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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-02-28 · 378 added, 299 removed, 437 unchanged (61% of the section changed)

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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 over our sixteen year history, to commercialize an increasing number of novel proteins, both as proprietary Codexis products and in partnership with our customers.

We are a pioneer in the harnessing of computational technologies to drive biology advancements.

Since our inception in 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.

We discover, develop and sell enzymes and other proteins that deliver value to our clients in a growing set of industries.

We view proteins as a vast, largely untapped source of value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.

We are a pioneer in harnessing computational technologies to drive biology advancements.

Since 2002, we have made substantial investments in the development of our CodeEvolver ® protein engineering technology platform, the primary source of our competitive advantage.

Our technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine the structural and performance attributes of our large and continuously growing library of protein variants.

These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted performance enhancements.

In addition to its computational prowess, our CodeEvolver ® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and bioprocess development which are all coordinated to rapidly innovate novel, fit-for-purpose products.

The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex chemicals.

It begins by conceptually designing the most cost-effective and practical process for a targeted product.

We then develop optimized biocatalysts to enable the designed process, using our CodeEvolver ® platform.

Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated using high throughput methods under process-relevant operating conditions.

This approach results in an optimized biocatalyst that enables cost-efficient processes that are relatively simple to run in conventional manufacturing equipment.

This also allows for efficient technical transfer of our processes to our manufacturing partners.

The successful embodiment of our CodeEvolver ® protein engineering technology platform in commercial manufacturing processes requires well-integrated expertise in a number of technical disciplines.

In addition to those directly involved in practicing our CodeEvolver ® protein engineering platform technology, such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical engineering, fermentation process development and fermentation engineering.

Our integrated, multi-disciplinary approach to biocatalyst and process development is a critical success factor for our company.

We initially commercialized our CodeEvolver ® protein engineering technology platform and products in the pharmaceuticals market, which remains our primary business focus.

Our customers, which include several large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development.

We have also 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, in May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver ® Agreement”) with Novartis Pharma AG (“Novartis”).

The Novartis CodeEvolver ® Agreement allows Novartis to use Codexis’ 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.

In December 2019, we entered into a license agreement to provide 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, most notably our lead program for the potential treatment of phenylketonuria ("PKU") in humans.

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 (Codexis’ third such agreement with large pharma companies) allows Novartis to use our proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare.

As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals.

In addition, we are using our technology to develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular diagnostic and genomic research applications.

In December 2019, we entered into a license agreement to provide Roche Sequencing Solutions, Inc.

with our first enzyme for this target market:

the Company’s EvoT4™ DNA ligase.

In June 2020, we also entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”) pursuant to which we are leveraging our CodeEvolver ® platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis.

Concurrently with the MAI Agreement, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc ("MAI") pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and, in connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.

Approximately five years ago, we began using the CodeEvolver ® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both in partnership with customers and for our own proprietary Codexis drug candidates.

Our first program was for the potential treatment of phenylketonuria ("PKU") in humans.

PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient.

In October 2017, we entered into a Global Development, Option and License Agreement (the "Nestlé Agreement") with Nestlé Health Science, to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

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.

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 a lead candidate targeting a gastro-intestinal disorder discovered through our Strategic Collaboration Agreement into pre-clinical and early clinical studies.

Concurrently, the Strategic Collaboration Agreement was extended through December 2021.

See Note 16, “Subsequent Events” in the notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for details.

Also in October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

In January 2020, we entered into a development agreement with Nestlé Health Science to advance a new lead candidate discovered under the Nestlé SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder.

In parallel, the Nestlé SCA was extended through December 2021 to support the discovery of therapeutic candidates for additional disorders.

In March 2020, we entered into a Strategic Collaboration and License Agreement (“Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), for the research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and a blood factor deficiency.

Business Segments

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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.

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 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.

These markets consist of several large industrial verticals, including food, feed, consumer care, and fine chemicals.

We also use our technology in the life sciences markets to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring applications.

Novel Biotherapeutics

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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 hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans.

Our first lead program was for the potential treatment of hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans.

PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient.

In October 2017, we announced a global development, option and license agreement with Nestlé Health Science to advance CDX-6114, our own novel orally administrable enzyme therapeutic candidate for the potential treatment of PKU.

In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, which was conducted in Australia.

In November 2018, we announced top-line results from the Phase 1a study in healthy volunteers with CDX-6114.

In December 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.

In January 2019, we received notice from the U.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 in the United States.

In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, which was conducted in

The initiation of the trial triggered a $4.0 million milestone payment from Nestlé Health Science.

The $1.0 million milestone payment that was triggered by the achievement of a formulation relating to CDX-6114 was received in February 2019.

In January 2019, we received notice from the FDA that it had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the United States.

In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU.

As a result of the option exercise, we earned a milestone and recognized $3.0 million in revenues in the first quarter of 2019.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114, with the exception of the completion of an extension study, CDX-6114-004, which was

substantially completed in the fourth quarter of 2019.

In October 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.

Concurrently, the Strategic Collaboration Agreement was extended through December 2021.

Using our CodeEvolver ® protein engineering platform technology, we have also developed a pipeline of other biotherapeutic drug candidates, all of 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.

For further description of our business segments, see Note 15, "Segment, Geographical and Other Revenue Information," in the Notes to Condensed Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114.

During 2020, Nestlé Health Science completed a safety, tolerability and PK/PD study of CDX-6114 in PKU patients that demonstrated CDX-6114 was well tolerated and safe at all doses tested.

In addition, an increase in blood levels of cinnamic acid, a biomarker of enzyme activity, was observed which is consistent with the intended mode of action for CDX-6114.

In October 2017, we separately entered into the Nestlé SCA with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

In January 2020, we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance into pre-clinical and early clinical studies a lead candidate targeting a gastro-intestinal disorder, CDX-7108, discovered through the Nestlé SCA.

The Nestlé SCA was extended through December 2021.

During 2020, we, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in 2021.

Additionally, the parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder.

In March 2020, we entered into the Takeda Agreement with Takeda pursuant to which we are collaborating to research and develop protein sequences for use in gene therapy products for certain disease indications in accordance with the respective program plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency.

In March 2020, we received a one-time, non-refundable cash payment of $8.5 million.

Of these programs, the Fabry disease program is the most advanced, with multiple sequences, including CDX-6311, having been provided to Takeda.

For further description of our business segments, see Note 15, “Segment, Geographical and Other Revenue Information,” in the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Business Update Regarding COVID-19

We are subject to risks and uncertainties as a result of the current COVID-19 pandemic.

The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the U.S.

economy and other economies worldwide.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide.

However, we are dependent on our manufacturing and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers.

Furthermore, our ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our customers with whom we collaborate.

We believe that these disruptions have had a negative impact on revenue for the year ended December 31, 2020, although we are unable to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues.

The extent to which the pandemic may impact our business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.

In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of our Redwood City, California facilities and has disrupted our R&D operations.

R&D operations for several projects were temporarily suspended from mid-March 2020 through the end of April 2020 in accordance with these Orders.

In May 2020, we re-initiated limited R&D operations and have ramped up operations such that we are currently utilizing the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees.

Additionally, we resumed small scale manufacturing at our Redwood City pilot plant in May 2020.

Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

Risk Factors included in this Annual Report on Form 10-K.

Recent Investing Activities

In June 2020, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million.

In connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.

Concurrently with our initial equity investment, we entered into the MAI Agreement, pursuant to which we are performing services utilizing our CodeEvolver ® protein engineering platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock.

We received 714,171 share s of MAI's Series A preferred stock from research and development activities in the year ended December 31, 2020, and recognized $0.9 million in research and development revenue from these activities with MAI in the year ended December 31, 2020.

At December 31, 2020, we had $0.5 million of financial assets due from MAI for services rendered.

In November 2020, we announced the SynBio Innovation Accelerator (“Accelerator”) collaboration with Casdin Capital, LLC ("Casdin").

The goal of the Accelerator is to fund the early-stage companies with disruptive technology platforms or unique product development capabilities in the field of synthetic and industrial biotechnology.

There is no commitment under the Accelerator collaboration for either party to make any specific investments or any volume of investments.

The first investment by Codexis associated with the Accelerator collaboration was made in Arzeda Corp., a privately-held computational protein design company that focuses on computational approaches to designing novel enzyme functionality.

We invested $1.0 million in Arzeda and received a convertible subordinated note issued by Arzeda Corp.

The note is an available-for-sale non-marketable interest-bearing debt security which will mature in July 2021.

In December 2020, we completed an underwritten public offering of 4,928,572 shares of our common stock, including the exercise in full by the underwriters of their option to purchase an additional 642,857 of our shares, at a public offering price of $17.50 per share.

After deducting the underwriting discounts, commissions, and estimated offering expenses, net proceeds were approximately $80.8 million.

Results of Operations Overview

On January 1, 2018, we adopted Accounting Standards Update, or ASU, 2014-09 “ Revenue from Contracts with Customers (Topic 606)” and the related amendments (“ASC 606”).

Under the modified retrospective method, we applied the new standard to contracts which were not completed as of January 1, 2018.

Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASU 2009-13 “Revenue Recognition (Topic 605).” The adoption of ASC 606 limits the comparability of revenue and certain expenses, including revenues and costs and operating expenses, presented in the results of operations for the years ended December 31, 2019 and 2018 when compared to the year ended December 31, 2017.

Revenues were $69.1 million in 2020, a 1% increase from $68.5 million in 2019.

Product revenue, which consists primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $29.5 million in 2019, an increase of 15% compared with $25.6 million in 2018.

The increase in product revenue was primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $39.0 million in 2019, an increase of 11%, compared with $35.0 million in 2018.

The increase was primarily due to revenues from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement partially offset by less revenue due to the prior year completion of services to Tate & Lyle and lower development fees from Nestlé Health Science.

Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $30.2 million in 2020, an increase of 3% compared with $29.5 million in 2019.

The increase in product revenue was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $38.8 million in 2020, with a nominal decrease compared with $39.0 million in 2019.

The decrease in research and development revenue was primarily due to lower revenues from Novartis CodeEvolver ® Agreement, a prior year functional license fee revenue from Nestlé Health Science, and a prior year milestone payment from GSK under GSK CodeEvolver ® Agreement, partially offset by the recognition of license fees from Takeda under the Takeda Agreement, and recognition of functional license fees revenue from Porton.

Our products’ profitability is affected by many factors including the margin of profit on products we sell.

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Profit margin data is used as a management performance measure to provide additional information regarding our results of operations on a consolidated basis.

Product gross margins decreased to 47% in 2019, compared to 51% in 2018 due to variations in product mix.

Product gross margins increased to 55% in 2020, compared to 47% in 2019 due to improved product mix due to higher demand for enzymes for the manufacture of branded pharmaceutical products.

Research and development expenses were $44.2 million in 2020, an increase of 30% from $33.9 million in 2019.

The increase was primarily due to an increase in costs associated with higher headcount, higher allocable expenses mainly relating to facilities expenses, and increases in lab supplies, which were partially offset by lower outside services and stock compensation expense.

The increase was primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher headcount, higher allocable expenses, higher outside services, higher in depreciation expense and were partially offset by lower lab supply expenses.

Selling, general and administrative expenses were $35.0 million in 2020, an increase of 11% compared to $31.5 million in 2019.

The increase was primarily due to higher facility expense and an increase in costs associated with headcount, which were partially offset by lower allocable expenses and outside services.

The increase was primarily due to an increase in costs associated with headcount, stock compensation expense, consultants, legal and accounting fees, facilities, outside and temporary services, and licensed technology, which were partially offset by lower allocable expenses and travel expenses.

Net loss was $24.0 million, or a net loss of $0.40 per share, in 2020 compared to a net loss of $11.9 million, or a net loss of $0.21 per share, in 2019.

The increase in net loss was primarily related to higher operating expenses composed of increases in costs associated with headcount, higher allocable expenses, and higher facility expense.

The increase in net loss was primarily related to higher operating expenses composed of increases in costs associated headcount, higher outside services, higher stock compensation expenses, and higher facility expense.

Cash and cash equivalents increased to $149.1 million as of December 31, 2020 compared to $90.5 million as of December 31, 2019.

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We believe that based on our current level of operations, our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.

In June 2017, we entered into a loan and security agreement 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").

In June 2017, we entered into a loan and security agreement with Western Alliance Bank that allows us to borrow up to $10.0 million under a term loan, and up to $5.0 million under a revolving credit facility with 80% of certain eligible accounts receivable as a borrowing base (the “Credit Facility”).

Obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property.

In September 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.

In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the term debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively.

Draws on the term debt are subject to customary conditions for funding including, among others, that no event of default exists.

As of December 31, 2020, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility.

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Performance Enzymes

Revenues increased by $11.1 million, or 24%, to $58.2 million in 2019, compared to 2018.

The increase in product revenue was primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products.

The increase in research and development revenues was primarily due to revenues from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement partially offset by less revenue due to the prior year completion of services to Tate & Lyle.

Revenues decreased by $10.1 million, or 17%, to $48.1 million in 2020, compared to $58.2 million in 2019.

The increase in product revenue of $0.8 million, or 3%, to $30.2 million in 2020, compared to $29.5 million in 2019 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products.

The decrease in research and development revenue of $10.8 million, or 38%, to $17.9 million in 2020, compared to $28.7 million in 2019 was primarily due to lower revenues from Novartis CodeEvolver ® Agreement, a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement, and lower license fees and revenues from Merck, partially offset by the recognition of functional license fees revenue from Porton.

Product gross margins were 55% in 2020, compared to 47% in the corresponding period in 2019.

The decrease in product gross margins was primarily due to variations in product mix.

Research and development expense increased $0.5 million, or 2%, to $19.4 million in 2019 compared to 2018, due primarily to an increase in costs associated with higher headcount and higher allocable expenses, which were partially offset by lower costs of outside consultants and stock compensation expense.

Selling, general and administrative expense increased by $0.9 million, or 12%, to $8.5 million in 2019, compared to 2018, due primarily to an increase in costs associated with headcount and facilities which were partially offset by higher allocable expenses.

The increase in product gross margins was primarily due to improved product mix due to higher demand for enzymes for the manufacture of branded pharmaceutical products.

Research and development expense increased $1.5 million, or 8%, to $20.9 million in 2020, compared to $19.4 million in 2019, The increase was primarily due to an increase in costs associated with higher headcount, higher stock compensation expense, and higher repairs and maintenance expense, which were partially offset by lower lab supply expenses and lower allocable expenses.

Selling, general and administrative expense increased by $1.1 million, or 13%, to $9.6 million in 2020, compared to $8.5 million in 2019, due primarily to an increase in costs associated with licensed technology, outside services, stock compensation expense, and higher allocable expenses which were partially offset by lower travel expenses.

Novel Biotherapeutics

Research and development revenue decreased by $3.2 million, or 24%, to $10.3 million in 2019, compared to 2018.

Revenues in the Novel Biotherapeutics segment are derived entirely from research and development revenue from Nestlé Health Science relating to the development of our CDX-6114 product candidate under the Nestlé Agreement and to services under the Strategic Collaboration Agreement.

The decrease was primarily due to lower development fees from Nestlé Health Science as an extension study was substantially completed in 2019.

Research and development expense increased $3.1 million, or 30%, to $13.3 million in 2019, compared to 2018, due primarily to higher allocable expenses which was partially offset by lower stock compensation expense.

Selling, general and administrative expense increased by $1.5 million, or 188%, to $2.2 million in 2019, compared to the year of 2018, due primarily an increase in costs associated with headcount and higher stock compensation expense.

Research and development revenue increased by $10.6 million, or 103%, to $21.0 million in 2020, compared to $10.3 million in 2019.

The increase in research and development revenue was primarily due to recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé Health Science.

Research and development expense increased $8.4 million, or 63%, to $21.7 million in 2020, compared to $13.3 million in 2019.

The increase was primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses for CDX-7108 which we are developing pursuant to our development agreement with Nestlé Health Science, higher headcount, higher outside services, and higher allocable expenses which were partially offset by lower expenses for lab supplies and consultants.

Selling, general and administrative expense increased by $0.1 million, or 6%, to $2.4 million in 2020, compared to $2.2 million in 2019.

The increase was primarily due to an increase in costs associated with headcount, licensed technology, consultants and stock compensation expense which were partially offset by lower allocable expenses, outside services, and travel expenses.

GSK Platform Technology Transfer, Collaboration and License Agreement

In July 2014, we entered into a CodeEvolver ® protein engineering platform technology transfer collaboration and license agreement (the "GSK CodeEvolver ® Agreement") with GlaxoSmithKline ("GSK").

In July 2014, we entered into a CodeEvolver ® protein engineering platform technology transfer collaboration and license agreement (the “GSK CodeEvolver ® Agreement”) with GSK.

Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver ® protein engineering platform technology to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products.

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We 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.

In September 2019, we received notification from GSK that a milestone relating to the advancement of an enzyme developed by GSK using our CodeEvolver ® protein engineering platform technology has been achieved, triggering a $2.0 million milestone payment to Codexis from GSK.

We recognized revenue of $2.0 million for the milestone payment in 2019, compared to zero in 2018 and 2017, respectively, as research and development revenue.

We are also eligible to receive royalties, based on net sales of GSK’s sales of licensed enzyme products, that are currently not being recognized.

In 2019, we received a $2.0 million milestone payment relating to the advancement of an enzyme developed by GSK using our CodeEvolver ® protein engineering platform technology.

We recognized research and development revenue of nil, $2.0 million and nil in 2020, 2019, and 2018, respectively.

Merck Platform Technology Transfer and License Agreement

In August 2015, we entered into a CodeEvolver ® platform technology transfer collaboration and license agreement (the “Merck CodeEvolver ® Agreement”) with Merck, Sharp & Dohme (“Merck”) which allows Merck to use the CodeEvolver ® protein engineering technology platform in the field of human and animal healthcare.

We received a $5.0 million up-front license fee upon execution of the Merck CodeEvolver ® Agreement, and milestone payments in September 2015 and in September 2016, when we completed the transfer of the engineering platform technology.

Additionally, we recognized research and development revenues of $4.0 million, $4.1 million, and $4.1 million in 2019, 2018 and 2017, 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 API that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver ® protein engineering technology platform.

We received an upfront license fee upon execution of the Merck CodeEvolver ® Agreement, and milestone payments in September 2015 and in September 2016, when we completed the transfer of the engineering platform technology.

Additionally, we recognized research and development revenues of $3.1 million, $4.0 million, and $4.1 million in the years ended December 31, 2020, 2019 and 2018, respectively, for various research projects under our collaborative arrangement.

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.

In October 2018, we entered into an amendment to the Merck CodeEvolver ® Agreement whereby we amended certain licensing provisions and one exhibit.

In January 2019, we entered into an amendment to the Merck CodeEvolver ® Agreement whereby we installed certain CodeEvolver ® protein engineering technology upgrades into Merck’s platform license installation and we will maintain those upgrades for a multi-year term.

We recognized $0.9 million in research and development revenues under the terms of the amendment in the year ended December 31, 2019.

As of December 31, 2019 and 2018, we had no deferred revenue balances.

The license installation was completed in 2019 and we recognized $0.9 million as license fee revenue accordingly in 2019 under the amendment.

Pursuant to the agreement, Merck has options to future technology enhancements for a specified fee.

As of December 31, 2020, Merck has not exercised its option for technology enhancements.

We recognize d $0.1 million and $0.9 million in research and development revenues under the terms of the amendment in the years ended December 31, 2020 and 2019, respectively.

Merck Sitagliptin Catalyst Supply Agreement

In February 2012, we entered into a five-year Sitagliptin Catalyst Supply Agreement (“Sitagliptin Catalyst Supply Agreement”) with Merck whereby Merck may obtain commercial scale enzyme for use in the manufacture of Januvia ® , its product based on the active ingredient sitagliptin.

In December 2015, Merck exercised its option under the terms of the Sitagliptin Catalyst Supply Agreement to extend the agreement for an additional five years through February 2022.

Effective as of January 2016, we and Merck amended the Sitagliptin Catalyst Supply Agreement to prospectively provide for variable pricing based on the cumulative volume of sitagliptin catalyst purchased by Merck and to allow Merck to purchase a percentage of its requirements for sitagliptin catalyst from a specified third-party supplier.

Merck received a distinct, functional license to manufacture a portion of its demand beginning January 1, 2018, which we recognized as research and development revenue.

We recognized research and development revenues of nil, nil and $1.3 million of research and development revenues in the years ended December 31, 2020, 2019 and 2018, respectively.

We have determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin catalyst purchased by Merck, provides Merck material rights and we are recognizing product revenues using the alternative method.

Under the alternative approach, we estimate the total expected consideration and allocate it proportionately with the expected sales.

The Sitagliptin Catalyst Supply Agreement requires Merck to pay an annual fee for the rights to the sitagliptin technology each year for the term of the Sitagliptin Catalyst Supply Agreement.

Amounts of annual license fees are based on contractually agreed prices and are on a declining scale over the term of the contract.

Pursuant to the terms of the Sitagliptin Catalyst Supply Agreement, Merck may purchase supply from us for a fee based on contractually stated prices.

We recognized $13.4 million, $15.1 million and $12.3 million in product revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

Revenues from Merck under the Sitagliptin Catalyst Supply Agreement comprised 19%, 22%, and 22% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively.

The Sitagliptin Catalyst Supply Agreement will terminate in February 2022 unless extended and we have not received an amendment to extend the agreement.

As of December 31, 2020, we recorded revenue of $6.8 million from sitagliptin products that were recognized over time based on the progress of the manufacturing process.

These products will be shipped within the six month period following the end of the quarter.

The contract asset balances were partially offset by contract liabilities as they are under the same contract.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

In October 2017, we entered into the Nestlé Agreement with Societé des Produits Néstle S.A., formerly known as Nestec Ltd.

("Nestlé Health Science") and, solely for the purpose of the integration and the dispute resolution clauses of the Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

We received an upfront cash payment of $14.0 million upon the execution of the Nestlé Agreement and 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.

In October 2017, we entered into the Nestlé License Agreement with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd.

(“Nestlé Health Science”) and, solely for the purpose of the integration and the dispute resolution clauses of the Nestlé License Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

We received an upfront cash payment of $14.0 million upon the execution of the Nestlé License Agreement, a $4.0 million milestone payment after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, and a $1.0 million milestone payment upon achievement of a milestone relating to formulation of CDX-6114.

The $4.0 million milestone payment that was triggered by the initiation of the trial was received in September 2018 and the $1.0 million milestone payment that was triggered by the achievement of a formulation relating to CDX-6114 was received in February 2019.

The upfront payment and the variable consideration relating to the progress payment of $4.0 million and milestone payment of $1.0 million 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 $1.9 million, $9.9 million, and $7.2 million in research and development revenue in 2019, 2018, and 2017, respectively.

We had deferred revenue under this agreement of $13 thousand at December 31, 2019 and $1.9 million at December 31, 2018.

In January 2019, we received notice from the U.S.

The upfront payment and the variable consideration relating to the progress payment of $4.0 million and milestone payment of $1.0 million were recognized over time as the development work was performed.

Revenue was recognized using a single measure of progress that depicted our performance in transferring control of the services, which was based on the ratio of level of effort incurred to date compared to the total estimated level of effort required to complete all performance obligations under the agreement.

We recognized development fees of $13 thousand, $1.9 million, and $9.9 million in research and development revenue in 2020, 2019, and 2018, respectively.

The option payment of $3.0 million was recognized in the first quarter of 2019 as research and development revenue.

We are also 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 concurrently 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.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114.

We are also eligible to receive payments from Nestlé Health Science under the Nestlé License Agreement that include (i) development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of product.

In October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® protein engineering technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

Under the Strategic Collaboration Agreement, we received an upfront payment of $1.2 million in 2017 and an incremental $0.6 million payment in September 2018 for additional services.

We recognized research and development fees of $5.4 million, $3.6 million and $0.5 million in 2019, 2018 and 2017 respectively.

As of December 31, 2019 and 2018, we had deferred revenue of $13 thousand and $0.8 million, respectively.

Concurrently, the Strategic Collaboration Agreement was extended through December 2021.

See Note 16, "Subsequent Events” in the notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

The Nestlé SCA has been extended through December 2021.

In January 2020, we entered into a development agreement with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to advance a lead candidate, CDX-7108, targeting a gastro-intestinal disorder discovered through our Nestlé SCA into pre-clinical and early clinical studies.

Under the Nestlé SCA and the development agreement, we recognized research and development fees of $7.9 million , $5.4 million, and $3.6 million in 2020, 2019 and 2018 respectively.

Strategic Collaboration Agreement

In April 2018, we entered into the Porton Agreement with Porton to license key elements of Codexis’ biocatalyst technology for use in Porton’s global custom intermediate and API development and manufacturing business.

In April 2018, we entered into a Strategic Collaboration Agreement (the “Porton Agreement”) with Porton Pharma Solutions Ltd.

(“Porton”) to license key elements of our biocatalyst technology for use in Porton’s global custom intermediate and API development and manufacturing business.

Under the Porton Agreement, we are eligible to receive annual collaboration fees and research and development revenues.

We received 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.

We received initial collaboration payments of $0.5 million within 30 days of the effective date of the Porton Agreement, $1.5 million upon the first anniversary of the effective date of the agreement, and $1.0 million upon the second anniversary of the effective date of the agreement and we are eligible to receive $1.0 million on the third anniversary of the effective date of the agreement.

We completed the technical transfer in the fourth quarter of 2018 and recognized $2.8 million in research and development revenue.

We recognized revenue related to the functional license provided to Porton at a point in time when control of the license was transferred to the customer.

We recognized research and development revenue related to the Porton Agreement of $1.1 million, nil, and $2.8 million in 2020, 2019 and 2018, respectively.

Platform Technology Transfer and License Agreement

In May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver ® Agreement”) with Novartis Pharma AG (“Novartis”).

The Agreement allows Novartis to use Codexis’ proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare.

Under the Novartis CodeEvolver ® Agreement, we will transfer Codexis' 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 will provide to Novartis Codexis’ proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms.

In addition, teams of Codexis and Novartis scientists will participate in technology training sessions and collaborative research projects at Codexis’ laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland.

In May 2019, we entered into a Platform Technology Transfer and License Agreement (the “Novartis CodeEvolver ® Agreement”) with Novartis.

The Agreement allows Novartis to use our proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare.

Under the Novartis CodeEvolver ® Agreement, we are transferring our proprietary CodeEvolver ® protein engineering platform technology to Novartis over approximately 25 months starting with the date on which we commenced the technology transfer (the “Technology Transfer Period”).

As a part of this technology transfer, the Company provided to Novartis our proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms.

In addition, teams of the Company and Novartis scientists participated in technology training sessions and collaborative research projects at our laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland.

Upon completion of technology transfer, Novartis will have the CodeEvolver ® protein engineering platform technology installed at its designated laboratory.

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 (“Improvements Term”), Novartis will pay Codexis 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 to Codexis for each quarter that Novartis manufactures API using a CodeEvolver ® -developed enzyme.

In the second quarter of 2020, we completed the second technology milestone transfer under the agreement and became eligible to receive a milestone payment of $4.0 million, which we subsequently received in July 2020.

We have also billed $3.4 million for partial completion of the third technology milestone and we expect to receive payment in the first quarter of 2021.

In addition to this payment we are eligible for an additional payment of $1.6 million for completion of the third technology milestone transfer, which would bring total cash payment for this milestone to $5 million as specified in the Novartis CodeEvolver ® Agreement.

In consideration for the continued disclosure and license of improvements to the our technology and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period (“Improvements Term”), Novartis will pay Codexis annual payments which amount to an additional $8.0 million.

The Company also has the potential to receive quantity-dependent, usage payments for each API that is manufactured by Novartis using one or more enzymes that have been developed or are in development using the CodeEvolver ® protein engineering platform technology during the period that begins on the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire licensed patent.

These product-related usage payments, if any, will be paid by Novartis to the Company for each quarter that Novartis manufactures API using a CodeEvolver ® -developed enzyme.

The usage payments will be based on the total volume of API produced using the CodeEvolver ® -developed enzyme.

These usage payments can begin in the clinical stage and will extend throughout the commercial life of each API.

Revenue for the combined initial license and technology transfer performance obligation, which is expected to occur over twenty 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 for the combined initial license and technology transfer performance obligation, which is expected to occur over twenty-three months, is being recognized using a single measure of progress that depicts our performance in transferring control of the services, which is based on the ratio of level of effort incurred to date compared to the total estimated level of effort required to complete the performance obligation relating to the combined initial license and technology transfer.

Revenue allocated to future improvements will be recognized during the Improvement Term.

We recognized $11.3 million in revenue in 2019 from the Novartis CodeEvolver ® Agreement.

As of December 31, 2019, we had no deferred revenue from the Novartis CodeEvolver ® Agreement.

We recognized $6.2 million and $11.3 million in research and development revenue in 2020 and 2019, respectively, from the Novartis CodeEvolver ® Agreement.

Strategic Collaboration and License Agreement

In March 2020, we entered into a Strategic Collaboration and License Agreement (the “Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co.

(“Takeda”), under which we are collaborating to research and develop protein sequences for use in gene therapy products for certain diseases.

On execution of the Takeda Agreement, we received an upfront non-refundable cash payment of $8.5 million.

Revenue relating to the functional licenses provided to Takeda was recognized at a point in time when the control of the license transferred to the customer.

Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical approval milestones for initial programs to earn $15.4 million, (ii) development and commercialization-based milestones, per target gene, of up to $100.0 million, the modulation of which leads to treatment of certain diseases by the applicable product, and (iii) tiered royalties based on net sales of applicable products at percentages ranging from the middle-single digits to low single-digits.

We recognized research and development revenue related to the Takeda Agreement of $13.2 million in 2020.

As of December 31, 2020, we had $1.5 million in deferred revenue.

Master Collaboration and Research Agreement and Stock Purchase Agreement

In June 2020, we entered into a Stock Purchase Agreement with Molecular Assemblies, Inc.

(“MAI”) pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million.

In connection with the transaction, John Nicols, our President and Chief Operating Officer, also joined MAI’s board of directors.

Concurrently with our initial equity investment, we entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”), pursuant to which we are performing services utilizing our CodeEvolver ® protein engineering platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock.

Based on these services, the Company is eligible to earn additional shares of MAI's Series A preferred stock.

MAI will combine its advanced chemistries with our enzymes to drive the process to commercialization.

We are eligible to earn such non-monetary payments over ten to thirteen months, and any such shares would be issued thirty days in arrears after each calendar quarter-end.

We are also eligible to receive amounts for bonuses, targets and milestones on achievement of timeline and project goals specified in the statement of work ("SOW").

Payments for bonuses, targets and milestones on achievement of timeline and project goals are to be issued thirty days after the Company provides notification of completion.

We recognized research and development revenue of $0.9 million in 2020.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies”, to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Financial results for the years ended December 31, 2019 and 2018, as compared to the year ended December 31, 2017, reflected the effects of adopting ASU 2014-09, “Revenue from Contracts with Customers (Topic 606), ” and the related amendments (“ASC 606”), which provided a new basis of accounting for our revenue arrangements during fiscal years in 2019 and 2018.

The adoption of ASC 606 limited the comparability of revenue and certain expenses, including revenues and costs and operating expenses, presented in the results of operations for the years ended December 31, 2019 and 2018 when compared to the year ended December 31, 2017.

The effects of adopting 2016-02, " Leases (Topic 842)" (“ASC 842”), and related amendments required lessees to record a ROU asset and lease obligations on the balance sheet for all leases with terms longer than 12 months, and disclose key information about leasing arrangements.

The adoption of ASC 842 limited the comparability of assets and liabilities in the balance sheets for the year ended December 31, 2019 when compared to the year ended December 31, 2018.

In addition, lease costs which are included in operating expenses, presented in the results of operations for the year ended December 31, 2019 are limited in comparability when compared to the years ended December 31, 2018 and 2017.

For information on recent accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies ”, in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Results of Operations

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Our revenues are comprised of product revenue and research and development revenue as follows:

• Product revenue consist 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, and revenue sharing arrangement based upon sales of licensed products by our former revenue sharing partner, Exela PharmSci, Inc.

(“Exela”) in 2017.

• Product revenue consist of sales of biocatalysts, 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.

Revenues are as follows (in thousands, except percentages):

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Total revenues increased by $0.6 million in 2020 to $69.1 million, as compared to 2019.

The increase was driven by growth in product revenue of $3.9 million, or 15%, and research and development revenue of $4.0 million, or 11%.

Product revenue, which consist primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, were $29.5 million in 2019, an increase of 15% compared with $25.6 million in 2018.

The increase in product revenue is primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products.

Research and development revenue increased by $4.0 million in 2019 to $39.0 million, or 11% compared with $35.0 million in 2018, primarily due to revenues from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement partially offset by less revenue due to the prior year completion of services to Tate & Lyle and lower development fees from Nestlé Health Science.

The increase was driven by growth in product revenue of $0.8 million, or 3%, offset by decrease in research and development revenue of $157 thousand, or nominal percent.

Product revenue, which consist primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, were $30.2 million in 2020, an increase of 3% compared with $29.5 million in 2019.

The increase in product revenue is primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products.

Research and development revenue decreased by $157 thousand in 2020 to $38.8 million, or nominal percent compared with $39.0 million in 2019, primarily due to lower revenues from the Novartis CodeEvolver ® Agreement, a prior year functional license fee revenue from Nestlé Health Science, and a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by the recognition of license fees from Takeda under the Takeda Agreement, and recognition of functional license fees revenue from Porton.

2019 compared to 2018

Total revenues increased by $7.9 million in 2019 to $68.5 million, as compared to 2018.

The increase was driven by growth in research and development revenue of $11.7 million, or 50%, partially offset by a decrease of $1.1 million in product revenue.

Product revenue, which consist primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, were $25.6 million in 2018, a decrease of 4% compared with $26.7 million in 2017.

The decrease was primarily due to variability in our customers’ manufacturing schedules.

Research and development revenue increased by $11.7 million in 2018 to $35.0 million, as compared to 2017, primarily due to revenues from our arrangements with Nestlé Health Science for the development of CDX-6114 and development of novel enzymes for Nestlé Health Science under our Strategic Collaboration Agreement, research and development revenue from Tate & Lyle, Merck and Novartis, and on the recognition of a functional license fee and technology transfer from Porton.

The increase was driven by growth in product revenue of $3.9 million, or 15%, and research and development revenue of $4.0 million, or 11%.

Product revenue, which consist primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, were $29.5 million in 2019, an increase of 15% compared with $25.6 million in 2018.

The increase in product revenue is primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products.

Research and development revenue increased by $4.0 million in 2019 to $39.0 million, or 11% compared with $35.0 million in 2018, primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement partially offset by lower revenue from Tate & Lyle due to the prior year completion of services and lower development fees from Nestlé Health Science.

Cost and Operating Expenses (in thousands, except percentages):

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2020 compared to 2019

Cost of product revenue decreased by $1.9 million in 2020 to $13.7 million, as compared to 2019.

The decrease was primarily due to lower costs compared to costs associated with prior year product revenue.

Product gross margin increased to 55% in 2020 as compared to 47% in 2019 due to improved product mix.

2019 compared to 2018

Cost of product revenue increased by $3.0 million in 2019 to $15.6 million, as compared to 2018.

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Product gross margin decreased to 47% in 2019 as compared to 51% in 2018 due to the variations in product mix.

2018 compared to 2017

Cost of product revenue decreased by $1.7 million in 2018 to $12.6 million, as compared to 2017.

The decrease was primarily due to a reduction in costs associated with a reduction in product revenue.

Product gross margin increased to 51% in 2018 as compared to 46% in 2017 due to the change in sales mix as we had an increase in sales of higher margin products in 2018 compared to 2017.

Research and Development Expenses

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Research and development expenses were $44.2 million in 2020 compared to $33.9 million in 2019, an increase of $10.3 million, or 30%.

The increase was primarily due to $2.1 million in costs associated with higher headcount, $2.1 million in higher allocable expenses which include occupancy-related costs and supplies, and increases of $0.8 million in lab supplies, which were partially offset by a decrease of $0.5 million in outside services and a decrease of $0.6 million in stock compensation expense.

The increase was primarily due to $5.0 million in costs associated with outside services relating to CMC and regulatory expenses, $3.4 million in costs associated with higher headcount, $1.5 million in higher allocable expenses which include occupancy-related costs and supplies, $0.4 million in higher outside services, $0.3 million in higher depreciation expense and were partially offset by a decrease of $0.4 million in lab supply expenses.

2019 compared to 2018

Research and development expenses were $33.9 million in 2019 compared to $30.0 million in 2018, an increase of $3.9 million, or 13%.

The increase was primarily due to $1.9 million in costs associated with higher headcount, $1.1 million in higher allocable expenses which include occupancy-related costs and supplies, and increases of $0.7 million in lab supplies, $0.6 million in stock compensation expenses, and $1.0 million increase in repairs and maintenance costs, outside consultants and travel costs.

These increases were partially offset by a decrease of $4.9 million in outside services which were mostly related to prior year development costs for project CDX-6114.

Selling, General and Administrative Expenses

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Selling, general and administrative expenses were $35.0 million in 2020 compared to $31.5 million in 2019, an increase of $3.5 million, or 11%.

The increase was primarily due to increases of $2.2 million in facility expense, $2.6 million in salaries and personnel costs associated with higher headcount, which were partially offset by decreases of $2.1 million in allocable expenses and $0.5 million in outside services.

The increase was primarily due to increases of $1.7 million in salaries and personnel costs associated with higher headcount, $0.6 million in stock compensation expense, $0.8 million in consultants, $0.8 million in legal and accounting fees, $0.7 million in facilities, $0.7 million in outside and temporary services, $0.4 million in licensed technology, which were partially offset by decreases of $1.6 million in allocable expenses and $0.8 million in travel expenses.

2019 compared to 2018

Selling, general and administrative expenses were $31.5 million in 2019 compared to $29.3 million in 2018, an increase of $2.2 million, or 8%.

The increase was primarily due to increases of $1.2 million in salaries and personnel costs associated with higher headcount, $1.0 million in consulting and outside services, $0.4 million in recruiting fees, $0.3 million in accounting fees and $0.2 million in stock compensation expense which were partially offset by a decrease of $1.1 million in allocable expenses and $1.8 million in legal expenses related to 2017 activities.

Other Income (Expense), net (in thousands, except percentages):

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Interest Income

Interest income increased by $0.6 million in 2019 compared to 2018, and increased by $0.5 million in 2018 compared to 2017.

The changes were primarily due to higher interest rates on higher levels of cash and cash equivalents.

Interest income decreased by $0.9 million in 2020 compared to 2019, primarily due to lower average interest rates on declining average cash balances.

Interest income increased by $0.6 million in 2019 compared to 2018, primarily due to higher interest rates on higher levels of cash and cash equivalents.

Other Expense

Other expense decreased by $0.5 million in 2020 compared to 2019 primarily due to prior year write-down of $0.5 million of our investment in CO 2 Solutions and fluctuations in foreign currency.

Other expense increased by $0.4 million in 2019 compared to 2018, primarily due to $0.5 million write-down in the fair value of our investment in CO 2 Solutions partially offset by gains from fluctuations in foreign currency.

Other expense increased by $0.2 million in 2018 compared to 2017, primarily due to an unrealized loss of $84 thousand related to our investment in CO 2 Solutions and expenses due to fluctuations in foreign currency.

Provision for (benefit from) Income Taxes (in thousands, except percentages):

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Provision for (benefit from) income taxes $ 339 $ 17 $ (37) $ 322 1,894 % $ 54 146 %

The provision for income taxes for 2019 was primarily due to the accrual of interest and penalties on historic uncertain tax positions.

The provision for income taxes for 2020 was primarily due to foreign withholding taxes on certain sales to non-U.S.

The provision for income taxes in 2019 was primarily due to the accrual of interest and penalties on historic uncertain tax positions.

The benefit from income taxes in 2018 was primarily related to a net loss from our foreign operations and a reduction in the deferred tax liability for accrued future withholding taxes on dividends.

The provision for income taxes for 2017 was primarily related to taxes on foreign earnings and an increase in the deferred tax liability for accrued future withholding taxes on dividends.

Net loss for 2020 was $24.0 million, or a net loss per basic and diluted share of $0.40.

This compared to a net loss of $11.9 million, or a net loss per basic and diluted share of $0.21 for 2019.

The increases in net loss was primarily attributable to higher operating expenses due to increase in costs associated with headcount, higher allocable expenses, and higher facility expense.

The decrease in net loss for 2018 over a net loss of $23.0 million, or a net loss per basic and diluted share of $0.50, for 2017 was primarily attributable a net increase in revenue and reductions in product costs.

The net increase in revenue was primarily attributed to research and development revenue from Nestlé Health Science and Tate & Lyle partially offset by a decrease in product revenue due to variability in our customers’ manufacturing schedules.

The reduction in product costs reflected the sale of higher gross margins products partially offset by lower costs associated with the reduction in product revenue.

The increase in net loss was primarily related to increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount, higher consultants, higher stock compensation expenses and higher facility expense.

The net loss for 2019 was $11.9 million, or a net loss per basic and diluted share of $0.21, for 2019.

This compared to a net loss of $10.9 million, or a net loss per basic and diluted share of $0.21 for 2018.

The increases in net loss was primarily attributable to higher operating expenses due to increases in costs associated with headcount, outside services, higher allocable expenses, and higher facility expense.

Results of Operations by Segment (in thousands, except percentages)

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2020 compared to 2019

Revenues from the Performance Enzymes segment decreased by $10.1 million, or 17%, to $48.1 million in 2020, compared to $58.2 million in 2019.

Revenues from the Novel Biotherapeutics segment increased by $10.6 million, or 103%, to $21.0 million in 2020, compared to $10.3 million in 2019.

The increase in revenue was primarily due to recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé Health Science.

2019 compared to 2018

Revenues from the Performance Enzymes segment increased by $11.1 million, or 24%, to $58.2 million in 2019, compared to $47.1 million in 2018.

The increase in product revenue was primarily due to higher customer demand for enzymes for the manufacture of both branded and generic pharmaceuticals products.

The increase in research and development revenues was primarily due to revenues from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by less revenue due to the prior year completion of services to Tate & Lyle.

The increase in research and development revenues was primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and a milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by less revenue due to the prior year completion of services to Tate & Lyle.

Revenues from the Novel Biotherapeutics segment decreased by $3.2 million, or 24%, to $10.3 million in 2019, compared to $13.5 million in 2018.

Revenues in the Novel Biotherapeutics segment are derived entirely from research and development revenue from Nestlé Health Science relating to the development of the CDX-6114 product candidate under the Nestlé Agreement and to services under the Strategic Collaboration Agreement.

Our revenues from the Novel Biotherapeutics segment are substantially dependent on revenues generated from Nestlé Health Science, which, if lost, would have a material adverse effect on the Novel Biotherapeutics segment.

Revenues in the Novel Biotherapeutics segment are derived entirely from research and development revenue from Nestlé Health Science relating to the development of the CDX-6114 product candidate under the Nestlé License Agreement and to services under the Nestlé SCA.

The decrease was primarily due to lower development fees from Nestlé Health Science as an extension study was substantially completed in 2019.

2018 compared to 2017

Revenues from the Performance Enzymes segment increased by $4.7 million, or 11%, to $47.1 million in 2018, compared to $42.3 million in 2017 primarily due to an increase in research and development revenue from Tate & Lyle, Merck and Novartis, and on the recognition of a functional license fee from Porton.

This increase was partially offset by a decrease in product revenue primarily due to variability in our customers’ manufacturing schedules.

Revenues from the Novel Biotherapeutics segment increased by $5.8 million, or 76%, to $13.5 million in 2018, compared to $7.7 million in 2017.

Revenues from the Novel Biotherapeutics segment are derived primarily from research and development revenue relating to the development of our CDX-6114 product candidate in collaboration with Nestlé Health Science.

Our dependence on revenues generated from Nestlé Health Science, if lost, would have a material adverse effect on the Novel Biotherapeutics segment.

Costs and operating expenses by segment

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Research and development expense in the Performance Enzymes segment increased by $1.5 million, or 8%, to $20.9 million in 2020, compared to $19.4 million in 2019.

The increase was primarily due to $2.2 million associated with higher headcount

which was partially offset by a decrease of $1.2 million in allocable expenses, which included occupancy-related costs, supplies, and depreciation expense, and a decrease of $0.5 million in stock compensation expense.

The increase was primarily due to an increase in costs associated with higher headcount, higher stock compensation expense, higher repairs and maintenance expense, and were partially offset by lower lab supply expenses and lower allocable expenses.

Selling, general and administrative expense in the Performance Enzymes segment increased by $1.1 million, or 13%, to $9.6 million in 2020, compared to $8.5 million in 2019.

The increase was primarily due to $0.5 million in higher costs associated with increased headcount, $0.2 million in higher stock compensation expense, and $0.1 million in higher allocable expenses.

The increase was primarily due to an increase in costs associated with licensed technology, outside services, stock compensation expense, and higher allocable expenses which were partially offset by lower travel expenses.

Research and development expense in the Novel Biotherapeutics segment increased by $8.4 million, or 63%, to $21.7 million in 2020, compared to $13.3 million in 2019.

The increase was primarily due to $3.2 million increase in allocable expenses which was partially offset by a decrease of $0.1 million in stock compensation expense.

The increase was primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses for CDX-7108 which we are developing pursuant to our development agreement with Nestlé Health Science, higher headcount, higher outside services, and higher allocable expenses and were partially offset by lower lab supply expenses and consultant expense.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million, or 6%, to $2.4 million in 2020, compared to $2.2 million in 2019.

The increase was primarily due to an increase of $1.0 million in higher costs associated with increased headcount and $0.5 million in higher stock compensation expense.

2019 compared to 2018

Research and development expense in the Performance Enzymes segment increased by $0.5 million, or 2%, to $19.4 million in 2019, compared to $18.9 million in 2018.

The increase was primarily due to $2.2 million in associated with increased headcount, $0.6 million in lab supplies costs and $0.5 million in stock compensation expenses.

These increases were partially offset by a decrease of $1.2 million in allocable expenses, which include occupancy-related costs, supplies, and depreciation expense.

The increase was primarily due to $2.2 million associated with higher headcount which was partially offset by a decrease of $1.2 million in allocable expenses, which included occupancy-related costs, supplies, and depreciation expense, and a decrease of $0.5 million in stock compensation expense.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.9 million, or 12%, to $8.5 million in 2019, compared to $7.5 million in 2018.

The increase was primarily due to $0.8 million in higher costs associated with increased headcount, partially offset by a decrease of $0.4 million in lower allocable expenses and $0.2 million in lower stock compensation expense.

Research and development expense in the Novel Biotherapeutics segment decreased by $1.9 million, or 16%, to $10.2 million in 2018, compared to $12.1 million in 2017.

The decrease was primarily due to $4.9 million in lower costs associated with a reduction in the outside research and development services used in the development of the CDX-6114 product candidate.

The decrease was partially offset by a $2.3 million increase in allocable expenses, a $0.6 million increase in costs associated with higher headcount and a $0.1 million increase in stock compensation expense.

Selling, general and administrative expense in the Novel Biotherapeutics segment was $0.8 million in 2018 and primarily consisted of $0.5 million in allocable costs and $0.2 million in costs associated with headcount.

Selling, general and administrative expense in the Novel Biotherapeutics segment was zero in 2017.

De minimis selling, general and administrative expense incurred in 2017 were not allocated to the biotherapeutics segment.

The increase was primarily due to $0.5 million in higher costs associated with increased headcount, $0.2 million in higher stock compensation expense, and $0.1 million in higher allocable expenses.

Research and development expense in the Novel Biotherapeutics segment increased by $3.1 million, or 30%, to $13.3 million in 2019, compared to $10.2 million in 2018.

The increase was primarily due to $3.2 million increase in allocable expenses which was partially offset by a decrease of $0.1 million in stock compensation expense.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $1.5 million, or 188%, to $2.2 million in 2019, compared to $0.8 million in 2018.

The increase was primarily due to an increase of $1.0 million in higher costs associated with increased headcount and $0.5 million in higher stock compensation expense.

Income (loss) from operations by segment

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2020 compared to 2019

Income from operations in the Performance Enzymes segment decreased by $10.8 million, or 74%, to $3.8 million, in 2020, compared to $14.7 million in 2019.

The decrease in income from operations was primarily due to decrease in research and development revenue and increases in research and development costs and selling, general and administrative expense.

Loss from operations in the Novel Biotherapeutics segment decreased by $2.1 million, or 40%, to $3.1 million in 2020 compared to a loss from operations of $5.2 million in 2019.

The decrease in loss from operations was primarily due to the recognition of license fees from Takeda under the Takeda Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé Health Science, an increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount, higher outside services, and higher allocable expenses.

2019 compared to 2018

Income from operations in the Performance Enzymes segment increased $6.7 million, or 84%, to $14.7 million, in 2019, compared to $8.0 million in 2018.

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The decrease in income from operation was primarily due to a decrease of $3.2 million in revenue from the development of our CDX-6114 product candidate and the Strategic Collaboration Agreement with Nestlé Health Science, and increase in the outside research and development services used in the CDX-6114 product candidate development and selling, general and administrative expense.

2018 compared to 2017

Income from operations in the Performance Enzymes segment increased $4.2 million, or 111%, to $8.0 million, in 2018, compared to $3.8 million in 2017.

The increase in income from operations was primarily due to an increase in research and development revenue, a reduction in product costs associated with a decline in product revenue and a reduction in product costs associated with the sale of higher margin products.

These were partially offset by a decrease in product revenues and an increase in research and development costs.

Income from operations in the Novel Biotherapeutics segment increased $7.0 million, or 158%, to $2.6 million in 2018 compared to in 2017.

The increase in income from operation was primarily due to $5.8 million in revenue from the development of our CDX-6114 product candidate in collaboration with Nestlé Health Science, partially offset by lower costs associated with a reduction in the outside research and development services used in the CDX-6114 product candidate development.

Liquidity and Capital Resources

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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.

In May 2019, we entered into a Platform Technology Transfer and License Agreement with Novartis.

The Novartis CodeEvolver ® Agreement allows Novartis to use Codexis’ proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare.

Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver ® Agreement.

In 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 have also recognized $3.4 million for partial completion of the third technology milestone and we expect to receive payment in the first quarter of 2021.

Additionally, we are eligible to receive an additional $1.6 million upon satisfactory completion of the third technology transfer milestone.

In consideration for the continued disclosure and license of improvements to our technology and materials during a multi-year period that begins on the conclusion of the Technology Transfer Period (“Improvements Term”), Novartis will pay Codexis annual payments which amount to an additional $8.0 million.

We are actively collaborating with new and existing customers in the pharmaceutical and food industries.

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Our cash flows from operations will continue to be affected principally by sales and gross margins from licensing our technology to major pharmaceutical companies, product sales and collaborative research and development services provided to customers, as well as our headcount costs, primarily in research and development.

Our primary source of cash flows from operating activities is cash receipts from licensing our technology to major pharmaceutical companies, and our customers for purchases of products and/or collaborative research and development services.

Our primary source of cash flows from operating activities is cash receipts from our customers for purchases of products, collaborative research and development services, and licensing our technology to major pharmaceutical companies.

Our largest uses of cash from operating activities are for employee-related expenditures, rent payments, inventory purchases to support our product sales and non-payroll research and development costs.

In December 2016, we filed a registration statement on Form S-3 (the “2016 Registration Statement”) with the SEC, under which we may sell an aggregate of up to $80.0 million of common stock, preferred stock, debt securities, warrants, purchase contract and/or units.

The SEC declared the 2016 Registration Statement effective on January 10, 2017.

Subsequently, in April 2017, we completed an underwritten public offering of approximately 6.3 million shares of our common stock at an offering price of $4.00 per share.

The net proceeds to us were approximately $23.8 million after deducting offering costs and the underwriting discounts and commissions.

In April 2018, we completed an underwritten public offering of 4.3 million shares of our common stock at a public offering price of $9.25 per share resulting in net proceeds of approximately $37.5 million after deducting the underwriting discounts and commissions.

The 2016 Registration Statement has now expired.

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.

The 2016 Registration Statement became automatically effective upon filing.

In June 2019, we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital ("Casdin") pursuant to which we issued and sold to Casdin 3,048,780 shares of our common stock at a purchase price of $16.40 per share resulting in net proceeds of approximately $49.9 million after deducting related issuance costs.

In 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 September 2018, we entered into a Fourth Amendment to the Credit Facility whereby the draw period on the term debt was extended to September 30, 2019.

In June 2019, we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital, LLC (“Casdin”) pursuant to which we issued and sold to Casdin 3,048,780 shares of our common stock at a purchase price of $16.40 per share resulting in net proceeds of approximately $49.9 million after deducting related issuance costs.

In December 2020, we completed an underwritten public offering of approximately 4,928,572 shares of our common stock, par value $0.0001 per share, at an offering price of $17.50 per share.

The net proceeds to us were approximately $80.8 million after deducting offering costs and the underwriting discounts and commissions and other offering expenses of $5.5 million.

In June 2017, we entered into the Credit Facility with Western Alliance Bank which consists of term debt for loans that allow us to borrow up to $10.0 million and a revolving credit facility that allows us to borrow up to $5.0 million with a certain eligible accounts receivable borrowing base of 80% of eligible accounts receivable.

In January 2019, we entered into a Fifth Amendment to the Credit Facility to allow for Codexis to obtain a letter of credit of up to $1.1 million to secure its obligations under the Lease with MetLife.

In July 2019, we entered into a Sixth Amendment to the Credit Facility to increase permitted indebtedness to $0.7 million for financing insurance premiums in the ordinary course of business.

In September 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.

In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the Term Debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively, subject to customary conditions for funding including, among others, that no event of default exists.

Draws on the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property.

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 December 31, 2019.

On October 1, 2024 loans drawn under the Term Debt mature and the Revolving Line of Credit terminate.

No amounts were drawn under the credit facility as of December 31, 2020.

At December 31, 2020, we were in compliance with the covenants for the Credit Facility.

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For additional information about our contractual obligations, see Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

In October 2017, we entered into the Nestlé Agreement with Nestlé Health Science.

Pursuant to the Nestlé Agreement, Nestlé Health Science paid us an upfront cash payment of $14.0 million.

In October 2017, we entered into the Nestlé SCA with Nestlé Health Science.

Pursuant to the Nestlé License Agreement, Nestlé Health Science paid us an upfront cash payment of $14.0 million.

In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 for the potential treatment of PKU.

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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.

Other potential payments from Nestlé Health Science to us under the Nestlé License Agreement include (i) development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of Product.

We are subject to risks and uncertainties as a result of the current COVID-19 pandemic.

The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the U.S.

economy and other economies worldwide.

To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide.

We believe that these disruptions had a negative impact on revenue for the year ended December 31, 2020, although we are unable to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues.

R&D operations for several projects were temporarily suspended from mid-

March 2020 through the end of April 2020 in accordance with these Orders.

Additionally, we have resumed small scale manufacturing at our Redwood City pilot plant in May 2020.

While we believe we have adequate cash on hand to manage through the disruptions being caused by the COVID-19 pandemic, the extent to which the pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

Risk Factors included in this Annual Report on Form 10-K.

As of December 31, 2020, we had cash and cash equivalents of $149.1 million and $15.0 million available to borrow under our Credit Facility.

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Cash Flows from Operating Activities

Cash used in operating activities was $16.5 million in 2020, which resulted from a net loss of $24.0 million adjusted for non-cash depreciation of $2.0 million, right-of-use ("ROU") lease asset amortization expense of $2.6 million, stock-based compensation of $7.7 million, offset by equity securities earned from research and development activities of $0.9 million as well as changes in operating assets and liabilities.

The net change in operating assets and liabilities included decreases in other

long-term liabilities of $2.6 million and combined increases in financial assets of $8.7 million, prepaid expenses and other assets of $1.0 million, as well as accrued liabilities of $6.2 million and deferred revenue of $2.7 million.

Cash used in operating activities was $12.6 million in 2019, which resulted from a net loss of $11.9 million adjusted for non-cash depreciation of $1.6 million, ROU lease asset amortization expense of $3.0 million and stock-based compensation of $6.9 million, as well as changes in operating assets and liabilities.

The net change in operating assets and liabilities included decreases in deferred revenue of $6.2 million and in accounts receivable of $2.5 million, and combined increases in unbilled receivables of $7.4 million, contract assets of $1.0 million, prepaid expenses and other current assets of $1.4 million, as well as accrued liabilities of $2.5 million.

Cash used in operating activities was $14.1 million in 2018, which resulted from a net loss of $10.9 million adjusted for non-cash depreciation of $1.1 million and stock-based compensation of $7.9 million, as well as changes in operating assets and liabilities.

The net change in operating assets and liabilities included decreases in deferred revenue of $10.6 million primarily related to the Nestlé Agreement, and a combined increase in accounts receivable and unbilled receivables of $1.4 million.

The net change in operating assets and liabilities included decreases in deferred revenue of $6.2 million and in other long-term liabilities of $1.2 million, and combined increases in financial assets of $5.9 million, prepaid expenses and other assets of $1.3 million, as well as accrued liabilities of $2.2 million.

The net change in operating assets and liabilities included increases in deferred revenue of $11.0 million primarily related to the Nestlé Agreement, and an increase in accounts receivable and unbilled receivables of $5.7 million, and an increase in other accrued liabilities of $1.4 million, offset by lower accounts payable of $0.8 million due to the timing of payment of invoices.

The net change in operating assets and liabilities included decreases in deferred revenue of $10.6 million primarily related to the Nestlé License Agreement, a decrease in other long-term liabilities of $0.9 million and a combined increase in financial assets of $1.4 million as well as accrued liabilities of $0.5 million.

Cash Flows from Investing Activities

Cash used in investing activities was $3.7 million in 2019 primarily due to the purchase of property and equipment of $3.7 million and partially offset by proceeds from sale of CO 2 investment securities of $62 thousand.

Cash used in investing activities was $5.7 million in 2020 primarily due to the purchase of property and equipment of $3.7 million, and investments in non-marketable equity securities of $1.0 million and in non-marketable debt security of $1.0 million.

We expect our capital spending including replacement and upgrades of lab equipment and information technology equipment will be higher in 2021 as compared to 2020.

Cash used in investing activities was $2.8 million in 2018, primarily due to the purchase of property and equipment.

Cash used investing activities was $1.0 million in 2017, primarily due to the purchase of property and equipment.

Cash Flows from Financing Activities

Cash provided by financing activities was $80.8 million in 2020, primarily due to $80.8 million net proceeds from our offering of common stock after deducting underwriting discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net share settlement of equity awards.

Cash provided by financing activities was $54.0 million in 2019, primarily due to net proceeds from our private offering of common stock after deducting underwriting discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net share settlement of equity awards.

Cash provided by financing activities was $38.6 million in 2018, primarily due to net proceeds from our offering of common stock after deducting underwriting discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net share settlement of equity awards.

Cash provided by financing activities was $21.7 million in 2017, primarily due to net proceeds from our offering of common stock after deducting underwriting discounts and commission and related costs and proceeds from the exercises of employee stock options which were partially offset by the payment of taxes related to the net share settlement of equity awards.

Contractual Obligations

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Total Less than 1 year 1 to 3 years 4 to 5 years More than 5 years

Finance lease obligations $ 60 $ 60 $ — $ — $ —

Operating leases obligations (1)

$ 31,291 $ 4,197 $ 8,874 $ 9,594 $ 8,626

Total $ 34,166 $ 2,876 $ 8,482 $ 9,315 $ 13,493

(1) Represents future minimum lease payments under non-cancellable operating leases in effect as of December 31, 2020 for our facilities in Redwood City, California.

The minimum lease payments above do not include common area maintenance charges or real estate taxes.

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 13, “Commitments and Contingencies” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

For additional information see Note 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Other Commitments

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For additional information about other commitments, see Note 13, “ Commitments and Contingencies ” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Future minimum payments reflect amounts those obligations are expected to have on our liquidity and cash flows in future period and include obligations subject to risk of cancellation by us (in thousands):

Future minimum payments reflect

amounts those obligations are expected to have on our liquidity and cash flows in future period and include obligations subject to risk of cancellation by us (in thousands):

Other Commitment Agreement Type Agreement Date Future Minimum Payment

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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.

In June 2017, we entered into a credit facility (“Credit Facility”) financing arrangement with Western Alliance Bank consisting of term loans (“Term Debt”) up to $10.0 million, and advances (“Advances”) under a revolving line of credit (“Revolving Line of Credit”) up to $5.0 million with an accounts receivable borrowing base of 80% of eligible accounts receivable.

At December 31, 2020, we have not drawn from the Credit Facility.

We may draw on the 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%.

We may draw on the Term Debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively.

Term loans drawn under the Term Debt mature and the Revolving Line of Credit terminates on October 1, 2024.

Term loans made under the Term Debt bear interest at variable rate through maturity at the greater of (i) 3.75% or (ii) the sum of (A) Index Rate (prime rate published in the Money Rates section of the Western Edition of The Wall Street Journal plus (B) 0.50%.

Advances made under the Revolving Line of Credit bear interest at a variable annual rate equal to the greater of (i) 4.25% or (ii) the sum of (A) the prime rate plus (B) 1.00%.

Our obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property.

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For additional information about our credit facility, see Note 13, “ Commitments and Contingencies” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Subsequent Event

In the first quarter of 2021, we entered into a new lease facility agreement for 36,593 square feet in San Carlos, California to serve as additional office and research and development laboratory space.

The lease commences on or around November 1, 2021 once tenant improvements are substantially completed by the contractors in accordance with the construction plan.

For additional information see Note 17, “Subsequent Events” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

The following table summarizes the estimated contractual obligation entered into after December 31, 2020 (in thousands):

Payments due by period

Total Less than 1 year 1 to 3 years 4 to 5 years More than 5 years

Operating leases obligations (1)

$ 27,969 $ 208 $ 4,673 $ 5,398 $ 17,690

(1) Represents estimated future minimum lease payments under non-cancellable operating leases entered into after December 31, 2020 for additional facilities in San Carlos, California.

The estimated minimum lease payments above do not include common area maintenance charges or real estate taxes.

Off-Balance Sheet Arrangements

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Revenue Recognition

Policy from January 1, 2018

On January 1, 2018, we adopted the provisions of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606) ” and the related amendments (“ASC 606”).

The guidance provides a unified model to determine how revenue is recognized.

Our revenues are derived primarily from product revenue and collaborative research and development agreements.

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and (v) recognition of revenue when (or as) we satisfy each performance obligation.

The majority of our collaborative contracts contain multiple revenue streams such as up-front and/or annual license fees, research and development services, contingent milestone payments upon achievement of contractual criteria, and royalty fees based on the licensees' product revenue or usage, among others.

The majority of our collaborative contracts contain multiple revenue streams such as upfront and/or annual license fees, research and development services, contingent milestone payments upon achievement of contractual criteria, and royalty fees based on the licensees' product revenue or usage, among others.

We determine the stand-alone selling price (“SSP”) and allocate consideration to distinct performance obligations.

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Product Revenue

Product revenue consist of sales of protein catalysts, pharmaceutical intermediates and Codex ® biocatalyst panels and kits.

Product revenue consist of sales of biocatalysts, pharmaceutical intermediates and Codex ® biocatalyst panels and kits.

A majority of our product revenue is made pursuant to purchase orders or supply agreements and is recognized at a point in time when the control of the product has been transferred to the customer typically upon shipment.

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Milestone payments that are not within our control or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received.

The transaction price is

then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied.

At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price.

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We recognize revenue at the later of (i) when the related sale of the product occurs, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially satisfied.

We recognized revenues from a revenue sharing arrangement based upon sales of licensed products by our revenue sharing partner Exela PharmSci, Inc.

We recognized revenues net of product and selling costs upon notification from our revenue sharing partner of our portion of net profit based on the contractual percentage from the sale of licensed product.

The revenue sharing arrangement was terminated in December 2017.

Revenue Recognition Policy before January 1, 2018

The following is a description of our revenue recognition policy for periods prior to our adoption of ASC 606 on January 1, 2018.

We recognize revenue from the sale of our products, collaborative research and development agreements and revenue sharing arrangements.

Revenue is recognized when the related costs are incurred and the four basic criteria of revenue recognition are met:

(1) persuasive evidence of an arrangement exists;

(2) delivery has occurred or services have been rendered;

(3) the fee is fixed or determinable;

and (4) collectability is reasonably assured.

Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria of revenue recognition are met.

We account for revenues from multiple element arrangements, such as license and platform technology transfer agreements in which a licensee may purchase several deliverables, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-25, “Multiple Element Arrangements.” For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the arrangement and each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met:

(1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

Revenue allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each element.

Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue ratably over the term of our estimated performance period under the agreement or using the proportional performance method based on the ratio of the level of effort incurred to date compared to the total estimated level of effort required to complete our performance obligations under the agreement.

Determining the total estimated level of effort required to complete all performance obligations requires management judgment and estimation including assumptions regarding the number of internal hours required to complete the project and external effort incurred.

We determine the estimated performance periods, and they are periodically reviewed based on the progress of the related program.

The effect of any change made to an estimated performance period and, therefore, to revenue recognized, would occur on a prospective basis in the period that the change was made.

Product Sales

Product sales consist of sales of protein catalysts, pharmaceutical intermediates, and Codex ® Biocatalyst Panels and Kits.

Product sales are recognized once passage of title and risk of loss has occurred and contractually specified acceptance criteria, if

any, have been met, provided all other revenue recognition criteria have also been met.

Shipping and handling costs charged to customers are recorded as revenue.

Research and Development Revenues

Collaborative research and development agreements typically provide us with multiple revenue streams, including:

research services fees for full time employee (“FTE”) research services, up-front license fees, technology access, contingent payments upon achievement of contractual criteria, and royalty fees based on the licensee’s product sales or cost savings achieved by our customers.

We perform collaborative research and development activities as specified in each respective customer agreement.

Payments for services received are not refundable.

Certain research agreements are based on a contractual reimbursement rate per FTE working on the project.

We recognize revenue from research services as those services are performed over the contractual performance periods.

When up-front payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using the proportionate performance method of revenue recognition based upon the actual amount of research labor hours incurred relative to the amount of the total expected labor hours to be incurred by us, up to the amount of cash received.

In cases where the planned levels of research services fluctuate substantially over the research term, we are required to make estimates of the total hours required to perform our obligations.

We recognize research and development revenues from non-refundable, up-front license fees or technology access payments that are not dependent on any future performance by us when such amounts are earned.

If we have continuing obligations to perform under the arrangement, such fees are recorded as deferred revenues and recognized over the estimated period of continuing performance.

Estimated performance periods are periodically reviewed based on the progress of the related program.

The effect of any change made to an estimated performance period, and therefore to revenue recognized, would occur on a prospective basis in the period that the change was made.

A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved.

A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is, as of the date the arrangement is entered into, substantive uncertainty that the event will be achieved and (iii) results in additional payments being due to us.

Milestones are considered substantive when the consideration earned from the achievement of the milestone (i) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from its performance, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverable and payment terms in the arrangement.

We recognize revenue from other contingent payments based on passage of time or when earned as the result of a customer’s performance in accordance with the contractual terms and when such payments can be reasonably estimated and collectability of such payments is reasonably assured.

We recognize revenue from royalties based on licensees’ sales of our products or products using our technologies.

Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured.

For the majority of our royalty revenue, estimates are made using notification of the sale of licensed products from the licensees.

Stock-Based Compensation

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The expected dividend assumption is based on our history and expectation of dividend payouts.

Restricted Stock Units ("RSUs") and Restricted Stock Awards ("RSAs") are measured based on the fair market values of the underlying stock on the dates of grant.

Performance based options ("PBOs") and performance-contingent restricted stock units ("PSUs") are measured using Black-Scholes-Merton option pricing model.

Restricted Stock Units (“RSUs”), Restricted Stock Awards (“RSAs”) and performance-contingent restricted stock units (“PSUs”) are measured based on the fair market values of the underlying stock on the dates of grant.

Performance based options (“PBOs”) are measured using Black-Scholes-Merton option pricing model.

The vesting of PBOs and PSUs awarded is conditioned upon the attainment of one or more performance objectives over a specified period and upon continued employment through the applicable vesting date.

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Management assesses the probability of the performance milestones being met on a continuous basis.

Impairment of Long-Lived Assets

We evaluate the carrying value of long-lived assets, including property and equipment, whenever events, changes in business circumstances or our planned use of long-lived assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate.

If these facts and circumstances exist, we assess for recovery by comparing the carrying values of long-lived assets with their future net undiscounted cash flows.

If the comparison indicates that impairment exists, long-lived assets are written down to their respective fair value based on discounted cash flows.

Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected undiscounted cash flows.

No impairment charges for long-lived assets were recorded during the year ended December 31, 2019, 2018 and 2017.

Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired and is assigned to reporting units.

We test goodwill for impairment considering amongst other things, whether there have been sustained declines in our share price.

If we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed.

We have two reporting units that reflect our operating segments and we test goodwill for impairment at the reporting unit level.

Historically, assets are jointly used by the segments, are not separable, and are not identified by reporting unit.

In order to assign the amount of goodwill to the two reporting units, we used a relative fair value allocation methodology that primarily relied on our estimates of revenue and future earnings for each reporting units.

Using the relative fair value allocation methodology, we have determined that approximately 76% of goodwill is allocated to the Performance Enzymes segment and 24% is allocated to the Novel Biotherapeutics segment.

As a result of the calculation, $2.4 million of the goodwill was assigned to the Performance Enzymes segment and $0.8 million was assigned to the Novel Biotherapeutics segment.

During 2019, 2018 and 2017, we did not record impairment charges related to goodwill.

Lease Accounting

Policy from January 1, 2019

Effective January 1, 2019, we adopted ASC 842, which established a right-of-use ("ROU") model requiring lessees to record a

right-of-use ("ROU") asset and lease obligations on the balance sheet for all leases with terms longer than 12 months.

We determine if an arrangement is a lease at inception.

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Instead, we recognize payments related to these arrangements in the consolidated statement of operations as lease costs on a straight-line basis over the lease term.

Policy before January 1, 2019

For periods prior to our adoption of ASC 842 on January 1, 2019, we recognize leases as either an operating lease or a capital lease (finance lease).

An operating lease records no asset or liability on the financial statements, the amount paid is expensed as incurred.

A capital lease is recorded as both an asset and a liability on our Consolidated Balance Sheets, generally at the present value of the rental payments.

We use the guidance provided by the FASB to determine if a lease should be capitalized, and if any one of the criteria for capitalization is met, the lease is treated as a capital lease.

We use the liability method of accounting for income taxes, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

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Any adjustment to the deferred tax asset valuation allowance would be recorded in the statements of operations for the periods in which the adjustment is determined to be required.

We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

We account for uncertainty in income taxes as required by the provisions of ASC Topic 740 (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.

The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

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Changes to Tax Law

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code.

Beginning in 2018, the global intangible low-taxed income (“GILTI”) provisions in the Tax Act required us to include, in our U.S.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), P.L.

116-136 was passed into law, amending portions of certain relevant US tax laws.

The CARES Act included a number of federal income tax law changes, including, but not limited to:

(i) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, (ii) accelerating alternative minimum tax credit refunds, (iii) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and (iv) providing a technical correction for depreciation related to qualified improvement property.

The CARES Act had no impact on our consolidated financial statements.

Beginning in 2018, the global intangible low-taxed income (“GILTI”) provisions in the Federal Tax Cuts and Jobs Act ("Tax Act") required us to include, in our U.S.

income tax return, foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets.

Per guidance issued by the FASB, companies could either account for deferred taxes related to GILTI or treat tax arising from GILTI as a period cost.

Both were acceptable methods subject to an accounting policy election.

Per guidance issued by the FASB, companies can either account for deferred taxes related to GILTI or treat tax arising from GILTI as a period cost.

Both are acceptable methods subject to an accounting policy election.

At December 31, 2018, we finalized our policy and elected to use the period cost method for GILTI.

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Due to losses incurred in the U.S., we will not be eligible for an Internal Revenue Code Section 250 deduction for foreign derived intangible income.

The BEAT provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign corporations and imposed a minimum base erosion anti-abuse tax if greater than regular tax.

The Base Erosion and Anti-Abuse Tax ("BEAT") provisions in the Tax Act eliminated the deduction of certain base-erosion payments made to related foreign corporations and imposed a minimum base erosion anti-abuse tax if greater than regular tax.

In 2020, our company was not subject to BEAT as it did not meet the requirements to be subject to BEAT.

Financial Assets and Allowances

We currently sell enzymes primarily to pharmaceutical and fine chemicals companies throughout the world by the extension of trade credit terms based on an assessment of each customer's financial condition.

Trade credit terms are generally offered without collateral and may include an insignificant discount for prompt payment for specific customers.

To manage our credit exposure, we perform ongoing evaluations of our customers' financial conditions.

In addition, accounts receivable include amounts owed to us under our collaborative research and development agreements and we recognize accounts receivables at invoiced amounts.

Our significant financial assets are comprised of accounts receivable, contract assets, and unbilled receivables.

We maintain a valuation allowance on our significant financial assets as follows:

Policy from January 1, 2019

Effective January 1, 2019, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instrument s, which amends guidance for impairment of financial instruments.

The standard adds a new impairment model (known as the “current expected credit loss model” or “CECL”) based on estimates and forecasts of future conditions requiring recognition of a lifetime of expected credit losses at inception on our financial assets measured at amortized costs.

Our significant financial assets measured at amortized costs are comprised of accounts receivable, contract assets, and unbilled receivables.

We have determined that our financial assets share similar risk characteristics including:

(i) customer origination in the pharmaceutical and fine chemicals industry, (ii) similar historical credit loss pattern of customers (iii) no meaningful trade receivable differences in terms, (iv) similar historical credit loss experience and (v) our belief that the composition of certain assets are comparable to our historical portfolio used to develop loss history.

As a result, we measured the allowance for credit loss (“ACL”) on a collective basis.

Our ACL methodology considers how long the asset has been past due, the financial condition of the customers, which includes ongoing quarterly evaluations and assessments of changes in customer credit ratings, and other market data that we believe are relevant to the collectability of the assets.

Nearly all financial assets are due from customers that are highly rated by major rating agencies and have a long history of no credit loss.

We derive our ACL by establishing an impairment rate attributable to assets not yet identified as impaired.

We derive our ACL by initially relying on our historical financial asset loss rate which contemplates the full contractual life of the assets sharing similar risk characteristics, adjusted to reflect (i) the extent to which we have determined current conditions differ from the conditions that existed for the period over which historical loss information was evaluated and (ii) by taking into consideration the changes in certain macroeconomic historical and forecasted information.

We apply the ACL to past due financial assets and record charges to the ACL as a provision to credit loss expense in the Statement of Operations.

Financial assets we identify as uncollectible are also charged against the ACL.

We adjust the impairment rate to reflect the extent to which we have determined current conditions differ from the conditions that existed for the period over which historical loss information was evaluated.

Adjustments to historical loss information may be qualitative or quantitative in nature and reflect changes related to relevant data.

Policy before January 1, 2019

For periods prior to the adoption of ASU 2016-13, the allowances for doubtful accounts reflects our best estimates of probable losses inherent in our accounts receivable and contract asset balances.

The allowance determination is based on known troubled accounts, historical experience, and other currently available evidence.

Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted.

Recoveries are recognized when they were received.

Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows.

Investment in Non-Marketable Securities

Investment in Non-Marketable Equity Securities

Our non-marketable equity securities are accounted for under the measurement alternative.

Under the measurement alternative, the carrying value of our non-marketable equity investments is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment.

Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of other income (expense), net.

We measure investments in non-marketable equity securities without a readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus changes resulting from observable price changes on a non-recurring basis.

Gains and losses on these securities are recognized in other income and expenses.

Investment in Non-Marketable Debt Securities

We measure available for sale investments in non-marketable debt at fair value.

Unrealized gains and losses on these securities are recognized in other comprehensive income until realized.

Non-marketable debt securities are classified as available-for-sale securities.

We classify non-marketable debt securities as Level 3 in the fair value hierarchy because we estimate the fair value based on a qualitative analysis using the most recent observable transaction price and other significant unobservable inputs including volatility, rights, and obligations of the securities we hold.

Significant changes to the unobservable inputs may result in a significantly higher or lower fair value estimate.

We may value these securities based on significant recent arms-length transactions with sophisticated non-strategic unrelated new investors, providing the terms of these transactions are substantially similar to the terms between the company and us.

The impact of the difference in transaction terms on the market value of the investment may be difficult or impossible to quantify.

See Note 7, “ Fair Value Measurements” for additional details.

We evaluate both equity and debt securities for impairment when circumstances indicate that we may not be able to recover the carrying value.

We may impair these securities and establish an allowance for a credit loss when we determine that there has been an “other-than-temporary” decline in estimated fair value of the debt or equity security compared to its carrying value.

We calculate the estimated fair value of these securities using information from the investee, which may include:

• Audited and unaudited financial statements;

• Projected technological developments of the company;

• Projected ability of the company to service its debt obligations;

• If a deemed liquidation event were to occur;

• Current fundraising transactions;

• Current ability of the company to raise additional financing if needed;

• Changes in the economic environment which may have a material impact on the operating results of the company;

• Contractual rights, obligations or restrictions associated with the investment;

• Other factors deemed relevant by our management to assess valuation.

• The valuation may be reduced if the company's potential has deteriorated significantly.

If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Recent Accounting Pronouncements

See Note 2, “ Basis of Presentation and Summary of Significant Accounting Policies ” in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for a full description of recent accounting standards, including the respective dates of adoption and effects on our consolidated financial position, results of operations and cash flows.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis