Codexis, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; selected unaudited quarterly data are also summarized below. Codexis develops and sells engineered enzymes and licenses its CodeEvolver protein-engineering platform. Its two reporting segments are Performance Enzymes and Novel Biotherapeutics.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $60.6 million | $50.0 million |
| Product revenue | $25.6 million | $26.7 million |
| Research and development revenue | $35.0 million | $23.3 million |
| Product gross margin | 51% | 46% |
| Research and development expense | $30.0 million | $29.7 million |
| Selling, general and administrative expense | $29.3 million | $29.0 million |
| Operating loss | $11.3 million | $23.0 million |
| Net loss | $10.9 million; $0.21 per share | $23.0 million; $0.50 per share |
| Cash used in operating activities | $14.1 million | $8.8 million |
Revenue increased 21%, driven by R&D and collaboration revenue, partly offset by a 4% decline in product revenue attributed mainly to customer manufacturing schedules. Higher-margin product mix improved product gross margin. Net loss narrowed, principally because of higher revenue and lower product costs. Results are not fully comparable because Codexis adopted ASC 606 in 2018: the company said adoption increased 2018 revenue by $5.0 million and increased opening accumulated deficit by $4.1 million.
Q4 2018: Revenue was $16.1 million, versus $21.7 million in Q4 2017. The company recorded an operating loss of $0.6 million and a net loss of $0.5 million, compared with operating income of $0.9 million and net income of $1.0 million in Q4 2017. Quarterly figures are unaudited.
Balance sheet, cash flow and liquidity
- At December 31, 2018, cash and cash equivalents were $53.0 million; cash, cash equivalents and restricted cash totaled $54.5 million. Working capital was $50.1 million, total assets $79.3 million, total liabilities $23.0 million and stockholders’ equity $56.3 million.
- Operating cash outflow was $14.1 million; investing outflow was $2.8 million; financing inflow was $38.6 million, primarily from the April 2018 stock offering and employee option exercises. The public offering generated approximately $37.3 million in net proceeds.
- No borrowings were outstanding under the credit facility at year-end. It provided up to $10 million of term debt and a $5 million revolving line, subject to conditions and financial covenants; the company reported covenant compliance.
- Management believed existing cash, cash equivalents and equity securities would fund operations, planned capital expenditures and working capital needs for at least 12 months. It expected capital spending, including laboratory and IT equipment, to be higher in 2019.
- Debt-like obligations included $0.3 million of capital lease obligations. Operating lease commitments reported at year-end were $4.5 million; a February 2019 lease amendment subsequently extended space leases and disclosed $32.9 million of future minimum payments.
Material changes, outlook and risks
- Revenue mix and concentration: R&D revenue became 58% of FY2018 revenue, up from 47%; product revenue fell to 42% from 53%. Merck, Nestlé Health Science and Tate & Lyle contributed 29%, 22% and 13% of revenue, respectively. The filing warns that dependence on a limited customer base can cause volatility.
- Collaborations and CDX-6114: Nestlé Health Science accounted for $13.5 million of Novel Biotherapeutics segment revenue in 2018. It exercised its exclusive worldwide license option in February 2019, after year-end, triggering a $3.0 million payment and assuming future clinical development and commercialization responsibilities, except for an extension study expected to finish in Q2 2019. The FDA had cleared the proposed Phase 1b study to proceed. Potential future Nestlé payments include up to $86 million in development and approval milestones, up to $250 million in sales milestones, and tiered royalties; these are contingent, not assured. A $1.0 million formulation milestone was also payable under the agreement.
- Other business developments: Codexis completed a technology transfer to Porton and recognized $2.8 million of related revenue in 2018. It began marketing a ligase enzyme for molecular biology and diagnostic applications. Merck continued to generate product and research revenue; future API-related payments depend on Merck’s production and usage.
- Profitability and funding: Codexis had a history of losses, with a $330.5 million accumulated deficit at year-end, and stated that profitability was not assured. Operating cash use increased despite the narrower net loss. Future funding needs may depend on growth, development spending and collaboration funding; equity financing could dilute shareholders.
- Key risks: High customer and product concentration; reliance on a small number of contract manufacturers; variable customer schedules and gross margins; clinical, regulatory and commercialization uncertainty; competition; intellectual-property risks; and dependence on collaborators. The company reported no material pending litigation. It settled patent litigation with EnzymeWorks in 2018; a related appellate ruling in February 2019 affirmed a lower-court ruling and remanded on jurisdictional grounds.
- Reporting and controls: Adoption of ASC 606 changed revenue timing and comparability. Management and the auditor reported effective internal control over financial reporting as of December 31, 2018; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of future revenue and cash flow is recurring product sales versus collaboration, license, milestone and other R&D revenue—and the effect of ASC 606 on comparability.
- Whether product revenue stabilizes or grows, given the 2018 decline and customer-driven manufacturing schedule variability.
- Cash burn, 2019 capital expenditures, lease commitments and liquidity runway relative to management’s 12-month assessment.
- Progress and final study results for CDX-6114, the status of the remaining extension study, and whether Nestlé achieves milestones that generate payments or royalties.
- Customer concentration, contract-manufacturer capacity and compliance with credit-facility covenants.