Commitments and Contingencies

Operating Leases

Codexis' headquarters are located in Redwood City, California where it leases approximately 107,000 square feet of office and laboratory space in four buildings within the same business park from Metropolitan Life Insurance Company ("MetLife"). Codexis entered into the initial lease with MetLife for a portion of this space in 2004 and the lease has been amended numerous times since then to add and subtract space and to amend the terms of the lease, with the latest amendment being in 2012. The various terms for the spaces under the lease have expiration dates that range from January 2017 through January 2020.

As of December 31, 2012, Codexis incurred $3.6 million of capital improvement costs related to the facilities leased from MetLife and received $3.1 million of reimbursements from the landlord out of the tenant improvement and HVAC allowances for the completed construction. The reimbursements are being amortized on a straight line basis over the term of the lease as a reduction in rent expense. As of September 30, 2014, the lease incentive obligation remaining was classified with other long-term liabilities on the condensed consolidated balance sheet for $1.8 million.

As part of a restructuring plan that Codexis undertook in the third quarter of 2012, Codexis began the process of vacating the 101 Saginaw Drive, Redwood City, California space and marketed the space for sublease. In March 2014, Codexis entered into a three-year sublease agreement with a subtenant, which terminates in April 2017, with the option to extend for two consecutive one-year terms thereafter. Sublease income is being recorded as a reduction of Codexis' rent expense and was $0.1 million for the three months and $0.2 million for the nine months ended September 30, 2014.

Codexis' lease obligations for the facility in Hungary were transferred to the buyer of Codexis' Hungarian subsidiary in March 2014.

Rent expense is recognized on a straight-line basis over the term of the lease. In accordance with the terms of the amended lease agreement, we exercised Codexis' right to deliver letters of credit in lieu of a security deposit. The letters of credit in the amount of $0.7 million as of September 30, 2014 were collateralized by deposit balances held by Codexis' bank. These deposits are recorded as restricted cash on the condensed consolidated balance sheets.

As of September 30, 2014, we had estimated asset retirement obligations of approximately $0.1 million from operating leases, requiring Codexis to restore the facilities that Codexis is renting to their original form. Codexis is expensing the asset retirement obligation over the terms of the respective leases. We review the estimated obligation each period and make adjustments for any changes in estimates.

Future minimum payments under non-cancellable operating leases at September 30, 2014 are as follows (in thousands):



	Lease payments
Three months ending December 31,
2014	$	669
Years ending December 31,
2015	2,743
2016	2,827
2017	2,677
2018	2,736
2019 and beyond	3,054
Total	$	14,706

Litigation

Codexis has been subject to various legal proceedings related to matters that have arisen during the ordinary course of business. Although there can be no assurance as to the ultimate disposition of these matters, we have determined, based upon the information available, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the condensed consolidated financial position, results of operations or cash flows.

On July 30, 2013, Dyadic International, Inc. ("Dyadic") delivered notice to Codexis alleging that it is in breach under the Dyadic license agreement and stating that Dyadic intended to terminate the Dyadic license agreement in 60 days if the alleged breach was not cured to Dyadic's satisfaction. This notice was subsequently withdrawn by Dyadic in February 2014 in light of Codexis' decision to wind down its CodeXyme^® cellulase enzyme program. Although we do not believe that the use of the licensed technology in its CodeXyme^® cellulase enzyme program constituted a breach of the Dyadic license agreement, we can make no assurances that Dyadic will not make such allegations again in the future, or regarding our ability to resolve any possible future disputes with Dyadic on commercially reasonable terms or our ability to dispute with success, through legal action or otherwise, any possible future allegations by Dyadic that such use may have breached the Dyadic license agreement.

Other Contingencies

In November 2009, one of Codexis' foreign subsidiaries sold intellectual property to Codexis. Under the local laws, the sale of intellectual property to a nonresident legal entity is deemed an export and is not subject to VAT. However, there is uncertainty regarding whether the items sold represented intellectual property or research and development services, which would subject the sale to VAT. We believe that the uncertainty results in an exposure to pay VAT that is more than remote but less than likely to occur and, accordingly, we have not recorded an accrual for this exposure. If the sale is deemed a sale of research and development services, Codexis could be obligated to pay an estimated amount of $0.6 million.

Indemnifications

Codexis is required to recognize a liability for the fair value of any obligations Codexis assumes upon the issuance of a guarantee. Codexis has certain agreements with licensors, licensees and collaborators that contain indemnification provisions. In such provisions, Codexis typically agrees to indemnify the licensor, licensee and collaborator against certain types of third party claims. The maximum amount of the indemnifications is not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnification issues for any periods presented.