Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 Codexis earnings conference call. [Operator Instructions] And without further ado, I would now like to hand the conference over to one of your speakers today, Mr. Bruce Voss. Please go ahead.

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's Codexis call to discuss first-quarter 2020 financial results and recent business progress. Joining me from Codexis are John Nicols, President and Chief Executive Officer and Ross Taylor, the company's Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of May 7th, 2020. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond the company's control and could materially affect actual results. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any time and the currently contemplated impact of the virus on the company's operations, financial results, and outlook is the best estimate based on available information. For details about these risks, please see the quarterly news release that accompanies this call, as well as, the company's SEC filings. Codexis expressly disclaims any intent or obligation to update forward-looking statements, except as required by law. Today's conference call remarks will include both GAAP and non-GAAP financial results. Codexis believes the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of its business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating the business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today. Now, I'd like to turn the call over to John Nicols. John?

Thanks, Bruce. Good afternoon, everyone, and thank you for joining us. Much has transpired in the world since our last investor call barely over two months ago, and we sincerely hope that you and your families have stayed safe and well in the face of the COVID-19 pandemic. As you will hear today, Codexis is indeed safe and well. And while moderately affected in the short term, we are delivering remarkably well as we operate through the effects of the pandemic. To start, note that we entered the pandemic stronger than ever. We had a multi-year growth trajectory firmly in place and substantial resources on our debt-free balance sheet. But our pre coronavirus strengths were even more about the organization. We have a growing super talented team driving more protein discovery capacity than ever before and exploiting an ever-improving CodeEvolver platform technology. Ensuring that team and their family safety has been primary for us. Even before the San Francisco Bay Area shelter-in-place orders were initiated, the leadership team and I were practicing measures of social distancing, and we have formalized and launched our COVID-19 task force which under the seasoned, disciplined leadership of Dr. Bob Sato, our long-standing Head of Quality, Regulatory and Analytical, has been crucial to lead us through these unprecedented times. With shelter-in-place orders issued on March 17, we swiftly and smoothly affected a company-wide work-from-home policy, effectively shutting down our research and development operations. The benefits of being proactive are clear at this point. No confirmed cases of COVID-19 infection of any of our employees, an even more cohesive group who appreciate management's genuine concern for their well-being and the ensuing strengthening of our culture motivated by doing what's best for society and our community. From there, the collective attitudes and force of our organization through…

Thank you, John. Starting with the Q1 top line. Total revenues for the first quarter of 2020 were $14.7 million, and this compares with $15.6 million for Q1 of 2019. The 2019 quarter included a $3 million milestone payment from Nestle health science, making for a challenging comparison. Revenue for the 2020 quarter included $10.9 million from the performance enzymes segment and $3.8 million from the novel biotherapeutics segment. Product revenue for the first quarter of 2020 was $5.1 million, on track with our expectations, compared with $8 million for the prior-year period, with the decrease due to the timing of demand for various enzymes. Within product sales, Merck once again had the strongest showing during Q1 and Allergan also made a meaningful contribution. R&D revenue for the 2020 first quarter increased 26% to $9.6 million, primarily due to revenue from the Novartis CodeEvolver agreement that we announced a year ago as well as the Takeda collaboration that we announced in March. R&D revenue for the first quarter of 2020 included $5.8 million from the Performance Enzymes segment and $3.8 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the first quarter of 2020 was 50% compared with 45% a year ago with the increase due to product mix. Turning to operating expenses. R&D expenses for the first quarter of 2020 were $11.0 million. This included $5.7 million from the Performance Enzymes segment and $4.9 million from the Novel Biotherapeutics segment, plus $0.3 million allocated to corporate expense. The increase in R&D expenses from $8.0 million a year ago was primarily due to higher outside services fees, higher salaries and personnel costs associated with higher headcount and higher allocation of occupancy-related costs. SG&A expenses in Q1 of 2020 were $9.0 million, which included $2.3 million from the Performance Enzymes segment and $0.6 million from the Novel Biotherapeutics segment. The remaining $6.1 million is included in corporate overhead and depreciation. The increase in SG&A expenses from $8.4 million a year ago was primarily due to higher accounting and outside services fees and higher facilities and headcount expenses, partially offset by lower allocable expenses. The net loss for the first quarter of 2020 was $7.7 million or $0.13 per share, and this compares with a net loss for the first quarter of 2019 of $5.1 million or $0.09 per share. Cash and equivalents as of March 31, 2020, were $87.3 million. Importantly, we believe this large cash balance provides ample liquidity to manage through the current COVID-19 situation. In addition, we are continually monitoring the pandemic and its impact on our business, such that we will be able to strategically manage operating expenses and capital expenditures in response to any changes in revenues. As John mentioned, we have already chosen to delay the majority of previously planned new hires in 2020. We are delaying some of our capital expenditures, and we have reduced some discretionary operating expenses as well. With that, I'll turn the call back to John.

Thanks, Ross. Before moving on to questions, let me take a minute to share our enthusiasm for our new biotherapeutic deal with Takeda. In its essence, we have struck a multi-program partnership that leverages our CodeEvolver platform to enable improved gene therapy candidates with one of the world's top 10 drug companies. The deal validates preclinical work we had advanced on our own against two lysosomal storage disorders, Fabry disease and Pompe disease, plus brings Codexis into a new therapeutic area targeting a rare blood factor deficiency. Takeda also has a time-limited option to call in a fourth program at their sole discretion and for a fee selected from a shortlist of reserved indications. The unique value that CodeEvolver can deliver for gene therapies is simple. Improve the protein encoded by the gene delivered to the patient via the gene therapy vector. In other words, improve the transgene component of the gene therapy system so that the target cell expresses a better protein. Make that protein more stable, more expressive, more organ directed or any combination of those, etc. These types of benefits we have shown preclinically for Fabry disease in our recent corporate presentation, the types of protein engineering improvements that only CodeEvolver can deliver. We have been promoting the benefits of CodeEvolver to uniquely improve gene therapies for the last year or more. So convincing Takeda of that is a truly gratifying accomplishment for our novel biotherapeutics team. We are excited to work to attract other partnerships with other gene therapy companies outside of the limited Takeda partnership list in the future as well. We received an upfront payment of $8.5 million from Takeda shortly after signing. The majority of this payment, net of certain fees, will be recognized in 2020, with nearly all of the remaining balance…

[Operator Instructions] Your first question [indiscernible]…

While we're waiting for the first question, I'd like to alert you to our participation in several upcoming virtual investment conferences. We will be presenting at the UBS Global Healthcare Conference on May 18th and the Jefferies Healthcare Conference being held June 2nd through the 4th. We'll be announcing the details of each conference as we get closer and the webcast of our presentation at the UBS conference will be posted to the Investors section of codexis.com. Okay, operator, we're ready for the first question.

Your first question comes from the line of Brandon Couillard from Jefferies.

John, maybe just start with sort of the R&D project deferrals from COVID-19. I imagine those are likely to get recouped in future periods, right? But is there a fixed amount of R&D capacity that you have? Do you think that will all be a gating factor to catching up on any work that might be delayed near term later in the year?

So yes, the effects of the R&D shutdown and now we're -- have the limited start-up while we're still under the strict local shelter-in-place is really delaying our ability to execute against deals that we've struck and deals that we plan to strike to deliver kind of growth story that we had previously projected for the company this year. So a delay. And of course, it will be affected by how quickly we can have the shelter-in-place restrictions relaxed and/or lifted, which will govern how quickly we can go from our current limited R&D capacity to back up to full capacity. And we're confident that we'll be able to get back up to full capacity, even with practicing some enhanced social distancing measures and operational changes to the way we do protein engineering. So hopefully, those address the questions that you had.

Yes, I think you've got something like 41 or so different R&D programs. Any chance you could quantify those might be deferred right now? Is it a relatively small number that we're relatively kind of talking about?

Yes, a lot of those programs, we don't need to do any more R&D. We did the R&D in the past. We're waiting for the proteins that we've already engineered to ultimately get taken up in commercial operations. So a good chunk of those 41 projects like that are really not governed by R&D capacity. So the more directly relevant number is how many protein engineering teams pre-COVID we had operating. So we've been off-quoted as saying we have about 15, maybe up to 16 or more teams that are working on new protein discovery in parallel. So from March 17, those 15 teams went home. And they weren't able to operate the workflow, of course, from home. But now they're -- a portion of them, a minority of them have returned to the lab to work on essential projects. We're instilling this new workflow arrangement, which is going to spread us out over wider distances and may have us work over shifts and weekends. And ultimately, that's going to enable us to get those 15 teams running again. So right now, we're roughly two months into not being able to discover those 15 proteins. Those have been put on pause. Some of those are coming back. So really, the pace with which we can get back to that protein discovery capacity is really the governing factor. It's really hard to predict, as you well know. But we're confident that we're going to be able to get the capacity up and running again. The team is incredibly supportive. The kinds of processes that we're putting in place are ensuring social distancing and proper safety measures to give the confidence to our team. So it's a multi-month period where those 15 programs or have had the slide sideways. Some of those are generating revenue. Some of those are advancing our own products and not revenue generating. So, it's quite qualified the revenue impact of the R&D shutdown that we've had to go through because of shelter in place.

I didn't hear you mentioned either Tasteva or the molecular diagnostics, NGS programs. Any material updates this year, perhaps relative to last time we so on the fourth quarter call?

So Tasteva is in the hands of our partner, Tate and lyle, and they are promoting that with their customers. And we're encouraged that they're going to be able to continue to successfully get downstream food ingredients companies to formulate in this better tasting, more naturally derived stevia. In our communications with Tate & Lyle, of course, our communications with customers continue despite the shelter in place. We continue to work via video and virtually with clients. They're encouraging us that they're working their clientele. There may be some delays because of COVID-19 as they work downstream, but they continue to encourage us about the continued penetration of Tasteva M and ultimately, their growing needs for our enzymes for the manufacture of that. So that's really on track. Maybe slightly affected by COVID, not in any way long-term affected by COVID-19. Molecular diagnostics is an area -- so we've been working on the technology transfer for the ligase with Roche. We've been able to make progress with Roche on transferring our technology even through the pandemic, again, some inefficiencies, but the progress continues, which is great. And we have been working more on the commercialization of the DNA polymerase, which is largely focused on establishment of the supply chain for the manufacture of that product for launch and less dependent on the R&D teams being in the labs, working on that DNA preliminary. So we've been able to progress the commercialization of the DNA polymerase and a few other molecular biology enzymes toward the marketplace. And so, we continue to be quite encouraged by the growth of products launching into these markets. We have a list of other molecular biology, molecular diagnostic enzymes we want to engineer with CodeEvolver. Those have had to wait a little bit because of the limitations on our ability to operate the lab, but our ability to commercialize has gone well, and we're quite encouraged that that's going to continue to be a good story for the company as we move through 2020.

Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.

John and Ross, appreciate you taking the questions. I was looking back at my model, at least I think it was my most recent model from before the pandemic, and I think you guys came in above what I was forecasting for Q1 at that point. Based on your prepared remarks, it seems like you got pretty close to what you expected to do in Q1 in spite of the pandemic and in spite of the fact that you started sheltering-in-place with a couple of weeks to go in March. So is that right? Did you actually hit or exceed your target? Do you think there was any revenue that got pushed out of Q1? Is there any possibility that there is actually maybe some pull forward of revenue given all that's going on?

So, I think we were modestly above expectations as the first quarter unfolded. There was some pushout of revenues because we had to shut down the R&D operations. And Ross, you may jump in. I think that was actually detailed in our forthcoming 10-Q filing, but it was modest. And I wouldn't necessarily call it pull forward. Just I think things were -- we were starting the year off quite well in terms of revenue generation, both on the product side and on the R&D revenue side.

Yes, I'll just add maybe two or three bullet points to that, Doug. But yes, we actually disclosed this. I think it's in the press release also, but we estimate that we lost about $0.6 million in R&D services revenue in the quarter due to the pandemic. And we did come in a little bit better than we expected in revenues in the quarter. I think we did a little better than expected on product sales. And we recognized a little more revenue from Takeda than we, frankly, had been expecting as well. So that certainly helped in the quarter.

And then just tell me if I'm not thinking about this the right way, but given some of your customers are seeing the same thing everybody else is seeing, right, near-term pressures with cash generation, they're trying to hold back spend, but there's a limit to what they can do. With that in mind, beyond just those customers navigating through their own lab shutdowns, if they're active, are they asking you at all the slowdown maybe to delay the timing of when they might have to make a milestone payment or some other cash flow to you? I ask in part, one, because I just wanted to gain a better understanding of what's going on with some of your customers. But then I'm also thinking that, that would suggest that this is pretty temporary or at least we hope. And if folks start getting back to work later in the quarter that this could really just be a timing issue where some of this cash flow to you that was expected in Q2, it just moves into the second half. Is -- any color you can provide, and any comment on whether I'm thinking about this the right way would be helpful.

Yes, sure. Our -- so most of the -- we call it partner-funded, time-based project work, that is a healthy portion of our R&D revenue stream. Had to be paused, right? Because we're not generating the products that generate those -- the deliverable to generate those revenues. And so we notified our customers, of course, they understood because they're in the same situation. And -- but at the same time, they are ready for us to get back to the work that we have been working on for these customers for those projects since whenever they started. So there is a desire to come back. I think there may be some modest effect of, "Hey, you guys are starting before us. We can't receive your products." But I don't see that being a big factor either because we can generate results, share those results virtually to the R&D teams that are working from home. The amount of work that a partner has to do to actually work up our product in their labs is less intensive than the work we do in our labs. So, I think it's really just kind of pause restart. The large majority of those partner funded time based projects, are under existing agreements. So there's obligations for them to take those deliverables and pay us for those when we're able to restart and these are extremely well funded partners. Our ability to catch-up is pretty limited. We're going to get back up to full R&D capacity again, I hope soon. And when we do, we're not really going to be able to catch up and double down for a period of time because we've always been operating pretty much at our full R&D capacity. That's what's led us to incrementally add people year after year modestly to build that capacity. But we've always been running out of capacity. So I wouldn't want you to believe that we can catch up once we get back to full capacity. But just get back on the track that we used to be on is the right expectation.

[Operator instructions] Your next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is open.

Good afternoon. Thank you for taking the questions. I'm glad to hear that everyone is safe and healthy. First question for me. Regarding the shelter in place, was that an elective decision that you made to keep your team safe and healthy? Or was that part of the government regulations? The reason I ask is, I guess, it's been kind of hit or miss a lot of pharma companies, med device companies, those types of industries have been unable to work, where possible while keeping social distancing. So, I'm just curious if this was your decision to keep the team safe or if this was more of the government regulations.

You have a really, really good question. I think it's predominantly the government regulations. When the first shelter in place order came out, there was vagaries in there that we needed to assess. Maybe a very liberal interpretation of the initial orders could have led us continue to operate, but we didn't feel right about that. And ultimately, we expected that those orders would get clearer and tighter with respect to things like are these projects COVID related? Are these projects for essential business? And they did and they bore out that our interpretation, which was more in favor of ensuring the safety and social distancing of our employees was more accurate. So, I think we landed exactly where we should have. And so the real question, while we're under these current strict orders in the San Francisco Bay area through the end of May, is it essential business? Is it code related and we have some work that is directed toward essential business, and our employees are confident in our guidelines to operate in a given the COVID-19 risks, and we work carefully with them to Stage 4 and ultimately get their full support for the limited start-up in the recent past. Hopefully that shed light on your question.

And then regarding COVID, I'm curious as pharma scrambles to try and find treatments and ultimately vaccines, I'm curious if this is creating any opportunities for you to potentially be a solution to either the treatments or vaccines?

Yes, there are some potential involvement of Codexis, that haven't been central to our go-forward growth strategy. We're assessing those. I think we'll just leave it as a light. But previously unforecasted upside may unfold, but I wouldn't want our investors focused on that at this point in time. So we've been thinking about that. Our scientists have been considering that as they've been working virtual team innovation processes. But I would hold back from setting any kind of upside expectation at this point.

Your next question comes from the line of James Lieberman from Revere Securities.

It's great seeing how the company has been evolving over the years. And I know you've addressed this several times already, but I just want to make just a further clarification. Regarding the enhanced enzymes part of the business and the opportunities there, are you seeing at least an acceleration of interest because of the pressing need to get more accurate gold standard diagnostics?

Yes, how is the world going to respond to an immediate scale-up of diagnostic, high-fidelity diagnostic techniques to both be able to diagnose the infection early and then later to diagnose the antibodies to show immunity thereafter. These are crucial global needs and topics. We're not a diagnostic development company, developer, but we do have the ability to provide inputs to enable better diagnosis on various biological samples for various targets. So yes, the interest is there. Like I said to Matt, there are ideas, there are opportunities, and they could become real business prospects for us, but I think it's premature for us to set any significant expectation on those at this point.

So any sort of acceleration of interest will come from your partners and contacts already in place, and they could come back to pretty much at any time as people realize what the news or world order is going to look like, type of thing.

Yes, or we would introduce something new that we had and promoted in this way prior. So that's another way that an opportunity could unfold for us.

Presenters, there are no further question at this time, please continue.

Okay. Well, thank you, everyone, for your questions. We will look forward to providing updates as we continue to manage effectively through the pandemic and ultimately ramp our R&D operations back up once to today's -- once today's strict shelter-in-place restrictions are relaxed and lifted. We look forward to that and hope it is not too far off. We'll continue to stay strong and navigate effectively until then. Thanks again, and stay safe and well. Bye-bye.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.