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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-27 · 108 added, 194 removed, 228 unchanged (57% of the section changed)

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Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item IA:"Risk Factors," of this Annual Report on Form 10-K and elsewhere in this report.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item IA:

"Risk Factors," of this Annual Report on Form 10-K and elsewhere in this report.

The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K.

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Business Overview

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

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 focus on leveraging our capacity to enhance the properties and performance of enzymes to drive pivotal improvements across two key focus areas:

our foundational, revenue-generating pharmaceutical manufacturing business and our Enzyme-Catalyzed Oligonucleotide (ECO) Synthesis™ (“ECO Synthesis™”) manufacturing platform, which is currently in development to enable the commercial scale manufacture of RNA interference (RNAi) therapeutics.

Our unique enzymes drive improvements such as higher yields, increased purity, reduced energy usage and waste generation, and improved efficiency in manufacturing.

In July 2023, we announced that we discontinued investment in certain development programs, primarily in our novel biotherapeutics business segment and that we are actively exploring options to drive value by potentially monetizing other non-core assets within our Life Sciences portfolio.

Within the pharmaceutical manufacturing business, we utilize our CodeEvolver ® technology 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 small molecule therapeutics.

We also use the CodeEvolver ® technology platform to develop enzymes for the synthesis of nucleic acids such as DNA/RNA, including our ECO Synthesis™ manufacturing platform.

We demonstrated gram-scale synthesis with the ECO Synthesis™ manufacturing platform in December 2023 and expect to begin pre-commercial customer testing in 2024.

We anticipate that this will be followed by early commercial licenses to the ECO Synthesis™ manufacturing platform in 2025 and a full commercial launch in 2026.

Recent Developments

Announcement of interim results from Phase 1 trial of CDX-7108 for Exocrine Pancreatic Insufficiency (“EPI”)

On February 23, 2023, we and our partner, Nestlé Health Science announced interim results from a Phase 1 clinical trial of CDX-7108 for the treatment of EPI.

Data from the proof-of-concept arm indicated improved lipid absorption when patients are administered CDX-7108 versus placebo.

Importantly, no 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-7018 in partnership with Nestlé Health Science, with potential for the initiation of a Phase 2 study in early 2024.

Presentation of pre-clinical data from the Fabry disease transgene program

O n February 22, 2023, w e announced that Takeda Pharmaceutical Company Limited (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.

Strengthened management team and Board of Directors with new appointments

On January 23,2023, we announced the appointment of Sri Ryali as Chief Financial Officer and on December 20, 2022, we announced the appointment of H.

Stewart Parker to our Board of Directors.

Recent Investing and Financing Activities

On February 13, 2024, we entered into a five-year loan and security agreement with Innovatus Life Sciences Lending Fund I, LP, an affiliate of Innovatus Capital Partners, LLC (“Innovatus”), for an aggregate principal amount of up to $40.0 million (the “Loan Agreement”) consisting of two tranches, of which the first tranche of $30.0 million was completed on execution of the Loan Agreement.

We will be eligible to draw on the second tranche of $10.0 million upon achievement of certain milestones including certain pre-specified revenue thresholds.

The two tranches collectively are referred to as the “Term Loans.”

Investing and Financing Activities

In March 2022, we entered into a Stock Purchase Agreement with seqWell Inc.

(“seqWell ” ), a privately held biotechnology company, pursuant to which we purchased 1,000,000 shares of seqWell's Series C preferred stock for $5.0 million.

In September 2023, we purchased an additional 88,256 shares of seqWell's Series C-1 preferred stock and 44,128 common stock warrants for $0.4 million.

As of December 31, 2023, we have 1,293,535 shares of seqWell's Series C and C-1 preferred stock that we have earned or purchased since executing the Stock Purchase Agreement with seqWell.

In May 2021, we filed a Registration Statement on Form S-3 with the SEC, that automatically became effective upon its filing, under which we may sell common stock, preferred stock, debt securities, warrants, purchase contracts, and units from time to time in one or more offerings.

On the date of this filing, we also filed a post-effective amendment to that Registration Statement on Form S-3.

On February 27, 2023, we filed a post-effective amendment to that Registration Statement on Form S-3.

Pursuant to that post-effective amendment, we registered an aggregate $200.0 million of securities.

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Under the terms of the EDA, PSC may sell the shares at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended.

During the year ended December 31, 2022, no shares of our common stock were issued pursuant to the EDA.

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

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

In June 2020, we entered into a Stock Purchase Agreement with MAI pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million.

In connection with the transaction, John Nicols, our former President and Chief Executive Officer, also joined MAI’s board of directors.

Concurrently with our initial equity investment, we entered into the MAI Agreement pursuant to which performed services utilizing our CodeEvolver ® protein engineering platform technology to improve DNA polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A preferred stock.

During the year ended December 31, 2023, 3,079,421 shares of our common stock were issued and sold pursuant to the EDA for gross proceeds of $8.7 million, or $7.9 million in net proceeds after PSC's commissions and direct offering expenses of $0.7 million.

As of December 31, 2023, $41.3 million of shares remained available for sale under the EDA.

During the year ended December 31, 2022, no shares of our common stock were sold pursuant to the EDA.

In June 2020, we entered into a Stock Purchase Agreement with MAI, a privately held life sciences company, pursuant to which we purchased 1,587,050 shares of MAI's Series A preferred stock for $1.0 million.

Nicols, our former President and CEO until August 2022, also joined MAI’s board of directors in June 2020 and remained on MAI's board until September 2023.

Concurrently with our initial equity investment, we entered into a Master Collaboration and Research Agreement with MAI (the “MAI Agreement”), pursuant to which we performed services utilizing our CodeEvolver ® directed evolution technology platform to improve DNA polymerase enzymes in exchange for compensation in the form of additional shares of MAI's Series A and B preferred stock.

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

In September 2021, we purchased 9,198,423 shares of MAI's Series B preferred stock for $7.0 million.

As of December 31, 2022, we have 18,292,369 shares of MAI's Series A and B preferred stock that we have earned or purchased since executing the Stock Purchase Agreement with MAI.

In November 2020, we invested $1.0 million in Arzeda Corp., a privately-held computational protein design company that focuses on computational approaches to designing novel enzyme functionality, and received a convertible subordinated note issued by Arzeda Corp.

In July 2021, we converted the non-marketable debt security with a carrying value of $1.3 million into 207,070 shares of Series B-2 preferred stock of Arzeda Corp.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 2, "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.

Business Update Regarding COVID-19

As of December 31, 2023, we held 19,277,914 shares of MAI's Series A and B preferred stock that we have earned or purchased since executing the Stock Purchase Agreement with MAI.

Business Impact of COVID-19 and Sales of CDX-616 to Pfizer for PAXLOVID™

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, we have received purchase orders from Pfizer Inc.

The impact of COVID-19 affected segments of the global economy and its continuing impacts may affect our operations, including the potential interruption of our supply chain.

On May 11, 2023, the COVID-19 Public Health Emergency (“PHE”) declared under the Public Health Service Act expired.

While COVID-19 is no longer considered a PHE, future surges or actions taken in response to COVID-19 or other PHEs may materially affect our products, supply chain or operations.

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;

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(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 is creditable against future orders of CDX-616 used to manufacture its PAXLOVID™ .

The sale of CDX-616 to Pfizer had a substantial impact on our revenue for the year ended December 31, 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.

For additional information on the various risks posed by the COVID-19 pandemic, please read Item 1A.

Risk Factors included in this Annual Report on Form 10-K.

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.

On March 31, 2023, 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 recognized $5.0 million as non-cash research and development revenue during the second quarter of 2023.

Pfizer's ability to utilize the credit under item (i) above expired on December 31, 2023, and under item (ii) above expired on April 4, 2023.

The sale of CDX-616 to Pfizer had a substantial impact on our revenues in 2021 and 2022, and to a lesser extent in 2023.

Potential revenues 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.

RESULTS OF OPERATIONS

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Restructuring charges 3,284 3,167 — 5 % 2 % — %

Asset impairment and other charges 9,984 — — 14 % — % — %

Total costs and operating expenses 138,212 173,471 127,451 197 % 125 % 121 %

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2023 compared to 2022

Total revenues decreased by $68.4 million in 2023 to $70.1 million, as compared to 2022.

The decrease was driven by lower product revenue as compared to the prior year.

Product revenue was $42.9 million in 2023, a decrease of 63% compared with $116.7 million in 2022.

The decrease in product revenue was primarily due to decreased sales of CDX-616 to Pfizer.

This decrease was partially offset by $8.2 million release of prior year's deferrals related to Pfizer's fee, $3.2 million release of prior periods' product revenue deferrals due to early termination of the enzyme supply obligations to a customer and $1.3 million of product revenue recognized as settlement fee pursuant to the enzyme supply agreement with the same customer .

Research and development revenue increased by $5.3 million in 2023 to $27.2 million, or 24% compared with $21.9 million in 2022, primarily due to higher revenue from the Pfizer license agreement and from Nestlé Health Science under the Nestlé SCA and development agreement and the Acquisition Agreement, which was partially offset by lower research and development fees from existing collaboration agreements being recognized in 2023 as compared to the prior year.

2022 compared to 2021

Total revenues increased b y $33.8 million in 2022 to $138.6 million, as compared to 2021.

The increase was driven by growth in product revenue of $46.0 million, or 65%, but partially offset by a decrease in research and development revenue of $12.2 million, or 36%.

Product revenue, which consist primarily of sales of biocatalysts, pharmaceutical intermediates, and Codex ® biocatalyst panels and kits, was $116.7 million in 2022, an increase of 65% compared with $70.7 million in 2021.

The increase was driven by growth in product revenue of $46.0 million, or 65%, partially offset by a decrease in research and development revenue of $12.2 million, or 36%.

Product revenue was $116.7 million in 2022, an increase of 65% compared with $70.7 million in 2021.

The increase in product revenue was primarily due to $40.9 million higher revenue from Pfizer sales related to the purchase of CDX-616.

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We received an aggregate of 1,587,049 and 3,491,505 shares of MAI's Series A and B preferred stock for the years ended December 31, 2022 and 2021, respectively.

2021 compared to 2020

Total revenues increased by $35.7 million in 2021 to $104.8 million, as compared to 2020.

The increase was driven by growth in product revenue of $40.4 million, or 134%, but partially offset by a decrease in research and development revenue of $4.7 million, or 12%.

Product revenues were $70.7 million in 2021, an increase of 134% compared with $30.2 million in 2020.

The increase in product revenue was primarily due to $34.5 million in revenue from Pfizer and an increase in demand for enzymes used in the manufacture of branded pharmaceutical products.

Research and development revenue decrea sed by $4.7 million in 2021 to $34.1 million, or 12% compared with $38.8 million in 2020, primarily due to lower license and research and development fees from Takeda and lower revenues from Novartis recognized in 2021 compared to the prior year, which was partially offset by higher license fees from other existing collaboration agreements.

A portion of our research and development revenue in 2020 was paid to us by MAI in the form of additional shares of MAI Series A preferred stock.

We received an aggregate of 714,171 shares of MAI's Series A preferred stock for the year ended December 31, 2020.

Costs and Operating Expenses (in thousands, except percentages):

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Restructuring charges 3,284 3,167 — 117 4 % 3,167 100 %

Asset impairment and other charges 9,984 — — 9,984 100 % — — %

Total costs and operating expenses $ 138,212 $ 173,471 $ 127,451 $ (35,259) (20) % $ 46,020 36 %

Costs of Product Revenue and Product Gross Margin

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

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

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

Year Ended December 31, Change Year Ended December 31, Change

December 31, Change Year Ended

December 31, Change

2023 2022 $ % 2022 2021 $ %

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2023 compared to 2022

Cost of product revenue decreased by $25.2 million in 2023 to $12.8 million, as compared to 2022.

The decrease was primarily due to lower volu me of product sales as compared to prior year.

Product gross margins increased to 70% in 2023 as compared to 67% in 2022, primarily due to product revenue recognized with no related costs in 2023 related to the utilization of Pfizer's fee and early termination of an enzyme supply agreement with a customer, and was partially offset by variability in the product mix.

2022 compared to 2021

Cost of product revenue increased by $15.8 million in 2022 to $38.0 million, as compared to 2021.

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Some of these cost increases are a result of the impact of inflation and supply chain pressures seen in 2022.

2021 compared to 2020

Cost of product revenue increased by $8.5 million in 2021 to $22.2 million, as compared to 2020.

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

The product gross margin increased to 69% in 2021 as compared to 55% in 2020, primarily due to the sale of higher margin branded products.

Research and Development Expenses

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2023 compared to 2022

Research and development expenses were $80.1 million in 2022 compared to $55.9 million in 2021, an increase of $24.2 million, or 43%.

The increase was primarily due to an increase of $7.4 million in costs associated with higher headcount, $4.8 million in higher facilities and repair and maintenance expenses, $5.3 million increase in outside services and Chemistry, Manufacturing and Controls (“CMC”) and regulatory expenses , $2.6 million in higher lab supplies, $2.1 million in higher depreciation expenses, $1.1 million in higher stock-based compensation expenses and $0.7 million in higher allocable expenses.

Some of these cost increases are a result of the impact of inflation seen in 2022.

Research and development expenses were $58.9 million in 2023 compared to $80.1 million in 2022, a decrease of $21.2 million, or 26%.

This decrease was primarily due $10.0 million decrease in costs associated with lower headcount, $6.4 million decrease in outside services and Chemistry, Manufacturing and Controls (“CMC”) and regulatory expense, $4.1 million in lower lab supplies expense, $1.3 million in lower stock comp expense, and $1.0 million decrease in lease costs due to the assignment of our San Carlos facility lease.

These were partially offset by $1.7 million in higher allocable costs.

2022 compared to 2021

Research and development expenses were $80.1 million in 2022 compared to $55.9 million in 2021, an increase of $24.2 million, or 43%.

The increase was primarily due to $7.6 million in costs associated with higher headcount, $0.8 million in higher stock-based compensation expenses, $2.6 million in higher lab supplies, $2.2 million in higher allocable expenses, $1.1 million increase in outside services, and $1.0 million in higher depreciation expenses, which was partially offset by a $3.7 million decrease in costs associated with outside services related to CMC and regulatory expenses.

The increase was primarily due to an increase of $7.4 million in costs associated with higher headcount, $4.8 million in higher facilities and repair and maintenance expenses, $5.3 million increase in outside services and CMC and regulatory expenses , $2.6 million in higher lab supplies, $2.1 million in higher depreciation expenses, $1.1 million in higher stock-based compensation expenses and $0.7 million in higher allocable expenses.

Some of these cost increases are a result of the impact of inflation seen in 2022.

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 and amortization expenses.

2023 compared to 2022

Selling, general and administrative expenses were $53.3 million in 2023 compared to $52.2 million in 2022, an increase of $1.1 million, or 2%.

The increase was primarily due to an increase of $6.0 million in costs associated with higher headcount, $1.8 million in higher stock-based compensation costs, $0.8 million in higher outside and temporary services, which was partially offset by a decrease of $3.5 million in allocable expenses due to higher expenses allocated to research and development activities in 2022 and $3.3 million in lower legal fees.

Some of these cost increases are a result of the impact of inflation seen in 2022.

This increase was primarily due to $3.6 million higher in payroll-based expenses, $0.6 million in higher legal expense, $0.4 million in higher repairs and maintenance expense, and $0.3 million in higher consulting and outside services.

This was partially offset by $3.2 million lower stock based compensation expense and $0.4 million in lower allocable expenses.

2022 compared to 2021

Selling, general and administrative expenses were $52.2 million in 2022 compared to $49.3 million in 2021, an increase of $2.8 million, or 6%.

The increase was primarily due to an increase of $6.6 million in costs associated with higher headcount to support our growth, $3.1 million in higher stock-based compensation costs, $5.1 million increase in legal fees, $1.1 million in higher outside and temporary services, $1.0 million in higher facilities cost, and $0.4 million increase in allowance for credit losses, which was partially offset by a decrease of $3.0 million in allocable expenses due to higher expenses allocated to research and development activities in 2021.

Some of these cost increases are a result of the impact of inflation seen in 2022.

Restructuring Charges

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

Restructuring charges consist of employee severance and other termination benefits due to workforce reduction plans that were initiated during the third quarter of 2023 and in the fourth quarter of 2022.

Restructuring charges were $3.3 million and $3.2 million for the years ended December 31, 2023 and 2022, respectively.

Asset Impairment and Other Charges

Asset impairment and other charges for the year ended December 31, 2023 were $10.0 million , consisting o f a $9.2 million long-lived asset impairment charge and a $0.8 million goodwill impairment charge, all of which are non-cash charges.

No asset impairment charges were recorded for the years ended December 31, 2022 or 2021.

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

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Interest Income

Interest income increased by $2.7 million in 2023 compared to 2022, primarily due to higher average interest rates on cash balances.

Interest income increased by $1.0 million in 2022 compared to 2021, primarily due to higher average interest rates on cash balances, and was partially offset by earned interest income on a non-marketable debt security in the prior year.

Interest income increased by $0.1 million in 2021 compared to 2020, primarily due to earned interest income on a non-marketable debt security, which was partially offset by a reduction in interest income from lower average interest rates on lower average cash balances

Other Income (Expense), net

Other income (expense), net, decreased by $1.0 million in 2022 compared to 2021, primarily due to a higher gain from remeasurement on the carrying value of our investment in MAI in the prior year compared to this year .

Other income (expense), net increased by $1.3 million in 2021 compared to 2020, primarily due to a $1.0 million gain from remeasurement on the carrying value of our investment in MAI.

Other income (expense), net, decreased by $12.4 million in 2023 compared to 2022, primarily due to impairment of our investments in MAI, seqWell and Arzeda.

Other income (expense), net, decreased by $1.0 million in 2022 compared to 2021, primarily due to a lower gain from remeasurement on the carrying value of our investment in MAI recognized in 2022 as compared to 2021 .

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

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Provision for income taxes $ 69 $ 276 $ 189 $ (207) (75) % $ 87 46 %

The provision for income taxes for 2022 was primarily due to the income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the Unites Stated and remitted to the United States and the accrual of interest and penalties on historic uncertain tax positions, as well as current year state income taxes.

The provision for income taxes in 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 in 2022 was primarily due to the income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the Unites Stated and remitted to the United States and the accrual of interest and penalties on historic uncertain tax positions, as well as current year state income taxes.

Starting in 2022, changes to Internal Revenue Code Section 174 made by the Tax Cuts and Jobs Act of 2017 no longer permit an immediate deduction for research and development expenditures in the tax year that such costs are incurred.

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The provision for income taxes in 2021 was primarily due to the income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the Unites Stated and remitted to the United States and the accrual of interest and penalties on historic uncertain tax positions.

The provision for income taxes in 2020 was primarily due to foreign withholding taxes on certain sales to non-U.S.

Net loss for 2023 was $76.2 million, or a net loss per basic and diluted share of $1.12.

This compared to a net loss of $33.6 million, or $0.51 per basic and diluted share for 2022.

The increase in net loss was primarily related to lower research and development revenues and higher operating expenses.

The increase in net loss was primarily related to lower product revenues from CDX-616 and one-time charges recognized during 2023 related to asset impairment, including impairment in our investments in non-marketable equity securities, and restructuring charges, which was partially offset by lower operating expenses in 2023.

Net loss for 2022 was $33.6 million, or a net loss per basic and diluted share of $0.51.

This compared to a net loss of $21.3 million, or $0.33 per basic and diluted share for 2021.

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

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

Revenues by segment

Year Ended December 31, 2022 Year Ended December 31, 2021 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Product revenue $ 116,676 $ — $ 116,676 $ 70,657 $ — $ 70,657 $ 46,019 65 % $ — — %

Research and development revenue 9,936 11,978 21,914 19,858 14,239 34,097 (9,922) (50) % (2,261) (16) %

Total revenues $ 126,612 $ 11,978 $ 138,590 $ 90,515 $ 14,239 $ 104,754 $ 36,097 40 % $ (2,261) (16) %

Year Ended December 31, 2021 Year Ended December 31, 2020 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Product revenue $ 70,657 $ — $ 70,657 $ 30,220 $ — $ 30,220 $ 40,437 134 % $ — — %

Research and development revenue 19,858 14,239 34,097 17,886 20,950 38,836 1,972 11 % (6,711) (32) %

Total revenues $ 90,515 $ 14,239 $ 104,754 $ 48,106 $ 20,950 $ 69,056 $ 42,409 88 % $ (6,711) (32) %

2022 compared to 2021

Revenues from the Performance Enzymes segment increased by $36.1 million, or 40%, to $126.6 million in 2022, compared to $90.5 million in 2021.

The increase in product revenue of $46.0 million, or 65%, to $116.7 million in 2022, compared to $70.7 million in 2021 was primarily due to $40.9 million higher revenue from Pfizer sales related to the purchase of CDX-616.

The decrease in research and development revenue of $9.9 million, or 50%, to $9.9 million in 2022, com pared to $19.9 million 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, decreased revenue from milestone payments received from GSK, and lower research and development fees from other existing collaboration agreements compared to 2021.

Revenues from the Novel Biotherapeutics segment decreased by $2.3 million, or 16% , to $12.0 million in 2022, compared to $14.2 million in 2021.

The decrease in revenue was primarily due to lower research an d development fees from Takeda and lower research and development revenue from Nestlé Health Science recognized this year compared to the prior year.

2021 compared to 2020

Revenues from the Performance Enzymes segment increased by $42.4 million, or 88%, to $90.5 million in 2021, compared to $48.1 million in 2020.

The increase in product revenue of $40.4 million, or 134%, to $70.7 million in 2021, compared to $30.2 million in 2020 was primarily due to $34.5 million in revenue from Pfizer and higher customer demand for enzymes used in the manufacture of branded pharmaceutical pro ducts.

The increase in research and development revenue of $2.0 million, or 11%, to $19.9 million in 2021, compared to $17.9 million in 2020 was primarily due to higher licenses fees from existing collaboration arrangements, which was partially offset by lower revenues from Novartis.

Revenues from the Novel Biotherapeutics segment decreased by $6.7 million, or 32%, to $14.2 million in 2021, compared to $21.0 million in 2020.

The decrease in revenue was primarily due to lower license and research and development fees from Takeda and a decrease in research and development revenue from Nestlé Health Science in 2021 compared to 2020.

Costs and operating expenses by segment

Year Ended December 31, 2022 Year Ended December 31, 2021 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Cost of product revenue $ 38,033 $ — $ 38,033 $ 22,209 $ — $ 22,209 $ 15,824 71% $ — —%

Research and development (1)

25,786 49,770 75,556 23,140 30,219 53,359 2,646 11% 19,551 65%

Selling, general and administrative (1)

14,724 2,421 17,145 12,105 2,755 14,860 2,619 22% (334) (12)%

Restructuring Charges $ 1,708 $ 966 2,674 $ — $ — — $ 1,708 100% $ 966 100%

Total segment costs and operating expenses $ 80,251 $ 53,157 133,408 $ 57,454 $ 32,974 90,428 $ 22,797 40% $ 20,183 61%

Corporate costs (2)

34,645 33,808

Unallocated depreciation and amortization 5,418 3,215

Total costs and operating expenses $ 173,471 $ 127,451

(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 expense and restructuring charges.

Year Ended December 31, 2021 Year Ended December 31, 2020 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Cost of product revenue $ 22,209 $ — $ 22,209 $ 13,742 $ — $ 13,742 $ 8,467 62% $ — —%

Research and development (1)

23,140 30,219 53,359 20,923 21,705 42,628 2,217 11% 8,514 39%

Selling, general and administrative (1)

12,105 2,755 14,860 9,597 2,355 11,952 2,508 26% 400 17%

Total segment costs and operating expenses $ 57,454 $ 32,974 90,428 $ 44,262 $ 24,060 68,322 $ 13,192 30% $ 8,914 37%

Corporate costs (2)

33,808 22,555

Unallocated depreciation and amortization 3,215 2,099

Total costs and operating expenses $ 127,451 $ 92,976

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

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

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

2022 compared to 2021

Research and development expense in the Performance Enzymes segment increased by $2.6 million, or 11%, to $25.8 million in 2022, compared to $23.1 million in 2021.

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

Selling, general and administrative expense in the Performance Enzymes segment increased by $2.6 million, or 22%, to $14.7 million in 2022, compared to $12.1 million in 2021.

The increase was 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 $19.6 million, or 65%, to $49.8 million in 2022, compared to $30.2 million 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 decreased by $0.3 million, or 12%, to $2.4 million in 2022, c ompared to $2.8 million in 2021.

The decrease was primarily due to lower outside services expenses.

2021 compared to 2020

Research and development expense in the Performance Enzymes segment increased by $2.2 million, or 11%, to $23.1 million in 2021, compared to $20.9 million in 2020.

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

Selling, general and administrative expense in the Performance Enzymes segment increased by $2.5 million, or 26%, to $12.1 million in 2021, compared to $9.6 million in 2020.

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

Research and development expense in the Novel Biotherapeutics segment increased by $8.5 million, or 39%, to $30.2 million in 2021, compared to $21.7 million in 2020.

The increase was primarily due to higher costs associated with higher headcount and allocable expenses but partially offset by reduction in costs associated with outside services relating to CMC and regulatory expenses.

Selling, general and administrative expense in the Novel Biotherapeutics segment increase d by $0.4 million, or 17%, to $2.8 million in 2021, compared to $2.4 million in 2020.

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

Income (loss) from operations by segment

Year Ended December 31, 2022 Year Ended December 31, 2021 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Income (loss) from operations $ 46,361 $ (41,179) $ 5,182 $ 33,061 $ (18,735) $ 14,326 $ 13,300 40% $ (22,444) (120)%

Year Ended December 31, 2021 Year Ended December 31, 2020 Change

Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics

Income (loss) from operations $ 33,061 $ (18,735) $ 14,326 $ 3,844 $ (3,110) $ 734 $ 29,217 760% $ (15,625) (502)%

2022 compared to 2021

Income from operations in the Performance Enzymes segment increased by $13.3 million, or 40%, to $46.4 million, in 2022, compared to $33.1 million in 2021.

The increase in income from operations was primarily due to higher product revenue from Pfizer sales partially offset by lower research and development revenue and higher costs and operating expenses.

Loss from operations in the Novel Biotherapeutics segment increased by $22.4 million, or 120%, to $41.2 million in 2022 compared to a loss from operations of $18.7 million in 2021, primarily d ue to lower research and development revenue from Takeda and Nestlé Health Science and higher research and development expenses associated with higher headcount, higher facilities cost and lab supplies and higher allocable expenses.

2021 compared to 2020

Income from operations in the Performance Enzymes segment increased by $29.2 million, or 760%, to $33.1 million, in 2021, compared to $3.8 million in 2020.

The increase in income from operations was primarily due to higher product revenue and research and development revenue, which was partially offset by higher costs and operating expenses.

Loss from operations in the Novel Biotherapeutics segment increased by $15.6 million, or 502%, to $18.7 million in 2021 compared to a loss from operations of $3.1 million in 2020.

The increase in loss from operations was primarily due to lower research and development revenue from Takeda and decrease in research and development revenue from Nestlé Health Science, and higher research and development expenses associated with higher headcount and allocable expenses.

The increase in net loss was primarily related to lower research and development revenues and higher operating expenses.

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 (defined below).

In addition, pursuant to the Loan Agreement, we received $30.0 million from Innovatus, as Lender, on February 13, 2024 and may become eligible to borrow up to an additional $10.0 million upon the achievement of certain financial milestones.

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

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

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™.

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

Our primary uses of capital for the foreseeable future, including the next 12 months, are for compensation and related expenses, research and development expenses including manufacturing costs, laboratory and related supplies, legal and other regulatory expenses, and general overhead costs.

The following summarizes our cash and cash equivalents balance and working capital as of December 31, 2023, 2022 and 2021 (in thousands):

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Sources of Capital

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 aggregate.

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, Nestlé, and Novartis of up to $59.0 million in 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 .

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

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 March 31, 2023 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.

In the fourth quarter of 2022, we and Pfizer agreed to adjust the terms of certain existing non-cancelable purchase orders of CDX-616 issued under the Pfizer Supply Agreement pursuant to which Pfizer will pay us $36.8 million in lieu of the delivery of certain quantities of CDX-616 under those purchase orders, upon which we collected $19.8 million in December 2022 and the remaining amount is expected to be received in the first quarter of 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.

We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to our CodeEvolver ® protein engineering technology platform, and expand our business development and collaboration with new customers.

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.

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 first quarter of 2023, 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 recognized $5.0 million as non-cash research and development revenue during the second quarter of 2023.

Pfizer's ability to utilize the credit under item (i) above expired on December 31, 2023, and 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, and any portion of the fee that is not utilized within the specific period will be forfeited and recognized as revenue.

We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to our CodeEvolver ® technology platform, develop and commercialize new and existing products including our ECO Synthesis™ manufacturing platform and expand our business development and collaboration with new customers.

Our cash flows from operations will continue to be affected principally by product sales and product gross margins, sales from licensing our technology to major pharmaceutical companies, and collaborative research and development services provided to customers, as well as our headcount costs, primarily in research and development.

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

Loan Agreement and Term Loans

On February 13, 2024, we entered into the Loan Agreement with Innovatus consisting of two tranches, of which the first tranche of $30.0 million was completed upon execution of the Loan Agreement.

We will be eligible to draw on the second tranche of $10.0 million upon achievement of certain milestones including certain pre-specified revenue thresholds.

The Term Loan carries an interest-only period of 36 months and will bear an interest at a floating rate of the sum of (a) the greater of (i) prime rate and (ii) 7.50%, plus (b) 3.25%.

Equity Distribution Agreement

In May 2021, we entered into an Equity Distribution Agreement (“EDA ” ) with Piper Sandler & Co (“PSC ” ), under which PSC, as our exclusive agent, at our discretion and at such times that we may determine from time to time, may sell over a three-year period from the execution of the EDA up to a maximum of $50.0 million of shares of our common stock.

During the year ended December 31, 2022, no shares of our common stock were issued pursuant to the EDA, and as of December 31, 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 uncertainties and contingencies, many of which may be beyond our control, and which could cause actual results from the sale of our common stock to differ materially from expectations.

Credit Facility

In June 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 up to $5.0 million with 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 December 31, 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 13, “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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 requirements for at least the next twelve months.

During the year ended December 31, 2023, 3,079,421 shares of our common stock were issued and sold pursuant to the EDA, all during the first half of 2023, and we received net proceeds of $7.9 million.

As of December 31, 2023, $41.3 million of shares remained available for sale under the EDA.

Sales of our common stock under this arrangement could be subject to business, economic or competitive 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.

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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In addition, we may choose to seek other sources of capital even if we believe we have generated sufficient cash flows to support our operating needs.

Our need for additional capital will depend on many factors, including the financial success of our business, the spending required to develop and commercialize new and existing products, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, and the potential costs for the filing, prosecution, enforcement and defense of patent claims, if necessary.

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

Our need for additional capital will depend on many factors, including the financial success of our business, the spending required to develop and commercialize new and existing products including our ECO Synthesis ™ manufacturing platform, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, and the potential costs for the filing, prosecution, enforcement and defense of patent claims, if necessary.

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

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

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

In addition, under our Loan Agreement, we are subject to restrictive covenants that limit our ability to conduct our business and could be subject to additional covenants to the extent we seek other debt financing in the future.

We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all.

If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited.

If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us.

If this happens, we may be forced to delay or terminate development of new products or services, such as our ECO Synthesis ™ manufacturing platform, or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us.

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

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Net cash provided by (used in) financing activities 8,167 (575) 3,767

Net increase (decrease) in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

$ (49,329) $ (2,869) $ (31,922)

Cash Flows from Operating Activities

The $63.9 million decrease in net cash provided by operating activities in 2023 as compared to 2022 was primarily due to the net effect of decreases in cash received from our customers due to lower revenue in 2023 and with 2022 benefiting from the receipt of a $25.9 million fee from Pfizer that is creditable against future orders, partially offset by decreases in cash paid for cost of revenues and operating expenses.

The $25.6 million increase in net cash provided by operating activities in 2022 as compared to 2021 was primarily due to the receipt of a $25.9 million fee from Pfizer in August 2022 creditable against future orders and increases in cash received from revenue, which was partially offset by increased payments associated with higher operating costs.

The $2.2 million decrease in net cash used by operating activities in 2021 as compared to 2020 was primarily due to increases in cash received from revenue, which was partially offset by increased payments associated with higher operating costs.

Cash Flows from Investing Activities

The $8.7 million decrease in net cash used in investing activities in 2023 as compared to 2022 was primarily due to higher cash utilized for additional investments in equity securities and purchases of property and equipment in the prior year.

The $7.8 million decrease in net cash used in investing activities in 2022 as compared to 2021 was primarily due to higher cash utilized for additional investments in equity securities and purchases of property and equipment in 2021.

The $15.7 million increase in net cash used in investing activities in 2021 as compared to 2020, was primarily due to higher cash utilized for the additional investments in MAI's Series A and B preferred stock for $7.6 million and higher purchases of property and equipment during 2021.

Cash Flows from Financing Activities

The $8.7 million increase in net cash provided by financing activities in 2023 as compared to 2022 was primarily due to proceeds from issuance of common stock under the EDA and lower cash paid on taxes related to net share settlement of equity awards.

The $4.3 million decrease in net cash provided by financing activities in 2022 as compared to 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.

The $77.0 million decrease in net cash provided by financing activities in 2021 as compared to 2020 was primarily due to the receipt of $80.8 million in net proceeds from our offering of common stock in 2020.

OFF-BALANCE SHEET ARRANGEMENTS

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If the contract gives the customer the option to acquire additional goods or services at their normal SSPs, we would likely determine that the option is not a material right and, therefore, account for it as a separate performance obligation when the customer exercises the option.

We primarily account for options which provide material rights using the alternative approach available under ASC 606, as we concluded we meet the criteria for using the alternative approach.

We primarily account for options which provide material rights using the alternative approach available under the Accounting Standards Codification (“ASC”) 606, as we concluded we meet the criteria for using the alternative approach.

Therefore, the transaction price is calculated as the expected consideration to be received for all the goods and services we expect to provide.

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We utilize an appropriate method of measuring progress towards the completion of our performance obligations to determine the timing of revenue recognition.

For each performance obligation that is satisfied over time, we recognize revenue using a single measure of progress either based on hours incurred or based on stage of progress under the project.

For each performance obligation that is satisfied over time, we recognize revenue using a single measure of progress either based on hours incurred or output of services provided.

Our contracts frequently provide customers with rights to use or access our products or technology, along with other promises or performance obligations.

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If the factors that led to a reduction in valuation are overcome, the valuation may be readjusted.

Impairment of Long-Lived Assets

We evaluate the carrying values of long-lived assets, which include property and equipment and right-of-use assets, whenever events, changes in business circumstances or our planned use of long-lived assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate.

If these facts and circumstances exist, we assess for recovery by comparing the carrying values of long-lived assets with the future net undiscounted cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measure by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis