Codexis, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Codexis develops engineered biocatalysts and related technology, products and services, primarily for pharmaceutical customers. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $8.00 | $6.80 | +18% |
| Operating loss | $(6.98) | $(5.53) | Loss widened $1.45 |
| Net loss | $(6.97) | $(5.56) | Loss widened $1.41 |
| Basic and diluted loss per share | $(0.17) | $(0.14) | |
| Net cash from (used in) operating activities | $0.22 | $(3.85) |
- Revenue mix: Biocatalyst product sales were $3.74 million (+22%); biocatalyst R&D revenue was $3.53 million (+61%); revenue-sharing revenue was $0.72 million (−53%). Product and R&D growth included higher Merck sitagliptin enzyme sales and a collaboration milestone; Exela argatroban revenue declined amid generic competition.
- Product margin: Product gross profit was $1.25 million, with a 33% product gross margin versus 53% a year earlier, reflecting sales mix. Product costs rose 71%, faster than product sales.
- Expenses: R&D expense increased 7% to $5.69 million, primarily due to consulting on drug-development targets. SG&A increased 22% to $6.80 million, primarily due to legal, consulting and marketing costs.
- Cash flows: Operating cash flow was positive $0.22 million, helped by working-capital movements, including collections of receivables; net loss was $6.97 million. Investing used $0.24 million and financing used $1.09 million, including $1.10 million of taxes paid on net share settlement of equity awards. Cash and cash equivalents fell $1.11 million during the quarter.
Financial position and liquidity
- At March 31, cash and cash equivalents were $22.16 million; marketable securities were $1.46 million and restricted cash was $0.79 million. Working capital was $12.29 million, down from $18.00 million at December 31, 2015.
- Total assets were $39.19 million and stockholders’ equity was $16.11 million. Current liabilities were $16.48 million, including $6.11 million of deferred revenue. No borrowings are listed as a balance-sheet line item.
- Management said existing cash and cash equivalents would fund operations, planned capital expenditures and working capital for at least 12 months, based on current operations. It also cautioned that changed plans or assumptions could require additional capital.
Material developments, outlook and risks
- Collaboration payments: On May 2, 2016, Codexis announced completion of the final GSK technology-transfer wave and expected a $7.5 million payment in Q2. Management expected total milestone payments of $15.5 million during the remaining nine months of 2016 under its GSK and Merck collaborations. These payments depend on milestone achievement; the Merck agreement included a further $8.0 million payment subject to satisfactory completion of its second technology-transfer milestone.
- Other collaboration economics: Codexis may earn additional GSK project payments and royalties, and Merck commercial-API payments of up to $15.0 million per API, subject to contractual conditions and future partner activity. Timing and achievement are uncertain.
- Revenue variability and concentration: Revenue can fluctuate with customer manufacturing schedules and clinical-trial timing. Two customers represented 37% and 18% of Q1 revenue; one customer represented 42% of quarter-end receivables. Product manufacturing also depends partly on third-party manufacturers. Management said purchase-order backlog is not a reliable predictor of sales.
- Legal and operating exposures: Codexis sued EnzymeWorks and an individual in February 2016, alleging patent infringement, trade-secret misappropriation and related claims; the outcome and timing are uncertain. Operating lease payments totaled $10.60 million, before $2.5 million of future minimum sublease rentals. Codexis reported no off-balance-sheet arrangements and no material changes to the risk factors in its prior annual report.
- Management noted possible future funding needs if business plans, revenue, margins or costs differ from expectations; any equity financing could dilute shareholders. The filing provided no formal revenue or earnings guidance.
Most important facts for investors to verify
- Whether GSK’s $7.5 million payment and the expected aggregate $15.5 million of 2016 collaboration milestones were received, and when any remaining Merck milestone is achieved.
- Whether product gross margin recovers from 33% and whether revenue growth can be sustained without one-time milestones or timing-related sales.
- Customer concentration, receivables collection and the durability of Exela revenue amid generic competition.
- Cash use excluding working-capital timing effects, and whether management’s stated 12-month liquidity outlook remains adequate.
- Developments in the EnzymeWorks litigation and any resulting costs or effects on intellectual property.