Codexis(CDXS) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets Provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total assets | 234,970 | 246,383 | (11,413) | | Total liabilities | 75,511 | 81,992 | (6,481) | | Total stockholders' equity | 159,459 | 164,391 | (4,932) | | Cash and cash equivalents | 90,113 | 116,797 | (26,684) | | Total current assets | 145,283 | 161,888 | (16,605) | | Total current liabilities | 30,014 | 33,371 | (3,357) | Condensed Consolidated Statements of Operations Details the company's revenues, costs, and net loss over specific reporting periods, highlighting operational performance | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Total revenues | 38,406 | 25,453 | 12,953 | 51% | | Product revenue | 34,645 | 14,717 | 19,928 | 135% | | Research and development revenue | 3,761 | 10,736 | (6,975) | (65)% | | Total costs and operating expenses | 41,015 | 29,939 | 11,076 | 37% | | Net loss | (2,640) | (4,265) | 1,625 | (38)% | | Net loss per share, basic and diluted | (0.04) | (0.07) | 0.03 | (43)% | | Metric | 6 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Total revenues | 73,746 | 43,485 | 30,261 | 70% | | Product revenue | 65,335 | 24,943 | 40,392 | 162% | | Research and development revenue | 8,411 | 18,542 | (10,131) | (55)% | | Total costs and operating expenses | 84,741 | 57,126 | 27,615 | 48% | | Net loss | (10,996) | (13,333) | 2,337 | (18)% | | Net loss per share, basic and diluted | (0.17) | (0.21) | 0.04 | (19)% | Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including additional paid-in capital and accumulated deficit | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------- | :----------------------------- | :------------------------------- | | Total Stockholders' Equity | 159,459 | 164,391 | | Additional Paid-in Capital | 558,147 | 552,083 | | Accumulated Deficit | (398,694) | (387,698) | - Employee stock-based compensation for the six months ended June 30, 2022, was $6,951 thousand, contributing to additional paid-in capital[17] - Net loss for the six months ended June 30, 2022, was $(10,996) thousand, increasing the accumulated deficit[17] Condensed Consolidated Statements of Cash Flows Presents the cash inflows and outflows from operating, investing, and financing activities, showing liquidity changes | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Net cash used in operating activities | (13,367) | (14,735) | 1,368 | | Net cash used in investing activities | (12,302) | (4,945) | (7,357) | | Net cash provided by (used in) financing activities | (1,047) | 473 | (1,520) | | Net decrease in cash, cash equivalents and restricted cash | (26,716) | (19,207) | (7,509) | | Cash, cash equivalents and restricted cash at end of period | 92,179 | 131,610 | (39,431) | - Investing activities included $5,300 thousand for investment in non-marketable securities and $7,030 thousand for purchase of property and equipment in H1 2022[19] - Financing activities included $1,437 thousand for taxes paid related to net share settlement of equity awards, partially offset by $432 thousand from stock option exercises in H1 2022[19] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Description of Business Describes the company's core business of discovering, developing, and selling enzymes and proteins across two segments - The company discovers, develops, and sells enzymes and other proteins, operating in two reportable segments: Performance Enzymes and Novel Biotherapeutics[24][25] - The COVID-19 pandemic has had a minimal impact on revenue for the three and six months ended June 30, 2022, but future impacts remain highly uncertain[27] Note 2. Basis of Presentation and Summary of Significant Accounting Policies Explains the preparation of financial statements in accordance with GAAP and SEC rules, noting no significant policy changes - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim financial information, consistent with the 2021 Annual Report on Form 10-K[28] - There have been no significant changes in the company's significant accounting policies or critical accounting estimates since December 31, 2021[28] - Recently adopted accounting pronouncements (ASU 2021-04, ASU 2020-06, ASU 2020-04) had no significant impact on the unaudited condensed consolidated financial statements[33][34][35] Note 3. Revenue Recognition Details the company's revenue recognition policies, including product and R&D revenue, contract assets, and deferred revenue | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2021 (in thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total revenues | 38,406 | 25,453 | 73,746 | 43,485 | | Product revenue | 34,645 | 14,717 | 65,335 | 24,943 | | Research and development revenue | 3,761 | 10,736 | 8,411 | 18,542 | | APAC revenue | 30,102 | 13,440 | 57,582 | 20,262 | | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------- | :----------------------------- | :------------------------------- | | Contract assets | 11,287 | 4,557 | | Deferred revenue | 5,381 | 6,335 | - The increase in contract assets was primarily due to increases in product revenue from contracts subject to over time revenue recognition, while the decrease in deferred revenue was due to timing of recognition[42] - Estimated future revenue from unsatisfied performance obligations totals $5,381 thousand, with $3,048 thousand from product revenue and $2,333 thousand from R&D revenue[45] Note 4. Net Loss per Share Explains the calculation of basic and diluted net loss per share, noting the anti-dilutive effect of potential common shares - Basic and diluted net loss per share are identical for all periods presented because potential common stock shares are excluded from the calculation as their effect was anti-dilutive due to net losses[46][47] - Shares issuable under the Equity Incentive Plan were 5,792 thousand for the three and six months ended June 30, 2022[48] Note 5. Investments in Non-Marketable Securities Provides details on the company's investments in privately held non-marketable equity securities, including recent purchases - In March 2022, the company purchased 1,000,000 shares of seqWell, Inc.'s Series C preferred stock for $5.0 million[54] | Company | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Molecular Assemblies, Inc. (MAI) | 12,713 | 12,713 | | seqWell | 5,000 | — | | Arzeda | 1,289 | 1,289 | | Other investments | 300 | — | | Total non-marketable equity securities | 19,302 | 14,002 | - No remeasurement event or realized gains or losses occurred for non-marketable equity securities during the three and six months ended June 30, 2022 and 2021[56] Note 6. Fair Value Measurements Discusses the fair value hierarchy for financial assets, primarily money market funds, and the absence of significant impairment losses | Asset Type | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :---------------- | :----------------------------- | :------------------------------- | | Money market funds | 67,218 | 86,095 | - Money market funds are classified within Level 1 of the fair value hierarchy[59] - No significant credit losses or other-than-temporary impairment losses on non-marketable securities were recognized during the reported periods[59] Note 7. Balance Sheets Details Offers additional details on specific balance sheet accounts, including cash, inventories, property and equipment, and goodwill | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | 90,113 | 116,797 | | Inventories | 1,718 | 1,160 | | Property and equipment, net | 23,694 | 21,345 | | Goodwill | 3,241 | 3,241 | | Other accrued liabilities | 12,934 | 12,578 | - Depreciation expense for the six months ended June 30, 2022, was $2,556 thousand, up from $1,375 thousand in the prior year[64] Note 8. Stock-based Compensation Presents information on stock-based compensation expenses, unrecognized compensation, and performance goal achievements for equity awards | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total Stock-based compensation | 3,231 | 2,844 | | Research and development | 959 | 597 | | Selling, general and administrative | 2,272 | 2,247 | | Metric | 6 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2021 (in thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total Stock-based compensation | 7,069 | 5,531 | | Research and development | 1,895 | 1,074 | | Selling, general and administrative | 5,174 | 4,457 | - Unrecognized stock-based compensation expense as of June 30, 2022, totaled $19.5 million, comprising $5.8 million for unvested stock options, $8.4 million for RSUs and RSAs, $1.8 million for PSUs, and $3.5 million for PBOs[79] - Estimated achievement for 2022 PSUs and PBOs performance goals was 92% and 46% of the target level, respectively[75] - 2021 PSUs and PBOs performance goals were achieved at 146% and 73% of the target level, respectively, with 50% vesting in Q1 2022 and the remaining 50% in Q1 2023[76] Note 9. Capital Stock Details common stock issuances from option exercises and the remaining availability under the Equity Distribution Agreement - For the six months ended June 30, 2022, the company issued 174,600 shares upon option exercises for net cash proceeds of $0.4 million, compared to 212,631 shares for $1.7 million in the same period of 2021[80] - No shares of common stock were issued pursuant to the Equity Distribution Agreement (EDA) during the three and six months ended June 30, 2022, with $50.0 million worth of shares remaining available for sale[84] Note 10. Commitments and Contingencies Outlines the company's operating lease liabilities, other contractual commitments, credit facility status, and legal settlements | Metric | Amount (in thousands) | | :----------------------------------------- | :-------------------- | | Total operating lease liabilities (June 30, 2022) | 46,109 | | Total minimum lease payments (undiscounted) | 55,981 | | Other commitments (Development/manufacturing services) | 3,970 | | Other commitments (Facility maintenance) | 1,450 | - The company has a Credit Facility with Western Alliance Bank for up to $10.0 million in term loans (expired Dec 2021) and $5.0 million revolving credit, with no amounts drawn as of June 30, 2022, and in compliance with covenants[97][98] - In April 2022, the company reached a settlement resolving a non-material trademark dispute[100] Note 11. Related Party Transactions Discloses revenue recognized from and investment in Molecular Assemblies, Inc., and a subsequent commercial license agreement - Recognized $0.1 million in product revenue from Molecular Assemblies, Inc. (MAI) for the three and six months ended June 30, 2022[104] - Recognized nil and $0.2 million in research and development revenue from MAI for the three and six months ended June 30, 2022, respectively[103] - The carrying value of the investment in MAI Series A and B preferred stock was $12.7 million as of June 30, 2022[105] - On August 2, 2022, the company executed a Commercial License and Enzyme Supply Agreement with MAI to utilize an evolved terminal deoxynucleotidyl transferase (TdT) enzyme[106] Note 12. Segment, Geographical and Other Revenue Information Provides a breakdown of revenues and operating results by business segment and geographical region, including major customer concentration | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | 6 Months Ended June 30, 2022 (in thousands) | 6 Months Ended June 30, 2021 (in thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Performance Enzymes Total Revenues | 36,530 | 21,585 | 69,629 | 35,815 | | Novel Biotherapeutics Total Revenues | 1,876 | 3,868 | 4,117 | 7,670 | | APAC Total Revenues | 30,102 | 13,440 | 57,582 | 20,262 | - Customer A accounted for 62% of total revenues for the three and six months ended June 30, 2022, and 67% of accounts receivable as of June 30, 2022[117][119] - Performance Enzymes segment income from operations increased to $14,455 thousand in Q2 2022 from $9,040 thousand in Q2 2021[113] - Novel Biotherapeutics segment loss from operations increased to $(9,882) thousand in Q2 2022 from $(3,946) thousand in Q2 2021[113] Note 13. Allowance for Credit Losses Details the changes in the allowance for credit losses, including write-offs and adjustments, and current accounts receivable | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Balance at beginning of period | 416 | 74 | | Provision for credit losses | — | — | | Write-offs | (257) | — | | Adjustment to existing allowance | (50) | — | | Balance at end of period | 109 | 74 | - Accounts receivable current portion was $26,883 thousand as of June 30, 2022[121] Note 14. Subsequent Events Reports significant events occurring after the reporting period, including a new supply agreement with Pfizer and CEO appointment - On July 14, 2022, the company entered into an Enzyme Supply Agreement with Pfizer Inc. for CDX-616, effective October 30, 2021[123] - Received a $25.9 million retainer fee from Pfizer in August 2022, creditable against future CDX-616 orders and new development/licensing agreements[124] - Dr. Stephen Dilly was appointed President and CEO, effective August 9, 2022, succeeding John Nicols[125] - On August 2, 2022, the company executed a Commercial License and Enzyme Supply Agreement with MAI[127] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial performance, highlighting revenue growth, segment results, liquidity, and internal control issues BUSINESS OVERVIEW Describes the company's core business of enzyme and protein development using its CodeEvolver platform across various markets - Codexis discovers, develops, and sells enzymes and other proteins, leveraging its CodeEvolver protein engineering technology platform[130][131] - The CodeEvolver platform is powered by proprietary, AI-based computational algorithms, integrating robotic high-throughput screening and genomic sequencing[131] - The technology is applied in small molecule pharmaceuticals, industrial markets (food, feed, consumer care, fine chemicals), life sciences (NGS, PCR/qPCR), and novel biotherapeutics[131][133] BUSINESS SEGMENTS Outlines the company's two reportable segments: Performance Enzymes and Novel Biotherapeutics, and their respective focuses - The company manages its business through two segments: Performance Enzymes and Novel Biotherapeutics[134] - Performance Enzymes focuses on pharmaceutical manufacturing, industrial markets, and life sciences applications[135] - Novel Biotherapeutics targets the discovery and development of biotherapeutic drug candidates for human diseases[136] BUSINESS UPDATE REGARDING COVID-19 Assesses the minimal direct impact of the COVID-19 pandemic on revenue, noting the significant contribution from Pfizer's PAXLOVID™ enzyme - The COVID-19 pandemic has presented substantial public health and economic challenges, but its direct impact on the company's revenue for the three and six months ended June 30, 2022, has been minimal[137][139] - Future impacts remain highly dependent on the pandemic's duration, severity, prevalence of variants, and economic effects[137][139] - Purchase orders from Pfizer for the CDX-616 enzyme product, used in PAXLOVID™, have substantially impacted revenue for the three and six months ended June 30, 2022, and for the year ended December 31, 2021[140] Recent Developments Highlights key recent events, including a new enzyme supply agreement with Pfizer and a significant retainer fee - In July 2022, the company entered into an Enzyme Supply Agreement with Pfizer Inc. for the manufacture and sale of CDX-616 for use in nirmatrelvir (PAXLOVID™)[141] - Pfizer will pay a retainer fee of $25.9 million, received in August 2022, which is creditable against future CDX-616 orders and new development/licensing agreements[141] - The retainer fee is anticipated to be recognized as revenue in 2022, 2023, and 2024[141] Results of Operations Overview Provides a summary of key financial metrics, including total revenues, product revenue, R&D revenue, and net loss | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Total revenues | 38,406 | 25,453 | 12,953 | 51% | | Product revenue | 34,645 | 14,717 | 19,928 | 135% | | Research and development revenue | 3,761 | 10,736 | (6,975) | (65)% | | Product gross margin | 67% | 71% | (4)% | | | Research and development expenses | 19,089 | 12,826 | 6,263 | 49% | | Selling, general and administrative expenses | 10,656 | 12,795 | (2,139) | (17)% | | Net loss | (2,640) | (4,265) | 1,625 | (38)% | - The increase in product revenue was primarily due to sales of CDX-616 enzyme products to Pfizer[143] - The decrease in research and development revenue was primarily due to lower fees from Takeda and other existing collaboration agreements[144] - Research and development expenses increased due to higher headcount, facilities costs, lab supplies, outside services (CMC and regulatory), stock-based compensation, and depreciation[147] Merck Sitagliptin Catalyst Supply Agreement Discusses the amended supply agreement with Merck for Sitagliptin catalyst and its revenue recognition changes - The Sitagliptin Catalyst Supply Agreement with Merck was amended in September 2021 to extend through December 2026[152] | Metric | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Product revenue from Sitagliptin | 0.7 | 2.2 | 2.4 | 5.5 | | % of Total Revenues (3 months) | 2% | 9% | | | | % of Total Revenues (6 months) | | | 3% | 13% | - Product revenue from this agreement is now recognized based on contractually stated prices, effective February 2022, as the variable pricing no longer provides Merck material rights[153] Global Development, Option and License Agreement and Strategic Collaboration Agreement Details collaborations with Nestlé Health Science for CDX-6114 and CDX-7108, including milestones and R&D fees - Nestlé Health Science exercised its option for CDX-6114 in February 2019, assuming all responsibilities for future clinical development and commercialization[158] - The company is eligible to receive up to $85.0 million in development/approval milestones, up to $250.0 million in sales-based milestones, and tiered royalties for CDX-6114[158] - Collaboration with Nestlé Health Science on CDX-7108 for Exocrine Pancreatic Insufficiency is ongoing, with a Phase 1 clinical trial initiated in Q4 2021[159] | Metric | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | R&D fees from Nestlé | 0.6 | 1.7 | 1.6 | 3.5 | Platform Technology Transfer and License Agreement Covers the completed technology transfer to Novartis, ongoing annual payments, and potential usage payments - The technology transfer of the CodeEvolver protein engineering platform to Novartis was completed in July 2021[161] - Novartis will pay an additional $8.0 million in aggregate annual payments over four years for continued disclosure and license of improvements to the technology[163] - The company has the potential to receive quantity-dependent usage payments for APIs manufactured by Novartis using the CodeEvolver platform[163] | Metric | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | R&D revenue from Novartis | 0.3 | 0.3 | 0.5 | 1.1 | Strategic Collaboration and License Agreement Describes the collaboration with Takeda for gene therapy products, including R&D fees and potential milestone payments - The company is collaborating with Takeda to research and develop protein sequences for gene therapy products, including three initial programs and an additional program initiated in May 2021[164][165] - Eligible to receive R&D fees and preclinical development milestones of up to $10.5 million for initial programs and $5.9 million for the fourth program[165] - Potential for clinical development and commercialization-based milestones up to $100.0 million per target gene and tiered royalty payments[165] | Metric | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | R&D revenue from Takeda | 1.3 | 2.1 | 2.5 | 4.2 | Pfizer, Inc. purchase orders Highlights significant product revenue generated from Pfizer's purchase orders for the CDX-616 enzyme | Metric | 3 Months Ended June 30, 2022 (in millions) | 3 Months Ended June 30, 2021 (in millions) | 6 Months Ended June 30, 2022 (in millions) | 6 Months Ended June 30, 2021 (in millions) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Product revenue from Pfizer (CDX-616) | 23.8 | 3.9 | 45.1 | 4.3 | | % of Total Revenues (3 months) | 62% | 15% | | | | % of Total Revenues (6 months) | | | 61% | 10% | - As of June 30, 2022, the company recorded $9.7 million in revenue and contract assets from CDX-616 sales recognized over time, with products expected to be shipped within three months[167] RESULTS OF OPERATIONS Provides a detailed analysis of the company's financial results, including revenues, costs, and net loss Revenues Analyzes the changes in total revenues, product revenue, and research and development revenue | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Total revenues | 38,406 | 25,453 | 12,953 | 51% | | Product revenue | 34,645 | 14,717 | 19,928 | 135% | | Research and development revenue | 3,761 | 10,736 | (6,975) | (65)% | - Product revenue increased primarily due to $23.8 million (Q2 2022) and $45.1 million (H1 2022) in revenue from Pfizer related to the purchase of CDX-616 enzyme products[176] - Research and development revenue decreased primarily due to lower fees from Takeda and other existing collaboration agreements[177] Cost and Operating Expenses Examines the trends in cost of product revenue, research and development, and selling, general and administrative expenses | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Cost of product revenue | 11,270 | 4,318 | 6,952 | 161% | | Research and development | 19,089 | 12,826 | 6,263 | 49% | | Selling, general and administrative | 10,656 | 12,795 | (2,139) | (17)% | | Total costs and operating expenses | 41,015 | 29,939 | 11,076 | 37% | | Product gross margin (%) | 67% | 71% | (4)% | | - Cost of product revenue increased due to a higher volume of product sales and variations in product mix[180] - Research and development expenses increased due to higher headcount, facilities cost, lab supplies, outside services (CMC and regulatory), stock-based compensation, and depreciation[183] - Selling, general and administrative expenses decreased in Q2 2022 primarily due to lower legal fees from a trademark dispute settlement, partially offset by higher headcount and outside services[185] Interest Income Discusses the decrease in interest income due to lower average interest rates and declining cash balances | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :--------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Interest income | 140 | 206 | (66) | (32)% | - Interest income decreased primarily due to earned interest income and amortization of debt discount on non-marketable debt security in the prior year and reduction in interest income from lower average interest rates on declining average cash balances[187] Other Income (Expense), net Explains the decrease in other income (expense), net, primarily due to prior year interest expense charges | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Other income (expense), net | (63) | 23 | (86) | (374)% | - Other income (expense), net, decreased primarily due to interest expense charges recognized on the amortization of an embedded bifurcated derivative of a share-settled redemption feature on non-marketable securities in the prior year[188] Provision for Income Taxes Details the provision for income taxes, mainly due to foreign withholding taxes and accruals for uncertain tax positions | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :------------------------- | | Provision for income taxes | 108 | 8 | 100 | 1,250% | - The provision for income taxes was primarily due to income tax withholding imposed by foreign taxing authorities and the accrual of interest and penalties on historic uncertain tax positions[189] Net Loss Summarizes the factors contributing to the decrease in net loss, including increased product revenues and operating expenses | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Net loss | (2,640) | (4,265) | 1,625 | (38)% | - The decrease in net loss for both the three and six months ended June 30, 2022, was primarily related to an increase in product revenues with higher margins, partially offset by higher operating expenses and lower research and development revenues[192] RESULTS OF OPERATIONS BY SEGMENT Presents a breakdown of revenues and expenses by the Performance Enzymes and Novel Biotherapeutics segments | Metric | 3 Months Ended June 30, 2022 (in thousands) | 3 Months Ended June 30, 2021 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | :--------- | | Performance Enzymes Total Revenues | 36,530 | 21,585 | 14,945 | 69% | | Novel Biotherapeutics Total Revenues | 1,876 | 3,868 | (1,992) | (51)% | | Performance Enzymes R&D expense | 6,929 | 5,057 | 1,872 | 37% | | Novel Biotherapeutics R&D expense | 11,078 | 7,194 | 3,884 | 54% | | Performance Enzymes SG&A expense | 3,876 | 3,170 | 706 | 22% | | Novel Biotherapeutics SG&A expense | 680 | 620 | 60 | 10% | - Performance Enzymes revenue increase was primarily due to higher product revenue from Pfizer, partially offset by lower R&D revenue from Novartis and other collaborations[193] - Novel Biotherapeutics revenue decrease was primarily due to lower R&D fees from Takeda and Nestlé Health Science[193] - Research and development expense increases in both segments were due to higher headcount, outside services, lab supplies, and facilities costs[196][198] LIQUIDITY AND CAPITAL RESOURCES Assesses the company's cash position, working capital, and ability to fund operations, including potential milestone payments | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | 90,113 | 116,797 | | Working capital | 115,269 | 128,517 | - The company believes its existing cash and cash equivalents, combined with future product and R&D revenues and expense management, will provide adequate funds for operations through the end of 2024[210] - The company is eligible to earn milestone and other contingent payments from collaboration agreements with Merck, GSK, Novartis, and Nestlé[203] - $50.0 million worth of shares remained available for sale under the Equity Distribution Agreement (EDA) as of June 30, 2022, with no shares issued during the six months ended June 30, 2022[207] - No amounts were borrowed under the Credit Facility as of June 30, 2022, and the company was in compliance with its covenants[209] Cash Flows Analyzes changes in cash flows from operating, investing, and financing activities, detailing key drivers | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Net cash used in operating activities | (13,367) | (14,735) | 1,368 | | Net cash used in investing activities | (12,302) | (4,945) | (7,357) | | Net cash provided by (used in) financing activities | (1,047) | 473 | (1,520) | - The decrease in net cash used in operations was primarily due to increases in cash received from revenue, partially offset by higher cash paid for cost of revenues and operating expenses[215] - The increase in net cash used in investing activities was primarily due to $5.3 million for additional new equity investments and $7.0 million for purchases of property and equipment[216][217] - The increase in net cash used in financing activities was primarily due to higher taxes paid related to net share settlement of equity awards and lower proceeds from exercises of stock options[218][219] CRITICAL ACCOUNTING POLICIES AND ESTIMATES Confirms no material changes to critical accounting policies or estimates since the 2021 Annual Report on Form 10-K - There have been no material changes to the company's critical accounting policies or estimates during the three and six months ended June 30, 2022, from those discussed in its 2021 Annual Report on Form 10-K[220] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to market risks, including interest rate sensitivity and foreign currency risk, and discusses the valuation of non-marketable equity securities Market Risk Management States that the company's cash flows and earnings are subject to fluctuations from foreign currency, interest rates, and other factors - The company's cash flows and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, and other factors[222] Interest Rate Sensitivity Assesses the impact of hypothetical interest rate changes on cash and cash equivalents, primarily money market funds - Unrestricted cash and cash equivalents totaled $90.1 million at June 30, 2022, primarily invested in money market funds[223] - A hypothetical 10% decrease in market interest rates would have a $0.1 million impact on potential loss in future interest income[223] - As there are no outstanding borrowings under the Credit Facility as of June 30, 2022, a hypothetical 10% change in interest rates would not impact interest expense[224] Foreign Currency Risk Discusses the most significant foreign currency exposure from non-functional currency monetary assets and potential impact on earnings - The most significant foreign currency exposure is due to non-functional currency denominated monetary assets[225] - A hypothetical 10% unfavorable change in exchange rates would result in a potential loss of approximately $44 thousand in future earnings and a reduction in the fair value of assets[225] Investment in Non-Marketable Equity Securities Addresses the valuation challenges of privately held non-marketable equity securities without readily determinable fair values - The company owns investments in privately held non-marketable equity securities without readily determinable fair values[226] - Valuation of these securities is based on significant recent arms-length equity transactions, but quantifying the impact of differing transaction terms can be difficult[226] ITEM 4. Controls and Procedures Management concluded that disclosure controls were ineffective due to an unremediated material weakness in revenue recognition, with remediation plans underway Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were not effective due to a material weakness in revenue recognition - Management concluded that disclosure controls and procedures were not effective as of June 30, 2022[229] - A material weakness in internal control over financial reporting exists related to management's controls over the revenue recognition process, specifically the completeness and accuracy of reports used to calculate product revenue from arrangements subject to over time revenue recognition[230] - This material weakness had not been remediated as of June 30, 2022[230] Management's Plan to Remediate Material Weakness The company has initiated a detailed plan to remediate the material weakness by enhancing review controls over revenue recognition - The company has begun implementing a detailed plan to remediate the material weakness by enhancing management's review controls over revenue and the level of detail and precision applied when reviewing reports for over time revenue recognition[231] - The material weakness will not be considered remediated until applicable controls operate for a sufficient period and are tested for effectiveness[231] Changes in Internal Control over Financial Reporting Reports no other material changes in internal control over financial reporting during the quarter, apart from the identified weakness - Other than the material weakness described, there were no other changes in internal control over financial reporting during the last fiscal quarter that materially affected or are reasonably likely to materially affect internal control over financial reporting[232] Inherent Limitations on Effectiveness of Controls Acknowledges that controls provide only reasonable assurance and are subject to inherent limitations and potential for deterioration - Management recognizes that controls, even if effective, can provide only reasonable assurance of achieving desired control objectives and are subject to resource constraints[233] - Projections of effectiveness to future periods are subject to the risk that controls may become inadequate due to changing conditions or deterioration in compliance[233] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any material pending litigation or other significant legal proceedings - The company is not currently a party to any material pending litigation or other material legal proceedings[236] ITEM 1A. RISK FACTORS Highlights an additional risk factor concerning the unremediated material weakness in internal control over financial reporting - A material weakness in internal control over accounting related to the product revenue recognition process was identified, leading to a conclusion that internal control over financial reporting and disclosure controls were not effective as of March 31, 2022, and remained unremediated as of June 30, 2022[238][239] - Failure to remediate this material weakness could impair the company's ability to produce accurate financial statements, adversely affect business decisions, harm results of operations, and negatively impact the stock price[240][242] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Reports no unregistered sales of equity securities or use of proceeds for the specified period - None[244] ITEM 3. DEFAULTS UPON SENIOR SECURITIES Confirms that there were no defaults upon senior securities to report for the period - None[245] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - Not applicable[246] ITEM 5. OTHER INFORMATION States that there is no other information to report for the period - Not applicable[247] ITEM 6. EXHIBITS Lists the exhibits filed with the Form 10-Q, including organizational documents, agreements, and certifications - Includes Amended and Restated Certificate of Incorporation, Bylaws, and Certifications of Principal Executive and Financial Officers[249] - Lists the Platform Technology Transfer, Collaboration and License Agreement with GlaxoSmithKline Intellectual Property Limited[249] - Financial statements are formatted in Inline Extensible Business Reporting Language ("iXBRL")[249] Signatures Confirms the report's official signing by the company's President and CEO and Senior VP and CFO on August 5, 2022 - The report was signed by John J. Nicols (President and Chief Executive Officer) and Ross Taylor (Senior Vice President and Chief Financial Officer) on August 5, 2022[254]