Codexis, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Codexis develops and sells enzymes and proteins, reporting in Performance Enzymes and Novel Biotherapeutics.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $34.5 | $36.8 | $108.2 | $80.3 |
| Product revenue | $28.0 | $28.7 | $93.4 | $53.7 |
| Research and development revenue | $6.4 | $8.0 | $14.8 | $26.6 |
| Operating income (loss) | $(10.6) | $1.3 | $(21.6) | $(12.3) |
| Net income (loss) | $(10.0) | $2.2 | $(21.0) | $(11.1) |
| Net loss per diluted share | $(0.15) | $0.03 income | $(0.32) | $(0.17) |
- Product gross margin was 65% for Q3 and 68% for the nine-month period, compared with 76% and 71%, respectively, in 2021. The company cited product mix, prices per volume sold, and higher shipping costs.
- Operating expenses were $45.1 million in Q3 and $129.8 million for nine months. Nine-month R&D expense rose 53% to $60.4 million, principally due to headcount, facilities, lab supplies, CMC and regulatory services, and depreciation.
- Cash and cash equivalents were $108.7 million at September 30, down from $116.8 million at December 31, 2021. Working capital was $114.1 million. Cash, cash equivalents, and restricted cash totaled $110.7 million.
- Nine-month operating cash flow was positive $6.4 million, versus negative $14.9 million in 2021; management attributed the improvement primarily to Pfizer’s $25.9 million fee and higher customer receipts, partly offset by higher operating costs. Investing cash outflow was $13.6 million, including $8.3 million of capital spending and $5.3 million of equity investments. Financing cash outflow was $0.9 million.
- No borrowings were outstanding under the credit facility. Operating lease liabilities totaled $44.9 million. Management said cash, expected revenue, and expense management should fund operations, planned capital expenditures, and working capital through at least the end of 2024, subject to assumptions and the possibility that additional capital may be needed.
Material changes and business developments
- Q3 revenue declined 6% year over year; nine-month revenue increased 35%. The nine-month increase reflected higher product sales, while R&D revenue fell 44%, including lower Takeda and other collaboration revenue and the prior-year completion of Novartis technology transfer.
- Pfizer CDX-616 sales were $12.9 million in Q3 and $58.0 million for nine months. They represented 38% of Q3 revenue and 54% of nine-month revenue. Q3 Pfizer sales were $6.0 million below the prior-year quarter, partly offset by $5.3 million more sales of other enzyme products.
- Under its July 2022 supply agreement, Pfizer paid a $25.9 million fee in August, recorded as deferred revenue and creditable against qualifying future orders and certain agreements. The fee is not equivalent to freely recurring revenue; credits depend on the agreement’s terms.
- Performance Enzymes generated $100.8 million of nine-month revenue, up 47%; Novel Biotherapeutics generated $7.4 million, down 37%. Revenue is exposed to customer manufacturing schedules and clinical-trial timing, and orders may be revised or cancelled.
- Cash balances include $83.6 million in money market funds. The company invested $5.0 million in seqWell during 2022 and held $20.5 million in non-marketable equity securities at quarter-end, including its related-party investment in Molecular Assemblies.
Outlook, risks, and unusual items
- Management expected R&D expense for the remainder of 2022 to exceed the prior-year comparative periods, citing headcount, added laboratory space, and external costs. No specific revenue or earnings guidance was provided.
- Management expects the Pfizer CDX-616 supply arrangement to remain a significant component of 2022 product revenue. Demand may vary, and the company depends on third-party manufacturers and logistics partners.
- A material weakness in controls over revenue recognition remained unremediated at September 30. The issue concerned the completeness and accuracy of reports used to calculate product revenue recognized over time; it caused a material misstatement of Q1 revenue-related accounts that the company corrected before issuing those statements. Management concluded disclosure controls and procedures were not effective at quarter-end and was implementing enhanced review controls.
- CEO transition-related stock-option modifications resulted in a one-time, non-cash compensation expense of $1.0 million in Q3. The company also settled a non-material trademark dispute in April 2022 and reported no material pending litigation.
- Codexis said COVID-19 disruptions had minimally affected revenue to date, but future impacts remain uncertain. Other risks include reliance on concentrated customers and collaborations, variable product margins, and the possibility that operating plans or revenue assumptions change and require additional capital.
Important facts for investors to verify
- Whether management remediates and tests the revenue-recognition control weakness, and whether any further corrections or reporting delays arise.
- Future Pfizer CDX-616 orders, use of the $25.9 million creditable fee, and the effect of Pfizer demand on revenue concentration and margins.
- Whether declining collaboration revenue is offset by new or expanding programs, and progress and spending in Novel Biotherapeutics.
- Cash burn, R&D and capital-spending trends, and the assumptions supporting management’s stated funding horizon through at least the end of 2024.
- Product gross-margin recovery and exposure to customer order changes, third-party manufacturing, and supply-chain disruptions.