Edgar Filing: CODEXIS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________

FORM 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No.: 001-34705

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Codexis, Inc.

(Exact name of Registrant as specified in its charter)

______________________________________



Delaware		71-0872999
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

200 Penobscot Drive, Redwood City, California		94063
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (650) 421-8100

Securities Registered Pursuant to Section 12(b) of the Act:



Title of Each Class:		Name of Each Exchange on which Registered:
Common Stock, par value $0.0001 per share		The Nasdaq Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None.

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

The aggregate market value of voting common stock held by non-affiliates of Codexis as of June 30, 2018 was approximately $731.5 million based upon the closing price reported for such date on the Nasdaq Global Select Market.

As of February 22, 2019, there were 54,158,617 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

______________________________________

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2019 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2018. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.

Codexis, Inc.

Annual Report on Form 10-K

For The Year Ended December 31, 2018

INDEX



PART I
Item 1	Business	4
Item 1A	Risk Factors	19
Item 1B	Unresolved Staff Comments	48
Item 2	Properties	48
Item 3	Legal Proceedings	48
Item 4	Mine Safety Disclosures	49
PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	50
Item 6	Selected Financial Data	52
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	54
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	75
Item 8	Financial Statements and Supplementary Data	77
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	130
Item 9A	Controls and Procedures	130
Item 9B	Other Information	131
PART III
Item 10	Directors, Executive Officers and Corporate Governance	131
Item 11	Executive Compensation	131
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	131
Item 13	Certain Relationships and Related Transactions, and Director Independence	131
Item 14	Principal Accounting Fees and Services	131
PART IV
Item 15	Exhibits, Financial Statement Schedules	132
Signatures		136

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), particularly in Part I, Item 1: “Business,” Part I, Item 1A: “Risk Factors” and Part 2, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate” or “continue,” and similar expressions or variations. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to: any projections of financial information; any statements about historical results that may suggest trends for our business; any statements of the plans, strategies, and objectives of management for future operations; any statements of expectation or belief regarding future events, technology developments, our products, product sales, expenses, liquidity, cash flow, market growth rates or enforceability of our intellectual property rights and related litigation expenses; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Accordingly, we caution you not to place undue reliance on these statements. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appear in Part I, Item 1A: “Risk Factors” of this Annual Report on Form 10-K and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission (“SEC”). The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.

PART I

ITEM 1. BUSINESS

COMPANY 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.

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 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 protein catalysts for use in the fine chemicals market. The fine chemicals market consists of several large market verticals, including food and food ingredients, animal feed, flavors, fragrances and agricultural chemicals.

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. 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 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 April 2018, we entered into a strategic agreement (the "Porton Agreement") with Porton Pharma Solutions, Ltd. ("Porton") to license key elements of our platform technology to Porton’s global custom intermediate and active pharmaceutical ingredients ("API") development and manufacturing business. This gives us access to a wide variety of small and medium-sized pharmaceutical customers.

We are also 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. Our first enzyme is a ligase which we began marketing to customers in 2018.

BUSINESS SEGMENTS

We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 15, "Segment, Geographical and Other Revenue Information" in the notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Performance Enzymes

We initially commercialized our CodeEvolver^® protein engineering technology platform and products in the pharmaceuticals market, and to date this continues to be our largest market served. Our customers, which include many large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development. We have also used the technology to develop customized enzymes for use in other industrial markets. These markets consist of several large industrial verticals, including food and food ingredients, animal feed, flavors, fragrances, and agricultural chemicals. We also use our technology to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications. In April 2018, we entered into the Porton Agreement related to our strategic collaboration with Porton to license key elements of our world-leading biocatalyst technology for use in Porton’s global custom intermediate and API development and manufacturing business.

Novel Biotherapeutics

We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. We believe that our CodeEvolver^® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases that are in need of improved therapeutic interventions. Similarly, we believe that we can deploy our platform technology to improve specific characteristics of a customer’s pre-existing biotherapeutic drug candidate, such as its activity, stability or immunogenicity. Most notable is our lead program for the potential treatment of 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 strategic collaboration 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 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, Nestlé Health Science is obligated to pay us $3.0 million within 60 days after exercise of the option. Upon exercising its option, Nestlé Health Science has 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 is expected to be completed in the second quarter of 2019. 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.

We have also developed a pipeline of other biotherapeutic drug candidates in which we expect to continue to make additional investments with the aim of advancing additional product candidates targeting other therapeutic areas.

OUR STRATEGY

Our strategy is to grow our revenues, profits, and stockholder value by leveraging our CodeEvolver^® protein engineering technology platform in the following ways:


•	Licensing our CodeEvolver^® protein engineering technology platform. We intend to continue to pursue opportunities to license our CodeEvolver^® protein engineering technology platform to third parties so they can create cost-saving protein catalyst solutions utilizing their own in-house protein engineering capability.


•	Growing our pharmaceutical protein catalysts business. We intend to continue to pursue opportunities in the pharmaceutical market to use our protein catalysis products and services to reduce the costs for manufacturing small

molecule drugs. We intend to increase the number of pharmaceutical customers and processes that utilize and benefit from our novel, cost-saving protein catalyst solutions.

•

Creating and advancing novel biotherapeutic drug candidates. We intend to continue to pursue opportunities to apply our protein engineering capabilities to the creation and development of novel biotherapeutic drug candidates, both in partnership with customers and as proprietary Codexis drug candidates. We have also invested in research and development in an effort to generate additional early stage novel biotherapeutic candidates.

•

Growing our fine chemicals protein catalysts business. We intend to continue to pursue opportunities in the fine chemicals market to use protein catalysis products and services to reduce the costs for manufacturing in adjacent markets like food and food ingredients. We intend to increase the number of fine chemical customers and processes who utilize and benefit from our novel, cost-saving protein catalyst solutions.


•	Developing high-performance enzymes for use in diagnostic applications. We intend to offer high-performance enzymes to customers using NGS and PCR/qPCR for in vitro molecular diagnostic applications.

In this Annual Report, the “Company,” “we,” “us” and “our” refer to Codexis, Inc. and its subsidiaries on a consolidated basis.

OUR MARKET OPPORTUNITIES

Pharmaceutical Market

We believe the pharmaceutical industry represents a significant market opportunity for us and is our primary business focus. Pharmaceutical companies are in constant search for new drugs to offer to their customers, and are under significant competitive pressure both to reduce costs and to increase the speed to market for their products. To meet these pressures, pharmaceutical companies are discovering and developing novel protein-based drug products, as well as seeking manufacturing processes for their new and existing drugs that reduce overall costs, simplify production and increase efficiency and product yield, while not affecting drug safety and efficacy. Cost reduction is even more important to developers (known as innovators) of patent-protected pharmaceutical products when the patents for those products expire and such innovators are forced to compete with manufacturers of generic drugs.

The pharmaceutical product lifecycle begins with the discovery of new chemical entities and continues through preclinical and clinical development, regulatory review and approval, commercial scale-up, product launch, and, ultimately, patent expiration and the transition from branded to generic products. As innovators develop, produce and then market products, manufacturing priorities and processes evolve. Historically, innovators have focused on production cost reduction in the later stages of clinical development and have been reluctant to make process changes after a product has been launched. However, as pressures to reduce costs have increased, innovators have pursued cost reduction measures much earlier in the pharmaceutical product lifecycle and are increasingly looking for opportunities to improve their operating margins, including making manufacturing process changes for marketed products after the products have been launched if these changes can result in significant cost reductions. As a result, innovators are investing in new technologies, including our CodeEvolver^® protein engineering technology platform, to improve their manufacturing productivity and efficiency or outsourcing the manufacture of their intermediates and APIs.

Our Solutions for the Pharmaceutical Market

Small Molecule Manufacturing Cost Reduction

Our pharmaceutical customers, which include many large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development. Our CodeEvolver^® protein engineering technology platform enables us to deliver solutions to our customers in this market by developing and delivering optimized protein catalysts that perform chemical transformations at a lower cost and improve the efficiency and productivity of manufacturing processes. We provide value throughout the pharmaceutical product lifecycle. Our products and services allow us to provide benefits to our pharmaceutical customers in a number of cost saving ways, including any - and sometimes all - of the following:

•reducing the use of raw materials and reagents;

•eliminating multiple steps in the manufacturing process;

•improving purity, productivity and yield;

•using water as a primary solvent;

•eliminating hazardous inputs;

•enabling the use of simple equipment and reducing the need for capital expenditure;

•reducing energy requirements;

•reducing the generation of chemical byproducts or waste; and

•reducing the need for late-stage purifications.

Early in a pharmaceutical product’s lifecycle, pharmaceutical manufacturers can use our protein catalyst products and services to reduce manufacturing costs. If an innovator incorporates our products or processes into an approved product, we expect the innovator to continue to use our products or processes at least over the patent life of the marketed drug.

Pharmaceutical manufacturers can also use our products and services to reduce manufacturing costs after a product is launched. At this stage, changes in the manufacturing process originally approved by the drug regulator may require additional regulatory review. Typically, pharmaceutical companies will only seek regulatory approval for a manufacturing change if substantial cost savings are realizable. We believe that the cost savings associated with our products may lead our customers to change their manufacturing processes for approved products and, if necessary, seek regulatory approval of the new processes which incorporate our proteins. Moreover, we believe these cost savings are attractive to generics manufacturers, who compete primarily on price.

In addition, manufacturing processes that utilize our protein catalysts can frequently enable processes that are more sustainable and environmentally friendly compared to alternative, traditional manufacturing approaches. This has led us to earn three U.S. EPA Presidential Green Chemistry Challenge awards for improved pharmaceutical manufacturing processes since we were founded. All three of these awards were associated with blockbuster drug products.

Discovery and Development of Biotherapeutic Drug Candidates

We are also targeting new opportunities in the pharmaceutical industry to discover or improve biotherapeutic drug candidates for our customers. We believe that our CodeEvolver^® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases that are in need of improved therapeutic interventions. Similarly, we believe that we can deploy our platform technology to improve specific characteristics of a customer’s pre-existing biotherapeutic drug candidate, such as its activity, stability or immunogenicity.

We approach biopharmaceutical companies to collaborate and utilize our platform technology for the discovery of specific novel biotherapeutic candidates. We currently have one such biotherapeutic discovery partnership in progress under the strategic collaboration agreement with Nestlé Health Science. We continue to pursue other customers who could benefit by applying our CodeEvolver^® protein engineering platform technology to improve the discovery and/or development of other biotherapeutics in partnership with us.

Biotherapeutic Product Discovery and Development

We are also using our platform technology to self-fund the development of our own early stage, novel enzyme therapeutic product candidates. The lead product candidate is CDX-6114, an enzyme which we have engineered to be orally administered and is being developed as a potential treatment of PKU in humans. PKU is an inborn metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient. As a result, phenylalanine accumulates to toxic levels in the brain, causing serious neurological problems including intellectual disability, seizures and cognitive and behavioral problems. To avoid toxic levels of phenylalanine in their blood, individuals with PKU must follow a strict, life-long diet that is low in phenylalanine and supplement their diet with a synthetic phenylalanine-free formula to provide them with sufficient nutrients. Maintaining a strict, life-long diet can be challenging for individuals with PKU. There are an estimated 50,000 people with PKU in the developed world.

In addition to the PKU program, we have focused our self-funded biotherapeutic investments with aim to discover therapeutic solutions for four additional rare disease conditions. Two of those programs are targeting potential enzyme replacement treatments for patients with inborn errors of amino acid metabolism diseases. The other two programs are targeting potential treatments for patients with lysosomal storage diseases. We expect to continue to make additional investments with the aim of generating additional product candidates targeting these, and potentially other therapeutic areas.

Nestlé Health Science

On October 12, 2017 (the “Effective Date”), we entered into a Global Development, Option and License Agreement (the “Nestlé Agreement”) with Nestlé Health Science and, solely for the purpose of the integration and the dispute resolution clauses of the Nestlé Agreement, Nestlé Health Science S.A., pursuant to which we granted to Nestlé Health Science, under certain of our patent rights and know-how: (i) an option to obtain an exclusive, worldwide, royalty-bearing, sublicenseable license to develop and commercialize certain products (each, a “Product”) based on CDX-6114 and our other therapeutic enzyme product candidates covered by specified patent applications for the treatment of hyperphenylalaninemia (“HPA”), and (ii) an exclusive right of first negotiation (the “Right of First Negotiation”) for a period of five years to obtain an exclusive worldwide license to develop and commercialize up to two enzymes discovered by us for use in the field of the prevention, diagnosis, treatment and

management of inborn errors of amino acid metabolism. We are not under any obligation to undertake any research and development activities relating to inborn errors of amino acid metabolism. HPA (also referred to as PKU) is a medical condition characterized by elevated concentrations of the amino acid phenylalanine in the blood. PKU can result in severe HPA.

In February 2019, Nestlé Health Science exercised its option to receive an exclusive license to further develop and commercialize CDX-6114 and our other therapeutic enzyme product candidates covered by specified patent applications for the treatment of PKU (each, a “Compound”). Under the terms of the Nestlé Agreement, upon option exercise, Nestlé Health Science received a license to the Compound, other than any enzyme that has other clinically significant, specified activity against another molecule, unless that enzyme’s specified activity against phenylalanine is ten times greater than its activity against such other molecule (in which case it is not excluded). Furthermore, we generally will retain the right to use any enzyme as a biocatalyst, provided that preclinical development of such enzyme has not commenced. The first Compound to be developed under the Nestlé Agreement was our enzyme CDX-6114.

The Nestlé Agreement also sets forth the parties’ respective obligations for development, commercialization, regulatory and manufacturing and supply activities for CDX-6114 and Product containing CDX-6114. Prior to Nestlé Health Science exercising its option to receive an exclusive license to CDX-6114, we were generally responsible for development activities, including conducting a Phase 1a clinical study. Upon exercising its option, Nestlé Health Science has 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 is expected to be completed in the second quarter of 2019. Our development activities were governed by a development plan and overseen by a joint steering committee. The parties established a patent committee to discuss strategies and coordinate activities for the patents related to CDX-6114 and Product containing CDX-6114, and we will jointly own all inventions and information that result from each party’s activities performed under the Nestlé Agreement. The Nestlé Agreement also contains customary representations and warranties by the parties, intellectual property protection provisions, certain indemnification rights in favor of each party and customary confidentiality provisions and limitations of liability.

Nestlé Health Science paid us an upfront cash payment of $14.0 million in the fourth quarter of 2017. In July 2018, we announced that we had dosed the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 which was conducted in Australia. In November 2018, we announced top-line results from the Phase 1a study in healthy volunteers with CDX-6114. 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 February 2019, Nestlé Health Science exercised its option to obtain an exclusive license for the global development and commercialization of CDX-6114 for the management of PKU. The exercise of the option triggers a $3 million milestone payment. Upon exercising its option, Nestlé Health Science has 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 is expected to be completed in the second quarter of 2019. 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.

Other potential payments from Nestlé Health Science to us under the Agreement include (i) development and approval milestones of up to $86.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of products containing an enzyme covered by the agreement as its sole active ingredient.

In addition to the Nestlé Agreement, we and Nestlé Health Science concurrently entered into a strategic collaboration agreement pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver^®platform technology to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

Fine Chemicals and Industrial Enzyme Markets

Beyond the pharmaceutical industry, our CodeEvolver^® protein engineering platform technology has enabled cost-savings for our partners in the fine chemicals markets, and the food industry in particular. In November 2016, we entered into an exclusive agreement with Tate & Lyle, a market-leading food ingredients company, to supply a proprietary enzyme for use in Tate & Lyle’s food ingredient production. In March 2017, we announced a second multi-year research and development services agreement with Tate & Lyle for the development of a second ingredient for the food ingredient industry. We engineered a suite of enzymes that enable Tate & Lyle’s novel bioconversion route for the manufacture of their newly-launched zero-calorie TASTEVA^® M Stevia sweetener.

We are seeking to expand our enzyme offerings in the fine chemical and industrial enzyme markets within and beyond the food industry, including, for example, to the animal feed, agricultural chemicals and flavors and fragrances markets.

Molecular Biology and In Vitro Diagnostic Enzymes

We believe that our Codexis protein engineering capability can also be deployed to commercialize novel enzymes as improvements to enzymes consumed by customers in many industrial sectors. As our first effort in this strategy, we have developed an enzyme for customers using NGS and PCR/qPCR for in vitro molecular diagnostic applications. Our first proprietary enzyme for this market targets improved library preparation for NGS users and is currently being beta tested. We are also currently working on a second enzyme, a DNA polymerase, which is being prepared for beta testing.

Licensing Our CodeEvolver^® Protein Engineering Technology Platform

Our CodeEvolver^® protein engineering technology platform enables rapid development of custom-designed enzymes that are highly optimized for efficient manufacturing processes. We intend to continue to enter into license arrangements with third parties that will allow them to use our CodeEvolver^® protein engineering technology platform to discover and develop novel proteins for their internal use. To date, we have entered into platform technology licensing agreements with each of GlaxoSmithKline and Merck.

GlaxoSmithKline

We entered into our first CodeEvolver^® protein engineering Platform Technology Transfer, Collaboration and License Agreement (“GSK CodeEvolver^® Agreement”) on July 10, 2014 with GlaxoSmithKline Intellectual Property Development Limited, a subsidiary of GlaxoSmithKline plc (collectively, “GSK”), pursuant to which we granted GSK a non-exclusive, worldwide license to use our CodeEvolver^® protein engineering technology platform in the field of human healthcare for its internal development purposes.

Under the GSK CodeEvolver^®Agreement, we transferred our CodeEvolver^® protein engineering technology platform to GSK over a twenty-one-month period that began on July 10, 2014. As a part of this technology transfer, we provided to GSK our proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of our and GSK scientists participated in technology training sessions and collaborative research projects at our laboratories in Redwood City, California and at GSK’s laboratories in Upper Merion, Pennsylvania. The technology transfer was completed in April 2016 and our CodeEvolver^® protein engineering technology platform has been installed at GSK’s Upper Merion, Pennsylvania site. We have the potential to receive additional contingent payments that range from $5.75 million to $38.5 million per project based on GSK's successful application of the licensed technology.

We are also eligible to receive royalties based on net sales, if any, of a limited set of products developed by GSK using the CodeEvolver^® protein engineering technology platform.

The licenses to GSK were granted under certain patents, patent applications and know-how that we owned or controlled as of the effective date of the GSK CodeEvolver^® Agreement and that cover our CodeEvolver^® protein engineering technology platform and certain enzymes useful in the Field. Any improvements to our CodeEvolver^® protein engineering technology platform during the technology transfer period were included in the license grants from us to GSK.

Under the GSK CodeEvolver^® Agreement, GSK owns (the “GSK-Owned Technology”) (a) any enzyme technology that was developed during a project under the GSK CodeEvolver^® Agreement that used our CodeEvolver^® protein engineering technology platform during the technology transfer period and (b) the methods of use of any Project Enzyme in compound synthesis that were developed during the technology transfer period. GSK granted to us a worldwide, non-exclusive, fully paid-up, royalty-free license, with the right to grant sublicenses, to use outside of the GSK Exclusive Field, the GSK-Owned Technology that was developed during the technology transfer period.

Until July 10, 2019 (the “Embargo Period”), GSK is prohibited from using the CodeEvolver^® protein engineering technology platform for the use, research or development (whether in vitro or in vivo) or commercialization of any enzyme or enzyme fusion protein that (a) effects a chemical transformation in humans or (b) facilitates, assists, transports or enables the action, dispersion, absorption or bioavailability of a molecule, biologic agent, drug product, therapeutic agent or other compound in humans (the “Embargo Field”). GSK is permitted to use our CodeEvolver^® protein engineering technology platform during the Embargo Period to develop and use an enzyme or enzyme fusion protein that (x) is used by GSK solely as a research reagent or a research tool within the Embargo Field, (y) is used to synthesize a small-molecule compound owned or controlled by GSK or (z) facilitates, assists, transports or enables the action, dispersion, absorption or bioavailability of a small-molecule compound that is owned or controlled by GSK.

The term of the GSK CodeEvolver^® Agreement continues, unless earlier terminated, until the expiration of all payment obligations under the GSK CodeEvolver^® Agreement. GSK can terminate the GSK CodeEvolver^® Agreement by providing 90 days written notice to us.

Merck

On August 3, 2015, we entered into a CodeEvolver^® platform technology transfer and license agreement (the “Merck CodeEvolver^® Agreement”) with Merck Sharp & Dohme Corp., a subsidiary of Merck & Co., Inc. (collectively, “Merck”).

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

Under the terms of the Merck CodeEvolver^® Agreement, we granted to Merck a non-exclusive worldwide license to use the CodeEvolver^®protein engineering technology platform to research, develop and manufacture novel enzymes for use by Merck in its internal research programs (“Merck Non-Exclusive Field”). The license to Merck is exclusive for the research, development and manufacture of novel enzymes for use by Merck in the chemical synthesis of therapeutic products owned or controlled by Merck (“Merck Exclusive Field”). Merck has the right to grant sublicenses to affiliates of Merck and, in certain limited circumstances, to third parties. We also granted to Merck a license to make or have made products manufactured using the CodeEvolver^® protein engineering technology platform with a right to grant sublicenses solely to affiliates of Merck, contract manufacturing organizations and contract research organizations. The manufacturing license is exclusive in the Merck Exclusive Field and non-exclusive in the Merck Non-Exclusive Field. The licenses are subject to certain limitations based on pre-existing contractual obligations that apply to the technology and intellectual property that are the subject of the license grants. The licenses do not permit the use of the CodeEvolver^®protein engineering technology platform to discover any therapeutic enzyme, diagnostic product or vaccine. In addition, Merck is prohibited from using the CodeEvolver^® protein engineering technology platform to develop or produce enzymes or any other compounds for or on behalf of any third parties except in a very limited manner when Merck divests a therapeutic product that is manufactured using an enzyme developed using the CodeEvolver^®protein engineering technology platform.

Under the terms of the Merck CodeEvolver^® Agreement, Merck paid us $18.0 million comprised of up-front technology transfer and license fees and milestone payments over the technology transfer period of 15 months from August 3, 2015, the effective date of the Merck CodeEvolver^®Agreement. We also have the potential to receive product-related payments of up to $15.0 million for each API that is manufactured by Merck using one or more enzymes that have been developed or are in development using the CodeEvolver^® protein engineering technology platform during the 10-year period that begins on the conclusion of the 15-month technology transfer period. These product-related payments, if any, will be paid by Merck to us for each quarter that Merck manufactures API using a CodeEvolver^®-developed enzyme. The payments will be based on the total volume of API produced using the CodeEvolver^®-developed enzyme. We have the right to conduct an annual audit to confirm that all payments that are owed to us have been paid in full and on time.

Under the Merck CodeEvolver^® Agreement, we transferred the CodeEvolver^® protein engineering technology platform to Merck over the period from August 2015 through September 2016. As part of this technology transfer, we provided to Merck our proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. We provided additional enzyme evolution services to Merck at our laboratories in Redwood City through November 2016. The remaining deferred revenue relating to the upfront payment was recognized upon completion of the additional enzyme evolution services.

The licenses to Merck are granted under patents, patent applications and know-how that we owned or controlled as of the effective date of the Merck CodeEvolver^® Agreement and that cover the CodeEvolver^® protein engineering technology platform. Any improvements to the CodeEvolver^® protein engineering technology platform during the technology transfer period are also included in the license grants from Codexis to Merck. Following the technology transfer period, Merck can exercise annual options that, upon payment of certain option fees, would extend Merck’s license to include certain improvements to the CodeEvolver^® protein engineering technology platform that arise during the three-year period that begins at the end of the technology transfer period.

Under the Merck CodeEvolver^® Agreement, we own any improvements to our protein engineering methods, processes and algorithms that arose and any enzyme technology or process technology that are developed during an evolution program or additional services. Merck owns (the “Merck-Owned Technology”) (a) any enzyme technology that is developed solely by Merck under the Merck CodeEvolver^® Agreement using the CodeEvolver^® protein engineering technology platform (a “Project Enzyme”) and (b) the methods of use of any Project Enzyme or any enzyme developed jointly by Merck and us using the CodeEvolver^® protein engineering technology platform. Merck granted to us a worldwide, non-exclusive, fully paid-up, royalty-free license, with the right to grant sublicenses, to use the Merck-Owned Technology outside of the Merck Exclusive Field.

For each API that Merck manufactures using an enzyme developed with the CodeEvolver^®protein engineering technology platform, we will have a right of first refusal to supply Merck with the enzyme used to manufacture the API if Merck outsources the supply of the enzyme. Our right of first refusal applies during the period that begins on the completion of a phase III clinical trial for the product containing the API and ends five years following regulatory approval for such product.

The Merck CodeEvolver^® Agreement has a term that continues, unless earlier terminated, until the expiration of all payment obligations under the agreement. Merck may terminate the Merck CodeEvolver^® Agreement by providing 90 days written notice to us. We can terminate the Merck CodeEvolver^®Agreement by providing 30 days written notice to Merck if we determine, pursuant to our contractual audit rights under the Merck CodeEvolver^® Agreement, that Merck has repeatedly failed to make required payments to us and/or materially underpaid us an amount due under the Merck CodeEvolver^® Agreement. In the event the Merck CodeEvolver^® Agreement is terminated earlier by Merck, or by us due to an uncured material breach by Merck, or if Merck sells or transfers to a third party any Merck business or facility that includes any of our proprietary materials, information or technology, we have the right to conduct an audit of Merck’s facilities to confirm that all of our proprietary materials, information and technology have been destroyed. The Merck CodeEvolver^® Agreement contains indemnification provisions under which Merck and we have agreed to indemnify each other against certain third party claims.

In September 2016, we completed the full transfer of the engineering platform technology and earned milestone revenue of $8.0 million. We received the $8.0 million milestone payment in the fourth quarter of 2016. 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 will install certain CodeEvolver^®protein engineering technology upgrades into Merck’s platform license installation and maintain those upgrades for a multi-year term.

Protein Catalyst Products and Services

Our protein catalyst products and services can deliver value to our customers in multiple potential ways:

•manufacture their products at lower cost;

•manufacture their products with lower fixed capital investment;

•reduce the cost of development of complex chemical synthesis processes;

•enable their products to achieve higher product purity;

•reduce the risk of adverse effects arising from product impurities;

•allow the removal of entire steps from chemical production; and

•provide flexibility to apply at any point across their product’s lifecycle.

Our products include protein catalysts, chemical intermediates and Codex^® Biocatalyst Panels and Kits. We sell our products worldwide primarily through our direct sales and business development force in the United States and Europe.

In addition to products, we also offer research and development services to our customers. These research and development service agreements often contain service fee payments and intellectual property provisions under which we screen and/or engineer protein catalysts for customers in connection with their process development efforts. In these collaborations, we typically receive consideration in the form of one or more of the following: up-front payments, milestone payments, payments for screening and engineering services, licensing fees and royalties.

Protein Catalysts

We often sell protein catalysts (also referred to as biocatalysts or enzymes), by the gram or kilogram, that have already been engineered, scaled up, and installed in a customer’s commercial process. For example, we sell protein catalysts to Merck for their manufacture of Sitagliptin, the active ingredient in Januvia^®. We also sell protein catalysts which are in developmental stages. These are enzymes that are sold in batches or by the gram or kilogram that are in the process of being engineered or scaled up by Codexis, or are in the process of being trialed or approved for use in the customer’s process. We may sell batches of specific protein catalysts that are in the middle of our protein engineering efforts to test their performance at a larger customer scale. We also may sell batches of specific protein catalysts for use in a customer’s developmental products (for example, to trial in a customer’s Phase II drug candidate process). Finally, we may sell batches of specific protein catalysts as a customer performs trials for approval in their commercial manufacturing operations.

Chemical Intermediates

In some cases, we sell intermediate chemicals products that are produced in a process that uses our protein catalysts. These chemical intermediates are then used by our customer for further chemical processing.

Codex^® Biocatalyst Panels and Kits

We sell kits and panels of our protein catalysts. These kits and panels assemble a relevant subset of our engineered enzymes to enable customers to perform chemistry screening on their own. These kits and panels are organized by specific types of chemical reactions that are widely applicable in the pharmaceutical and fine chemical markets.

Protein Catalyst Screening Services

If a customer prefers, rather than purchasing our Codex^® Biocatalyst Panels or Kits to use for its own screening, it may send us its starting materials and desired chemical reaction, and we will test against our existing libraries of enzymes on a research and development service fee basis. If we detect desired activity in a specific enzyme, we can supply the customer with this enzyme or perform engineering services to improve the performance of the enzyme.

Protein Engineering Services

We work with our customers throughout their product development lifecycle to optimize enzymes that have been engineered specifically to perform a desired process according to a highly selective set of specifications. We typically charge customers for research and development services by project or project-month. These are typically larger research and development service fees than screening services.

The protein engineering process starts by identifying genes that code for enzymes known to have the general type of catalytic reactivity for a desired chemical reaction. Typically, we identify gene sequences from our extensive in-house collection or from published databases and then synthesize candidate genes having those sequences. Using a variety of biotechnology tools, we diversify these genes by introducing mutations, giving rise to changes in the enzymes for which they encode. The methods for diversifying these genes, and types of diversity being tested, often vary over the course of a protein engineering program. For finding initial diversity, methods typically include random mutagenesis and site-directed (included computational structure-guided) mutagenesis. We also test mutational variations from related enzymes found in different organisms.

Once we have identified potentially beneficial mutations, we create libraries of thousands of variants with combinations of these mutations. With our proprietary genetic manipulation tools, we generate libraries of genes that have programmed and random combinations of the mutations for testing. The pool of genes is used to transform host cells, which entails introducing the various genes into host cells. These cells are then grown into colonies. Cells from individual colonies are cultured in high throughput to produce the enzyme encoded by the genetic variant in those cells. The enzymes expressed by these cells are then screened in high throughput using test conditions relevant to the desired process. The screening results allow us to identify and catalog individual genes that produce improved enzymes with beneficial mutations as well as enzymes having detrimental ones. Using specifically developed test conditions and analytical methods, we can identify variant enzymes that exhibit various improved performance characteristics, such as stability, activity and selectivity, under conditions relevant to the desired chemical process.

In the next step in our optimization process, we use our proprietary bioinformatics software to analyze protein sequence-activity relationships. Our software and algorithms relate the screening results to the mutations and rank the individual and interacting protein sequence mutations with regard to their degree of benefit or detriment, relative to the process parameter(s) tested. Using this information, we can create a select pool of mutational diversity in the next iteration to further the accumulation of beneficial diversity and cancel out detrimental diversity in the individual genes in the resulting library. The gene that codes for the best performing enzyme in one iteration is used as the starting gene for the next iteration of recombination and screening. As the enzymes improve over these iterations, the screening conditions are made increasingly more stringent. In this way, the protein catalyst is rapidly optimized until all in-process performance requirements have been achieved and the economic objectives for the desired process have been met.

INTELLECTUAL PROPERTY

Our success depends in large part on our ability to protect our proprietary products and technology under patent, copyright, trademark and trade secret laws. We also rely heavily on confidential disclosure agreements for further protection of our proprietary products and technologies. Protection of our technologies is important for us to offer our customers and partners proprietary services and products that are not available from our competitors, and to exclude our competitors from practicing technology that we have developed or exclusively licensed from other parties. For example, our ability to supply innovator pharmaceutical manufacturers depends on our ability to supply proprietary enzymes or methods for making pharmaceutical intermediates or APIs that are not available from our competitors. Likewise, in the generic pharmaceutical area, proprietary protection, through patent, trade secret or other protection of our enzymes and methods of producing a pharmaceutical product is important for us and our customers to maintain a lower cost production advantage over competitors.

As of December 31, 2018, we owned or controlled approximately 1,100 issued patents and pending patent applications in the United States and in various foreign jurisdictions. These patents and patent applications include many that are directed to our enabling technologies and specific methods and products that support our business in the pharmaceutical markets. In addition, our portfolio includes applications and patents that support our businesses in the biotherapeutics, molecular diagnostics, food and other markets. Our current intellectual property rights have terms that expire between 2019 and 2039. Our United States intellectual property rights directed to the CodeEvolver^® proprietary enabling technology platform developed internally by us have terms that expire between 2029 to 2034. Our current intellectual property rights also include patents, trademarks, copyrights, software and certain assumed contracts that we acquired from Maxygen, Inc. (“Maxygen”) in October 2010, which are associated with directed evolution technology, known as the MolecularBreeding™ technology platform developed by Maxygen. The intellectual property rights and assets that we acquired from Maxygen continue to be subject to existing exclusive and non-exclusive license rights granted by Maxygen to third parties. We continue to file new patent applications, for which terms generally extend 20 years from the non-provisional filing date in the United States.

As of December 31, 2018, we owned and used the following registered, pending, and common law trademarks in the United States, with some trademarks also registered or pending in foreign jurisdictions: Codexis^®, Codex^®, CodeEvolver^®, Mosaic^®, Sage^®, Microcyp^®, MCYP^®, ProSAR^®, Unlock the Power of Proteins^®, Codexis Protein Engineering Experts™, and a Codexis design mark (i.e., the Codexis logo).

COMPETITION

We face differing forms of competition in the small molecule pharmaceuticals, biotherapeutics, and fine chemicals markets, as set forth below.

Small Molecule Pharmaceuticals

We market our protein catalyst products and services to manufacturers of small molecule pharmaceutical intermediates and APIs. Our primary competitors in that market are companies marketing either conventional, non-enzymatic catalysts or alternative protein catalyst products and services. We also face competition sometimes from existing in-house technologies (both biocatalysts and conventional catalysts) within our client and potential client companies. The principal methods of competition and competitive differentiation in this market are price, product quality and performance, including manufacturing yield, safety and environmental benefits and speed of delivery of product. Pharmaceutical manufacturers that use biocatalytic processes can face increased competition from manufacturers that use more conventional processes and/or manufacturers that are based in regions (such as India and China) with lower regulatory, safety and environmental costs.

The market for the manufacture and supply of APIs and intermediates is large with many established companies. These companies include many of our large innovator and generic pharmaceutical customers, such as Merck, GSK, Pfizer, Bristol Myers Squibb and Teva Pharmaceutical Industries Ltd., which have significant internal research and development efforts directed at developing processes to manufacture APIs and intermediates. The processes used by these companies include classical conventional organic chemistry reactions, chemo catalytic reactions, biocatalytic reactions or combinations thereof. Our protein catalyst based manufacturing processes must compete with these internally developed routes.

Companies developing and marketing conventional catalysts include Solvias AG, BASF, Johnson-Mathey, and Takasago International Corporation.

The market for supplying enzymes for use in pharmaceutical manufacturing is quite fragmented. There is competition from large industrial enzyme companies, such as Novozymes, as well as subsidiaries of larger contract research/contract manufacturing organizations (“CRO/CMO”), such as Royal DSM N.V. (“DSM”), Cambrex Corporation and Almac Group Ltd. There is also competition in the customized and optimized enzyme area from several smaller companies, such as BRAIN AG, Arzeda, c-LEcta GmbH and Evocatal GmbH.

We believe that our principal advantage is our ability to rapidly deliver customized protein catalysts for existing and new intermediates and APIs in the pharmaceutical manufacturing market. This capability has allowed us to create a breadth of protein catalysts with improved performance characteristics including, for example, better activity, stability, and activity on a range of substrates, compared to traditional chemistry-based manufacturing processes and naturally occurring (and thus not optimized) biocatalysts. We believe that our CodeEvolver^® protein engineering platform technology provides substantially superior results, in shorter time frames, than companies offering competing biocatalyst development services.

Biotherapeutics

There are other companies that participate in the biotherapeutics market generally and the PKU market specifically. Many of these companies are large, successful and well-capitalized. BioMarin Pharmaceutical Inc. (“BioMarin”) and Daiichi Sankyo Company market Kuvan^® in the United States, Europe and Japan for the treatment of a certain type of PKU. In addition, BioMarin gained US FDA approval in 2018 and began commercial sales of Palynziq^TM as an injectable enzyme substitution therapy for the potential treatment of PKU. Synlogic is developing SYNB1618 as a potential treatment for PKU, and in 2018, they completed a phase 1/2a clinical trial using SYNB1618. Takeda (who recently acquired Shire Plc), Genzyme / Sanofi S.A. and other companies market or are actively developing new enzyme therapeutics. There are numerous companies that are developing other forms of therapeutics, such as small molecules and gene therapy, which could compete with biotherapeutics.

Fine Chemicals

We entered the fine chemicals market in 2013 by applying our protein engineering technology in the food market. We face similar forms of competition in this market as in the small molecule pharmaceutical markets, with the exception that the risk of losing opportunities to larger competitors in fine chemicals is greater given the larger scale of opportunities available in the fine chemicals market compared to the pharmaceutical market. Our significant competitors in the fine chemicals markets include companies that have been in these marketplaces for many years, such as DuPont Industrial Biosciences (DuPont Genencor), DSM, Novozymes and A.B. Enzymes. These companies have greater resources in these markets than we do and have long-term supply arrangements already in place with customers. Our ability to compete in these markets may be limited by our relatively late entrance. We also face competition in both the fine chemicals and small molecule pharmaceutical markets from emerging companies, like Zymergen and Gingko Bioworks who offer engineered microbe metabolic pathway approaches to these markets.

Core Technology

We are a leader in the field of protein engineering to create novel biocatalysts. Both our pharmaceuticals and fine chemicals businesses rely on our core technology. We are aware that other companies, organizations and persons have developed technologies that appear to have some similarities to our patented proprietary technologies. For example, we are aware that other companies, including DSM and BASF, have alternative methods for obtaining and generating genetic diversity or use mutagenesis techniques to produce genetic diversity. In addition, academic institutions such as the California Institute of Technology, the Max Planck Institute and the Austrian Centre of Industrial Biotechnology are also working in this field. This field is highly competitive with companies and academic and research institutions actively seeking to develop technologies that could be competitive with our technologies.

Technological developments by others may result in our products and technologies, as well as products manufactured by our customers using our biocatalysts, becoming obsolete. We monitor publications and patents that relate to directed molecular evolution to be aware of developments in the field and evaluate appropriate courses of action in relation to these developments.

Many of our competitors have substantially greater manufacturing, financial, research and development, personnel and marketing resources than we do. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors.

OPERATIONS

Our corporate headquarters are located in Redwood City, California and provide general administrative support to our business and are the center of our research, development and business operations. We have limited internal manufacturing capacity at our headquarters in Redwood City. We expect to rely on third-party manufacturers for commercial production of our biocatalysts for the foreseeable future. Our in-house manufacturing is dedicated to producing both Codex^® Biocatalyst Panels and Kits and enzymes for use by our customers in pilot scale production. We also supply initial commercial quantities of biocatalysts for use by our collaborators to produce pharmaceutical intermediates and manufacture biocatalysts that we sell. Please see Note 15 in the notes to our Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for a description of our revenues and long-lived assets both within and outside of the United States.

Our research and development operations include efforts directed towards engineering protein catalysts, bioprocess development, cellular engineering, biocatalyst screening, metabolites, strain improvement, fermentation development and process engineering. We conduct enzyme evolution, enzyme production development, microbial bioprocess development, cellular engineering, microbial evolution and process engineering evaluations and design primarily at our headquarters in Redwood City, California. For more information on our research and development expenditures, see Item 8 of this Annual

Report on Form 10-K. Manufacturing of our enzymes is conducted primarily in three locations, at our in-house facility in Redwood City, California and at third-party contract manufacturing organizations, Lactosan, GmbH & Co. KG (“Lactosan”) in Kapfenberg, Austria and DPhar SpA (“DPhar”) in Agnani, Italy. Generally, we perform smaller scale manufacturing in-house and outsource the larger scale manufacturing and a large percentage of our production of novel enzymes to contract manufacturing organizations.

GOVERNMENT REGULATION

In the United States, the FDA regulates drug and biologic products under the Federal Food, Drug and Cosmetic Act, its implementing regulations and other laws, including, in the case of biologics, the Public Health Service Act. Our biotherapeutic product candidates are subject to regulation by the FDA as biologics. Biologics require the submission of a biologics license application (“BLA”) and licensure, which constitutes approval, by the FDA before being marketed in the United States. If we or our development partners fail to comply with applicable FDA or other requirements at any time during product development, clinical testing, the approval process or after approval, we may become subject to administrative or judicial sanctions.

The process required by the FDA before our biologic product candidates may be marketed in the United States generally involves the following:


•	completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s good laboratory practice (“GLP”) regulations;


•	submission to the FDA of an IND, which must become effective before clinical trials in the United States may begin;


•	performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication, conducted in accordance with the FDA’s good clinical practice (“GCP”) regulations;


•	submission to the FDA of a BLA;


•	satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current good manufacturing (“cGMP”) regulations; and


•	FDA review and approval of the BLA prior to any commercial marketing, sale or distribution of the product.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Preclinical and Clinical Trials

Once a product candidate is identified for development, it enters the preclinical testing stage. Preclinical studies include laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which must be conducted in accordance with GLP requirements. The results of preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks, and imposes a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development, and the FDA must grant permission, either explicitly or implicitly by not objecting, before each clinical trial can begin.

Clinical trials involve the administration of the product candidate to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial and the parameters and criteria to be used in monitoring safety and evaluating effectiveness. Each protocol must be submitted to the FDA as part of the IND. An independent institutional review board (“IRB”) for each investigator site proposing to participate in a clinical trial must also review and approve the clinical trial before it can begin at that site, and the IRB must monitor the clinical trial until it is completed. The FDA, the IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP requirements, including requirements for informed consent.

For purposes of BLA approval, clinical trials are typically conducted in three sequential phases, which may overlap or be combined.


•	Phase 1-Phase 1 clinical trials involve initial introduction of the investigational product into healthy human subjects or patients with the target disease or condition. These studies are typically designed to test the safety,

dosage tolerance, absorption, metabolism and distribution of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.


•	Phase 2-Phase 2 clinical trials typically involve administration of the investigational product to a limited patient population with a specified disease or condition to evaluate the preliminary efficacy, optimal dosage and dosing schedule and to identify possible adverse side effects and safety risks.

•

Phase 3-Phase 3 clinical trials typically involve administration of the investigational product to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval and physician labeling.

In some cases, the FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the biologic’s safety and effectiveness after BLA approval. Such post-approval clinical trials are typically referred to as Phase 4 clinical trials.

Although most clinical research performed in the United States in support of a BLA must be authorized in advance by the FDA, under the IND regulations and procedures described above, there are certain circumstances under which clinical trials can be conducted without submission of an IND. For example, a sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND.

Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events, findings from other studies that suggest a significant risk for human subjects, and any clinically important increase in the rate of a serious adverse reaction over that listed in the protocol or investigator brochure.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the biologic and finalize a process for manufacturing the biologic in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and manufacturers must develop, among other things, methods for testing the identity, strength, quality and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

BLA Submission and FDA Review

The results of preclinical studies and clinical trials, together with other detailed information, including extensive manufacturing information and information on the composition of the biologic, are submitted to the FDA in the form of a BLA requesting approval to market the biologic for one or more specified indications. The submission of a BLA requires payment of a substantial user fee unless a waiver is granted. Each BLA submitted to the FDA is reviewed for administrative completeness and reviewability within 60 days of the FDA’s receipt of the application. If the BLA is found to be complete, the FDA will file the BLA, triggering a full substantive review of the application. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission.

Once a BLA has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant. However, the review process is often significantly longer. Under the Prescription Drug User Fee Act, the FDA has a goal of reviewing BLAs within ten months of the 60-day filing date for standard review or six months for priority review, but the overall timeframe is often extended by FDA requests for additional information or clarification. The FDA reviews a BLA to determine, among other things, whether the biological product is safe, pure and potent and whether the facility or facilities in which it is manufactured meet standards designed to assure the product’s continued safety, purity and potency. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.

Before approving a BLA, the FDA will inspect the facility or the facilities at which the biologic product is manufactured, and will not license the product unless cGMP compliance is satisfactory. The FDA may also inspect the sites at which the clinical trials were conducted to assess their compliance with GCP requirements.

The FDA may deny approval of a BLA if the applicable statutory and regulatory criteria are not satisfied, or it may require additional preclinical or clinical data. Even if such data are submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than sponsors. Once the FDA approves a BLA, such approval defines the indicated uses for which the biologic may be

marketed. The FDA may also require implementation of a Risk Evaluation and Mitigation Strategy, or REMS, which can include a medication guide, communication plan, or elements to assure safe use, such as restricted distribution methods, physician training, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling claims or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is not maintained or if problems occur after the product reaches the market. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and it may limit further marketing based on the results of these post-marketing studies. After approval, certain changes to the approved biologic, such as adding new indications, manufacturing changes or additional labeling claims, are subject to further FDA review and approval. Depending on the nature of the proposed change, a BLA supplement must be filed and approved before the change may be implemented.

Post-Approval Requirements

Licensed biologics that are manufactured and distributed in the United States are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product distribution, advertising and promotion and reporting of adverse experiences with the product. There is also a continuing, annual prescription drug program user fee.

Any biologics manufactured or distributed by us, our partners or our contract manufacturers pursuant to FDA approvals would be subject to ongoing regulation by the FDA. Manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose extensive procedural and documentation requirements. Failure to comply with statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, product seizures, injunctions, civil penalties or criminal prosecution.

Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information, requirements for post-market studies or clinical trials to assess new safety risks, imposition of distribution or other restrictions under a REMS. Other potential consequences include, among other things:


•	restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;


•	fines, warning letters or holds on post-approval clinical trials;


•	refusal of the FDA to approve applications or supplements to approved applications, or suspension or revocation of product approvals;


•	product seizure or detention, or refusal to permit the import or export of products; or


•	injunctions or the imposition of civil or criminal penalties.

The FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet and social media. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Physicians may prescribe legally available biologics for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.

Biosimilars and Regulatory Exclusivity

As part of the Patient Protection and Affordable Care Act enacted in 2010, as amended by the Health Care and Education Reconciliation Act of 2010, the Biologics Price Competition and Innovation Act (“BPCIA”) established an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The abbreviated regulatory pathway provides legal authority for the FDA to review and approve biosimilar biologics based on their similarity to an existing brand product, referred to as a reference product, including the possible designation of a biosimilar as interchangeable with a brand product. Under the BPCIA, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. Moreover, the extent to which a biosimilar, once approved, will be substituted for a reference product in a way that is similar to traditional generic substitution for non-biological drug products is not yet clear and will depend on a number of marketplace and regulatory factors that are still developing. The BPCIA is complex and continues

to be interpreted and implemented by the FDA. As a result, its ultimate implementation and impact are subject to uncertainty. In addition, the period of exclusivity provided by the BPCIA only operates against third parties seeking approval via the abbreviated pathway, but would not prevent third parties from pursuing approval via the traditional BLA approval pathway.

CUSTOMERS

We rely on a limited number of key customers for the majority of our revenues. Customers that provided 10% or more of our total revenues in any of the past three fiscal years consist of the following:



	Percentage of Total Revenues For The Years Ended December 31,
	2018		2017		2016
Customers:
Merck	29	%	28	%	47	%
Nestlé Health Science	22	%	15	%	*
Tate & Lyle	13	%	11	%	*
Novartis	*		14	%	*
GSK	*		*		22	%
* Percentage was less than 10%

EMPLOYEES

As of December 31, 2018, we had 132 full-time employees and part-time employees worldwide. Of these employees, 77 were engaged in research and development, 18 were engaged in operations and quality control, and 37 were engaged in selling, general and administrative activities. None of our employees is represented by a labor union, and we consider our employee relations to be good.

CORPORATE & AVAILABLE INFORMATION

Our principal corporate offices are located at 200 Penobscot Drive, Redwood City, California 94063 and our telephone number is (650) 421-8100. We were incorporated in Delaware in January 2002. Our internet address is www.codexis.com. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K or any other filings we make with the U.S. Securities and Exchange Commission (the “SEC”).

We make available on or through our website certain reports and amendments to those reports that we file with, or furnish to, the SEC in accordance with the Exchange Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. Copies of this information may be obtained at the SEC website at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the references to website URLs are intended to be inactive textual references only.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below together with the other information set forth in this Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Risks Relating to Our Business and Strategy

During our operating history, the markets in which we have participated have changed significantly, which may make it difficult to evaluate our current business and predict our future performance.

Our company has been in existence since January 2002. From 2002 until 2005, our operations focused on organizing and staffing our company and developing our technology platform. In 2005, we recognized our first revenues from product sales. From 2006 to August 2012, a major portion of our business revolved around our research and development collaboration with Shell with respect to advanced biofuels. The Shell collaboration was terminated in August 2012 and did not contribute to our revenues after the termination. As a result of the termination of the Shell collaboration, we undertook a significant restructuring of our operations and refocused our business on the biocatalysis market. In November 2013, we announced that we had begun to wind down our CodeXyme^® cellulase enzymes program, and that we had stopped further development of our CodeXol^®detergent alcohols program in the third quarter of 2013. Our Novel Biotherapeutics business is relatively new to Codexis. As a result of these changes in our business and any changes to our business focus that we may make as we move forward, our operating history in past periods may not provide a basis to evaluate our current business or be indicative of our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by young companies in rapidly changing industries. If we do not address these risks successfully, our business will be harmed.

Our quarterly or annual operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of research analysts or investors, which could cause our stock price to decline.

Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this report:


•	our ability to achieve or maintain profitability;


•	our relationships with, and dependence on, collaborators in our principal markets;


•	our dependence on a limited number of customers;


•	our dependence on a limited number of products in our biocatalysis business;


•	our reliance on a limited number of contract manufacturers for large scale production of substantially all of our enzyme products;


•	our ability to develop and successfully commercialize new products for the biocatalysis market(s);


•	our ability to obtain additional development partners for our biotherapeutic programs;


•	potential of Nestlé Health Science terminating any development program under its license agreement with us;


•	our ability to deploy our technology platform in the fine chemicals market;


•	the success of our customers’ pharmaceutical products in the market and the ability of such customers to obtain regulatory approvals for products and processes;


•	our or our customers’ ability to obtain regulatory approval for the sale and manufacturing of food products using our enzymes;


•	our ability to deploy our technology platform in the in vitro molecular diagnostics market;


•	our ability to successfully achieve domestic and foreign regulatory approval for product candidates;


•	our ability to successfully design and execute clinical testing at a reasonable cost and on an acceptable time-frame;


•	our dependence on product candidates which could unexpectedly fail at any stage of preclinical or clinical development;


•	our dependence on product candidates which may lack the ability to work as intended or cause undesirable side effects;


•	our dependency on third parties to conduct clinical trials, research, and preclinical studies;


•	our ability to successfully prosecute and protect our intellectual property;


•	our ability to compete if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights;


•	our ability to avoid infringing the intellectual property rights of third parties;


•	our involvement in lawsuits to protect or enforce our patents or other intellectual property rights;


•	our ability to enforce our intellectual property rights throughout the world;


•	our dependence on, and the need to attract and retain, key management and other personnel;


•	our ability to prevent the theft or misappropriation of our biocatalysts, the genes that code for our biocatalysts, know-how or technologies;


•	our ability to protect our trade secrets and other proprietary information from disclosure by employees and others;


•	our ability to obtain substantial additional capital that may be necessary to expand our business;


•	our ability to comply with the terms of our credit facility;


•	our ability to timely pay debt service obligations;


•	our customers’ ability to pay amounts owed to us in a timely manner;


•	our ability to avoid charges to earnings as a result of any impairment of goodwill, intangible assets or other long-lived assets;


•	changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations;


•	our ability to maintain effective internal control over financial reporting;


•	our dependency on information technology systems, infrastructure and data;


•	our ability to control and to improve product gross margins;


•	our ability to protect against risks associated with the international aspects of our business;


•	the cost of compliance with European Union chemical regulations;


•	potential advantages that our competitors and potential competitors may have in securing funding or developing products;


•	our ability to accurately report our financial results in a timely manner;


•	results of regulatory tax examinations;


•	business interruptions, such as earthquakes and other natural disasters;


•	public concerns about the ethical, legal and social ramifications of genetically engineered products and processes;


•	our ability to integrate our current business with any businesses that we may acquire in the future;


•	our ability to properly handle and dispose of hazardous materials in our business;


•	potential product liability claims;


•	uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act and related regulations could materially affect our tax obligations and effective tax rate; and


•	our ability to use our net operating loss carryforwards to offset future taxable income.

Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

We have a history of net losses and we may not achieve or maintain profitability.

We have incurred net losses since our inception, including losses of $10.9 million in 2018, $23.0 million in 2017 and $8.6 million in 2016. As of December 31, 2018 and 2017, we had an accumulated deficit of $330.5 million and $315.1 million, respectively. If we are unable to expand our biocatalysis business, through new or expanded collaborations, development of new products or services, or increased sales of existing products and services, our net losses may increase and we may never achieve profitability. In addition, some of our collaboration agreements, including our collaboration with Nestlé Health Science, provide for milestone payments and/or future royalty payments, which we will only receive if we and our collaborators develop and commercialize products. We also may fund development of additional proprietary biocatalysis and/or biotherapeutic products. There can be no assurance that any of these products will become commercially viable or that we will ever achieve profitability on a quarterly or annual basis. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We are dependent on our collaborators, and our failure to successfully manage these relationships could prevent us from developing and commercializing many of our products and achieving or sustaining profitability, and could lead to disagreements with our current or former collaborators.

Our ability to maintain and manage collaborations in our markets is fundamental to the success of our business. We currently have license agreements, research and development agreements, supply agreements and/or distribution agreements with various collaborators. For example, we have ongoing collaborations with GSK, Merck and Nestlé Health Science that are important to our business and financial results. We may have limited or no control over the amount or timing of resources that any collaborator is able or willing to devote to our partnered products or collaborative efforts. Any of our collaborators may fail to perform its obligations. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. Moreover, disagreements with a collaborator could develop, and any conflict with a collaborator could lead to litigation and could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one or more existing collaborators. If any of these events occur, especially if they occur in our collaborations with GSK, Merck or Nestlé Health Science, or if we fail to maintain our agreements with our collaborators, we may not be able to commercialize our existing and potential products or grow our business or generate sufficient revenues to support our operations, we may not receive contemplated milestone payments and royalties under the collaboration, and we may be involved in litigation. Our collaboration opportunities could be harmed and our financial condition and results of operations could be negatively affected if:


•	we do not achieve our research and development objectives under our collaboration agreements in a timely manner or at all;


•	we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;


•	we, our collaborators and/or our contract manufacturers do not receive the required regulatory and other approvals necessary for the commercialization of the applicable product;


•	we disagree with our collaborators as to rights to intellectual property that are developed during the collaboration, or their research programs or commercialization activities;


•	we are unable to manage multiple simultaneous collaborations;


•	our collaborators or licensees are unable or unwilling to implement or use the technology or products that we provide or license to them;


•	our collaborators become competitors of ours or enter into agreements with our competitors;


•	our collaborators become unable or less willing to expend their resources on research and development or commercialization efforts due to general market conditions, their financial condition or other circumstances beyond our control; or


•	our collaborators experience business difficulties, which could eliminate or impair their ability to effectively perform under our agreements.

Even after collaboration relationships expire or terminate, some elements of the collaboration may survive. For instance, certain rights, licenses and obligations of each party with respect to intellectual property and program materials may survive the expiration or termination of the collaboration. Disagreements or conflicts between and among the parties could develop even though the collaboration has ended. These disagreements or conflicts could result in expensive arbitration or litigation, which may not be resolved in our favor.

Finally, our business could be negatively affected if any of our collaborators or suppliers undergoes a change of control or were to otherwise assign the rights or obligations under any of our agreements.

We are dependent on a limited number of customers.

Our current revenues are derived from a limited number of key customers. For the year ended December 31, 2018 and 2017, customers that each individually contributed 10% or more of our total revenue accounted for 64% and 68% of our total revenues in 2018 and 2017, respectively. We expect a limited number of customers to continue to account for a significant portion of our revenues for the foreseeable future. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers could, materially adversely affect our revenues, financial condition and results of operations.

We are dependent on a limited number of products in our protein catalysts business.

Our current product sales are derived from a limited number of protein catalyst products. We expect a limited number of protein catalyst products to continue to account for a significant portion of our product sales for the foreseeable future. This product concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business of one or a combination of our significant products could materially adversely affect our revenues, financial condition and results of operations.

We are dependent on a limited number of contract manufacturers for large scale production of substantially all of our enzymes.

Manufacturing of our enzymes is conducted primarily in three locations: our in-house facility in Redwood City, California, and at two third-party contract manufacturing organizations, Lactosan, GmbH & Co. KG ("Lactosan"), in Kapfenberg, Austria, and DPhar SpA (“DPhar”), in Agnani, Italy. Generally, we perform smaller scale manufacturing in-house and outsource the larger scale manufacturing to these contract manufacturers. We have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the performance and capacity of third-party manufacturers for the larger scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals business.

Accordingly, we face risks of difficulties with, and interruptions in, performance by third party manufacturers, the occurrence of which could adversely impact the availability, launch and/or sales of our enzymes in the future. Manufacturing delays at a contract manufacturer could negatively affect our business, reputation, results of operations and financial condition. The failure of any contract manufacturer to supply us enzymes on a timely basis, or to manufacture our enzymes in compliance with our specifications or applicable quality requirements or in volumes sufficient to meet demand, would adversely affect our ability to sell pharmaceutical and fine and complex chemicals products, could harm our relationships with our collaborators or customers and could negatively affect our revenues and operating results. We may be forced to secure alternative sources of supply, which may be unavailable on commercially acceptable terms, and could cause delays in our ability to deliver products to our customers, increase our costs and decrease our profit margins.

We currently have supply agreements in place with Lactosan and DPhar. In the absence of a supply agreement, a contract manufacturer will be under no obligation to manufacture our enzymes and could elect to discontinue their manufacture at any time. If we require additional manufacturing capacity and are unable to obtain it in sufficient quantity, we may not be able to increase our product sales, or we may be required to make substantial capital investments to build that capacity or to contract with other manufacturers on terms that may be less favorable than the terms we currently have with our suppliers. If we choose to build our own additional manufacturing facility, it could take two years or longer before our facility is able to produce commercial volumes of our enzymes. Any resources we expend on acquiring or building internal manufacturing capabilities could be at the expense of other potentially more profitable opportunities. In addition, if we contract with other manufacturers, we may experience delays of several months in qualifying them, which could harm our relationships with our collaborators or customers and could negatively affect our revenues or operating results.

If we are unable to develop and commercialize new products for the pharmaceutical, fine chemicals, biotherapeutics and molecular diagnostics markets, our business and prospects will be harmed.

We plan to launch new products for the pharmaceutical, fine chemicals, therapeutics and molecular diagnostics markets. These efforts are subject to numerous risks, including the following:


•	customers in these markets may be reluctant to adopt new manufacturing processes that use our enzymes;


•	we may be unable to successfully develop the enzymes or manufacturing processes for our products in a timely and cost-effective manner, if at all;


•	we may face difficulties in transferring the developed technologies to our customers and the contract manufacturers that we may use for commercial scale production of intermediates and enzymes in these markets;


•	the contract manufacturers that we may use may be unable to scale their manufacturing operations to meet the demand for these products and we may be unable to secure additional manufacturing capacity;


•	customers may not be willing to purchase these products for these markets from us on favorable terms, if at all;


•	we may face product liability litigation, unexpected safety or efficacy concerns and product recalls or withdrawals;


•	changes in laws or regulations relating to the pharmaceutical industry or the industries into which we sell our fine chemicals products, including the food industry, could cause us to incur increased costs of compliance or otherwise harm our business;


•	our customers’ products may experience adverse events or face competition from new products, which would reduce demand for our products;


•	we may face pressure from existing or new competitive products; and


•	we may face pricing pressures from existing or new competitors, some of which may benefit from government subsidies or other incentives.

Our biotherapeutic programs are early stage, highly regulated and expensive. Our ability to obtain additional development partners for the programs, to advance our product candidates to clinical trials and to ultimately receive regulatory approvals is highly uncertain.

We are developing and have developed novel biotherapeutic candidates, including CDX-6114, our novel oral enzyme product candidate for the treatment of PKU. The successful development of biotherapeutic candidates involves many risks and uncertainties, requires long timelines and may lead to uncertain results. In addition, drug development is highly regulated and requires areas of expertise and capital resources we do not currently possess. In order to market a drug product in the United States, we must undergo the following process required by the FDA:


•	completion of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with GLP requirements;


•	submission to the FDA of an IND, which must become effective before human clinical studies may begin in the United States;


•	approval by an independent IRB representing each clinical site before the clinical study may be initiated at the site;


•	performance of adequate and well-controlled human clinical studies (generally divided into three phases) in accordance with GCP requirements to establish the safety and efficacy of the product candidate for each proposed indication;


•	preparation of and submission to the FDA of a BLA after completion of all clinical studies;


•	potential review of the product candidate by an FDA advisory committee;


•	satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities where the product candidate is produced to assess compliance with cGMP requirements; and


•	FDA review and approval of a BLA prior to any commercial marketing or sale of the product in the United States.

If we fail to comply with applicable FDA or other regulatory requirements at any time during the drug development process, clinical testing, the approval process or after approval, we may become subject to administrative or judicial penalties, including the FDA’s refusal to approve a pending application, withdrawal of an approval, warning letters, product recalls, and additional enforcement actions.

In October 2017, we entered into a Global Development, Option and License Agreement with Nestlé Health Science (“Nestlé Agreement”) pursuant to which we granted to Nestlé Health Science an option to obtain an exclusive, worldwide, royalty-bearing, sublicenseable license to develop and commercialize certain products based on our therapeutic enzyme product candidates for the treatment of hyperphenylalaninemia (“HPA”), including CDX-6114, as well as an exclusive right of first negotiation to obtain an exclusive worldwide license to develop and commercialize any enzyme discovered by us for use in the field of the prevention, diagnosis, treatment and management of inborn errors of amino acid metabolism. HPA is a medical condition characterized by mildly or strongly elevated concentrations of the amino acid phenylalanine in the blood. PKU can result in severe HPA. In February 2019, Nestlé Health Science exercised its option to receive an exclusive license to further develop and commercialize CDX-6114 and our other therapeutic enzyme product candidates covered by specified patent applications for the treatment of PKU.

Our efforts to advance our biotherapeutic candidates that we develop are subject to numerous risks, including the following:

•

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and the results are inherently unpredictable. If we are ultimately unable to obtain regulatory approval for biotherapeutic product candidates, our business will be harmed. To obtain regulatory approval to market any product candidate, preclinical studies and costly and lengthy clinical trials are required, and the results of the studies and trials are highly uncertain. A failure of one or more pre-clinical or clinical trials can occur at any stage, and many companies that have believed their drug candidates performed satisfactorily in pre-clinical and clinical testing have nonetheless failed to obtain marketing approval of their product candidates.


•	We may find it difficult to enroll patients in our clinical trials for product candidates. Any enrollment difficulties could delay clinical trials and any potential product approval.


•	We may experience difficulty or delay in obtaining the FDA’s acceptance of an IND for product candidates we may seek to enter into clinical development, which would delay initiation of Phase 1 clinical testing. Delays in the

commencement or completion of clinical testing could significantly affect our product development costs or the product development costs of our present and any future collaborators. We do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons. For example, a clinical trial may be suspended or terminated by us, by the IRB of the institution in which such trial is being conducted, or by the FDA due to a number of factors, including unforeseen safety issues, changes in governmental regulations or lack of adequate funding to continue the clinical trial.

•

We have limited experience in drug development or regulatory matters related to drug development. As a result, we rely or will rely on third parties to conduct our pre-clinical and clinical studies, assist us with drug manufacturing and formulation and perform other tasks for us. If these third parties do not successfully carry out their responsibilities or comply with regulatory requirements, we may receive lower quality products or services, suffer reputational harm and not be able to obtain regulatory approval for product candidates.


•	Our efforts to use CodeEvolver^® protein engineering technology platform to generate new lead biotherapeutic candidates, whether under our collaboration with Nestlé Health Science or otherwise, may not be successful in creating candidates of value.


•	We will be exposed to potential product liability risks through the testing of experimental therapeutics in humans, which may expose us to substantial uninsured liabilities.


•	Third parties may develop intellectual property that could limit our ability to develop, market and commercialize product candidates.


•	Changes in methods of treatment of disease, such as gene therapy, could cause us to stop development of our product candidate or reduce or eliminate potential demand for CDX-6114, if approved, or any other product candidates that we may develop in the future.

If Nestlé Health Science terminates its development program under its license agreement with us, any potential revenue from that license agreement will be significantly reduced or non-existent, and our results of operations and financial condition will be materially and adversely affected.

We have invested significant time and financial resources in the development of CDX-6114 and other product candidates for the treatment of HPA now included in the Nestlé Agreement (each a “Compound”).

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, Nestlé Health Science is obligated to pay us $3.0 million within 60 days after exercise of the option. Upon exercising its option, Nestlé Health Science has 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 is expected to be completed in the second quarter of 2019. 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.

Under the Nestlé Agreement, we are eligible to receive from Nestlé Health Science development and approval milestones of up to $86.0 million, sales-based milestones of up to $250.0 million, and tiered royalties, at percentages ranging from the middle single digits to low double-digits, of net sales of products containing a licensed Compound as its sole active ingredient. We have received milestone payments under the Nestlé Agreement to date. However, there is no guarantee that we will receive further milestone payments under the Nestlé Agreement.

Nestlé Health Science may terminate the entire agreement in the event of serious safety issues related to any Compound or product subject to the agreement and at its convenience. We may terminate the Nestlé Agreement if Nestlé Health Science challenges the validity or enforceability of any of our patents covering the Compound. Either party may terminate the agreement in the event of the other party’s uncured material breach or insolvency. Depending on the timing of any such termination, we may not be entitled to receive potential milestone payments, as these payments terminate with termination of the Nestlé Agreement.

If Nestlé Health Science terminates its rights and obligations with respect to the Nestlé Agreement, then depending on the timing of such event:


•	the development of our product candidates subject to the agreement may be terminated or significantly delayed;


•	our cash expenditures could increase significantly if it is necessary for us to hire additional employees and allocate scarce resources to the development and commercialization of product candidates;


•	we would bear all of the risks and costs related to the further development and commercialization of product candidates that were previously the subject of the Nestlé Agreement, including the reimbursement of third parties; and

•

in order to fund further development and commercialization of new product candidates or programs, we may need to seek out and establish alternative collaboration arrangements with third-party partners; this may not be possible, or we may not be able to do so on terms which are acceptable to us, in which case it may be necessary for us to limit the size or scope of one or more of our programs or increase our expenditures and seek additional funding by other means.

Our efforts to deploy our technology platform in the fine chemicals market may fail.

We have recently begun to use our CodeEvolver^® protein engineering technology platform to develop new products in the fine chemicals markets. We do not know if we can successfully compete in this new market. This new market is well established and consists of numerous large, well-funded entrenched market participants who have long and established track records and customer relationships. We have currently developed products in the food sector of this market and these products, or any other products that we may develop in the future for the fine chemicals market may not succeed in displacing current products. If we succeed in commercializing new products for the fine chemicals market, we may not generate significant revenues and cash flows from these activities. The failure to successfully deploy products in the fine chemicals space may limit our growth and have a material adverse effect on our financial condition, operating results and business prospects.

Our business could be adversely affected if our customers’ products are not received well in the market, if their products, or the processes used by our customers to manufacture their final products, fail to be approved, or if our customers discontinue their development activities for any reason.

Our enzymes are used by our pharmaceutical customers in the manufacture of intermediates and APIs which are then used in the manufacture of final pharmaceutical products by our existing and potential branded and generic drug customers, and by our fine chemicals customers to manufacture food ingredients. Our business could be adversely affected if these final products do not perform in the market as well as expected, or if our customers encounter competition from new entrants into the market with competing, and possibly superior, products. Additionally, many of these pharmaceutical and food products must be reviewed and approved by the FDA in the United States and similar regulatory bodies in other markets prior to commercialization. If our customers who sell branded drugs, which we refer to as innovators, fail to receive regulatory approval for the drugs, fail to receive regulatory approval for new manufacturing processes for previously approved drugs, or decide for business or other reasons to discontinue their drug development activities, our revenues and prospects will be negatively impacted. The process of producing these drugs, and their generic equivalents, is also subject to regulation by the FDA in the United States and equivalent regulatory bodies in other markets. Similarly, if our food ingredient product and other fine chemical customers were to delay or discontinue development on their products, our revenues and prospects will be negatively impacted. If any pharmaceutical or food manufacturing process that uses our enzymes or enzyme technology does not receive required approval by the appropriate regulatory body or if customers decide not to pursue approval, our business could be adversely affected.

We or our customers may not be able to obtain regulatory approval for the use of our products in food and food ingredients, if required, and, even if approvals are obtained, complying on an ongoing basis with the numerous regulatory requirements applicable to these products will be time-consuming and costly.

The products that we develop for our food and food ingredient customers are, and any other products that we may develop for the food and food ingredients market will likely be, subject to regulation by various government agencies, including the FDA, state and local agencies and similar agencies outside the United States, as well as religious compliance certifying organizations. Food ingredients are regulated by the FDA either as food additives or as substances generally recognized as safe (“GRAS”). A substance can be listed or affirmed as GRAS by the FDA or self-affirmed by its manufacturer upon determination that independent qualified experts would generally agree that the substance is GRAS for a particular use. While we generally self-affirm GRAS status for the products that we develop for the food market, our customer(s) will need to submit a GRAS Notice of Determination for its final commercial product. There can be no assurance that our customer(s) will not receive any objections from the FDA to their Notice of Determination. If the FDA were to disagree with our customer’s determination, they could ask our customer to voluntarily withdraw the final commercial product from the market or could initiate legal action to halt its sale. Such actions by the FDA could have an adverse effect on our business, financial condition, and results of our operations. Food ingredients that are not GRAS are regulated as food additives and require FDA approval prior to commercialization. The food additive petition process is generally expensive and time consuming, with approval, if secured, potentially taking years.

Changes in regulatory requirements, laws and policies, or evolving interpretations of existing regulatory requirements, laws and policies, may result in increased compliance costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.

We expect to encounter regulations in most if not all of the countries in which we may seek to sell our products which are used in food and food ingredients, and we cannot be sure that we or our customers will be able to obtain necessary approvals in a timely manner or at all. If our existing and future products which are used in food and food ingredients do not meet applicable regulatory requirements in a particular country or at all, then we may not be able to commercialize them and our business will be adversely affected. The various regulatory schemes applicable to our products which are used in food and food ingredients will continue to apply following initial approval for sale, including FDA requirements for food safety, mandatory labeling, and certain nutrient content or health claims made about the product. Monitoring regulatory changes and ensuring our ongoing compliance with applicable requirements will be time-consuming and may affect our results of operations. If we fail to comply with such requirements on an ongoing basis, we may be subject to fines or other penalties, or may be prevented from selling our products which are used in food and food ingredients and our business may be harmed.

Our efforts to deploy our technology in the in vitro molecular diagnostics market may fail.

We have recently begun to use our CodeEvolver^® protein engineering technology platform to develop new products for customers using NGS and PCR/qPCR for in vitro molecular diagnostic applications. We do not know if we can successfully compete in this new market. This new market is well established and consists of numerous large, well-funded entrenched market participants who have long and established track records and customer relationships. Our first proprietary enzyme for this market, which is designed to improve library preparation for NGS users, and any products that we may develop in the future for this market, may not succeed in displacing current products. If we succeed in commercializing new products for this market, we may not generate significant revenues and cash flows from these activities. The failure to successfully deploy products on timely basis in this space may limit our growth and have a material adverse effect on our financial condition, operating results and business prospects.

Interim “top-line” and preliminary data from studies or trials that we announce or publish from time to time may change as more data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publish interim “top-line” or preliminary data from preclinical studies or clinical trials. Interim data are subject to the risk that one or more of the outcomes may materially change as more data become available. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Preliminary or “top-line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Additionally, interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure. Any information we determine not to disclose may ultimately be deemed significant by you or others with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the topline data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, product candidates may be harmed, which could significantly harm our business prospects.

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

We and any collaborators are not permitted to commercialize, market, promote or sell any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities impose similar requirements. The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. To date, neither we nor our collaborators have submitted a BLA to FDA or similar drug approval submissions to comparable foreign regulatory authorities for any product candidate. We and any collaborators must complete additional preclinical or nonclinical studies and clinical trials to demonstrate the safety and efficacy of our product candidates in humans to the satisfaction of the regulatory authorities before we will be able to obtain these approvals. Our product candidates could fail to receive regulatory approval for many reasons, including the following:


•	the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our or our collaborators’ clinical trials;


•	we or our collaborators may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;


•	the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;


•	we or our collaborators may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;


•	the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical studies or clinical trials;


•	the data collected from clinical trials of product candidates may not be sufficient to support the submission of a BLA to obtain regulatory approval in the United States or elsewhere;


•	the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies;


•	the FDA or comparable foreign regulatory authorities may fail to approve the companion diagnostics we contemplate developing with collaborators; and


•	the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our or our collaborators’ clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects. In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may impose significant limitations in the form of narrow indications, warnings, or a REMS. Regulatory authorities may not approve the price we or our collaborators intend to charge for products we may develop, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.

Clinical trials are difficult to design and implement, expensive, time-consuming and involve an uncertain outcome, and the inability to successfully conduct clinical trials and obtain regulatory approval for our product candidates would substantially harm our business.

Clinical testing is expensive and usually takes many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process, and product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. We do not know whether planned clinical trials will begin on time, need to be redesigned, recruit and enroll patients on time or be completed on schedule, or at all. Clinical trials can be delayed, suspended or terminated for a variety of reasons, including in connection with:


•	the inability to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of clinical trials;


•	applicable regulatory authorities disagreeing as to the design or implementation of the clinical trials;


•	obtaining regulatory authorization to commence a trial;


•	reaching an agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;


•	obtaining IRB approval at each site;


•	developing and validating the companion diagnostic to be used in a clinical trial, if applicable;


•	insufficient or inadequate supply or quality of product candidates or other materials necessary for use in clinical trials, or delays in sufficiently developing, characterizing or controlling a manufacturing process suitable for clinical trials;


•	recruiting and retaining enough suitable patients to participate in a trial;


•	having enough patients complete a trial or return for post-treatment follow-up;


•	adding a sufficient number of clinical trial sites;


•	inspections of clinical trial sites or operations by applicable regulatory authorities, or the imposition of a clinical hold;


•	clinical sites deviating from trial protocol or dropping out of a trial;


•	the inability to demonstrate the efficacy and benefits of a product candidate;


•	discovering that product candidates have unforeseen safety issues, undesirable side effects or other unexpected characteristics;


•	addressing patient safety concerns that arise during the course of a trial; receiving untimely or unfavorable feedback from applicable regulatory authorities regarding the trial or requests from regulatory authorities to modify the design of a trial;


•	non-compliance with applicable regulatory requirements by us or third parties or changes in such regulations or administrative actions;


•	suspensions or terminations by IRBs of the institutions at which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities due to a number of factors, including those described above;


•	third parties being unable or unwilling to satisfy their contractual obligations to us; or


•	changes in our financial priorities, greater than anticipated costs of completing a trial or our inability to continue funding the trial.

Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Additionally, we or our collaborators may experience unforeseen events during or resulting from clinical trials that could delay or prevent receipt of marketing approval for or commercialization of product candidates. For example, clinical trials of product candidates may produce negative, inconsistent or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon development programs. Regulators may also revise the requirements for approving the product candidates, or such requirements may not be as we anticipate. If we or our collaborators are required to conduct additional clinical trials or other testing of product candidates beyond those that we or our collaborators currently contemplate, if we or our collaborators are unable to successfully complete clinical trials or other testing of such product candidates, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:


•	incur unplanned costs;


•	be delayed in obtaining or fail to obtain marketing approval for product candidates;


•	obtain marketing approval in some countries and not in others;


•	obtain marketing approval for indications or patient populations that are not as broad as intended or desired;


•	obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;


•	be subject to additional post-marketing testing requirements;


•	be subject to changes in the way the product is administered;


•	have regulatory authorities withdraw or suspend their approval of the product or impose restrictions on its distribution;


•	be sued; or


•	experience damage to our reputation.

If we or our collaborators experience delays in the commencement or completion of our clinical trials, or if we or our collaborators terminate a clinical trial prior to completion, we may experience increased costs, have difficulty raising capital and/or be required to slow down the development and approval process timelines. Furthermore, the product candidates that are the subject of such trials may never receive regulatory approval, and their commercial prospects and our ability to generate product revenues from them could be impaired or not realized at all.

We or our collaborators may experience delays or difficulties in enrolling patients in clinical trials, which could delay or prevent receipt of regulatory approvals.

We or our collaborators may not be able to initiate or continue clinical trials on a timely basis or at all for any product candidates we or our collaborators identify or develop if we or our collaborators are unable to locate and enroll a sufficient number of eligible patients to participate in the trials as required by applicable regulations or as needed to provide appropriate statistical power for a given trial. Additionally, some of our competitors may have ongoing clinical trials for product candidates that would treat the same indications as one or more of our product candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in our competitors’ clinical trials. Patient enrollment may also affected by many factors, including:


•	severity and difficulty of diagnosing of the disease under investigation;


•	size of the patient population and process for identifying subjects;


•	eligibility and exclusion criteria for the trial in question;


•	our or our collaborators’ ability to recruit clinical trial investigators with the appropriate competencies and experience;


•	design of the trial protocol;


•	availability and efficacy of approved medications or therapies, or other clinical trials, for the disease or condition under investigation;


•	perceived risks and benefits of the product candidate under trial or testing, or of the application of genome editing to human indications;


•	efforts to facilitate timely enrollment in clinical trials;


•	patient referral practices of physicians;


•	ability to obtain and maintain subject consent;


•	risk that enrolled subjects will drop out before completion of the trial;


•	ability to monitor patients adequately during and after treatment; and


•	proximity and availability of clinical trial sites for prospective patients.

We expect that some of our product candidates will focus on diseases with limited patient pools from which to draw for enrollment in clinical trials. The eligibility criteria of our clinical trials will further limit the pool of available trial participants. In addition to the factors identified above, patient enrollment in any clinical trials we or our collaborators may conduct may be adversely impacted by any negative outcomes our competitors may experience, including adverse side effects, clinical data showing inadequate efficacy or failures to obtain regulatory approval. Enrollment delays in clinical trials may result in increased development costs for any of our product candidates, which may cause the value of our company to decline and limit our ability to obtain additional financing. If we or our collaborators have difficulty enrolling a sufficient number of patients to conduct clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which may have an adverse effect on our results of operations and prospects.

Results of preclinical studies and early clinical trials of product candidates may not be predictive of results of later studies or trials. Our product candidates may not have favorable results in later clinical trials, if any, or receive regulatory approval.

Preclinical and clinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the preclinical study or clinical trial process. Despite promising preclinical or clinical results, any product candidate can unexpectedly fail at any stage of preclinical or clinical development. The historical failure rate for product candidates in our industry is high. The results from preclinical studies or early clinical trials of a product candidate may not be predictive of the results from later preclinical studies or clinical trials, and interim results of a clinical

trial are not necessarily indicative of final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through preclinical studies and initial clinical trials.

Many companies in the biopharmaceutical and biotechnology industries have suffered significant setbacks at later stages of development after achieving positive results in early stages of development, and we may face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain regulatory approval. Even if any product candidates progress to clinical trials, these product candidates may fail to show the safety and efficacy in clinical development required to obtain regulatory approval, despite the observation of positive results in animal studies. Our or our collaborators’ failure to replicate positive results from early research programs and preclinical or greenhouse studies may prevent us from further developing and commercializing those or other product candidates, which would limit our potential to generate revenues from them and harm our business and prospects.

For the foregoing reasons, we cannot be certain that any ongoing or future preclinical studies or clinical trials will be successful. Any safety or efficacy concerns observed in any one of our preclinical studies or clinical trials in a targeted area could limit the prospects for regulatory approval of product candidates in that and other areas, which could have a material adverse effect on our business and prospects.

If any of our product candidates do not work as intended or cause undesirable side effects, it could hinder or prevent receipt of regulatory approval or realization of commercial potential for them or our other product candidates and could substantially harm our business.

Our product candidates may be associated with serious adverse events, undesirable side effects or unexpected characteristics. Results of clinical trials could reveal severe or recurring side effects, toxicities or unexpected events. In addition to serious adverse events or side effects caused by product candidates we develop alone or with collaborators, the administration process or related procedures may also cause undesirable side effects. If any such events occur, clinical trials or commercial distribution of any product candidates or products we develop alone or with collaborators could be suspended or terminated, and our business and reputation could suffer substantial harm. Treatment-related side effects could affect patient recruitment and the ability of enrolled patients to complete the trial or result in potential liability claims. Regulatory authorities could order us or our collaborators to cease further development of, deny approval of or require us to cease selling any product candidates or products for any or all targeted indications. If we or our collaborators elect, or are required, to delay, suspend or terminate any clinical trial or commercialization efforts, the commercial prospects of such product candidates or products may be harmed, and our ability to generate product revenues from them or other product candidates that we develop may be delayed or eliminated.

Additionally, if we successfully develop a product candidate alone or with collaborators and it receives marketing approval, the FDA could require us to adopt a REMS to ensure that the benefits of treatment with such product candidate outweigh the risks for each potential patient, which may include, among other things, a communication plan to health care practitioners, patient education, extensive patient monitoring or distribution systems and processes that are highly controlled, restrictive and more costly than what is typical for the industry. We or our collaborators may also be required to adopt a REMS or engage in similar actions, such as patient education, certification of health care professionals or specific monitoring, if we or others later identify undesirable side effects caused by any product that we develop alone or with collaborators. Such identification could also have several additional significant negative consequences, such as:


•	regulatory authorities may suspend, withdraw or limit approvals of such product, or seek an injunction against its manufacture or distribution;


•	regulatory authorities may require additional warnings on the label, including “boxed” warnings, or issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings or other safety information about the product;


•	we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;


•	we may be required to change the way a product is administered or conduct additional trials;


•	the product may become less competitive;


•	we or our collaborators may decide to remove the product from the marketplace;


•	we may be subject to fines, injunctions or the imposition of civil or criminal penalties;


•	we could be sued and be held liable for harm caused to patients; and


•	our reputation may suffer.

Any of these events could prevent us or our collaborators from achieving or maintaining market acceptance of any potential product.

Even if we obtain regulatory approval for any products that we develop alone or with collaborators, such products will remain subject to ongoing regulatory requirements, which may result in significant additional expense.

Even if products we develop alone or with collaborators receive regulatory approval, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, distribution, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, among other things. Any regulatory approvals received for such products may also be subject to limitations on the approved indicated uses for which they may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing and surveillance studies. For example, the holder of an approved BLA in the United States is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. In the United States, the holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Similar provisions apply in the EU. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws. Similarly, in the EU any promotion of medicinal products is highly regulated and, depending on the specific jurisdiction involved, may require prior vetting by the competent national regulatory authority. In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the BLA or foreign marketing application.

If we, our collaborators or a regulatory agency discovers previously unknown problems with a product such as adverse events of unanticipated severity or frequency or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory agency may impose restrictions relative to that product, the manufacturing facility or us or our collaborators, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

Moreover, if any of our product candidates are approved, our product labeling, advertising, promotion and distribution will be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about drug products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product’s approved labeling. If we or our collaborators fail to comply with applicable regulatory requirements following approval of any potential products we may develop, authorities may:


•	issue an untitled enforcement letter or a warning letter asserting a violation of the law;


•	seek an injunction, impose civil and criminal penalties, and impose monetary fines, restitution or disgorgement of profits or revenues;


•	suspend or withdraw regulatory approval;


•	suspend or terminate any ongoing clinical trials or implement requirements to conduct post-marketing studies or clinical trials;


•	refuse to approve a pending BLA or comparable foreign marketing application (or any supplements thereto) submitted by us or our collaborators;


•	restrict the labeling, marketing, distribution, use or manufacturing of products;


•	seize or detain products or otherwise require the withdrawal or recall of products from the market;


•	refuse to approve pending applications or supplements to approved applications that we or our collaborators submit;


•	refuse to permit the import or export of products; or


•	refuse to allow us or our collaborators to enter into government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our or our collaborators’ ability to commercialize products and our ability to generate revenues.

In addition, the FDA’s policies, and policies of foreign regulatory agencies, may change, and additional regulations may be enacted that could prevent, limit or delay regulatory approval of product candidates. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of biologics and spur innovation. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuance of guidance and review and approval of marketing applications. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements, or if we or our collaborators are unable to maintain regulatory compliance, marketing approval that has been obtained may be lost.

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products from being developed or commercialized in a timely manner, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs and biologics to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Our product candidates for which we intend to seek approval as a biologic products may face competition sooner than anticipated.

The BCPIA enacted in the Patient Protection and Affordable Care Act, signed into law on March 23, 2010, created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when the FDA will fully adopt processes intended to implement BPCIA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development

programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. As a result, we are and expect to remain dependent on third parties to conduct clinical trials of our product candidates. Specifically, we expect CROs, clinical investigators, and consultants to play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs or clinical trial sites fail to comply with applicable GCP requirements, the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to stop and/or repeat clinical trials, which would delay the marketing approval process.

There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development activities or perform as contractually required. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. In addition, clinical trial investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or comparable foreign regulatory authorities concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit by the FDA or any comparable foreign regulatory authority. Any such delay or rejection could prevent us from commercializing our product candidates.

We contract with third parties for the manufacturing and supply of product candidates for use in preclinical testing and clinical trials and related services, which supply may become limited or interrupted or may not be of satisfactory quality and quantity.

We do not have any manufacturing facilities. We produce in our laboratory relatively small quantities of products for evaluation in our research programs. We rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our product candidates are approved. We currently have limited manufacturing arrangements and expect that each of our product candidates will only be covered by single source suppliers for the foreseeable future. This reliance increases the risk that we will not have sufficient quantities of our product candidates or products, if approved, or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.

Furthermore, all entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturers for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in accordance with cGMP requirements. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s cGMP regulations enforced by the FDA through its facilities inspection program. Comparable foreign regulatory authorities may require compliance with similar requirements. The facilities and quality systems of our third-party contractor manufacturers must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our product candidates. We do not control the manufacturing activities of, and are completely dependent on, our contract manufacturers for compliance with cGMP regulations.

In the event that any of our manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party, which we may not be able to do on commercially reasonable terms, if at all. In particular, any replacement of our manufacturers could require significant effort and expertise because there may be a limited number of qualified replacements. In some cases, the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty transferring such skills or technology to another third party and a feasible alternative may not exist. In addition, certain of our product candidates and our own proprietary methods have never been produced or implemented outside of our company, and we may therefore experience delays to our development programs if and when we attempt to establish new third party manufacturing arrangements for these product candidates or methods. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.

Our or a third party’s failure to execute on our manufacturing requirements, do so on commercially reasonable terms and comply with cGMP could adversely affect our business in a number of ways, including:


•	an inability to initiate or continue clinical trials of our product candidates under development;


•	delay in submitting regulatory applications, or receiving marketing approvals, for our product candidates;


•	loss of the cooperation of future collaborators;


•	subjecting third-party manufacturing facilities or our manufacturing facilities to additional inspections by regulatory authorities;


•	requirements to cease development or to recall batches of our product candidates; and


•	in the event of approval to market and commercialize our product candidates, an inability to meet commercial demands for our product or any other future product candidates.

Our efforts to prosecute and protect our intellectual property may not be successful.

We will continue to file and prosecute patent applications and maintain trade secrets in an ongoing effort to protect our intellectual property. It is possible that our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part. It is also possible that we may not obtain issued patents from our pending patent applications or other inventions we seek to protect. We sometimes permit certain intellectual property to lapse or go abandoned under appropriate circumstances. Due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are rejected and we subsequently abandon them. It is also possible that we may develop proprietary products or technologies in the future that are not patentable or that the patents of others will limit or altogether preclude our ability to conduct business. In addition, any patent issued to us may provide us with little or no competitive advantage, in which case we may abandon such patent or license it to another entity.

Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar to ours or that compete with ours. Patent, trademark, and trade secret laws afford only limited protection for our technology platform and products. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt, to operate under aspects of our intellectual property or products or to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or technology is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our technology platform and products do not infringe patents held by others or that they will not in the future.

Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims.

Any such litigation could result in substantial costs and diversion of our resources. Moreover, any settlement of or adverse judgment resulting from litigation relating to intellectual property could require us to obtain a license to continue to make, use or sell the products or technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.

Our ability to compete may decline if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights.

Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products and potential products in the United States and other countries. We have adopted a strategy of seeking patent protection in the United States and in foreign countries with respect to certain of the technologies used in or relating to our products and processes. As such, as of December 31, 2018, we owned or controlled approximately 1,100 issued patents and pending patent applications in the United States and in various foreign jurisdictions. Our intellectual property rights, as of December 31, 2018, have terms that expire between 2019 and 2039. We also have license rights to a number of issued patents and pending patent applications in the United States and in various foreign jurisdictions. Our owned and licensed patents and patent applications include those directed to our enabling technologies and to the methods and products that support our business in the pharmaceuticals manufacturing and complex chemistry markets. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.

Numerous patents in our portfolio involve complex legal and factual questions and, therefore, enforceability cannot be predicted with any certainty. Issued patents and patents issuing from pending applications may be challenged, invalidated, or circumvented. Moreover, the United States Leahy-Smith America Invents Act (“AIA”), enacted in September 2011, brought significant changes to the United States patent system, which include a change to a “first to file” system from a “first to invent” system and changes to the procedures for challenging issued patents and disputing patent applications during the examination process, among other things. While interference proceedings are possible for patent claims filed prior to March 16, 2013, many of our filings will be subject to the post- and pre-grant proceedings set forth in the AIA, including citation of prior art and written statements by third parties, third party pre-issuance submissions, ex parte reexamination, inter partes review, post-grant review, and derivation proceedings. We may need to utilize the processes provided by the AIA for supplemental examination or patent reissuance. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, any interference may result in loss of certain claims. Any litigation or proceedings could divert our management's time and efforts. Even unsuccessful claims filed by third parties could result in significant legal fees and other expenses, diversion of management time, and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete. We have not assessed the applicability of the AIA and new regulations on our patent portfolio. These changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement or defense of our patent rights.

Additional uncertainty may result from legal precedent handed down by the United States Federal Circuit Court and Supreme Court as they determine legal issues concerning the scope and construction of patent claims and inconsistent interpretation of patent laws by the lower courts. Accordingly, we cannot ensure that any of our pending patent applications will result in issued patents, or even if issued, predict the breadth of the claims upheld in our and other companies' patents. Given that the degree of future protection for our proprietary rights is uncertain, we cannot ensure that: (i) we were the first to invent the inventions covered by each of our pending applications, (ii) we were the first to file patent applications for these inventions, or (iii) the proprietary technologies we develop will be patentable. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the United States. Moreover, third parties could practice our inventions in territories where we do not have patent protection. Such third parties may then try to import products made using our inventions into the United States or other territories. If competitors are able to use our technology, our ability to compete effectively could be harmed. In addition, others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause harm to our business.

Third parties may claim that we are infringing their intellectual property rights or other proprietary rights, which may subject us to costly and time consuming litigation and prevent us from developing or commercializing our products.

Our commercial success also depends in part on our ability to operate without infringing patents and proprietary rights of third parties, and without breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot ensure that patents have not been issued to third parties that could block our ability to obtain patents or to operate as we would like. There may be patents in some countries that, if valid, may block our ability to make, use or sell our products in those countries, or import our products into those countries, if we are unsuccessful in circumventing or

acquiring rights to these patents. There also may be claims in patent applications filed in some countries that, if granted and valid, may also block our ability to commercialize products or processes in these countries if we are unable to circumvent or license them.

The industries in which we operate and the biotechnology industry, in particular, are characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. Our involvement in litigation or other intellectual property proceedings inside and outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, may divert our management’s time from focusing on business operations and could cause us to spend significant amounts of money. Any potential intellectual property litigation also could force us to do one or more of the following:


•	stop selling or using our products or technologies that use the subject intellectual property;


•	pay monetary damages or substantial royalties;


•	grant cross-licenses to third parties relating to our patents or proprietary rights;


•	obtain from the third party asserting its intellectual property rights a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or


•	redesign those products or processes that use any allegedly infringing technology, or relocate the operations relating to the allegedly infringing technology to another jurisdiction, which may result in significant cost or delay to us, could be technically infeasible or could prevent us from selling some of our products in the United States or other jurisdictions.

We are aware of some patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. We cannot assure you that if this third party intellectual property is asserted against us that we would ultimately prevail.

We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe our intellectual property rights or those of our licensors. To prevent infringement or unauthorized use, we have in the past filed, and may in the future be required to file, infringement claims, which can be expensive and time-consuming. See Item 3, “Legal Proceedings.” In addition, in a patent infringement proceeding, a court may decide that a patent we own or in-license is not valid, is unenforceable and/or is not infringed. In legal proceedings against a third party to enforce a patent directed at one of our technologies or products, the defendant could counterclaim that our patent is invalid and/or unenforceable in whole or in part. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable, and prior art could render our patents or those of our licensors invalid. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product. Such a loss of patent protection would have a material adverse impact on our business.

Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our expenses and reduce the resources available for operations and research and development activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could compromise our ability to compete in the marketplace. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries where we do business do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual

property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property, particularly those relating to biotechnology and/or bioindustrial technologies. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Additionally, proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business.

If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel as needed in the future, it could disrupt the operation of our business, delay our product development programs, harm our research and development efforts, and/or impact our ability to pursue and build collaborations.

Our business involves complex, global operations across a variety of markets and requires a management team and employee workforce that is knowledgeable in the many areas in which we operate. The loss of any key members of our management team or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy.

In addition, the loss of any key scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing and commercializing our products for our target markets and entering into collaborations or licensing arrangements to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses or due to the availability of personnel with the qualifications or experience necessary for our business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that will adversely affect our ability to meet the demands of our collaborators and customers in a timely fashion or to support our internal research and development programs. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which mean that either the employee or we may terminate their employment at any time.

Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our technology platform or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to develop the necessary expertise could impair our ability to grow our business.

If our protein catalysts, or the genes that code for our protein catalysts, are stolen, misappropriated or reverse engineered, others could use these biocatalysts or genes to produce competing products.

Third parties, including our contract manufacturers, customers and those involved in shipping our protein catalysts, often have custody or control of our protein catalysts. If our protein catalysts, or the genes that code for our protein catalysts, were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce these protein catalysts for their own commercial gain. If this were to occur, it may be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection or in countries in which we do not have patents covering the misappropriated biocatalysts.

Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, third parties could reverse engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We may need additional capital in the future in order to expand our business.

Our future capital requirements may be substantial, particularly as we continue to develop our business. Although we believe that, based on our current level of operations, our existing cash, cash equivalents and equity securities will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months, we may need additional capital if our current plans and assumptions change. Our need for additional capital will depend on many factors, including the financial success of our biocatalysis business, our spending to develop and commercialize new and existing products and the amount of collaboration funding we may receive to help cover the cost of such expenditures, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, including opportunities in the fine chemicals markets, and the filing, prosecution, enforcement and defense of patent claims. If our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We may seek to obtain such additional capital through equity offerings, debt financings, credit facilities and/or strategic collaborations. If future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants that limit our ability to conduct our business. Strategic collaborations may also place restrictions on our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

If we are unable to comply with the terms of our credit facility, our business and financial condition would be materially and adversely affected.

On June 30, 2017 we entered into a credit facility ("Credit Facility") financing arrangement secured by a lien on substantially all of our personal property other than our intellectual property. Although we have made no loans or draws under the Credit Facility as of December 31, 2018, the Credit Facility includes affirmative and negative covenants including, among others, covenants requiring us to achieve consolidated product revenues at minimum levels and restricting our ability to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens and sell assets. The Credit Facility also includes events of default including, among other things, our failure to pay any amounts due under the Credit Facility, a breach of covenants under the Credit Facility, our insolvency, a material adverse change, the occurrence of any default under certain other indebtedness in an amount greater than $250,000 and a final judgment against us in an amount greater than $250,000. If an event of default occurs, it could cause our obligations to become immediately due and payable and our lender would be entitled to foreclose against the collateral securing the indebtedness, including our cash. If our indebtedness were to be accelerated, we may be unable to repay such debt and, therefore, such acceleration could materially and adversely affect our business and financial condition. For more information regarding our compliance with our financial covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Debt service obligation may place us at a competitive disadvantage in our industry.

Draws under the Credit Facility would create debt service obligations for us. Although we have not drawn on the Credit Facility to date, any future draws under the Credit Facility and the related debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, the Credit Facility presents the following risks, certain of which apply regardless of whether we draw on the Credit Facility:


•	we may be required to use a portion of our cash flow from operations to make debt service payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, research and development, and other general corporate requirements;


•	our interest expense could increase if prevailing interest rates increase, because a portion of draws which could be made under the Credit Facility bear interest at floating rates;


•	the Credit Facility could reduce our flexibility to adjust to changing business conditions or obtain additional financing to fund working capital, capital expenditures, product development efforts, research and development, and other general corporate requirements; and


•	restrictive covenants in our Credit Facility, which apply regardless of whether we draw down under the facility, limit our ability to, among other things, transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens and sell assets.

Our revenues, financial condition and results of operations may also be adversely affected if one or more of our customers is delayed in paying, or becomes unable to pay, for our delivered products on a timely basis.

Certain of our customers may become subject to financial and other challenges that affect their cash flow. If these customers fail to pay us on a timely basis it may cause our financial results to fluctuate. Failure by such customers to pay us on timely basis, or at all, would adversely impact our financial condition.

If goodwill or other long-lived assets become impaired we may be required to record a significant charge to earnings.

Our total assets reflect goodwill of $3.2 million and other long-lived assets of $5.8 million as of December 31, 2018. Under accounting principles generally accepted in the United States (“GAAP”), we review goodwill for impairment on at least an annual basis and at any interim date whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We review our long lived assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances (i.e., information that indicates an impairment might exist) could include: a significant decrease in the market price of our common stock; current period cash flow losses or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; slower growth rates in our industry; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the assets; loss of significant customers or partners; or the current expectation that the assets will more likely than not be sold or disposed of significantly before the end of their estimated useful life. We tested goodwill for impairment as of December 31, 2018. Based on our analysis, we determined that the fair value of goodwill at the reporting unit level exceeded their carrying value and that no impairment was necessary as of December 31, 2018. Nevertheless, we may experience additional events or changes in circumstances in the future that we determine to be indicators of impairment and that may in turn require us to undertake impairment analysis in future periods. Depending on the circumstances and judgments made at such future time, the outcome of the analysis may require us to recognize impairment.

We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or other long-lived assets is determined, resulting in an adverse impact on our financial position and results of operations.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

Financial accounting standards may change or their interpretation may change. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change becomes effective. Changes to existing rules or the re-examining of current practices may adversely affect our reported financial results or the way we conduct our business. In particular, in order to be able to comply with the requirements of the revenue recognition standard under Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers (Topic 606) and related amendments (“ASC 606”), we have updated and enhanced our internal accounting processes and our internal controls over financial reporting. This has required, and will continue to require, additional investments by us, and may require incremental resources that could increase our operating costs in future periods. Further, the timing of recognition for our product sales under certain license and supply agreements and research and development revenues, on or after January 1, 2018, have been changed as a result of ASC 606.

If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their disclosure controls and procedures over financial reporting. At the end of each fiscal year, we must perform an evaluation of our disclosure controls and procedures over financial reporting, include in our annual report the results of the evaluation, and have our external auditors publicly attest to such evaluation.

We have identified material weaknesses and other control deficiencies in the past, and while the material weaknesses have since been remediated, we cannot assure you that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If other deficiencies are discovered in the future, our ability to accurately report our financial position, results of operations or cash flows on timely basis could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock by the Nasdaq Stock Market, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.

We are dependent on information technology systems, infrastructure and data, and any failure of these systems could harm our business. Security breaches, loss of data, and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business, results of operations and financial condition.

Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. If our data management systems do not effectively collect, store, process, and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, or human error, our ability to effectively plan, forecast, and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows, and the timeliness with which we report our internal and external operating results.

Our business may require us to use and store customer, employee, and business partner personally identifiable information (“PII”). This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account information. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of security breaches by unauthorized persons, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user names, passwords, or other sensitive information, which may in turn be used to access our information technology systems. For example, our employees have received “phishing” emails and phone calls attempting to induce them to divulge passwords and other sensitive information.

In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to employees and other individuals, our confidential or proprietary information or confidential information we hold on behalf of third parties. If the unauthorized persons successfully hack into or interfere with our connected products or services, they may create issues with product functionality that could pose a risk of loss of data. We have programs in place to detect, contain, and respond to data security incidents, and we make ongoing improvements to our information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards. However, because the techniques used to obtain unauthorized access to or sabotage systems change frequently and may be difficult to detect, we may not be able to anticipate and prevent these intrusions or mitigate them when and if they occur.

We also rely on external vendors to supply and/or support certain aspects of our information technology systems. The systems of these external vendors may contain defects in design or manufacture or other problems that could unexpectedly compromise information security of our own systems, and we are dependent on these third parties to deploy appropriate security programs to protect their systems.

While we devote significant resources to network security, data encryption, and other security measures to protect our systems and data, these security measures cannot provide absolute security. We may experience a breach of our systems and may be unable to protect sensitive data. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, malicious software programs, and security vulnerabilities could be significant. Our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, cessation of service, and harm to our business operations. Moreover, if a computer security breach affects our systems or results in the unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease. We would also be exposed to a risk of loss or litigation and potential liability, which could have a material adverse impact on our business, financial condition, results of operations, or cash flows.

Our business is subject to complex and evolving laws and regulations regarding privacy, data protection and other matters relating to information collection.

There are numerous state, federal and foreign laws, regulations, decisions, and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure and protection of PII and other personal, customer, or other data, the scope of which is continually evolving and subject to differing interpretations. We may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations and directives.

Furthermore, any failure, or perceived failure, by us to comply with or make effective modifications to our policies, or to comply with any federal, state or international privacy, data-retention or data-protection-related laws, regulations, orders or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, a loss of customer confidence, damage to our brand and reputation and a loss of customers, any of which could have an adverse effect on our business. In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues, including laws or regulations mandating disclosure to domestic or international law enforcement bodies, which could adversely impact our business or our reputation with customers. For example, some countries have adopted laws mandating that some PII regarding customers in their country be maintained solely in their country. Having to maintain local data centers and redesign product, service and business operations to limit PII processing to within individual countries could increase our operating costs significantly.

Our product gross margins are variable and may decline from quarter to quarter.

Our product gross margins have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, including product mix, pricing pressure from our pharmaceutical customers and competition from other products or technologies. This variability may have a material adverse impact on our operating results and financial condition and cause our stock price to decline.

We face risks associated with our international business.

While we have a limited number of employees located outside of the United States, we are and will continue to be dependent upon contract manufacturers located outside of the United States. In addition, we have customers and partners located outside of the United States. Conducting business internationally exposes us to a variety of risks, including:


•	changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, repatriate profits to the United States or operate our foreign-located facilities;


•	the imposition of tariffs;


•	the imposition of limitations on, or increase of, withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;


•	the imposition of limitations on genetically-engineered products or processes and the production or sale of those products or processes in foreign countries;


•	currency exchange rate fluctuations;


•	uncertainties relating to foreign laws, regulations and legal proceedings including tax, import/export, anti-corruption and exchange control laws;


•	the availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us;


•	increased demands on our limited resources created by our operations may constrain the capabilities of our administrative and operational resources and restrict our ability to attract, train, manage and retain qualified management, technicians, scientists and other personnel;


•	economic or political instability in foreign countries;


•	difficulties associated with staffing and managing foreign operations; and


•	the need to comply with a variety of United States and foreign laws applicable to the conduct of international business, including import and export control laws and anti-corruption laws.

Compliance with European Union chemical regulations could be costly and adversely affect our business and results of operations.

Some of our products are subject to the European Union regulatory regime known as The Registration, Evaluation and Authorization of Chemicals (“REACH”). REACH mandates that certain chemicals manufactured in, or imported into, the European Union be registered and evaluated for their potential effects on human health and the environment. Under REACH, we and our contract manufacturers located in the European Union are required to register certain of our products based on the quantity of such product imported into or manufactured in the European Union and on the product’s intended end-use. The registration, evaluation and authorization process under REACH can be costly and time consuming. Problems or delays in the registration, evaluation or authorization process under REACH could delay or prevent the manufacture of some of our products in, or the importation of some of our products into, the European Union, which could adversely affect our business and results of operations. In addition, if we or our contract manufacturers fail to comply with REACH, we may be subject to penalties or other enforcement actions, which could have a material adverse effect on our business and results of operations.

Competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.

The biocatalysis industry and each of our target markets are characterized by rapid technological change. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. In addition, as we enter new markets, we will face new competition and will need to adapt to competitive factors that may be different from those we face today.

We are aware that other companies, including Royal DSM, N.V. (“DSM”), BASF, and Novozymes have alternative methods for obtaining and generating genetic diversity or use mutagenesis techniques to produce genetic diversity. Academic institutions such as the California Institute of Technology, the Max Planck Institute and the Austrian Centre of Industrial Biotechnology are also working in this field. Technological development by others may result in our products and technologies, as well as products developed by our customers using our biocatalysts, becoming obsolete.

Our primary competitors in the biocatalysis for pharmaceutical products are companies marketing either conventional, non-enzymatic processes or biocatalytic enzymes to manufacturers of pharmaceutical intermediates and APIs, and also existing in-house technologies (both biocatalysts and conventional catalysts) within our client and potential client companies. The principal methods of competition and competitive differentiation in this market are price, product quality and performance, including manufacturing yield, safety and environmental benefits, and speed of delivery of product. Pharmaceutical manufacturers that use biocatalytic processes can face increased competition from manufacturers that use more conventional processes and/or manufacturers that are based in regions (such as India and China) with lower regulatory, safety and environmental costs.

The market for the manufacture and supply of APIs and intermediates is large with many established companies. These companies include many of our large innovator and generic pharmaceutical customers, such as Merck, GSK, Pfizer, Bristol Myers, Squibb and Teva Pharmaceutical Industries Ltd., which have significant internal research and development efforts directed at developing processes to manufacture APIs and intermediates. The processes used by these companies include classical conventional organic chemistry reactions, chemo catalytic reactions, biocatalytic reactions or combinations thereof. Our biocatalytic based manufacturing processes must compete with these internally developed routes. Additionally, we also face competition from companies developing and marketing conventional catalysts such as Solvias Inc., BASF and Takasago International Corporation.

The market for supplying enzymes for use in pharmaceutical manufacturing is quite fragmented. There is competition from large industrial enzyme companies, such as Novozymes, as well as subsidiaries of larger CRO/CMOs, such as DSM, Cambrex Corporation and Almac Group Ltd. There is also competition in the customized and optimized enzyme area from several smaller companies, such as BRAIN AG, Arzeda, c-LEcta GmbH, Gingko Bioworks, Zymergen, and Evocatal GmbH.

We entered the fine chemicals market in 2013, by applying our protein engineering technology in the food market. We face similar forms of competition in this market as in the pharmaceutical markets with the exception that the risk of losing opportunities to larger competitors in fine chemicals is greater given the larger scale of opportunities available in the fine chemicals market compared to the pharmaceutical market. Our significant competitors in the fine chemicals markets include companies that have been in these marketplaces for many years, such as DuPont Industrial Biosciences (DuPont Genencor), DSM, Novozymes and A.B. Enzymes. These companies have greater resources in these markets than we do and have long-term supply arrangements already in place with customers. Our ability to compete in these markets may be limited by our relatively late entrance. We also face competition in both the fine chemicals and pharmaceutical markets from emerging companies offering whole cell metabolic pathway approaches to these markets.

There are numerous companies that participate in the biotherapeutics market generally and the PKU market specifically. Many of these companies are large, successful and well-capitalized. BioMarin Pharmaceutical Inc. (“BioMarin”) and Daiichi Sankyo Company market Kuvan^® in the United States, Europe and Japan for the treatment of a certain type of PKU. In addition, BioMarin gained US FDA approval in 2018 and began commercial sales of Palynziq^TM as an injectable enzyme substitution therapy for the potential treatment of PKU. Synlogic is developing SYNB1618 as a potential treatment for PKU, and in 2018, they completed a phase 1/2a clinical trial using SYNB1618. Takeda (who recently acquired Shire Plc), Genzyme / Sanofi S.A. and other companies market or are actively developing new enzyme therapeutics. There are numerous companies that are developing other forms of therapeutics, such as small molecules and gene therapies, which could compete with biotherapeutics.

Our ability to compete successfully in any of these markets will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Many of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. They also started developing products earlier than we did, which may allow them to establish blocking intellectual property positions or bring products to market before we can. In addition, certain of our competitors may also benefit from local government subsidies and other incentives that are not available to us. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. We cannot be certain that any products we develop in the future will compare favorably to products offered by our competitors or that our existing or future products will compare favorably to any new products that are developed by our competitors. As more companies develop new intellectual property in our markets, the possibility of a competitor acquiring patent or other rights that may limit our products or potential products increases, which could lead to litigation.

Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position, and prevent us from obtaining or maintaining profitability.

We must rely on our suppliers, contract manufacturers and customers to deliver timely and accurate information in order to accurately report our financial results in the time frame and manner required by law.

We need to receive timely, accurate and complete information from a number of third parties in order to accurately report our financial results on a timely basis. We rely on suppliers and certain contract manufacturers to provide us with timely and accurate information regarding our inventories and manufacturing cost information, and we rely on current and former collaborators to provide us with product sales and cost saving information in connection with royalties owed to us. Any failure to receive timely information from one or more of these third parties could require that we estimate a greater portion of our revenues and other operating performance metrics for the period, which could cause our reported financial results to be incorrect. Moreover, if the information that we receive is not accurate, our financial statements may be materially incorrect and may require restatement, and we may not receive the full amount of revenues that we are entitled to under these arrangements. Although we typically have audit rights with these parties, performing such an audit could be harmful to our collaborative relationships, expensive and time consuming and may not be sufficient to reveal any discrepancies in a timeframe consistent with our reporting requirements.

Our results of operations may be adversely affected by the results of regulatory tax examinations.

We are subject to value added tax, customs tax, sales and use tax, withholding tax, payroll tax, income tax and other taxes in connection with the operation of our business. Regulators from the various jurisdictions in which we operate periodically perform audits, and we are regularly subject to, and are currently undergoing, audits and assessments by tax authorities in the United States and foreign jurisdictions for prior tax years. Although we believe our tax estimates are reasonable, and we intend to defend our positions if necessary, the final outcome of tax audits and related proceedings is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits. The adverse resolution of any audits or related proceedings could have an adverse effect on our financial position and results of operations.

Business interruptions could delay us in the process of developing our products and could disrupt our sales.

Our headquarters is located in the San Francisco Bay Area near known earthquake fault zones and is vulnerable to significant damage from earthquakes. We are also vulnerable to other types of natural disasters and other events that could disrupt our operations, such as riot, civil disturbances, war, terrorist acts, flood, infections in our laboratory or production facilities or those of our contract manufacturers and other events beyond our control. We do not carry insurance for earthquakes and we may not

carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our cash flows and success as an overall business.

Ethical, legal and social concerns about genetically engineered products and processes could limit or prevent the use of our products, processes, and technologies and limit our revenues.

Some of our products and processes are genetically engineered or involve the use of genetically engineered products or genetic engineering technologies. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to genetic engineering, our products and processes may not be accepted. Any of the risks discussed below could result in increased expenses, delays, or other impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:


•	public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and processes, which could influence public acceptance of our technologies, products and processes;


•	public attitudes regarding, and potential changes to laws governing ownership of genetic material, which could harm our intellectual property rights with respect to our genetic material and discourage collaborators from supporting, developing, or commercializing our products, processes and technologies; and

•

governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic research and derivative products. The subject of genetically modified organisms has received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products. The protein catalysts that we develop have significantly enhanced characteristics compared to those found in naturally occurring enzymes or microbes. While we produce our biocatalysts only for use in a controlled industrial environment, the release of such biocatalysts into uncontrolled environments could have unintended consequences. Any adverse effect resulting from such a release could have a material adverse effect on our business and financial condition, and we may have exposure to liability for any resulting harm.

If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and operations.

We have made acquisitions in the past, and if appropriate opportunities become available, we expect to acquire additional businesses, assets, technologies, or products to enhance our business in the future. For example, in October 2010, we acquired substantially all of the patents and other intellectual property rights associated with Maxygen’s directed evolution technology.

In connection with any future acquisitions, we could:


•	issue additional equity securities, which would dilute our current stockholders;


•	incur substantial debt to fund the acquisitions;


•	use our cash to fund the acquisitions; or


•	assume significant liabilities including litigation risk.

Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other liabilities, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. We do not have extensive experience in managing the integration process and we may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management’s time from focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. Acquisitions may also require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

We use hazardous materials in our business and we must comply with environmental laws and regulations. Any claims relating to improper handling, storage or disposal of these materials or noncompliance of applicable laws and regulations could be time consuming and costly and could adversely affect our business and results of operations.

Our research and development and commercial processes involve the use of hazardous materials, including chemical, radioactive, and biological materials. Our operations also produce hazardous waste. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, local and foreign laws and regulations govern the use, manufacture, storage, handling and disposal of, and human exposure to, these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Although we believe that our activities comply in all material respects with environmental laws, there can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws could result in the imposition of fines, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws can be joint and several and without regard to comparative fault. Environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and harm our business. In addition, we may have to indemnify some of our customers or suppliers for losses related to our failure to comply with environmental laws, which could expose us to significant liabilities.

We may be sued for product liability.

The design, development, manufacture and sale of our products involve an inherent risk of product liability claims and the associated adverse publicity. For example, we may be named directly in product liability suits relating to drugs that are produced using our enzymes or that incorporate our intermediates and APIs. The biocatalysts, pharmaceutical intermediates and APIs that we produce or are produced for us by our manufacturing partners could be subject to quality control or contamination issues of which we are not aware. Claims could be brought by various parties, including customers who are purchasing products directly from us, other companies who purchase products from our customers or by the end users of the drugs. We could also be named as co-parties in product liability suits that are brought against our contract manufacturers who manufacture our enzymes, pharmaceutical intermediates and APIs. Insurance coverage is expensive and may be difficult to obtain, and may not be available in the future on acceptable terms, or at all. We cannot assure you that any contract manufacturer that we have used in the past or shall use in the future has or will have adequate insurance coverage to cover against potential claims. In addition, although we currently maintain product liability insurance for our products in amounts we believe to be commercially reasonable, if the coverage limits of these insurance policies are not adequate, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on our business, results of operations, financial condition and cash flows. This insurance may not provide adequate coverage against potential losses, and if claims or losses exceed our liability insurance coverage, we may go out of business. Moreover, we have agreed to indemnify some of our customers for certain claims that may arise out of the use of our products, which could expose us to significant liabilities.

Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective tax rate.

The 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, and significantly changed how the U.S. imposes income tax on multinational corporations. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a partially territorial system, and a one-time transition tax on the mandatory deemed repatriation of accumulated foreign earnings as of December 31, 2017. The U.S. Department of Treasury (“Treasury”) has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. The Tax Act requires complex computations not previously required under U.S. tax law. As of December 31, 2018, the application of accounting guidance for some of these items is still currently uncertain, as Treasury has yet to issue proposed or final regulations for many provisions of the Act. Further, compliance with the Tax Act and the accounting for such provisions require accumulation of information not previously required or regularly produced. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, and as we perform additional analysis on the application of the law, our results may be different from our current amounts, which could materially affect our tax obligations and effective tax rate.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (“NOLs”), to offset future taxable income. If the Internal Revenue Service challenges our analysis that our existing NOLs are not subject to limitations arising from previous ownership changes, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs reflected in our financial statements, even if we attain profitability.

Risks Related to Owning our Common Stock

We are subject to anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law that could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders.

Provisions in our amended and restated certificate of incorporation and our bylaws may delay or prevent an acquisition of us. Among other things, our amended and restated certificate of incorporation and bylaws provide for a board of directors which is divided into three classes, with staggered three-year terms and provide that all stockholder action must be effected at a duly called meeting of the stockholders and not by a consent in writing, and further provide that only our board of directors, the chairman of the board of directors, our chief executive officer or president may call a special meeting of the stockholders. In addition, our amended and restated certificate of incorporation allows our board of directors, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer to acquire our company may be considered beneficial by some stockholders.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price.

Based on the number of shares outstanding as of December 31, 2018, our officers, directors and stockholders who hold at least 5% of our stock together beneficially own approximately 40% of our outstanding common stock. If these officers, directors, and principal stockholders or a group of our principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. As of December 31, 2018, one stockholder beneficially owned approximately 12% of our common stock.

Our share price may be volatile which may cause the value of our common stock to decline and subject us to securities class action litigation.

The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:


•	actual or anticipated fluctuations in our financial condition and operating results;


•	the position of our cash, cash equivalents and equity securities;


•	actual or anticipated changes in our growth rate relative to our competitors;


•	actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;


•	announcements of technological innovations by us, our collaborators or our competitors;


•	announcements by us, our collaborators or our competitors of significant acquisitions or dispositions, strategic partnerships, joint ventures or capital commitments;


•	additions or losses of one or more significant pharmaceutical products;


•	announcements or developments regarding pharmaceutical products manufactured using our protein catalysts and intermediates;


•	the entry into, modification or termination of collaborative arrangements;


•	additions or losses of customers;


•	additions or departures of key management or scientific personnel;


•	competition from existing products or new products that may emerge;


•	issuance of new or updated research reports by securities or industry analysts;


•	fluctuations in the valuation of companies perceived by investors to be comparable to us;


•	disputes or other developments related to proprietary rights, including patent litigation and our ability to obtain patent protection for our technologies;


•	contractual disputes or litigation with our partners, customers or suppliers;


•	announcement or expectation of additional financing efforts;


•	sales of our common stock by us, our insiders or our other stockholders;


•	share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;


•	general market conditions in our industry; and


•	general economic and market conditions, including the recent financial crisis.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operating results and cash flows are subject to volatility due to fluctuations in foreign currency exchange rates. Our primary exposure to fluctuations in foreign currency exchange rates relates to cash denominated in currencies other than the U.S. dollar. The weakening of foreign currencies relative to the United States dollar adversely affects our foreign currency-denominated cash. In periods when the United States dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based cash decrease when translated into United States dollars. Conversely, the strengthening of foreign currencies relative to the United States dollar will generally be beneficial to our foreign currency-denominated cash when translated into United States dollars.

The effect of a 10% unfavorable change in exchange rates on foreign denominated receivables and cash as of December 31, 2018 would have had foreign exchange losses of approximately $0.1 million recognized as a component of other expense in our consolidated statement of operations.

We do not engage in foreign currency hedging transactions, and as a result, unfavorable movements in foreign currency exchange rates may have an adverse financial impact, which could materially adversely affect our financial condition or results of operations. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional discussion on the impact of foreign exchange risk.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock in a negative manner, our stock price would likely decline. If one or

more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as related rules implemented by the Securities and Exchange Commission and the Nasdaq Stock Market, impose various requirements on public companies that require our management and other personnel to devote a substantial amount of time to compliance initiatives.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues. Moreover, if we are not able to maintain compliance with the requirements of Section 404, our stock price could decline, and we could face sanctions, delisting or investigations by the Nasdaq Global Market, or other material adverse effects on our business, reputation, results of operations, financial condition or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Facilities

Our headquarters are located in Redwood City, California, where we lease approximately 107,200 square feet of office and laboratory space.

Our lease (“Lease”) with Metropolitan Life Insurance Company (“MetLife”) includes approximately 28,200 square feet of space located at 200 and 220 Penobscot Drive, Redwood City, California (the “Penobscot Space”), approximately 37,900 square feet of space located at 400 Penobscot Drive, Redwood City, California (the “Building 2 Space”), approximately 11,200 square feet of space located at 501 Chesapeake Drive, Redwood City, California (“501 Chesapeake Space”), and approximately 29,900 square feet of space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw Space”). Through December 31, 2018, there have been seven amendments to the Lease. Through November 30, 2019, we will continue to sublease approximately 26,500 square feet of the Saginaw Space to a subtenant and we will continue to sublease approximately 13,000 square feet of the Penobscot Space to a different subtenant.

In January 2019, we entered into an Eighth Amendment to the Lease ( the “Eighth Amendment”) with MetLife with respect to the Penobscot Space, the Building 2 Space and the 501 Chesapeake Space to extend the term of the Lease for additional periods. Pursuant to the Eighth Amendment, the term of the lease of the Penobscot Space and the Building 2 Space has been extended through May 2027. The lease term for 501 Chesapeake Space has been extended to May 2029. We have two consecutive options to extend the term of the lease for the Penobscot Space, the Building 2 Space and 501 Chesapeake Space for an additional period of five years per option. Our lease on the Saginaw Space will expire on January 30, 2020.

We believe that the facilities that we currently lease in California are adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material pending litigation or other material legal proceedings.

In February 2018, we and EnzymeWorks, Inc. (U.S.), Suzhou Hanmei Biotechnology Co. Ltd, d/b/a EnzymeWorks, Inc. (China) (collectively, "EnzymeWorks"), Junhua Tao, and Andrew Tao reached a settlement concerning the lawsuit filed by us in February 2016 against EnzymeWorks, Junhua Tao, and Andrew Tao in the United States District Court for the Northern District of California. The parties have entered into a settlement agreement, the terms of which are confidential. The parties have also

stipulated to a judgment of patent infringement of all asserted patents against EnzymeWorks, and a permanent injunction barring any future infringement. The remaining claims against EnzymeWorks, and all claims against Junhua Tao, and Andrew Tao including trade secret misappropriation, breach of contract and voidable transfer have been dismissed with prejudice. EnzymeWorks appealed the sanctions levied against them by Judge Orrick to the Federal Circuit and filed its opening brief on May 30, 2018. On July 9, 2018, Codexis filed its response brief, and EnzymeWorks filed its reply on July 30, 2018. On February 8, 2019, the Federal Circuit panel of judges assigned to the case issued an opinion affirming the lower court’s ruling and remanding the case to the lower court on jurisdictional grounds to vacate the order to which the parties had earlier stipulated.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the Nasdaq Global Select Market (“Nasdaq”), under the symbol “CDXS.” The following table sets forth the high and low sales prices per share of the common stock as reported on Nasdaq. Such quotations represent inter dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.



Fiscal 2018	High		Low
First Quarter	$	13.60	$	7.95
Second Quarter	16.80		9.30
Third Quarter	19.60		12.85
Fourth Quarter	23.05		14.05



Fiscal 2017	High		Low
First Quarter	$	5.29	$	3.60
Second Quarter	5.45		3.95
Third Quarter	6.70		4.80
Fourth Quarter	8.55		5.70

As of February 22, 2019, there were approximately 132 stockholders of record. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

Stock Price Performance Graph

The following tabular information and graph compare our total common stock return with the total return for (i) the Nasdaq Composite Index and (ii) the Nasdaq Biotechnology Index for the period December 31, 2013 through December 31, 2018. The figures represented below assume an investment of $100 in our common stock at the closing price on December 31, 2013 and in the Nasdaq Composite Index and the Nasdaq Biotechnology Index on December 31, 2013 and the reinvestment of dividends into shares of common stock. The comparisons in the table and graph are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock. The tabular information and graph shall not be deemed “soliciting material” or to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.



		December 31,
$100 investment in stock or index	Ticker	2013		2014		2015		2016		2017		2018
Codexis, Inc.	CDXS	$	100.00	$	180.00	$	302.14	$	328.57	$	596.43	$	1,192.86
Nasdaq Composite Total Return	XCMP	$	100.00	$	114.75	$	122.74	$	133.62	$	173.22	$	168.30
Nasdaq Biotechnology (Total Return) Index	XNBI	$	100.00	$	136.28	$	152.32	$	119.80	$	145.71	$	132.80

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. Our historical results are not necessarily indicative of our future results.

We derived the consolidated statements of operations data for the fiscal years ended December 31, 2018, 2017, and 2016 and the consolidated balance sheets data as of December 31, 2018 and 2017 from our audited consolidated financial statements appearing elsewhere in this filing. The consolidated statements of operations data for the fiscal years ended December 31, 2015 and 2014 and the consolidated balance sheets data as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements not included in this filing. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.

SELECTED CONSOLIDATED FINANCIAL DATA



	Year Ended December 31,
	2018			2017			2016			2015			2014
	₍₁₎
	(In Thousands, Except Per Share Amounts)
Consolidated Statements of Operations Data:
Revenues:
Product revenue	$	25,590		$	26,685		$	15,321		$	11,376		$	13,064
Research and development revenue	35,004			23,339			33,516			30,428			22,243
Total revenues	60,594			50,024			48,837			41,804			35,307
Costs and operating expenses:
Cost of product revenue	12,620			14,327			9,753			6,586			9,726
Research and development	29,978			29,659			22,229			20,673			22,755
Selling, general and administrative	29,291			29,008			25,419			22,315			21,937
Total costs and operating expenses	71,889			72,994			57,401			49,574			54,418
Loss from operations	(11,295		)	(22,970		)	(8,564		)	(7,770		)	(19,111		)
Interest income	671			147			60			19			18
Other expenses, net	(291		)	(92		)	(94		)	(168		)	(234		)
Loss before income taxes	(10,915		)	(22,915		)	(8,598		)	(7,919		)	(19,327		)
Provision for (benefit from) income taxes	(37		)	81			(40		)	(338		)	(256		)
Net loss	$	(10,878	)	$	(22,996	)	$	(8,558	)	$	(7,581	)	$	(19,071	)
Net loss per share, basic and diluted	$	(0.21	)	$	(0.50	)	$	(0.21	)	$	(0.19	)	$	(0.50	)
Weighted average common shares used in computing net loss per share, basic and diluted	52,205			46,228			40,629			39,438			38,209

(1) Financial results for year ended December 31, 2018, as compared to the years ended December 31, 2017, 2016, 2015, and 2014 reflect 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 year 2018. 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 year ended December 31, 2018 when compared to the years ended December 31, 2017, 2016, 2015, and 2014. For additional information regarding the impact from adoption of this accounting standard, see Note 3, “Revenue Recognition” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.



	December 31,
	2018		2017		2016		2015		2014
Consolidated Balance Sheets Data:	(In Thousands)
Cash, cash equivalents and restricted cash	$	54,485	$	32,776	$	20,864	$	24,060	$	27,198
Working capital	50,085		20,087		14,860		17,998		19,272
Total assets	79,283		53,625		35,648		44,647		48,122
Total liabilities	22,977		29,078		16,549		21,768		21,811
Total stockholders’ equity	56,306		24,547		19,099		22,879		26,311

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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.

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 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. 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.

Business Segments

We manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 15, "Segment, Geographical and Other Revenue Information" in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Performance Enzymes

Novel Biotherapeutics

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.

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 year ended December 31, 2018 when compared to the years ended December 31, 2017 and 2016. For additional information regarding the adoption of this accounting standard, 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.

Revenues were $60.6 million in 2018, a 21% increase from $50.0 million in 2017. Product revenue, which consists primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex^® Biocatalyst Panels and Kits, was $25.6 million in 2018, a decrease of 4% compared with $26.7 million in 2017. The decrease in product revenue is primarily due to variability in our customers’ manufacturing schedules.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $35.0 million in 2018, an increase of 50%, compared with $23.3 million in 2017. The increase is primarily due to revenues from our collaborative 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 and Merck, and recognition of a license fee and technology transfer from Porton.

Our products’ profitability is affected by many factors including the margin of profit on products we sell. Our profit margins are affected by many factors including the costs of internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs. Profit margin data is used as a management performance measure to provide additional information regarding our results of operations on a consolidated basis. Product gross margins increased to 51% in 2018, compared to 46% in 2017 due to improved sales mix.

Research and development expenses were $30.0 million in 2018, an increase of 1% from $29.7 million in 2017. The increase was primarily due to an increase in costs associated with higher headcount, higher allocable expenses, increases in lab supplies and stock compensation expense and were partially offset by a decrease in outside services which were mostly related to prior year development costs for project CDX-6114.

Selling, general and administrative expenses were $29.3 million in 2018, an increase of 1% compared to $29.0 million in 2017. The increase was primarily due to increases in costs associated with higher headcount, consulting and outside services, accounting fees, recruiting fees, and stock compensation expenses which were partially offset by a reduction in legal expenses related to 2017 activities and allocable expenses.

Net loss was $10.9 million, or a net loss of $0.21 per share, in 2018 compared to a net loss of $23.0 million, or a net loss of $0.50 per share, in 2017. The decreases in net loss and net loss per share are primarily attributable to a net increase in revenue and reductions in product costs. The net increase in revenue is primarily attributed to research and development revenue from Nestlé Health Science and Tate & Lyle partially offset by a decrease in product revenue. The reduction in product costs reflected the sale of higher gross margin products.

Cash and cash equivalents increased to $53.0 million as of December 31, 2018 compared to $31.2 million as of December 31, 2017. In addition, net cash used in operations was $14.1 million in 2018, as compared to net cash used in operations of $8.8 million in 2017. We believe that based on our current level of operations, our existing cash, cash equivalents, and equity securities will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.

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

than our intellectual property. 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. We may draw on the Term Debt at any time prior to September 30, 2019, subject to customary conditions for funding including, among others, that no event of default exists. As of December 31, 2018, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility. See Note 13, "Commitments and Contingencies" in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Below is an overview of our results of operations by business segments:

Performance Enzymes

Revenues increased by $4.7 million, or 11%, to $47.1 million in 2018, compared to 2017. The increase in revenues was due primarily to an increase in research and development revenue from Tate & Lyle and Novartis, and the recognition of a license fee and technology transfer from Porton. These increases were partially offset by a decrease in product revenue due to the variability in our customers’ manufacturing schedules.

Product gross margins were 51% in 2018, compared to 46% in the corresponding period in 2017. The increase in product gross margins was primarily due an increase in sales of higher margin products combined with a decrease in sales of lower margin products over the prior fiscal period.

Research and development expense increased $2.1 million, or 12%, to $18.9 million in 2018, compared to 2017, due primarily to an increase in costs associated with higher headcount, an increase in lab supplies and stock compensation expenses and an increase related to activities under the Tate and Lyle and Novartis collaboration agreements.

Selling, general and administrative expense increased by $0.2 million, or 2%, to $7.5 million in 2018, compared to the year of 2017, due primarily to an increase in costs associated with higher headcount.

Novel Biotherapeutics

Research and development revenue in 2018 was $13.5 million. Revenues in the Novel Biotherapeutics segment are derived entirely from research and development revenue relating to the development of our CDX-6114 product candidate in collaboration with Nestlé Health Science. In 2017, we signed a global development, option and license agreement with Nestlé Health Science and, thus, we had no revenues in the Novel Biotherapeutics segment prior to 2017.

Research and development expense decreased $1.9 million, or 16%, to $10.2 million in 2018, compared to 2017, due primarily to activities related to the development of our CDX-6114 in the prior year.

Selling, general and administrative expense was $0.8 million in 2018, compared to zero in 2017. This consisted of the allocated employee costs related to the development of our CDX-6114 product candidate and other product candidates in our Novel Biotherapeutics pipeline. De minimis selling, general and administrative expense incurred in 2017 were not allocated to the biotherapeutics segment.

Below is an overview of our collaborative arrangements:

GSK Platform Technology Transfer, Collaboration and License Agreement

In July 2014, we entered into a CodeEvolver^® protein engineering platform technology transfer collaboration and license agreement (the "GSK CodeEvolver^®Agreement") with GlaxoSmithKline ("GSK"). Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver^® protein engineering platform technology to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products.

We received an upfront fee upon the execution of the agreement in July 2014 and milestone payments in each of the years from 2014 through April 2016. We completed the transfer of the CodeEvolver^®protein engineering platform technology to GSK in April 2016 and all revenues relating to the technology transfer have been recognized as of April 2016. We have the potential to receive additional cumulative contingent payments that range from $5.75 million to $38.5 million per project based on GSK’s successful application of the licensed technology. We are also eligible to receive royalties based on net sales of GSK’s sales of licensed enzyme products that are currently not being recognized.

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 $4.1 million, $3.6 million, and $3.0 million in 2018, 2017 and 2016, 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. The API payments, which are currently not recognized as revenue, are based on quantity of API developed and manufactured by Merck and will be recognized as usage-based royalties. In February 2019, we have signed a new agreement with Merck to install certain CodeEvolver^® protein engineering technology upgrades into Merck’s platform license installation and will maintain those upgrades for a multi-year term.

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 will install certain CodeEvolver^®protein engineering technology upgrades into Merck’s platform license installation and maintain those upgrades for a multi-year term.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

In October 2017, we entered into the Nestlé Agreement with 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 60 days after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 for the potential treatment of PKU. The $4.0 million milestone payment that was triggered by the initiation of the trial was received in September 2018. The upfront payment and the variable consideration relating to the progress payment of $4.0 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 $9.9 million in 2018 as research and development revenue and $7.2 million in 2017. We had deferred revenue under this agreement of $1.9 million at December 31, 2018 and $6.8 million at December 31, 2017.

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 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, Nestlé Health Science is obligated to pay us $3.0 million within 60 days after exercise of the option. Upon exercising its option, Nestlé Health Science has 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 is expected to be completed in the second quarter of 2019. 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.

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 $86.0 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. 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 $3.6 million and $0.5 million in 2018 and 2017, respectively. As of December 31, 2018 and 2017, we had deferred revenue of $0.8 million and $1.1 million, 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. 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 of the agreement. As of December 31, 2018, we completed the technical transfer and we recognized revenue of $2.8 million in 2018 as research and development revenue. Revenue relating to the functional license provided to Porton was recognized at a point in time when control of the license transferred and technology transfer to the customer. We have the potential to receive performance payments based on products produced by Porton using our company’s technology under the license agreement.

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 year ended December 31, 2018, as compared to the year ended December 31, 2017, reflect 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 2018.

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 year ended December 31, 2018 when compared to the year ended December 31, 2017. For additional information regarding the impact from adoption of this accounting standard, see Note 3, “Revenue Recognition” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Results of Operations

The following table shows the amounts from our consolidated statements of operations for the periods presented (in thousands, except percentages):



	Year Ended December 31,									% of Total Revenues
	2018			2017			2016			2018		2017		2016
Revenues:
Product revenue	$	25,590		$	26,685		$	15,321		42	%	53	%	31	%
Research and development revenue	35,004			23,339			33,516			58	%	47	%	69	%
Total revenues	60,594			50,024			48,837			100	%	100	%	100	%
Costs and operating expenses:
Cost of product revenue	12,620			14,327			9,753			21	%	29	%	20	%
Research and development	29,978			29,659			22,229			50	%	59	%	46	%
Selling, general and administrative	29,291			29,008			25,419			48	%	58	%	52	%
Total costs and operating expenses	71,889			72,994			57,401			119	%	146	%	118	%
Loss from operations	(11,295		)	(22,970		)	(8,564		)	(19	)%	(46	)%	(18	)%
Interest income	671			147			60			1	%	—	%	—	%
Other expense, net	(291		)	(92		)	(94		)	—	%	—	%	—	%
Loss before income taxes	(10,915		)	(22,915		)	(8,598		)	(18	)%	(46	)%	(18	)%
Provision for (benefit from) income taxes	(37		)	81			(40		)	—	%	—	%	—	%
Net loss	$	(10,878	)	$	(22,996	)	$	(8,558	)	(18	)%	(46	)%	(18	)%

Revenues

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 and 2016.

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



							Change
	Year Ended December 31,						2018				2017
	2018		2017		2016		$			%	$			%
Product revenue	$	25,590	$	26,685	$	15,321	$	(1,095	)	(4)%	$	11,364		74%
Research and development revenue	35,004		23,339		33,516		11,665			50%	(10,177		)	(30)%
Total revenues	$	60,594	$	50,024	$	48,837	$	10,570		21%	$	1,187		2%

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 one year 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.

2018 compared to 2017

Total revenues increased by $10.6 million in 2018 to $60.6 million, as compared to 2017. 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.

2017 compared to 2016

Total revenues increased by $1.2 million in 2017 to $50.0 million, as compared to 2016. The increase was driven by an increase in product revenue of $11.4 million or 74%, offset by a decrease of $10.2 million in research and development revenue.

Product revenue, which consist primarily of sales of protein catalysts, pharmaceutical intermediates, and Codex^® Biocatalyst Panels and Kits, were $26.7 million in 2017, an increase of 74% compared with $15.3 million in 2016. The increase was primarily due to higher customer demand in 2017 as compared to 2016, in particular higher sales of enzymes to the existing 2016 customer base.

Research and development revenue decreased by $10.2 million in 2017 to $23.3 million, as compared to 2016. The revenue decrease in 2017 was primarily due to the absence of $22.5 million of non-recurring revenues from the technology transfer of our proprietary CodeEvolver^® protein engineering platform technology to Merck and GSK in 2016, which was comprised of a milestone payment of $8.0 million from Merck, a milestone payment of $7.5 million from GSK and $7.0 million in recognition of license fees under both agreements. The revenue decrease in 2017 was partially offset by revenues of $13.1 million for research services under our agreements with Nestlé Health Sciences, Tate & Lyle, Novartis, and revenue sharing arrangement revenues from Exela.

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



							Change
	Year Ended December 31,						2018				2017
	2018		2017		2016		$			%	$		%
Cost of product revenue	$	12,620	$	14,327	$	9,753	$	(1,707	)	(12)%	$	4,574	47%
Research and development	29,978		29,659		22,229		319			1%	7,430		33%
Selling, general and administrative	29,291		29,008		25,419		283			1%	3,589		14%
Total costs and operating expenses	$	71,889	$	72,994	$	57,401	$	(1,105	)	(2)%	$	15,593	27%

Cost of Product Revenue and Product Gross Margin

Our revenues from product revenue are derived entirely from our Performance Enzymes segment. Revenues from the Novel Biotherapeutics segment are from collaborative research and development activities and not from product revenue.

The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our consolidated statements of operations for the years ended (in thousands, except percentages):



	Year Ended December 31,						Change				Year Ended December 31,						Change
	2018			2017			$			%	2017			2016			$		%
Product revenue	$	25,590		$	26,685		$	(1,095	)	(4)%	$	26,685		$	15,321		$	11,364	74%
Cost of product revenue ⁽¹⁾	12,620			14,327			(1,707		)	(12)%	14,327			9,753			4,574		47%
Product gross profit	$	12,970		$	12,358		$	612		5%	$	12,358		$	5,568		$	6,790	122%
Product gross margin (%)⁽²⁾	51		%	46		%					46		%	36		%

⁽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.

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.

2017 compared to 2016

Cost of product revenue increased by $4.6 million in 2017 to $14.3 million, as compared to 2016. The increase was primarily due to higher product revenue from increased customer demand. Product gross margin increased to 46% in 2017 as compared to 36% in 2016 due to improved sales mix.

Research and Development Expenses

Research and development expenses consist of costs incurred for internal projects as well as collaborative research and development activities. These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, depreciation of facilities and laboratory equipment, and (iii) external costs. Research and development expenses are expensed when incurred.

2018 compared to 2017

Research and development expenses were $30.0 million in 2018 compared to $29.7 million in 2017, an increase of $0.3 million or 1%. 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.

2017 compared to 2016

Research and development expenses were $29.7 million in 2017 compared to $22.2 million in 2016, an increase of $7.4 million or 33%. The increase was primarily due to a $7.2 million increase in outside services, which were mostly related to the development project for CDX-6114, an increase of $1.5 million in costs associated with higher headcount relating to additional research and development projects, including the development of CDX-6114, and an increase of $0.7 million in lab supplies, which were partially offset by lower amortization of intangibles.

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.

2018 compared to 2017

Selling, general and administrative expenses were $29.3 million in 2018 compared to $29.0 million in 2017, an increase of $0.3 million or 1%. 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.

2017 compared to 2016

Selling, general and administrative expenses were $29.0 million in 2017 compared to $25.4 million in 2016, an increase of $3.6 million or 14%. The increase was primarily due to an increase of $1.9 million in costs associated with higher headcount, including stock-based compensation costs, an increase of $1.2 million in legal expenses relating to intellectual property and higher consulting fees, partially offset by lower depreciation expense.

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



										Change
	Year Ended December 31,									2018			2017
	2018			2017			2016			$		%	$			%
Interest income	$	671		$	147		$	60		$	524	356%	$	87		145%
Other expense, net	(291		)	(92		)	(94		)	199		216%	(2		)	(2)%
Total other income (expense), net	$	380		$	55		$	(34	)	$	325	591%	$	89		262%

Interest Income

Interest income increased by $0.5 million in 2018 compared to 2017, and increased by $87 thousand in 2017 compared to 2016. The changes were primarily due to higher interest rates on higher levels of cash, cash equivalents and short-term investment portfolio balances.

Other Expense

Other expense increased by $0.2 million in 2018 compared to 2017 primarily due to an unrealized loss of $83 thousand related to our investment in CO2 Solutions and expenses due to fluctuations in foreign currency. Other expense decreased by $2 thousand in 2017 compared to 2016, primarily due to fluctuations in foreign currency.

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



									Change
	Year Ended December 31,								2018			2017
	2018			2017		2016			$		%	$			%
Provision for (benefit from) income taxes	$	(37	)	$	81	$	(40	)	$	118	146%	$	(121	)	(303)%

The benefit from income taxes for 2018 is 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 in 2017 is primarily

related to taxes on foreign earnings and an increase in the deferred tax liability for accrued future withholding taxes on dividends. The benefit from income taxes for 2016 is primarily related to a reduction in the deferred tax liability for accrued future withholding taxes on dividends. We continue to maintain a full valuation allowance against our net deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be realized.

Net Loss

Net loss for 2018 was $10.9 million, or a net loss per basic and diluted share of $0.21. This compares to a net loss of $23.0 million, or a net loss per basic and diluted share of $0.50 for 2017. The decreases in net loss is primarily attributable a net increase in revenue and reductions in product costs. The net increase in revenue is 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 for 2017 over a net loss of $8.6 million, or a net loss per basic and diluted share of $0.21, for 2016 is primarily related to a decrease in research and development revenues and an increase in research and development expenses which were partially offset by an increase in product revenue.

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

Revenues by segment



	Year Ended December 31, 2018						Year Ended December 31, 2017						Change
	Performance Enzymes		Novel Biotherapeutics		Total		Performance Enzymes		Novel Biotherapeutics		Total		Performance Enzymes				Novel Biotherapeutics
													$			%	$		%
Revenues:
Product revenue	$	25,590	$	—	$	25,590	$	26,685	$	—	$	26,685	$	(1,095	)	(4)%	$	—	—%
Research and development revenue	21,483		13,521		35,004		15,648		7,691		23,339		5,835			37%	5,830		76%
Total revenues	$	47,073	$	13,521	$	60,594	$	42,333	$	7,691	$	50,024	$	4,740		11%	$	5,830	76%

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



	Year Ended December 31, 2018						Year Ended December 31, 2017						Change
	Performance Enzymes		Novel Biotherapeutics		Total		Performance Enzymes		Novel Biotherapeutics		Total		Performance Enzymes				Novel Biotherapeutics
													$			%	$			%
Cost of product revenue	$	12,620	$	—	$	12,620	$	14,327	$	—	$	14,327	$	(1,707	)	(12)%	$	—		—%
Research and development⁽¹⁾	18,924		10,185		29,109		16,847		12,107		28,954		2,077			12%	(1,922		)	(16)%
Selling, general and administrative⁽¹⁾	7,538		771		8,309		7,371		—		7,371		167			2%	771			100%
Total segment costs and operating expenses	$	39,082	$	10,956	50,038		$	38,545	$	12,107	50,652		$	537		1%	$	(1,151	)	(10)%
Corporate costs					20,704						21,300
Depreciation					1,147						1,042
Total costs and operating expenses					$	71,889					$	72,994

⁽¹⁾Research and development expenses and Selling, general and administrative expenses exclude depreciation.

For a discussion of product cost of revenue, see