Codexis, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Codexis discovers, develops and sells engineered proteins and licenses its CodeEvolver platform. Its segments are Performance Enzymes and Novel Biotherapeutics.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 or prior period |
|---|---|---|
| Total revenue | $15.6 million | $14.0 million; up 11% |
| Product revenue | $8.0 million | $6.2 million; up 30% |
| Research and development revenue | $7.6 million | $7.9 million; down 4% |
| Product gross margin | 45% | 38% |
| Operating expenses | $20.8 million | $18.7 million |
| Operating loss | $5.2 million | $4.7 million |
| Net loss | $5.1 million; $0.09 per share | $4.7 million; $0.10 per share |
| Cash used in operations | $2.9 million | $4.2 million |
| Cash, cash equivalents and restricted cash at quarter-end | $49.1 million | $25.8 million at March 31, 2018 |
| Cash and cash equivalents at quarter-end | $47.3 million | $53.0 million at December 31, 2018 |
| Working capital | $45.1 million | $50.1 million at December 31, 2018 |
At March 31, 2019, total assets were $101.1 million and total liabilities were $49.9 million, including $27.2 million of operating-lease obligations recognized following adoption of ASC 842. The company had no borrowings under its credit facility; up to $10 million of term debt and a $5 million revolving line were available, subject to facility terms.
Changes and business developments
- Revenue growth was led by product sales, reflecting higher demand for enzymes for generic and branded products. Improved sales mix lifted product gross margin to 45% from 38%.
- R&D and SG&A expenses rose 12% and 9%, respectively, primarily due to headcount, facilities and other costs. The higher operating expenses contributed to the increased net loss.
- Performance Enzymes revenue declined 6% to $10.1 million, partly because the prior-year period included Merck license revenue and Tate & Lyle development services. Novel Biotherapeutics revenue grew 66% to $5.5 million, largely reflecting the CDX-6114 license payment.
- In February, Nestlé Health Science exercised its option to license CDX-6114, triggering a $3.0 million payment recognized as revenue and transferring responsibility for future development and commercialization to Nestlé, except for an extension study expected to conclude in Q2 2019.
- After quarter-end, Codexis signed a multi-year Tate & Lyle commercial agreement for enzyme supply and an exclusive license relating to stevia products. In May, it signed a Novartis platform transfer and license agreement, with up to $14 million in transfer payments, $8 million in annual improvement payments, and potential usage-based payments. These are subsequent events, not Q1 revenue.
Outlook, risks and contingencies
- Management stated that existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least the next 12 months. It noted that additional capital could be needed if plans or assumptions change.
- No formal revenue or earnings guidance is provided in the filing. Revenue can fluctuate with customer manufacturing schedules and clinical-trial timing; purchase orders are often changeable or cancellable, and commercial enzyme production depends on third-party manufacturers.
- Two customers accounted for 41% and 35% of Q1 revenue, respectively, underscoring customer concentration. Milestones and royalties under collaboration agreements are contingent on partner activity and outcomes and may be uncertain in timing or amount.
- Operating lease commitments totaled $36.6 million in undiscounted payments at March 31, 2019, before future sublease receipts. Other disclosed supply and service commitments totaled $1.8 million. Credit-facility covenants restrict certain actions; Codexis reported compliance at quarter-end.
- The company reported no material pending litigation and no material changes to the risk factors in its 2018 Form 10-K. The EnzymeWorks settlement-related appeal was affirmed and remanded on jurisdictional grounds; a further appeal remained possible. Management reported disclosure controls effective as of March 31, 2019.
Investor verification points
- Check whether product demand and the improved sales mix that supported Q1 revenue and gross margin continue in subsequent quarters.
- Track customer concentration and the timing and variability of major customers’ orders and manufacturing schedules.
- Verify progress, milestones, royalties and remaining responsibilities under the Nestlé CDX-6114 agreement, including completion of the extension study.
- Assess execution and payment conditions for the post-quarter Tate & Lyle and Novartis agreements; distinguish contingent or future payments from recognized revenue.
- Monitor cash burn, working capital, lease obligations, credit-facility availability and the company’s stated liquidity runway.