CODEXIS, INC. The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2019 included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onFebruary 28, 2020 (the "Annual Report"). This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, expectations regarding our strategy, business plans, financial performance and developments relating to our industry. 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 Part II, Item 1A: "Risk Factors" of this Quarterly Report on Form 10-Q and Part I, Item 1A: "Risk Factors" of our Annual Report, as incorporated herein and referenced in Part II, Item 1A: "Risk Factors" of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. Business Overview We discover, develop and sell proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast untapped source of value-creating materials, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel proteins, both as proprietaryCodexis products and in partnership with our customers. We are a pioneer in the harnessing of 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 our large and continuously growing library of protein variants' performance attributes. These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling delivery of targeted performance enhancements in a time-efficient manner. In addition to its computational prowess, our CodeEvolver® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and process development which are all coordinated to create our novel protein innovations. Our approach to developing commercially viable biocatalytic manufacturing processes begins by conceptually designing the most cost-effective and practical process for a targeted product. We then develop optimized protein catalysts to enable that process design using our CodeEvolver® protein engineering platform technology. Engineered protein catalyst candidates many thousands for each protein engineering project are then rapidly screened and validated in high throughput screening under relevant manufacturing operating conditions. This approach results in an optimized protein catalyst enabling cost-efficient processes that typically are relatively simple to run in conventional manufacturing equipment. This also allows for the efficient technical transfer of our process to our manufacturing partners. The successful embodiment of our CodeEvolver® protein engineering technology platform in commercial manufacturing processes requires well-integrated expertise in a number of technical disciplines. In addition to those directly involved in practicing our CodeEvolver® protein engineering platform technology, such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical engineering, fermentation process development and fermentation engineering. Our integrated, multi-disciplinary approach to biocatalyst and process development is a critical success factor for our company. We initially commercialized our CodeEvolver® protein engineering technology platform and products in the pharmaceuticals market, which remains a primary business focus. Our customers, which include many large global 32 -------------------------------------------------------------------------------- pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development. We have also licensed our proprietary CodeEvolver® protein engineering technology platform to global pharmaceutical companies so that they may in turn use this technology to engineer enzymes for their own businesses. Most recently, inMay 2019 , we entered into a Platform Technology Transfer and License Agreement (the "Novartis CodeEvolver® Agreement") withNovartis Pharma AG ("Novartis"). The Novartis CodeEvolver® Agreement allows Novartis to useCodexis' 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 protein catalysts and industrial enzymes for use in a wider set of industrial markets. These target industries consist of several large market verticals, including food and food ingredients, animal feed, consumer care, flavors, fragrances and agricultural chemicals. In addition, we are using our technology to develop enzymes for customers using next generation sequencing ("NGS") and polymerase chain reaction ("PCR/qPCR") for in vitro molecular diagnostic and genomic research applications. InDecember 2019 , we entered into a license agreement to provideRoche Sequencing Solutions, Inc. ("Roche") with our first enzyme for this target market,Codexis' EvoT4™ DNA ligase. We have also begun using the CodeEvolver® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both for our customers and for our own business. Our first lead 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. InOctober 2017 , we entered into the "Nestlé Agreement" with Nestlé Health Science to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU. PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. InFebruary 2019 , Nestlé Health Science exercised its option to obtain an exclusive license to develop and commercialize CDX-6114. InJanuary 2020 , we entered a development agreement with Nestlé Health Science to advance a lead candidate, CDX-7108, into preclinical development and early clinical studies. CDX-7108 is the lead candidate for a potential treatment for a gastro-intestinal disorder. In parallel, the original Strategic Collaboration Agreement was extended throughDecember 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") withShire 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 blood factor deficiencies. Business Segments We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. 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, consumer care, 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. 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. InOctober 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. InJuly 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 inAustralia . InNovember 2018 , we announced top-line results from the Phase 1a study in healthy volunteers with CDX-6114. InDecember 2018 , Nestlé Health Science became obligated to pay us an additional$1.0 million within 60 days after the achievement of a milestone relating to formulation of CDX-6114. InJanuary 2019 , we received notice from theU.S. Food and 33 --------------------------------------------------------------------------------Drug Administration (the "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 inthe United States . InFebruary 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, with the exception of the completion of an extension study, CDX-6114-004, which was substantially completed in the fourth quarter of 2019. InOctober 2017 , we separately entered into a Strategic Collaboration Agreement 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. InJanuary 2020 , we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance a lead candidate targeting a gastro-intestinal disorder discovered through our Strategic Collaboration Agreement into pre-clinical and early clinical studies. The Strategic Collaboration Agreement was extended throughDecember 2021 . Using our CodeEvolver® protein engineering platform technology, we have also developed a pipeline of other biotherapeutic drug candidates, which are in preclinical development. We expect to continue to make additional investments in our pipeline with the aim of advancing additional product candidates targeting other therapeutic areas. InMarch 2020 , we entered into the Takeda Agreement withTakeda in which we will collaborate to research and develop protein sequences for use in gene therapy products for certain disease indications in accordance with each applicable program plans for Fabry Disease, Pompe Disease, and an unnamed blood factor deficiency. InMarch 2020 , we received a one-time, non-refundable cash payment of$8.5 million . For further description of our business segments, see Note 13, "Segment, Geographical and Other Revenue Information" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 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 theU.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 cannot 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 disrupted as a result of local shelter-in-place orders and any disruptions in operations of our customers with whom we collaborate. For the three months endedMarch 31, 2020 , the COVID-19 pandemic resulted in lower research and development revenues of approximately$0.6 million as completion of certain R&D services were deferred to the future periods. We are unable to fully determine and quantify the extent to which delays in our R&D projects will be affected by the COVID-19 pandemic. We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our product sales, R&D service revenue, expenses and manufacturing. In theU.S. , the impact of COVID-19, including governmental orders governing the operation of non-essential businesses during the pandemic, has caused the temporary closure of ourRedwood City, California facilities and has disrupted our research and development operations. OurRedwood City employees have been working from home sincemid-March 2020 , while ensuring essential staffing levels in our operations remain in place. 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 is uncertain. 34 --------------------------------------------------------------------------------
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.
Results of Operations Overview Revenues decreased to$14.7 million for the first quarter of 2020 from$15.6 million in the first quarter of 2019, due to decreases in product revenue partially offset by increases in research and development revenue. Product revenue for the first quarter of 2020 decreased by$2.9 million to$5.1 million from$8.0 million in the first quarter of 2019 primarily due to timing of customer demand for branded products. Research and development revenue increased by$2.0 million for the first quarter of 2020 to$9.6 million from$7.6 million in the first quarter of 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver® Agreement and recognition of license fees fromTakeda under theTakeda Agreement, partially offset by prior year functional license fee revenue from Nestlé Health Science. For the three months endedMarch 31, 2020 , the COVID-19 pandemic resulted in lower research and development revenues of approximately$0.6 million as completion of certain R&D services were deferred to the future periods. Product gross margins were 50% for the first quarter of 2020, compared to 45% in the same period in 2019, due to improved product mix. 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 are used as a management performance measure to provide additional information regarding our results of operations on a consolidated basis. Research and development expense increased by$3.0 million , or 37%, to$11.0 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher headcount, and higher allocable expenses. Selling, general and administrative expense increased by$0.6 million , or 7%, to$9.0 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses. Net loss for the first quarter of 2020 was$7.7 million , representing a net loss of$0.13 per basic and diluted share. This compares to a net loss of$5.1 million , representing a net loss of$0.09 per basic and diluted share for the first quarter of 2019. The increase in net loss for the first quarter of 2020 over the same period of the prior year is primarily related to higher operating expenses and decreases in product revenue partially offset by increases in research and development revenue. Cash and cash equivalents decreased by$3.2 million to$87.3 million as ofMarch 31, 2020 compared to$90.5 million as ofDecember 31, 2019 . Net cash used in operating activities decreased to$1.4 million in the three months endedMarch 31, 2020 compared to$2.9 million in the three months endedMarch 31, 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. InJune 2017 , we entered into a loan and security agreement 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. InSeptember 2019 , we entered into a Seventh Amendment to the Credit Facility whereby the draw period on the term debt was extended toSeptember 30, 2020 . We may draw on the Term Debt at any time prior toSeptember 30, 2020 , subject to customary conditions for funding including, among others, that no event of default exists. As ofMarch 31, 2020 , no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility. See Note 11, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 35 -------------------------------------------------------------------------------- Below is an overview of our results of operations by business segments: Performance Enzymes Revenues increased by$0.8 million , or 8%, to$10.9 million for the three months endedMarch 31, 2020 , compared to the first quarter of 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver® Agreement and revenue under a license agreement with Roche providing our EvoT4 DNA™ ligase high-performance molecular diagnostic enzyme, partially offset by a decrease in product revenue due to timing of customer demand for branded products. Product gross margins were 50% in the three months endedMarch 31, 2020 , compared to 45% in the corresponding period in 2019 due to improved product mix. Research and development expense increased by$1.3 million , or 28%, to$5.7 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with higher headcount and higher allocable expenses. Selling, general and administrative expense increased by$0.2 million , or 12% to$2.3 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses. Novel Biotherapeutics Revenues decreased by$1.7 million , or 31%, to$3.8 million for the three months endedMarch 31, 2020 , compared to the first quarter of 2019 primarily due to a decrease in prior year functional license fee revenue from Nestlé Health Science and partially offset by recognition of revenue under the Takeda Agreement. Research and development expense increased by$1.6 million , or 48%, to$4.9 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with outside services relating to CMC, regulatory expenses, higher outside services, higher headcount and higher stock compensation expense. Selling, general and administrative expense increased by$0.1 million , or 14%, to$0.6 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with higher headcount, higher allocable expense and higher stock-based compensation. GSK Platform Technology Transfer, Collaboration and License Agreement InJuly 2014 , we entered into a CodeEvolver® protein engineering platform technology transfer collaboration and license agreement (the "GSK CodeEvolver® Agreement") with GlaxoSmithKline ("GSK"). Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver® protein engineering platform technology to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products. We received an up-front fee upon the execution of the agreement inJuly 2014 and milestone payments in each of the years from 2014 throughApril 2016 . We completed the transfer of the CodeEvolver® protein engineering platform technology to GSK inApril 2016 and all revenues relating to the technology transfer have been recognized as ofApril 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, if any, of a limited set of products developed by GSK using our CodeEvolver® protein engineering platform technology. InSeptember 2019 , we recognized revenue of$2.0 million for the milestone payment from GSK relating to the advancement of an enzyme developed by GSK using our CodeEvolver® protein engineering platform technology. We recognized no research and development revenue for the three months endedMarch 31, 2020 and 2019. We had no deferred revenue balances as ofMarch 31, 2020 andDecember 31, 2019 . Merck Platform Technology Transfer and License Agreement InAugust 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. We received an up-front license fee upon execution of the Merck CodeEvolver® Agreement, and milestone payments inSeptember 2015 and inSeptember 2016 , when we completed the transfer of the engineering platform technology. Additionally, 36 -------------------------------------------------------------------------------- we recognized research and development revenues of$0.9 million and$1.0 million for the three months endedMarch 31, 2020 and 2019, respectively, for various research projects under our collaborative arrangement. 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. InJanuary 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. The license installation was completed in 2019 and we recognized$0.9 million as license fee revenue accordingly. Pursuant to the agreement, Merck has options to future technology enhancements for a specified fee. As ofMarch 31, 2020 , Merck has not exercised its option for technology enhancements. We recognized$25 thousand in research and development revenues under the terms of the amendment in the three months endedMarch 31, 2020 . As ofMarch 31, 2020 andDecember 31, 2019 , we had deferred revenue balances of$0.1 million and nil, respectively.Global Development , Option and License Agreement and Strategic Collaboration Agreement InOctober 2017 , we entered into the Nestlé Agreement with Societé des Produits Néstle S.A., formerly known asNestec Ltd. ("Nestlé Health Science") and, solely for the purpose of the integration and the dispute resolution clauses of the Agreement, NestléHealth 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 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 inSeptember 2018 and the$1.0 million milestone payment that was triggered by the achievement of a formulation relating to CDX-6114 was received inFebruary 2019 . The upfront payment and the variable consideration relating to the progress payment of$4.0 million and milestone payment of$1.0 million are being recognized over time as the development work is being performed. Revenue 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 all performance obligations under the agreement. We recognized development fees of nil for the three months endedMarch 31, 2020 , compared to$1.3 million for the three months endedMarch 31, 2019 in research and development revenue. InJanuary 2019 , we received notice from theU.S. Food and Drug Administration (the "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 inthe United States . InFebruary 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. We are eligible to receive payments from Nestlé Health Science under the Nestlé 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 addition to the Nestlé Agreement, we and Nestlé Health Science entered into a Strategic Collaboration Agreement (the "Strategic Collaboration Agreement") pursuant to which we and Nestlé Health Science will collaborate 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 inSeptember 2018 for additional services. We recognized research and development fees of$1.6 million for the three months endedMarch 31, 2020 compared to$1.2 million for the three months endedMarch 31, 2019 . Development Agreement InJanuary 2020 , we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance a lead candidate, CDX-7108, targeting a gastro-intestinal disorder discovered 37 -------------------------------------------------------------------------------- through our Strategic Collaboration Agreement into pre-clinical and early clinical studies. The Strategic Collaboration Agreement was extended throughDecember 2021 . Strategic Collaboration Agreement InApril 2018 , we entered into the Porton Agreement with Porton to license key elements ofCodexis' 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 an initial collaboration fee of$0.5 million within 30 days of the effective date and$1.5 million upon the first anniversary of the effective date of the agreement. We completed the technical transfer in the fourth quarter of 2018. Revenue relating to the functional license provided to Porton was recognized at a point in time when control of the license transferred to the customer. Platform Technology Transfer and License Agreement InMay 2019 , we entered into a Platform Technology Transfer and License Agreement (the "Novartis CodeEvolver® Agreement") withNovartis Pharma AG ("Novartis"). The Agreement allows Novartis to useCodexis' proprietary CodeEvolver® protein engineering platform technology in the field of human healthcare. Under the Novartis CodeEvolver® Agreement, we will transferCodexis' proprietary CodeEvolver® protein engineering platform technology to Novartis over approximately 20 months starting with the date on which we commence the technology transfer (the "Technology Transfer Period"). As a part of this technology transfer, our company provided to Novartis Codexis' proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, teams ofCodexis and Novartis scientists participated in technology training sessions and collaborative research projects atCodexis' laboratories inRedwood City, California and at a designated Novartis laboratory inBasel, Switzerland . Upon completion of technology transfer, Novartis will have the CodeEvolver® protein engineering platform technology installed at its designated laboratory. Pursuant to the agreement, we received an upfront payment of$5.0 million shortly after the effective date of the Novartis CodeEvolver® Agreement. We are entitled to receive an additional$4.0 million subject to satisfactory completion of the second technology transfer milestone and an additional$5.0 million upon satisfactory completion of the third technology transfer milestone. In consideration for the continued disclosure and license of improvements to theCodexis technology and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period ("Improvements Term"), Novartis will payCodexis 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® 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 toCodexis 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 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$2.4 million in research and development revenue for the three months endedMarch 31, 2020 from the Novartis CodeEvolver® Agreement. InApril 2020 , we achieved a technology transfer milestone associated with the Novartis CodeEvolver® Agreement. See Note 15, "Subsequent Events" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more details. Strategic Collaboration and License Agreement InMarch 2020 , we entered into a Strategic Collaboration and License Agreement (the "Takeda Agreement") withShire Human Genetic Therapies, Inc. , a wholly-owned subsidiary of Takeda Pharmaceutical Co. Ltd. ("Takeda") under which we will collaborate to research and develop protein sequences for use in gene therapy products for certain diseases. On execution of the Takeda Agreement, we received an up-front non-refundable cash payment of$8.5 million . We recognized license fees of$2.1 million as research & development revenue in the three months endedMarch 31, 2020 . Other potential payments fromTakeda include (i) reimbursement of research and development fees and pre-clinical approval milestones for initial programs of up to$22.3 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, at percentages ranging from the middle-single digit to low single-digit of sales of the applicable product. 38 -------------------------------------------------------------------------------- Results of Operations The following table shows the amounts from our unaudited condensed consolidated statements of operations for the periods presented (in thousands): Three months ended March 31, Change 2020 2019 $ % Revenues: Product revenue$ 5,100 $ 7,988 $ (2,888) (36)% Research and development revenue 9,570 7,595 1,975 26% Total revenues 14,670 15,583 (913) (6)% Costs and operating expenses: Cost of product revenue 2,541 4,391 (1,850) (42)% Research and development 10,967 8,016 2,951 37% Selling, general and administrative 8,989 8,415 574 7% Total costs and operating expenses 22,497 20,822 1,675 8% Loss from operations (7,827) (5,239) (2,588) (49)% Interest income 266 231 35 15% Other expenses, net (86) (125) (39) (31)% Loss before income taxes (7,647) (5,133) (2,514) (49)% Provision for income taxes 5 3 2 67% Net loss$ (7,652) $ (5,136) $ (2,516) (49)% Revenues Our revenues comprise product revenue and research and development revenue as follows: •Product revenue consists of sales of protein catalysts, pharmaceutical intermediates, and Codex® biocatalyst panels and kits. •Research and development revenue include license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and screening fees. The following table shows the amounts of our product revenue and research and development revenue from our unaudited condensed consolidated statements of operations for the periods presented (in thousands): Three months ended March 31, Change (In Thousands) 2020 2019 $ % Product revenue$ 5,100 $ 7,988 $ (2,888) (36)% Research and development revenue 9,570 7,595 1,975 26% Total revenues$ 14,670 $ 15,583 $ (913) (6)% 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. Total revenues decreased by$0.9 million in the three months endedMarch 31, 2020 compared to the same period in 2019, primarily due to a decrease in product revenue partially offset by an increase in research and development revenue. The decrease in product revenue was primarily due to timing of customer demand for branded products. 39 -------------------------------------------------------------------------------- Research and development revenue increased by$2.0 million in the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver® Agreement and recognition of license fees fromTakeda under the Takeda Strategic Collaboration and License Agreement, partially offset by prior year functional license fee revenue from Nestlé Health Science. For the three months endedMarch 31, 2020 , the COVID-19 pandemic resulted in lower research and development revenues of approximately$0.6 million as completion of certain R&D services were deferred to the future periods. Cost and Operating Expenses Our cost and operating expenses comprise cost of product revenue, research and development expense, and selling, general and administrative expense. The following table shows the amounts of our cost of product revenue, research and development expense, and selling, general and administrative expense from our unaudited condensed consolidated statements of operations for the periods presented (in thousands): Three months ended March 31, Change (In Thousands) 2020 2019 $ % Cost of product revenue$ 2,541 $ 4,391 $ (1,850) (42)% Research and development 10,967 8,016 2,951 37% Selling, general and administrative 8,989 8,415 574 7% Total costs and operating expenses$ 22,497 $ 20,822 $ 1,675 8% 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 unaudited condensed consolidated statements of operations for the periods presented (in thousands): Three months ended March 31, Change (In Thousands) 2020 2019 $ % Product revenue$ 5,100 $ 7,988 $ (2,888) (36)% Cost of product revenue 2,541 4,391 (1,850) (42)% Product gross profit$ 2,559 $ 3,597 $ (1,038) (29)% Product gross margin (%) 50 % 45 % 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. Product gross margins were 50% in the three months endedMarch 31, 2020 , compared to 45% in the corresponding period in 2019 due to 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, and depreciation of facilities and laboratory equipment, and (iii) external costs. Research and development expenses are expensed when incurred. Research and development expenses increased by$3.0 million , or 37%, in the three months endedMarch 31, 2020 compared to the same period in 2019, primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount, and higher allocable expenses. 40 -------------------------------------------------------------------------------- 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 costs), marketing costs, building lease costs, and depreciation and amortization expense. Selling, general and administrative expenses increased by$0.6 million , or 7%, in the three months endedMarch 31, 2020 compared to the same period in 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses. Interest Income and Other Expense Three months ended March 31, Change (In Thousands) 2020 2019 $ % Interest income $ 266$ 231 $ 35 15% Other expense, net (86) (125) (39) (31)% Total other income $ 180$ 106 $ 74 70% Interest Income Interest income increased by$35 thousand in the three months endedMarch 31, 2020 , compared to the same period in 2019 primarily due to higher levels of cash and cash equivalents which earned lower average interest rates. Other Expense Other expense decreased by$39 thousand in the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to an unrealized loss of$0.1 million investment loss in the prior year, partially offset by increases in losses due to fluctuations in foreign currency. Provision for Income Taxes We recognized an income tax provision of$5 thousand and$3 thousand in the three months endedMarch 31, 2020 and 2019, respectively. The increase in income tax expense was due to additional interest recorded on uncertain tax positions from previous years. 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. Net loss Net loss for the first quarter of 2020 was$7.7 million , representing a net loss of$0.13 per basic and diluted share. This compares to a net loss of$5.1 million , representing a net loss of$0.09 per basic and diluted share for the first quarter of 2019. The increase in net loss for the three months endedMarch 31, 2020 compared to the same period of the prior year was primarily related to higher operating expenses and decreases in product revenue partially offset by increases in research and development revenue. 41 -------------------------------------------------------------------------------- Results of Operations by Segment (in thousands, except percentages) Revenue by segment Three months endedMarch 31 , Change 2020 2019 Performance Enzymes Novel Biotherapeutics Performance Performance Enzymes Novel Biotherapeutics Total Enzymes Novel Biotherapeutics Total $ % $ % Revenues: Product revenue$ 5,100 $ -$ 5,100 $ 7,988 $ -$ 7,988 $ (2,888) (36) % $ - - % Research and development revenue 5,774 3,796 9,570 2,099 5,496 7,595 3,675 175 % (1,700) (31) % Total revenues$ 10,874 $ 3,796$ 14,670 $ 10,087 $ 5,496$ 15,583 $ 787 8 %$ (1,700) (31) % Revenues from the Performance Enzymes segment increased by$0.8 million , or 8%, to$10.9 million for the three months endedMarch 31, 2020 , compared to$10.1 million for the three months endedMarch 31, 2019 . The increase in revenue is primarily due to recognition of revenue fromNovartis Pharma AG under the Novartis CodeEvolver® Agreement and revenue under a license agreement withRoche Sequencing Solutions, Inc. licensing our EvoT4 DNA™ ligase high-performance molecular diagnostic enzyme, partially offset by a decrease in product revenue due to timing of customer demand for branded products. Revenues from the Novel Biotherapeutics segment decreased by$1.7 million , or 31%, to$3.8 million for the three months endedMarch 31, 2020 , compared to$5.5 million for the three months endedMarch 31, 2019 . The decrease in revenue is primarily due to a prior year functional license fee revenue from Nestlé Health Science partially offset by recognition of revenue under the Takeda Agreement and by a reduction in research and development service revenues. Cost and Operating Expenses by Segment Three months endedMarch 31 , Change 2020 2019 Performance Enzymes Novel Biotherapeutics Performance Performance Enzymes Novel Biotherapeutics Total Enzymes Novel Biotherapeutics Total $ % $ % Cost of product revenue$ 2,541 $ -$ 2,541 $ 4,391 $ -$ 4,391 $ (1,850) (42) % $ - - % Research and development(1) 5,696 4,925 10,621 4,442 3,317 7,759 1,254 28 % 1,608 48 % Selling, general and administrative(1) 2,345 591 2,936 2,101 517 2,618 244 12 % 74 14 % Total segment costs and operating expenses$ 10,582 $ 5,516 16,098$ 10,934 $ 3,834 14,768$ (352) (3) %$ 1,682 44 % Corporate costs 5,907 5,681 Depreciation and amortization 492 373 Total costs and operating expenses$ 22,497 $ 20,822
(1) Research and development expenses and Selling, general and administrative expenses exclude depreciation and amortization of finance leases.
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For a discussion of product cost of revenue, see "Results of Operations".
Research and development expense in the Performance Enzymes segment increased by
$1.3 million , or 28%, to $5.7 million in the first quarter of 2020, compared to
the first quarter of 2019. The increase was primarily due to an increase in
costs associated with higher headcount and higher allocable expenses.
Selling, general and administrative expense in the Performance Enzymes segment
increased by $0.2 million , or 12%, to $2.3 million in the first quarter of 2020,
compared to the first quarter of 2019. The increase was primarily due to an
increase in costs associated with accounting fees and outside services, and
higher facilities and headcount offset by lower allocable expenses.
Research and development expense in the Novel Biotherapeutics segment increased
by $1.6 million , or 48%, to $4.9 million in the first quarter of 2020, compared
to the first quarter of 2019. The increase was primarily due to an increase in
costs associated with outside services relating to CMC, regulatory expenses,
higher outside services, higher headcount and higher stock compensation expense.
Selling, general and administrative expense in the Novel Biotherapeutics segment
increased by $0.1 million , or 14%, to $0.6 million in the first quarter of 2020,
compared to the first quarter of 2019. The increase was primarily due to an
increase in costs associated with higher headcount, higher allocable expense and
higher stock-based compensation.
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 is a summary of cash and cash equivalents balances and working
capital as of March 31, 2020 and December 31, 2019 (in thousands):
(In Thousands) March 31, 2020 December 31, 2019
Cash and cash equivalents $ 87,327 $ 90,498
Working capital $ 92,280 $ 98,817
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 2016, we completed the final phase in the transfer of CodeEvolver®
technology to Merck under the Merck CodeEvolver® Agreement. Following the
completion of the technology transfer to Merck, we are now eligible to receive
payments of up to $15.0 million for each commercial API that is manufactured by
Merck using one or more novel enzymes developed by Merck using 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 Pharma AG . 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. We are entitled to receive an additional $4.0 million
subject to satisfactory completion of the second technology transfer milestone
and an additional $5.0 million upon satisfactory completion of the third
technology transfer milestone. In consideration for the continued disclosure and
license of improvements to the Codexis technology and materials during a
multi-year period that begins on the conclusion of the Technology Transfer
Period, 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.
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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 revenue and
collaborative research and development services provided to customers, as well
as our headcount costs, primarily in research and development. Our primary
source of cash flows from operating activities is cash receipts from licensing
our technology to major pharmaceutical companies, and our customers for
purchases of products and/or collaborative research and development services.
Our largest uses of cash from operating activities are for employee-related
expenditures, rent payments, inventory purchases to support our product revenue
and non-payroll research and development costs.
In June 2017 , we entered into the Credit Facility, 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 2019 , we entered into a Seventh Amendment to the Credit Facility
whereby the draw period on the term debt was extended to September 30, 2020 . We
may draw on the term debt at any time prior to September 30, 2020 , 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.
We may draw on the revolving line of credit at any time prior to the maturity
date. On October 1, 2023 , any loans for Term Debt mature and the Revolving Line
of Credit terminates. No amounts were drawn down under the credit facility as of
March 31, 2020 . At March 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 11,
"Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q.
In October 2017 , we entered into the Nestlé Agreement with Nestlé Health
Science. Pursuant to the Nestlé 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 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
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 December 2018 , we filed an automatic shelf registration statement on Form S-3
(the "2018 Registration Statement") with the SEC , under which we may sell common
stock, preferred stock, debt securities, warrants, purchase contract and/or
units, which immediately became effective upon filing. In 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 (the "Private
Offering"). After deducting issuance costs of $0.1 million from the Private
Offering, our net proceeds were $49.9 million .
In March 2020 , we entered into a Strategic Collaboration and License Agreement
with Takeda under which we received an up-front non-refundable cash payment of
$8.5 million in March 2020 . Other potential payments from Takeda include (i) of
research and development fees and pre-clinical approval milestones for initial
programs of up to $22.3 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, at percentages ranging from the middle-single digit to low
single-digit of sales of the applicable product.
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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 cannot 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 disrupted as a result of local
shelter-in-place orders and any disruptions in operations of our customers with
whom we collaborate. For the three months ended March 31, 2020 , the COVID-19
pandemic resulted in lower research and development revenues of approximately
$0.6 million as completion of certain R&D services were deferred to the future
periods. We are unable to fully determine and quantify the extent to which
delays in our R&D projects will be affected by the COVID-19 pandemic. We are
continuing to assess the potential impact of the COVID-19 pandemic on our
business and operations, including our product sales, R&D service revenue,
expenses and manufacturing. In the U.S. , the impact of COVID-19, including
governmental orders governing the operation of non-essential businesses during
the pandemic, has caused the temporary closure of our Redwood City, California
facilities and has disrupted our research and development operations. Our
Redwood City employees have been working from home since mid-March 2020 , while
ensuring essential staffing levels in our operations remain in place. 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 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.
As of March 31, 2020 , we had cash and cash equivalents of $87.3 million and
$15.0 million available to borrow under the 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.
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Cash Flows
The following is a summary of cash flows for three months ended March 31, 2020
(in thousands):
Three months ended March 31,
(In Thousands) 2020 2019
Net cash used in operating activities $ (1,425) $ (2,851)
Net cash used in investing activities (761) (445)
Net cash used in financing activities (1,019) (2,082)
Net decrease in cash, cash equivalents and restricted cash $
(3,205)
Cash Flows from Operating Activities Cash used in operating activities was$1.4 million net for the three months endedMarch 31, 2020 , which resulted from a net loss of$7.7 million for the three months endedMarch 31, 2020 adjusted for non-cash charges for depreciation of$0.4 million , ROU lease asset amortization expense of$0.7 million and stock-based compensation of$2.2 million . Additional cash used by changes in operating assets and liabilities was$2.9 million . Changes in operating assets and liabilities included an increase of$6.5 million in deferred revenue and$3.1 million in other accrued liabilities, partially offset by a$3.9 million increase in unbilled receivables and a$1.9 million decrease accrued compensation. Cash used in operating activities was$2.9 million net for the three months endedMarch 31, 2019 , which resulted from a net loss of$5.1 for the three months endedMarch 31, 2019 adjusted for non-cash charges for depreciation of$0.3 million , ROU lease asset amortization expense of$0.8 million and stock-based compensation of$2.1 million . Additional cash used by changes in operating assets and liabilities was$1.0 million . Changes in operating assets and liabilities included an increase of$1.1 million in accounts receivable, a decrease of$1.0 million of accounts payable, and a decrease of$2.9 million in deferred revenue. Cash Flows from Investing Activities Cash used in investing activities was$0.8 million and$0.4 million for the three months endedMarch 31, 2020 and 2019, respectively, which was primarily attributable to purchase of property and equipment. Cash Flows from Financing Activities Cash used in financing activities was$1.0 million for the three months endedMarch 31, 2020 and primarily included taxes paid related to net share settlement of equity awards. Cash used in financing activities was$2.1 million for the three months endedMarch 31, 2019 which included$0.8 million of proceeds from exercises of stock options offset by$2.8 million for taxes paid related to net share settlement of equity awards. 46 --------------------------------------------------------------------------------
Contractual Obligations
The following table summarizes our significant contractual obligations at
Payments due by period
(In Thousands) Total Less than 1 year 1-3 years 4-5 years >5 years
Finance lease obligations $ 9 $ 9 $ - $ - $ -
Operating leases obligations (1) 33,753 3,504 8,579 9,385 12,285
Total $ 33,762 $ 3,513 $ 8,579 $ 9,385 $ 12,285
(1) Represents future minimum lease payments under non-cancellable operating
leases in effect as of March 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. Minimum payments have not been reduced
by future minimum sublease rentals of $0.1 million to be received under
non-cancellable subleases. 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 11, "Commitments and Contingencies" in the notes to unaudited condensed
consolidated financial statements.
Other Commitments
We have other commitments related to supply and service arrangements entered
into the normal course of business. For additional information about other
commitments, see Note 11, "Commitments and Contingencies" in the notes to the
unaudited condensed consolidated financial statements. Future minimum payments
reflect amounts those obligations are expected to have on our liquidity and cash
flows in future periods and include obligations subject to risk of cancellation
by us (in thousands):
Other Commitment Agreement Type Agreement Date Future Minimum Payment
(In Thousands)
Manufacture and supply agreement with expected
future payment date of December 2022 April 2016 $ 847
Development and manufacturing services
agreements September 2019 5,084
Total other commitments $ 5,931
Credit Facility
In June 2017 , we entered into a credit facility ("Credit Facility") 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
March 31, 2020 , we have not drawn from the Credit Facility. We may draw on the
Revolving Line of Credit at any time prior to the September 30, 2020 maturity
date. On October 1, 2023 , loans drawn under the Term Debt mature and the
Revolving Line of Credit terminates. Loans made under the Term Debt bear
interest through maturity at a variable rate based upon the LIBOR rate plus
3.6%. Advances made under the Revolving Line of Credit bear interest at a
variable annual rate equal to the greater of (i) 1.00% above the prime rate and
(ii) 5.00%.
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 March 31, 2020 , we were in
compliance with the covenants for the Credit Facility. For additional
information about our credit facility, see Note 11 "Commitments and
Contingencies" in the accompanying notes to the unaudited condensed consolidated
financial statements.
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Off-Balance Sheet Arrangements
As of March 31, 2020 , we did not have any 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
The preparation financial statements in conformity with generally accepted
accounting principles requires management to make judgments, estimates and
assumptions in the preparation of our consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no material changes to our critical accounting policies or estimates during
the three months ended March 31, 2020 from those discussed in our Annual Report
on Form 10-K for the year ended December 31, 2019 , filed with the SEC on
February 28, 2020 , except for critical accounting policies and estimates for
credit losses and for goodwill impairment. The changes in critical accounting
policies or estimates are due to adoption of Accounting Standards Update ("ASU")
2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments, and ASU No. 2017-04, Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which are described below:
Financial Instruments - Credit Losses (Topic 326)
On January 1, 2020 , we adopted the provisions of ASU 2016-13, Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, using a modified retrospective approach. The standard
changes the impairment model for most financial assets measured at amortized
cost, requiring the use of a "current expected credit loss" model. Under this
model, we are required to estimate the lifetime expected credit loss on
financial assets, and to record the estimate to an allowance for credit loss.
The allowance offsets the amortized cost basis of the financial asset, resulting
in a net presentation of the amount expected to be collected on the financial
asset or liability.
Financial assets measured at amortized cost
Financial assets measured at amortized cost include loans receivable, debt
security assets, trade receivables, net investments in leases, off-balance-sheet
credit exposures, reinsurance receivables, contract assets and any other
financial assets not excluded from the scope that have the contractual right to
receive cash. These assets are not accounted for at fair value through net
income.
Current expected credit model
The model requires that credit loss estimates include forecasted information in
its formulation. In addition, the model requires recognition of credit loss
estimates to be reflected in the financial statements before actual losses are
incurred.
Allowance for credit losses
The allowance for credit losses is a valuation account that reflects recognition
of losses under the current expected credit model. The allowance for credit
losses is deducted from the amortized cost basis of financial assets and is
presented net on the balance sheet. The net represents the expected to be
collected on the financial asset.
Intangibles - Goodwill and Other (Topic 350)
On January 1, 2020 , we adopted the provisions of ASU No. 2017-04, "Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,"
using a prospective approach. The standard simplifies the accounting for
goodwill impairments by eliminating step two from the goodwill impairment test.
Goodwill impairment will now be the amount by which a reporting unit's carrying
value exceeds its fair value. The adoption of ASU 2017-04 had no impact on our
unaudited condensed consolidated financial statements.
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