Codexis, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Codexis develops and sells engineered proteins and enzymes, using its CodeEvolver platform. Its reportable segments are Performance Enzymes and Novel Biotherapeutics.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $16.9M | $10.0M | $44.5M | $28.3M |
| Product revenue | $8.4M | $6.9M | $18.3M | $19.1M |
| Research and development revenue | $8.5M | $3.0M | $26.2M | $9.2M |
| Operating loss | $2.1M | $10.0M | $10.7M | $23.9M |
| Net loss | $2.0M | $10.2M | $10.4M | $24.0M |
| Net loss per share, diluted | $0.04 | $0.21 | $0.20 | $0.53 |
- Q3 product gross margin was 55%, versus 43% a year earlier; nine-month product gross margin was 44%, unchanged year over year.
- Cash and cash equivalents were $54.2M at September 30, compared with $31.2M at year-end 2017; working capital was $50.8M. Marketable securities were $0.7M and restricted cash was $1.4M.
- For the first nine months, operating cash outflow was $13.4M, investing outflow $2.1M, and financing inflow $38.3M. Financing included $37.3M net proceeds from an April public offering and $4.3M from option exercises.
- Total liabilities were $23.8M. Codexis had no borrowings under its credit facility; capital lease obligations were $0.36M. Its facility provides up to $10M in term loans and a $5M revolving line, subject to terms and covenants.
Changes and drivers
- Q3 revenue increased 70%, primarily from collaboration and development revenue, including Nestlé Health Science and Tate & Lyle, alongside stronger enzyme product demand. Nine-month revenue rose 57%; product revenue declined 4% as shipment timing offset growth in research and development revenue.
- Q3 net loss narrowed substantially, reflecting increased collaboration revenue and improved product mix, as well as lower selling, general and administrative expense. Nine-month research and development expense rose 11%, and selling, general and administrative expense rose 6%.
- Novel Biotherapeutics generated $4.8M of Q3 revenue and $10.5M for the nine months, entirely from the Nestlé collaboration. Performance Enzymes generated $12.1M and $34.0M, respectively.
- Codexis adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased reported revenue by $1.0M in Q3 and $6.4M for the first nine months; the 2017 comparison was not restated. Adoption also reduced opening accumulated equity by $4.1M. Comparisons should account for this change.
Outlook, risks and notable items
- Management said existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least 12 months from the filing. It cautioned that additional capital could be needed if plans or assumptions change.
- Management expected product gross margin to increase for the rest of 2018, citing anticipated favorable product mix. The filing provides no formal revenue or earnings guidance.
- CDX-6114 entered a first-in-human Phase 1a dose-escalation trial in July 2018, triggering a $4.0M Nestlé milestone paid in September. Potential further payments depend on Nestlé exercising its option and future development, regulatory and sales milestones; they are uncertain. The filing notes that top-line Phase 1a results were announced November 8, 2018, but does not provide those results.
- Key risks include early-stage clinical and regulatory uncertainty, patient enrollment and trial execution, reliance on third parties for studies and manufacturing, and the possibility Nestlé does not exercise its option or terminates the agreement. Customer concentration is material: one customer accounted for 27% of Q3 revenue and another 28%; one customer represented 45% of accounts receivable at quarter-end.
- Cash use included a $10.2M decline in deferred revenue and a $1.9M increase in contract assets during the nine months. Revenue timing and working-capital movements may affect cash generation. The company also relies on a limited number of suppliers and outsourced manufacturers.
- The company reported no material pending litigation. A patent dispute with EnzymeWorks was settled, with a stipulated infringement judgment and permanent injunction; an appeal concerning sanctions remained pending.
- Codexis expected adoption of the new lease standard in January 2019 to result in material right-of-use assets and lease liabilities on its balance sheet.
Most important facts to verify
- Whether revenue growth and improved product mix persist, and how much reported growth reflects ASC 606 timing and collaboration revenue.
- CDX-6114 Phase 1a results, Nestlé’s option decision, and the timing and conditions attached to potential future milestone and royalty payments.
- Cash runway and operating cash burn, particularly as deferred revenue is recognized and contract assets or customer collections change.
- Exposure to major customers, outsourced manufacturing capacity, and the credit-facility covenants and borrowing conditions.
- The balance-sheet impact of lease-standard adoption and any future financing needs or resulting shareholder dilution.