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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-09 · 127 added, 100 removed, 255 unchanged (47% of the section changed)

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economy and other economies worldwide.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and may not be accurately predicted, including the duration and severity of the pandemic, the prevalence of more contagious and or virulent variants such as the Delta and Omicron 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.

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, there can be no guarantee this will continue.

Furthermore, our ability to provide future 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 minimal impact on our revenue for the three months ended March 31, 2022.

We believe that these disruptions have had minimal impact on our revenue for the three and six months ended June 30, 2022.

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.

As a result of the COVID-19 pandemic we have received purchase orders from Pfizer for large quantities of our proprietary enzyme product, CDX-616, for use by Pfizer in the manufacture of a critical intermediate for its proprietary active pharmaceutical ingredient, nirmatrelvir, used by Pfizer in combination with the active pharmaceutical ingredient ritonavir, as its PAXLOVID™ (nirmatrelvir tablets;

Should these disruptions escalate in the future, they may negatively and materially impact our business.

results of operations and financial condition.

As a result of the COVID-19 pandemic we have received purchase orders from Pfizer for large quantities of our proprietary enzyme product, CDX-616, for use by Pfizer in the manufacture of a critical intermediate for its proprietary API, nirmatrelvir, used by Pfizer in combination with the API ritonavir, as its PAXLOVID™ (nirmatrelvir tablets;

ritonavir tablets) product for the treatment of COVID-19 infections in humans.

These purchase orders have had substantial impact on our revenue for the three months ended March 31, 2022 and for the year ended December 31, 2021.

These purchase orders have had substantial impact on our revenue for the three and six months ended June 30, 2022 and for the year ended December 31, 2021.

See below under “Recent Developments.”

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 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.

Although some of the Orders that were enacted to control the spread of COVID-19 have been 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.

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

Recent Developments

In July 2022, we entered into an Enzyme Supply Agreement, effective as of October 30, 2021, with Pfizer Inc.

(the “Pfizer Supply Agreement”), covering the manufacture, sale and purchase of CDX-616 for use by Pfizer in the manufacture of nirmatrelvir.

In addition to defining terms under which Pfizer has and will continue to purchase quantities of CDX-616 from us, Pfizer will, pursuant to the terms of the Pfizer Supply Agreement, pay Codexis a retainer fee of $25.9 million which we received in August 2022 , which is being paid in lieu of certain existing orders for delivery of the CDX-616 enzyme product in early 2023, which have been cancelled.

The retainer fee is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ and for fees associated with any new development and licensing agreements with Pfizer entered into prior to December 31, 2022.

We anticipate recognizing a nominal portion of the retainer fee as revenue in 2022, and recognizing the remainder as revenue in 2023 and 2024.

Results of Operations Overview

Revenues were $35.3 million in the first quarter of 2022, a 96% increase from $18.0 million in the first quarter of 2021.

Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $30.7 million in the first quarter of 2022, an increase of 200% fro m $10.2 million in the first quarter of 2021.

The increase in product revenue was primarily due to $21.3 million in revenue from Pfizer related to the purchase of our CDX-616 enzyme products but partially offset by lower revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products.

We expect the significant purchase orders we have received from Pfizer for CDX-616 enzyme products to continue to remain a significant component of our product revenue in 2022.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $4.7 million in the first quarter of 2022, a 40% decrease compared with $7.8 million in the first quarter of 2021.

The decrease in research and development revenue was primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development fees from other existing collaboration agreements being recognized in the first quarter of 2022 as compared to the same period in the prior year.

Revenues were $38.4 million in the second quarter of 2022, a 51% increase from $25.5 million in the second quarter of 2021.

Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $34.6 million in the second quarter of 2022, an increase of 135% from $14.7 million in the second quarter of 2021.

The increase in product revenue was primarily due to revenue from Pfizer related to the purchase of our CDX-616 enzyme products, but partially offset by lower revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products.

We expect the sale of CDX-616 enzyme products to Pfizer under the Pfizer Supply Agreement to remain a significant component of our product revenue in 2022.

Research and development revenues, which include license, technology access and exclusivity fees, research service fees, milestone payments, royalties, and optimization and screening fees, totaled $3.8 million in the second quarter of 2022, a 65% decrease compared with $10.7 million in the second quarter of 2021.

The decrease in research and development revenue was primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development fees from other existing collaboration agreements being recognized in the second quarter of 2022 as compared to the same period in the prior year.

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

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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 72% in the first quarter of 2022, compared to 59% in the first quarter of 2021, due to improved product mix resulting from sales to Pfizer and to other pharmaceutical customers.

Research and development expenses were $19.5 million in the first quarter of 2022, an increase of 69% from $11.6 million in the first quarter of 2021.

The increase was primarily due to increases in costs associated with higher headcount, higher facilities cost and lab supplies, higher stock-based compensation and higher depreciation expense and other outside services.

We expect research and development expenses for the rest of the year to be higher than the comparative prior year periods mainly due to increase in headcount and higher allocation of facilities cost due to the additional research and development laboratory space we commenced occupancy in December 2021, and as we continue our efforts on advancing our internal and collaborative programs.

Selling, general and administrative expenses were $15.7 million in the first quarter of 2022, an increase of 38%, compared to $11.4 million in the first quarter of 2021.

The increase was primarily due to increase in costs associated with a higher headcount, increase in legal fees, higher stock-based compensation costs, higher outside and temporary services, partially offset by lower allocable expenses.

We expect selling, general and administrative expenses for the rest of the year to be higher than the comparative prior year periods mainly due to increase in headcount and higher operating costs as we invest more in our business.

Net loss wa s $8.4 million, or a net loss of $0.13 per basic and diluted share in the first quarter of 2022 compared to a net loss of $9.1 million, or a net loss of $0.14 per basic and diluted share in the first quarter of 2021.

The decrease in net loss is primarily related to an increase in product revenue with higher margins, partially offset by higher operating expenses and lower research and development revenues.

Cash and cash equivalents decreased to $94.3 million of March 31, 2022 compared to $116.8 million as of December 31, 2021.

In addition, net cash used in operations was $11.2 million in the three months ended March 31, 2022 compared to $6.4 million in the three months ended March 31, 2021.

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.

Product gross margins were 67% in the second quarter of 2022, compared to 71% in the second quarter of 2021, due to a less favorable product mix, variation in prices per volume sold and higher shipping costs.

Research and development expenses were $19.1 million in the second quarter of 2022, an increase of 49% from $12.8 million in the second quarter of 2021.

The increase was primarily due to increases in costs associated with higher headcount, higher facilities cost and lab supplies, increase in outside services costs related to Chemistry, Manufacturing and Controls ("CMC") and regulatory expenses, higher stock-based compensation and higher depreciation expense and other outside services.

We expect research and development expenses for the rest of the year to be higher than the comparative prior year periods mainly due to increases in headcount, higher allocation of facilities cost due to the additional research and development laboratory space in which we commenced occupancy in December 2021, and other external costs as we continue our efforts on advancing our internal and collaborative programs.

Selling, general and administrative expenses were $10.7 million in the second quarter of 2022, a decrease of 17%, compared to $12.8 million in the second quarter of 2021.

The decrease was primarily due to decrease in legal fees due to settlement of a trademark dispute in April 2022 and lower allocable expenses, partially offset by an increase in costs associated with a higher headcount and higher outside and temporary services.

Net loss was $2.6 million, or a net loss of $0.04 per basic and diluted share in the second quarter of 2022 compared to a net loss of $4.3 million, or a net loss of $0.07 per basic and diluted share for the second quarter of 2021.

The decrease in net loss is primarily related to an increase in product revenue, partially offset by higher operating expenses and lower research and development revenues.

Cash and cash equivalents decreased to $90.1 million as of June 30, 2022 compared to $116.8 million as of December 31, 2021.

In addition, net cash used in operations was $13.4 million in the six months ended June 30, 2022 compared to $14.7 million in the six months ended June 30, 2021.

We believe that our existing cash and cash equivalent s, combined with our future expectations for product revenues, research and development revenues, and expense management will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements through the end of 2024.

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").

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Our ability to take draws on the term debt expired on December 31, 2021.

As of March 31, 2022, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility.

As of June 30, 2022, 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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Pursuant to the latest amendment of the Sitagliptin Supply Agreement, we have determined that the latest price per volume of sitagliptin enzyme to be purchased by Merck no longer provides Merck material rights, and as such we are recognizing product revenue based on contractually stated prices effective as of February 2022.

We recognized $1.7 million and $3.3 million in product revenue under this contract for the three months ended March 31, 2022 and 2021, respectively.

Revenues recognized by us under the Sitagliptin Supply Agreement comprised 5% and 18% of our total revenues for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, we recorded revenue o f $1.2 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 first quarter of 2022.

We recognized revenue of $0.7 million and $2.4 million for the three and six months ended June 30, 2022, respectively, compared to $2.2 million and $5.5 million for the three and six months ended June 30, 2021, respectively, in product revenue under this agreement.

Revenues recognized by us under the Sitagliptin Catalyst Supply Agreement comprised 2% and 3% of our total revenues for the three and six months ended June 30, 2022, respectively, compared to 9% and 13% for the three and six months ended June 30, 2021, respectively.

As of June 30, 2022 , we recorded revenue of $1.0 million from sitagliptin enzyme sales 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 second quarter of 2022.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

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The term of the Nestlé SCA has been extended through December 2022.

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 with the first subject being dosed in November 2021.

Under the Nestlé SCA and the development agreement, we recognize d $1.1 million and $1.8 million in research and development fees for the three months ended March 31, 2022 and 2021, respectively.

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 discovered through our Nestlé SCA, CDX-7108, targeting Exocrine Pancreatic Insufficiency, into preclinical and early clinical studies.

We, together with Nestlé Health Science, are continuing to advance CDX-7108 and initiated a Phase 1 clinical trial with the first subject being dosed in the fourth quarter of 2021.

Under the Nestlé SCA and the development agreement, we recognized $0.6 million and $1.6 million in research and development fees for the three and six months ended June 30, 2022, respectively, compared to $1.7 million and $3.5 million for the three and six months ended June 30, 2021, respectively.

Platform Technology Transfer and License Agreement

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Revenue allocated to improvements made during the Improvements Term are being recognized during the Improvements Term.

We recognize d $0.2 million and $0.8 million in research and development revenue for the three months ended March 31, 2022 and 2021, respectively.

We recognized $0.3 million and $0.5 million in research and development revenue for the three and six months ended June 30, 2022, respectively, compared to $0.3 million and $1.1 million for the three and six months ended June 30, 2021, respectively.

Strategic Collaboration and License Agreement

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as a result we received the option exercise fee during the third quarter of 2021.

Pursuant to the Takeda Agreement, we are eligible to receive other payments that include (i) reimbursement of research and development fees and preclinical development milestones for the three initial programs of $10.5 million, in aggregate, and $7.2 million for the fourth program, (ii) clinical development and commercialization-based mil estones, per target gene, of up t o $100.0 million and (iii) tiered royalty payments based on net sales of applicable products at percentages ranging from the mid-single digits to low single-digits.

Pursuant to the Takeda Agreement, we are eligible to receive other payments that include (i) reimbursement of research and development fees and preclinical development milestones for the three initial programs of $10.5 million, in aggregate, and $5.9 million for the fourth program, (ii) clinical development and commercialization-based milestones, per target gene, of up to $100.0 million and (iii) tiered royalty payments based on net sales of applicable products at percentages ranging from the mid-single digits to low single-digits.

Revenue recognized 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 $1.2 million a nd $2.1 million for the three months ended March 31, 2022 and 2021, respectively.

We recognized research and development revenue related to the Takeda Agreement of $1.3 million and $2.5 million for the three and six months ended June 30, 2022, respectively, compared to $2.1 million and $4.2 million for the three and six months ended June 30, 2021, respectively.

purchase orders

In 2021, we received purchase orders from Pfizer, Inc.

(“Pfizer”) for large quantities of our proprietary enzyme product, CDX-616, for use by Pfizer in the manufacture of a critical intermediate for its proprietary active pharmaceutical ingredient, nirmatrelvir.

Pfizer markets, sells and distributes nirmatrelvir, in combination with the active pharmaceutical ingredient ritonavir, as its PAXLOVID™ (nirmatrelvir tablets;

ritonavir tablets) product, which received emergency use authorization by the FDA in late 2021 for the treatment of COVID-19 in humans.

We have received additional purchase orders from Pfizer for significant quantities of CDX-616.

As of March 31, 2022, we have not yet executed a long-term purchase and sale agreement with Pfizer for CDX-616.

We currently expect that future orders for quantities of CDX-616 by Pfizer will continue to be based on the needs of Pfizer for quantities of CDX-616 and there will be no minimum purchase obligation on the part of Pfizer.

We recognized product revenue of $21.3 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively, from the sale of quantities of CDX-616 enzyme products to Pfizer.

Revenues recognized by us from sales of CDX-616 enzyme products to Pfizer comprised 60% and 2% of our total revenues for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, we recorded revenue and contract assets of $7.1 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 first quarter of 2022.

We recognized product revenue of $23.8 million and $45.1 million for the three and six months ended June 30, 2022 , respectively, compared to $3.9 million and $4.3 million for the three and six months ended June 30, 2021, respectively, from the sale of quantities of CDX-616 enzyme products to Pfizer.

Revenues recognized by us from sales of CDX-616 enzyme products to Pfizer comprised 62% and 61% of our total revenues for the three and six months ended June 30, 2022, respectively, and 15% and 10% for the three and six months ended June 30, 2021, respectively .

As of June 30, 2022, we recorded revenue and contract assets of $9.7 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 second quarter of 2022.

See Note 14, “Subsequent Events” in the Notes to Unaudited Condensed Consolidated Financial Statements and above under “Recent Developments” for additional information with regard to the Pfizer Supply Agreement.

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 March 31, Change

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

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Interest income 140 206 (66) (32) % 182 382 (200) (52) %

Other expense, net (3) (88) 85 (97)%

Other income (expense), net (63) 23 (86) (374) % (66) (63) (3) 5 %

Loss before income taxes (2,532) (4,257) 1,725 (41) % (10,879) (13,322) 2,443 (18) %

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Net loss $ (2,640) $ (4,265) $ 1,625 (38) % $ (10,996) $ (13,333) $ 2,337 (18) %

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

Our revenues consisted 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.

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

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

Total revenues increased by $17.3 million to $35.3 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to higher product revenue but partially offset by lower research and development revenue.

Product revenue, increased by $20.5 million to $30.7 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to $21.3 million in revenue from Pfizer related to the purchase of our CDX-616 enzyme products but partially offset by lower revenue from sales of other enzyme products used in the manufacture of branded pharmaceutical products.

Research and development revenue decreased by $3.2 million to $4.7 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development fees from other existing collaboration agreements being recognized in the first quarter of 2022 as compared to the same period in the prior year.

Total revenues increased by $13.0 million and $30.3 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to higher product revenue but partially offset by lower research and development revenue.

Product revenue, increased by $19.9 million and $40.4 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to $23.8 million and $45.1 million in revenue from Pfizer related to the purchase of our CDX-616 enzyme products, but partially offset by lower revenue volume from sales of other enzyme products used in the manufacture of branded pharmaceutical products.

Research and development revenue decreased by $7.0 million and $10.1 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development fees from other existing collaboration agreements being recognized in 2022 as compared to the same periods in the prior year.

Cost and Operating Expenses

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

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Product gross margin (%) (2)

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

67 % 71 % 70 % 66 %

(1) Cost of product revenue consist of 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.

Cost of product revenue increased by $4.3 million in the three months ended March 31, 2022 compared to the same period in 2021.

Cost of product revenue increased by $7.0 million in the three months ended June 30, 2022 and by $11.3 million in the six months ended June 30, 2022 compared to the same periods in 2021.

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

The product gross margin increased to 72% in the three months ended March 31, 2022 compared to 59% in the three months ended March 31, 2021, primarily due to the sale of higher margin branded products.

Product gross margins were 67% and 70% in the three and six months ended June 30, 2022, respectively, compared to 71% and 66% in the corresponding periods in 2021 due to variations in product mix, variation in prices per volume sold and higher shipping costs.

Research and Development Expenses

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Research and development expenses are expensed when incurred.

Research and development expenses were $19.5 million in the first quarter of 2022, an increase of $7.9 million or 69%, from $11.6 million in the first quarter of 2021.

Research and development expenses increased by $6.3 million, or 49%, during the three months ended June 30, 2022, and by $14.2 million, or 58%, in the six months ended June 30, 2022, compared to the same periods in 2021.

The increase in research and development expenses was primarily due to increases in costs associated with higher headcount, higher facilities cost and lab supplies, increase in outside services related to CMC and regulatory expenses, higher stock-based compensation and higher depreciation expense and other outside services.

Selling, General and Administrative Expenses

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

Selling, general and administrative expenses were $15.7 million in the first quarter of 2022, an increase of $4.3 million, or 38%, compared to $11.4 million in the first quarter of 2021.

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

Three Months Ended March 31, Change

Selling, general and administrative expenses decreased by $2.1 million, or 17%, in the three months ended June 30, 2022, compared to the same period in 2021, primarily due to decrease in legal fees due to settlement of a trademark dispute in April 2022 and lower allocable expenses, partially offset by an increase in costs associated with a higher headcount and higher outside and temporary services.

The increase of $2.2 million, or 9%, in the six months ended June 30, 2022 compared to the same period in 2021, was primarily due to increase in costs associated with a higher headcount, higher stock-based compensation costs and higher outside and temporary services, partially offset by decrease in legal fees due to settlement of the trademark dispute in April 2022 and lower allocable expenses.

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

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

Interest income $ 140 $ 206 $ (66) (32) % $ 182 $ 382 $ (200) (52) %

Other expense, net (3) (88) 85 97%

Total other income (expense), net $ 39 $ 89 $ (50) (56)%

Other income (expense), net (63) 23 (86) (374) % (66) (63) (3) 5 %

Total other income $ 77 $ 229 $ (152) (66) % $ 116 $ 319 $ (203) (64) %

Interest Income

Interest income decreased by $0.1 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to earned interest income and amortization of debt discount on non-marketable debt security in prior year and reduction in interest income from lower average interest rates on declining average cash balances.

Other Expense, net

Other expense, net, decreased by $85.0 thousand in the three months ended March 31, 2022 compared to the same period in 2021, 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 in prior year.

Interest income decreased by $0.1 million and $0.2 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to earned interest income and amortization of debt discount on non-marketable debt security in the prior year and reduction in interest income from lower average interest rates on declining average cash balances.

Other Income (Expense), net

Other income (expense), net, decreased by $86 thousand and $3 thousand in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, 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 in the prior year.

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

Three Months Ended March 31, Change

Three Months Ended June 30, Change Six Months Ended June 30, Change

2022 2021 $ % 2022 2021 $ %

Provision for income taxes $ 108 $ 8 $ 100 1,250 % $ 117 $ 11 $ 106 964 %

The provision for income taxes for the three months ended March 31, 2022 and 2021, were primarily due to the accrual of interest and penalties on historic uncertain tax positions.

Net loss for the three months ended March 31, 2022 was $8.4 million, or a net loss per basic and diluted share of $0.13.

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

The decrease in net loss is primarily related to an increase in product revenues with higher margins, partially offset by higher operating expenses and lower research and development revenues.

The provision for income taxes for the three and six months ended June 30, 2022 and 2021 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 loss for the three months ended June 30, 2022 was $2.6 million, or a net loss per basic and diluted share of $0.04.

This compared to a net loss of $4.3 million, or a net loss per basic and diluted share of $0.07 for the three months ended June 30, 2021.

Net loss for the six months ended June 30, 2022 was $11.0 million, or a net loss per basic and diluted share of $0.17.

This compared to a net loss of $13.3 million, or a net loss per basic and diluted share of $0.21 for the six months ended June 30, 2021.

The decrease in net loss for both the three and six months ended June 30, 2022 was primarily related to an increase in product revenues 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 March 31, Change

Three Months Ended June 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 36,530 $ 1,876 $ 38,406 $ 21,585 $ 3,868 $ 25,453 $ 14,945 69 % $ (1,992) (51) %

Revenues from the Performance Enzymes segment increased by $18.9 million, or 133%, for the three months ended March 31, 2022, compared to the same period in 2021.

The increase in product revenue of $20.5 million, or 200%, in the three months ended March 31, 2022 as compared to the same period in 2021, was primarily due to higher revenue from Pfizer but partially offset by lower revenue from the sales of other enzyme products used in the manufacture of branded pharmaceuticals products.

The decrease in research and development revenue of $1.6 million, or 40%, to $2.4 million in three months ended March 31, 2021, as compared to $4.0 million in the three months ended March 31, 2021 was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement as we completed the technology transfer to Novartis during the third quarter of 2021 and lower research and development fees from other existing collaboration agreements compared to the same period in the prior year.

Revenues from the Novel Biotherapeutics segment decreased by $1.6 million, or 41%, for the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development revenue from Nestlé Health Science.

Six Months Ended June 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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

Product revenue $ 65,335 $ — $ 65,335 $ 24,943 $ — $ 24,943 $ 40,392 162 % $ — — %

Research and development revenue 4,294 4,117 8,411 10,872 7,670 18,542 (6,578) (61) % (3,553) (46) %

Total revenues $ 69,629 $ 4,117 $ 73,746 $ 35,815 $ 7,670 $ 43,485 $ 33,814 94 % $ (3,553) (46) %

Revenues from the Performance Enzymes segment increased by $14.9 million, or 69%, for the three months ended June 30, 2022 and by $33.8 million, or 94%, for the six months ended June 30, 2022 compared to the same periods in 2021.

The increase in product revenue of $19.9 million, or 135%, in the three months ended June 30, 2022, and of $40.4 million, or 162%, in the six months ended June 30, 2022, compared to the same periods in 2021, was primarily due to higher revenue from Pfizer but partially offset by lower revenue from the sales of other enzyme products used in the manufacture of branded pharmaceuticals products.

The decrease in research and development revenue of $5.0 million, or 73%, for the three months ended June 30, 2022 and of $6.6 million, or 61%, in the six months ended June 30, 2022, compared to the same periods in 2021 was primarily due to lower revenues from Novartis under the Novartis CodeEvolver ® Agreement as we completed the technology transfer to Novartis during the third quarter of 2021 and lower research and development fees from other existing collaboration agreements compared to the same period in the prior year.

Revenues from the Novel Biotherapeutics segment decreased by $2.0 million, or 51%, for the three months ended June 30, 2022 and by $3.6 million, or 46%, for the six months ended June 30, 2022 compared to the same periods in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development revenue from Nestlé Health Science recognized this year compared to the prior year.

Costs and operating expenses by segment

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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Total costs and operating expenses $ 41,015 $ 29,939

Six Months Ended June 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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

Cost of product revenue $ 19,791 $ — $ 19,791 $ 8,536 $ — $ 8,536 $ 11,255 132 % $ — — %

Research and development (1)

13,051 23,424 36,475 11,502 11,799 23,301 1,549 13 % 11,625 99 %

Selling, general and administrative (1)

7,416 1,400 8,816 5,988 1,221 7,209 1,428 24 % 179 15 %

Total segment costs and operating expenses $ 40,258 $ 24,824 65,082 $ 26,026 $ 13,020 39,046 $ 14,232 55 % $ 11,804 91 %

Corporate costs (2)

17,110 16,654

Unallocated depreciation and amortization 2,549 1,426

Total costs and operating expenses $ 84,741 $ 57,126

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

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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 $0.3 million, or 5%, in the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to lower allocable expenses, partially offset by 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 $0.7 million, or 26%, in the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to an increase in costs associated with higher headcount and higher stock-based compensation costs.

Research and development expense in the Novel Biotherapeutics segment increased by $7.7 million, or 168%, in the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to higher costs associated with higher headcount, higher facilities cost and lab supplies and higher allocable expenses.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.1 million or 20% in the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to an increase in costs associated with higher headcount and higher stock-based compensation costs.

Research and development expense in the Performance Enzymes segment increased by $1.9 million, or 37%, in the three months ended June 30, 2022 and by $1.5 million, or 13% in the six months ended June 30, 2022, as compared to the same periods in 2021.

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 $0.7 million, or 22%, in the three months ended June 30, 2022, and increased by $1.4 million, or 24%, in the six months ended June 30, 2022, as compared to the same periods in 2021, primarily due to an increase in costs associated with higher headcount and higher outside services expenses, partially offset by lower allocable expenses.

Research and development expense in the Novel Biotherapeutics segment increased by $3.9 million, or 54%, in the three months ended June 30, 2022 and by $11.6 million, or 99% in the six months ended June 30, 2022, as compared to the same periods in 2021.

The increase was primarily due to higher costs associated with higher headcount, higher facilities cost and lab supplies, increase in outside services related to CMC and regulatory expenses and higher allocable expenses.

Selling, general and administrative expense in the Novel Biotherapeutics segment remained unchanged for the three and six months ended June 30, 2022 as compared to the same periods in 2021.

LIQUIDITY AND CAPITAL RESOURCES

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Our cash and cash equivalents are held in U.S.

The following summarizes our cash and cash equivalents balance and working capital as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022 December 31, 2021

The following summarizes our cash and cash equivalents balance and working capital as of June 30, 2022 and December 31, 2021 (in thousands):

June 30, 2022 December 31, 2021

Cash and cash equivalents $ 90,113 $ 116,797

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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.

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

We are actively collaborating with new and existing customers in th e 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.

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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 EDA up to a maximum of $50.0 million of shares of our common stock.

During the three months ended March 31, 2022, no shares of our common stock were issued pursuant to the EDA and as of March 31, 2022, $50.0 million worth of shares remained available for sale under the EDA.

During the six months ended June 30, 2022, no shares of our common stock were issued pursuant to the EDA and as of June 30, 2022, $50.0 million worth 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 unce rtainties 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.

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Our right to take draws on the term debt expired on December 31, 2021.

On October 1, 2024, loans drawn under the Revolving Line of Credit terminate.

On October 1, 2024, loans drawn, if any, under the Revolving Line of Credit terminate.

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.

As of March 31, 2022, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility.

As of June 30, 2022, no amounts were borrowed under the Credit Facility and we were in compliance with the covenants for the Credit Facility.

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 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.

We believe that our existing cash and cash equivalents, combined with our future expectations for product revenues, research and development revenue, and expense management will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirement s through the end of 2024.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our capital resources sooner than we expect.

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

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

The following is a summary of cash flows for three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,

The following is a summary of cash flows for six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended June 30,

Net cash used in operating activities $ (13,367) $ (14,735)

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Cash Flows from Operating Activities

Cash used in operating activities for the three months ended March 31, 2022 of $11.2 million consisted of net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

The $4.7 million increase in net cash used in operations for the three months ended March 31, 2022 as compared to the same period in 2021, was primarily due to the net effect of increases in cash paid for cost of revenues and operating expenses and changes in operating assets and liabilities, partially offset by increases in cash received from revenue.

Cash used in operating activities for the six months ended June 30, 2022 o f $13.4 million consisted of net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

The $1.4 million decrease in net cash used in operations for the six months ended June 30, 2022 as compared to the same period in 2021, was primarily due to the increases in cash received from revenue, partially offset by the net effect of increases in cash paid for cost of revenues and operating expenses and changes in operating assets and liabilities.

Cash Flows from Investing Activities

Cash used in investing activities for the three months ended March 31, 2022 was primarily attributable to $5.0 million for the purchase of 1,000,000 shares of seqWell Series C preferred stock in March 2022 an d $5.1 million for purchases of property and equipment.

Th e $7.5 million increase in net cash used in investing activities for the three months ended March 31, 2022 as compared to the same period in 2021, was primarily due to higher cash utilized for additional investment in equity securities and purchases of property and equipment.

Cash used in investing activities for the six months ended June 30, 2022 was primarily attributable to $5.3 million for additional new equity investments in privately held companies and $7.0 million for purchases of property and equipment during the period.

The $7.4 million increase in net cash used in investing activities for the six months ended June 30, 2022 as compared to the same period in 2021, was primarily due to higher cash utilized for additional investments in equity securities and purchases of property and equipment.

Cash Flows from Financing Activities

Cash used in financing activities for the three months ended March 31, 2022 included $1.4 million for taxes paid related to net share settlement of equity awards offset by $0.2 million of proceeds from exercises of stock options.

The $1.3 million increase in net cash used financing activities for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to lower proceeds from exercises of stock options and higher cash paid on taxes related to net share settlement of equity awards.

Cash used in financing activities for the six months ended June 30, 2022 included $1.4 million for taxes paid related to net share settlement of equity awards offset by $0.4 million of proceeds from exercises of stock options.

The $1.5 million increase in net cash used in financing activities for the six months ended June 30, 2022 as compared to the same period in 2021 was primarily due to higher cash paid on taxes related to net share settlement of equity awards and lower proceeds from exercises of stock options.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of 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.

The of 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 months ended March 31, 2022 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

There have been no material changes to our critical accounting policies or estimates during the three and six months ended June 30, 2022 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis