CODEXIS, INC. 10-Q

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, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 27, 2023 (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 are a leading enzyme engineering company leveraging our proprietary CodeEvolver ® technology platform to discover, develop, enhance, and commercialize novel, high performance enzymes and other classes of proteins. Enzymes are naturally occurring biological molecules critical to almost all biochemical reactions that sustain life. They can be precisely engineered and optimized for specific functions, and to have particular characteristics, such as an ability to survive environments in which natural enzymes cannot, or to perform (bio)chemical transformations different than those for which they naturally evolved. The capacity to enhance the properties and performance of enzymes has led to pivotal improvements across three healthcare industry pillars: pharmaceutical manufacturing, life sciences, and biotherapeutics. The enzymes we produce solve for real-world challenges associated with small molecule pharmaceuticals manufacturing 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. Performance Enzymes Our performance enzymes business consists primarily of two focus areas: biocatalysts for the sustainable manufacturing of pharmaceuticals and enzymes for life science applications, including genomic sequencing and nucleic acid synthesis. In our pharmaceutical manufacturing business, we utilize our CodeEvolver® 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. 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, including our ECO Synthesis™ Platform, which is in development to enable the commercial scale manufacture of RNAi therapeutics. 24 Novel Biotherapeutics 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 In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 has affected segments of the global economy and may affect our operations, including the potential interruption of our supply chain. We are monitoring this situation closely, and although operations have not been materially affected by the COVID-19 outbreak to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is uncertain. As a result of the COVID-19 pandemic, in 2021 and 2022 we received purchase orders from Pfizer Inc. (“Pfizer”) for large quantities of our proprietary enzyme product, CDX-616, for use by Pfizer in the manufacture of a critical intermediate for its proprietary API, nirmatrelvir, used by Pfizer in combination with the API ritonavir, as its PAXLOVID™ (nirmatrelvir tablets; ritonavir tablets) product for the treatment of COVID-19 infections in humans. We are a party to an Enzyme Supply Agreement with Pfizer Ireland Pharmaceuticals, a subsidiary of Pfizer, Inc. (the “Pfizer Supply Agreement”), covering the manufacture, sale and purchase of CDX-616 for use by Pfizer in the manufacture of nirmatrelvir. Under the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue. Pursuant to the agreement, 90% of the fee ($23.3 million) is creditable against (i) future orders of CDX-616 used to manufacture its PAXLOVID™ with shipment dates prior to December 31, 2023, and (ii) fees associated with any new development and licensing agreements with Pfizer entered into prior to April 4, 2023. On March 31, 2023, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we recognized $5.0 million as non-cash research and development revenue 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. Up to 50% of any portion of the $25.9 million which has not been credited under items (i) and (ii) is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates in 2024. The sale of CDX-616 to Pfizer had a substantial impact on our revenues in 2021 and 2022. Revenues in 2023 and in future years from our sales of CDX-616 to Pfizer and other potential customers (including sublicensees of Pfizer technology from The Medicine Patent Pool) are subject to a number of factors which are outside of our control and could reduce or eliminate our sales of CDX-616, and therefore materially and adversely affect our business, results of operations and financial conditions. Significant Collaborative Arrangements Update Merck Sitagliptin Catalyst Supply Agreement 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. 25 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 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 Strategic Collaboration Agreement (“SCA”) pursuant to which we and Nestlé Health Science are collaborating to leverage the CodeEvolver ® protein engineering technology platform to develop novel enzymes for Nestlé Health Science’s established Consumer Care and Medical Nutrition business areas. The term of the Nestlé SCA has been extended through December 2023 with an automatic renewal through December 2024 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. 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. 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 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. 26 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 received the first annual payment of $2.0 million in the fourth quarter of 2022. The Company also has the potential to receive quantity-dependent, usage payments for each API that is manufactured by Novartis using one or more enzymes that have been developed or are in development using the CodeEvolver ® protein engineering platform technology during the period that began on the conclusion of the Technology Transfer Period and ends on the expiration date of the last to expire licensed patent. 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 $0.6 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 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. 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 $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 We are a party to the Pfizer Supply Agreement, covering the manufacture, sale and purchase of CDX-616 for use by Pfizer in the manufacture of nirmatrelvir. Under the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue. Pursuant to the agreement, 90% of the fee ($23.3 million) is creditable against (i) future orders of CDX-616 used to manufacture its PAXLOVID™ with shipment dates prior to December 31, 2023, and (ii) fees associated with any new development and licensing agreements with Pfizer entered into prior to April 4, 2023. On March 31, 2023, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we recognized $5.0 million as non-cash research and development revenue 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. 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. 27 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 June 30, Change Six Months Ended June 30, Change 2023 2022 $ % 2023 2022 $ % Revenues: Product revenue $ 11,048 $ 34,645 $ (23,597) (68) % $ 19,412 $ 65,335 $ (45,923) (70) % Research and development revenue 10,275 3,761 6,514 173 % 14,893 8,411 6,482 77 % Total revenues 21,323 38,406 (17,083) (44) % 34,305 73,746 (39,441) (53) % Costs and operating expenses: Cost of product revenue 3,178 11,270 (8,092) (72) % 7,698 19,791 (12,093) (61) % Research and development 17,334 19,089 (1,755) (9) % 33,988 38,590 (4,602) (12) % Selling, general and administrative 13,365 10,656 2,709 25 % 28,765 26,360 2,405 9 % Restructuring charges 72 — 72 100 % 145 — 145 100 % Total costs and operating expenses 33,949 41,015 (7,066) (17) % 70,596 84,741 (14,145) (17) % Loss from operations (12,626) (2,609) (10,017) 384 % (36,291) (10,995) (25,296) 230 % Interest income 1,121 140 981 701 % 2,209 182 2,027 1,114 % Other expense, net (9) (63) 54 (86) % (33) (66) 33 (50) % Loss before income taxes (11,514) (2,532) (8,982) 355 % (34,115) (10,879) (23,236) 214 % Provision for income taxes 9 108 (99) (92) % 25 117 (92) (79) % Net loss $ (11,523) $ (2,640) $ (8,883) 336 % $ (34,140) $ (10,996) $ (23,144) 210 % 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 June 30, Change Six Months Ended June 30, Change 2023 2022 $ % 2023 2022 $ % Product revenue $ 11,048 $ 34,645 $ (23,597) (68) % $ 19,412 $ 65,335 $ (45,923) (70) % Research and development revenue 10,275 3,761 6,514 173 % 14,893 8,411 6,482 77 % Total revenues $ 21,323 $ 38,406 $ (17,083) (44) % $ 34,305 $ 73,746 $ (39,441) (53) % 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. 28 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 $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 June 30, Change Six Months Ended June 30, Change 2023 2022 $ % 2023 2022 $ % Cost of product revenue $ 3,178 $ 11,270 $ (8,092) (72) % $ 7,698 $ 19,791 $ (12,093) (61) % Research and development 17,334 19,089 (1,755) (9) % 33,988 38,590 (4,602) (12) % Selling, general and administrative 13,365 10,656 2,709 25 % 28,765 26,360 2,405 9 % Restructuring charges 72 — 72 100 % 145 — 145 100 % Total costs and operating expenses $ 33,949 $ 41,015 $ (7,066) (17) % $ 70,596 $ 84,741 $ (14,145) (17) % 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 derived entirely from collaborative research and development activities as we have no approved products available for sale. The following table shows the amounts of our product revenue, cost of product revenue, product gross profit and product gross margin from our unaudited condensed consolidated statements of operations for the periods presented (in thousands, except percentages): Three Months Ended June 30, Change Six Months Ended June 30, Change 2023 2022 $ % 2023 2022 $ % Product revenue $ 11,048 $ 34,645 $ (23,597) (68) % $ 19,412 $ 65,335 $ (45,923) (70) % Cost of product revenue (1) 3,178 11,270 (8,092) (72) % 7,698 19,791 (12,093) (61) % Product gross profit $ 7,870 $ 23,375 $ (15,505) (66) % $ 11,714 $ 45,544 $ (33,830) (74) % 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 $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. 29 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 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 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 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 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 June 30, Change Six Months Ended June 30, Change 2023 2022 $ % 2023 2022 $ % Interest income $ 1,121 $ 140 $ 981 701 % $ 2,209 $ 182 $ 2,027 1,114 % Other expense, net (9) (63) 54 (86) % (33) (66) 33 (50) % Total other income, net $ 1,112 $ 77 $ 1,035 1,344 % $ 2,176 $ 116 $ 2,060 1,776 % Interest Income 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 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) % 30 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 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 June 30, Change 2023 2022 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Revenues: Product revenue $ 11,048 $ — $ 11,048 $ 34,645 $ — $ 34,645 $ (23,597) (68) % $ — — % Research and development revenue 8,260 2,015 10,275 1,885 1,876 3,761 6,375 338 % 139 7 % Total revenues $ 19,308 $ 2,015 $ 21,323 $ 36,530 $ 1,876 $ 38,406 $ (17,222) (47) % $ 139 7 % Six Months Ended June 30, Change 2023 2022 Performance Enzymes Novel Biotherapeutics Performance Enzymes Novel Biotherapeutics Total Performance Enzymes Novel Biotherapeutics Total $ % $ % Revenues: 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. 31 Costs and operating expenses by segment Three 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 $ 3,178 $ — $ 3,178 $ 11,270 $ — $ 11,270 $ (8,092) (72) % $ — — % Research and development (1) 7,856 8,240 16,096 6,929 11,078 18,007 927 13 % (2,838) (26) % Selling, general and administrative (1) 2,032 191 2,223 3,876 680 4,556 (1,844) (48) % (489) (72) % Restructuring charges — 72 72 — — — — — % 72 100 % Total segment costs and operating expenses $ 13,066 $ 8,503 21,569 $ 22,075 $ 11,758 33,833 $ (9,009) (41) % $ (3,255) (28) % Corporate costs (2) 10,900 5,866 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 Total costs and operating expenses $ 70,596 $ 84,741 (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 $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. 32 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 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 actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our working capital needs. Our cash and cash equivalents are held in U.S. banks. Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, research and development expenses including costs related to the potential clinical development of our product candidates, manufacturing costs, laboratory and related supplies, legal and other regulatory expenses, and general overhead costs. We expect our cash requirements to increase in the near term as we 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 Working capital $ 84,308 $ 113,828 Sources of Capital In addition to our existing cash and cash equivalents and revenue generated through our existing operations, we are eligible to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain royalty payments under our collaboration agreements with Merck, Novartis and Nestlé Health Science of up to $439.0 million in the aggregate. 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 . In addition, pursuant to the terms of the Pfizer Supply Agreement, Pfizer paid us a fee of $25.9 million in August 2022 which was recorded as deferred revenue. Pursuant to the agreement, 90% of the fee ( $23.3 million ) is creditable against (i) future orders of CDX-616 used to manufacture its PAXLOVID™ with shipment dates prior to December 31, 2023, and (ii) fees associated with any new development and licensing agreements with Pfizer entered into prior to April 4, 2023. Subsequent to the end of the first quarter of 2023, we entered into a license agreement whereby Pfizer utilized a portion of the $23.3 million credit towards a license to develop future product candidates, for which we recognized $5.0 million as non-cash research and development revenue for the three months ended June 30, 2023. Pfizer's ability to utilize the credit under item (ii) above expired on April 4, 2023. Up to 50% of any portion of the $25.9 million which has not been credited under items (i) and (ii) is creditable against future orders of CDX-616 used to manufacture PAXLOVID™ with shipment dates in 2024. 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. 33 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 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. We believe that our existing cash and cash equivalents, combined with our future expectations for product revenues, research and development revenue, and expense management will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirement s for at least the next 12 months. 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 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. 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 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. Cash Flows The following is a summary of cash flows for six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 2022 Net cash used in operating activities $ (25,299) $ (13,367) Net cash used in investing activities (4,855) (12,302) Net cash provided by (used in) financing activities 8,275 (1,047) Net decrease in cash, cash equivalents and restricted cash $ (21,879) $ (26,716) Cash Flows from Operating Activities 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 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. 34 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 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 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 six months ended June 30, 2023 from those discussed in our Annual Report. 35