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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022 (the “Annual Report”). This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, expectations regarding our strategy, business plans, financial performance and developments relating to our industry. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A: “Risk Factors” of this Quarterly Report on Form 10-Q and Part I, Item 1A: “Risk Factors” of our Annual Report, as incorporated herein and referenced in Part II, Item 1A: “Risk Factors" of this Quarterly Report on Form 10-Q and elsewhere in this report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
BUSINESS OVERVIEW
We discover, develop and sell enzymes and other proteins that deliver value to our clients in a growing set of industries. We view proteins as a vast, largely untapped source of value-creating products, and we are using our proven technologies, which we have been continuously improving since our inception in 2002, to commercialize an increasing number of novel enzymes, both as proprietary Codexis products and in partnership with our customers.
We are a pioneer in harnessing computational technologies to drive biology advancements. Since 2002, we have made substantial investments in the development of our CodeEvolver® protein engineering technology platform, the primary source of our competitive advantage. Our technology platform is powered by proprietary, artificial intelligence-based, computational algorithms that rapidly mine the structural and performance attributes of our large and continuously growing library of protein variants. These computational outputs enable increasingly reliable predictions for next generation protein variants to be engineered, enabling time- and cost-efficient delivery of the targeted performance enhancements. In addition to its computational prowess, our CodeEvolver® protein engineering technology platform integrates additional modular competencies, including robotic high-throughput screening and genomic sequencing, organic chemistry and bioprocess development which are all coordinated to rapidly innovate novel, fit-for-purpose products.
The core historical application of the technology has been in developing commercially viable biocatalytic manufacturing processes for more sustainable production of complex chemicals. 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 manage our business as two business segments: Performance Enzymes and Novel Biotherapeutics. See Note 12, “Segment, Geographical and Other Revenue Information” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Performance Enzymes
We initially commercialized our CodeEvolver® protein engineering technology platform and products in the manufacture of small molecule pharmaceuticals and, to date, this continues to be our largest market served. Our customers, which include many large global pharmaceutical companies, use our technology, products and services in their manufacturing processes and process development. We have also used the technology to develop customized enzymes for use in other industrial markets. These markets consist of several large industrial verticals, including food, feed, consumer care, and fine chemicals. We also use our technology in the life sciences markets to develop enzymes for customers using NGS and PCR/qPCR for in vitro molecular diagnostic and molecular biology research applications, as well DNA/RNA synthesis and health monitoring applications.
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.
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. (“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. (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 in 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 equivalents, 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.
Merck Sitagliptin Catalyst Supply Agreement
In February 2012, we entered into a five-year Sitagliptin Catalyst Supply Agreement (“Sitagliptin Supply Agreement”) with Merck whereby Merck may obtain commercial scale enzyme for use in the manufacture of Januvia®, its product based on the active ingredient sitagliptin. In December 2015, Merck exercised its option under the terms of the Sitagliptin Catalyst Supply Agreement to extend the agreement for an additional five years through February 2022. In September 2021, the Sitagliptin Catalyst Supply Agreement was amended to extend the agreement through December 2026.
Effective as of January 2016, we and Merck amended the Sitagliptin Supply Agreement to prospectively provide for variable pricing based on the cumulative volume of sitagliptin enzyme purchased by Merck. We have 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.
Global Development, Option and License Agreement and Strategic Collaboration Agreement
In October 2017, we entered into the Nestlé License Agreement with Nestlé Health Science and, solely for the purpose of the integration and the dispute resolution clauses of the Nestlé License Agreement, Nestlé Health Science S.A., to advance CDX-6114, our enzyme biotherapeutic product candidate for the potential treatment of PKU.
In January 2019, we received notice from the U.S. Food and Drug Administration (“FDA”) that it had completed its review of our IND for CDX-6114 and concluded that we may proceed with the proposed Phase 1b multiple ascending dose study in healthy volunteers in the United States. In February 2019, Nestlé Health Science exercised its option to obtain an exclusive, worldwide, royalty-bearing, sub-licensable license for the global development and commercialization of CDX-6114 for the management of PKU. Upon exercising its option, Nestlé Health Science made an option payment and assumed all responsibilities for future clinical development and commercialization of CDX-6114. 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 recognized $2.2 million and $3.8 million in research and development fees for the three and nine months ended September 30, 2022, respectively, compared to $2.4 million and $5.8 million for the three and nine months ended September 30, 2021, respectively.
Platform Technology Transfer and License Agreement
In May 2019, we entered into the Novartis CodeEvolver® Agreement with Novartis. The Agreement allows Novartis to use our proprietary CodeEvolver® protein engineering platform technology in the field of human healthcare. In July 2021, we announced the completion of the technology transfer period during which we transferred our proprietary CodeEvolver® protein engineering platform technology to Novartis (the “Technology Transfer Period”). As a part of this technology transfer, we provided to Novartis our proprietary enzymes, proprietary protein engineering protocols and methods, and proprietary software algorithms. In addition, our teams and Novartis scientists participated in technology training sessions and collaborative research projects at our laboratories in Redwood City, California and at a designated Novartis laboratory in Basel, Switzerland. Novartis has now installed the CodeEvolver® protein engineering platform technology at its designated laboratory.
Pursuant to the agreement, we received an upfront payment of $5.0 million shortly after the effective date of the Novartis CodeEvolver® Agreement. We completed the second technology milestone transfer under the agreement in 2020 and received a milestone payment of $4.0 million. We have also received an aggregate of $5.0 million for the completion of 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 Codexis annual payments over four years which amount to an additional $8.0 million in aggregate. We expect to receive the first annual payment of $2.0 million in the fourth quarter of 2022. The Company also has the potential to receive quantity-dependent, usage payments for each API that is manufactured by Novartis using one or more enzymes that have been developed or are in development using the CodeEvolver® protein engineering platform technology during the period that began on the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire licensed patent. Revenue for the combined initial license and technology transfer performance obligation was recognized using a single measure of progress that depicted our performance in transferring control of the services. 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 research and development revenue for the three and nine months ended September 30, 2022, respectively, compared to $0.2 million and $1.4 million for the three and nine months ended September 30, 2021, respectively.
Strategic Collaboration and License Agreement
In March 2020, we entered into the Takeda Agreement with Shire Human Genetic Therapies, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Co. Ltd. (“Takeda”), under which we are collaborating to research and develop protein sequences for use in gene therapy products for certain diseases in accordance with each applicable program plan.
On execution of the Takeda Agreement, we received an upfront non-refundable cash payment of $8.5 million and we initiated activities under three program plans for Fabry Disease, Pompe Disease, and an undisclosed blood factor deficiency, respectively (the “Initial Programs”). In May 2021, Takeda elected to exercise its option to initiate an additional program for a certain undisclosed rare genetic disorder; as a result we received the option exercise fee during the third quarter of 2021. Pursuant to the Takeda Agreement, we are eligible to receive other payments that include (i) reimbursement of research and development fees and preclinical development milestones for the Initial Programs of $10.5 million, in aggregate, and $4.7 million for the fourth program, (ii) clinical development and commercialization-based milestones, per target gene, of up to $100.0 million and (iii) tiered royalty payments based on net sales of applicable products at percentages ranging from the mid-single digits to low single-digits.
Revenue recognized relating to the functional licenses provided to Takeda was recognized at a point in time when the control of the license transferred to the customer. We recognized research and development revenue related to the Takeda Agreement of $1.2 million and $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. 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 was recorded as deferred revenue. The fee is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates prior to December 31, 2023 and for fees associated with any new development and licensing agreements with Pfizer entered into prior to December 31, 2022 that are invoiced prior to December 31, 2023. Up to 50% of any portion of the fee which has not been credited pursuant to credits granted under the preceding sentence is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates prior to December 31, 2024.
We recognized product revenue of $12.9 million and $58.0 million for the three and nine months ended September 30, 2022, respectively, compared to $18.9 million and $23.2 million for the three and nine months ended September 30, 2021, respectively, from the sale of quantities of CDX-616 to Pfizer. Revenues recognized by us from sales of CDX-616 to Pfizer comprised 38% and 54% of our total revenues for the three and nine months ended September 30, 2022, respectively, and 51% and 29% for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we recorded revenue of $19.4 million from the sale of certain quantities of CDX-616 that were recognized over time based on the progress of the manufacturing process. These quantities will be shipped within the four month period following the end of the third quarter of 2022.
As of September 30, 2022, we had $5.2 million in deferred revenue related to the $25.9 million fee received from Pfizer, net of $19.4 million in contract assets that was offset against deferred revenue as it relates to the same performance obligation within the same agreement and net of $1.3 million of product revenue recognized from the fee during the three months ended September 30, 2022. We had nil in contract assets as of September 30, 2022.
RESULTS OF OPERATIONS
The following table shows the amounts from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Revenues: | | | | | | | | | | | | | | | |
Product revenue | $ | 28,042 | | | $ | 28,731 | | | $ | (689) | | | (2) | % | | $ | 93,376 | | | $ | 53,674 | | | $ | 39,702 | | | 74 | % |
Research and development revenue | 6,428 | | | 8,038 | | | (1,610) | | | (20) | % | | 14,839 | | | 26,579 | | | (11,740) | | | (44) | % |
Total revenues | 34,470 | | | 36,769 | | | (2,299) | | | (6) | % | | 108,215 | | | 80,253 | | | 27,962 | | | 35 | % |
Costs and operating expenses: | | | | | | | | | | | | | | | |
Cost of product revenue | 9,786 | | | 6,867 | | | 2,919 | | | 43 | % | | 29,577 | | | 15,403 | | | 14,174 | | | 92 | % |
Research and development | 21,821 | | | 15,165 | | | 6,656 | | | 44 | % | | 60,410 | | | 39,562 | | | 20,848 | | | 53 | % |
Selling, general and administrative | 13,499 | | | 13,407 | | | 92 | | | 1 | % | | 39,859 | | | 37,600 | | | 2,259 | | | 6 | % |
Total costs and operating expenses | 45,106 | | | 35,439 | | | 9,667 | | | 27 | % | | 129,846 | | | 92,565 | | | 37,281 | | | 40 | % |
Income (loss) from operations | (10,636) | | | 1,330 | | | (11,966) | | | (900) | % | | (21,631) | | | (12,312) | | | (9,319) | | | 76 | % |
Interest income | 436 | | | 41 | | | 395 | | | 963 | % | | 618 | | | 424 | | | 194 | | | 46 | % |
Other income, net | 216 | | | 983 | | | (767) | | | (78) | % | | 150 | | | 920 | | | (770) | | | (84) | % |
Income (loss) before income taxes | (9,984) | | | 2,354 | | | (12,338) | | | (524) | % | | (20,863) | | | (10,968) | | | (9,895) | | | 90 | % |
Provision for income taxes | 8 | | | 110 | | | (102) | | | (93) | % | | 125 | | | 121 | | | 4 | | | 3 | % |
Net income (loss) | $ | (9,992) | | | $ | 2,244 | | | $ | (12,236) | | | (545) | % | | $ | (20,988) | | | $ | (11,089) | | | $ | (9,899) | | | 89 | % |
| | | | | | | | | | | | | | | |
Revenues
Our revenues consisted of product revenue and research and development revenue as follows:
•Product revenue consist of sales of biocatalysts, pharmaceutical intermediates, and Codex® biocatalyst panels and kits.
•Research and development revenue include license, technology access and exclusivity fees, research services fees, milestone payments, royalties, optimization and screening fees.
Revenues are as follows (in thousands, except percentages): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Product revenue | $ | 28,042 | | | $ | 28,731 | | | $ | (689) | | | (2) | % | | $ | 93,376 | | | $ | 53,674 | | | $ | 39,702 | | | 74 | % |
Research and development revenue | 6,428 | | | 8,038 | | | (1,610) | | | (20) | % | | 14,839 | | | 26,579 | | | (11,740) | | | (44) | % |
Total revenues | $ | 34,470 | | | $ | 36,769 | | | $ | (2,299) | | | (6) | % | | $ | 108,215 | | | $ | 80,253 | | | $ | 27,962 | | | 35 | % |
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Revenues typically fluctuate on a quarterly basis due to the variability in our customers' manufacturing schedules and the timing of our customers' clinical trials. In addition, we have limited internal capacity to manufacture enzymes. As a result, we are dependent upon the performance and capacity of third-party manufacturers for the commercial scale manufacturing of the enzymes used in our pharmaceutical and fine chemicals business.
We accept purchase orders for deliveries covering periods from one day up to 14 months from the date on which the order is placed. However, some of our purchase orders can be revised or cancelled by the customer without penalty. Considering these industry practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be relied on to predict actual sales for future periods.
Total revenues decreased by $2.3 million in the three months ended September 30, 2022, compared to the same period in 2021, primarily due to lower product revenue and lower research and development revenue. The increase of $28.0 million in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to higher product revenue, which was partially offset by lower research and development revenue.
Product revenue, decreased by $0.7 million in the three months ended September 30, 2022, compared to the same period in 2021, primarily due to $6.0 million lower revenue from Pfizer related to their decreased purchases of CDX-616 during the third quarter of 2022, but was partially offset by $5.3 million higher revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products, The increase of $39.7 million in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to 2021 revenue from Pfizer sales largely occurring in the second half of 2021 whereas we reported $58.0 million in revenue from Pfizer related to the purchase of CDX-616 in the nine months ended September 30, 2022.
Research and development revenue decreased by $1.6 million and $11.7 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development fees from other existing collaboration agreements being recognized in 2022 as compared to the same periods in the prior year.
Cost and Operating Expenses
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 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Cost of product revenue | $ | 9,786 | | | $ | 6,867 | | | $ | 2,919 | | | 43 | % | | $ | 29,577 | | | $ | 15,403 | | | $ | 14,174 | | | 92 | % |
Research and development | 21,821 | | | 15,165 | | | 6,656 | | | 44 | % | | 60,410 | | | 39,562 | | | 20,848 | | | 53 | % |
Selling, general and administrative | 13,499 | | | 13,407 | | | 92 | | | 1 | % | | 39,859 | | | 37,600 | | | 2,259 | | | 6 | % |
Total costs and operating expenses | $ | 45,106 | | | $ | 35,439 | | | $ | 9,667 | | | 27 | % | | $ | 129,846 | | | $ | 92,565 | | | $ | 37,281 | | | 40 | % |
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Cost of Product Revenue and Product Gross Margin
Our product revenues are derived entirely from our Performance Enzymes segment. Revenues from the Novel Biotherapeutics segment are 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 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 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Product revenue | $ | 28,042 | | $ | 28,731 | | $ | (689) | | | (2) | % | | $ | 93,376 | | $ | 53,674 | | $ | 39,702 | | | 74 | % |
Cost of product revenue (1) | 9,786 | | 6,867 | | 2,919 | | | 43 | % | | 29,577 | | 15,403 | | 14,174 | | | 92 | % |
Product gross profit | $ | 18,256 | | $ | 21,864 | | $ | (3,608) | | | (17) | % | | $ | 63,799 | | $ | 38,271 | | $ | 25,528 | | | 67 | % |
Product gross margin (%) (2) | 65 | % | | 76 | % | | | | | | 68 | % | | 71 | % | | | | |
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(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.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects as well as collaborative research and development activities. These costs primarily consist of (i) employee-related costs, which include salaries and other personnel-related expenses (including stock-based compensation), (ii) various allocable expenses, which include occupancy-related costs, supplies, depreciation of facilities and laboratory equipment, and (iii) external costs. Research and development expenses are expensed when incurred.
Research and development expenses increased by $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.
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 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Interest income | $ | 436 | | | $ | 41 | | | $ | 395 | | | 963 | % | | $ | 618 | | | $ | 424 | | | $ | 194 | | | 46 | % |
Other income, net | 216 | | | 983 | | | (767) | | | (78) | % | | 150 | | | 920 | | | (770) | | | (84) | % |
Total other income | $ | 652 | | | $ | 1,024 | | | $ | (372) | | | (36) | % | | $ | 768 | | | $ | 1,344 | | | $ | (576) | | | (43) | % |
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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.
Provision for Income Taxes (in thousands, except percentages): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Provision for income taxes | $ | 8 | | | $ | 110 | | | $ | (102) | | | (93) | % | | $ | 125 | | | $ | 121 | | | $ | 4 | | | 3 | % |
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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
Net loss for the three months ended September 30, 2022 was $10.0 million, or a net loss per basic and diluted share of $0.15. This compared to a net income of $2.2 million, or a net income per basic and diluted share of $0.03 for the three months ended September 30, 2021. Net loss for the nine months ended September 30, 2022 was $21.0 million, or a net loss per basic and diluted share of $0.32. This compared to a net loss of $11.1 million, or a net loss per basic and diluted share of $0.17 for the nine months ended September 30, 2021. The increase in net loss for both the three and nine months ended September 30, 2022 was primarily related to a decrease in product revenues with higher margins, lower research and development revenues and higher operating expenses.
RESULTS OF OPERATIONS BY SEGMENT (in thousands, except percentages):
Revenues by segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2022 | | 2021 | | Performance Enzymes | | Novel Biotherapeutics |
| Performance Enzymes | | Novel Biotherapeutics | | Total | | Performance Enzymes | | Novel Biotherapeutics | | Total | | $ | | % | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | |
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) | % |
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| Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | Performance Enzymes | | Novel Biotherapeutics |
| Performance Enzymes | | Novel Biotherapeutics | | Total | | Performance Enzymes | | Novel Biotherapeutics | | Total | | $ | | % | | $ | | % |
Revenues: | | | | | | | | | | | | | | | | | | | |
Product revenue | $ | 93,376 | | | $ | — | | | $ | 93,376 | | | $ | 53,674 | | | $ | — | | | $ | 53,674 | | | $ | 39,702 | | | 74 | % | | $ | — | | | — | % |
Research and development revenue | 7,398 | | | 7,441 | | | 14,839 | | | 14,723 | | | 11,856 | | | 26,579 | | | (7,325) | | | (50) | % | | (4,415) | | | (37) | % |
Total revenues | $ | 100,774 | | | $ | 7,441 | | | $ | 108,215 | | | $ | 68,397 | | | $ | 11,856 | | | $ | 80,253 | | | $ | 32,377 | | | 47 | % | | $ | (4,415) | | | (37) | % |
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Revenues from the Performance Enzymes segment decreased by $1.4 million, or 4%, for the three months ended September 30, 2022 and increased by $32.4 million, or 47%, for the nine months ended September 30, 2022 compared to the same periods in 2021. The decrease in product revenue of $0.7 million, or 2%, in the three months ended September 30, 2022, compared to the same period in 2021 was primarily due to $6.0 million lower revenue from Pfizer related to their decreased purchases of CDX-616 during the third quarter of 2022, but was partially offset by $5.3 million higher revenue from the sales of other enzyme products used in the manufacture of branded pharmaceutical products. The increase in product revenue of $39.7 million, or 74%, in the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to 2021 product revenue from Pfizer sales largely occurring in the second half of 2021 whereas we reported $58.0 million in revenue from Pfizer for the nine months ended September 30, 2022. The decrease in research and development revenue of $0.7 million, or 19%, for the three months ended September 30, 2022 and of $7.3 million, or 50%, in the nine months ended September 30, 2022, compared to the same periods in 2021 was primarily due to lower revenues from Novartis under the Novartis CodeEvolver® Agreement as we completed the technology transfer to Novartis during the third quarter of 2021 and lower research and development fees from other existing collaboration agreements compared to the same period in the prior year.
Revenues from the Novel Biotherapeutics segment decreased by $0.9 million, or 21%, for the three months ended September 30, 2022 and by $4.4 million, or 37%, for the nine months ended September 30, 2022 compared to the same periods in 2021, primarily due to lower research and development fees from Takeda under the Takeda Agreement and lower research and development revenue from Nestlé Health Science recognized this year compared to the prior year.
Costs and operating expenses by segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended 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) | | | | | 8,599 | | | | | | | 9,121 | | | | | | | | | |
Unallocated depreciation and amortization | | | | | 1,405 | | | | | | | 794 | | | | | | | | | |
Total costs and operating expenses | | | | | $ | 45,106 | | | | | | | $ | 35,439 | | | | | | | | | |
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| Nine 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 | $ | 29,577 | | | $ | — | | | $ | 29,577 | | | $ | 15,403 | | | $ | — | | | $ | 15,403 | | | $ | 14,174 | | | 92 | % | | $ | — | | | — | % |
Research and development (1) | 19,833 | | | 37,279 | | | 57,112 | | | 17,172 | | | 20,649 | | | 37,821 | | | 2,661 | | | 15 | % | | 16,630 | | | 81 | % |
Selling, general and administrative (1) | 11,208 | | | 2,288 | | | 13,496 | | | 9,294 | | | 2,052 | | | 11,346 | | | 1,914 | | | 21 | % | | 236 | | | 12 | % |
Total segment costs and operating expenses | $ | 60,618 | | | $ | 39,567 | | | 100,185 | | | $ | 41,869 | | | $ | 22,701 | | | 64,570 | | | $ | 18,749 | | | 45 | % | | $ | 16,866 | | | 74 | % |
Corporate costs (2) | | | | | 25,708 | | | | | | | 25,775 | | | | | | | | | |
Unallocated depreciation and amortization | | | | | 3,953 | | | | | | | 2,220 | | | | | | | | | |
Total costs and operating expenses | | | | | $ | 129,846 | | | | | | | $ | 92,565 | | | | | | | | | |
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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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures. We have historically funded our operations primarily through cash generated from operations, stock option exercises and public and private offerings of our common stock. We also have the ability to borrow up to $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. banks.
The following summarizes our cash and cash equivalents balance and working capital as of September 30, 2022 and December 31, 2021 (in thousands): | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Cash and cash equivalents | | $ | 108,689 | | | $ | 116,797 | |
Working capital | | $ | 114,089 | | | $ | 128,517 | |
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. 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 to $15.0 million for each commercial API that is manufactured by Merck using one or more novel enzymes developed by Merck using the CodeEvolver® technology. In addition, 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. We 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. We are also eligible to receive payments from Nestlé Health Science under the Nestlé License Agreement that include (i) development and approval milestones of up to $85.0 million, (ii) sales-based milestones of up to $250.0 million in the aggregate, which aggregate amount is achievable if net sales exceed $1.0 billion in a single year, and (iii) tiered royalties, at percentages ranging from the mid-single digits to low double-digits, of net sales of product.
Pursuant to the terms of the Pfizer Supply Agreement, we received a fee of $25.9 million in August 2022. 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 are actively collaborating with new and existing customers in the pharmaceutical and food industries. We believe that we can utilize our current products and services, and develop new products and services, to increase our revenues and gross margins in future periods.
We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects and improvements to our CodeEvolver® protein engineering technology platform and expand our business development and collaboration with new customers. Our cash flows from operations will continue to be affected principally by product sales and product gross margins, sales from licensing our technology to major pharmaceutical companies, and collaborative research and development services provided to customers, as well as our headcount costs, primarily in research and development. Our primary source of cash flows from operating activities is cash receipts from our customers for purchases of products, collaborative research and development services, and licensing our technology to major pharmaceutical companies. Our largest uses of cash from operating activities are for employee-related expenditures, rent payments, inventory purchases to support our product sales and non-payroll research and development costs.
Equity Distribution Agreement
In May 2021, we entered into an Equity Distribution Agreement (“EDA”) with Piper Sandler & Co (“PSC”), under which PSC, as our exclusive agent, at our discretion and at such times that we may determine from time to time, may sell over a three-year period from the execution of the 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. 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 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 requirements through the end of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our capital resources sooner than we expect.
However, we may need additional capital if our current plans and assumptions change. 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 capital requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. If future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we raise debt financing or enter into credit facilities, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.
Cash Flows
The following is a summary of cash flows for nine months ended September 30, 2022 and 2021 (in thousands): | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Net cash provided by (used in) operating activities | | $ | 6,367 | | | $ | (14,927) | |
Net cash used in investing activities | | (13,611) | | | (15,942) | |
Net cash provided by (used in) financing activities | | (914) | | | 1,341 | |
Net decrease in cash, cash equivalents and restricted cash | | $ | (8,158) | | | $ | (29,528) | |
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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 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 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. 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.