Codexis, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. Codexis develops and sells engineered proteins, enzymes and related research services using its CodeEvolver platform. Its segments are Performance Enzymes and Novel Biotherapeutics.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $18.4m | $21.9m | $48.0m | $49.8m |
| Product revenue | $8.4m | $10.4m | $18.0m | $24.6m |
| Research and development revenue | $10.0m | $11.6m | $30.0m | $25.2m |
| Operating income (loss) | $(6.1)m | $0.3m | $(20.0)m | $(11.6)m |
| Net income (loss) | $(6.1)m | $0.3m | $(20.1)m | $(11.3)m |
| Diluted EPS | $(0.10) | $0.01 | $(0.34) | $(0.20) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(15.0)m | $(8.9)m |
- Q3 revenue declined 16% year over year; nine-month revenue declined 4%. Lower product revenue drove the nine-month decline, partly offset by higher R&D revenue.
- Product gross margin improved to 57% in Q3 and 56% for the nine-month period, versus 51% and 50%, respectively, primarily due to product mix.
- Q3 R&D expense rose 38% to $12.0m; nine-month R&D expense rose 35% to $33.8m. SG&A increased 12% to $8.8m in Q3 and 9% to $26.3m over nine months. Management cited higher headcount, outside services and CMC and regulatory costs.
- Performance Enzymes revenue fell 36% in Q3 and 24% over nine months. Novel Biotherapeutics revenue rose 263% in Q3 and 91% over nine months, aided by Takeda collaboration revenue.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $71.5m, down from $90.5m at December 31, 2019; cash, cash equivalents and restricted cash totaled $73.2m. Working capital was $82.4m.
- Nine-month cash used in operations was $15.0m; investing activities used $3.3m, including $2.3m of capital expenditures and a $1.0m investment in Molecular Assemblies. Financing activities used $0.8m. The 2019 period included $49.9m of net private-placement proceeds.
- No borrowings were outstanding under the credit facility. It provides up to $10m of term debt and a revolving line of up to $5m, subject to borrowing-base requirements, covenants and other conditions. Codexis reported covenant compliance.
- Management said existing cash and available facility borrowings were expected to fund operations, planned capital expenditures and working capital for at least 12 months. Operating lease obligations were $25.6m on the balance sheet; undiscounted future operating lease payments were $32.3m. Other commitments totaled $4.9m.
Outlook, risks and notable items
- Codexis withdrew its full-year 2020 financial guidance in May, citing pandemic uncertainty; the filing provides no replacement numerical guidance.
- COVID-19 temporarily closed the Redwood City facilities and suspended some R&D work from mid-March through April. Limited R&D and pilot manufacturing resumed in May, with R&D later ramping to most normal capacity. Management believed the disruptions negatively affected nine-month revenue but could not quantify the effect.
- Management identified risks from customer demand and payment delays, supply-chain and logistics disruption, partner operations, and further restrictions on research or clinical work. The duration and financial impact of the pandemic remained uncertain.
- Codexis received an $8.5m non-refundable Takeda upfront payment in March and a $4.0m Novartis technology-transfer milestone payment in July. Further collaboration milestones and royalties are contingent and not assured.
- In June, Codexis invested $1.0m in Molecular Assemblies and entered into a research collaboration. The CEO joined MAI’s board; Codexis recorded $0.5m of R&D revenue due from MAI, subsequently settled with preferred shares. The related-party relationship and investment valuation are relevant to monitor.
- COVID-19 prompted an interim goodwill impairment assessment; management concluded reporting-unit fair values were more likely than not above carrying values, so no quantitative test was required. No goodwill impairment was recorded.
- The company reported no material pending litigation. It reported no material changes to its previously disclosed risk factors apart from expanded COVID-19 risks.
Important facts for investors to verify
- Whether product demand and revenue recover, particularly given customer manufacturing variability and the approaching generic phase of Merck’s sitagliptin product; the Merck supply agreement runs through February 2022.
- How much revenue and cash flow depend on a small group of customers: four customers each represented at least 10% of Q3 revenue, together accounting for 65%; two customers represented 10% or more of nine-month revenue at 22% and 21%.
- Collection and conversion of unbilled receivables, which rose to $15.0m from $10.1m at year-end, and the timing of deferred revenue recognition.
- Whether cash burn, R&D investment and collaboration milestones remain consistent with management’s stated liquidity runway; future milestone and royalty receipts depend on partner progress and decisions.
- Whether COVID-19, supply-chain constraints or customer and partner disruptions cause further delays, lower demand, or additional liquidity needs.