CODEXIS, INC. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021 (the “Annual Report”). This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, expectations regarding our strategy, business plans, financial performance and developments relating to our industry. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form 10-Q and Part I, Item 1A: “Risk Factors” of our Annual Report, as incorporated herein and referenced in Part II, Item 1A: “Risk Factors" of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. Business Overview We discover, develop and sell enzymes and other proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast, largely untapped source of value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel enzymes, both as proprietary Codexis products and in partnership with our customers. We are a pioneer in harnessing computational technologies to drive biology advancements. Since 2002, we have made substantial investments in the development of our CodeEvolver ® protein engineering technology platform, the primary source of our competitive advantage. Our technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine the structural and performance attributes of our large and continuously growing library of protein variants. These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted performance enhancements. In addition to its computational prowess, our CodeEvolver ® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and bioprocess development which are all coordinated to rapidly innovate novel, fit-for-purpose products. The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex chemicals. This begins by conceptually designing the most cost-effective and practical process for a targeted product. We then develop optimized biocatalysts to enable the designed process, using our CodeEvolver ® platform. Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated using high throughput methods under process-relevant operating conditions. This approach results in an optimized biocatalyst that enables cost-efficient processes that are relatively simple to run in conventional manufacturing equipment. This also allows for efficient technical transfer of our processes to our manufacturing partners. The successful embodiment of our CodeEvolver ® protein engineering technology platform in commercial manufacturing processes requires well-integrated expertise in a number of technical disciplines. In addition to those competencies directly integrated in our CodeEvolver ® protein engineering platform, such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical engineering, bioprocess development and fermentation engineering. Our integrated, multi-disciplinary approach to product and process development is a critical success factor for the Company. 27 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 the Novartis CodeEvolver ® Agreement with Novartis. The Novartis CodeEvolver ® Agreement (our third such agreement with large pharma companies) allows Novartis to use our proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare. As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals. In addition, we are using our technology to develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular diagnostic and genomic research applications. In December 2019, we entered into a license agreement to provide Roche Sequencing Solutions, Inc. with our first enzyme for this target market: the Company’s EvoT4™ DNA ligase. In June 2020, we entered into a co-marketing and enzyme supply collaboration agreement with Alphazyme LLC for the production and co-marketing of enzymes for life science applications including, initially, high-fidelity DNA polymerase, T7 RNA polymerase and reverse transcriptase enzymes. We have been using the CodeEvolver ® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both in partnership with customers and for our own proprietary Codexis drug candidates. Our first program was for the potential treatment of phenylketonuria ("PKU") in humans. PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we entered into Nestlé License Agreement with Nestlé Health Science to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive license to develop and commercialize CDX-6114. Also in October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. In January 2020, we entered into a development agreement with Nestlé Health Science to advance a new lead candidate discovered under the Nestlé SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder. In parallel, the Nestlé SCA was extended through December 2021 to support the discovery of therapeutic candidates for additional disorders. In March 2020, we entered into Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda, for the research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and a blood factor deficiency. In June 2020, we also entered into the MAI Agreement with MAI pursuant to which we are leveraging our CodeEvolver ® platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis. Concurrently with the MAI Agreement, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and, in connection with the transaction, John Nicols, our President and Chief Executive Officer, also joined MAI’s board of directors. In April 2021, we purchased an additional 1,000,000 shares of MAI's Series A preferred stock for $0.6 million. Business Segments We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 12, “Segment, Geographical and Other Revenue Information” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Performance Enzymes We initially commercialized our CodeEvolver ® protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this continues to be our largest market served. Our customers, which include many large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development. We have also used the technology to develop customized enzymes for use in other industrial markets. These markets consist of several large industrial verticals, including food, feed, consumer care, and fine chemicals. We also use our technology in the life sciences markets to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring applications. 28 Novel Biotherapeutics We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. We believe that our CodeEvolver ® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases that are in need of improved therapeutic interventions. Similarly, we believe that we can deploy our platform technology to improve specific characteristics of a customer’s pre-existing biotherapeutic drug candidate, such as its activity, stability or immunogenicity. Our first lead program was for the potential treatment of hyperphenylalaninemia (“HPA”) (also referred to as PKU) in humans. PKU is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. In October 2017, we announced a global development, option and license agreement with Nestlé Health Science to advance CDX-6114, our own novel orally administrable enzyme therapeutic candidate for the potential treatment of PKU. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU. As a result of the option exercise, we earned a milestone and recognized $3.0 million in revenues in the first quarter of 2019. Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114. 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. We, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in 2021. Additionally, the parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder. In March 2020, we entered into the Takeda Agreement pursuant to which we are collaborating to research and develop protein sequences for use in gene therapy products for certain disease indications in accordance with the respective program plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency. In March 2020, we received a one-time, non-refundable cash payment of $8.5 million. Of these programs, the Fabry disease program is the most advanced, with multiple sequences, including CDX-6311, having been provided to Takeda. For further description of our business segments, see Note 12, "Segment, Geographical and Other Revenue Information" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Business Update Regarding COVID-19 We are subject to risks and uncertainties as a result of the current COVID-19 pandemic. The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the U.S. economy and other economies worldwide. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide. However, we are dependent on our manufacturing and logistics partners and consequently, disruptions in operations of our partners and customers may affect our ability to supply enzymes to our customers. Furthermore, our ability to provide future research and development (“R&D”) services will continue to be impacted as a result of governmental orders and any disruptions in operations of our customers with whom we collaborate. We believe that these disruptions have had a minimal impact on revenue for the three months ended March 31, 2021. The extent to which the pandemic may impact our business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence. In the U.S., the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of our Redwood City, California facilities and has disrupted our R&D operations. R&D operations for several projects were temporarily suspended from mid-March 2020 through the end of April 2020 in accordance with these Orders. In May 2020, we re-initiated limited R&D operations and have ramped up operations 29 such that we are currently utilizing the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees. Additionally, we resumed small scale manufacturing at our Redwood City pilot plant in May 2020. Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain. For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q. Results of Operations Overview Revenues were $18.0 million in the first quarter of 2021, a 23% increase from $14.7 million in the first quarter of 2020. Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $10.2 million in the first quarter of 2021, an increase of 101% from $5.1 million in the first quarter of 2020. The increase in product revenue was primarily due to an increase in customer demand for branded pharmaceutical 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 $7.8 million in the first quarter of 2021, a 18% decrease compared with $9.6 million in the first quarter of 2020. The decrease in research and development revenue was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement as we approach completion of the technology transfer to Novartis and prior year license fees from Takeda under the Takeda Agreement. Our products’ profitability is affected by many factors including the margin of profit on the products we sell. Our profit margins are affected by many factors including the costs of internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs. Profit margin data is used as a management performance measure to provide additional information regarding our results of operations on a consolidated basis. Product gross margins increased to 59% in the first quarter of 2021, compared to 50% in the first quarter of 2020, due to improved product mix resulting from an increase in customer demand for branded products. Research and development expenses were $11.6 million in the first quarter of 2021, an increase of 6% from $11.0 million in the first quarter of 2020. The increase was primarily due to increases in expenses associated with a higher headcount, an increase in outside services costs, higher depreciation expense and higher lab supplies costs, partially offset by a reduction in outside services related to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses and a decrease in allocable expenses. Selling, general and administrative expenses were $11.4 million in the first quarter of 2021, an increase of 27%, compared to $9.0 million in the first quarter of 2020. The increase was primarily due to increases in expenses associated with a higher headcount, legal expenses, stock-based compensation partially offset by lower travel and allocable expenses. Net loss was $9.1 million, or a net loss of $0.14 per basic and diluted share in the first quarter of 2021 compared to a net loss of $7.7 million, or a net loss of $0.13 per basic and diluted share for the first quarter of 2020. The increase in net loss is primarily related to increases in operating expenses and a reduction in research and development revenue, partially offset by an increase in product revenues and margins. Cash and cash equivalents decreased to $139.7 million of March 31, 2021 compared to $149.1 million as of December 31, 2020. In addition, net cash used in operations was $6.4 million in the three months ended March 31, 2021 compared to $1.4 million in the three months ended March 31, 2020. We believe that based on our current level of operations, our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. In June 2017, we entered into a loan and security agreement with Western Alliance Bank that allows us to borrow up to $10.0 million under a term loan, and up to $5.0 million under a revolving credit facility with 80% of certain eligible accounts receivable as a borrowing base (the "Credit Facility"). Obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the term debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively. Draws on the term debt are subject to customary conditions for funding including, among others, that no event of default exists. As of March 31, 2021, no amounts were borrowed under the Credit 30 Facility and we were in compliance with the covenants for the Credit Facility. See Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Below is an overview of our results of operations by business segments: Performance Enzymes Revenues increased by $3.4 million, or 31%, to $14.2 million in the first quarter of 2021, compared to $10.9 million in the first quarter of 2020. The increase in product revenue of $5.1 million, or 101%, to $10.2 million in the first quarter of 2021, compared to $5.1 million in the first quarter of 2020 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products The decrease in research and development revenue of $1.8 million, or 31%, to $4.0 million in the first quarter of 2021, compared to $5.8 million in first quarter of 2020 was primarily due to lower revenues from the Novartis CodeEvolver ® Agreement as we approach completion of the technology transfer to Novartis. Product gross margins were 59% in the first quarter of 2021, compared to 50% in the first quarter of 2020. 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 by $0.7 million, or 13%, to $6.4 million for the first quarter of 2021, compared to the first quarter of 2020. The increase was primarily due to an increase in costs associated with higher headcount, higher outside services expenses, and higher lab supplies, partially offset by lower allocable expenses. Selling, general and administrative expense increased by $0.5 million, or 20%, to $2.8 million for the first quarter of 2021, compared to the first quarter of 2020. The increase was primarily due to an increase in costs associated with headcount, and higher allocable expenses, partially offset by lower outside services expenses. Novel Biotherapeutics Research and development revenues remained unchanged at approximately $3.8 million for the first quarter of 2021 and 2020. Revenue in the first quarter of 2021 as compared to the first quarter of 2020 increased from higher license and research and development fees from Takeda under the Takeda Agreement, and were mostly offset by decreases in research and development revenue from Nestlé Health Science. Research and development expense decreased by $0.3 million, or 6%, to $4.6 million for the first quarter of 2021, compared to $4.9 million in the first quarter of 2020. The decrease was primarily due to lower 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, lower outside services costs, and lower lab supply expenses, which were partially offset by higher allocable expenses and an increase in costs associated with higher headcount. Selling, general and administrative expense remained unchanged at approximately $0.6 million for the first quarter of 2021 and 2020. An increase in costs associated with higher headcount were mostly, offset by lower allocable expenses. 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 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. 31 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 revenue of $3.3 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively, in product revenue under this agreement. Revenues recognized by us under the Sitagliptin Catalyst Supply Agreement comprised 18% and 12% of our total revenues for the three months ended March 31, 2021 and 2020, respectively. The Sitagliptin Catalyst Supply Agreement will expire in February 2022. We are in process of negotiating an extension at this time. As of March 31, 2021 and March 31, 2020, we recorded revenue of $3.1 million and $2.2 million, respectively, from sitagliptin products that were recognized over time based on the progress of the manufacturing process. These products will be shipped within the six month period following the end of the quarter. The contract asset balances were partially offset by contract liabilities as they are under the same contract. Global Development, Option and License Agreement and Strategic Collaboration Agreement In October 2017, we entered into the Nestlé License Agreement with 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 upon the execution of the Nestlé License Agreement and milestone payments after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, and upon achievement of a milestone relating to formulation of CDX-6114. 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. Upon exercising its option, Nestlé Health Science made an option payment and 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. 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 $1.8 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively. Platform Technology Transfer and License Agreement In May 2019, we entered into 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 32 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. 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 received $3.4 million in March 2021 for partial completion of the third technology milestone. 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 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 in aggregate. 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-five 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 $0.8 million and $2.4 million in research and development revenue for the three months ended March 31, 2021 and 2020, respectively, from the Novartis CodeEvolver ® Agreement. Strategic Collaboration and License Agreement In March 2020, we entered into the Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co. Ltd. (“Takeda”), under which we are collaborating to research and develop protein sequences for use in gene therapy products for certain diseases. On execution of the Takeda Agreement, we received an upfront non-refundable cash payment of $8.5 million. Revenue relating to the functional licenses provided to Takeda was recognized at a point in time when the control of the license transferred to the customer. Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical development milestones for the three initial programs of $15.4 million, in aggregate (ii) clinical development and commercialization-based milestones, per target gene, of up to $100.0 million, 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 $2.1 million and $2.2 million in the three months ended March 31, 2021 and 2020, respectively. 33 Results of Operations The following table shows the amounts from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Revenues: Product revenue $ 10,226 $ 5,100 $ 5,126 101% Research and development revenue 7,806 9,570 (1,764) (18)% Total revenues 18,032 14,670 3,362 23% Costs and operating expenses: Cost of product revenue 4,218 2,541 1,677 66% Research and development 11,571 10,967 604 6% Selling, general and administrative 11,398 8,989 2,409 27% Total costs and operating expenses 27,187 22,497 4,690 21% Loss from operations (9,155) (7,827) (1,328) (17)% Interest income 177 266 (89) (33)% Other expenses, net (88) (86) (2) (2)% Loss before income taxes (9,066) (7,647) (1,419) (19)% Provision for income taxes 2 5 (3) (60)% Net loss $ (9,068) $ (7,652) $ (1,416) (19)% Revenues Our revenues comprise of product revenue and research and development revenue as follows: • Product revenue consist of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits. • Research and development revenue includes license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and screening fees. Revenues are as follows (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Product revenue $ 10,226 $ 5,100 $ 5,126 101% Research and development revenue 7,806 9,570 (1,764) (18)% Total revenues $ 18,032 $ 14,670 $ 3,362 23% Revenues typically fluctuate on a quarterly basis due to the variability in our customers' manufacturing schedules and the timing of our customers' clinical trials. In addition, we have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the performance and capacity of third-party manufacturers for the commercial scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals business. We accept purchase orders for deliveries covering periods from one day up to approximately 14 months from the date on which the order is placed. However, a majority of the purchase orders can be revised or cancelled by the customer without penalty. Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods. Total revenues increased by $3.4 million to $18.0 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due higher product revenue partially offset by lower research and development revenue. 34 Product revenue, increased by $5.1 million to $10.2 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due to an increase in customer demand for branded pharmaceutical products. Research and development revenue decreased by $1.8 million to $7.8 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement. Cost and Operating Expenses Our cost and operating expenses comprise cost of product revenue, research and development expense, and selling, general and administrative expense. The following table shows the amounts of our cost of product revenue, research and development expense, and selling, general and administrative expense from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Cost of product revenue $ 4,218 $ 2,541 $ 1,677 66% Research and development 11,571 10,967 604 6% Selling, general and administrative 11,398 8,989 2,409 27% Total costs and operating expenses $ 27,187 $ 22,497 $ 4,690 21% Cost of Product Revenue and Product Gross Margin Our product revenues are derived entirely from our Performance Enzymes segment. Revenues from the Novel Biotherapeutics segment are from collaborative research and development activities and not from product revenue. The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Product revenue $ 10,226 $ 5,100 $ 5,126 101% Cost of product revenue (1) 4,218 2,541 1,677 66% Product gross profit $ 6,008 $ 2,559 $ 3,449 135% Product gross margin (%) (2) 59 % 50 % (1) Cost of product revenue comprises both internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs associated with our product revenue. (2) Product gross margin is used as a performance measure to provide additional information regarding our results of operations on a consolidated basis. Cost of product revenue increased by $1.7 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due to a higher volume of product sales and variations in product mix. The product gross margin increased to 59% in the three months ended March 31, 2021 compared to 50% in the three months ended March 31, 2020 is primarily due to the sale of higher margin branded products. Research and Development Expenses Research and development expenses consist of costs incurred for internal projects as well as collaborative research and development activities. These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, depreciation of facilities and laboratory equipment, and (iii) external costs. Research and development expenses are expensed when incurred. Research and development expenses were $11.6 million in the three months ended March 31, 2021 compared to $11.0 million in the three months ended March 31, 2020, an increase of $0.6 million, or 6%. The increase was primarily due to costs 35 associated with higher headcount, higher lab supplies, depreciation and other outside services, which was partially offset by a decrease in costs associated with outside services relating to CMC and regulatory expenses. We expect research and development expenses for the rest of the year to be higher than the comparative periods in the prior year as we invest more in our business in order to pursue on future growth opportunities. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), hiring and training costs, consulting and outside services expenses (including audit and legal counsel related costs), marketing costs, building lease costs, and depreciation expenses and amortization expense. Selling, general and administrative expenses were $11.4 million in the three months ended March 31, 2021 compared to $9.0 million in the three months ended March 31, 2020, an increase of $2.4 million, or 27%. The increase was primarily due to costs associated with a higher headcount, an increase in legal fees, and higher share-based compensation costs, partially offset by lower travel and allocable expenses. We expect selling, general and administrative expenses for the rest of the year to be higher than the comparative periods in the prior year as we invest more in our business in order to pursue on future growth opportunities. Interest Income and Other Expense (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Interest income $ 177 $ 266 $ (89) (33)% Other expenses, net (88) (86) (2) (2)% Total other income $ 89 $ 180 $ (91) (51)% Interest Income Interest income decreased by $0.1 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to earned interest income and amortization of debt discount on non-marketable debt security, partially offset by a reduction in interest income from lower average interest rates on declining average cash balances. Other Expenses Other expenses increased by $2.0 thousand in three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to interest expense charges recognized on the amortization of an embedded bifurcated derivative of a share-settled redemption feature on non-marketable securities, partially offset by prior year write-down of $0.4 million of our investment in CO 2 Solutions and fluctuations in foreign currency. Provision for Income Taxes (in thousands, except percentages): Three months ended March 31, Change 2021 2020 $ % Provision for income taxes $ 2 $ 5 $ (3) (60) % The provision for income taxes for the three months ended March 31, 2021 and 2020, were primarily due to the accrual of interest and penalties on historic uncertain tax positions. Net Loss Net loss for the three months ended March 31, 2021 was $9.1 million, or a net loss per basic and diluted share of $0.14. This compared to a net loss of $7.7 million, or a net loss per basic and diluted share of $0.13 for the three months ended March 31, 2020. The increase in net loss was primarily related to higher operating expenses and lower in research and development revenues, partially offset by increased in product revenue and related margins from the sale of products. 36 Results of Operations by Segment (in thousands, except percentages): Revenues by segment Three months ended March 31, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Revenues: Product revenue $ 10,226 $ — $ 10,226 $ 5,100 $ — $ 5,100 $ 5,126 101 % $ — — % Research and development revenue 4,003 3,803 7,806 5,774 3,796 9,570 (1,771) (31) % 7 — % Total revenues $ 14,229 $ 3,803 $ 18,032 $ 10,874 $ 3,796 $ 14,670 $ 3,355 31 % $ 7 — % Revenues from the Performance Enzymes segment increased by $3.4 million, or 31%, to $14.2 million for the three months ended March 31, 2021, compared to $10.9 million for the three months ended March 31, 2020. The increase in product revenue of $5.1 million, or 101%, to $10.2 million in the three months ended March 31, 2021 compared to $5.1 million in the three months ended March 31, 2020 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products. The decrease in research and development revenue of $1.8 million, or 31%, to $4.0 million in three months ended March 31, 2020, compared to $5.8 million in the three months ended March 31, 2020 was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement. Revenues from the Novel Biotherapeutics segment was approximately $3.8 million for the three months ended March 31, 2021 and 2020. Revenue in three months ended March 31, 2021 as compared to three months ended March 31, 2020 increased from higher license and research and development fees from Takeda under the Takeda Agreement, and were partially offset by decreases in research and development revenue from Nestlé Health Science. Costs and operating expenses by segment Three months ended March 31, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Cost of product revenue $ 4,218 $ — $ 4,218 $ 2,541 $ — $ 2,541 $ 1,677 66 % $ — — % Research and development (1) 6,444 4,605 11,049 5,696 4,925 10,621 748 13 % (320) (6) % Selling, general and administrative (1) 2,818 600 3,418 2,345 591 2,936 473 20 % 9 2 % Total segment costs and operating expenses $ 13,480 $ 5,205 18,685 $ 10,582 $ 5,516 16,098 $ 2,898 27 % $ (311) (6) % Corporate costs 7,817 5,907 Unallocated depreciation and amortization 685 492 Total costs and operating expenses $ 27,187 $ 22,497 (1) Research and development expenses and selling, general and administrative expenses exclude depreciation and amortization of finance leases. 37 For a discussion of product cost of revenue, see " Results of Operations ". Research and development expense in the Performance Enzymes segment increased by $0.7 million, or 13%, to $6.4 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The increase was primarily due to an increase in costs associated with outside services, lab supplies and higher headcount. Selling, general and administrative expense in the Performance Enzymes segment increased by $0.5 million, or 20%, to $2.8 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The increase was primarily due to an increase in costs associated with headcount. Research and development expense in the Novel Biotherapeutics segment decreased by $0.3 million, or 6%, to $4.6 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020. The decrease was primarily due to lower outside services including lower costs relating to CMC regulatory expenses, partially offset by an increase in costs associated with higher headcount. Selling, general and administrative expense in the Novel Biotherapeutics segment remained unchanged for the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Liquidity and Capital Resources Liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures. We have historically funded our operations primarily through cash generated from operations, stock option exercises and public and private offerings of our common stock. We also have the ability to borrow up to $15.0 million under our Credit Facility. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our working capital needs. The majority of our cash and cash equivalents are held in U.S. banks, and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses. The following summarizes our cash and cash equivalents balance and working capital as of March 31, 2021 and December 31, 2020 (in thousands): March 31, 2021 December 31, 2020 Cash and cash equivalents $ 139,748 $ 149,117 Working capital $ 151,010 $ 159,442 In addition to our existing cash and cash equivalents, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain royalty payments under our collaboration agreements. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at this time. In 2016, we completed the final phase in the transfer of CodeEvolver ® technology to Merck under the Merck CodeEvolver ® Agreement. Following the completion of the technology transfer to Merck, we are now eligible to receive payments of up to $15.0 million for each commercial API that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver ® technology. In addition, depending upon GSK's successful application of the licensed technology, we have the potential to receive additional contingent payments that range from $5.75 million to $38.5 million per project. In May 2019, we entered into the Novartis CodeEvolver ® Agreement with Novartis. The Novartis CodeEvolver ® Agreement allows Novartis to use Codexis’ proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare. Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver ® Agreement. In the second quarter of 2020, we completed the second technology milestone transfer under the agreement and became eligible to receive a milestone payment of $4.0 million , which we subsequently received in July 2020. In the first quarter of 2021, we also received $3.4 million for partial completion of the third technology milestone. 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 million in aggregate . We are actively collaborating with new and existing customers in the pharmaceutical and food industries. We believe that we can utilize our current products and services, and develop new products and services, to increase our revenues and gross margins in future periods. 38 We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to our CodeEvolver ® protein engineering technology platform and expand our business development and collaboration with new customers. Our cash flows from operations will continue to be affected principally by sales from licensing our technology to major pharmaceutical companies, product sales and product gross margins, and collaborative research and development services provided to customers, as well as our headcount costs, primarily in research and development. Our primary source of cash flows from operating activities is cash receipts from our customers for purchases of products, collaborative research and development services, and licensing our technology to major pharmaceutical companies. Our largest uses of cash from operating activities are for employee-related expenditures, rent payments, inventory purchases to support our product sales and non-payroll research and development costs In 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 a public 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 30, 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 under a revolving 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 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the Term Debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively, subject to customary conditions for funding including, among others, that no event of default exists. Draws on the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. On October 1, 2024 loans drawn under the Term Debt mature and the Revolving Line of Credit terminate. No amounts were drawn under the credit facility as of March 31, 2021 and December 31, 2020. At March 31, 2021 we were in compliance with the covenants for the Credit Facility. The Credit Facility requires us to maintain compliance with certain financial covenants including attainment of certain lender-approved projections or maintenance of certain minimum cash levels. Restrictive covenants in the Credit Facility restrict the payment of dividends or other distributions. For additional information about our contractual obligations, see Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. In October 2017, we entered into the Nestlé License Agreement with Nestlé Health Science. Pursuant to the Nestlé License Agreement, Nestlé Health Science paid us an upfront cash payment and milestone payments after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 and achievement of a formulation relating to CDX-6114. 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. Upon exercising its option, Nestlé Health Science made an option payment and assumed all responsibilities for future clinical development and commercialization of CDX-6114, with the exception of the completion of an extension study, CDX-6114-004, which was substantially completed in the fourth quarter of 2019. Other potential payments from Nestlé Health Science to us under the Nestlé License Agreement include (i) development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of Product. As of March 31, 2021, we had cash and cash equivalents of $139.7 million and $15.0 million available to borrow under our Credit Facility. Our liquidity is dependent upon our cash and cash equivalents, cash flows provided by operating activities and the continued availability of borrowings under our Credit Facility. We believe that, based on our current level of operations, our existing cash and cash equivalents will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months. However, we may need additional capital if our current plans and assumptions change. In addition, we may choose to seek other sources of capital even if we believe we have generated sufficient cash flows to support our operating needs. Our need for additional capital will depend on many factors, including the financial success of our business, the spending required to develop and commercialize new and existing products, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, and the potential costs for the filing, prosecution, enforcement and defense of patent claims, if necessary. If our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. If future financings involve the issuance of equity securities, our existing stockholders would suffer 39 dilution. If we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business. Cash Flows The following is a summary of cash flows for three months ended March 31, 2021 and 2020 (in thousands): Three months ended March 31, 2021 2020 Net cash used in operating activities $ (6,440) $ (1,425) Net cash used in investing activities (2,533) (761) Net cash provided by (used in) financing activities 17 (1,019) Net decrease in cash, cash equivalents and restricted cash $ (8,956) $ (3,205) Cash Flows from Operating Activities Cash used in operating activities was $6.4 million net for the three months ended March 31, 2021, which resulted from a net loss of $9.1 million for the three months ended March 31, 2021 adjusted for non-cash charges for depreciation of $0.7 million, ROU lease asset amortization expense of $0.6 million, stock-based compensation of $2.7 million, partially offset by equity securities earned from research and development activities of $0.1 million. Additional cash used by changes in operating assets and liabilities was $1.2 million. Changes in operating assets and liabilities included a decrease of $0.6 million in other long-term liabilities, a decrease of $1.7 million in accrued compensation and other accrued liabilities, a decrease of $0.3 million in deferred revenue, partially offset by a decrease of $1.1 million in financial assets and an increase of $0.4 million in accounts payable. Cash used in operating activities was $1.4 million net for the three months ended March 31, 2020, which resulted from a net loss of $7.7 million for the three months ended March 31, 2020 adjusted for non-cash charges for depreciation of $0.4 million, ROU lease asset amortization expense of $0.7 million and stock-based compensation of $2.2 million. Additional cash used by changes in operating assets and liabilities was $2.9 million. Changes in operating assets and liabilities included an increase of $6.5 million in deferred revenue and $3.1 million in other accrued liabilities, partially offset by a $3.9 million increase in unbilled receivables and a $1.9 million decrease accrued compensation. Cash Flows from Investing Activities Cash used in investing activities was $2.5 million for the three months ended March 31, 2021 and 2020. Cash used in investing activities for the three months ended March 31, 2021 and 2020, was primarily attributable to $2.6 million for purchases of property and equipment. Cash Flows from Financing Activities Cash used in financing activities was nominal for the three months ended March 31, 2021. Cash used in financing included $1.2 million for taxes paid related to net share settlement of equity awards offset by $1.2 million of proceeds from exercises of stock options. Cash used in financing activities was $1.0 million for the three months ended March 31, 2020 and primarily included taxes paid related to net share settlement of equity awards. 40 Credit Facility In June 2017, we entered into the 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. As of March 31, 2021, we have not drawn from the Credit Facility. For additional information about our credit facility, see Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Material Cash Requirements The following table summarizes our material cash requirements as of March 31, 2021 (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) $ 30,251 $ 4,144 $ 9,058 $ 9,666 $ 7,383 Operating leases obligations (2) 31,723 276 5,939 6,252 19,256 Total $ 61,974 $ 4,420 $ 14,997 $ 15,918 $ 26,639 (1) Represents future minimum lease payments under non-cancellable operating leases in effect as of March 31, 2021 for our facilities in Redwood City, California. The minimum lease payments above do not include common area maintenance charges or real estate taxes. In February 2019, we have entered into an Eighth Amendment to the Lease (the “Eighth Amendment”) with MetLife for our facilities, extending the lease terms fr om May 2027 to May 2029. (2) Represents future minimum lease payments under non-cancellable operating lease entered into in the first quarter of 2021 for facilities in San Carlos, California. The estimated minimum lease payments above do not include common area maintenance charges or real estate taxes. For additional information see Note 10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Other Material Cash Requirements We have other material cash requirements related to supply and service arrangements entered in the normal course of business. For additional information about other material cash requirements, see Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. 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 Material Cash Requirements by Agreement Type Agreement Date Future Minimum Payment Manufacture and supply agreement with expected future payment date of December 2022 April 2016 $ 55 Development and manufacturing services agreements September 2019 2,374 Total other commitments $ 2,429 We are contingently committed to an aggregate $2.7 million of potential future research and development milestone payments to third parties for patents, licensing and development programs achieved in clinical application and the regulatory approval process. Payments generally are due and payable only upon achievement of certain developmental and regulatory milestones for which the specific timing cannot be predicted. Certain agreements also provide for sales-based milestones aggregating to $0.6 million that we are contingently obligated to pay to upon achievement of certain sales levels in addition to royalties. We do not utilize special-purpose financing vehicles or have undisclosed off-balance sheet arrangements. 41 Critical Accounting Policies and Estimates The preparation financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. There have been no material changes to our critical accounting policies or estimates during the three months ended March 31, 2021 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021. 42