Codexis, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Codexis develops and sells engineered proteins and enzymes, technology licenses, and research services. Its two segments are Performance Enzymes and Novel Biotherapeutics.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $15.0 million | $12.3 million | $29.6 million | $27.9 million |
| Product revenue | $4.5 million | $6.2 million | $9.6 million | $14.2 million |
| Research and development revenue | $10.5 million | $6.1 million | $20.0 million | $13.7 million |
| Operating loss | $6.1 million | $6.6 million | $13.9 million | $11.9 million |
| Net loss | $6.3 million | $6.5 million | $14.0 million | $11.6 million |
| Net loss per share, basic and diluted | $0.11 | $0.12 | $0.24 | $0.21 |
- Q2 revenue increased 21%, as higher R&D revenue more than offset lower product sales. Product revenue fell 28% in Q2 and 33% year to date, primarily due to the timing of customer demand for branded products.
- R&D revenue rose 72% in Q2 and 47% year to date, reflecting Takeda and Novartis agreement revenue and Porton license fees, partly offset by lower revenue from other work.
- Product gross margin improved to 62% in Q2 and 56% year to date, versus 56% and 50%, respectively, in 2019, primarily due to product mix. This is product margin, not a consolidated gross margin.
- Q2 R&D expense increased 31% to $10.9 million; SG&A increased 8% to $8.5 million. For the first half, R&D expense rose 34% to $21.8 million and SG&A rose 7% to $17.5 million. Management cited higher CMC and regulatory outside services, headcount and certain overhead costs.
- Segment revenue in Q2 was $7.5 million for Performance Enzymes, down 29%, and $7.5 million for Novel Biotherapeutics, up 331%. Takeda-related license revenue was a major contributor to the latter increase.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $75.6 million; cash, cash equivalents and restricted cash totaled $77.3 million. Working capital was $87.6 million, down from $98.8 million at December 31, 2019.
- First-half operating cash use was $11.5 million, versus $7.9 million in the prior-year period. Investing cash use was $2.5 million, including a $1.0 million investment in Molecular Assemblies and $1.5 million of capital expenditures. Cash and restricted cash decreased by $14.9 million.
- No amounts were drawn under the credit facility at quarter-end. It provides up to $10 million in term loans and a revolving line of up to $5 million, subject to terms and borrowing-base limitations. The revolving draw period was available only through September 30, 2020. The company reported covenant compliance at June 30.
- Operating lease obligations were $26.1 million on the balance sheet; undiscounted minimum lease payments were $33.3 million. Other disclosed commitments totaled $4.9 million. The filing reports no material pending litigation and no off-balance-sheet arrangements.
- Management said existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least 12 months; additional capital may be needed if plans or assumptions change.
Changes, outlook and risks
- Codexis withdrew its full-year 2020 financial guidance because of COVID-19 uncertainty. It did not provide replacement numerical guidance.
- COVID-19 temporarily closed the Redwood City facilities and disrupted R&D; projects were generally suspended from mid-March through April. Limited operations resumed in May, with R&D back to the majority of normal capacity and small-scale pilot manufacturing restarted. Management said the pandemic likely negatively affected Q2 revenue but could not quantify its total effect.
- Management identified potential further impacts from customer demand uncertainty, delayed receivable collections, partner or customer disruptions, supply-chain and logistics constraints, and interruptions to R&D or clinical work. The company relies on third-party manufacturers for commercial-scale enzyme production.
- Notable collaboration activity included a March Takeda agreement covering three initial gene-therapy programs and a non-refundable $8.5 million upfront payment; $5.7 million of related license revenue was recognized in Q2. Potential future payments are contingent on research, development and commercial outcomes.
- Codexis completed its second Novartis technology-transfer milestone in Q2 and received the associated $4.0 million payment in July 2020, after quarter-end. Further milestone, annual improvement and usage payments are contingent on contract terms and future events.
- The company invested $1.0 million in Molecular Assemblies, a privately held company, and its CEO joined that company’s board. Codexis may receive further compensation in MAI shares for services; the relationship and investment involve valuation uncertainty.
- Revenue and receivables were concentrated among a small number of customers: one customer accounted for 38% of Q2 revenue; four customers accounted for at least 10% each of June 30 receivables. Customer identities are anonymized in the filing.
- Codexis reported no goodwill impairment after an interim test prompted by COVID-19-related conditions. It adopted the expected-credit-loss standard in 2020; the filing says adoption had no other financial-statement impact. Disclosure controls were considered effective as of June 30.
Important facts for investors to verify
- Whether product demand recovers and whether collaboration and license revenue can offset continued product-sales declines.
- Cash burn, receivable collections, working-capital trends and the availability and terms of credit after the revolving draw period ended.
- COVID-19 effects on customers, third-party manufacturing, research operations and collaborators’ development timelines.
- Timing and achievement conditions for Takeda, Novartis, Nestlé and other contingent milestones, royalties and future payments.
- Customer concentration, including the identities and durability of major revenue and receivable exposures, and the valuation of the MAI investment.