Codexis, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Codexis develops and sells engineered proteins, serving pharmaceutical and other markets through product sales and research collaborations. It reports two segments: Performance Enzymes and, newly designated in 2018, Novel Biotherapeutics.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $14.0 million | $8.0 million; up 76% as reported |
| Product revenue | $6.2 million | $5.6 million; up 10% |
| Research and development revenue | $7.9 million | $2.4 million; up 230% |
| Product gross margin | 38% | 46% |
| Operating expenses | $18.7 million | $15.4 million |
| Operating loss | $4.7 million | $7.5 million |
| Net loss / loss per share | $4.7 million / $0.10 | $7.5 million / $0.18 |
| Cash used in operations | $4.2 million | $3.6 million |
Research and development expense rose 23% to $7.2 million, mainly reflecting CDX-6114 development, higher headcount, lab supplies, and outside services. Selling, general and administrative expense increased 17% to $7.7 million, including higher outside services, accounting, compensation, recruiting, and intellectual-property legal costs. Product margin declined because of a less favorable product mix.
At March 31, cash and cash equivalents were $24.3 million, restricted cash $1.5 million, and marketable securities $0.7 million. Working capital was $14.4 million. Total liabilities were $29.4 million, including $0.5 million of capital-lease obligations; no amounts were drawn under the $10 million term-loan and $5 million revolving facility. The company reported covenant compliance. Cash, cash equivalents, and restricted cash decreased $7.0 million during the quarter.
Material changes and accounting context
- Codexis adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased Q1 revenue by $3.8 million and reduced opening accumulated equity by $4.1 million. Without ASC 606, Q1 revenue would have been $10.2 million and net loss $7.2 million; prior-year results were not restated.
- Reported revenue growth was driven chiefly by collaboration and research revenue, including Nestlé Health Science, Tate & Lyle, another customer, and a Merck license fee. Product revenue growth was more modest.
- Novel Biotherapeutics generated $3.3 million of Q1 revenue, entirely related to Nestlé collaboration work; it had no comparable Q1 2017 revenue. The segment reported $1.2 million operating income before corporate costs and depreciation and amortization.
- In April 2018, after quarter-end, Codexis sold 4,312,500 shares at $9.25 each and received approximately $37.2 million in net proceeds.
Outlook, risks, and unusual items
- Management said existing cash and cash equivalents were expected to fund operations, planned capital expenditures, and working capital for at least 12 months; it noted additional capital could be needed if plans or assumptions change. The April offering subsequently increased liquidity.
- Management expected full-year 2018 product revenue to be about the same as the prior year. The filing provides no specific total-revenue or earnings guidance.
- CDX-6114 is being developed with Nestlé for potential treatment of PKU. Codexis may receive a $4 million progress payment after commencement of a Phase 1a trial, plus potential option, milestone, and royalty payments; these future amounts are contingent and uncertain.
- Customer concentration is material: one customer contributed 48% of Q1 revenue and another 24%. One customer represented 46% of receivables at quarter-end.
- Revenue can fluctuate with customer manufacturing schedules and clinical-trial timing. Commercial-scale enzyme manufacturing depends on third-party manufacturers, and the company relies on a limited number of suppliers for some products.
- The credit facility includes financial covenants and restrictions; noncompliance could allow lender remedies against collateral. The company reported no material pending litigation and settled its EnzymeWorks patent dispute in February 2018, including a judgment of infringement and permanent injunction.
Important facts for investors to verify
- How much of reported revenue growth reflects ASC 606 timing and the distinct Merck license versus recurring product and service demand?
- Whether customer concentration, contract renewals, and manufacturing schedules support revenue stability, particularly given management’s product-revenue expectation.
- Progress and timing for CDX-6114, including the Phase 1a trial trigger and the status of Nestlé’s option and contingent payments.
- Cash burn, working-capital changes, and the sufficiency of post-offering liquidity against planned development spending and facility covenants.
- Whether product margins recover from the Q1 mix-related decline and whether rising R&D and corporate costs are matched by sustainable revenue growth.