What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 177 added, 172 removed, 380 unchanged (48% of the section changed)

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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 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 for the potential treatment of

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

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As a result of the option exercise, we earned a milestone and recognized $3.0 million in revenues in the first quarter of 2019.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114, with the exception of the completion of an extension study, CDX-6114-004, which was substantially completed in the fourth quarter of 2019.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114 was substantially completed in the fourth quarter of 2019.

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

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The Strategic Collaboration Agreement was extended through December 2021.

Using our CodeEvolver ® protein engineering platform technology, we have also developed a pipeline of other biotherapeutic drug candidates, which are in preclinical development.

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 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.

Using our CodeEvolver ® protein engineering platform technology, we have also developed a pipeline of other biotherapeutic drug candidates, which are in preclinical development.

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

For further description of our business segments, see Note 13, "Segment, Geographical and Other Revenue Information" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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economy and other economies worldwide.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide.

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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.

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.

We believe that these disruptions have had a negative impact on revenue for the nine months ending September 30, 2020, although we are unable to fully determine and quantify the extent to which this pandemic has affected the amount and timing of our total revenues.

The extent to which the pandemic may impact our business operations and operating results will continue to remain highly dependent on future developments, which are uncertain and cannot be predicted with confidence.

R&D operations for several projects were temporarily suspended from mid-March 2020 through the end of April in accordance with these Orders.

In May 2020, we initiated limited R&D operations and have gradually ramped up operations such 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.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain.

programs that we may undertake to address financial and operations challenges faced by our customers.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations in the future is uncertain.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

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

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

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.

Total revenues decreased to $18.4 million for the third quarter of 2020 from $21.9 million for the third quarter of 2019, due to decreases in both research and development and product revenues.

Product revenue for the third quarter of 2020 decreased by $2.0 million to $8.4 million from $10.4 million for the third quarter of 2019 due to variability of customer demand for both generic and branded products.

Research and development revenue decreased by $1.6 million for the third quarter of 2020 to $10.0 million from $11.6 million in the third quarter of 2019, primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement and a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by the recognition of license fees from Takeda under the Takeda Strategic Collaboration and License Agreement.

Product gross margins were 57% for the third quarter of 2020, compared to 51% in the third 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 $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.

Research and development expense increased by $3.3 million, or 38%, to $12.0 million for the third quarter of 2020, compared to the third 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 $0.9 million, or 12%, to $8.8 million for the third quarter of 2020 compared to the third quarter of 2019, primarily due to an increase in costs associated with headcount, consultants, facilities, outside services and insurance, partially offset by lower recruiting costs and lower allocable expenses.

Net loss for the third quarter of 2020 was $6.1 million, representing a net loss of $0.10 per basic and diluted share.

This compares to net income of $0.3 million, representing net income of $0.01 per basic and diluted share for the third quarter of 2019.

The increase in net loss for the third quarter over the same period of the prior year is primarily related to decreases in research and development and product revenues and higher research and development expenses.

Cash and cash equivalents decreased by $19.0 million to $71.5 million as of September 30, 2020 compared to $90.5 million as of December 31, 2019.

Net cash used in operating activities increased to $15.0 million in the nine months ended September 30, 2020 compared to $8.9 million in the nine months ended September 30, 2019.

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

In June 2017, we entered into a loan and security agreement that allows us to borrow up to $10.0 million under a term loan, and up to $5.0 million under a revolving credit facility with 80% of certain eligible accounts receivable as a borrowing base (the "Credit Facility").

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

In September 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.

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.

In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the term debt and the Revolving Line of Credit at any time prior to October 1, 2021 and October 1, 2024, respectively.

Draws on the term debt are subject to customary conditions for funding including, among others, that no event of default exists.

As of September 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 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.

Revenues decreased by $7.4 million, or 36%, to $13.0 million for the third quarter of 2020, compared to the third quarter of 2019.

Product gross margins were 57% in the third quarter of 2020, compared to 51% in the corresponding period in 2019.

Research and development expense decreased by $0.1 million, or 2%, to $5.2 million for the third quarter of 2020, compared to the third quarter of 2019, primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses and higher headcount.

Selling, general and administrative expense increased by $0.6 million, or 31%, to $2.7 million for the third quarter of 2020, compared to the third quarter of 2019, primarily due to an increase in costs associated with headcount, partially offset by lower allocable expenses.

Novel Biotherapeutics

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.

Revenues increased by $3.9 million, or 263%, to $5.4 million for the third quarter of 2020, compared to the third quarter of 2019, primarily due to recognition of license and research and development fees from Takeda under the Takeda Strategic Collaboration and License Agreement and research and development revenue from Nestlé Health Science.

Research and development expense increased by $3.4 million, or 109%, to $6.4 million for the third quarter of 2020, compared to the third quarter of 2019, primarily due to an increase in costs associated with outside services relating to CMC regulatory expenses, higher outside services and higher headcount.

Selling, general and administrative expense decreased by $0.2 million, or 25%, to $0.5 million for the third quarter of 2020 compared to the third quarter of 2019, primarily due to lower allocable expense and outside services.

GSK Platform Technology Transfer, Collaboration and License Agreement

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

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 and six months ended June 30, 2020 and 2019.

We recognized no research and development revenue for the three and nine months ended September 30, 2020.

In three and nine months ended September 30, 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.

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 $0.2 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 in three and six months ended June 30, 2019, respectively, under the amendment.

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

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

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.

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

We recognized research and development revenues of $1.1 million and $2.1 million for the three and nine months ended September 30, 2020, respectively, compared to $1.1 million and $4.0 million for the three and nine months ended September 30, 2019, respectively, under Merck CodeEvolver ® Agreement.

Merck Sitagliptin Catalyst Supply Agreement

In February 2012, we entered into a five-year Sitagliptin Catalyst Supply Agreement (“Sitagliptin Catalyst Supply Agreement”) with Merck whereby Merck may obtain commercial scale enzyme for use in the manufacture of Januvia ® , its product based on the active ingredient sitagliptin.

In December 2015, Merck exercised its option under the terms of the sitagliptin Catalyst Supply Agreement to extend the agreement for an additional five years through February 2022.

Effective as of January 2016, we and Merck amended the Sitagliptin Catalyst Supply Agreement to prospectively provide for variable pricing based on the cumulative volume of sitagliptin catalyst purchased by Merck and to allow Merck to purchase a percentage of its requirements for sitagliptin catalyst from a specified third-party supplier.

Merck received a distinct, functional license to manufacture a portion of its demand beginning January 1, 2018, which we recognized as research and development revenue.

We have determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin catalyst purchased by Merck, provides Merck material rights and we are recognizing product revenues using the alternative method.

Under the alternative approach, we estimate the total expected consideration and allocate it proportionately with the expected sales.

The Sitagliptin Catalyst Supply Agreement requires Merck to pay an annual fee for the rights to the sitagliptin technology each year for the term of the Sitagliptin Catalyst Supply Agreement.

Amounts of annual license fees are based on contractually agreed prices and are on a declining scale over the term of the contract.

Pursuant to the terms of the Sitagliptin Catalyst Supply Agreement, Merck may purchase supply from us for a fee based on contractually stated prices.

We recognized revenue of $3.2 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, compared to $3.6 million and $11.4 million in the three and nine months ended September 30, 2019, respectively, in product revenue under this agreement.

Revenues from Merck under the Sitagliptin Catalyst Supply Agreement were 17% and 15% of our total revenues for the three and nine months ended September 30, 2020, respectively, compared to 16% and 23% in the three and nine months ended September 30, 2019, respectively.

As the active pharmaceutical ingredient sitagliptin approaches its generic phase, there is no guarantee that the revenues under this agreement will continue at these levels in future years.

As of September 30, 2020, we recorded revenue of $3.2 million from sitagliptin products that were recognized over time based on the progress of the manufacturing process.

These products will be shipped within the six month period following the end of the quarter.

The contract asset balances were partially offset by contract liabilities as they are under the same contract.

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

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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.

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 months ended September 30, 2020 and nominal revenue for the nine months ended September 30, 2020 compared to $0.1 million and $1.8 million for the three and nine months ended September 30, 2019, respectively.

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

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The option payment of $3.0 million was recognized in the first quarter of 2019 as research and development revenue.

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.

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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.

Under the Strategic Collaboration Agreement and development agreement, we recognized research and development fees of $2.8 million and $6.1 million for the three and nine months ended September 30, 2020, respectively, compared to $1.4 million and $3.9 million for the three and nine months ended September 30, 2019, respectively.

Strategic Collaboration Agreement

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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, $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.

We received an initial collaboration fee of $0.5 million within 30 days of the effective date of the Porton Agreement, $1.5 million upon the first anniversary of the effective date of the agreeme nt, and $1.0 million upon the second anniversary of the effective date of the agreement and we are eligible to receive $1.0 million on the third anniversary of the effective date of the agreement.

We completed the technica l transfer in the fourth quarter of 2018 and recognized $2.8 million in research and development revenue.

We recognized revenue related to the functional license provided to Porton at a point in time when control of the license was transferred to the customer.

We recognized research and development revenue related to the Porton Agreement of nil and $1.1 million in the three and nine months ended September 30, 2020, respectively, and no revenue in the three and nine months ended September 30, 2019.

Platform Technology Transfer and License Agreement

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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.

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.

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

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.

We recognized $0.9 million and $4.1 million in research and development revenue for the three and nine months ended September 30, 2020, respectively, and $3.8 million in revenue for the three and nine months ended September 30, 2019, respectively, from the Novartis CodeEvolver ® Agreement.

Strategic Collaboration and License Agreement

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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.

We recognized research and development revenue related to the Takeda Agreement of $2.6 million and $10.6 million in the three and nine months ended September 30, 2020, respectively.

Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical approval milestones for initial programs to earn $18.3 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

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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.

We did not receive any shares of MAI's Series A preferred stock based on services provided in the nine months ended September 30, 2020.

Under the MAI Agreement, we 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.

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.

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(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.

We recognized $0.5 million in research and development revenue in the three and nine months ended September 30, 2020 from transactions with MAI.

At September 30, 2020, we had $0.5 million of financial assets due from MAI.

Payment for the services was subsequently received in the form of additional Series A preferred stock of MAI in October.

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 June 30, Change Six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

2020 2019 $ % 2020 2019 $ %

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Total costs and operating expenses 24,449 21,647 2,802 13% 68,019 61,410 6,609 11%

Loss from operations (6,107) (6,623) 516 8% (13,935) (11,863) (2,072) (17)%

Income (loss) from operations (6,064) 259 (6,323) (2,441)% (19,996) (11,602) (8,394) (72)%

Interest income 39 480 (441) (92)% 362 929 (567) (61)%

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)%

Provision for income taxes 307 16 291 1,819% 312 19 293 1,542%

Net loss $ (6,344) $ (6,507) $ 163 3% $ (13,996) $ (11,643) $ (2,353) (20)%

Other expenses, net (50) (403) 353 88% (125) (615) 490 80%

Income (loss) before income taxes (6,075) 336 (6,411) (1,908)% (19,759) (11,288) (8,471) (75)%

Provision for (benefit from) income taxes 19 (7) 26 371% 331 12 319 2,658%

Net income (loss) $ (6,094) $ 343 $ (6,437) (1,877)% $ (20,090) $ (11,300) $ (8,790) (78)%

Our revenues comprise product revenue and research and development revenue as follows:

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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 June 30, Change Six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 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 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.

Total revenues decreased by $3.5 million in the three months ended September 30, 2020 compared to the same period in 2019 due to lower research and development revenue and lower product revenue.

Total revenues decreased by $1.8 million in the nine months ended September 30, 2020 compared to the same period in 2019 due to lower product revenue offset by higher research and development revenue.

Product revenue decreased by $2.0 million and $6.6 million in the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, primarily due to variability of customer demand for generic and branded products.

Research and development revenue decreased by $1.6 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement and a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by license fees and research and development revenue from Takeda under the Takeda Agreement.

Research and development revenue increased by $4.8 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to the recognition of license fees and research and development revenue 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, lower revenue from a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement.

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 June 30, Change Six months ended June 30, Change

Three months ended September 30, Change Nine months ended September 30, Change

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

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Cost of Product Revenue and Product Gross Margin

Our revenues from product revenue are derived entirely from our Performance Enzymes segment.

Our product revenues are derived entirely from our Performance Enzymes segment.

Revenues from the Novel Biotherapeutics segment are from collaborative research and development activities and not from product revenue.

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

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

Three months ended September 30, Change Nine months ended September 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 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.

Product gross margins were 57% and 56% in the three and nine months ended September 30, 2020, respectively, compared to 51% 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 $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.

Research and development expenses increased by $3.3 million, or 38%, during the three months ended September 30, 2020 and by $8.8 million, or 35%, in the nine months ended September 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 consultants.

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 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.

Selling, general and administrative expenses increased by $0.9 million, or 12%, in the three months ended September 30, 2020 and by $2.1 million, or 9%, in the nine months ended September 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 higher facilities and headcount, legal and accounting fees, outside services, and licensed technology partially offset by lower allocable expenses, lower travel expenses and lower recruiting costs.

Interest Income and Other Expense

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

Three months ended September 30, Change Nine months ended September 30, Change

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

Interest income $ 39 $ 480 $ (441) (92)% $ 362 $ 929 $ (567) (61)%

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

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

Other expenses, net (50) (403) 353 88% (125) (615) 490 80%

Total other income, net $ (11) $ 77 $ (88) (114)% $ 237 $ 314 $ (77) (25)%

Interest Income

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 $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.

Interest income decreased by $0.4 million and $0.6 million in the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 due to lower average interest rates on declining average cash balances.

Other Expenses, net

Other expenses decreased by $0.4 million and $0.5 million in three and nine months ended September 30, 2020, respectively, compared to the same period in 2019 due to prior year write-down of $0.4 million of our investment in CO 2 Solutions and fluctuations in foreign currency.

Provision for and Benefit from Income Taxes

We recognized an income tax provision of $19 thousand and $0.3 million in the three and nine months ended September 30, 2020, respectively.

We recognized an income tax benefit of $7 thousand and an income tax provision of $12 thousand in the three and nine months ended September 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.

Net Income (Loss)

The net loss for the third quarter of 2020 was $6.1 million, representing a net loss of $0.10 per basic and diluted share.

This compares to a net income of $0.3 million, representing a net income of $0.01 per basic and diluted share for the third quarter of 2019.

For the nine months ended September 30, 2020, the net loss was $20.1 million, representing a net loss of $0.34 per basic and diluted share.

This compares to a net loss of $11.3 million, representing a net loss of $0.20 per basic and diluted share for the nine months ended September 30, 2019.

The increase in net loss for the three and nine months ended September 30, 2020 compared to the same period of the prior year was primarily related to higher operating expenses and lower in revenues.

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

Revenue by segment

Three months ended June 30, Change

Three months ended September 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 13,005 $ 5,380 $ 18,385 $ 20,424 $ 1,482 $ 21,906 $ (7,419) (36) % $ 3,898 263 %

Six months ended June 30, Change

Nine months ended September 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 31,385 $ 16,638 $ 48,023 $ 41,100 $ 8,708 $ 49,808 $ (9,715) (24) % $ 7,930 91 %

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.

Revenues from the Performance Enzymes segment decreased by $7.4 million, or 36%, to $13.0 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

Revenues decreased by $9.7 million, or 24%, to $31.4 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement and a prior year milestone payment from GSK under the GSK CodeEvolver ® Agreement, partially offset by research and development revenue from Takeda under the Takeda Agreement.

Revenues from the Novel Biotherapeutics segment increased by $3.9 million, or 263%, to $5.4 million for the three months ended September 30, 2020, compared to the three months ended September 30, 2019.

Revenues increased by $7.9 million, or 91%, to $16.6 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, primarily due to recognition of license and research and development 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 June 30, Change

Three months ended September 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

Nine months ended September 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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

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.

Research and development expense in the Performance Enzymes segment decreased by $0.1 million, or 2%, to $5.2 million in the third quarter of 2020, compared to the third quarter of 2019.

Research and development expense in the Performance Enzymes segment increased by $1.0 million, or 7%, to $15.9 million in the nine months ended September 30, 2020 compared to the corresponding period in 2019.

The increase was primarily due to an increase in costs associated with outside services relating to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses and higher headcount.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.6 million, or 31%, to $2.7 million in the third quarter of 2020, compared to the third quarter of 2019.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.9 million, or 14%, to $7.4 million in the nine months ended September 30, 2020, compared to the corresponding period in 2019.

The increase was primarily due to an increase in costs associated with headcount, partially offset by lower allocable expenses.

Research and development expense in the Novel Biotherapeutics segment increased by $3.4 million, or 109%, to $6.4 million in the third quarter of 2020, compared to the third quarter of 2019.

Research and development expense in the Novel Biotherapeutics segment increased by $7.6 million, or 82%, to $16.8 million in the nine months ended September 30, 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, higher outside services and higher headcount.

Selling, general and administrative expense in the Novel Biotherapeutics segment decreased by $0.2 million, or 25%, to $0.5 million in the third quarter of 2020, compared to the third quarter of 2019.

Selling, general and administrative expense in the Novel Biotherapeutics segment decreased by $40 thousand, or 2%, to $1.7 million in the nine months ended September 30, 2020, compared to the corresponding period in 2019.

The decrease was primarily due to lower allocable expense and outside services.

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 June 30, 2020 and December 31, 2019 (in thousands):

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

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

September 30, 2020 December 31, 2019

Cash and cash equivalents $ 71,516 $ 90,498

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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 the Company's 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

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

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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 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, 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 option payment of $3.0 million was recognized in the first quarter of 2019 as research and development revenue.

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.

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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 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.

In September 2020, we entered into an Eighth Amendment to the Credit Facility whereby we may draw on the Term Debt and the Revolving Line of Credit at any time prior to the October 1, 2021 and October 1, 2024, respectively.

Draws on the term debt are subject to customary conditions for funding including, among others, that no event of default exists.

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, 2024, 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.

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

At September 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.

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economy and other economies worldwide.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic and the extent and severity of the impact on our customers, new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide.

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

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.

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.

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.

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

While we believe we have adequate cash on hand to manage through the disruptions being caused by the COVID-19 pandemic, the extent to which the pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

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

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.

As of September 30, 2020, we had cash and cash equivalents of $71.5 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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Our need for additional capital will depend on many factors, including the financial success of our business, the spending required to develop and commercialize new and existing products, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, and the potential costs for the filing, prosecution, enforcement and defense of patent claims, if necessary.

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

However, we may need additional capital if our current plans and assumptions change.

However, we may need additional capital if our current plans and assumptions change, or if we are unable to execute on our current operating plan.

In addition, we may choose to seek other sources of capital even if we believe we have generated sufficient cash flows to support our operating needs.

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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 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

The following table is our statements of cash flows for nine months ended September 30, 2020 and 2019 (in thousands):

Nine months ended September 30,

Net cash used in operating activities $ (14,972) $ (8,899)

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Cash Flows from Operating Activities

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.

Cash used in operating activities was $15.0 million net for the nine months ended September 30, 2020, which resulted from a net loss of $20.1 million for the nine months ended September 30, 2020 adjusted for non-cash charges for depreciation of $1.4 million, ROU lease asset amortization expense of $2.0 million, stock-based compensation of $6.1 million and allowance of credit loss of $40 thousand.

Additional cash used by changes in operating assets and liabilities was $4.3 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.

Changes in operating assets and liabilities included an increase of $4.9 million in unbilled receivables, an increase of $1.6 million in accounts receivables, and a decrease of $1.9 million in other long-term liabilities partially offset by an increase of $2.3 million in other accrued liabilities and an increase of $2.0 million in deferred revenue.

Cash used in operating activities was $8.9 million net for the nine months ended September 30, 2019, which resulted from a net loss of $11.3 million for the nine months ended September 30, 2019 adjusted for non-cash charges for depreciation of $1.1 million, ROU lease asset amortization expense of $2.2 million and stock-based compensation of $5.8 million.

Additional cash used by changes in operating assets and liabilities was $6.7 million.

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.

Changes in operating assets and liabilities included a decrease of $5.0 million in deferred revenue, a decrease of $1.3 million of accounts payable, and an increase of $1.2 million of contract assets.

Cash Flows from Investing Activities

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 used in investing activities was $3.3 million for the nine months ended September 30, 2020 and 2019.

Cash used in investing activities for the nine months ended September 30, 2020 was primarily attributable to $2.3 million for purchases of property and equipment and the purchase of 1,587,050 shares of MAI's Series A preferred stock for $1.0 million.

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

Cash Flows from Financing Activities

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.

Cash used in financing activities was $0.8 million for the nine months ended September 30, 2020 which included $1.3 million for taxes paid related to net share settlement of equity awards offset by $0.5 million of proceeds from exercises of stock options.

Cash provided by financing activities was $51.5 million for the nine months ended September 30, 2019 which included $49.9 million of net proceeds from a private placement in June 2019 and $4.6 million of proceeds from exercises of stock options offset by $2.9 million for taxes paid related to net share settlement of equity awards.

Contractual Obligations

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

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

Payments due by period

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

Total Less than 1 year 1-3 years 4-5 years >5 years

Operating leases obligations (1)

32,313 4,167 8,776 9,525 9,845

(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.

(1) Represents future minimum lease payments under non-cancellable operating leases in effect as of September 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.

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.

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

For additional information see Note 11, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements.

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Other Commitment Agreement Type Agreement Date Future Minimum Payment

(In Thousands)

Manufacture and supply agreement with expected future payment date of December 2022 April 2016 $ 532

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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 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.

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

Loans made under the Term Debt bear interest through maturity at a variable rate based upon the LIBOR rate plus 3.6%.

Advances made under the Revolving Line of Credit bear interest at a variable annual rate equal to the greater of (i) 1.00% above the prime rate and (ii) 5.00%.

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

We may draw on the Term Debt and the Revolving Line of Credit at any time prior to the October 1, 2021 and October 1, 2024, respectively.

Term loans drawn under the Term Debt mature and the Revolving Line of Credit terminates on October 1, 2024.

Term loans made under the Term Debt bear interest at variable rate through maturity at greater of (i) 3.75% and (ii) the sum of (A) Index Rate (prime rate published in the Money Rates section of the Western Edition of The Wall Street Journal plus (B) 0.50%.

Advances made under the Revolving Line of Credit bear interest at a variable annual rate equal to the greater of (i) 4.25% and (ii) the sum of (A) the prime rate plus (B) 1.00%.

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

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

At September 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 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.

As of September 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 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):

There have been no material changes to our critical accounting policies or estimates during the three and nine months ended September 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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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