Codexis, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited. Codexis develops and sells engineered proteins and operates Performance Enzymes and Novel Biotherapeutics segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $12.3m | $13.5m | $27.9m | $27.6m |
| Product revenue | $6.2m | $3.7m | $14.2m | $9.9m |
| Research and development revenue | $6.1m | $9.8m | $13.7m | $17.7m |
| Operating loss | $(6.6)m | $(3.8)m | $(11.9)m | $(8.5)m |
| Net loss | $(6.5)m | $(3.7)m | $(11.6)m | $(8.4)m |
| Basic and diluted loss per share | $(0.12) | $(0.07) | $(0.21) | $(0.17) |
- Q2 product revenue rose 68%, largely on higher enzyme demand for generic and branded products. Product gross margin improved to 56% from 30%, attributed to sales mix. For the first half, product gross margin was 50%, versus 35%.
- Q2 revenue declined 9% as R&D revenue fell, mainly because Tate & Lyle development work recognized in the prior-year period had been completed. First-half revenue was nearly flat, as higher product revenue largely offset lower R&D revenue.
- Q2 R&D expense increased 12% to $8.3m; selling, general and administrative expense increased 7% to $7.9m. Higher costs and lower prior-year-comparable collaboration revenue contributed to the larger net loss.
- For the first half, Performance Enzymes revenue was $20.7m, down 6%; Novel Biotherapeutics revenue was $7.2m, up 27%, primarily reflecting CDX-6114 license revenue recognized after Nestlé exercised its option.
Cash, liquidity and obligations
- Cash and cash equivalents were $93.4m at June 30, 2019, up from $53.0m at December 31, 2018. Including restricted cash, the period-end total was $95.2m. Working capital was $92.8m.
- First-half operating cash use was $7.9m, compared with $12.1m in the prior-year period. Investing cash use was $1.3m; financing provided $49.9m, principally from the June private placement.
- Codexis sold 3,048,780 shares to a Casdin affiliate at $16.40 per share, receiving approximately $49.9m net. Shares outstanding were 57.94m at June 30; the filing reports 58.36m as of July 31.
- No amounts were drawn under the $10m term-loan and $5m revolving credit facility. The company reported compliance with its covenants. The term-loan draw period was scheduled to end September 30, 2019.
- Operating lease liabilities totaled approximately $26.8m at June 30, following adoption of the lease accounting standard; total undiscounted operating lease payments were $35.8m. The company also disclosed $1.4m in other supply and service commitments.
- Management said existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least the next 12 months, while noting additional capital could be needed if plans or assumptions change.
Business developments, outlook and risks
- In May, Codexis signed a CodeEvolver platform transfer and license agreement with Novartis. It received a $5m upfront payment, recorded as deferred revenue at quarter-end; additional milestone payments of $4m and $5m, $8m in annual improvement payments, and usage-based payments may be earned subject to contractual terms. The technology transfer is expected to take approximately 20 months from commencement.
- Nestlé Health Science exercised its exclusive worldwide license option for CDX-6114 in February and assumed future clinical development and commercialization responsibilities, except completion of an extension study substantially completed in Q2. Potential future payments include development and approval milestones, sales milestones and tiered royalties; these are contingent, not guaranteed.
- Management cited fluctuating customer manufacturing schedules and clinical-trial timing, reliance on third-party manufacturers with limited internal enzyme-manufacturing capacity, and uncertainty in collaboration milestones and royalties. Four customers each represented at least 10% of Q2 revenue; the largest accounted for 35%. Customer concentration and manufacturing capacity are material considerations.
- There were no material changes to the risk factors disclosed in the 2018 Form 10-K. The company reported no material pending litigation and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30.
- Codexis reported a net loss and continued investment in research and development; it provided no specific revenue or earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether product-revenue growth and improved product gross margin persist, given quarter-to-quarter variability and customer concentration.
- Progress, timing and revenue recognition under the Novartis technology transfer, including satisfaction of milestone conditions and future usage-based payments.
- CDX-6114’s development and commercial progress under Nestlé’s license, and the timing and probability of contingent milestones and royalties.
- Operating cash use and the adequacy of liquidity beyond management’s stated 12-month outlook, especially as research and development and facility costs evolve.
- Credit-facility terms and availability after the September 30, 2019 term-loan draw-period deadline, alongside ongoing lease commitments.