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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 253 added, 367 removed, 190 unchanged (77% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 28, 2020 (the “Annual Report”).

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 1, 2021 (the “Annual Report”).

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

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Business Overview

We discover, develop and sell proteins that deliver value to our clients in a growing set of industries.

We view proteins as a vast untapped source of value-creating materials, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel proteins, both as proprietary Codexis products and in partnership with our customers.

We are a pioneer in the harnessing of computational technologies to drive biology advancements.

We discover, develop and sell enzymes and other proteins that deliver value to our clients in a growing set of industries.

We view proteins as a vast, largely untapped source of value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.

We are a pioneer in harnessing computational technologies to drive biology advancements.

Since 2002, we have made substantial investments in the development of our CodeEvolver ® protein engineering technology platform, the primary source of our competitive advantage.

Our technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine our large and continuously growing library of protein variants’ performance attributes.

These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling delivery of targeted performance enhancements in a time-efficient manner.

In addition to its computational prowess, our CodeEvolver ® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and process development which are all coordinated to create our novel protein innovations.

Our approach to developing commercially viable biocatalytic manufacturing processes begins by conceptually designing the most cost-effective and practical process for a targeted product.

We then develop optimized protein catalysts to enable that process design using our CodeEvolver ® protein engineering platform technology.

Engineered protein catalyst candidates many thousands for each protein engineering project are then rapidly screened and validated in high throughput screening under relevant manufacturing operating conditions.

This approach results in an optimized protein catalyst enabling cost-efficient processes that typically are relatively simple to run in conventional manufacturing equipment.

This also allows for the efficient technical transfer of our process to our manufacturing partners.

Our technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine the structural and performance attributes of our large and continuously growing library of protein variants.

These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted performance enhancements.

In addition to its computational prowess, our CodeEvolver ® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and bioprocess development which are all coordinated to rapidly innovate novel, fit-for-purpose products.

The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex chemicals.

This begins by conceptually designing the most cost-effective and practical process for a targeted product.

We then develop optimized biocatalysts to enable the designed process, using our CodeEvolver ® platform.

Engineered biocatalyst candidates, numbering many thousands for each project, are then rapidly screened and validated using high throughput methods under process-relevant operating conditions.

This approach results in an optimized biocatalyst that enables cost-efficient processes that are relatively simple to run in conventional manufacturing equipment.

This also allows for efficient technical transfer of our processes to our manufacturing partners.

The successful embodiment of our CodeEvolver ® protein engineering technology platform in commercial manufacturing processes requires well-integrated expertise in a number of technical disciplines.

In addition to those directly involved in practicing our CodeEvolver ® protein engineering platform technology, such as molecular biology, enzymology, microbiology, cellular engineering, metabolic engineering, bioinformatics, biochemistry and high throughput analytical chemistry, our process development projects also involve integrated expertise in organic chemistry, chemical process development, chemical engineering, fermentation process development and fermentation engineering.

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

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 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.

These target industries consist of several large market verticals, including food and food ingredients, animal feed, consumer care, flavors, fragrances and agricultural chemicals.

In addition, we are using our technology to develop enzymes for customers using next generation sequencing ("NGS") and polymerase chain reaction ("PCR/qPCR") for in vitro molecular diagnostic and genomic research applications.

In addition to those competencies directly integrated in our CodeEvolver ® protein engineering platform, 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, bioprocess development and fermentation engineering.

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

We initially commercialized our CodeEvolver ® protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals, which remains a primary business focus.

Our customers, which include many large, global pharmaceutical companies, use our technology, products and services in their process development and in manufacturing.

Additionally, we have licensed our proprietary CodeEvolver ® protein engineering technology platform to global pharmaceutical companies enabling them to use this technology, in house, to engineer enzymes for their own businesses.

Most recently, in May 2019, we entered into the Novartis CodeEvolver ® Agreement with Novartis.

The Novartis CodeEvolver ® Agreement (our third such agreement with large pharma companies) 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 biocatalysts and enzyme products for use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals.

In addition, we are using our technology to develop enzymes for various life science related applications, such as next generation sequencing (“NGS”) and polymerase chain reaction (“PCR/qPCR”) for in vitro molecular diagnostic and genomic research applications.

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

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

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.

Our first lead program was for the potential treatment of phenylketonuria ("PKU") in humans.

We have been using the CodeEvolver ® protein engineering technology platform to develop early stage, novel biotherapeutic product candidates, both in partnership with customers and for our own proprietary Codexis drug candidates.

Our first program was for the potential treatment of phenylketonuria ("PKU") in humans.

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

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

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

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

In January 2020, we entered a development agreement with Nestlé Health Science to advance a lead candidate, CDX-7108, into preclinical development and early clinical studies.

CDX-7108 is the lead candidate for a potential treatment for a gastro-intestinal disorder.

In parallel, the original Strategic Collaboration Agreement was extended through December 2021 to support the discovery of therapeutic candidates for additional disorders.

In March 2020, we entered into a Strategic Collaboration and License Agreement (“Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), for the research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and blood factor deficiencies.

Also in October 2017, we entered into the Nestlé SCA 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.

In January 2020, we entered into a development agreement with Nestlé Health Science to advance a new lead candidate discovered under the Nestlé SCA, CDX-7108, into preclinical development and early clinical studies as a potential treatment for a gastro-intestinal disorder.

In parallel, the Nestlé SCA was extended through December 2021 to support the discovery of therapeutic candidates for additional disorders.

In March 2020, we entered into Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda, for the research and development of novel gene therapies for certain disease indications, including the treatment of lysosomal storage disorders and a blood factor deficiency.

In June 2020, we also entered into the MAI Agreement with MAI pursuant to which we are leveraging our CodeEvolver ® platform technology to improve the DNA polymerase enzymes that are critical for enzymatic DNA synthesis.

Concurrently with the MAI Agreement, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million and, in connection with the transaction, John Nicols, our President and Chief Executive Officer, also joined MAI’s board of directors.

In April 2021, we purchased an additional 1,000,000 shares of MAI's Series A preferred stock for $0.6 million.

Business Segments

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Performance Enzymes and Novel Biotherapeutics.

See Note 12, “Segment, Geographical and Other Revenue Information” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Performance Enzymes

We initially commercialized our CodeEvolver ® protein engineering technology platform and products in the pharmaceuticals market, and to date this continues to be our largest market served.

We initially commercialized our CodeEvolver ® protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this continues to be our largest market served.

Our customers, which include many large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development.

We have also used the technology to develop customized enzymes for use in other industrial markets.

These markets consist of several large industrial verticals, including food and food ingredients, animal feed, consumer care, flavors, fragrances, and agricultural chemicals.

We also use our technology to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications.

These markets consist of several large industrial verticals, including food, feed, consumer care, and fine chemicals.

We also use our technology in the life sciences markets to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring applications.

Novel Biotherapeutics

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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

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.

Food and Drug Administration (the “FDA”) that it had completed its review of our investigational new drug application (“IND”) for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the United States.

In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU.

As a result of the option exercise, 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 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.

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 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.

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.

Upon exercising its option, Nestlé Health Science assumed all responsibilities for future clinical development and commercialization of CDX-6114.

During 2020, Nestlé Health Science completed a safety, tolerability and PK/PD study of CDX-6114 in PKU patients that demonstrated CDX-6114 was well tolerated and safe at all doses tested.

In addition, an increase in blood levels of cinnamic acid, a biomarker of enzyme activity, was observed which is consistent with the intended mode of action for CDX-6114.

In October 2017, we separately entered into the Nestlé SCA 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.

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 into pre-clinical and early clinical studies a lead candidate targeting a gastro-intestinal disorder, CDX-7108, discovered through the Nestlé SCA.

The Nestlé SCA was extended through December 2021.

We, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which we anticipate will begin in 2021.

Additionally, the parties initiated two new programs under the Nestlé SCA targeting a gastro-intestinal disorder.

In March 2020, we entered into the Takeda Agreement 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 the respective program plans for Fabry Disease, Pompe Disease, and an undisclosed 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.

Of these programs, the Fabry disease program is the most advanced, with multiple sequences, including CDX-6311, having been provided to Takeda.

For further description of our business segments, see Note 12, "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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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 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.

We believe that these disruptions have had a minimal impact on revenue for the three months ended March 31, 2021.

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.

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

In May 2020, we re-initiated limited R&D operations and have ramped up operations

such that we are currently utilizing the majority of our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees.

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

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

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Results of Operations Overview

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 $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").

Revenues were $18.0 million in the first quarter of 2021, a 23% increase from $14.7 million in the first quarter of 2020.

Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $10.2 million in the first quarter of 2021, an increase of 101% from $5.1 million in the first quarter of 2020.

The increase in product revenue was primarily due to an increase in customer demand for branded pharmaceutical products.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $7.8 million in the first quarter of 2021, a 18% decrease compared with $9.6 million in the first quarter of 2020.

The decrease in research and development revenue was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement as we approach completion of the technology transfer to Novartis and prior year license fees from Takeda under the Takeda Agreement.

Our products’ profitability is affected by many factors including the margin of profit on the products we sell.

Our profit margins are affected by many factors including the costs of internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs.

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

Product gross margins increased to 59% in the first quarter of 2021, compared to 50% in the first quarter of 2020, due to improved product mix resulting from an increase in customer demand for branded products.

Research and development expenses were $11.6 million in the first quarter of 2021, an increase of 6% from $11.0 million in the first quarter of 2020.

The increase was primarily due to increases in expenses associated with a higher headcount, an increase in outside services costs, higher depreciation expense and higher lab supplies costs, partially offset by a reduction in outside services related to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses and a decrease in allocable expenses.

Selling, general and administrative expenses were $11.4 million in the first quarter of 2021, an increase of 27%, compared to $9.0 million in the first quarter of 2020.

The increase was primarily due to increases in expenses associated with a higher headcount, legal expenses, stock-based compensation partially offset by lower travel and allocable expenses.

Net loss was $9.1 million, or a net loss of $0.14 per basic and diluted share in the first quarter of 2021 compared to a net loss of $7.7 million, or a net loss of $0.13 per basic and diluted share for the first quarter of 2020.

The increase in net loss is primarily related to increases in operating expenses and a reduction in research and development revenue, partially offset by an increase in product revenues and margins.

Cash and cash equivalents decreased to $139.7 million of March 31, 2021 compared to $149.1 million as of December 31, 2020.

In addition, net cash used in operations was $6.4 million in the three months ended March 31, 2021 compared to $1.4 million in the three months ended March 31, 2020.

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.

In June 2017, we entered into a loan and security agreement with Western Alliance Bank 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.

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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.

As of March 31, 2021, no amounts were borrowed under the Credit

Facility and we were in compliance with the covenants for the Credit Facility.

See Note 10, "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 $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.

Revenues increased by $3.4 million, or 31%, to $14.2 million in the first quarter of 2021, compared to $10.9 million in the first quarter of 2020.

The increase in product revenue of $5.1 million, or 101%, to $10.2 million in the first quarter of 2021, compared to $5.1 million in the first quarter of 2020 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products The decrease in research and development revenue of $1.8 million, or 31%, to $4.0 million in the first quarter of 2021, compared to $5.8 million in first quarter of 2020 was primarily due to lower revenues from the Novartis CodeEvolver ® Agreement as we approach completion of the technology transfer to Novartis.

Product gross margins were 59% in the first quarter of 2021, compared to 50% in the first quarter of 2020.

The increase in product gross margins was primarily due to improved product mix due to higher demand for enzymes for the manufacture of branded pharmaceutical products.

Research and development expense increased by $0.7 million, or 13%, to $6.4 million for the first quarter of 2021, compared to the first quarter of 2020.

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

Selling, general and administrative expense increased by $0.5 million, or 20%, to $2.8 million for the first quarter of 2021, compared to the first quarter of 2020.

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

Novel Biotherapeutics

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

In July 2014, we entered into a CodeEvolver ® protein engineering platform technology transfer collaboration and license agreement (the "GSK CodeEvolver ® Agreement") with GlaxoSmithKline ("GSK").

Pursuant to the terms of the agreement, we granted GSK a non-exclusive license to use the CodeEvolver ® protein engineering platform technology to develop novel enzymes for use in the manufacture of GSK's pharmaceutical and health care products.

We received an up-front fee upon the execution of the agreement in July 2014 and milestone payments in each of the years from 2014 through April 2016.

We completed the transfer of the CodeEvolver ® protein engineering platform technology to GSK in April 2016 and all revenues relating to the technology transfer have been recognized as of April 2016.

We have the potential to receive additional cumulative contingent payments that range from $5.75 million to $38.5 million per project based on GSK’s successful application of the licensed technology.

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

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

In August 2015, we entered into a CodeEvolver ® platform technology transfer collaboration and license agreement (the "Merck CodeEvolver ® Agreement") with Merck, Sharp & Dohme ("Merck"), which allows Merck to use the CodeEvolver ® protein engineering technology platform in the field of human and animal healthcare.

We received 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.

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.

The API payments are based on the quantity of API developed and manufactured by Merck and will be recognized as usage-based royalties.

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 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 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.

Research and development revenues remained unchanged at approximately $3.8 million for the first quarter of 2021 and 2020.

Revenue in the first quarter of 2021 as compared to the first quarter of 2020 increased from higher license and research and development fees from Takeda under the Takeda Agreement, and were mostly offset by decreases in research and development revenue from Nestlé Health Science.

Research and development expense decreased by $0.3 million, or 6%, to $4.6 million for the first quarter of 2021, compared to $4.9 million in the first quarter of 2020.

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

Selling, general and administrative expense remained unchanged at approximately $0.6 million for the first quarter of 2021 and 2020.

An increase in costs associated with higher headcount were mostly, offset by lower allocable expenses.

Merck Sitagliptin Catalyst Supply Agreement

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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.

We recognized revenue of $3.3 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively, in product revenue under this agreement.

Revenues recognized by us under the Sitagliptin Catalyst Supply Agreement comprised 18% and 12% of our total revenues for the three months ended March 31, 2021 and 2020, respectively.

The Sitagliptin Catalyst Supply Agreement will expire in February 2022.

We are in process of negotiating an extension at this time.

As of March 31, 2021 and March 31, 2020, we recorded revenue of $3.1 million and $2.2 million, respectively, 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

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

("Nestlé Health Science") and, solely for the purpose of the integration and the dispute resolution clauses of the Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

We received an upfront cash payment of $14.0 million upon the execution of the Nestlé Agreement, a $4.0 million milestone payment after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, and a $1.0 million milestone payment upon achievement of a milestone relating to formulation of CDX-6114.

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 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 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.

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.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

In October 2017, we entered into the Nestlé License Agreement with Nestlé Health Science and, solely for the purpose of the integration and the dispute resolution clauses of the Nestlé License Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

We received an upfront cash payment upon the execution of the Nestlé License Agreement and milestone payments after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114, and upon achievement of a milestone relating to formulation of CDX-6114.

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.

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.

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.

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.

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

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 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.

Upon exercising its option, Nestlé Health Science made an option payment and assumed all responsibilities for future clinical development and commercialization of CDX-6114.

We are also eligible to receive payments from Nestlé Health Science under the Nestlé License 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 October 2017, we entered into the Nestlé SCA 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.

In January 2020, we entered into a development agreement with Nestlé Health Science 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 Nestlé SCA into pre-clinical and early clinical studies.

Under the Nestlé SCA and the development agreement, we recognized research and development fees of $1.8 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively.

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”).

In May 2019, we entered into the Novartis CodeEvolver ® Agreement with Novartis.

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

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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.

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 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.

Pursuant to the agreement, we received an upfront payment 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 have also received $3.4 million in March 2021 for partial completion of the third technology milestone.

In addition to this payment, we are eligible for an additional payment of $1.6 million for completion of the third technology milestone transfer, which would bring total cash payment for this milestone to $5 million as specified in the Novartis CodeEvolver ® Agreement.

In consideration for the continued disclosure and license of improvements to the 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 in aggregate.

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.

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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-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 for the combined initial license and technology transfer performance obligation, which is expected to occur over twenty-five 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 $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.

We recognized $0.8 million and $2.4 million in research and development revenue for the three months ended March 31, 2021 and 2020, respectively, from the Novartis CodeEvolver ® Agreement.

Strategic Collaboration and License Agreement

In March 2020, we entered into a Strategic Collaboration and License Agreement (the “Takeda Agreement”) with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co.

(“Takeda”), under which we will collaborate to research and develop protein sequences for use in gene therapy products for certain diseases.

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

In March 2020, we entered into the Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co.

(“Takeda”), under which we are collaborating to research and develop protein sequences for use in gene therapy products for certain diseases.

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

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 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

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.

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.

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 $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.

Other potential payments from Takeda include (i) reimbursement of research and development fees and pre-clinical development milestones for the three initial programs of $15.4 million, in aggregate (ii) clinical development and commercialization-based milestones, per target gene, of up to $100.0 million, and (iii) tiered royalties based on net sales of applicable products at percentages ranging from the middle-single digits to low single-digits.

We recognized research and development revenue related to the Takeda Agreement of $2.1 million and $2.2 million in the three months ended March 31, 2021 and 2020, respectively.

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 September 30, Change Nine months ended September 30, Change

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

Three months ended March 31, Change

2021 2020 $ %

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Total costs and operating expenses 27,187 22,497 4,690 21%

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

Loss from operations (9,155) (7,827) (1,328) (17)%

Interest income 177 266 (89) (33)%

Other expenses, net (88) (86) (2) (2)%

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:

• Product revenue consists of sales of protein catalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits.

• Research and development revenue include license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and screening fees.

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 September 30, Change Nine months ended September 30, Change

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

Loss before income taxes (9,066) (7,647) (1,419) (19)%

Provision for income taxes 2 5 (3) (60)%

Net loss $ (9,068) $ (7,652) $ (1,416) (19)%

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

• Product revenue consist of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits.

• Research and development revenue includes license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and screening fees.

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

Three months ended March 31, Change

2021 2020 $ %

Product revenue $ 10,226 $ 5,100 $ 5,126 101%

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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 $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.

Total revenues increased by $3.4 million to $18.0 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily due higher product revenue partially offset by lower research and development revenue.

Product revenue, increased by $5.1 million to $10.2 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily due to an increase in customer demand for branded pharmaceutical products.

Research and development revenue decreased by $1.8 million to $7.8 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement.

Cost and Operating Expenses

Our cost and operating expenses comprise cost of product revenue, research and development expense, and selling, general and administrative expense.

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 September 30, Change Nine months ended September 30, Change

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

Three months ended March 31, Change

2021 2020 $ %

Cost of product revenue $ 4,218 $ 2,541 $ 1,677 66%

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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 September 30, Change Nine months ended September 30, Change

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

Three months ended March 31, Change

2021 2020 $ %

Product revenue $ 10,226 $ 5,100 $ 5,126 101%

Cost of product revenue (1)

4,218 2,541 1,677 66%

Product gross profit $ 6,008 $ 2,559 $ 3,449 135%

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(1) Cost of product revenue comprises both internal and third-party fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs associated with our product revenue.

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.

(2) Product gross margin is used as a performance measure to provide additional information regarding our results of operations on a consolidated basis.

Cost of product revenue increased by $1.7 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily due to a higher volume of product sales and variations in product mix.

The product gross margin increased to 59% in the three months ended March 31, 2021 compared to 50% in the three months ended March 31, 2020 is primarily due to the sale of higher margin branded products.

Research and Development Expenses

Research and development expenses consist of costs incurred for internal projects as well as collaborative research and development activities.

These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, and depreciation of facilities and laboratory equipment, and (iii) external costs.

These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, depreciation of facilities and laboratory equipment, and (iii) external costs.

Research and development expenses are expensed when incurred.

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.

Research and development expenses were $11.6 million in the three months ended March 31, 2021 compared to $11.0 million in the three months ended March 31, 2020, an increase of $0.6 million, or 6%.

The increase was primarily due to costs

associated with higher headcount, higher lab supplies, depreciation and other outside services, which was partially offset by a decrease in costs associated with outside services relating to CMC and regulatory expenses.

We expect research and development expenses for the rest of the year to be higher than the comparative periods in the prior year as we invest more in our business in order to pursue on future growth opportunities.

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 $0.9 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 September 30, Change Nine months ended September 30, Change

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

Selling, general and administrative expenses consist of employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), hiring and training costs, consulting and outside services expenses (including audit and legal counsel related costs), marketing costs, building lease costs, and depreciation expenses and amortization expense.

Selling, general and administrative expenses were $11.4 million in the three months ended March 31, 2021 compared to $9.0 million in the three months ended March 31, 2020, an increase of $2.4 million, or 27%.

The increase was primarily due to costs associated with a higher headcount, an increase in legal fees, and higher share-based compensation costs, partially offset by lower travel and allocable expenses.

We expect selling, general and administrative expenses for the rest of the year to be higher than the comparative periods in the prior year as we invest more in our business in order to pursue on future growth opportunities.

Interest Income and Other Expense (in thousands, except percentages):

Three months ended March 31, Change

2021 2020 $ %

Interest income $ 177 $ 266 $ (89) (33)%

Other expenses, net (88) (86) (2) (2)%

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

Total other income $ 89 $ 180 $ (91) (51)%

Interest Income

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.

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.

Interest income decreased by $0.1 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to earned interest income and amortization of debt discount on non-marketable debt security, partially offset by a reduction in interest income from lower average interest rates on declining average cash balances.

Other Expenses

Other expenses increased by $2.0 thousand in three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to interest expense charges recognized on the amortization of an embedded bifurcated derivative of a share-settled redemption feature on non-marketable securities, partially offset by prior year write-down of $0.4 million of our investment in CO 2 Solutions and fluctuations in foreign currency.

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

Three months ended March 31, Change

2021 2020 $ %

Provision for income taxes $ 2 $ 5 $ (3) (60) %

The provision for income taxes for the three months ended March 31, 2021 and 2020, were primarily due to the accrual of interest and penalties on historic uncertain tax positions.

Net loss for the three months ended March 31, 2021 was $9.1 million, or a net loss per basic and diluted share of $0.14.

This compared to a net loss of $7.7 million, or a net loss per basic and diluted share of $0.13 for the three months ended March 31, 2020.

The increase in net loss was primarily related to higher operating expenses and lower in research and development revenues, partially offset by increased in product revenue and related margins from the sale of products.

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

Revenue by segment

Three months ended September 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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

Product revenue $ 8,401 $ — $ 8,401 $ 10,351 $ — $ 10,351 $ (1,950) (19) % $ — — %

Research and development revenue 4,604 5,380 9,984 10,073 1,482 11,555 (5,469) (54) % 3,898 263 %

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

Nine months ended September 30, Change

Revenues by segment

Three months ended March 31, Change

2021 2020 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 14,229 $ 3,803 $ 18,032 $ 10,874 $ 3,796 $ 14,670 $ 3,355 31 % $ 7 — %

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 September 30, Change

2020 2019 Performance Enzymes Novel Biotherapeutics

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

Cost of product revenue $ 3,642 $ — $ 3,642 $ 5,067 $ — $ 5,067 $ (1,425) (28) % $ — — %

Research and development (1)

5,184 6,433 11,617 5,313 3,080 8,393 (129) (2) % 3,353 109 %

Selling, general and administrative (1)

2,675 515 3,190 2,037 690 2,727 638 31 % (175) (25) %

Total segment costs and operating expenses $ 11,501 $ 6,948 18,449 $ 12,417 $ 3,770 16,187 $ (916) (7) % $ 3,178 84 %

Corporate costs 5,472 4,989

Depreciation and amortization 528 471

Total costs and operating expenses $ 24,449 $ 21,647

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

Nine months ended September 30, Change

Revenues from the Performance Enzymes segment increased by $3.4 million, or 31%, to $14.2 million for the three months ended March 31, 2021, compared to $10.9 million for the three months ended March 31, 2020.

The increase in product revenue of $5.1 million, or 101%, to $10.2 million in the three months ended March 31, 2021 compared to $5.1 million in the three months ended March 31, 2020 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products.

The decrease in research and development revenue of $1.8 million, or 31%, to $4.0 million in three months ended March 31, 2020, compared to $5.8 million in the three months ended March 31, 2020 was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement.

Revenues from the Novel Biotherapeutics segment was approximately $3.8 million for the three months ended March 31, 2021 and 2020.

Revenue in three months ended March 31, 2021 as compared to three months ended March 31, 2020 increased from higher license and research and development fees from Takeda under the Takeda Agreement, and were partially offset by decreases in research and development revenue from Nestlé Health Science.

Costs and operating expenses by segment

Three months ended March 31, Change

2021 2020 Performance Enzymes Novel Biotherapeutics

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Corporate costs 7,817 5,907

Depreciation and amortization 1,526 1,273

Unallocated depreciation and amortization 685 492

Total costs and operating expenses $ 27,187 $ 22,497

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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 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.

Research and development expense in the Performance Enzymes segment increased by $0.7 million, or 13%, to $6.4 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The increase was primarily due to an increase in costs associated with outside services, lab supplies and higher headcount.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.5 million, or 20%, to $2.8 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The increase was primarily due to an increase in costs associated with headcount.

Research and development expense in the Novel Biotherapeutics segment decreased by $0.3 million, or 6%, to $4.6 million in the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The decrease was primarily due to lower outside services including lower costs relating to CMC regulatory expenses, partially offset by an increase in costs associated with higher headcount.

Selling, general and administrative expense in the Novel Biotherapeutics segment remained unchanged for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

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

September 30, 2020 December 31, 2019

The following summarizes our cash and cash equivalents balance and working capital as of March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 139,748 $ 149,117

Working capital $ 151,010 $ 159,442

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 addition, depending upon GSK's successful application of the licensed technology, we have the potential to receive additional contingent payments that range from $5.75 million to $38.5 million per project.

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

In May 2019, we entered into the Novartis CodeEvolver ® Agreement with Novartis.

The Novartis CodeEvolver ® Agreement allows Novartis to use Codexis’ 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 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 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.

Pursuant to the Nestlé Agreement, Nestlé Health Science paid us an upfront cash payment of $14.0 million.

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 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 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.

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 $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.

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.

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 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 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.

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 first quarter of 2021, we also received $3.4 million for partial completion of the third technology milestone.

Additionally, we are eligible to receive an additional $1.6 million upon 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 Codexis annual payments which amount to an additional $8 million in aggregate .

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.

Our cash flows from operations will continue to be affected principally by sales from licensing our technology to major pharmaceutical companies, product sales and product gross margins, 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 our customers for purchases of products, collaborative research and development services, and licensing our technology to major pharmaceutical companies.

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

In December 2020, we completed an underwritten public offering of approximately 4,928,572 shares of our common stock, par value $0.0001 per share, at a public offering price of $17.50 per share.

The net proceeds to us were approximately $80.8 million after deducting offering costs and the underwriting discounts and commissions and other offering expenses of $5.5 million.

In June 30, 2017, we entered into the Credit Facility with Western Alliance Bank which consists of term debt for loans that allow us to borrow up to $10.0 million, and under a revolving 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 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, 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.

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 September 30, 2020.

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

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

No amounts were drawn under the credit facility as of March 31, 2021 and December 31, 2020.

At March 31, 2021 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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For additional information about our contractual obligations, see Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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

The COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the U.S.

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.

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 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 R&D operations.

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 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.

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.

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

Pursuant to the Nestlé License Agreement, Nestlé Health Science paid us an upfront cash payment and milestone payments after dosing the first subjects in a first-in-human Phase 1a dose-escalation trial with CDX-6114 and achievement of a formulation relating to CDX-6114.

Upon exercising its option, Nestlé Health Science made an option payment and 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.

Other potential payments from Nestlé Health Science to us under the Nestlé License 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.

As of March 31, 2021, we had cash and cash equivalents of $139.7 million and $15.0 million available to borrow under our 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.

We may need additional capital if our current plans and assumptions change.

Our need for additional capital will depend on many factors, including the financial success of our 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.

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.

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.

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 our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies.

If future financings involve the issuance of equity securities, our existing stockholders would suffer dilution.

If future financings involve the issuance of equity securities, our existing stockholders would suffer

If we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants that limit our ability to conduct our business.

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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 nine months ended September 30, 2020 and 2019 (in thousands):

Nine months ended September 30,

The following is a summary of cash flows for three months ended March 31, 2021 and 2020 (in thousands):

Three months ended March 31,

Net cash used in operating activities $ (6,440) $ (1,425)

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Net cash provided by (used in) financing activities 17 (1,019)

Net increase (decrease) in cash, cash equivalents and restricted cash $ (19,010) $ 39,389

Net decrease in cash, cash equivalents and restricted cash $ (8,956) $ (3,205)

Cash Flows from Operating Activities

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.

Cash used in operating activities was $6.4 million net for the three months ended March 31, 2021, which resulted from a net loss of $9.1 million for the three months ended March 31, 2021 adjusted for non-cash charges for depreciation of $0.7 million, ROU lease asset amortization expense of $0.6 million, stock-based compensation of $2.7 million, partially offset by equity securities earned from research and development activities of $0.1 million.

Additional cash used by changes in operating assets and liabilities was $1.2 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.

Changes in operating assets and liabilities included a decrease of $0.6 million in other long-term liabilities, a decrease of $1.7 million in accrued compensation and other accrued liabilities, a decrease of $0.3 million in deferred revenue, partially offset by a decrease of $1.1 million in financial assets and an increase of $0.4 million in accounts payable.

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.

Additional cash used by changes in operating assets and liabilities was $2.9 million.

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.

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 Flows from Investing Activities

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 used in investing activities was $2.5 million for the three months ended March 31, 2021 and 2020.

Cash used in investing activities for the three months ended March 31, 2021 and 2020, was primarily attributable to $2.6 million for purchases of property and equipment.

Cash Flows from Financing Activities

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 September 30, 2020 (in thousands):

Cash used in financing activities was nominal for the three months ended March 31, 2021.

Cash used in financing included $1.2 million for taxes paid related to net share settlement of equity awards offset by $1.2 million of proceeds from exercises of stock options.

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.

Credit Facility

In June 2017, we entered into the Credit Facility financing arrangement with Western Alliance Bank 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.

As of March 31, 2021, we have not drawn from the Credit Facility.

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

Material Cash Requirements

The following table summarizes our material cash requirements as of March 31, 2021 (in thousands):

Payments due by period

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

Total Less than 1 year 1 to 3 years 4 to 5 years More than 5 years

Operating leases obligations (1) $ 30,251 $ 4,144 $ 9,058 $ 9,666 $ 7,383

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 September 30, 2020 for our facilities in Redwood City, California.

Operating leases obligations (2) 31,723 276 5,939 6,252 19,256

Total $ 61,974 $ 4,420 $ 14,997 $ 15,918 $ 26,639

(1) Represents future minimum lease payments under non-cancellable operating leases in effect as of March 31, 2021 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 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.

Other Commitments

We have other commitments related to supply and service arrangements entered into the normal course of business.

For additional information about other commitments, see Note 11, "Commitments and Contingencies" in the notes to the unaudited condensed consolidated financial statements.

Future minimum payments reflect amounts those obligations are expected to have on our liquidity and cash flows in future periods and include obligations subject to risk of cancellation by us (in thousands):

Other Commitment Agreement Type Agreement Date Future Minimum Payment

(2) Represents future minimum lease payments under non-cancellable operating lease entered into in the first quarter of 2021 for facilities in San Carlos, California.

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

For additional information see Note 10, “Commitments and Contingencies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Other Material Cash Requirements

We have other material cash requirements related to supply and service arrangements entered in the normal course of business.

For additional information about other material cash requirements, see Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Future minimum payments reflect amounts those obligations are expected to have on our liquidity and cash flows in future period and include obligations subject to risk of cancellation by us (in thousands):

Other Material Cash Requirements by Agreement Type Agreement Date Future Minimum Payment

Manufacture and supply agreement with expected future payment date of December 2022 April 2016 $ 55

Development and manufacturing services agreements September 2019 2,374

Strategic collaboration and license agreement March 2020 520

Total other commitments $ 2,429

Credit Facility

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 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.

The Credit Facility includes a number of customary covenants and restrictive financial covenants including meeting minimum product revenues levels and maintaining certain minimum cash levels with the lender.

The Credit Facility’s financial covenants restrict the ability of the Company to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens, sell assets, or sell certain assets held at foreign subsidiaries.

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 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 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.

We are contingently committed to an aggregate $2.7 million of potential future research and development milestone payments to third parties for patents, licensing and development programs achieved in clinical application and the regulatory approval process.

Payments generally are due and payable only upon achievement of certain developmental and regulatory milestones for which the specific timing cannot be predicted.

Certain agreements also provide for sales-based milestones aggregating to $0.6 million that we are contingently obligated to pay to upon achievement of certain sales levels in addition to royalties.

We do not utilize special-purpose financing vehicles or have undisclosed off-balance sheet arrangements.

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 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.

2017-04, Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment, which are described below:

Financial Instruments - Credit Losses (Topic 326)

On January 1, 2020, we adopted the provisions of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, using a modified retrospective approach.

The standard changes the impairment model for most financial assets measured at amortized cost, requiring the use of a "current expected credit loss" model.

Under this model, we are required to estimate the lifetime expected credit loss on financial assets, and to record the estimate to an allowance for credit loss.

The allowance offsets the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset or liability.

Financial assets measured at amortized cost

Financial assets measured at amortized cost include loans receivable, debt security assets, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, contract assets and any other financial assets not excluded from the scope that have the contractual right to receive cash.

These assets are not accounted for at fair value through net income.

Current expected credit model

The model requires that credit loss estimates include forecasted information in its formulation.

In addition, the model requires recognition of credit loss estimates to be reflected in the financial statements before actual losses are incurred.

Allowance for credit losses

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.

The net represents the expected to be collected on the financial asset.

Intangibles - Goodwill and Other (Topic 350)

On January 1, 2020, we adopted the provisions of ASU No.

2017-04, "Intangibles - Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment," using a prospective approach.

The standard simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.

Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value.

The adoption of ASU 2017-04 had no impact on our unaudited condensed consolidated financial statements.

There have been no material changes to our critical accounting policies or estimates during the three months ended March 31, 2021 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 1, 2021.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis