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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34705
___________________________
Codexis, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________
| | | | | | | | |
Delaware | | 71-0872999 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | |
200 Penobscot Drive, | Redwood City, | California | | 94063 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (650) 421-8100
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class | Trading | Name of Each Exchange on Which Registered |
| Symbol(s) | |
Common Stock, par value $0.0001 per share | CDXS | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-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 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021, there were 64,489,793 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.
Codexis, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2021
TABLE OF CONTENTS
| | | | | | | | |
| PAGE NUMBER |
|
PART I. FINANCIAL INFORMATION |
| | |
ITEM 1. | | |
| | |
| | |
| | |
| | |
| | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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ITEM 1. | | |
ITEM 1A. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
ITEM 5. | | |
ITEM 6. | | |
| |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Codexis, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Per Share Amounts)
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 139,748 | | | $ | 149,117 | |
Restricted cash, current | 594 | | | 638 | |
Investment in non-marketable debt security | 1,067 | | | 1,000 | |
Financial assets: | | | |
Accounts receivable | 11,368 | | | 13,894 | |
Contract assets | 5,143 | | | 4,526 | |
Unbilled receivables | 11,298 | | | 10,942 | |
Total financial assets | 27,809 | | | 29,362 | |
Less: allowances | (74) | | | (74) | |
Total financial assets, net | 27,735 | | | 29,288 | |
Inventories | 1,029 | | | 964 | |
Prepaid expenses and other current assets | 3,390 | | | 3,416 | |
Total current assets | 173,563 | | | 184,423 | |
Restricted cash | 1,519 | | | 1,062 | |
Investment in non-marketable equity securities | 2,350 | | | 1,450 | |
Right-of-use assets - Operating leases, net | 20,758 | | | 21,382 | |
Right-of-use assets - Finance leases, net | 94 | | | 119 | |
Property and equipment, net | 10,396 | | | 9,675 | |
Goodwill | 3,241 | | | 3,241 | |
Other non-current assets | 249 | | | 294 | |
Total assets | $ | 212,170 | | | $ | 221,646 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 3,569 | | | $ | 2,970 | |
Accrued compensation | 4,953 | | | 7,288 | |
Other accrued liabilities | 9,516 | | | 10,272 | |
Current portion of lease obligations - Operating leases | 2,618 | | | 2,627 | |
Deferred revenue | 1,897 | | | 1,824 | |
Total current liabilities | 22,553 | | | 24,981 | |
Deferred revenue, net of current portion | 2,900 | | | 2,967 | |
Long-term lease obligations - Operating leases | 21,701 | | | 22,324 | |
Other long-term liabilities | 1,277 | | | 1,271 | |
Total liabilities | 48,431 | | | 51,543 | |
Commitments and Contingencies (Note 11) | | | |
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; 64,488 shares and 64,283 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 6 | | | 6 | |
Additional paid-in capital | 539,220 | | | 536,516 | |
Accumulated deficit | (375,487) | | | (366,419) | |
Total stockholders' equity | 163,739 | | | 170,103 | |
Total liabilities and stockholders' equity | $ | 212,170 | | | $ | 221,646 | |
| | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Codexis, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Amounts)
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Revenues: | | | | | | | |
Product revenue | $ | 10,226 | | | $ | 5,100 | | | | | |
Research and development revenue | 7,806 | | | 9,570 | | | | | |
Total revenues | 18,032 | | | 14,670 | | | | | |
Costs and operating expenses: | | | | | | | |
Cost of product revenue | 4,218 | | | 2,541 | | | | | |
Research and development | 11,571 | | | 10,967 | | | | | |
Selling, general and administrative | 11,398 | | | 8,989 | | | | | |
Total costs and operating expenses | 27,187 | | | 22,497 | | | | | |
Loss from operations | (9,155) | | | (7,827) | | | | | |
Interest income | 177 | | | 266 | | | | | |
Other expenses, net | (88) | | | (86) | | | | | |
Loss before income taxes | (9,066) | | | (7,647) | | | | | |
Provision for income taxes | 2 | | | 5 | | | | | |
Net loss | $ | (9,068) | | | $ | (7,652) | | | | | |
| | | | | | | |
Net loss per share, basic and diluted | $ | (0.14) | | | $ | (0.13) | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average common stock shares used in computing net loss per share, basic and diluted | 64,290 | | | 58,888 | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
Codexis, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional paid-in Capital | | Accumulated Deficit | | Total Stockholders' Equity |
Three months ended March 31, 2021 | | Shares | | Amount | | | |
| | | | | | | | | | |
Balance as of January 1, 2021 | | 64,283 | | | $ | 6 | | | $ | 536,516 | | | $ | (366,419) | | | $ | 170,103 | |
Exercise of stock options | | 118 | | | — | | | 1,223 | | | — | | | 1,223 | |
Release of stock awards | | 139 | | | — | | | — | | | — | | | — | |
Employee stock-based compensation | | — | | | — | | | 2,626 | | | — | | | 2,626 | |
Non-employee stock-based compensation | | — | | | — | | | 61 | | | — | | | 61 | |
Taxes paid related to net share settlement of equity awards | | (52) | | | — | | | (1,206) | | | — | | | (1,206) | |
Net loss | | — | | | — | | | — | | | (9,068) | | | (9,068) | |
Balance as of March 31, 2021 | | 64,488 | | | $ | 6 | | | $ | 539,220 | | | $ | (375,487) | | | $ | 163,739 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional paid-in Capital | | Accumulated Deficit | | Total Stockholders' Equity |
Three months ended March 31, 2020 | | Shares | | Amount | | | |
| | | | | | | | | | |
Balance as of January 1, 2020 | | 58,877 | | | $ | 6 | | | $ | 447,920 | | | $ | (342,409) | | | $ | 105,517 | |
Exercise of stock options | | 5 | | | — | | | 39 | | | — | | | 39 | |
Release of stock awards | | 219 | | | — | | | — | | | — | | | — | |
Employee stock-based compensation | | — | | | — | | | 2,169 | | | — | | | 2,169 | |
Taxes paid related to net share settlement of equity awards | | (84) | | | — | | | (1,007) | | | — | | | (1,007) | |
Net loss | | — | | | — | | | — | | | (7,652) | | | (7,652) | |
Balance as of March 31, 2020 | | 59,017 | | | $ | 6 | | | $ | 449,121 | | | $ | (350,061) | | | $ | 99,066 | |
| | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
Codexis, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in Thousands)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Operating activities: | | | |
Net loss | $ | (9,068) | | | $ | (7,652) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation | 659 | | | 438 | |
Amortization expense - right-of-use assets - operating and finance leases | 649 | | | 692 | |
Stock-based compensation | 2,687 | | | 2,169 | |
Equity securities earned from research and development activities | (132) | | | — | |
Other non-cash items | (84) | | | — | |
Changes in operating assets and liabilities: | | | |
Financial assets, net | 1,103 | | | (2,763) | |
Inventories | (65) | | | (330) | |
Prepaid expenses and other assets | 70 | | | (838) | |
Accounts payable | 400 | | | (246) | |
Accrued compensation and other accrued liabilities | (1,731) | | | 1,237 | |
Other long-term liabilities | (617) | | | (624) | |
Deferred revenue | (311) | | | 6,492 | |
Net cash used in operating activities | (6,440) | | | (1,425) | |
Investing activities: | | | |
Purchase of property and equipment | (2,550) | | | (761) | |
Proceeds from sale of property and equipment | 17 | | | — | |
Net cash used in investing activities | (2,533) | | | (761) | |
Financing activities: | | | |
Proceeds from exercises of stock options | 1,223 | | | 39 | |
Payments of lease obligations - Finance leases | — | | | (51) | |
Taxes paid related to net share settlement of equity awards | (1,206) | | | (1,007) | |
Net cash provided by (used in) financing activities | 17 | | | (1,019) | |
Net decrease in cash, cash equivalents and restricted cash | (8,956) | | | (3,205) | |
Cash, cash equivalents and restricted cash at the beginning of the period | 150,817 | | | 92,221 | |
Cash, cash equivalents and restricted cash at the end of the period | $ | 141,861 | | | $ | 89,016 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Interest paid | $ | 3 | | | $ | 4 | |
| | | |
Supplemental non-cash investing and financing activities: | | | |
Capital expenditures incurred but not yet paid | $ | 579 | | | $ | 182 | |
Assets received for research and development revenue earned | $ | 900 | | | $ | — | |
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets as of March 31, 2021 and 2020 to the total of the same such amounts shown above:
| | | | | | | | | | | | | | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
Cash and cash equivalents | $ | 139,748 | | | $ | 87,327 | | | | | |
Restricted cash, current and non-current | 2,113 | | | 1,689 | | | | | |
Total cash, cash equivalents and restricted cash | $ | 141,861 | | | $ | 89,016 | | | | | |
| | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
Codexis Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business
In these notes to the unaudited condensed 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. This 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 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. The Novartis CodeEvolver® Agreement (our 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 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.
We have been 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 Nestlé Health Science (“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.
In June 2020, we also entered into a Master Collaboration and Research Agreement (the “MAI Agreement”) with Molecular Assemblies, Inc ("MAI") 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 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 Executive Officer, also joined MAI’s board of directors. See Note 14, "Subsequent Event" for additional information.
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 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 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 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 have had a minimal impact on revenue for the three months ended March 31, 2021. 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 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, please read Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying Unaudited Condensed 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") for interim financial information and include all the information and notes required by GAAP for complete financial statements. These interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements. The significant accounting policies used in preparation of the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2021 and 2020, are consistent with those discussed in Note 2 to the audited consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K and are updated below as necessary. There have been no significant changes in our significant accounting policies or
critical accounting estimates since December 31, 2020.
The Unaudited Condensed Consolidated Financial Statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly our financial position as of March 31, 2021, results of our operations for the three months ended March 31, 2021 and 2020, changes in stockholders' equity for the three months ended March 31, 2021 and 2020, and cash flows for the three months ended March 31, 2021 and 2020. The interim results are not necessarily indicative of the results for any future interim period or for the entire year.
The Unaudited Condensed 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.
Use of Estimates
The preparation of our unaudited condensed 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.
Financial Statement Exclusion
The total net loss in the Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, is not different from the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the same periods. Accordingly, the Unaudited Condensed Consolidated Financial Statements exclude the Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020.
Accounting Pronouncements
Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board ("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. We adopted the standard on January 1, 2021 on a modified retrospective basis. The adoption of this standard had no impact on our Unaudited Condensed Consolidated Financial Statements.
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. We adopted the standard on January 1, 2021 on a retrospective basis. The adoption of this standard had no impact on our Unaudited Condensed Consolidated Financial Statements
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 Unaudited Condensed Consolidated Financial Statements upon adoption.
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 for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years with early adoption permitted for fiscal years beginning December 15, 2020. The standard may be adopted on a
modified retrospective or fully retrospective method of transition and on adoption, entities may irrevocably elect the fair value option in accordance with Subtopic 825-10, Financial Instruments—Overall, for any financial instrument that is a convertible security. We believe that the effect of the adoption of ASU 2020-06 will have no impact on our Unaudited Condensed Consolidated Financial Statements and related disclosures.
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 and can be adopted no later than December 1, 2022, with early adoption permitted. The standard may be adopted on a prospective basis. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to elect optional expedients for contract modification; however, we believe that effects of the adoption of ASU 2020-04 will have no impact on our Unaudited Condensed Consolidated Financial Statements and related disclosures.
There have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2021, as compared to the recent accounting pronouncements described in herein, that are of significance or potential significance to us.
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 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 | | Three months ended March 31, 2020 |
| Performance Enzymes | | Novel Biotherapeutics | | Total | | Performance Enzymes | | Novel Biotherapeutics | | Total |
Major products and service: | | | | | | | | | | | |
Product Revenue | $ | 10,226 | | | $ | — | | | $ | 10,226 | | | $ | 5,100 | | | $ | — | | | $ | 5,100 | |
Research and development revenue | 4,003 | | | 3,803 | | | 7,806 | | | 5,774 | | | 3,796 | | | 9,570 | |
Total revenues | $ | 14,229 | | | $ | 3,803 | | | $ | 18,032 | | | $ | 10,874 | | | $ | 3,796 | | | $ | 14,670 | |
| | | | | | | | | | | |
Primary geographical markets: | | | | | | | | | | | |
Americas | $ | 2,871 | | | $ | 2,058 | | | $ | 4,929 | | | $ | 2,999 | | | $ | 2,226 | | | $ | 5,225 | |
EMEA | 4,537 | | | 1,745 | | | 6,282 | | | 4,401 | | | 1,570 | | | 5,971 | |
APAC | 6,821 | | | — | | | 6,821 | | | 3,474 | | | — | | | 3,474 | |
Total revenues | $ | 14,229 | | | $ | 3,803 | | | $ | 18,032 | | | $ | 10,874 | | | $ | 3,796 | | | $ | 14,670 | |
| | | | | | | | | | | |
Contract Balances
The following table presents balances of contract assets, unbilled receivables, contract costs, and contract liabilities (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Contract assets | | $ | 5,143 | | | $ | 4,526 | |
Unbilled receivables | | $ | 11,298 | | | $ | 10,942 | |
Contract costs | | $ | 58 | | | $ | 90 | |
Contract liabilities: deferred revenue | | $ | 4,797 | | | $ | 4,791 | |
We had no asset impairment charges related to contract assets in the three months ended March 31, 2021 and 2020.
During the three months ended March 31, 2021, the increase in contract assets was primarily due to increases in product revenue from contracts subject to over time revenue recognition. The increase in unbilled receivables were primarily due to the timing of billings. The increase in deferred revenue was nominal compared to prior period. During the three months ended March 31, 2020, decreases in contract assets were primarily due to contract assets that were subsequently invoiced as our right to consideration for goods and services became unconditional. Increases in unbilled receivables were primarily due to the timing of billings. The increase in deferred revenue were primarily due to cash advances received in excess of revenue recognized.
We recognized the following revenues (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
Revenue recognized in the period for: | 2021 | | 2020 |
Amounts included in contract liabilities at the beginning of the period: | | | |
Performance obligations satisfied | $ | 862 | | | $ | 57 | |
Changes in the period: | | | |
Changes in the estimated transaction price allocated to performance obligations satisfied in prior periods | $ | 24 | | | $ | (643) | |
Performance obligations satisfied from new activities in the period - contract revenue | 17,146 | | | 15,256 | |
Total revenues | $ | 18,032 | | | $ | 14,670 | |
| | | |
Performance Obligations
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 March 31, 2021.
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 as of March 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2021 | | 2022 | | 2023 | | 2024 and Thereafter | | | | Total |
Product Revenue | $ | 400 | | | $ | 67 | | | $ | 431 | | | $ | 1,923 | | | | | $ | 2,821 | |
Research and development revenue | 1,430 | | | — | | | 546 | | | — | | | | | 1,976 | |
Total revenues | $ | 1,830 | | | $ | 67 | | | $ | 977 | | | $ | 1,923 | | | | | $ | 4,797 | |
| | | | | | | | | | | |
Note 4. Net Loss per Share
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.
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):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2021 | | 2020 |
Shares issuable under the Equity Incentive Plan | 5,497 | | 5,071 |
Note 5. 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 from bifurcated embedded derivatives, which represent share-settled redemption features, are recorded as other expense, net, in the unaudited condensed consolidated statements of operations. 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.
In the three months ended March 31, 2021, we recognized $0.1 million in interest income from amortization of debt discount and interest earned on our investment in non-marketable debt security, and $68 thousand in other expenses, net, on the change in the fair value of an embedded bifurcated derivative. We recognized no unrealized or realized gains or losses during the three months ended March 31, 2021. We recognized no interest income, other expenses, and unrealized or realized gains or losses during the three months ended March 31, 2020.
The following table presents balances of the adjusted cost and carrying value and fair value of non-marketable debt security by contractual maturity (in thousands):
| | | | | | | | | | | |
| March 31, 2021 |
| Adjusted Cost and Carrying Value | | Fair Value |
Non-marketable debt security due in 1 year or less | $ | 1,067 | | | $ | 1,067 | |
| | | | | | | | | | | |
| December 31, 2020 |
| Adjusted Cost and Carrying Value | | Fair value |
Non-marketable debt security due in 1 year or less | $ | 1,000 | | | $ | 1,000 | |
Non-Marketable Equity Securities
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 three months ended March 31, 2021 and 2020.
The following table presents balances of the carrying value of non-marketable equity securities (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
Non-marketable equity securities | | $ | 2,350 | | | $ | 1,450 | |
Note 6. Fair Value Measurements
The following tables present the financial instruments that were measured at fair value on a recurring basis within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Money market funds | $ | 122,075 | | | $ | — | | | $ | — | | | $ | 122,075 | |
Non-marketable debt security | — | | | | | 1,067 | | | 1,067 | |
Total | $ | 122,075 | | | $ | — | | | $ | 1,067 | | | $ | 123,142 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Money market funds | $ | 127,567 | | | $ | — | | | $ | — | | | $ | 127,567 | |
Non-marketable debt security | — | | | — | | | 1,000 | | | 1,000 | |
Total | $ | 127,567 | | | $ | — | | | $ | 1,000 | | | $ | 128,567 | |
| | | | | | | |
The fair value of non-marketable securities remeasured due to impairment would be classified within level 3. During the three months ended March 31, 2021 and 2020, we did not recognize any significant credit losses nor other-than-temporary impairment losses on non-marketable securities. The carrying value of our non-marketable securities approximated fair value.
Note 7. Balance Sheets Details
Cash Equivalents
Cash equivalents as of March 31, 2021 and December 31, 2020, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Adjusted Cost | | Estimated Fair Value | | Adjusted Cost | | Estimated Fair Value |
Money market funds (1) | $ | 122,075 | | | $ | 122,075 | | | $ | 127,567 | | | $ | 127,567 | |
| | | | | | | |
(1) 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 March 31, 2021, the total cash and cash equivalents balance of $139.7 million was comprised of money market funds of $122.1 million and cash of $17.6 million held with major financial institutions. 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.
Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Raw materials | $ | 77 | | | $ | 77 | |
Work-in-process | 107 | | | 82 | |
Finished goods | 845 | | | 805 | |
Inventories | $ | 1,029 | | | $ | 964 | |
| | | |
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Laboratory equipment | $ | 27,491 | | | $ | 25,468 | |
Leasehold improvements | 10,785 | | | 10,785 | |
Computer equipment and software | 3,236 | | | 3,192 | |
Office equipment and furniture | 1,246 | | | 1,246 | |
Construction in progress | 1,375 | | | 2,357 | |
Property and equipment | 44,133 | | | 43,048 | |
Less: accumulated depreciation and amortization | (33,737) | | | (33,373) | |
Property and equipment, net | $ | 10,396 | | | $ | 9,675 | |
| | | |
Depreciation expense included in the Unaudited Condensed Consolidated Statements of Operations was follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2021 | | 2020 |
Depreciation Expense | $ | 659 | | | $ | 438 | |
| | | |
Goodwill
Goodwill had a carrying value of $3.2 million as of March 31, 2021 and December 31, 2020.
Other Accrued Liabilities
Other accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
Accrued purchases | $ | 5,749 | | | $ | 7,170 | |
Accrued professional and outside service fees | 3,527 | | | 2,589 | |
| | | |
| | | |
Other | 240 | | | 513 | |
Total | $ | 9,516 | | | $ | 10,272 | |
| | | |
Note 8. Stock-based Compensation
Equity Incentive Plans
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 2019 Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards ("RSAs"), restricted stock units ("RSUs"), performance-contingent restricted stock units ("PSUs"), performance based options ("PBOs"), 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.
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 2010 Plan provided for the grant of incentive stock options, non-statutory stock options, RSUs, RSAs, PSUs, PBOs, stock appreciation rights, and stock purchase rights to our employees, non-employee directors and consultants.
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 the first quarter of 2021, we awarded PSUs ("2021 PSUs") and PBOs ("2021 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, safety, and technology and strategic plan development. As of March 31, 2021, we estimated that the 2021 PSUs and 2021 PBOs performance goals would be achieved at 100% of the target level, and recognized expenses accordingly.
In 2020, we awarded PSUs ("2020 PSUs") and PBOs ("2020 PBOs"), each of which commenced 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. In the first quarter of 2021, we determined that the 2020 PSUs and 2020 PBOs performance goals had been achieved at 88% of the target level, and recognized expenses accordingly. Accordingly, 50% of the shares underlying the 2020 PSUs and PBOs vested in the first quarter of 2021 and 50% of the shares underlying the 2020 PSUs and PBOs will vest in the first quarter of 2022, in each case subject to the recipient’s continued service on each vesting date.
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 vested in the first quarter of 2021, 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 unaudited condensed consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
| 2021 | | 2020 | | | |
Research and development | $ | 477 | | | $ | 424 | | | | |
Selling, general and administrative | 2,210 | | | 1,745 | | | | |
Total | $ | 2,687 | | | $ | 2,169 | | | | |
The following table presents total stock-based compensation expense by security type included in the unaudited condensed consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
Stock options | $ | 665 | | | $ | 541 | | | | | |
RSUs and RSAs | 542 | | | 599 | | | | | |
PSUs | 470 | | | 331 | | | | | |
PBOs | 1,010 | | | 698 | | | | | |
Total | $ | 2,687 | | | $ | 2,169 | | | | | |
As of March 31, 2021, unrecognized stock-based compensation expense, net of expected forfeitures, was $5.3 million related to unvested stock options, $4.7 million related to unvested RSUs and RSAs, $2.0 million related to unvested PSUs, and $3.3 million related to unvested PBOs based on current estimates of the level of achievement. Stock-based compensation expense for these awards will be recognized through the year of 2025.
Note 9. Capital Stock
Exercise of Options
For the three months ended March 31, 2021 and March 31, 2020, we issued 118,437 and 5,333 shares, respectively, upon option exercises at a weighted-average exercise price of $10.33 and $7.31 per share, respectively, with net cash proceeds of $1.2 million and $39 thousand, respectively.
Note 10. 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 multiple 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 January 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 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 March 31, 2021 and December 31, 2020, which are included in other liabilities on the unaudited condensed consolidated balance sheets. Accretion expense related to our asset retirement obligations was nominal in the three months ended March 31, 2021 and 2020.
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 March 31, 2021 and December 31, 2020, and are recorded as non-current restricted cash on the unaudited condensed 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 of the three-year lease was from May 2017 and expired in April 2020.
Lease and other information
Lease costs, amounts included in measurement of lease obligations and other information related to non-cancellable operating leases and finance leases were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| | 2021 | | 2020 |
Finance lease amortization of right-of-use assets | | $ | 26 | | | $ | 54 | |
Operating lease cost | | 1,032 | | | 1,068 | |
Short-term lease costs (1) | | — | | | 31 | |
Sublease income | | — | | | (55) | |
Total lease cost (2) | | $ | 1,058 | | | $ | 1,098 | |
| | | | |
(1) Short-term lease costs on leases with terms of over one month and less than one year.
(2) The Company had no variable lease costs.
| | | | | | | | |
Other information: | | Operating Leases |
Weighted-average remaining lease term (in years) | | 5.2 years |
Weighted-average discount rate | | 6.6 | % |
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
Cash paid: | | 2021 | | 2020 |
Operating cash flows from operating leases | | $ | 1,042 | | | $ | 354 | |
Financing cash flows from finance leases | | $ | — | | | $ | 51 | |
As of March 31, 2021, our maturity analysis of annual undiscounted cash flows of the non-cancellable operating leases are as follows (in thousands):
| | | | | | | | |
Years ending December 31, | | Operating Leases |
2021 (remaining 9 months) | | $ | 3,156 | |
2022 | | 4,285 | |
2023 | | 4,589 | |
2024 | | 4,726 | |
2025 | | 4,868 | |
Thereafter | | 8,627 | |
Total minimum lease payments | | 30,251 | |
Less: imputed interest | | (5,932) | |
Lease obligations | | $ | 24,319 | |
| | |
Future Lease Commitment
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 budget provides a net tenant improvement allowance of $6.3 million and an additional allowance of up to $2.7 million, which we expect to use. 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 for the additional allowance. The terms include an initial annualized base rent of approximately $2.5 million, subject to scheduled 3% annual rent increases, an annualized additional allowance payment of approximately $0.4 million, 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 $0.5 million security deposit in the form of a letter of credit. We have the right to sublease the facility, subject to landlord consent. We
determined that the lease commencement date is in November 2021 at which point we will record a right of use asset and a corresponding lease liability.
An estimated maturity analysis of the annual undiscounted cash flows of the lease is as follows (in thousands):
| | | | | | | | |
Years ending December 31, | | Operating Lease |
2021 (remaining 9 months) | | $ | 34 | |
2022 | | 2,925 | |
2023 | | 3,001 | |
2024 | | 3,079 | |
2025 | | 3,159 | |
2026 and thereafter | | 19,525 | |
Total minimum lease payments | | $ | 31,723 | |
| | |
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.
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 | | Agreement Date | | Future Minimum Payment |
Manufacture and supply agreement with expected future payment date of December 2022 | | April 2016 | | $ | 55 | |
Development and manufacturing services agreements | | September 2019 | | 2,374 | |
Total other commitments | | | | $ | 2,429 | |
| | | | |
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. As of March 31, 2021 and 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. 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) 1.00%.
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 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. As of March 31, 2021, 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.
Note 11. Related Party Transactions
Molecular Assemblies, Inc.
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 Executive Officer, also joined MAI’s board of directors. Concurrently with our initial equity investment, we entered into the MAI Agreement with MAI, 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 recognized $0.1 million and nil in research and development revenue from transactions with MAI in the three months ended March 31, 2021 and 2020, respectively. We received 1,428,342 shares and nil of MAI's Series A preferred stock from research and development services we provided to MAI in the three months ended March 31, 2021 and 2020, respectively. We have 3,729,563 shares of MAI's Series A preferred stock from the inception to date. The carrying value of our investment in MAI Series A preferred stock was $2.4 million and $1.5 million at March 31, 2021 and December 31, 2020, respectively. We had nil and $0.5 million in contract asset due from MAI for services rendered as of March 31, 2021 and December 31, 2020, respectively. Payment for the services rendered was subsequently received in the form of additional MAI Series A preferred stock in the subsequent quarter.
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 from transactions with AstraZeneca and its controlled purchasing agents and contract manufacturers for the three months ended March 31, 2020 and through the date of Ms. Cheng’s departure from our board of director. As of March 31, 2021 and December 31, 2020, we had nominal and no receivables from AstraZeneca PLC and its controlled purchasing agents and contract manufacturers from related party transactions, respectively.
Note 12. Segment, Geographical and Other Revenue Information
Segment Information
We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. Our chief operating decision maker ("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 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.
The following table provides financial information by our reportable business segments along with a reconciliation to consolidated income (loss) before income taxes (in thousands):
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| | Three months ended March 31, 2021 | | Three months ended March 31, 2020 |
| | Performance Enzymes | | Novel Biotherapeutics | | Total | | Performance Enzymes | | Novel Biotherapeutics | | Total |
Revenues: | | | | | | | | | | | | |
Product revenue | | $ | 10,226 | | | $ | — | | | $ | 10,226 | | | $ | 5,100 | | | $ | — | | | $ | 5,100 | |
Research and development revenue | | 4,003 | | | 3,803 | | | 7,806 | | | 5,774 | | | 3,796 | | | 9,570 | |
Total revenues | | 14,229 | | | 3,803 | | | 18,032 | | | 10,874 | | | 3,796 | | | 14,670 | |
Costs and operating expenses: | | | | | | | | | | | | |
Cost of product revenue | | 4,218 | | | — | | | 4,218 | | | 2,541 | | | — | | | 2,541 | |
Research and development(1) | | 6,444 | | | 4,605 | | | 11,049 | | | 5,696 | | | 4,925 | | | 10,621 | |
Selling, general and administrative(1) | | 2,818 | | | 600 | | | 3,418 | | | 2,345 | | | 591 | | | 2,936 | |
Total segment costs and operating expenses | | 13,480 | | | 5,205 | | | 18,685 | | | 10,582 | | | 5,516 | | | 16,098 | |
Income (loss) from operations | | $ | 749 | | | $ | (1,402) | | | (653) | | | $ | 292 | | | $ | (1,720) | | | (1,428) | |
Corporate costs (2) | | | | | | (7,728) | | | | | | | (5,727) | |
Unallocated depreciation and amortization | | | | | | (685) | | | | | | | (492) | |
Loss before income taxes | | | | | | $ | (9,066) | | | | | | | $ | (7,647) | |
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(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.
The following table provides stock-based compensation expense included in income (loss) from operations (in thousands):
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| | Three months ended March 31, |
| | 2021 | | 2020 |
| | Performance Enzymes | | Novel Biotherapeutics | | Corporate cost | | Total | | Performance Enzymes | | Novel Biotherapeutics | | Corporate cost | | Total |
Stock-based compensation | | $ | 994 | | | $ | 238 | | | $ | 1,455 | | | $ | 2,687 | | | $ | 756 | | | $ | 241 | | | $ | 1,172 | | | $ | 2,169 | |
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Significant Customers
Customers that each accounted for 10% or more of our total revenues were as follows:
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| Percentage of Total Revenues for the |
| Three Months Ended March 31, |
| 2021 | | 2020 |
Customer A | 28 | % | | 24 | % |
Customer B | * | | 19 | % |
Customer C | 11 | % | | 15 | % |
Customer D | 10 | % | | 11 | % |
Customer E | |