lease was from
February 2017 and expired in February 2020. This financing agreement was accounted for as a finance lease due to bargain purchase options at the end of the lease. In April
2017, we entered into a three-year financing lease agreement with a third party supplier for the purchase of information technology equipment for approximately $0.3 million.
The effective term the three-year lease was from May 2017 and expired in April 2020.
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Lease costs, amounts included in measurement of lease obligations and other information related to non-cancellable operating leases and finance leases for the year ended
December 31, 2020 and 2019 were as follows (in thousands):
Amortization of right-of-use assets
Interest on lease obligations
Finance lease costs
Operating lease cost
Short-term lease costs
Sublease income
(2)
Total lease cost
(1)
Year Ended December 31,
2020
2019
$
$
152
1
153
3,879
47
(55)
4,024
$
$
217
10
227
4,556
—
(957)
3,826
(1)
(2)
Short-term lease costs on leases with terms of over one month and less than one year.
The Company had no variable lease costs.
Lease costs for the years ended December 31, 2020 and 2019 as compared to year ended December 31, 2018 reflected the effects of adopting the provisions of ASC 842 which
provided a new basis of accounting for leases in 2019. Operating lease costs were $3.2 million for the year ended December 31, 2018, partially offset by sublease income of
$1.1 million. Finance lease payments were $0.3 million for the year ended December 31, 2018.
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Amounts included in measurement of lease obligations:
Cash paid:
Operating cash flows from operating leases
Operating cash flow from finance leases
Financing cash flows from finance leases
Non-cash activity:
Operating Lease - Right-of-use assets obtained in exchange for lease liabilities
Finance Lease - Right-of-use assets obtained in exchange for lease liabilities
Year Ended December 31,
2020
2019
$
$
$
$
$
2,816
1
60
—
—
$
$
$
$
$
3,279
10
242
26,617
493
Operating Lease
Finance Lease
Other information:
Weighted-average remaining lease term (in years)
Weighted-average discount rate
5.5 years
6.6 %
As of December 31, 2020, our maturity analyses of annual undiscounted cash flows of the non-cancellable operating leases are as follows (in thousands):
Years ending December 31,
Operating Leases
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less: imputed interest
Lease obligations
Subsequent Event
$
$
—
5.0 %
4,197
4,285
4,589
4,726
4,868
8,626
31,291
6,340
24,951
In the first quarter of 2021, we entered into a lease agreement with ARE-San Francisco No. 63, LLC (“ARE”) to lease a portion of a facility comprising approximately 36,593
rentable square feet in San Carlos, California to serve as additional office and research and development laboratory space (the “San Carlos Space”). We expect to commence
occupancy of the San Carlos Space in November 2021 once tenant improvements are substantially completed by ARE in accordance with the construction plan. For additional
information and a maturity analyses of the estimated annual undiscounted cash flows of the operating lease, see Note 17, “Subsequent Events”
Other Commitments
We enter into supply and service arrangements in the normal course of business. Supply arrangements are primarily for fixed-price manufacture and supply. Service agreements
are primarily for the development of manufacturing processes and certain studies. Commitments under service agreements are subject to cancellation at our discretion which
may require payment of certain cancellation fees. The timing of completion of service arrangements is subject to variability in estimates of the time required to complete the
work.
143
The following table provides quantitative data regarding our other commitments. Future minimum payments reflect amounts that we expect to pay including potential
obligations under services agreements subject to risk of cancellation by us (in thousands):
Other Commitment Agreement Type
Manufacture and supply agreement with expected future payment date of December 2022
Development and manufacturing services agreements
Total other commitments
Agreement Date
April 2016
September 2019
Future Minimum
Payment
$
$
320
2,341
2,661
Credit Facility
In June 30, 2017, we entered into a credit facility (the “Credit Facility”) with Western Alliance Bank consisting of term loans (“Term Debt”) up to $10.0 million, and advances
(“Advances”) under a revolving line of credit (“Revolving Line of Credit”) up to $5.0 million with an accounts receivable borrowing base of 80% of eligible accounts
receivable. At December 31, 2020 and 2019, we have not drawn from the Credit Facility. We may draw on the Term Debt and the Revolving Line of Credit at any time prior to
October 1, 2021 and October 1, 2024, respectively. On October 1, 2024 loans drawn under the Term Debt mature and the Revolving Line of Credit terminate. Loans made
under the Term Debt bear interest through maturity equal to the greater of (i) 3.75% or (ii) the sum of (A) Index Rate (prime rate published in the Money Rates section of the
Western Edition of The Wall Street Journal plus (B) 0.50%. Advances made under the Revolving Line of Credit bear interest at a variable annual rate equal to the equal to the
greater of (i) 4.25% or (ii) the sum of (A) the prime rate plus (B) 1.0%.
Our obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. The Credit Facility includes a
number of customary covenants and restrictive financial covenants including meeting minimum product revenue levels and maintaining certain minimum cash levels with the
lender. The Credit Facility’s financial covenants restrict the ability of the Company to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay
dividends or make other distributions, make investments, create liens, sell assets, or sell certain assets held at foreign subsidiaries. A failure to comply with these covenants
could permit the lender to exercise remedies against us and the collateral securing the Credit Facility, including foreclosure of our properties securing the Credit Facilities and
our cash. At December 31, 2020, we were in compliance with the covenants for the Credit Facility.
The Credit Facility allows for interest-only payments on the Term Debt through November 1, 2022. Monthly payments of principal and interest on the Term Debt are required
following the applicable amortization date. We may elect to prepay in full the Term Debt and Advances under the Revolving Line of Credit at any time.
Legal Proceedings
We are not currently a party to any material pending 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 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.
Impact of COVID-19
We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent
to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are
highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new
information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international
markets.
144
To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our manufacturing
and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers. Furthermore, our
ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our
customers with whom we collaborate. We believe that these disruptions have had a negative impact on revenue for the year ended December 31, 2020, although we are unable
to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues. The extent to which the pandemic may impact our
business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.
In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of
our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-March 2020 through
the end of April in accordance with these Orders. In May 2020, we initiated limited R&D operations and have gradually ramped up operations such that we are currently
utilizing the majority of our normal R&D capacity. Additionally, we resumed small scale manufacturing at our Redwood City pilot plant in May 2020.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain
disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.
As of the date of issuance of these consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or
results of operations in the future is uncertain.
Note 14. Related Party Transactions
Molecular Assemblies, Inc.
In June 2020, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc. (“MAI”) pursuant to which we purchased 1,587,050 shares of MAI's Series A
preferred stock for $1.0 million. In connection with the transaction,
John Nicols, our President and Chief Executive Officer, also joined MAI’s board of directors. Concurrently with our initial equity investment, we entered into a Master
Collaboration and Research Agreement with MAI (the “MAI Agreement”), pursuant to which we are performing services utilizing our CodeEvolver protein engineering
platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock.
®
We received 714,171 shares of MAI's Series A preferred stock from research and development services with MAI and we recognized $0.9 million in research and development
revenue from these services with MAI in the year ended December 31, 2020. Our investment in MAI Series A preferred stock was $1.5 million at December 31, 2020. At
December 31, 2020, we had $0.5 million in contract asset due from MAI for services rendered. Payment for the services rendered was subsequently received in the form of
additional MAI Series A preferred stock in the first quarter of 2021. For addition information, see Note 5, "Collaborative Arrangements."
Arzeda Corp.
In November 2020, we entered into the SynBio Innovation Accelerator (“Accelerator”) collaboration with Casdin Capital, LLC ("Casdin"). The Accelerator is an informal
collaboration with no commitment, designed to invest in the bio-production space to stimulate innovation which may deliver products leveraging the engineering technology and
operational capability of Codexis and the resources, network and investment processes of Casdin, a shareholder with greater than a 5% ownership in Codexis' publicly traded
common stock. The first Accelerator investment was in an available-for-sale non-marketable interest-bearing debt securities which are convertible subordinated notes issued by
Arzeda Corp., an early-stage computational protein design company. The cost to acquire and the carrying value of the investment as of December 31, 2020 was $1.0 million.
For additional information, see Note 7, “Fair Value Measurements.”
AstraZeneca PLC
Pam P. Cheng, who served as a member of our board of directors until June 2020, joined AstraZeneca PLC as Executive Vice President, Operations and Information
Technology in June 2015. We sold biocatalyst products to AstraZeneca PLC and its controlled purchasing agents and contract manufacturers. We recognized $0.1 million of
revenue in 2020 through the date of Ms. Cheng’s departure from our board of directors. We recognized $1.0 million and $0.6 million of revenue from transactions with
AstraZeneca in the years ended December 30, 2019 and 2018, respectively. At December 31, 2020 and 2019, we had nil
145
and $0.3 million of related party receivables from AstraZeneca PLC and its controlled purchasing agents and contract manufacturers, respectively.
Settlement of Short Swing Profit Claim
In August 2019, we recorded approximately $77 thousand related to the short swing profit settlement remitted by a shareholder of our company under Section 16(b) of the
Securities Exchange Act of 1934, as amended. We recognized the proceeds as an increase to additional paid-in capital in the consolidated balance sheets as of December 31,
2019 and consolidated statements of stockholders’ equity as well as in cash provided by financing activities in the consolidated statements of cash flows for the year ended
December 31, 2019.
Note 15. Segment, Geographical and Other Revenue Information
Segment Information
We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics.
We report corporate-related expenses such as legal, accounting, information technology, and other costs that are not otherwise included in our reportable business segments as
“Corporate costs.” All items not included in income (loss) from operations are excluded from the business segments.
We manage our assets on a total company basis, not by business segment, as the majority of our operating assets are shared or commingled. Our CODM does not review asset
information by business segment in assessing performance or allocating resources, and accordingly, we do not report asset information by business segment.
Performance Enzymes
We initially commercialized our CodeEvolver protein engineering technology platform and products in the pharmaceuticals market, and to date this continues to be our largest
market served. Our customers, which include many 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 customized enzymes for use in other industrial markets. These markets consist of several large industrial
verticals, including food and food ingredients, animal feed, flavors, fragrances, and agricultural chemicals. We also use our technology to develop enzymes for customers using
NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications.
®
Novel Biotherapeutics
®
We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. 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,
such as its activity, stability or immunogenicity. Most notable is 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 developed a pipeline of other biotherapeutic drug candidates, which are in preclinical development, and in which we expect to continue to make additional
investments with the aim of advancing additional product candidates targeting other therapeutic areas. In March 2020 we entered into the Takeda Agreement with Takeda under
which we will research and develop protein sequences for use in gene therapy products for certain diseases.
Factors considered in determining the two reportable segments of the Company include the nature of business activities, the management structure directly accountable to our
CODM for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors. Our CODM regularly
reviews our segments and the approach provided by management for performance evaluation and resource allocation.
Operating expenses that directly support the segment activity are allocated based on segment headcount, revenue contribution or activity of the business units within the
segments, based on the corporate activity type provided to the segment. The expense allocation excludes certain corporate costs that are separately managed from the segments.
This provides the CODM with more meaningful segment profitability reporting to support operating decisions and allocate resources.
146
The following tables provide financial information by our reportable business segments along with a reconciliation to consolidated loss before income taxes (in thousands):
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
(1)
(1)
Total segment costs and operating expenses
Income (loss) from operations
Corporate costs
Depreciation and amortization
(2)
Loss before income taxes
Year Ended December 31, 2020
Year Ended December 31, 2019
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
$
$
30,220
17,886
48,106
13,742
20,923
9,597
44,262
3,844
$
$
—
20,950
20,950
—
21,705
2,355
24,060
(3,110)
$
$
30,220 $
38,836
69,056
13,742
42,628
11,952
68,322
734 $
(22,306)
(2,099)
(23,671)
29,465
28,691
58,156
15,632
19,380
8,462
43,474
14,682
$
$
—
10,302
10,302
—
13,278
2,222
15,500
(5,198)
$
$
29,465
38,993
68,458
15,632
32,658
10,684
58,974
9,484
(19,624)
(1,778)
(11,918)
(1)
Research and development expenses and selling, general and administrative expenses exclude depreciation and amortization of finance leases.
(2)
Corporate costs include unallocated selling, general and administrative expense, interest income, and other income and expenses.
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
(1)
(1)
Total segment costs and operating expenses
Income (loss) from operations
Corporate costs
Depreciation
(2)
Loss before income taxes
Year Ended December 31, 2019
Year Ended December 31, 2018
Performance
Enzymes
Novel Biotherapeutics
Total
Performance
Enzymes
Novel Biotherapeutics
Total
$
$
29,465
28,691
58,156
15,632
19,380
8,462
43,474
14,682
$
$
—
10,302
10,302
—
13,278
2,222
15,500
(5,198)
$
$
29,465 $
38,993
68,458
15,632
32,658
10,684
58,974
9,484 $
(19,624)
(1,778)
(11,918)
25,590
21,483
47,073
12,620
18,924
7,538
39,082
7,991
$
$
—
13,521
13,521
—
10,185
771
10,956
2,565
$
$
25,590
35,004
60,594
12,620
29,109
8,309
50,038
10,556
(20,324)
(1,147)
(10,915)
(1)
For the year ended December 31, 2019, research and development expenses and selling, general and administrative expenses exclude depreciation and amortization of finance leases. For
the year ended December 31, 2018, research and development expenses and selling, general and administrative expenses exclude depreciation.
(2)
Corporate costs include unallocated selling, general and administrative expense, interest income, and other income and expenses.
147
The following table provides stock-based compensation expense included in income (loss) from operations (in thousands):
Performance Enzymes
Novel Biotherapeutics
Corporate cost
Total
Significant Customers
Customers that each accounted for 10% or more of our total revenues were as follows:
Merck
Nestlé Health Science
Novartis
Tate & Lyle
Takeda Pharmaceutical Co. Ltd.
* Percentage was less than 10%
2020
Years Ended December 31,
2019
2018
$
$
2,970
768
3,990
7,728
$
$
2,303
695
3,945
6,943
$
$
2,591
338
4,960
7,889
Percentage of Total Revenues
For the Years Ended December 31,
2019
2020
2018
26 %
11 %
*
*
19 %
28 %
15 %
23 %
*
*
29 %
22 %
*
13 %
*
38 %
10 %
*
Customers that each accounted for 10% or more of accounts receivable balances as of the periods presented as follows:
Merck & Co.
Nestlé Health Science
Novartis
* Percentage was less than 10%
Geographical Information
Percentage of Accounts Receivables
As Of December 31,
2020
2019
32 %
13 %
25 %
Geographic revenues are identified by the location of the customer and consist of the following (in thousands):
Revenues
Americas
EMEA
APAC
Total revenues
Identifiable long-lived assets by location was as follows (in thousands):
United States
2020
Year Ended December 31, 2020
2019
2018
$
$
24,352 $
19,257
25,447
69,056 $
13,039 $
37,133
18,286
68,458 $
15,370
22,361
22,863
60,594
December 31,
2020
2019
$
31,176 $
30,387
148
Identifiable goodwill was as follows (in thousands):`
Goodwill
Performance Enzymes
$
2,463 $
Year Ended December 31, 2020
Novel Biotherapeutics
Total
Performance Enzymes
Year Ended December 31, 2019
Novel Biotherapeutics
Total
778 $
3,241 $
2,463 $
778 $
3,241
Note 16. Allowance for Credit Losses
The following summarizes the financing receivables allowance for credit losses (in thousands):
Beginning Balance, January 1, 2020
Current year provision
Ending Balance, December 31, 2020
Year Ended December 31, 2020
34
40
74
$
$
The following tables below summarizes accounts receivable by aging category (in thousands):
Accounts receivable
Accounts receivable
$
$
31-60 Days
61-90 Days
91 Days and over
Total over 31 Days
Current
Total balance
688 $
7 $
27 $
722 $
13,172 $
13,894
December 31, 2020
31-60 Days
61-90 Days
91 Days and over
Total over 31 Days
Current
Total balance
191 $
8 $
62 $
261 $
8,802 $
9,063
December 31, 2019
149
Note 17. Subsequent Events
In the first quarter of 2021, we entered into a lease agreement with ARE-San Francisco No. 63, LLC (“ARE”) to lease a portion of a facility comprising approximately 36,593
rentable square feet in San Carlos, California to serve as additional office and research and development laboratory space (the “San Carlos Space”). We expect to commence
occupancy of the San Carlos Space in November 2021 once tenant improvements are substantially completed by ARE in accordance with the construction plan. The
construction plan includes Codexis-specific improvements necessary for operations at the lease commencement date. The budget provides a net tenant improvement allowance
of $6.3 million plus an additional allowance of up to $2.7 million. If we use the additional allowance, ARE will have an enforceable right to payment by us in the form of equal
monthly additional rent payments at a certain interest rate through the lease term. The useful life of improvements made under the additional allowance are the lesser of useful
life or lease term. The terms include an initial annualized base rent of approximately $2.5 million which are subject to scheduled 3% annual rent increases, plus certain operating
expenses. The lease has a 10-year term with one option to extend the term for an additional period of 5 years. We have provided ARE with an approximately $0.4 million
security deposit in the form of a letter of credit. We have the right to sublease the facility, subject to landlord consent.
An estimated maturity analyses of the annual undiscounted cash flows of the operating lease is as follows (in thousands):
Years ending December 31,
Operating lease
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less: imputed interest
Lease obligations
$
$
208
2,091
2,582
2,659
2,739
17,690
27,969
5,328
22,641
150
The following table provides the selected quarterly financial data for 2020 and 2019:
Selected Quarterly Financial Data (Unaudited)
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Quarter Ended
(1)
December 31,
2020
(3)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
(3)
September 30,
2019
June 30,
2019
March 31,
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12,215
8,819
21,034
5,860
10,355
8,741
24,956
(3,922)
(3,912)
(3,920)
(0.06)
(0.06)
60,483
60,483
8,401
9,984
18,385
3,642
12,010
8,797
24,449
(6,064)
(6,075)
(6,094)
(0.10)
(0.10)
$
$
$
$
$
$
$
$
$
4,504
10,463
14,967
1,699
10,853
8,522
21,074
(6,107)
(6,037)
(6,344)
(0.11)
(0.11)
$
$
$
$
$
$
$
$
$
5,100
9,570
14,670
2,541
10,967
8,989
22,497
(7,827)
(7,647)
(7,652)
(0.13)
(0.13)
$
$
$
$
$
$
$
$
$
59,061
59,000
58,888
59,061
59,000
58,888
$
$
$
$
$
$
$
$
$
4,877
13,773
18,650
3,402
8,872
7,322
19,596
(946)
(630)
(635)
(0.01)
(0.01)
58,620
58,620
10,351
11,555
21,906
5,067
8,711
7,869
21,647
259
336
343
0.01
0.01
$
$
$
$
$
$
$
$
$
6,249
6,070
12,319
2,772
8,274
7,896
18,942
(6,623)
(6,491)
(6,507)
(0.12)
(0.12)
$
$
$
$
$
$
$
$
$
7,988
7,595
15,583
4,391
8,016
8,415
20,822
(5,239)
(5,133)
(5,136)
(0.09)
(0.09)
58,287
54,954
54,170
61,412
54,954
54,170
Revenues:
Product revenue
Research and development revenue
Total revenues
Costs and operating expenses:
Cost of product revenue
Research and development
Selling, general and administrative
Total costs and operating expenses
Income (loss) from operations
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 income (loss) per share, basic
Weighted average common shares used in
computing net income (loss) per share, diluted
(2)
(2)
(1)
Amounts were computed independently for each quarter, and the sum of the quarters may not total the annual amounts due to rounding differences.
(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, PBOs, and cash bonus awards are granted to certain employees and executives 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 estimate revisions of approximately $(0.1) million in 2020 and $(0.9)
million in 2019, primarily in selling, general and administrative expense.
151
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, 2020. 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, 2020 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, 2020 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, 2020. We reviewed the results of management’s assessment with our Audit Committee.
Our internal control over financial reporting as of December 31, 2020 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 were no changes 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 or 15d-15 of the Exchange Act, which occurred during the fourth fiscal quarter of the year ended December 31, 2020, which has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting. Because of the impact of COVID-19 shelter-in-place orders, we have made
minor modifications to existing controls involving evidence of review-type controls. Further, we implemented internal controls to ensure we adequately evaluated impairment of
financial instruments and goodwill, respectively, in properly assessing and facilitating the impact and adoption on January 1, 2020 of ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326) and ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. There were no significant
changes to our internal control over financial reporting due to the adoption of new standards.
152
Not applicable.
ITEM 9B. OTHER INFORMATION
153
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 the 2021 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 2021 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 2021 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 2021 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 2021 Proxy Statement under the heading “Ratification of
Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
154
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.
155
Exhibit
No.
EXHIBIT INDEX
Description
3.1
3.2
3.3
4.1
4.2
4.3
10.1A*
10.1B*
10.1C*
10.1D*
10.1E
10.1F
10.1G
10.1H
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).
Reference is made to Exhibits 3.1 through 3.3.
Form of the Company’s Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2012, filed on August 9, 2012).
Description of the Common Stock of Codexis, Inc. (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2019, filed on February 28, 2020).
Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of February 1, 2004.
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of June 1, 2004.
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 9, 2007.
Amendment to Lease Agreement by and between the Company and Metropolitan Life Insurance Company dated as of March 31, 2008.
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 11, 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).
156
Exhibit
No.
10.1I***
Eighth Amendment to Lease, dated as of February 8, 2019, by and between the Company and Metropolitan Life Insurance Company
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed
on May 8, 2019).
Description
10.2+*
10.3A+
10.3B+
10.3C+
10.3D+
10.3E+
10.3F+
10.4*
10.5+
10.6
10.7A†
10.7B
10.8+
10.9A+
Codexis, Inc. 2010 Equity Incentive Award Plan and Form of Stock Option Agreement.
Codexis, Inc. 2019 Incentive Award Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-
8 (File No. 333-232262) filed with the SEC on June 21, 2019).
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under 2019 Incentive Award Plan
(incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (File No. 333-232262) filed with the
SEC on June 21, 2019).
Form of Stock Option Grant Notice and Stock Option Agreement under 2019 Incentive Award Plan (incorporated by reference to Exhibit
99.3 to the Company's Registration Statement on Form S-8 (File No. 333-232262) filed with the SEC on June 21, 2019).
Form of Stock Option Grant Notice and Stock Option Agreement under 2019 Incentive Award Plan (incorporated by reference to Exhibit
99.4 to the Company's Registration Statement on Form S-8 (File No. 333-232262) filed with the SEC on June 21, 2019).
Form of Performance Stock Unit Award Grant Notice and Performance Stock Unit Award Agreement under 2019 Incentive Award Plan
(incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (File No. 333-232262) filed with the
SEC on June 21, 2019).
Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under 2019 Incentive Award Plan (incorporated
by reference to Exhibit 99.6 to the Company's Registration Statement on Form S-8 (File No. 333-232262) filed with the SEC on June 21,
2019).
Form of Indemnification Agreement between the Company and each of its directors, officers and certain employees.
Form of Amended and Restated Change in Control Severance Agreement between the Company and certain of its officers (incorporated
by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed on
November 6, 2019).
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 Ross Taylor effective as of August 4, 2019 (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed on November 6, 2019).
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).
157
Exhibit
No.
Description
10.9B+
10.9C+
10.9D+
10.9E+
10.10A†
10.10B†
10.10C
10.10D
10.10E
10.11A†
10.11B†
10.11C†
10.12A†
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).
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, filed on August 9, 2016).
Amendment to Employment Agreement between the Company and John Nicols, dated November 16, 2017 (incorporated by reference to
Exhibit 10.8E to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 15, 2018).
Amendment to Employment Agreement between the Company and John Nicols, effective as of June 28, 2019, (incorporated by reference
to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed on November 6, 2019).
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 (incorporated by reference to Exhibit 10.11D to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015, filed on March 8, 2016).
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 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2016, filed on November 8, 2016).
Global Development, Option and License Agreement by and among the Company, Societé des Produits Nestlé S.A., formerly known as
Nestec Ltd. (“Nestlé Health Science”), effective as of October 12, 2017 (incorporated by reference to Exhibit 10.10 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 15, 2018).
Amendment No. 1 to Global Development, Option and License Agreement by and among the Company, Nestec Ltd. and Nestlé
Amendment No. 1 to Global Development, Option and License Agreement by and among the Company, Nestec Ltd. and Nestlé Health
Science S.A., effective as of July 26, 2018.(incorporated by reference to Exhibit 10.12B to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2018, filed on March 3, 2019). Science S.A., effective as of July 26, 2018.
Letter Agreement to Global Development, Option and License Agreement by and among the Company, Nestec Ltd. and Nestlé Health
Science S.A., effective as of December 12, 2018. (incorporated by reference to Exhibit 10.12C to the Company’s Annual Report on Form
10-K for the year ended December 31, 2018, filed on March 3, 2019).
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).
158
Exhibit
No.
10.12B†
10.13A†
10.13B†
10.13C***
10.14***
10.15***
10.16A†
10.16B†
10.16C†
10.16D†
10.16E†
10.16F
10.16G
Description
Letter Agreement, effective as of February 21, 2020, by and between Codexis, Inc. and GlaxoSmithKline Intellectual Property
Development Limited (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2020, filed on May 8, 2020).
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).
Amendment No. 1 to Platform Technology Transfer and License Agreement by and between the Company and Merck Sharp & Dohme
Corp., dated as of October 10, 2018, incorporated by reference to Exhibit 10.14A to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2018, filed on March 3, 2019).
Amendment No. 2 to Platform Technology Transfer and License Agreement by and between Merck and the Company dated as of
January 1, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2019, filed on May 8, 2019).
Platform Technology Transfer and License Agreement, dated May 2, 2019, by and between the Company and Novartis Pharma AG
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed
on August 6, 2019).
Strategic Collaboration and License Agreement by and between Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of
Takeda Pharmaceutical Company Limited and the Company, dated March 23, 2020 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 8, 2020).
Loan and Security Agreement effective as of June 30, 2017 by and between the Company and Western Alliance Bank (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed on August 9,
2017).
First Amendment to Loan and Security Agreement effective as of September 28, 2017 by and between the Company and Western
Alliance Bank (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2017, filed on November 9, 2017).
Second Amendment to Loan and Security Agreement effective as of November 7, 2017 by and between the Company and Western
Alliance Bank (incorporated by reference to Exhibit 10.15B to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017, filed on March 15, 2018).
Third Amendment to Loan and Security Agreement by and between the Company and Western Alliance Bank dated as of June 29, 2018
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed
on August 9, 2018).
Fourth Amendment to Loan and Security Agreement effective as of September 28, 2018 by and between the Company and Western
Alliance Bank (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2018, filed on November 9, 2018).
Fifth Amendment to Loan and Security Agreement effective as of January 23, 2019 by and between the Company and Western Alliance
Bank (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2019, filed on May 8, 2019).
Sixth Amendment to Loan and Security Agreement by and between the Company and Western Alliance Bank dated as of July 11, 2019
(incorporated by reference to Exhibit 10.1A to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2019, filed on November 6, 2019).
159
Exhibit
No.
10.16H
10.16I
23.1
24.1
31.1
31.2
32.1**
101
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Description
Seventh Amendment to Loan and Security Agreement by and between the Company and Western Alliance Bank dated as of September
30, 2019 (incorporated by reference to Exhibit 10.1B to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2019, filed on November 6, 2019).
Eighth Amendment to Loan and Security Agreement by and between the Company and Western Alliance Bank dated as of September
30, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2020, filed on November 6, 2020.)
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, 2020 formatted in Inline
Extensible Business Reporting Language (iXBRL) includes: (i) Consolidated Balance Sheets at December 31, 2020 and December 31,
2019, (ii) Consolidated Statements of Operations for the years ended December 31, 2020, December 31, 2019 and December 31, 2018,
(iii) Consolidated Statements of Cash Flows for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, (vi)
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, December 31, 2019 and December 31, 2018
and (vii) Notes to Consolidated Financial Statements.
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in Inline
XBRL and contained in Exhibit 101.
+ 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.
*** Portions of the exhibit, marked by brackets, have been omitted because the omitted information is (i) not material and (ii) would be competitively harmful if publicly
disclosed.
160
Not applicable.
ITEM 16. FORM 10-K SUMMARY
161
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 1, 2021
CODEXIS, INC.
By:
/s/ John J. Nicols
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, Ross Taylor 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
/s/ John J. Nicols
John J. Nicols
/s/ Ross Taylor
Ross Taylor
/s/ Bernard J. Kelley
Bernard J. Kelley
/s/ Jennifer Aaker
Jennifer Aaker
/s/ Stephen Dilly
Stephen Dilly
/s/ Byron L. Dorgan
Byron L. Dorgan
/s/ Esther Martinborough
Esther Martinborough
/s/ Alison Moore
Alison Moore
/s/ David V. Smith
David V. Smith
/s/ Dennis P. Wolf
Dennis P. Wolf
/s/ Patrick Y. Yang
Patrick Y. Yang
TITLE
DATE
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date:
March 1, 2021
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
162
Date:
Date:
Date:
Date:
Date:
Date:
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
Date:
March 1, 2021
Date:
Date:
Date:
March 1, 2021
March 1, 2021
March 1, 2021
Consent of Independent Registered Public Accounting Firm
Codexis, Inc.
Redwood City, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-167752, 333-172166, 333-179903, 333-187711, 333-194524, 333-
202596, 333-210022, 333-216587, 333-223693, 333-224885, 333-230037, and 333-232262) and Form S-3ASR (No. 333-228693) of Codexis, Inc. of our reports dated March 1,
2021, relating to the consolidated financial statements and the effectiveness of Codexis, Inc.’s internal control over financial reporting, which appear in this Form 10K.
/s/BDO USA, LLP
San Jose, California
March 1, 2021
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
R-221 (11/20)
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 1, 2021
/s/John J. Nicols
John J. Nicols
President and Chief Executive Officer
Exhibit 31.2
I, Ross Taylor, 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 1, 2021
/s/Ross Taylor
Ross Taylor
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, 2020, as filed with the Securities and
Exchange Commission (the “Report”), John J. Nicols, President and Chief Executive Officer of the Company and Ross Taylor, 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 1, 2021
/s/John J. Nicols
John J. Nicols
President and Chief Executive Officer
/s/Ross Taylor
Ross Taylor
Senior Vice President and Chief Financial Officer
Corporate Headquarters
200 Penobscot Drive
Redwood City, CA 94063, USA
+1 (650) 421-8100
www.codexis.com
©2021 Codexis, Inc. All rights reserved.