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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-04 · 128 added, 225 removed, 170 unchanged (67% of the section changed)

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Business Overview

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

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

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

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

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

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

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

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

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

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

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

This approach results in an optimized biocatalyst that enables cost-efficient processes that are relatively simple to run in conventional manufacturing equipment allowing for efficient technical transfer of our processes to our manufacturing partners.

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

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

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

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

In May 2019, we entered into a Platform Technology Transfer and License Agreement (the "Novartis CodeEvolver ® Agreement") with Novartis Pharma AG ("Novartis").

The Novartis CodeEvolver ® Agreement (Codexis' third such agreement with large pharmaceutical companies) allows Novartis to use our proprietary CodeEvolver ® protein engineering platform technology in the field of human healthcare.

As evidence of our strategy to extend our technology beyond pharmaceutical manufacturing, we have also used the technology to develop biocatalysts and enzyme products for use in a broader set of industrial markets, including several large verticals, such as food, feed, consumer care and fine chemicals.

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

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

with our first enzyme for this target market:

the Company’s EvoT4™ DNA ligase.

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

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

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

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

In October 2017, we entered into a Global Development, Option and License Agreement (the “Nestlé License Agreement”) with Societé des Produits Nestlé S.A., formerly known as Nestec Ltd.

(“Nestlé Health Science”) to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.

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

Also in October 2017, we entered into a strategic collaboration agreement with Nestle Health Science (“Nestlé SCA”) pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® platform technology to develop other novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

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

BUSINESS SEGMENTS

We are a leading enzyme engineering company leveraging our proprietary CodeEvolver ® technology platform to discover, develop, enhance, and commercialize novel, high performance enzymes and other classes of proteins.

Enzymes are naturally occurring biological molecules critical to almost all biochemical reactions that sustain life.

They can be precisely engineered and optimized for specific functions, and to have particular characteristics, such as an ability to survive environments in which natural enzymes cannot, or to perform (bio)chemical transformations different than those for which they naturally evolved.

The capacity to enhance the properties and performance of enzymes has led to pivotal improvements across three healthcare industry pillars:

pharmaceutical manufacturing, life sciences, and biotherapeutics.

The enzymes we produce solve for real-world challenges associated with small molecule pharmaceuticals manufacturing, nucleic acid synthesis and genomic sequencing, and – as biotherapeutic candidates – they have the potential to treat challenging diseases.

Our unique enzymes drive improvements such as higher yields, reduced energy usage and waste generation, improved efficiency in manufacturing, greater sensitivity in genomic and diagnostic applications, and potentially more efficacious therapeutics.

We manage our business as two business segments:

Performance Enzymes and Novel Biotherapeutics.

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

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

Performance Enzymes

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

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

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

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

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

Our performance enzymes business consists primarily of two focus areas:

biocatalysts for the sustainable manufacturing of pharmaceuticals and enzymes for life science applications, including genomic sequencing and nucleic acid synthesis.

In our pharmaceutical manufacturing business, we utilize our CodeEvolver ® platform to develop optimized enzymes that are used by some of the world’s largest pharmaceutical companies to reduce their costs and improve the efficiency and productivity of their manufacturing processes for some small molecule therapeutics.

In life science markets, we use our platform technology to develop enzymes for customers using next generation sequencing (“NGS”), a parallel sequencing technology used to identify genomic information in the study of biological systems, and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well as for synthesis of nucleic acids such as DNA/RNA.

Novel Biotherapeutics

We are also targeting new opportunities in the pharmaceutical industry to discover, improve, and/or develop biotherapeutic drug candidates.

We believe that our CodeEvolver ® protein engineering platform technology can be used to discover novel biotherapeutic drug candidates that will target human diseases that are in need of improved therapeutic interventions.

Similarly, we believe that we can deploy our platform technology to improve specific characteristics of a customer’s pre-existing biotherapeutic drug candidate, such as its activity, stability or immunogenicity.

Our novel biotherapeutics business includes a diverse pipeline of product candidates in clinical and preclinical development.

Our initial biotherapeutic product candidates include enzymes that are orally administered for function in the gastrointestinal tract (“GI”), such as our partnered product candidates CDX-7108 for the treatment of exocrine pancreatic insufficiency (“EPI”) and CDX-6114 for the treatment of phenylketonuria (“PKU”), which are both in Phase 1 clinical trials.

We have also engineered a series of transgenes that code for enzymes that may be used as gene therapies to treat rare lysosomal storage disorders with our partner Takeda, such as Fabry Disease and Pompe Disease, as well as a blood factor disorder.

Business Update Regarding COVID-19

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

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

economy and other economies worldwide.

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

To date, we and our collaboration partners have been able to continue to supply our enzymes to our customers worldwide, however, there can be no guarantee this will continue.

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.

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 Inc.

In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide.

The spread of COVID-19 has affected segments of the global economy and may affect our operations, including the potential interruption of our supply chain.

We are monitoring this situation closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain.

As a result of the COVID-19 pandemic, in 2021 and 2022 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 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.

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.

We are a party to an Enzyme Supply Agreement 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 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.

Results of Operations Overview

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.

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

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

Product gross margins 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 $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.

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 at least 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”).

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

Draws on the term debt are subject to customary conditions for funding.

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

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.

Under the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue.

Pursuant to the agreement, 90% of the fee ($23.3 million) is creditable against (i) future orders of CDX-616 used to manufacture its PAXLOVID™ with shipment dates prior to December 31, 2023, and (ii) fees associated with any new development and licensing agreements with Pfizer entered into prior to April 4, 2023.

Subsequent to the end of the quarter, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we expect to recognize $5.0 million as non-cash research and development revenue in the second quarter of 2023.

Pfizer's ability to utilize the credit under item (ii) above expired on April 4, 2023.

Up to 50% of any portion of the $25.9 million which has not been credited under items (i) and (ii) is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates in 2024.

The sale of CDX-616 to Pfizer had a substantial impact on our revenues in 2021 and 2022.

Revenues in 2023 and in future years from our sales of CDX-616 to Pfizer and other potential customers (including sublicensees of Pfizer technology from The Medicine Patent Pool) are subject to a number of factors which are outside of our control and could reduce or eliminate our sales of CDX-616, and therefore materially and adversely affect our business, results of operations and financial conditions.

Significant Collaborative Arrangements Update

Merck Sitagliptin Catalyst Supply Agreement

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In September 2021, the Sitagliptin Catalyst Supply Agreement was amended to extend the agreement through December 2026.

Effective as of January 2016, we and Merck amended the Sitagliptin Supply Agreement to prospectively provide for variable pricing based on the cumulative volume of sitagliptin enzyme purchased by Merc k.

We have previously determined that the variable pricing, which provides a discount based on the cumulative volume of sitagliptin enzyme purchased by Merck, provides Merck material rights and we recognized product revenues using the alternative method wherein we estimated the total expected consideration and allocated it proportionately with the expected sales.

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 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.

We recognized $3.0 million and $1.7 million under this agreement for the three months ended March 31, 2023 and 2022, respectively, which represented 23% and 5% of our total revenues for those periods.

As of March 31, 2023 , we recorded revenue o f $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 first quarter of 2023.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

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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.

In October 2017, we entered into the Nestlé SCA pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® protein engineering technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

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 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 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.

In October 2017, we entered into the Nestlé Strategic Collaboration Agreement (“SCA”) pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® protein engineering technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas.

The term of the Nestlé SCA has been extended through December 2023 with an automatic renewal through December 2024.

The term of the development has been extended through December 2023 with an automatic renewal through December 2024.

We, together with Nestlé Health Science, are continuing to advance CDX-7108 and initiated a Phase 1 clinical trial of CDX-7108 for the treatment of EPI in the fourth quarter of 2021 and, on February 23, 2023, we and Nestlé Health Science announced interim results.

Interim data from the proof-of-concept arm showed improved lipid absorption when patients were administered CDX-7108 versus placebo.

Importantly, no notable safety issues were noted in the 48 subjects that participated in the single ascending dose and multiple ascending dose portion of the study.

We believe the interim data support further development of CDX-7108 in partnership with Nestlé Health Science, with potential for the initiation of a Phase 2 study in 2024.

Under the Nestlé SCA and the development agreement, we recognize d $1.8 million and $1.1 million in research and development fees for the three months ended March 31, 2023 and 2022, respectively.

Platform Technology Transfer and License Agreement

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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.

We received 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.

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

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.

We recognize d $0.3 million and $0.2 million in research and development revenue for the three months ended March 31, 2023 and 2022, 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 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.

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 $12.0 million, in aggregate, and $4.2 million for the fourth program, (ii) clinical development and commercialization-based milestones, per target gene, of up t o $104.0 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.

O n February 22, 2023, w e announced that Takeda presented pre-clinical data from the Fabry Disease transgene program, part of its Strategic Collaboration and License Agreement with Codexis, at the 19th Annual WORLD Symposium ™ .

The gene therapy candidate is being developed to encode the codon optimized, CodeEvolver ® engineered-GAL enzyme, which is designed to have improved serum and lysosomal stability and a predicted reduced immunogenicity.

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 $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.

We recognized research and development revenue related to the Takeda Agreement of $1.7 million a nd $1.2 million for the three months ended March 31, 2023 and 2022, respectively.

Pfizer Enzyme Supply Agreement

We are a party to the Pfizer Supply Agreement, covering the manufacture, sale and purchase of CDX-616 for use by Pfizer in the manufacture of nirmatrelvir.

Under the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue.

Pfizer's ability to utilize the credit under item (ii) above expired on April 4, 2023.

No revenue was recognized from the Pfizer Supply Agreement during the three months ended March 31, 2023.

We recognized product revenue of $21.3 million for the three months ended March 31, 2022 from the sale of quantities of CDX-616 to Pfizer which comprised 60% of our total revenues for the three months ended March 31, 2022.

As of March 31, 2023 and December 31, 2022, we had $24.4 million in deferred revenue related to the $25.9 million fee received from Pfizer.

Results of Operations

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

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

Three Months Ended March 31, Change

2023 2022 $ %

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Selling, general and administrative 15,399 15,705 (306) (2)%

Restructuring charges 72 — 72 100%

Total costs and operating expenses 36,647 43,726 (7,079) (16)%

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

Loss from operations (23,665) (8,386) (15,279) 182%

Interest income 1,089 42 1,047 2,493%

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 %

Other expense, net (25) (3) (22) 733%

Loss before income taxes (22,601) (8,347) (14,254) 171%

Provision for income taxes 16 9 7 78%

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

Net loss $ (22,617) $ (8,356) $ (14,261) 171%

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

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

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

Three Months Ended March 31, Change

2023 2022 $ %

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

Total revenues decreased by $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.

Total revenues decreased by $22.4 million to $13.0 million in the three months ended March 31, 2023 compared to the same period in 2022, or 63%, primarily due to lower product revenue.

Product revenue, decreased by $22.3 million to $8.4 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to decreased sales of CDX-616 to Pfizer.

Research and development revenue remained unchanged in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to higher revenue from Nestlé Health Science under the Nestlé SCA and development agreement which was offset by lower research and development fees from existing collaboration agreements being recognized in the first quarter of 2023 as compared to the same period in the prior year.

Cost and Operating Expenses

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

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

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

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

Three Months Ended March 31, Change

2023 2022 $ %

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Selling, general and administrative 15,399 15,705 (306) (2)%

Restructuring charges 72 — 72 100%

Total costs and operating expenses $ 36,647 $ 43,726 $ (7,079) (16)%

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

Revenues from the Novel Biotherapeutics segment are only from collaborative research and development activities.

Revenues from the Novel Biotherapeutics segment are derived entirely from collaborative research and development activities as we have no approved products available for sale.

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

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

Three Months Ended March 31, Change

2023 2022 $ %

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Product gross margin (%) (2)

65 % 76 % 68 % 71 %

(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 $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 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.

Cost of product revenue decreased by $4.0 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a lower volume of product sales as compared to the same period in prior year.

The product gross margin decreased to 46% in the three months ended March 31, 2023 compared to 72% in the three months ended March 31, 2022, primarily due to the sales of lower margin products, including sitagliptin, and variation in prices per volume sold.

Research and Development Expenses

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Research and development expenses are expensed when incurred.

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.

Research and development expenses were $16.7 million in the first quarter of 2023, a decrease of $2.8 million, or 15%, from $19.5 million in the first quarter of 2022.

The decrease was primarily due to decreases in costs associated with lower headcount, decrease in outside services related to Chemistry, Manufacturing and Controls ( “CMC” ) and regulatory expenses, lower stock-based compensation costs and lower lab supply costs.

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 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

Selling, general and administrative expenses were $15.4 million in the first quarter of 2023, a decrease of $0.3 million, or 2%, compared to $15.7 million in the first quarter of 2022.

The decrease was primarily due to lower legal fees and lower stock-based compensation costs, which was partially offset by higher payroll-based expenses and higher outside and temporary services.

Restructuring Charges

Restructuring charges consist of one-time employee severance and other termination benefits due to a workforce reduction plan that was initiated in the fourth quarter of 2022.

Restructuring charges were $0.1 million for the three months ended March 31, 2023.

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

Three Months Ended March 31, Change

2023 2022 $ %

Interest income $ 1,089 $ 42 $ 1,047 2,493 %

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

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

Other expense, net (25) (3) (22) 733 %

Total other income, net $ 1,064 $ 39 $ 1,025 2,628 %

Interest Income

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.

Interest income increased by $1.0 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to higher average interest rates on cash balances.

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

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

Three Months Ended March 31, Change

2023 2022 $ %

Provision for income taxes $ 16 $ 9 $ 7 78%

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.

The provision for income taxes for the three months ended March 31, 2023 was primarily for current year state income taxes and the accrual of interest and penalties on historic uncertain tax positions.

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

Net loss for the three months ended March 31, 2023 was $22.6 million, or a net loss per basic and diluted share of $0.34.

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

The increase in net loss is primarily related to lower product revenues from CDX-616, which was partially offset by lower operating expenses.

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

Revenues by segment

Three Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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

Product revenue $ 28,042 $ — $ 28,042 $ 28,731 $ — $ 28,731 $ (689) (2) % $ — — %

Research and development revenue 3,104 3,324 6,428 3,853 4,185 8,038 (749) (19) % (861) (21) %

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

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 9,486 $ 3,496 $ 12,982 $ 33,099 $ 2,241 $ 35,340 $ (23,613) (71)% $ 1,255 56%

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.

Revenues from the Performance Enzymes segment decreased by $23.6 million, or 71%, for the three months ended March 31, 2023, compared to the same period in 2022.

The decrease in product revenue of $22.3 million, or 73%, in the three months ended March 31, 2023 as compared to the same period in 2022, was primarily due to decreased sales of CDX-616 to Pfizer.

The decrease in research and development revenue of $1.3 million, or 53%, to $1.1 million in the three months ended March 31, 2023, as compared to $2.4 million in the three months ended March 31, 2022 was primarily due to lower research and development fees from existing collaboration agreements compared to the same period in the prior year.

Revenues from the Novel Biotherapeutics segment increased by $1.3 million, or 56%, for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to higher research and development revenue from Nestlé Health Science under the Nestlé SCA and development agreement.

Costs and operating expenses by segment

Three Months Ended September 30, Change

2022 2021 Performance Enzymes Novel Biotherapeutics

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

Cost of product revenue $ 9,786 $ — $ 9,786 $ 6,867 $ — $ 6,867 $ 2,919 43 % $ — — %

Research and development (1)

6,782 13,855 20,637 5,670 8,850 14,520 1,112 20 % 5,005 57 %

Selling, general and administrative (1)

3,791 888 4,679 3,306 831 4,137 485 15 % 57 7 %

Total segment costs and operating expenses $ 20,359 $ 14,743 35,102 $ 15,843 $ 9,681 25,524 $ 4,516 29 % $ 5,062 52 %

Corporate costs (2)

Unallocated depreciation and amortization 1,405 794

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

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

5 unchanged sentences

2,798 951 3,749 3,541 720 4,261 (743) (21)% 231 32%

Restructuring charges — 72 72 — — — — —% 72 100%

Total segment costs and operating expenses $ 15,418 $ 8,335 $ 23,753 $ 18,184 $ 13,066 31,250 $ (2,766) (15)% $ (4,731) (36)%

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

(2) Corporate costs include unallocated selling, general and administrative expenses.

(2) Corporate costs include unallocated selling and general and administrative expenses.

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

Research and development expense in the Performance Enzymes segment increased by $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.

Research and development expense in the Performance Enzymes segment increased by $2.0 million, or 32%, in the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to higher allocable costs and higher stock-based compensation costs which was offset by decrease in costs associated with lower headcount and decrease in costs associated with outside services and lab supply costs.

Selling, general and administrative expense in the Performance Enzymes segment decreased by $0.7 million, or 21%, in the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to decrease in costs associated with lower headcount and lower stock-based compensation costs.

Research and development expense in the Novel Biotherapeutics segment decreased by $5.0 million, or 41%, in the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to decrease in costs associated with lower headcount, decrease in outside services related to CMC and regulatory expenses and lower lab supply costs.

Selling, general and administrative expense in the Novel Biotherapeutics segment increased by $0.2 million or 32% in the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to higher payroll-based expenses and higher outside and temporary services.

LIQUIDITY AND CAPITAL RESOURCES

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We have historically funded our operations primarily through cash generated from operations, stock option exercises and public and private offerings of our common stock.

We also have the ability to borrow up to $5.0 million under our Credit Facility.

We actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our working capital needs.

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

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

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, research and development expenses including costs related to the potential clinical development of our product candidates, manufacturing costs, laboratory and related supplies, legal and other regulatory expenses, and general overhead costs.

We expect our cash requirements to increase in the near term as we continue to invest in high potential research and development activities with long-term commercial potential, if approved, and see less cash revenue from sales of CDX-616 to Pfizer for PAXLOVID™.

The following summarizes our cash and cash equivalents balance and working capital as of March 31, 2023 and December 31, 2022 (in thousands):

March 31, 2023 December 31, 2022

Cash and cash equivalents $ 102,831 $ 113,984

1 unchanged sentence

Sources of Capital

In addition to our existing cash and cash equivalents, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain royalty payments under our collaboration agreements.

In addition to our existing cash and cash equivalents and revenue generated through our existing operations, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain royalty payments under our collaboration agreements with Merck, Novartis and Nestlé Health Science of up to $439.0 million in the aggregate.

In addition, under the GSK CodeEvolver ® Agreement, we have the potential to receive additional contingent payments that range from $5.8 million to $38.5 million per project.

Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome of our collaborators’ research and development activities and is uncertain at this time .

Under the Merck CodeEvolver ® Agreement, we are eligible to receive payments of up t o $15.0 million for each commercial API that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver ® technology.

In addition, under the GSK CodeEvolver ® Agreement, depending upon GSK's successful application of the licensed technology, we have the potential to receive additional contingent payments that range from $5.8 million to $38.5 million per project.

In May 2019, we entered into the Platform Technology Transfer and License Agreement with Novartis.

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

Pursuant to the agreement, we received an upfront payment 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.

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

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.

In addition, pursuant to the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue.

Pfizer's ability to utilize the credit under item (ii) above expired on April 4, 2023.

We are actively collaborating with new and existing customers.

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 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.

During the three months ended March 31, 2023, 327,480 shares of our common stock were issued pursuant to the EDA and we received net proceeds of $1.2 million.

As of March 31, 2023, $48.5 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.

Credit Facility

In June 30, 2017, we entered into the Credit Facility with Western Alliance Bank consisting of term loans up to $10.0 million, and advances under a revolving credit facility of up to $5.0 million with an accounts receivable borrowing base of 80% of eligible accounts receivable.

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

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 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.

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.

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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 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)

The following is a summary of cash flows for three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

Net cash used in operating activities $ (9,212) $ (11,186)

Net cash used in investing activities (3,284) (10,082)

2 unchanged sentences

Cash Flows from Operating Activities

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 used in operating activities for the three months ended March 31, 2023 of $9.2 million consisted of net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

The $2.0 million decrease in net cash used in operations for the three months ended March 31, 2023 as compared to the same period in 2022, was primarily due to the net effect of decreases 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 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 used in investing activities for the three months ended March 31, 2023 was primarily attributable to $0.8 million for the purchase of additional shares of MAI's Series B preferred stock in March 2023 and $2.5 million for purchases of property and equipment.

The $6.8 million decrease in net cash used in investing activities for the three months ended March 31, 2023 as compared to the same period in 2022, was primarily due to higher cash utilized for additional investment in equity securities and purchases of property and equipment in prior year.

Cash Flows from Financing Activities

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.

Cash provided by financing activities for the three months ended March 31, 2023 included $1.5 million gross proceeds from issuance of common stock and $0.3 million of proceeds from exercises of stock options, and was partially offset by $0.4 million for taxes paid related to net share settlement of equity awards.

The $2.6 million increase in net cash provided by financing activities for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to proceeds from issuance of common stock and lower cash paid on taxes related to net share settlement of equity awards .

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies or estimates during the three and nine months ended September 30, 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 months ended March 31, 2023 from those discussed in our Annual Report.

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