CODEXIS, INC. 10-Q

ITEM 2. 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, 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"). These statements include, but are not limited to, expectations regarding our strategy, business plans, financial performance and developments relating to our industry. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form 10-Q and Part I, Item 1A: “Risk Factors” of our Annual Report, as incorporated herein and referenced in Part II, Item 1A: “Risk Factors" of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. Business Overview 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 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 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 30 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. 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 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 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. 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 gastrointestinal 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 the 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 entered into the MAI Agreement with Molecular Assemblies, Inc. ("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 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, 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. In September 2021, we purchased 9,198,423 shares of MAI's Series B preferred stock for $7.0 million. We anticipate completing an enzyme engineering project with MAI in the first quarter of 2022. Business Segments We manage our business as two business segments: 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 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, 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. 31 Novel Biotherapeutics We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates. We believe that our CodeEvolver ® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases that are in need of improved therapeutic interventions. Similarly, we believe that we can deploy our platform technology to improve specific characteristics of a customer’s pre-existing biotherapeutic drug candidate, such as its activity, stability or immunogenicity. Our first lead program was for the potential treatment of 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 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 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. 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 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. The Nestlé SCA was extended through December 2021. 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 preclinical and early clinical studies a lead candidate targeting a gastrointestinal disorder, CDX-7108, discovered through the Nestlé SCA. During 2021, we, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which commenced in October 2021. Additionally, the parties are progressing three programs under the Nestlé SCA targeting different gastrointestinal disorders. 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. Of these programs, the Fabry disease program is the most advanced, with multiple sequences, including CDX-6311, having been provided to Takeda. In May 2021, Takeda elected to exercise their option to initiate an additional program for a certain undisclosed rare genetic disorder, as a result we received the option exercise fee during the third quarter of 2021. 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. Business Update Regarding COVID-19 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, the prevalence of more contagious and or virulent variants, 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. We believe that these disruptions have had a minimal impact on revenue for the three and nine months ended September 30, 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. In the United States, the impact of COVID-19, including governmental orders (“Orders”) governing the operation of businesses during the pandemic, caused the temporary closure of our Redwood City, California facilities and disrupted our 32 R&D operations . 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 re-initiated limited R&D operations and have ramped up operations such that we are currently utilizing our normal R&D capacity while following county, state and federal COVID-19 guidance for the protection of our employees. Additionally, we resumed manufacturing at our Redwood City pilot plant in May 2020. Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers. The near-and-long term impact of COVID-19 to our financial condition, liquidity, or results of operations in the future remains uncertain. Although some of the Orders that were enacted to control the spread of COVID-19 have begun to be scaled back and the vaccine rollout has expanded, surges in the spread of COVID-19 due to the emergence of new more contagious or virulent variants or the ineffectiveness of the vaccines against such strains, may result in the reimplementation of certain Orders, which could adversely impact our business. For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A. Risk Factors included in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2020, filed on March 1, 2021. Results of Operations Overview Revenues were $36.8 million in the third quarter of 2021, a 100% increase from $18.4 million in the third quarter of 2020. Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $28.7 million in the third quarter of 2021, an increase of 242% from $8.4 million in the third quarter of 2020. The increase in product revenue was primarily due to an increase in customer demand for branded pharmaceutical products. We expect the demand for our products for the rest of the year to be higher than the comparative periods in the prior year mainly due to overall higher demand for enzymes used in the manufacture of branded pharmaceutical products and a total of three large purchase orders from Pfizer, Inc. for an aggregate amount of $29.0 million of a proprietary high enzyme product that we received in June and August 2021, and that will continue to be recognized as revenue in subsequent periods. Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $8.0 million in the third quarter of 2021, a 19% decrease compared with $10.0 million in the third quarter of 2020. The decrease in research and development revenue was primarily due to lower license fees from Takeda under the Takeda Agreement and lower revenue from Novartis under the Novartis CodeEvolver ® Agreement being recognized this year compared to the same period in the prior year. 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 76% in the third quarter of 2021, compared to 57% in the third quarter of 2020, due to improved product mix resulting from an increase in customer demand for branded products. Research and development expenses were $15.2 million in the third quarter of 2021, an increase of 26% from $12.0 million in the third quarter of 2020. The increase was primarily due to increases in costs associated with higher headcount, higher depreciation expense and higher lab supplies costs, partially offset by a reduction in costs associated with outside services related to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses and a decrease in allocable expenses. We expect research and development expenses for the rest of the year to be higher than the comparative periods in the prior year mainly due to increase in headcount as we continue our efforts on advancing our internal and collaborative programs. Selling, general and administrative expenses were $13.4 million in the third quarter of 2021, an increase of 52%, compared to $8.8 million in the third quarter of 2020. The increase was primarily due to increases in expenses associated with a higher headcount, increase in legal expenses, and higher stock-based compensation expense, 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 prior year mainly due to increase in headcount and higher operating costs as we invest more in our business. We recognized $0.1 million in income tax expense in the third quarter of 2021 due to income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the United States and remitted to the United States. We recognized $19.0 thousand provision for income taxes for the third quarter 2020 due to the accrual of interest and penalties on historical uncertain tax positions 33 Net income was $2.2 million, or $0.03 per basic and diluted share in the third quarter of 2021 compared to a net loss of $6.1 million, or $0.10 per basic and diluted share for the third quarter of 2020. The increase in net income is primarily related to increase in product revenues and margins, which were partially offset by increases in operating expenses. Cash and cash equivalents decreased to $119.2 million as of September 30, 2021 compared to $149.1 million as of December 31, 2020. In addition, net cash used in operating activities was $14.9 million in the nine months ended September 30, 2021 as compared to $15.0 million in the nine months ended September 30, 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 . In September 2021, we entered into the Ninth Amendment to the Credit Facility whereby we may draw on the term debt and the Revolving Line of Credit at any time prior to December 31, 2021 and October 1, 2024, respectively. Draws on the term debt are subject to customary conditions for funding including, among others, that no event of default exists. As of September 30, 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. Below is an overview of our results of operations by business segments: Performance Enzymes Revenues increased by $19.6 million, or 151%, to $32.6 million in the third quarter of 2021, compared to $13.0 million in the third quarter of 2020 primarily due to higher product revenue. The increase in product revenue of $20.3 million, or 242%, to $28.7 million in the third quarter of 2021, compared to $8.4 million in the third quarter of 2020 was primarily due to higher customer demand for enzymes for the manufacture of branded pharmaceuticals products. We expect the demand for our products for the rest of the year to be higher than the comparative periods in the prior year mainly due to overall higher demand for enzymes used in the manufacture of branded pharmaceutical products and a total of three large purchase orders from Pfizer, Inc. for an aggregate amount of $29.0 million of a proprietary high enzyme product that we received in June and August 2021 and that will continue to be recognized as revenue in subsequent periods. The decrease in research and development revenue of $0.8 million, or 16%, to $3.9 million in the third quarter of 2021, compared to $4.6 million in third quarter of 2020 was primarily due to lower revenues from the Novartis CodeEvolver ® Agreement as we completed the technology transfer to Novartis during the third quarter of 2021, but were partially offset by higher license fees from existing collaboration agreements. Product gross margins were 76% in the third quarter of 2021, compared to 57% in the third 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 $0.5 million, or 9%, to $5.7 million for the third quarter of 2021, compared to $5.2 million in the third 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 $0.6 million, or 24%, to $3.3 million for the third quarter of 2021, compared to $2.7 million in the third quarter of 2020. The increase was primarily due to an increase in costs associated with higher headcount and allocable expenses, partially offset by lower outside services expenses. We expect both research and development expenses and selling, general and administrative expenses for the rest of the year to be higher than the comparative periods in the prior year mainly due to increase in headcount a s we invest more in our business . Novel Biotherapeutics Research and development revenues decreased by $1.2 million, to $4.2 million in the third quarter of 2021, compared to $5.4 million in the third quarter of 2020. The decrease in research and development revenue was primarily due to lower license and research and development fees from Takeda under the Takeda Agreement recognized this year compared to the prior year. Research and development expense increased by $2.4 million, or 38%, to $8.9 million for the third quarter of 2021, compared to $6.4 million in the third quarter of 2020. The increase was primarily due to higher costs associated with higher 34 headcount and allocable expenses, but offset by reduction in outside services related 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 prior year mainly due to increase in headcount as we continue our efforts on advancing our internal and collaborative programs. Selling, general and administrative expense increased by $0.3 million, or 61%, to $0.8 million in the third quarter of 2021, compared to $0.5 million in the third quarter of 2020. The increase was primarily due to increase in costs associated with higher headcount and higher allocable expenses, partially offset by lower outside services expenses. Merck Sitagliptin Catalyst Supply Agreement In February 2012, we entered into a five-year Sitagliptin Catalyst Supply Agreement (“Sitagliptin Supply Agreement”) with Merck whereby Merck may obtain commercial scale enzyme for use in the manufacture of Januvia ® , its product based on the active ingredient sitagliptin. In December 2015, Merck exercised its option under the terms of the Sitagliptin Catalyst Supply Agreement to extend the agreement for an additional five years through February 2022. In September 2021, the Sitagliptin Catalyst Supply Agreement was amended to extend the agreement through December 2026. Effective as of January 2016, we and Merck amended the Sitagliptin Supply Agreement to prospectively provide for variable pricing based on the cumulative volume of sitagliptin enzyme purchased by Merck. We have determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin enzyme purchased by Merck, provides Merck material rights and we are recognizing product revenues using the alternative method. Under the alternative method, we estimate the total expected consideration and allocate it proportionately with the expected sales. Pursuant to the terms of the Sitagliptin Supply Agreement, Merck may purchase supply of sitagliptin enzyme from us for a fee based on contractually stated prices. We recognized revenue of $1.9 million and $7.3 million for the three and nine months ended September 30, 2021, respectively, compared to $3.2 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, in product revenue under this contract. Revenues recognized by us under the Sitagliptin Supply Agreement comprised 5% and 9% for the three and nine months ended September 30, 2021, respectively, compared to 17% and 15% for the three and nine months ended September 30, 2020 of our total revenues. As of September 30, 2021, we recorded revenue of $2.5 million from sitagliptin enzyme 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 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. 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. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensabl e license for the global development and commercialization of CDX-6114 for the management of PKU. 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 mid-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 gastrointestinal disorder discovered through our Nestlé SCA into preclinical and early clinical studies. During 2021, we, together with Nestlé Health Science, continued to advance CDX-7108 towards initiation of a Phase 1 clinical trial which commenced in October 2021. Additionally, the parties are progressing three programs under the Nestlé SCA targeting different gastrointestinal disorders 35 Under the Nestlé SCA and the development agreement, we recognized research and development fees of $2.4 million and $5.8 million for the three and nine months ended September 30, 2021, r espectively, compared to $2.8 million and $6.1 million for the three and nine months ended September 30, 2020, respectively. Platform Technology Transfer and License Agreement 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. In July 2021, we announced the completion of the technology transfer period during which we transferred our proprietary CodeEvolver ® protein engineering platform technology to Novartis (the “Technology Transfer Period”). As a part of this technology transfer, the Company provided to Novartis our proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, teams of the Company and Novartis scientists participated in technology training sessions and collaborative research projects at our laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland. Novartis has now installed the CodeEvolver ® protein engineering platform technology at its designated laboratory. Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver ® Agreement. 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. Additionally, we will receive an additional payment of $1.6 million for completion of the third technology transfer milestone in July 2021, which brings the total cash payment for the third technology transfer milestone to $5.0 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 began 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 began on the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire licensed patent. These product-related usage payments, if any, will be paid by Novartis to the Company for each quarter that Novartis manufactures API using a CodeEvolver ® -developed enzyme. The usage payments will be based on the total volume of API produced using the CodeEvolver ® -developed enzyme. These usage payments can begin in the clinical stage and will extend throughout the commercial life of each API. Revenue for the combined initial license and technology transfer performance obligation 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. In July 2021, we completed the technology transfer to Novartis. Revenue allocated to improvements made during the Improvements Term will be recognized during the Improvement Term. We recognized $0.2 million and $1.4 million in research and development revenue for the three and nine months ended September 30, 2021, respectively, compared to $0.9 million and $4.1 million for the three and nine months ended September 30, 2020, respectively. Strategic Collaboration and License Agreement In March 2020, we entered into the Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of 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. In May 2021, Takeda elected to exercise its option to initiate an additional program for a certain undisclosed rare genetic disorder; as a result we received the option exercise fee during the third quarter of 2021. Other potential payments from Takeda include (i) reimbursement of research and development fees and preclinical 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 $1.8 million and $6.0 million f or the three and nine months ended September 30, 2021, respectively, compared to $2.6 million and $10.6 million for the three and nine months ended September 30, 2020, respectively. 36 Pfizer, Inc. purchase orders In June 2021, we received a binding purchase order from Pfizer, Inc. for the sale and purchase of a quantity of proprietary enzyme product for $13.9 million. In August 2021, we had received two additional binding purchase orders from Pfizer for the sale and purchase of a quantity of the same enzyme product for an aggregate amount of approximately $15.0 million. The enzyme product is intended for use in the manufacture of Pfizer's clinical-stage COVID antiviral therapeutic candidate. We recognized product revenue related to the three purchase orders from Pfizer of $18.9 million for the three and nine months ended September 30, 2021. As of September 30, 2021, we recorded revenue of $10.6 million from the sale of this enzyme product that were recognized over time based on the progress of the manufacturing process. These products will be shipped within the three month period following the end of the quarter. As of September 30, 2021, we had $10.6 million in contract assets related to these purchase orders. Results of Operations 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 September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Revenues: Product revenue $ 28,731 $ 8,401 $ 20,330 242 % $ 53,674 $ 18,005 $ 35,669 198 % Research and development revenue 8,038 9,984 (1,946) (19) % 26,579 30,018 (3,439) (11) % Total revenues 36,769 18,385 18,384 100 % 80,253 48,023 32,230 67 % Costs and operating expenses: Cost of product revenue 6,867 3,642 3,225 89 % 15,403 7,882 7,521 95 % Research and development 15,165 12,010 3,155 26 % 39,562 33,830 5,732 17 % Selling, general and administrative 13,407 8,797 4,610 52 % 37,600 26,307 11,293 43 % Total costs and operating expenses 35,439 24,449 10,990 45 % 92,565 68,019 24,546 36 % Income (loss) from operations 1,330 (6,064) 7,394 122 % (12,312) (19,996) 7,684 (38) % Interest income 41 39 2 5 % 424 362 62 17 % Other income (expense), net 983 (50) 1,033 2,066 % 920 (125) 1,045 836 % Income (loss) before income taxes 2,354 (6,075) 8,429 139 % (10,968) (19,759) 8,791 (44) % Provision for income taxes 110 19 91 479 % 121 331 (210) (63) % Net income (loss) $ 2,244 $ (6,094) $ 8,338 137 % $ (11,089) $ (20,090) $ 9,001 (45) % Revenues 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 September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Product revenue $ 28,731 $ 8,401 $ 20,330 242 % $ 53,674 $ 18,005 $ 35,669 198 % Research and development revenue 8,038 9,984 (1,946) (19) % 26,579 30,018 (3,439) (11) % Total revenues $ 36,769 $ 18,385 $ 18,384 100 % $ 80,253 $ 48,023 $ 32,230 67 % Revenues typically fluctuate on a quarterly basis due to the variability in our customers' manufacturing schedules and the timing of our customers' clinical trials. In addition, we have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the performance and capacity of third-party manufacturers for the commercial scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals business. 37 We accept purchase orders for deliveries covering periods from one day up to approximately 14 months from the date on which the order is placed. However, a majority of the purchase orders can be revised or cancelled by the customer without penalty. Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods. Total revenues increased by $18.4 million and $32.2 million in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to higher product revenue but partially offset by lower research and development revenue for the three and nine month period. Product revenue, increased by $20.3 million and $35.7 million in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to an increase in customer demand for branded pharmaceutical products. We expect the demand for our products for the rest of the year to be higher than the comparative periods in the prior year mainly due to overall higher demand for enzymes used in the manufacture of branded pharmaceutical products and a total of three large purchase orders from Pfizer, Inc. for an aggregate amount of $29.0 million of a proprietary high enzyme product that we received in June and August 2021 and that will continue to be recognized as revenue in subsequent periods. Research and development revenue decreased by $1.9 million and $3.4 million in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to lower license and research and development fees from Takeda under the Takeda Agreement and lower revenues from the Novartis CodeEvolver ® Agreement recognized this year compared to the prior year period, partially offset by higher license fees from other existing collaboration agreements. 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, except percentages): Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Cost of product revenue $ 6,867 $ 3,642 $ 3,225 89 % $ 15,403 $ 7,882 $ 7,521 95 % Research and development 15,165 12,010 3,155 26 % 39,562 33,830 5,732 17 % Selling, general and administrative 13,407 8,797 4,610 52 % 37,600 26,307 11,293 43 % Total costs and operating expenses $ 35,439 $ 24,449 $ 10,990 45 % $ 92,565 $ 68,019 $ 24,546 36 % Cost of Product Revenue and Product Gross Margin Our product revenues are derived entirely from our Performance Enzymes segment. Revenues from the Novel Biotherapeutics segment are from collaborative research and development activities and not from product revenue. The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Product revenue $ 28,731 $ 8,401 $ 20,330 242 % $ 53,674 $ 18,005 $ 35,669 198 % Cost of product revenue (1) 6,867 3,642 3,225 89 % 15,403 7,882 7,521 95 % Product gross profit $ 21,864 $ 4,759 $ 17,105 359 % $ 38,271 $ 10,123 $ 28,148 278 % Product gross margin (%) (2) 76 % 57 % 71 % 56 % (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. (2) Product gross margin is used as a performance measure to provide additional information regarding our results of operations on a consolidated basis. 38 Cost of product revenue increased by $3.2 million in the three months ended September 30, 2021, compared to the three months ended September 30, 2020, and increased by $7.5 million in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase was primarily due to a higher volume of product sales and variations in product mix. The product gross margin increased to 76% and 71% in the three and nine months ended September 30, 2021, respectively, compared to 57% and 56% in the three and nine months ended September 30, 2020, respectively, 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, depreciation of facilities and laboratory equipment, and (iii) external costs. Research and development expenses are expensed when incurred. Research and development expenses increased by $3.2 million, or 26%, during the three months ended September 30, 2021, and by $5.7 million, or 17%, in the nine months ended September 30, 2021, compared to the same periods in 2020. The increase in research and development expenses w as primarily due to an increase in costs associated with higher headcount, higher lab supplies, depreciation and other outside services, 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 mainly due to increase in headcount as we continue our efforts on advancing our internal and collaborative programs. 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 counsel related costs), marketing costs, building lease costs, and depreciation expenses and amortization expense. Selling, general and administrative expenses increased by $4.6 million, or 52%, in the three months ended September 30, 2021, and by $11.3 million, or 43%, in the nine months ended September 30, 2021 compared to the same periods in 2020. The increase wa s primarily due to an increase in costs associated with a higher headcount, 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 mainly due to increase in headcount and higher operating costs as we invest more in our business. Interest Income and Other Income (Expense), net (in thousands, except percentages): Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Interest income $ 41 $ 39 2 5 % $ 424 $ 362 62 17 % Other income (expense), net 983 (50) 1,033 2,066 % 920 (125) 1,045 836 % Total other income (expense), net $ 1,024 $ (11) $ 1,035 9,409% $ 1,344 $ 237 $ 1,107 467 % Interest Income Interest income increased by $2 thousand and $62 thousand in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to earned interest income and amortization of debt discount on a non-marketable debt security, partially offset by a reduction in interest income from lower average interest rates on lower average cash balances. Other Income (Expense), net Other income (expense), net, increased by $1.0 million in the three and nine months ended September 30, 2021 compared to the same periods in 2020, primarily due to gain from remeasurement on the carrying value of our investment in MAI, but partially offset by a prior year write-down of $0.4 million of our investment in CO 2 Solutions and fluctuations in foreign currency. 39 Provision for Income Taxes (in thousands, except percentages): Three months ended September 30, Change Nine months ended September 30, Change 2021 2020 $ % 2021 2020 $ % Provision for income taxes $ 110 $ 19 $ 91 479 % $ 121 $ 331 $ (210) (63) % The provision for income taxes for the three and nine months ended September 30, 2021 and 2020 were primarily due to the income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the United States and remitted to the United States and the accrual of interest and penalties on historic uncertain tax positions. Net Income (Loss) Net income for the three months ended September 30, 2021 was $2.2 million, or $0.03 per basic and diluted share. This compared to a net loss of $6.1 million, or $0.10 per basic and diluted share for the three months ended September 30, 2020. Net loss for the nine months ended September 30, 2021 was $11.1 million, or $0.17 per basic and diluted share. This compared to a net loss of $20.1 million, or $0.34 per basic and diluted share for the nine months ended September 30, 2020. The achievement of net income in the three months ended September 30, 2021, and the decrease in net loss for the nine months ended September 30, 2021, was primarily related to an increase in product revenue with higher margins, partially offset by higher operating expenses and lower research and development revenues. Results of Operations by Segment (in thousands, except percentages): Revenues by segment Three months ended September 30, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Revenues: Product revenue $ 28,731 $ — $ 28,731 $ 8,401 $ — $ 8,401 $ 20,330 242 % $ — — % Research and development revenue 3,853 4,185 8,038 4,604 5,380 9,984 (751) (16) % (1,195) (22) % Total revenues $ 32,584 $ 4,185 $ 36,769 $ 13,005 $ 5,380 $ 18,385 $ 19,579 151 % $ (1,195) (22) % Nine months ended September 30, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Revenues: Product revenue $ 53,674 $ — $ 53,674 $ 18,005 $ — $ 18,005 $ 35,669 198 % $ — — % Research and development revenue 14,723 11,856 26,579 13,380 16,638 30,018 1,343 10 % (4,782) (29) % Total revenues $ 68,397 $ 11,856 $ 80,253 $ 31,385 $ 16,638 $ 48,023 $ 37,012 118 % $ (4,782) (29) % Revenues from the Performance Enzymes segment increased by $19.6 million, or 151%, for the three months ended September 30, 2021, and by $37.0 million, or 118%, for the nine months ended September 30, 2021, compared to the same periods in 2020, primarily due to higher product revenue. The increase in product revenue of $20.3 million, or 242%, in the three months ended September 30, 2021, and of $35.7 million, or 198%, in the nine months ended September 30, 2021, compared to the same periods in 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 $0.8 million, or 16%, to $3.9 million in three months ended September 30, 2021, compared to $4.6 million in the three months ended September 30, 2020 was primarily due to lower revenue from the Novartis CodeEvolver ® Agreement as we completed the technology transfer to Novartis during the third quarter of 2021 . The increase in research and development revenue of $1.3 million, or 10%, to $14.7 million in the nine months ended September 30, 2021, compared to $13.4 million in the nine months ended September 30, 2020, was primarily due to higher license fees from existing collaboration agreements but partially offset by lower revenues from Novartis under the Novartis CodeEvolver ® Agreement. Revenues from the Novel Biotherapeutics segment decreased by $1.2 million, or 22%, for the three months ended September 30, 2021, and by $4.8 million, or 29%, for the nine months ended September 30, 2021 , compared to the same 40 periods in 2020, primarily due to lower license and research and development fees from Takeda under the Takeda Agreement recognized this year compared to the prior year and a decrease in research and development revenue from Nestlé Health Science compared to last year. Costs and operating expenses by segment Three months ended September 30, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Cost of product revenue $ 6,867 $ — $ 6,867 $ 3,642 $ — $ 3,642 $ 3,225 89 % $ — — % Research and development (1) 5,670 8,850 14,520 5,184 6,433 11,617 486 9 % 2,417 38 % Selling, general and administrative (1) 3,306 831 4,137 2,675 515 3,190 631 24 % 316 61 % Total segment costs and operating expenses $ 15,843 $ 9,681 25,524 $ 11,501 $ 6,948 18,449 $ 4,342 38 % $ 2,733 39 % Corporate costs (2) 9,121 5,472 Unallocated depreciation and amortization 794 528 Total costs and operating expenses $ 35,439 $ 24,449 Nine months ended September 30, Change 2021 2020 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Cost of product revenue $ 15,403 $ — $ 15,403 $ 7,882 $ — $ 7,882 $ 7,521 95 % $ — — % Research and development (1) 17,172 20,649 37,821 15,877 16,848 32,725 1,295 8 % 3,801 23 % Selling, general and administrative (1) 9,294 2,052 11,346 7,395 1,728 9,123 1,899 26 % 324 19 % Total segment costs and operating expenses $ 41,869 $ 22,701 64,570 $ 31,154 $ 18,576 49,730 $ 10,715 34 % $ 4,125 22 % Corporate costs (2) 25,775 16,763 Unallocated depreciation and amortization 2,220 1,526 Total costs and operating expenses $ 92,565 $ 68,019 (1) Research and development expenses and selling, general and administrative expenses exclude depreciation and amortization of finance leases. (2) Corporate costs include unallocated selling, general and administrative expenses. For a discussion of product cost of revenue, see " Results of Operations ". Research and development expense in the Performance Enzymes segment increased by $0.5 million, or 9%, in the three months ended September 30, 2021, and by $1.3 million, or 8% in the nine months ended September 30, 2021, as compared to the same periods in 2020. The increase was primarily due to an increase in costs associated with outside services, lab supplies and higher headcount, partially offset by lower allocable expenses. Selling, general and administrative expense in the Performance Enzymes segment increased by $0.6 million, or 24%, in the three months ended September 30, 2021, and by $1.9 million, or 26%, in the nine months ended September 30, 2021, as compared to the same periods in 2020. The increase wa s primarily due to an increase in costs associated with higher headcount and higher allocable expenses, partially offset by lower outside services expenses. 41 Research and development expense in the Novel Biotherapeutics segment increased by $2.4 million, or 38%, in the three months ended September 30, 2021, and by $3.8 million, or 23%, in the nine months ended September 30, 2021, as compared to the same periods in 2020. The increase was primarily due to higher costs associated with higher headcount and allocable expenses but partially offset by reduction in costs associated with outside services relating to CMC and regulatory expenses. Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.3 million, or 61%, in the three months ended September 30, 2021, and by $0.3 million, or 19%, in the nine months ended September 30, 2021, as compared to the same periods in 2020. The increase was primarily due to increase in costs associated with higher headcount and higher allocable expenses, partially offset by lower outside services expenses. Liquidity and Capital Resources Liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures. We have historically funded our operations primarily through cash generated from operations, stock option exercises and public and private offerings of our common stock. We also have the ability to borrow up to $15.0 million under our Credit Facility. We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our working capital needs. Our cash and cash equivalents are held in U.S. banks. The following summarizes our cash and cash equivalents balance and working capital as of September 30, 2021 and December 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Cash and cash equivalents $ 119,189 $ 149,117 Working capital $ 140,632 $ 159,442 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. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at this time. In 2016, we completed the final phase in the transfer of CodeEvolver ® technology to Merck under the Merck CodeEvolver ® Agreement. We are eligible to receive payments of up to $15.0 million for each commercial API that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver ® technology. 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 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 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 will receive an additional $1.6 million for the completion of the third technology transfer milestone in July 2021. 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 . 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. 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. 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. 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 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 mid-single digits to low double-digits, of net sales of products containing CDX-6114. 42 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. 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 product sales and product gross margins, sales from licensing our technology to major pharmaceutical companies, 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. Equity Distribution Agreement In May 2021, we entered into an Equity Distribution Agreement ("EDA") with Piper Sandler & Co ("PSC"), under which PSC, as our exclusive agent, at our discretion and at such times that we may determine from time to time, may sell over a three-year period from the execution of the agreement up to a maximum of $50 million of shares of our common stock. During the nine months ended September 30, 2021, no shares were issued of our common stock pursuant to the EDA. As of September 30, 2021, $50.0 million of shares remained available for sale under the EDA. Sales of our common stock under this arrangement could be subject to business, economic or competitive uncertainties and contingencies, many of which may be beyond our control, and which could cause actual results from the sale of our common stock to differ materially from expectations. For information, see Note 9, "Capital Stock" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Stock Offering In December 2020, we completed an underwritten public offering of 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. Credit Facility 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 2021, we entered into the Ninth Amendment to the Credit Facility whereby we may draw on the Term Debt and the Revolving Line of Credit at any time prior to December 31, 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, loans drawn under the Term Debt mature and the Revolving Line of Credit terminates. There were no amounts drawn under the credit facility as of September 30, 2021 and December 31, 2020. At September 30, 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. Restrictive covenants in the Credit Facility restrict the payment of dividends or other distributions. 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. As of September 30, 2021, we had cash and cash equivalents of $119.2 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 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. 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 43 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. 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 we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business. Cash Flows The following is a summary of cash flows for nine months ended September 30, 2021 and 2020 (in thousands): Nine months ended September 30, 2021 2020 Net cash used in operating activities $ (14,927) $ (14,972) Net cash used in investing activities (15,942) (3,260) Net cash provided by (used in) financing activities 1,341 (778) Net decrease in cash, cash equivalents and restricted cash $ (29,528) $ (19,010) Cash Flows from Operating Activities Cash used in operating activities was $14.9 million for the nine months ended September 30, 2021, which resulted from a net loss of $11.1 million adjusted for non-cash charges for depreciation of $2.1 million, ROU lease asset amortization expense of $2.0 million, stock-based compensation of $8.5 million, partially offset by equity securities earned from research and development activities of $0.7 million and unrealized gain on non-marketable securities of $1.0 million. Additional cash used by changes in operating assets and liabilities was $14.8 million. Changes in operating assets and liabilities included a decrease of $2.3 million in other long-term liabilities, increase of $19.6 million in financial assets and increase of $1.2 million in prepaid expenses and other assets, partially offset by increase of $7.0 million in accrued compensation and other accrued liabilities, increase of $0.9 million in deferred revenue and increase of $0.6 million in accounts payable. Cash used in operating activities was $15.0 million for the nine months ended September 30, 2020, which resulted from a net loss of $20.1 million adjusted for non-cash charges for depreciation of $1.4 million, ROU lease asset amortization expense of $2.0 million, stock-based compensation of $6.1 million and allowance of credit loss of $40 thousand. Additional cash used by changes in operating assets and liabilities was $4.3 million. Changes in operating assets and liabilities included 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 $3.6 million in accrued compensation and other accrued liabilities and an increase of $2.0 million in deferred revenue. Cash Flows from Investing Activities Cash used in investing activities was $15.9 million and $3.3 million for the nine months ended September 30, 2021 and 2020, respectively. Cash used in investing activities for the nine months ended September 30, 2021 was primarily attributable to $8.3 million for purchases of property and equipment and $7.6 million for the purchase of 1,000,000 shares of MAI's Series A preferred stock in April 2021 and 9,198,423 shares of MAI's Series B preferred stock in September 2021. Cash used in investing activities of $3.3 million for the nine months ended September 30, 2020, was primarily attributable to $2.3 million for purchases of property and equipment and $1.0 million for the purchase of 1,587,050 shares of MAI's Series A preferred stock. 44 Cash Flows from Financing Activities Cash provided by financing activities was $1.3 million for the nine months ended September 30, 2021 primarily attributable to $2.7 million of proceeds from exercises of stock options, partially offset by $1.2 million for taxes paid related to net share settlement of equity awards. Cash used in financing activities was $0.8 million for the nine months ended September 30, 2020, which included $1.3 million for taxes paid related to net share settlement of equity awards offset by $0.5 million of proceeds from exercises of stock options. Material Cash Requirements The following table summarizes material cash requirements related to minimum future payments under non-cancellable operating leases, exclusive of common area maintenance charges and real estate taxes, as of September 30, 2021 (in thousands): Payments due by period Total Less than 1 year 1 to 3 years 4 to 5 years More than 5 years Operating lease (1) $ 28,146 $ 4,220 $ 9,247 $ 9,810 $ 4,869 Operating lease (2) 31,723 1,726 6,015 7,974 16,008 Total $ 59,869 $ 5,946 $ 15,262 $ 17,784 $ 20,877 (1) In the first quarter of 2019, we have entered into an Eighth Amendment to the Lease with MetLife, extending the lease terms fr om May 2027 to May 2029 of our Redwood City, California facilities. (2) In the first quarter of 2021, we entered into a ten-year lease with ARE-San Francisco No. 63, LLC, for our San Carlos facilities. 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 $ 147 Development and manufacturing services agreements September 2019 686 Total other commitments $ 833 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 The preparation financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. 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, 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. 45