Codexis, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Codexis develops and sells engineered proteins and enzymes, with businesses in Performance Enzymes and Novel Biotherapeutics. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $13.5m | $10.3m | $27.6m | $18.3m |
| Product revenue | $3.7m | $6.6m | $9.9m | $12.2m |
| R&D revenue | $9.8m | $3.7m | $17.7m | $6.1m |
| Operating loss | $(3.8)m | $(6.3)m | $(8.5)m | $(13.8)m |
| Net loss | $(3.7)m | $(6.3)m | $(8.4)m | $(13.7)m |
| Basic and diluted loss per share | $(0.07) | $(0.13) | $(0.17) | $(0.31) |
Q2 revenue rose 31%, and first-half revenue rose 51%, primarily from collaboration and development revenue, including work for Tate & Lyle and Nestlé Health Science. Product revenue fell 44% in Q2 and 19% for the first half, mainly reflecting shipment timing and lower revenue from certain customers. Product gross margin was 30% in Q2 and 35% for the first half, versus 43% and 44% in the comparable 2017 periods; management attributed the decline to product mix and said it expected product margins to increase in future quarters. R&D and SG&A expenses increased as staffing, lab supplies, recruiting and stock-based compensation costs rose.
Cash, liquidity and financing
- At June 30, cash and cash equivalents were $53.6m, restricted cash $1.5m, marketable securities $0.7m, and working capital $49.9m. Total assets were $76.0m and total liabilities $23.4m.
- First-half operating cash use was $12.1m, investing cash use $1.5m, and financing cash provided $35.9m. Cash, cash equivalents and restricted cash increased $22.3m.
- An April public offering of 4.31m shares at $9.25 per share generated approximately $37.3m net proceeds. Common shares outstanding were 53.5m at June 30.
- No borrowings were outstanding under the $10m term-loan and $5m revolving credit facility; the company reported covenant compliance. The term-loan draw period was extended to September 30, 2018. Management said available cash was expected to fund operations, planned capital expenditures and working capital for at least 12 months, while noting additional capital could be needed if plans or assumptions change.
Material changes, outlook and risks
- Codexis adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased reported 2018 revenue by $1.6m in Q2 and $5.4m for the first half versus amounts that would have been reported under the prior method; it also reduced opening accumulated deficit by $4.1m. 2017 comparative results were not restated, so comparisons are not on the same revenue-recognition basis.
- Novel Biotherapeutics generated $2.4m of Q2 and $5.7m of first-half revenue, entirely from the Nestlé collaboration for CDX-6114, a potential PKU treatment. On July 9, 2018, the first subjects were dosed in a Phase 1a trial, triggering a $4.0m payment from Nestlé, payable within 60 days. Further development, sales milestones and royalties are contingent on options, development outcomes and commercial sales.
- A new Porton collaboration was signed in April 2018; Codexis received a $0.5m initial collaboration fee and may earn annual fees and R&D revenue.
- Revenue timing can vary with customer manufacturing schedules and clinical trials. Three customers each represented at least 10% of Q2 revenue; two customers accounted for 73% of June 30 accounts receivable. The company also relies on a limited number of suppliers and third-party manufacturers.
- The company reported no material pending litigation. A patent dispute with EnzymeWorks was settled, with a permanent injunction; an appeal concerning sanctions remained pending. Indemnification obligations are uncapped, though no related accrual was recorded.
- No specific revenue or earnings guidance was provided. Management’s margin expectation and liquidity assessment are forward-looking and subject to execution, customer, financing and development risks.
Investor verification priorities
- Assess how much reported revenue growth reflects recurring customer activity versus collaboration milestones, license recognition and the ASC 606 accounting change.
- Track product revenue, product mix and gross-margin recovery, given the substantial year-over-year declines.
- Monitor operating cash use, remaining cash runway, possible financing needs and the impact of equity issuance on shareholders.
- Check customer concentration, receivable collections, supplier/manufacturer capacity and credit-facility covenant requirements.
- Verify CDX-6114 trial progress and the timing and collectability of contingent Nestlé payments, options, milestones and royalties.