Codexis, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 11, 2015. Codexis develops engineered biocatalysts and licenses its CodeEvolver protein-engineering platform, primarily for pharmaceutical applications, with fine chemicals and an early-stage PKU enzyme-therapy program also noted.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $6.0 million | $6.6 million | $12.8 million | $13.6 million |
| Operating loss | $5.7 million | $8.9 million | $11.2 million | $15.3 million |
| Net loss | $5.4 million | $8.5 million | $10.9 million | $14.9 million |
| Net loss per share | $0.14 | $0.22 | $0.28 | $0.39 |
- Q2 revenue fell 8% year over year: biocatalyst product sales declined 27% to $2.0 million and Exela revenue sharing declined 31% to $1.5 million, partly offset by a 52% increase in biocatalyst R&D revenue to $2.5 million.
- Product gross margin improved to 38% in Q2 from 24%; for the first half it was 47% versus 19%. Higher-margin sales mix drove the improvement.
- Operating expenses declined 24% in Q2 to $11.7 million. The year-ago quarter included $2.6 million of nonrecurring impairment charges; excluding such items, R&D expense was roughly flat in Q2.
- Cash used in operations was $8.0 million in the first half, versus $6.3 million in 2014. Cash and cash equivalents were $16.6 million at June 30, down from $26.5 million at year-end; working capital was $10.0 million, versus $19.3 million. Marketable securities were $1.9 million, consisting of CO2 Solutions shares.
- Total assets were $35.3 million and stockholders’ equity was $17.1 million. The balance sheet reports no debt line item; operating lease commitments totaled $12.7 million. Restricted cash was $0.8 million.
Changes, outlook, and material items
- Management attributed lower Exela revenue to generic competition after the argatroban formulation patent expired in June 2014, and expects this revenue stream may decline further. Product sales were affected by customer order timing and a large year-ago shipment.
- Management stated that existing cash, cash equivalents, and marketable securities were expected to fund operations, planned capital expenditures, and working capital for at least 12 months from the filing’s perspective. No numerical revenue or earnings guidance was provided. Management said it aims to grow revenue and gross margins through customer collaborations and product development.
- The 2014 GSK platform license continues to provide recognized license revenue and potential additional technology-transfer payments, project-based payments, and royalties; timing and achievement of contingent payments are uncertain.
- Subsequent event: In August 2015, Codexis signed a Merck platform-license agreement, receiving $5 million at signing and becoming eligible for a further $13 million tied to technology-transfer milestones over approximately 15–24 months, plus up to $15 million per qualifying active pharmaceutical ingredient.
- Unrealized appreciation in the CO2 Solutions investment increased its reported fair value to $1.9 million from $0.7 million at year-end; the investment is exposed to share-price and Canadian-dollar exchange-rate movements. The filing estimates a 10% adverse move in either factor could produce an unrealized loss of about $0.2 million.
- Risks include continuing operating cash burn and possible need for capital if plans change; dependence on a limited number of customers (two customers contributed 28% and 24% of Q2 revenue); customer production schedules; reliance on third-party enzyme manufacturers; and potential dilution or restrictive financing terms. A potential $0.6 million VAT exposure was disclosed without accrual; the company also reported ongoing tax audits and assessments. Management said no material litigation was pending.
Important facts for investors to verify
- Whether the August Merck agreement’s milestone payments are achieved and when they are recognized as revenue or cash.
- Whether GSK technology-transfer milestones and future contingent payments progress as planned, and whether either licensee exercises termination rights.
- How quickly Exela-related revenue declines under generic competition and whether growth in R&D licensing revenue offsets that decline.
- Cash burn, liquidity runway, and the effect of customer concentration and order timing on quarterly revenue.
- Outcome of tax examinations and the disclosed VAT contingency, and valuation changes in the CO2 Solutions investment.