Codexis, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Codexis develops and sells engineered proteins and licenses its CodeEvolver platform. Its two segments are Performance Enzymes and Novel Biotherapeutics.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $21.9m | $16.9m | $49.8m | $44.5m |
| Operating income (loss) | $0.3m | $(2.1)m | $(11.6)m | $(10.7)m |
| Net income (loss) | $0.3m | $(2.0)m | $(11.3)m | $(10.4)m |
| Basic and diluted EPS | $0.01 | $(0.04) | $(0.20) | $(0.20) |
- Q3 product revenue rose 23% to $10.4m; research and development revenue rose 35% to $11.6m. For the nine-month period, product revenue increased 34% to $24.6m, while R&D revenue declined 4% to $25.2m.
- Product gross margin was 51% in Q3 versus 55% in Q3 2018, attributed to less favorable product mix; nine-month margin improved to 50% from 44%.
- At September 30, cash and cash equivalents were $92.1m, restricted cash was $1.7m, working capital was $95.0m, and total assets were $146.2m. Total liabilities were $43.7m, including $26.4m of recognized operating lease obligations. No credit-facility borrowings were outstanding.
- For the first nine months, operating cash use was $8.9m versus $13.4m in 2018; investing cash use was $3.3m and financing cash provided was $51.5m. Cash, cash equivalents and restricted cash increased $39.4m, largely reflecting the June private placement’s $49.9m net proceeds.
Material changes and business developments
- Performance Enzymes Q3 revenue grew 68% to $20.4m, driven by Novartis agreement revenue, a $2.0m GSK milestone, and higher enzyme demand. Nine-month segment revenue increased 21% to $41.1m.
- Novel Biotherapeutics Q3 revenue fell 69% to $1.5m, and nine-month revenue declined 17% to $8.7m, primarily reflecting lower CDX-6114 development and license revenue. Nestlé exercised its exclusive license option in February 2019 and assumed future CDX-6114 clinical development and commercialization, subject to completion of an extension study that was substantially completed in Q3.
- Codexis recognized $3.8m of revenue under its May 2019 Novartis platform transfer and license agreement. The agreement includes further milestone and improvement payments and potential usage-based payments, subject to stated terms.
- In June 2019, Codexis issued 3.05m shares to a Casdin affiliate for $50.0m gross proceeds, increasing shares outstanding and providing $49.9m net proceeds.
Outlook, risks and unusual items
- Management said existing cash and cash equivalents were expected to fund ongoing operations, planned capital expenditures and working capital for at least the next 12 months. It noted additional capital could be needed if plans or assumptions change; no specific revenue or earnings guidance was provided.
- Cash generation depends on product sales, platform licensing and collaborative R&D. Milestone and royalty timing is uncertain and depends on collaborators’ development and commercial activity. Revenue can fluctuate with customer manufacturing schedules and clinical-trial timing; most purchase orders may be revised or cancelled, and commercial enzyme supply depends on third-party manufacturers.
- Customer concentration is significant: Customer A represented 31% of nine-month revenue and Customer B 17%; Customer D represented 29% of Q3 revenue. Management also flagged potential share-price pressure from sales of outstanding or registered shares.
- Codexis wrote down its CO₂ Solutions investment to zero after the investee announced bankruptcy proceedings and trading was suspended; the resulting loss was $0.4m in Q3 and $0.5m for nine months.
- Operating lease accounting adoption added $26.6m of operating-lease right-of-use assets and $27.6m of lease obligations at January 1, 2019. Future undiscounted operating-lease payments were $34.9m at quarter end. The $15m credit facility was undrawn; Codexis reported covenant compliance. No material pending litigation was reported.
Important facts for investors to verify
- Whether enzyme demand, customer orders and product gross margins remain stable, given quarterly variability and third-party manufacturing dependence.
- Progress and revenue recognition under the Novartis and GSK agreements, and the timing and likelihood of future contingent payments.
- Novel Biotherapeutics spending and pipeline progress after Nestlé assumed CDX-6114 development responsibilities; confirm what development obligations remain with Codexis.
- Cash burn, lease commitments and the stated 12-month liquidity outlook, including potential need for additional financing.
- Customer concentration, potential share issuance or resale, and the effects of the CO₂ Solutions write-down.