What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 112 added, 75 removed, 223 unchanged (46% of the section changed)

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pharmaceutical manufacturing, life sciences, and biotherapeutics.

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

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

We manage our business as two business segments:

The enzymes we produce solve for real-world challenges associated with small molecule pharmaceuticals manufacturing and nucleic acid synthesis.

We are currently developing our proprietary ECO Synthesis ™ Platform to enable the commercial scale manufacture of RNAi therapeutics through an enzymatic route.

We expect to demonstrate gram-scale synthesis using the ECO Synthesis ™ Platform by the end of 2023, enabling per-commercial customer testing to begin in 2024, all with a goal of commercialization beginning in 2025.

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

As of June 30, 2023, we managed our business as two business segments:

Performance Enzymes and Novel Biotherapeutics.

However, in July 2023, we announced that we are discontinuing investment in Novel Biotherapeutics and expect to have just one business segment, Performance Enzymes, by the end of 2023.

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

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

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

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

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

Novel Biotherapeutics

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

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

In July 2023, we announced that we are discontinuing investment in our biotherapeutics business, including our partnered product candidate CDX-7108 for the treatment of exocrine pancreatic insufficiency (“EPI”), which has completed Phase 1 clinical trials.

We are in active negotiations with Nestlé Health Science to advance the program without our financial support.

In addition, we previously licensed CDX-6114 for the treatment of phenylketonuria (“PKU”).

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

Takeda previously announced that they are discontinuing development of these programs.

Recent Developments

In July 2023, we announced an update to our business strategy to focus resources on programs with the strongest probability of creating significant value in the near-term and beyond.

As part of this enhanced strategic focus, we are prioritizing the advancement and commercialization of our ECO Synthesis ™ Platform and our highly complementary Pharmaceutical manufacturing business.

We also streamlined operations, including the discontinuation of investment in certain development programs, primarily in our biotherapeutics business, consolidated operations to our headquarters in Redwood City, California and reduced headcount by approximately 25%.

Business Update Regarding COVID-19

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

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

On March 31, 2023, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we recognized $5.0 million as non-cash research and development revenue for the three and six months ended June 30, 2023.

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

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

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

As of March 31, 2023 , we recorded revenue o f $2.0 million from sitagliptin enzyme sales that were recognized over time based on the progress of the manufacturing process.

These products will be shipped within the six-month period following the end of the first quarter of 2023.

We recognized $0.8 million and $3.8 million under this agreement for the three and six months ended June 30, 2023, respectively, compared to $0.7 million and $2.4 million for the three and six months ended June 30, 2022, respectively.

This represented 4% and 11% of our total revenues for the three and six months ended June 30, 2023, respectively, compared to 2% and 3% for the three and six months ended June 30, 2022, respectively.

As of June 30, 2023 , we recorded revenue of $2.2 million from sitagliptin enzyme sales that were recognized over time based on the progress of the manufacturing process.

These products will be shipped within the six-month period following the end of the second quarter of 2023.

Global Development, Option and License Agreement and Strategic Collaboration Agreement

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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 EPI, into preclinical and early clinical studies.

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

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

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

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

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

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

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

In July 2023, we announced plans to discontinue our development support of CDX-7108 and are in active negotiations with Nestlé Health Science to advance the program without our financial support.

Under the Nestlé SCA and the development agreement, we recogni zed $1.7 million and $3.6 million in research and development fees for the three and six months ended June 30, 2023, respectively, compared to $0.6 million and $1.6 million for the three and six months ended June 30, 2022, respectively.

Platform Technology Transfer and License Agreement

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

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

We recognized $0.2 million and $0.6 million in r esearch and development revenue for the three and six months ended June 30, 2023, respectively, compared to $0.3 million and $0.5 million for the three and six months ended June 30, 2022, respectively.

Strategic Collaboration and License Agreement

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as a result we received the option exercise fee during the third quarter of 2021.

Pursuant to the Takeda Agreement, we are eligible to receive other payments that include (i) reimbursement of research and development fees and preclinical development milestones for the Initial Programs of $12.0 million, in aggregate, and $4.2 million for the fourth program, (ii) clinical development and commercialization-based milestones, per target gene, of up t o $104.0 million and (iii) tiered royalty payments based on net sales of applicable products at percentages ranging from the mid-single digits to low single-digits.

We completed the research and development services relating to the fourth program with Takeda during the second quarter of 2023.

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

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

Pursuant to the Takeda Agreement, we are eligible to receive other payments that include (i) reimbursement of research and development fees and preclinical development milestones for the Initial Programs of $12.0 million, in aggregate, and $4.0 million for the fourth program, (ii) clinical development and commercialization-based milestones, per target gene, of up to $104.0 million and (iii) tiered royalty payments based on net sales of applicable products at percentages ranging from the mid-single digits to low single-digits.

However, Takeda recently announced that they are discontinuing development of these programs.

We continue to engage in discussions with Takeda about the foregoing but we and Takeda has not terminated the Takeda Agreement as of the date of this report.

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 $1.7 million a nd $1.2 million for the three months ended March 31, 2023 and 2022, respectively.

We recognized research and development revenue related to the Takeda Agreement of $0.3 million a nd $1.9 million for the three and six months ended June 30, 2023, respectively, compared to $1.3 million and $2.5 million for the three and six months ended June 30, 2022, respectively.

Pfizer Enzyme Supply Agreement

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

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

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

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

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

No revenue was recognized from the Pfizer Supply Agreement during the three and six months ended June 30, 2023.

We recognized product revenue of $23.8 million and $45.1 million for the three and six months ended June 30, 2022, respectively, from the sale of quantities of CDX-616 to Pfizer which comprised 62% and 61% of our total revenues for the three and six months ended June 30, 2022, respectively.

As of June 30, 2023 and December 31, 2022, we had $18.9 million and $24.4 million, respectively, in deferred revenue related to the $25.9 million fee received from Pfizer.

Results of Operations

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

Three Months Ended March 31, Change

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

2023 2022 $ % 2023 2022 $ %

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

Three Months Ended March 31, Change

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

2023 2022 $ % 2023 2022 $ %

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

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

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

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

Total revenues decreased by $17.1 million and $39.4 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to lower product revenue, which was partially offset by higher research and development revenue.

Product revenue, decreased by $23.6 million and $45.9 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to decreased sales of CDX-616 to Pfizer.

This decrease was partially offset by $2.9 million release of prior periods' product revenue deferrals during the second quarter of 2023 due to early termination of the enzyme supply obligations to a customer .

Research and development revenue increased by $6.5 million and $6.5 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher revenue from Pfizer license agreement and from Nestlé Health Science under the Nestlé SCA and development agreement, which was offset by lower research and development fees from existing collaboration agreements being recognized in 2023 as compared to the same periods in the prior year.

Cost and Operating Expenses

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

Three Months Ended March 31, Change

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

2023 2022 $ % 2023 2022 $ %

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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 March 31, Change

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

2023 2022 $ % 2023 2022 $ %

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Product gross margin (%) (2)

71 % 67 % 60 % 70 %

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

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

Cost of product revenue decreased by $8.1 million and $12.1 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to lower volume of product sales as compared to the same periods in prior year.

Product gross margins were 71% and 60% in the three and six months ended June 30, 2023, respectively, compared to 67% and 70% in the corresponding periods in 2022 due to variability in the product mix which was partially offset by revenue recognized with no related cost in the second quarter of 2023.

Research and Development Expenses

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Research and development expenses are expensed when incurred.

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

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

Research and development expenses decreased by $1.8 million, or 9%, during the three months ended June 30, 2023 compared to th e same period in 2022 was primarily due to a $1.5 million decrease in costs associated with lower headcount, and $0.3 million from low er stock-based compensation costs, lower lab supply costs and lower outside services related to Chemistry, Manufacturing and Controls (“CMC ” ) and regulatory expenses.

The decrease in research and development expenses of $4.6 million, or 12%, in the six months ended June 30, 2023, compared to the same period in 2022, was primarily due to $3.2 million decrease in costs associated with lower headcount, $0.5 million lower stock-based compensation costs and $0.7 million lower lab supply costs and lower 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 were $15.4 million in the first quarter of 2023, a decrease of $0.3 million, or 2%, compared to $15.7 million in the first quarter of 2022.

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

Selling, general and administrative expenses increased by $2.7 million, or 25%, during the three months ended June 30, 2023, compared to the same period in 2022 was primarily due to $1.4 million higher payroll-based expenses and $1.4 million of higher fees for outside services.

The increase in selling, general and administrative expenses of $2.4 million, or 9%, in the six months ended June 30, 2023, compared to the same period in 2022 was primarily due to $2.9 million higher payroll-based expenses, partially offset by $0.9 million in lower stock-based compensation costs and lower legal fees.

Restructuring Charges

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

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

Restructuring charges were $0.1 million and $0.2 million for the three and six months ended June 30, 2023, respectively.

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

Three Months Ended March 31, Change

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

2023 2022 $ % 2023 2022 $ %

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Interest Income

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

Interest income increased by $1.0 million and $2.0 million in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, primarily due to higher average interest rates on cash balances.

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

Three Months Ended March 31, Change

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

2023 2022 $ % 2023 2022 $ %

Provision for income taxes $ 9 $ 108 $ (99) (92) % $ 25 $ 117 $ (92) (79) %

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

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

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

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

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

The provision for income taxes for the three and six months ended June 30, 2023, was primarily for current year state income taxes and the accrual of interest and penalties on historic uncertain tax positions.

The three and six months ended June 30, 2022, were primarily due to the income tax withholding imposed by foreign taxing authorities on income earned in certain countries outside of the United States and remitted to the United States and the accrual of interest and penalties on historic uncertain tax positions.

Net loss for the three months ended June 30, 2023, was $11.5 million, or a net loss per basic and diluted share of $0.17.

This compared to a net loss of $2.6 million, or a net loss per basic and diluted share of $0.04 for the three months ended June 30, 2022.

Net loss for the six months ended June 30, 2023, was $34.1 million, or a net loss per basic and diluted share of $0.51.

This compared to a net loss of $11.0 million, or a net loss per basic and diluted share of $0.17 for the six months ended June 30, 2022.

The increase in net loss for both the three and six months ended June 30, 2023, was primarily related to lower product revenues from CDX-616, which was partially offset by higher research and development revenues and lower operating expenses.

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

Revenues by segment

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

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Total revenues $ 19,308 $ 2,015 $ 21,323 $ 36,530 $ 1,876 $ 38,406 $ (17,222) (47) % $ 139 7 %

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

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

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

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

Six Months Ended June 30, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

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

Product revenue $ 19,412 $ — $ 19,412 $ 65,335 $ — $ 65,335 $ (45,923) (70) % $ — — %

Research and development revenue 9,382 5,511 14,893 4,294 4,117 8,411 5,088 118 % 1,394 34 %

Total revenues $ 28,794 $ 5,511 $ 34,305 $ 69,629 $ 4,117 $ 73,746 $ (40,835) (59) % $ 1,394 34 %

Revenues from the Performance Enzymes segment decreased by $17.2 million, or 47%, for the three months ended June 30, 2023, and by $40.8 million, or 59%, for the six months ended June 30, 2023 compared to the same periods in 2022.

The decrease in product revenue of $23.6 million, or 68%, in the three months ended June 30, 2023, and $45.9 million, or 70%, in the six months ended June 30, 2023, compared to the same periods in 2022, was primarily due to decreased sales of CDX-616 to Pfizer which was partially offset by $2.9 million release of prior periods' product revenue deferrals during the second quarter of 2023 due to early termination of the enzyme supply obligations to a customer.

The increase in research and development revenue of $6.4 million, or 338%, for the three months ended June 30, 2023, and of $5.1 million, or 118%, in the six months ended June 30, 2023, compared to the same periods in 2022, was primarily due to higher revenue from Pfizer license agreement.

Revenues from the Novel Biotherapeutics segment increased by $0.1 million, or 7%, for the three months ended June 30, 2023 and by $1.4 million, or 34%, for the six months ended June 30, 2023 compared to the same periods in 2022, primarily due to higher research and development revenue from Nestlé Health Science under the Nestlé SCA and development agreement, which was partially offset by lower research and development fees from Takeda under the Takeda Agreement.

Costs and operating expenses by segment

Three Months Ended March 31, Change

Three Months Ended June 30, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

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Corporate costs (2)

Unallocated depreciation and amortization 1,480 1,316

Total costs and operating expenses $ 33,949 $ 41,015

Six Months Ended June 30, Change

2023 2022 Performance Enzymes Novel Biotherapeutics

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

Cost of product revenue $ 7,698 $ — $ 7,698 $ 19,791 $ — $ 19,791 $ (12,093) (61) % $ — — %

Research and development (1)

15,955 15,552 31,507 13,051 23,424 36,475 2,904 22 % (7,872) (34) %

Selling, general and administrative (1)

4,830 1,142 5,972 7,416 1,400 8,816 (2,586) (35) % (258) (18) %

Restructuring charges — 145 145 — — — — — % 145 100 %

Total segment costs and operating expenses $ 28,483 $ 16,839 45,322 $ 40,258 $ 24,824 65,082 $ (11,775) (29) % $ (7,985) (32) %

Corporate costs (2)

22,328 17,110

Unallocated depreciation and amortization 2,946 2,549

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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 and general and administrative expenses.

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

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

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

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

Research and development expense in the Performance Enzymes segment increased by $0.9 million, or 13%, in the three months ended June 30, 2023, compared to the same period in 2022 primarily due to $3.0 million higher allocable expenses, partially offset by $2.2 million decrease in costs associated with lower headcount and lower lab supply costs.

The increase in research and development expense by $2.9 million, or 22%, in the six months ended June 30, 2023, as compared to the same period in 2022 was primarily due to $6.0 million in higher allocable expenses, partially offset by $3.4 million decrease in costs associated with lower headcount and lower lab supply costs.

Selling, general and administrative expense in the Performance Enzymes segment decreased by $1.8 million, or 48%, in the three months ended June 30, 2023, and by $2.6 million, or 35%, in the six months ended June 30, 2023, as compared to the same periods in 2022, primarily due to lower payroll-based expenses.

Research and development expense in the Novel Biotherapeutics segment decreased by $2.8 million, or 26%, in the three months ended June 30, 2023, as compared to the same period in 2022, was primarily due to $0.8 million decrease in costs associated with lower headcount and $2.2 million in lower fees related to outside services and lower allocable expenses.

The decrease in research and development expenses by $7.9 million, or 34% in the six months ended June 30, 2023, as compared to the same period in 2022, was primarily due to $2.7 million decrease in costs associated with lower headcount and $5.3 million decrease in outside services related to CMC and regulatory expenses, lower lab supply costs and lower allocable expenses.

Selling, general and administrative expense in the Novel Biotherapeutics segment decreased by $0.5 million, or 72%, in the three months ended June 30, 2023 and by $0.3 million, or 18%, in the six months ended June 30, 2023, as compared to the same periods in 2022.

The decrease was primarily due to lower payroll-based expenses.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

March 31, 2023 December 31, 2022

We expect our cash requirements to increase in the near term as we complete the reduction in force and restructuring that we announced in July 2023.

The following summarizes our cash and cash equivalents balance and working capital as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023 December 31, 2022

Cash and cash equivalents $ 92,093 $ 113,984

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

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

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

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

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

Subsequent to the end of the first quarter of 2023, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we recognized $5.0 million as non-cash research and development revenue for the three months ended June 30, 2023.

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

We are actively collaborating with new and existing customers.

We believe that we can utilize our current products and services, and develop new products and services, to increase our revenues and gross margins in future periods.

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.

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

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

As of March 31, 2023, $48.5 million worth of shares remained available for sale under the EDA.

During the three and six months ended June 30, 2023, 2,751,941 and 3,079,421 shares of our common stock, respectively, were issued and sold pursuant to the EDA and we received net proceeds of $6.8 million and $7.9 million, respectively.

As of June 30, 2023, $41.3 million worth of shares remained available for sale under the EDA.

There have been no additional sales of common stock under the EDA since the last sale occurred in June 2023.

Sales of our common stock under this arrangement could be subject to business, economic or competitive unce rtainties and contingencies, many of which may be beyond our control, and which could cause actual results from the sale of our common stock to differ materially from expectations.

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

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

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

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

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

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

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

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

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

Three Months Ended March 31,

The following is a summary of cash flows for six months ended June 30, 2023 and 2022 (in thousands):

Six Months Ended June 30,

Net cash used in operating activities $ (25,299) $ (13,367)

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Cash Flows from Operating Activities

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

The $2.0 million decrease in net cash used in operations for the three months ended March 31, 2023 as compared to the same period in 2022, was primarily due to the net effect of decreases in cash paid for cost of revenues and operating expenses and changes in operating assets and liabilities.

Cash used in operating activities for the six months ended June 30, 2023 of $25.3 million consisted of net loss adjusted for certain non-cash items and changes in operating assets and liabilities.

The $11.9 million increase in net cash used operating activities for the six months ended June 30, 2023 as compared to the same period in 2022, was primarily due to the net effect of decreases in cash received from revenue, increases in cash paid for cost of revenues and operating expenses and changes in operating assets and liabilities.

Cash Flows from Investing Activities

Cash used in investing activities for the three months ended March 31, 2023 was primarily attributable to $0.8 million for the purchase of additional shares of MAI's Series B preferred stock in March 2023 and $2.5 million for purchases of property and equipment.

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

Cash used in investing activities for the six months ended June 30, 2023 was primarily attributable to $0.8 million for the purchase of additional shares of MAI's Series B preferred stock in March 2023 and $4.1 million for purchases of property and equipment during the period.

The $7.4 million decrease in net cash used in investing activities for the six months ended June 30, 2023 as compared to the same period in 2022, 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 provided by financing activities for the three months ended March 31, 2023 included $1.5 million gross proceeds from issuance of common stock and $0.3 million of proceeds from exercises of stock options, and was partially offset by $0.4 million for taxes paid related to net share settlement of equity awards.

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

Cash provided by financing activities for the six months ended June 30, 2023 included $8.7 million gross proceeds from issuance of common stock and $0.4 million of proceeds from exercises of stock options, and was partially offset by $0.4 million for taxes paid related to net share settlement of equity awards.

The $9.3 million increase in net cash provided by financing activities for the six months ended June 30, 2023 as compared to the same period in 2022 was primarily due to proceeds from issuance of common stock and lower cash paid on taxes related to net share settlement of equity awards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Actual results could differ from those estimates.

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

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis