Codexis, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial amounts are in millions of dollars unless stated otherwise. Codexis develops and sells engineered proteins and enzymes, with pharmaceuticals its primary business focus.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $10.0 | $14.9 | $28.3 | $38.9 |
| Product sales | $6.9 | $4.1 | $19.1 | $11.1 |
| Research and development revenue | $2.9 | $10.4 | $8.3 | $26.0 |
| Operating expenses | $20.0 | $13.5 | $52.2 | $42.2 |
| Operating loss | $(10.0) | $1.4 | $(23.9) | $(3.3) |
| Net income (loss) | $(10.2) | $1.4 | $(24.0) | $(3.3) |
| Basic and diluted EPS | $(0.21) | $0.04 basic; $0.03 diluted | $(0.53) | $(0.08) |
- Product gross margin improved to 43% in Q3 and 44% for the nine months, from 32% and 33%, respectively, a change management attributed to sales mix.
- Cash and cash equivalents were $23.8 million at September 30, 2017, versus $19.2 million at year-end 2016. Working capital was $18.0 million. Marketable securities were $1.2 million and restricted cash was $1.5 million.
- Operating cash use was $16.4 million for the first nine months, compared with $7.0 million in 2016. Investing activities used $0.7 million; financing provided $21.6 million, mainly from the April public offering. Cash increased $4.6 million during the period.
- Total liabilities were $22.0 million, including $0.6 million of capital-lease obligations. The company had drawn none of its credit facility at quarter-end.
Changes versus the prior comparable period
- Revenue fell 33% in Q3 and 27% year to date. Lower R&D revenue reflected the absence of prior-year Merck and GSK technology-transfer milestones and related deferred-revenue recognition.
- Product sales rose 71% in Q3 and 73% year to date, which the company attributed to higher demand for enzymes used in generic and branded products. Exela revenue-sharing income declined 76% in Q3 and 54% year to date.
- R&D expense increased 47% in Q3 and 24% year to date, primarily from CDX-6114 development services and higher headcount. SG&A increased 53% in Q3 and 15% year to date, mainly due to intellectual-property legal costs and headcount.
- The April 2017 offering issued approximately 6.3 million shares at $4.00 per share and raised net proceeds of $23.2 million. Shares outstanding were 48.3 million at September 30, versus 41.3 million at December 31, 2016.
Outlook, risks and unusual items
- Management expected full-year product revenue to exceed 2016 levels and R&D revenue to be lower than 2016, whose results included significant platform-transfer milestones. It stated existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least 12 months, based on the current operating level. These are expectations, not a quantified earnings forecast.
- On October 12, 2017, after quarter-end, Codexis entered a collaboration with Nestlé Health Science. The agreement provides for a $14 million upfront payment within 30 days, a further $3 million if an option is exercised, potential development and approval milestones up to $90 million, sales milestones up to $250 million, and tiered royalties. These amounts are contingent or post-period and are not September 30 cash.
- The credit facility provides up to $10 million in term loans and a $5 million revolving line, subject to terms and covenants. It is secured by substantially all personal property other than intellectual property, carries financial covenants, and restricts certain corporate actions. The company reported compliance at quarter-end.
- Key risks include continuing operating cash burn and potential need for capital; dependence on customer demand, collaboration milestones and third-party enzyme manufacturing; customer concentration; and the cost and uncertainty of early-stage biotherapeutic development and regulatory approval. The company noted it may need additional capital if plans or assumptions change.
- Codexis’s patent and trade-secret litigation against EnzymeWorks remained unresolved. The court granted partial summary judgment of infringement and ruled the asserted patents were not invalid; the company said the timing and ultimate outcome remained uncertain.
- The company expected adoption of the new revenue-recognition standard in January 2018 to have a material impact on its financial statements and disclosures; its assessment was preliminary.
Important facts for investors to verify
- Whether product-sales growth and improved product gross margin continue, and how much revenue remains concentrated among major customers.
- Actual operating cash burn, cash runway and any future use of the credit facility, including compliance with revenue and cash-related covenants.
- Receipt and accounting treatment of the Nestlé upfront payment, and whether Nestlé exercises its option; distinguish potential milestone and royalty amounts from committed revenue.
- Progress, funding responsibility and development risks for CDX-6114 and other biotherapeutic programs.
- Developments and potential financial effects of the EnzymeWorks litigation and intellectual-property legal spending.
- The quantified effect of adopting Topic 606 and any associated changes in revenue timing or disclosures.