What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 115 added, 102 removed, 280 unchanged (44% of the section changed)

66 unchanged sentences

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 and six months ended June 30, 2022.

Furthermore, our ability to provide future R&D services will continue to be impacted by 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 and nine months ended September 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.

1 unchanged sentence

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;

As a result of the COVID-19 pandemic, we have 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 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 and six months ended June 30, 2022 and for the year ended December 31, 2021.

See below under “Recent Developments.”

In July 2022, we entered into an Enzyme Supply Agreement, effective as of October 30, 2021, with Pfizer Ireland Pharmaceuticals, a subsidiary of 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, pursuant to the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which is creditable against future orders of CDX-616 used to manufacture its PAXLOVID™ .

The sale of CDX-616 to Pfizer have had substantial impact on our revenue for the three and nine months ended September 30, 2022 and for the year ended December 31, 2021.

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 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.

Although some of the government 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 government 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 $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.

Revenues were $34.5 million in the third quarter of 2022, a 6% decrease from $36.8 million in the third quarter of 2021.

Product revenue, which consists primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $28.0 million in the third quarter of 2022, a decrease of 2% from $28.7 million in the third quarter of 2021.

The decrease was primarily due to $6.0 million lower revenue from Pfizer related to their decreased purchases of CDX-616 during the third quarter of 2022, but was partially offset by $5.3 million higher revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products.

We expect the sale of CDX-616 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 $6.4 million in the third quarter of 2022, a 20% decrease compared with $8.0 million in the third 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 third 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.

1 unchanged sentence

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 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.

Product gross margins were 65% in the third quarter of 2022, compared to 76% in the third 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 $21.8 million in the third quarter of 2022, an increase of 44% from $15.2 million in the third 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.

Selling, general and administrative expenses were $13.5 million in the third quarter of 2022 and remained unchanged as compared to the same period in 2021.

Net loss was $10.0 million, or a net loss of $0.15 per basic and diluted share in the third quarter of 2022 compared to a net income of $2.2 million, or a net income of $0.03 per basic and diluted share for the third quarter of 2021.

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

Cash and cash equivalents decreased to $108.7 million as of September 30, 2022 compared to $116.8 million as of December 31, 2021.

In addition, net cash inflows from operations was $6.4 million i n the nine months ended September 30, 2022 compared to $14.9 million net cash outflows in the nine months ended September 30, 2021.

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”).

2 unchanged sentences

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

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.

As of September 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.

6 unchanged sentences

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 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.

We recognized product revenue of $2.4 million and $5.1 million under this agreement for the three and nine months ended September 30, 2022, respectively, compared to $1.9 million and $7.3 million for the three and nine months ended September 30, 2021, respectively.

Revenues recognized by us under the Sitagliptin Catalyst Supply Agreement comprised 7% and 5% of our total revenues for the three and nine months ended September 30, 2022, respectively, compared to 5% and 9% for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022 , we recorded revenue of $2.0 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 third quarter of 2022.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

9 unchanged sentences

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.

Under the Nestlé SCA and the development agreement, we recogni zed $2.2 million and $3.8 million in research and development fees for the three and nine months ended September 30, 2022, respectively, compared to $2.4 million and $5.8 million for the three and nine months ended September 30, 2021, respectively.

Platform Technology Transfer and License Agreement

2 unchanged sentences

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.

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

In addition, our teams 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.

4 unchanged sentences

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 over four years which amount to an additional $8.0 million in aggregate.

We expect to receive the first annual payment of $2.0 million in the fourth quarter of 2022.

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.

1 unchanged sentence

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

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.

We recognized $0.2 million and $0.7 million in r esearch and development revenue for the three and nine months ended September 30, 2022, respectively, compared to $0.2 million and $1.4 million for the three and nine months ended September 30, 2021, respectively.

Strategic Collaboration and License Agreement

4 unchanged sentences

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 $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.

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 Initial Programs of $10.5 million, in aggregate, and $4.7 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 $1.3 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

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.

We recognized research and development revenue related to the Takeda Agreement of $1.2 million a nd $3.7 million for the three and nine months ended September 30, 2022, respectively, compared to $1.8 million and $6.0 million for the three and nine months ended September 30, 2021, respectively.

Enzyme Supply Agreement

In July 2022, we entered into the Pfizer Supply Agreement covering the manufacture, sale and purchase of CDX-616 for use by Pfizer in the manufacture of nirmatrelvir.

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

ritonavir tablets) product.

The fee is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates prior to December 31, 2023 and for fees associated with any new development and licensing agreements with Pfizer entered into prior to December 31, 2022 that are invoiced prior to December 31, 2023.

Up to 50% of any portion of the fee which has not been credited pursuant to credits granted under the preceding sentence is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates prior to December 31, 2024.

We recognized product revenue of $12.9 million and $58.0 million for the three and nine months ended September 30, 2022 , respectively, compared to $18.9 million and $23.2 million for the three and nine months ended September 30, 2021, respectively, from the sale of quantities of CDX-616 to Pfizer.

Revenues recognized by us from sales of CDX-616 to Pfizer comprised 38% and 54% of our total revenues for the three and nine months ended September 30, 2022, respectively, and 51% and 29% for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022, we recorded revenue of $19.4 million from the sale of certain quantities of CDX-616 that were recognized over time based on the progress of the manufacturing process.

These quantities will be shipped within the four month period following the end of the third quarter of 2022.

As of September 30, 2022, we had $5.2 million in deferred revenue related to the $25.9 million fee received from Pfizer, net of $19.4 million in contract assets that was offset against deferred revenue as it relates to the same performance obligation within the same agreement and net of $1.3 million of product revenue recognized from the fee during the three months ended September 30, 2022.

We had nil in contract assets as of September 30, 2022.

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 June 30, Change Six Months Ended June 30, Change

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

7 unchanged sentences

Total costs and operating expenses 45,106 35,439 9,667 27 % 129,846 92,565 37,281 40 %

Loss from operations (2,609) (4,486) 1,877 (42) % (10,995) (13,641) 2,646 (19) %

Income (loss) from operations (10,636) 1,330 (11,966) (900) % (21,631) (12,312) (9,319) 76 %

Interest income 436 41 395 963 % 618 424 194 46 %

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) %

Other income, net 216 983 (767) (78) % 150 920 (770) (84) %

Income (loss) before income taxes (9,984) 2,354 (12,338) (524) % (20,863) (10,968) (9,895) 90 %

Provision for income taxes 8 110 (102) (93) % 125 121 4 3 %

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

Net income (loss) $ (9,992) $ 2,244 $ (12,236) (545) % $ (20,988) $ (11,089) $ (9,899) 89 %

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

2 unchanged sentences

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

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

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

8 unchanged sentences

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 $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.

Total revenues decreased by $2.3 million in the three months ended September 30, 2022, compared to the same period in 2021, primarily due to lower product revenue and lower research and development revenue.

The increase of $28.0 million in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to higher product revenue, which was partially offset by lower research and development revenue.

Product revenue, decreased by $0.7 million in the three months ended September 30, 2022, compared to the same period in 2021, primarily due to $6.0 million lower revenue from Pfizer related to their decreased purchases of CDX-616 during the third quarter of 2022, but was partially offset by $5.3 million higher revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products, The increase of $39.7 million in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to 2021 revenue from Pfizer sales largely occurring in the second half of 2021 whereas we reported $58.0 million in revenue from Pfizer related to the purchase of CDX-616 in the nine months ended September 30, 2022.

Research and development revenue decreased by $1.6 million and $11.7 million in the three and nine months ended September 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

1 unchanged sentence

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 June 30, Change Six Months Ended June 30, Change

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

7 unchanged sentences

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 June 30, Change Six Months Ended June 30, Change

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

7 unchanged sentences

(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 $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.

Cost of product revenue increased by $2.9 million in the three months ended September 30, 2022 and by $14.2 million in the nine months ended September 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.

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.

Product gross margins were 65% and 68% in the three and nine months ended September 30, 2022, respectively, compared to 76% and 71% 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

2 unchanged sentences

Research and development expenses are expensed when incurred.

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.

Research and development expenses increased by $6.7 million, or 44%, during the three months ended September 30, 2022, and by $20.8 million, or 53%, in the nine months ended September 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.

1 unchanged sentence

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 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

Selling, general and administrative expenses remained unchanged for the three months ended September 30, 2022 as compared to the same period in 2021.

The increase of $2.3 million, or 6%, in the nine months ended September 30, 2022 compared to the same period in 2021, was primarily due to increase in costs associated with a higher headcount and higher outside and temporary services, and was partially offset by decrease in legal fees and lower allocable expenses.

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

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

Interest income $ 436 $ 41 $ 395 963 % $ 618 $ 424 $ 194 46 %

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

Other income, net 216 983 (767) (78) % 150 920 (770) (84) %

Total other income $ 652 $ 1,024 $ (372) (36) % $ 768 $ 1,344 $ (576) (43) %

Interest Income

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.

Interest income increased by $0.4 million and $0.2 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to higher average interest rates on cash balances and was partially offset by earned interest income and amortization of debt discount on non-marketable debt security in the prior year.

Other Income, net

Other income, net, decreased by $0.8 million and $0.8 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to a higher gain recognized from remeasurement of the carrying value of our investment in MAI in the prior year compared to this year.

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

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

Three Months Ended September 30, Change Nine Months Ended September 30, Change

2022 2021 $ % 2022 2021 $ %

Provision for income taxes $ 8 $ 110 $ (102) (93) % $ 125 $ 121 $ 4 3 %

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.

The provision for income taxes for the three and nine months ended September 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.

The Tax Cuts and Jobs Act of 2017 provided for significant changes to the U.S tax system including the mandatory capitalization of research and development expenses starting in 2022.

While we are still assessing the legislation's potential impact, we do not expect it to have a material effect on our financial statements.

Net loss for the three months ended September 30, 2022 was $10.0 million, or a net loss per basic and diluted share of $0.15.

This compared to a net income of $2.2 million, or a net income per basic and diluted share of $0.03 for the three months ended September 30, 2021.

Net loss for the nine months ended September 30, 2022 was $21.0 million, or a net loss per basic and diluted share of $0.32.

This compared to a net loss of $11.1 million, or a net loss per basic and diluted share of $0.17 for the nine months ended September 30, 2021.

The increase in net loss for both the three and nine months ended September 30, 2022 was primarily related to a decrease in product revenues with higher margins, lower research and development revenues and higher operating expenses.

RESULTS OF OPERATIONS BY SEGMENT (in thousands, except percentages):

Revenues by segment

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

3 unchanged sentences

Total revenues $ 31,146 $ 3,324 $ 34,470 $ 32,584 $ 4,185 $ 36,769 $ (1,438) (4) % $ (861) (21) %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

3 unchanged sentences

Total revenues $ 100,774 $ 7,441 $ 108,215 $ 68,397 $ 11,856 $ 80,253 $ 32,377 47 % $ (4,415) (37) %

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.

Revenues from the Performance Enzymes segment decreased by $1.4 million, or 4%, for the three months ended September 30, 2022 and increased by $32.4 million, or 47%, for the nine months ended September 30, 2022 compared to the same periods in 2021.

The decrease in product revenue of $0.7 million, or 2%, in the three months ended September 30, 2022, compared to the same period in 2021 was primarily due to $6.0 million lower revenue from Pfizer related to their decreased purchases of CDX-616 during the third quarter of 2022, but was partially offset by $5.3 million higher revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products.

The increase in product revenue of $39.7 million, or 74%, in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to 2021 product revenue from Pfizer sales largely occurring in the second half of 2021 whereas we reported $58.0 million in revenue from Pfizer for the nine months ended September 30, 2022.

The decrease in research and development revenue of $0.7 million, or 19%, for the three months ended September 30, 2022 and of $7.3 million, or 50%, in the nine months ended September 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 $0.9 million, or 21%, for the three months ended September 30, 2022 and by $4.4 million, or 37%, for the nine months ended September 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 June 30, Change

Three Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

9 unchanged sentences

Total costs and operating expenses $ 45,106 $ 35,439

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

13 unchanged sentences

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

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.

Research and development expense in the Performance Enzymes segment increased by $1.1 million, or 20%, in the three months ended September 30, 2022 and by $2.7 million, or 15%, in the nine months ended September 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.

Selling, general and administrative expense in the Performance Enzymes segment increased by $0.5 million, or 15%, in the three months ended September 30, 2022, and increased by $1.9 million, or 21%, in the nine months ended September 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.

Research and development expense in the Novel Biotherapeutics segment increased by $5.0 million, or 57%, in the three months ended September 30, 2022 and by $16.6 million, or 81% in the nine months ended September 30, 2022, as compared to the same periods in 2021.

The increase was primarily due to increased 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 increased by $0.1 million, or 7%, in the three months ended September 30, 2022 and by $0.2 million, or 12%, in the nine months ended September 30, 2022, as compared to the same periods in 2021.

The increase was primarily due to increased costs associated with higher headcount.

LIQUIDITY AND CAPITAL RESOURCES

4 unchanged sentences

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

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

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

September 30, 2022 December 31, 2021

Cash and cash equivalents $ 108,689 $ 116,797

7 unchanged sentences

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 shortly after the effective date and we also received milestone payments upon completion of the second technology milestone transfer in 2020 and the third technology milestone in 2021.

Pursuant to the agreement, we received an upfront payment shortly after the effective date and we also received milestone payments upon completion of the second technology milestone transfer in 2020 and the third technology milestone in 2021.

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 an additional $8.0 million in aggregate over four years.

W e expect to receive the first annual payment of $2.0 million in the fourth quarter of 2022 .

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

1 unchanged sentence

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.

Pursuant to the terms of the Pfizer Supply Agreement, we received a fee of $25.9 million in August 2022.

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

6 unchanged sentences

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 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.

During the nine months ended September 30, 2022, no shares of our common stock were issued pursuant to the EDA and as of September 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.

5 unchanged sentences

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

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.

As of September 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.

11 unchanged sentences

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 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)

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

Nine Months Ended September 30,

Net cash provided by (used in) operating activities $ 6,367 $ (14,927)

Net cash used in investing activities (13,611) (15,942)

2 unchanged sentences

Cash Flows from Operating Activities

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 used in operating activities for the nine months ended September 30, 2022 of $6.4 million consisted of net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

The $21.3 million increase in net cash provided by operating activities for the nine months ended September 30, 2022 as compared to the same period in 2021, was primarily due to the receipt of $25.9 million fee from Pfizer and increases in cash received from revenue, partially offset by increased payments associated with higher operating costs.

Cash Flows from Investing Activities

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 used in investing activities for the nine months ended September 30, 2022 was primarily attributable to $5.3 million for additional new equity investments in privately held companies and $8.3 million for purchases of property and equipment during the period.

The $2.3 million decrease in net cash used in investing activities for the nine months ended September 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 in prior year.

Cash Flows from Financing Activities

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.

Cash used in financing activities for the nine months ended September 30, 2022 included $1.5 million for taxes paid related to net share settlement of equity awards offset by $0.6 million of proceeds from exercises of stock options.

The $2.3 million decrease in net cash provided by financing activities for the nine months ended September 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 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.

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.

Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies or estimates during the three and six months ended June 30, 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 nine months ended September 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