What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 219 added, 165 removed, 333 unchanged (54% of the section changed)

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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.

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

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

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 licensed our proprietary CodeEvolver ® protein engineering technology platform to global pharmaceutical companies so that they may in turn use this technology to engineer enzymes for their own businesses.

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

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

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

As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop protein catalysts and industrial enzymes for use in a wider set of industrial markets.

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

("Roche") with our first enzyme for this target market, Codexis’ EvoT4™ DNA ligase.

("Roche") with our first enzyme for this target market, the Company's EvoT4™ DNA ligase.

In June 2020, we entered into a co-marketing and enzyme supply collaboration agreement with Alphazyme LLC for the production and co-marketing of enzymes for life science applications including, initially, high-fidelity DNA polymerase, T7 RNA polymerase and reverse transcriptase enzymes

We have 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.

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In October 2017, we entered into the "Nestlé Agreement” with Nestlé Health Science to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

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

In February 2019, Nestlé Health Science exercised its option to obtain an exclusive license to develop and commercialize CDX-6114.

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

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

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

In December 2018, Nestlé Health Science became obligated to pay us an additional $1.0 million within 60 days after the achievement of a milestone relating to formulation of CDX-6114.

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

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

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

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

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.

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.

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We expect to continue to make additional investments in our pipeline with the aim of advancing additional product candidates targeting other therapeutic areas.

In March 2020, we entered into the Takeda Agreement with Takeda in which we will collaborate to research and develop protein sequences for use in gene therapy products for certain disease indications in accordance with each applicable program plans for Fabry Disease, Pompe Disease, and an unnamed blood factor deficiency.

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

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

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

Furthermore, our ability to provide future research and development ("R&D") services will continue to be disrupted as a result of local shelter-in-place orders and any disruptions in operations of our customers with whom we collaborate.

For the three months ended March 31, 2020, the COVID-19 pandemic resulted in lower research and development revenues of approximately $0.6 million as completion of certain R&D services were deferred to the future periods.

We are unable to fully determine and quantify the extent to which delays in our R&D projects will be affected by the COVID-19 pandemic.

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

We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our product sales, R&D service revenue, expenses and manufacturing.

In the U.S., the impact of COVID-19, including governmental orders governing the operation of non-essential businesses during the pandemic, has caused the temporary closure of our Redwood City, California facilities and has disrupted our research and development operations.

Our Redwood City employees have been working from home since mid-March 2020, while ensuring essential staffing levels in our operations remain in place.

However, we are unable to fully determine and quantify the extent to which this pandemic affected our total revenues due to complex accounting judgments.

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

Research and development operations for all other projects were temporarily suspended from mid-March 2020 through the end of April in accordance with these Orders.

In May 2020, we initiated limited operations and gradually ramped up our R&D operations so that we are currently utilizing the majority of our normal R&D capacity.

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

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

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Risk Factors included in this Quarterly Report on Form 10-Q.

Recent Investing Activities

In June 2020, we entered into a Master Collaboration and Research Agreement (“MAI Agreement”) with Molecular Assemblies, Inc.

(“MAI”), to engineer enzymes to deliver differentiated and cost-effective solutions for the enzymatic synthesis of DNA.

Under an associated stock purchase agreement, we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and in connection with our investment, John Nicols, our chief executive officer, joined MAI’s board of directors.

Under the MAI Agreement, for a fixed monthly fee payable in shares of Series A preferred stock, we will apply our CodeEvolver ® protein engineering platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis.

Through the provision of these services, we are eligible to earn additional shares of Series A preferred stock.

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

For additional information, see Note 12, "Related Party Transactions," in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations Overview

Revenues decreased to $14.7 million for the first quarter of 2020 from $15.6 million in the first quarter of 2019, due to decreases in product revenue partially offset by increases in research and development revenue.

Product revenue for the first quarter of 2020 decreased by $2.9 million to $5.1 million from $8.0 million in the first quarter of 2019 primarily due to timing of customer demand for branded products.

Research and development revenue increased by $2.0 million for the first quarter of 2020 to $9.6 million from $7.6 million in the first quarter of 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and recognition of license fees from Takeda under the Takeda Agreement, partially offset by prior year functional license fee revenue from Nestlé Health Science.

Product gross margins were 50% for the first quarter of 2020, compared to 45% in the same period in 2019, due to improved product mix.

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.

Total revenues increased to $15.0 million for the second quarter of 2020 from $12.3 million for the second quarter of 2019, due to increases in research and development revenue partially offset by decreases in product revenue.

Product revenue for the second quarter of 2020 decreased by $1.7 million to $4.5 million from $6.2 million for the second quarter of 2019 due to timing of customer demand for branded products.

Research and development revenue increased by $4.4 million for the second quarter of 2020 to $10.5 million from $6.1 million in the second quarter of 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and recognition of license fees from Takeda under the Takeda Agreement, partially offset by lower revenue as a result of delays attributable to the COVID-19 pandemic.

Product gross margins were 62% for the second quarter of 2020, compared to 56% in the second quarter of 2019, due to improved product mix.

Our profit margins are affected by many factors including product pricing and costs of internal and third-party fixed and variable costs.

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

Research and development expense increased by $3.0 million, or 37%, to $11.0 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher headcount, and higher allocable expenses.

Selling, general and administrative expense increased by $0.6 million, or 7%, to $9.0 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses.

Net loss for the first quarter of 2020 was $7.7 million, representing a net loss of $0.13 per basic and diluted share.

This compares to a net loss of $5.1 million, representing a net loss of $0.09 per basic and diluted share for the first quarter of 2019.

The increase in net loss for the first quarter of 2020 over the same period of the prior year is primarily related to higher operating expenses and decreases in product revenue partially offset by increases in research and development revenue.

Cash and cash equivalents decreased by $3.2 million to $87.3 million as of March 31, 2020 compared to $90.5 million as of December 31, 2019.

Net cash used in operating activities decreased to $1.4 million in the three months ended March 31, 2020 compared to $2.9 million in the three months ended March 31, 2019.

Research and development expense increased by $2.6 million, or 31%, to $10.9 million for the second quarter of 2020, compared to the second quarter of 2019, primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher headcount, and higher allocable expenses, partially offset by lower lab supply expenses and outside services.

Selling, general and administrative expense increased by $0.6 million, or 8%, to $8.5 million for the second quarter of 2020 compared to the second quarter of 2019, primarily due to an increase in costs associated with legal and accounting fees, higher facilities and headcount offset by lower allocable expenses.

Income earned in certain countries outside of the United States is subject to the imposition of income tax withholding by foreign taxing authorities when the income is paid to the United States.

We recognized $0.3 million in income tax expense in the second quarter of 2020 due to the imposition of income tax on revenue by foreign taxing authorities.

Net loss for the second quarter of 2020 was $6.3 million, representing a net loss of $0.11 per basic and diluted share.

This compares to a net loss of $6.5 million, representing a net loss of $0.12 per basic and diluted share for the second quarter of 2019.

The decrease in net loss for the second quarter over the same period of the prior year is primarily related to increases in research and development revenue partially offset by higher research and development expenses and lower product revenue and related costs.

Cash and cash equivalents decreased by $14.8 million to $75.6 million as of June 30, 2020 compared to $90.5 million as of December 31, 2019.

Net cash used in operating activities increased to $11.5 million in the six months ended June 30, 2020 compared to $7.9 million in the six months ended June 30, 2019.

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

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We may draw on the Term Debt at any time prior to September 30, 2020, subject to customary conditions for funding including, among others, that no event of default exists.

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

As of June 30, 2020, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility.

See Note 11, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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Performance Enzymes

Revenues increased by $0.8 million, or 8%, to $10.9 million for the three months ended March 31, 2020, compared to the first quarter of 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and revenue under a license agreement with Roche providing our EvoT4 DNA™ ligase high-performance molecular diagnostic enzyme, partially offset by a de crease in product revenue due to timing of customer demand for branded products.

Product gross margins were 50% in the three months ended March 31, 2020, compared to 45% in the corresponding period in 2019 due to improved product mix.

Research and development expense increased by $1.3 million, or 28%, to $5.7 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with higher headcount and higher allocable expenses.

Selling, general and administrative expense increased by $0.2 million, or 12% to $2.3 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses.

Revenues decreased by $3.1 million, or 29%, to $7.5 million for the second quarter of 2020, compared to the second quarter of 2019,

Product gross margins were 62% in the second quarter of 2020, compared to 56% in the corresponding period in 2019 due to variations in product mix.

Research and development expense decreased by $0.1 million, or 3%, to $5.0 million for the second quarter of 2020, compared to the second quarter of 2019, primarily due to lower allocable expenses and lab supplies costs partially offset by an increase in costs associated with higher headcount and outside services.

Selling, general and administrative expense increased by $13 thousand, or 1%, to $2.4 million for the second quarter of 2020, compared to the second quarter of 2019, primarily due to higher stock compensation expense and allocable expenses partially offset by lower costs associated with travel and outside services.

Novel Biotherapeutics

Revenues decreased by $1.7 million, or 31%, to $3.8 million for the three months ended March 31, 2020, compared to the first quarter of 2019 primarily due to a decrease in prior year functional license fee revenue from Nestlé Health Science and partially offset by recognition of revenue under the Takeda Agreement.

Research and development expense increased by $1.6 million, or 48%, to $4.9 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with outside services relating to

CMC, regulatory expenses, higher outside services, higher headcount and higher stock compensation expense.

Selling, general and administrative expense increased by $0.1 million, or 14%, to $0.6 million for the first quarter of 2020, compared to the first quarter of 2019, primarily due to an increase in costs associated with higher headcount, higher allocable expense and higher stock-based compensation.

Revenues increased by $5.7 million, or 331%, to $7.5 million for the second quarter of 2020, compared to the second quarter of 2019, primarily due to recognition of license fees from Takeda under the Takeda Strategic Collaboration and License Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé Health Science.

Research and development expense increased by $2.6 million, or 92%, to $5.5 million for the second quarter of 2020, compared to the second quarter of 2019, primarily due to an increase in costs associated with outside services relating to CMC regulatory expenses, higher outside services, higher headcount and higher stock compensation expense.

Selling, general and administrative expense increased by $0.1 million, or 11%, to $0.6 million for the second quarter of 2020 compared to the second quarter of 2019, primarily due to an increase in costs associated with higher headcount, higher allocable expense and higher stock-based compensation.

GSK Platform Technology Transfer, Collaboration and License Agreement

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

We recognized no research and development revenue for the three months ended March 31, 2020 and 2019.

We had no deferred revenue balances as of March 31, 2020 and December 31, 2019.

We recognized no research and development revenue for the three and six months ended June 30, 2020 and 2019.

Merck Platform Technology Transfer and License Agreement

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We received an 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 $0.9 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively, for various research projects under our collaborative arrangement.

Additionally, we recognized research and development revenues of $0.2 million and $1.0 million for the three and six months ended June 30, 2020, respectively, compared to $1.0 million and $2.0 million for the three and six months ended June 30, 2019, respectively, for various research projects under our collaborative arrangement.

We have the potential to receive payments of up to a maximum of $15.0 million for each commercial active pharmaceutical ingredient ("API") that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver ® protein engineering technology platform.

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

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

The license installation was completed in 2019 and we recognized $0.9 million as license fee revenue accordingly in three and six months ended June 30, 2019, respectively, under the amendment.

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

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

We recognized $25 thousand in research and development revenues under the terms of the amendment in the three months ended March 31, 2020.

As of March 31, 2020 and December 31, 2019, we had deferred revenue balances of $0.1 million and nil, respectively.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

As of June 30, 2020, Merck has not exercised its option for technology enhancements.

We recognized $25 thousand and $0.1 million in research and development revenues for the three and six months ended June 30, 2020, respectively.

As of June 30, 2020 and December 31, 2019, we had deferred revenue balances of $0.1 million and nil, respectively.

Global Development, Option and License Agreement, Strategic Collaboration Agreement, and Development Agreement

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

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

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

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

We recognized development fees of nil for the three months ended March 31, 2020, compared to $1.3 million for the three months ended March 31, 2019 in research and development revenue.

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

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

We recognized nominal research and development revenue for the three and six months ended June 30, 2020, respectively, compared to $0.5 million and $1.7 million for the three and six months ended June 30, 2019, respectively.

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

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

In addition to the Nestlé Agreement, we and Nestlé Health Science 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.

In October 2017, we also entered into a Strategic Collaboration Agreement (the “Strategic Collaboration Agreement”) with Nestlé Health Science pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® protein engineering technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

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

We recognized research and development fees of $1.6 million for the three months ended March 31, 2020 compared to $1.2 million for the three months ended March 31, 2019.

Development Agreement

In January 2020, we and Nestlé Health Science entered into a development agreement pursuant to which we and Nestlé Health Science are collaborating to advance a lead candidate, CDX-7108, targeting a gastro-intestinal disorder discovered

through our Strategic Collaboration Agreement into pre-clinical and early clinical studies.

The Strategic Collaboration Agreement was extended through December 2021.

We recognized research and development fees of $1.7 million and $3.3 million for the three and six months ended June 30, 2020, respectively, compared to $1.2 million and $2.5 million for the three and six months ended June 30, 2019, respectively.

Strategic Collaboration Agreement

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

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

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

We received an initial collaboration fee of $0.5 million within 30 days of the effective date and $1.5 million upon the first anniversary of the effective date of the agreement.

We received an initial collaboration fee of $0.5 million within 30 days of the effective date, $1.5 million upon the first anniversary of the effective date of the agreement.

We recognized revenue of $1.0 million upon the second anniversary of the effective date of the agreement.

We are eligible to receive $1.0 million on the third anniversary of the effective date of the agreement.

We completed the technical transfer in the fourth quarter of 2018.

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

We recognized research and development revenue related to the Porton Agreement of $1.0 million and $1.1 million in the three and six months ended June 30, 2020, respectively, compared to nil in the three and six months ended June 30, 2019.

Platform Technology Transfer and License Agreement

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

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

Under the Novartis CodeEvolver ® Agreement, we will transfer Codexis' proprietary CodeEvolver ® protein engineering platform technology to Novartis over approximately 20 months starting with the date on which we commence the technology transfer (the “Technology Transfer Period”).

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

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

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

Under the Novartis CodeEvolver ® Agreement, we are transferring our proprietary CodeEvolver ® protein engineering platform technology to Novartis over approximately 23 months starting with the date on which we commenced the technology transfer (the “Technology Transfer Period”).

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

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

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

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

We are entitled to receive an additional $4.0 million subject to satisfactory completion of the second technology transfer milestone and an additional $5.0 million upon satisfactory completion of the third technology transfer milestone.

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

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

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

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

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

We are eligible to receive an additional $5.0 million up on satisfactory completion of the third technology transfer milestone.

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

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

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

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

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

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

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

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

We recognized $2.4 million in research and development revenue for the three months ended March 31, 2020 from the Novartis CodeEvolver ® Agreement.

In April 2020, we achieved a technology transfer milestone associated with the Novartis CodeEvolver ® Agreement.

See Note 15, "Subsequent Events" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more details.

We recognized $0.9 million and $3.7 million in research and development revenue for the three and six months ended June 30, 2020, respectively, and no revenue for the three and six months ended June 30, 2019, respectively, from the Novartis CodeEvolver ® Agreement.

Strategic Collaboration and License Agreement

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

We recognized license fees of $2.1 million as research & development revenue in the three months ended March 31, 2020.

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

We recognized license fees of $5.7 million and $8.0 million as research & development revenue in the three and six months ended June 30, 2020, respectively.

Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical approval milestones for initial programs of up to $22.3 million, (ii) development and commercialization-based milestones, per target gene, of up to $100.0 million, the modulation of which leads to treatment of certain diseases by the applicable product, and (iii) tiered royalties, at percentages ranging from the middle-single digit to low single-digit of sales of the applicable product.

Master Collaboration and Research Agreement and Stock Purchase Agreement

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

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

In connection with the transaction, our chief executive officer, John Nicols, also joined MAI’s board of directors.

At the same time, we entered into a Master Collaboration and Research Agreement (the “MAI Agreement”) with MAI to engineer DNA polymerase enzymes to deliver differentiated and cost-effective solutions for the enzymatic synthesis of DNA.

Under the MAI Agreement and its related statement of work (“SOW”), we will apply our CodeEvolver ® protein engineering platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis.

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

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

Under the MAI Agreement and its associated SOW, we will engage in research and development activities to engineer DNA polymerase enzymes for the enzymatic synthesis of DNA in exchange for monthly fees in the form of shares of Series A preferred stock in MAI.

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

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

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

Under the MAI Agreement, the Company will have the right to use and sell the engineered enzymes to third parties for any purpose other than for the synthesis of native DNA.

Under the MAI Agreement, we would make a $0.5 million payment to MAI on meeting a milestone of $5.0 million in aggregate commercial sales by the Company to third parties of the engineered enzymes or any product incorporating or derived from the engineered enzymes for any purpose other than the synthesis of native DNA.

The MAI Agreement contemplates that we and MAI will enter into a Commercialization and Enzyme Supply Agreement (the “CESA”) within six months following the completion of certain timelines specified in the SOW.

In addition, we and MAI have agreed pursuant to the MAI Agreement to certain terms to be contained within the CESA in the event that the CESA becomes executed in the future.

Those include:

(a) that MAI would receive an exclusive license to use the DNA polymerase enzymes engineering by us under the MAI Agreement in the synthesis of native DNA and a non-exclusive license to use these enzymes for research and development on the synthesis of non-native DNA, and (b) that we would become the exclusive manufacturer of these enzymes for MAI, its affiliates and licensees.

We recognized no research and development revenue in the three and six months ended June 30, 2020 from transactions with MAI.

Results of Operations

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

Three months ended March 31, Change

Three months ended June 30, Change Six months ended June 30, Change

2020 2019 $ % 2020 2019 $ %

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Interest income 57 220 (163) (74)% 323 450 (127) (28)%

Other expenses, net (86) (125) (39) (31)%

Other income (expenses), net 13 (88) 101 115% (72) (211) 139 66%

Loss before income taxes (6,037) (6,491) 454 7% (13,684) (11,624) (2,060) (18)%

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The following table shows the amounts of our product revenue and research and development revenue from our unaudited condensed consolidated statements of operations for the periods presented (in thousands):

Three months ended March 31, Change

Three months ended June 30, Change Six months ended June 30, Change

(In Thousands) 2020 2019 $ % 2020 2019 $ %

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Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods.

Total revenues decreased by $0.9 million in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to a decrease in product revenue partially offset by an increase in research and development revenue.

The decrease in product revenue was primarily due to timing of customer demand for branded products.

Research and development revenue increased by $2.0 million in the three months ended March 31, 2020, compared to the same period in 2019, primarily due to revenues from Novartis under the Novartis CodeEvolver ® Agreement and recognition of license fees from Takeda under the Takeda Strategic Collaboration and License Agreement, partially offset by prior year functional license fee revenue from Nestlé Health Science.

Total revenues increased by $2.6 million and $1.7 million in the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to higher research and development revenue offset by lower product revenue.

Product revenue decreased by $1.7 million and $4.6 million in the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to timing of customer demand for branded products.

Research and development revenue increased by $4.4 million and $6.4 million in the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019.

The increase in research and development revenue was primarily due to revenues from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement, recognition of license fees from Takeda under the Takeda Strategic Collaboration and License Agreement, and recognition of license fees from Porton, partially offset by lower revenue and prior year functional license fee revenue from Nestlé Health Science.

Cost and Operating Expenses

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The following table shows the amounts of our cost of product revenue, research and development expense, and selling, general and administrative expense from our unaudited condensed consolidated statements of operations for the periods presented (in thousands):

Three months ended March 31, Change

Three months ended June 30, Change Six months ended June 30, Change

(In Thousands) 2020 2019 $ % 2020 2019 $ %

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The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our unaudited condensed consolidated statements of operations for the periods presented (in thousands):

Three months ended March 31, Change

Three months ended June 30, Change Six months ended June 30, Change

(In Thousands) 2020 2019 $ % 2020 2019 $ %

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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.

Product gross margins were 50% in the three months ended March 31, 2020, compared to 45% in the corresponding period in 2019 due to variations in product mix.

Product gross margins were 62% and 56% in the three and six months ended June 30, 2020, respectively, compared to 56% and 50% and in the corresponding periods in 2019 due to variations in product mix.

Research and Development Expenses

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Research and development expenses are expensed when incurred.

Research and development expenses increased by $3.0 million, or 37%, in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount, and higher allocable expenses.

Research and development expenses increased by $2.6 million, or 31%, during the three months ended June 30, 2020 and by $5.5 million, or 34%, in the six months ended June 30, 2020, compared to the same periods in 2019.

The increase in research and development expenses was primarily due to an increase in costs associated with outside services relating to CMC and regulatory expenses, higher headcount, and higher allocable expenses partially offset by lower lab supplies and outside services.

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 costs), marketing costs, building lease costs, and depreciation and amortization expense.

Selling, general and administrative expenses increased by $0.6 million, or 7%, in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses.

Selling, general and administrative expenses increased by $0.6 million, or 8%, in the three months ended June 30, 2020.

and by $1.2 million, or 7%, in the six months ended June 30, 2020 compared to the same periods in 2019.

The increase in selling, general and administrative expense was primarily due to an increase in costs associated with legal and accounting fees, higher facilities and headcount, and licensed technology partially offset by lower allocable expenses and lower travel expenses.

Interest Income and Other Expense

Three months ended March 31, Change

Three months ended June 30, Change Six months ended June 30, Change

(In Thousands) 2020 2019 $ % 2020 2019 $ %

Interest income $ 57 $ 220 $ (163) (74)% 323 450 $ (127) (28)%

Other expense, net (86) (125) (39) (31)%

Other income (expense), net 13 (88) 101 115% (72) (211) 139 66%

Total other income $ 70 $ 132 $ (62) (47)% $ 251 $ 239 $ 12 5%

Interest Income

Interest income increased by $35 thousand in the three months ended March 31, 2020, compared to the same period in 2019 primarily due to higher levels of cash and cash equivalents which earned lower average interest rates.

Other Expense

Other expense decreased by $39 thousand in the three months ended March 31, 2020, compared to the same period in 2019, primarily due to an unrealized loss of $0.1 million investment loss in the prior year, partially offset by increases in losses due to fluctuations in foreign currency.

Interest income decreased by $0.2 million and $0.1 million in the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 due to lower average interest rates on declining average cash balances.

Other Income (Expense)

Other income increased by $0.1 million in three and six months ended June 30, 2020, respectively, compared to the same period in 2019 due to increases in fluctuations in foreign currency.

Provision for Income Taxes

We recognized an income tax provision of $5 thousand and $3 thousand in the three months ended March 31, 2020 and 2019, respectively.

The increase in income tax expense was due to additional interest recorded on uncertain tax positions from previous years.

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 for the first quarter of 2020 was $7.7 million, representing a net loss of $0.13 per basic and diluted share.

This compares to a net loss of $5.1 million, representing a net loss of $0.09 per basic and diluted share for the first quarter of 2019.

The increase in net loss for the three months ended March 31, 2020 compared to the same period of the prior year was primarily related to higher operating expenses and decreases in product revenue partially offset by increases in research and development revenue.

We recognized an income tax provision of $0.3 million in the three and six months ended June 30, 2020, respectively.

We recognized an income tax provision of $16 thousand and $19 thousand in the three and six months ended June 30, 2019, respectively.

The increase in income tax provision was primarily due to mandatory income tax withheld by a foreign taxing authority and additional interest recorded on uncertain tax positions from previous years.

The net loss for the second quarter of 2020 was $6.3 million, representing a net loss of $0.11 per basic and diluted share.

This compares to a net loss of $6.5 million, representing a net loss of $0.12 per basic and diluted share for the second quarter of 2019.

The decrease in net loss for the three months ended June 30, 2020 compared to the same period of the prior year was primarily related to increases in revenue partially offset by higher operating expenses and the impact of the COVID-19 pandemic.

For the six months ended June 30, 2020, the net loss was $14.0 million, representing a net loss of $0.24 per basic and diluted share.

This compares to a net loss of $11.6 million, representing a net loss of $0.21 per basic and diluted share for the six months ended June 30, 2019.

The increase in net loss for the six months ended June 30, 2020 compared to the same period of the prior year was primarily related to higher operating expenses and the impact of the COVID-19 pandemic partially offset by increases in revenue.

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

Revenue by segment

Three months ended March 31, Change

Three months ended June 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 7,506 $ 7,461 $ 14,967 $ 10,589 $ 1,730 $ 12,319 $ (3,083) (29) % $ 5,731 331 %

Revenues from the Performance Enzymes segment increased by $0.8 million, or 8%, to $10.9 million for the three months ended March 31, 2020, compared to $10.1 million for the three months ended March 31, 2019.

The increase in revenue is primarily due to recognition of r evenue from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement and revenue under a license agreement with Roche Sequencing Solutions, Inc.

licensing our EvoT4 DNA™ ligase high-performance molecular diagnostic enzyme, partially offset by a de crease in product revenue due to timing of customer demand for branded products.

Revenues from the Novel Biotherapeutics segment decreased by $1.7 million, or 31%, to $3.8 million for the three months ended March 31, 2020, compared to $5.5 million for the three months ended March 31, 2019.

The decrease in revenue is primarily due to a prior year functional license fee revenue from Nestlé Health Science partially offset by recognition of revenue under the Takeda Agreement and by a reduction in research and development service revenues.

Six months ended June 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ %

Product revenue $ 9,604 $ — $ 9,604 $ 14,236 $ — $ 14,236 $ (4,632) (33) % $ — — %

Research and development revenue 8,775 11,258 20,033 6,440 7,225 13,665 2,335 36 % 4,033 56 %

Total revenues $ 18,379 $ 11,258 $ 29,637 $ 20,676 $ 7,225 $ 27,901 $ (2,297) (11) % $ 4,033 56 %

Revenues from the Performance Enzymes segment decreased by $3.1 million, or 29%, to $7.5 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Revenues decreased by $2.3 million, or 11%, to $18.4 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to a de crease in product revenue due to timing of customer demand for branded products partially offset by recognition of r evenue from Novartis Pharma AG under the Novartis CodeEvolver ® Agreement, revenue under a license agreement with Roche Sequencing Solutions, Inc.

licensing our EvoT4 DNA™ ligase high-performance molecular diagnostic enzyme, and license fees from Porton.

Revenues from the Novel Biotherapeutics segment increased by $5.7 million, or 331%, to $7.5 million for the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Revenues increased by $4.0 million, or 56%, to $11.3 million for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily due to recognition of license fees from Takeda under the Takeda Strategic Collaboration and License Agreement, partially offset by a decrease in prior year functional license fee revenue from Nestlé Health Science.

Cost and Operating Expenses by Segment

Three months ended March 31, Change

Three months ended June 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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(1) Research and development expenses and Selling, general and administrative expenses exclude depreciation and amortization of finance leases.

Six months ended June 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ %

Cost of product revenue $ 4,240 $ — $ 4,240 $ 7,163 $ — $ 7,163 $ (2,923) (41) % $ — 0 %

Research and development (1)

10,693 10,415 21,108 9,576 6,172 15,748 1,117 12 % 4,243 69 %

Selling, general and administrative (1)

4,720 1,213 5,933 4,463 1,078 5,541 257 6 % 135 13 %

Total segment costs and operating expenses $ 19,653 $ 11,628 31,281 $ 21,202 $ 7,250 28,452 $ (1,549) (7) % $ 4,378 60 %

Corporate costs 11,293 10,510

Depreciation and amortization 998 802

Total costs and operating expenses $ 43,572 $ 39,764

(1) Research and development expenses and Selling, general and administrative expenses exclude depreciation and amortization of finance leases.

For a discussion of product cost of revenue, see " Results of Operations ".

Research and development expense in the Performance Enzymes segment increased by $1.3 million, or 28%, to $5.7 million in the first quarter of 2020, compared to the first quarter of 2019.

The increase was primarily due to an increase in costs associated with higher headcount and higher allocable expenses.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.2 million, or 12%, to $2.3 million in the first quarter of 2020, compared to the first quarter of 2019.

The increase was primarily due to an increase in costs associated with accounting fees and outside services, and higher facilities and headcount offset by lower allocable expenses.

Research and development expense in the Novel Biotherapeutics segment increased by $1.6 million, or 48%, to $4.9 million in the first quarter of 2020, compared to the first quarter of 2019.

The increase was primarily due to an increase in costs associated with outside services relating to CMC, regulatory expenses, higher outside services, higher headcount and higher stock compensation expense.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million, or 14%, to $0.6 million in the first quarter of 2020, compared to the first quarter of 2019.

The increase was primarily due to an increase in costs associated with higher headcount, higher allocable expense and higher stock-based compensation.

Research and development expense in the Performance Enzymes segment decreased by $0.1 million, or 3%, to $5.0 million in the second quarter of 2020, compared to the second quarter of 2019.

The decrease was primarily due to lower allocable expenses partially offset by an increase in costs associated with higher headcount and outside services.

Research and development expense in the Performance Enzymes segment increased by $1.1 million, or 12%, to $10.7 million in the six months ended June 30, 2020 compared to the corresponding period in 2019.

The increase was primarily due to an increase in costs associated with higher headcount partially offset by lower allocable expenses and lab supplies costs.

Selling, general and administrative expense in the Performance Enzymes segment increased by $13.0 thousand, or 1%, to $2.4 million in the second quarter of 2020, compared to the second quarter of 2019.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.3 million, or 6%, to $4.7 million in the six months ended June 30, 2020, compared to the corresponding period in 2019.

The increase was primarily due to higher stock compensation expense and allocable expenses partially offset by lower costs associated with travel and outside services.

Research and development expense in the Novel Biotherapeutics segment increased by $2.6 million, or 92%, to $5.5 million in the second quarter of 2020, compared to the second quarter of 2019.

Research and development expense in the Novel Biotherapeutics segment increased by $4.2 million, or 69%, to $10.4 million in the second quarter 2020, compared to the same corresponding period in 2019.

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

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million, or 11%, to $0.6 million in the second quarter of 2020, compared to the second quarter of 2019.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million, or 13%, to $1.2 million in the six months ended June 30, 2020, compared to the corresponding period in 2019.

The increase was primarily due to an increase in costs associated with higher headcount and higher stock-based compensation partially offset by a reduction in allocable expenses.

Liquidity and Capital Resources

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banks, and our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.

The following is a summary of cash and cash equivalents balances and working capital as of March 31, 2020 and December 31, 2019 (in thousands):

(In Thousands) March 31, 2020 December 31, 2019

The following is a summary of cash and cash equivalents balances and working capital as of June 30, 2020 and December 31, 2019 (in thousands):

(In Thousands) June 30, 2020 December 31, 2019

Cash and cash equivalents $ 75,649 $ 90,498

Working capital $ 87,554 $ 98,817

We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to our CodeEvolver ® protein engineering technology platform and expand our business development and collaboration with new customers.

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

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

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

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

We believe that we can utilize our current products and services, and develop new products and services, to increase our revenues and gross margins in future periods.

In addition to our existing cash and cash equivalents, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain royalty payments under our collaboration agreements.

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

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

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

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

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

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

We believe that we can utilize our current products and services, and develop new products and services, to increase our revenues and gross margins in future periods.

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

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

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

In September 2019, we entered into a Seventh Amendment to the Credit Facility whereby the draw period on the term debt was extended to September 30, 2020.

We may draw on the term debt at any time prior to September 30, 2020, subject to customary conditions for funding including, among others, that no event of default exists.

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

We may draw on the revolving line of credit at any time prior to the maturity date.

On October 1, 2023, any loans for Term Debt mature and the Revolving Line of Credit terminates.

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

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

The Credit Facility requires us to maintain compliance with certain financial covenants including attainment of certain lender-approved projections or maintenance of certain minimum cash levels.

Restrictive covenants in the Credit Facility restrict the payment of dividends or other distributions.

For additional information about our contractual obligations, see Note 11, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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

We are eligible to receive an additional $5.0 million upon satisfactory completion of the third technology transfer milestone.

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

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

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

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

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

In December 2018, we filed an automatic shelf registration statement on Form S-3 (the “2018 Registration Statement”) with the SEC, under which we may sell common stock, preferred stock, debt securities, warrants, purchase contract and/or units, which immediately became effective upon filing.

In 2019 we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital, LLC (“Casdin”) pursuant to which we issued and sold to Casdin 3,048,780 shares of our common stock at a purchase price of $16.40 per share (the “Private Offering”).

After deducting issuance costs of $0.1 million from the Private Offering, our net proceeds were $49.9 million.

In March 2020, we entered into a Strategic Collaboration and License Agreement with Takeda under which we received an up-front non-refundable cash payment of $8.5 million in March 2020.

Other potential payments from Takeda include (i) of research and development fees and pre-clinical approval milestones for initial programs of up to $22.3 million, (ii) development and commercialization-based milestones, per target gene, of up to $100.0 million, the modulation of which leads to treatment of certain diseases by the applicable product, and (iii) tiered royalties, at percentages ranging from the middle-single digit to low single-digit of sales of the applicable product.

Subsequently in 2019, we entered into a Securities Purchase Agreement with an affiliate of Casdin Capital, LLC (“Casdin”) pursuant to which we issued and sold to Casdin 3,048,780 shares of our common stock at a purchase price of $16.40 per share (the “Private Offering”).

After deducting issuance costs of $0.1 million from the Private Offering, our net proceeds were $49.9 million.

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

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

In September 2019, we entered into a Seventh Amendment to the Credit Facility whereby the draw period on the term debt was extended to September 30, 2020.

We may draw on the term debt at any time prior to September 30, 2020, subject to customary conditions for funding including, among others, that no event of default exists.

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

We may draw on the revolving line of credit at any time prior to the maturity date.

On October 1, 2023, any loans for Term Debt mature and the Revolving Line of Credit terminates.

No amounts were drawn down under the credit facility as of June 30, 2020.

At June 30, 2020, we believe we were in compliance with the covenants for the Credit Facility.

The Credit Facility requires us to maintain compliance with certain financial covenants including attainment of certain lender-approved projections or maintenance of certain minimum cash levels.

Restrictive covenants in the Credit Facility restrict the payment of dividends or other distributions.

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

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We are unable to fully determine and quantify the extent to which delays in our R&D projects will be affected by the COVID-19 pandemic.

We are continuing to assess the potential impact of the COVID-19 pandemic on our business and operations, including our product sales, R&D service revenue, expenses and manufacturing.

Our Redwood City employees have been working from home since mid-March 2020, while ensuring essential staffing levels in our operations remain in place.

However, we are unable to fully determine and quantify the extent to which this pandemic affected our total revenues due to complex accounting judgments.

In the U.S., the impact of COVID-19, including governmental orders ("Orders") governing the operation of businesses during the pandemic, had caused the temporary closure of our Redwood City, California facilities from mid-March 2020 through the end of April and has disrupted our research and development operations.

In May 2020, we initiated limited operations and gradually ramped up our R&D operations so that we are currently operating utilizing the majority of our normal R&D capacity.

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Risk Factors included in this Quarterly Report on Form 10-Q.

As of March 31, 2020, we had cash and cash equivalents of $87.3 million and $15.0 million available to borrow under the Credit Facility.

As of June 30, 2020, we had cash and cash equivalents of $75.6 million and $15.0 million available to borrow under the Credit Facility.

Our liquidity is dependent upon our cash and cash equivalents, cash flows provided by operating activities and the continued availability of borrowings under our Credit Facility.

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If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

The following is a summary of cash flows for three months ended March 31, 2020 (in thousands):

Three months ended March 31,

The following table is our statements of cash flows for six months ended June 30, 2020 and 2019:

Six months ended June 30,

(In Thousands) 2020 2019

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Net cash used in investing activities (2,490) (1,257)

Net cash used in financing activities (1,019) (2,082)

Net decrease in cash, cash equivalents and restricted cash $ (3,205) $ (5,378)

Net cash provided by (used in) financing activities (903) 49,851

Net increase (decrease) in cash, cash equivalents and restricted cash $ (14,891) $ 40,685

Cash Flows from Operating Activities

Cash used in operating activities was $1.4 million net for the three months ended March 31, 2020, which resulted from a net loss of $7.7 million for the three months ended March 31, 2020 adjusted for non-cash charges for depreciation of $0.4 million, ROU lease asset amortization expense of $0.7 million and stock-based compensation of $2.2 million.

Cash used in operating activities was $11.5 million net for the six months ended June 30, 2020, which resulted from a net loss of $14.0 million for the six months ended June 30, 2020 adjusted for non-cash charges for depreciation of $0.9 million, ROU lease asset amortization expense of $1.3 million and stock-based compensation of $4.1 million.

Additional cash used by changes in operating assets and liabilities was $3.8 million.

Changes in operating assets and liabilities included an increase of $6.5 million in deferred revenue and $3.1 million in other accrued liabilities, partially offset by a $3.9 million increase in unbilled receivables and a $1.9 million decrease accrued compensation.

Cash used in operating activities was $2.9 million net for the three months ended March 31, 2019, which resulted from a net loss of $5.1 for the three months ended March 31, 2019 adjusted for non-cash charges for depreciation of $0.3 million, ROU lease asset amortization expense of $0.8 million and stock-based compensation of $2.1 million.

Changes in operating assets and liabilities included a $2.3 million decrease in unbilled receivables and a $5.0 million decrease in accounts receivables, partially offset by an increase of $3.0 million in deferred revenue and $1.9 million in other accrued liabilities.

Cash used in operating activities was $7.9 million net for the six months ended June 30, 2019, which resulted from a net loss of $11.6 million for the six months ended June 30, 2019 adjusted for non-cash charges for depreciation of $0.7 million, ROU lease asset amortization expense of $1.5 million and stock-based compensation of $4.1 million.

Additional cash used by changes in operating assets and liabilities was $2.7 million.

Changes in operating assets and liabilities included an increase of $1.1 million in accounts receivable, a decrease of $1.0 million of accounts payable, and a decrease of $2.9 million in deferred revenue.

Changes in operating assets and liabilities included an increase of $0.9 million in prepaid expenses and other current assets due mainly to stock exercises and a decrease of $1.6 million in accounts payable due to timing of vendor payments.

Cash Flows from Investing Activities

Cash used in investing activities was $0.8 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively, which was primarily attributable to purchase of property and equipment.

Cash used in investing activities was $2.5 million and $1.3 million for the six months ended June 30, 2020 and 2019, respectively.

Cash used in investing activities for the six months ended June 30, 2020 was primarily attributable to the purchase of 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and $1.5 million for purchases of property and equipment.

Cash used in investing activities for the six months ended June 30, 2019 was primarily attributable to the purchase of property and equipment.

Cash Flows from Financing Activities

Cash used in financing activities was $1.0 million for the three months ended March 31, 2020 and primarily included taxes paid related to net share settlement of equity awards.

Cash used in financing activities was $2.1 million for the three months ended March 31, 2019 which included $0.8 million of proceeds from exercises of stock options offset by $2.8 million for taxes paid related to net share settlement of equity awards.

Cash used in financing activities was $0.9 million for the six months ended June 30, 2020 and primarily included taxes paid related to net share settlement of equity awards.

Cash provided by financing activities was $49.9 million for the six months ended June 30, 2019 which included $49.9 million of net proceeds from a private placement in June 2019 and $2.8 million of proceeds from exercises of stock options offset by $2.8 million for taxes paid related to net share settlement of equity awards.

Contractual Obligations

The following table summarizes our significant contractual obligations at March 31, 2020 (in thousands):

The following table summarizes our significant contractual obligations at June 30, 2020 (in thousands):

Payments due by period

(In Thousands) Total Less than 1 year 1-3 years 4-5 years >5 years

Finance lease obligations $ 9 $ 9 $ — $ — $ —

Operating leases obligations (1)

33,333 4,136 8,677 9,455 11,065

Total $ 33,762 $ 3,513 $ 8,579 $ 9,385 $ 12,285

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

(1) Represents future minimum lease payments under non-cancellable operating leases in effect as of June 30, 2020 for our facilities in Redwood City, California.

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

Minimum payments have not been reduced by future minimum sublease rentals of $0.1 million to be received under non-cancellable subleases.

In February 2019, we have entered into an Eighth Amendment to the Lease (the “Eighth Amendment”) with MetLife for our facilities, extending the lease terms from May 2027 to May 2029.

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Development and manufacturing services agreements September 2019 3,785

Strategic collaboration and license agreement March 2020 364

Total other commitments $ 4,853

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

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

At June 30, 2020, we have not drawn from the Credit Facility.

We may draw on the Revolving Line of Credit at any time prior to the September 30, 2020 maturity date.

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A failure to comply with these covenants could permit the lender to exercise remedies against us and the collateral securing the Credit Facility, including foreclosure of our properties securing the Credit Facilities and our cash.

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

At June 30, 2020, we were in compliance with the covenants for the Credit Facility.

For additional information about our credit facility, see Note 11 "Commitments and Contingencies" in the accompanying notes to the unaudited condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies or estimates during the three months ended March 31, 2020 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020, except for critical accounting policies and estimates for credit losses and for goodwill impairment.

The changes in critical accounting policies or estimates are due to adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326):

There have been no material changes to our critical accounting policies or estimates during the three and six months ended June 30, 2020 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020, except for changes due to adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, and ASU No.

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Allowance for credit losses

The allowance for credit losses is a valuation account that reflects recognition of losses under the current expected credit model.

The allowance for credit losses is a valuation account that reflects recognition of losses under the current expected credit loss model.

The allowance for credit losses is deducted from the amortized cost basis of financial assets and is presented net on the balance sheet.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis