Codexis, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparison is with the corresponding 2014 periods. Amounts are in U.S. dollars.
Business context
Codexis develops engineered biocatalysts and protein-engineering technology, primarily for pharmaceutical and fine-chemicals markets. It also has an early-stage enzyme therapeutic candidate for PKU. The company reported one operating segment. Q3 results were significantly affected by milestone revenue from its GSK and Merck technology-transfer and license agreements.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $17.4 million | $7.5 million | $30.2 million | $21.1 million |
| Operating income (loss) | $5.7 million | ($4.3 million) | ($5.5 million) | ($19.6 million) |
| Net income (loss) | $5.4 million | ($4.6 million) | ($5.5 million) | ($19.4 million) |
| Net income (loss) per diluted share | $0.13 | ($0.12) | ($0.14) | ($0.51) |
- Q3 revenue mix: biocatalyst product sales $1.8 million, R&D revenue $14.5 million, and revenue-sharing revenue $1.1 million. Q3 R&D revenue included $5.0 million in Merck and $6.5 million in GSK milestone payments.
- Q3 biocatalyst product gross margin was 28%, versus 40% a year earlier; nine-month product gross margin was 42%, versus 26%. The filing attributes the changes to product mix.
- Cash and cash equivalents were $17.0 million at September 30, down from $26.5 million at year-end 2014. Marketable securities were $1.2 million; working capital was $19.5 million.
- For the first nine months, operating cash use was $7.5 million, investing cash use $0.5 million, and financing cash use $1.6 million. Operating cash use included a $9.7 million increase in accounts receivable, mainly from the Q3 collaboration milestones.
- Total assets were $44.3 million and stockholders’ equity $23.3 million at quarter-end. No interest-bearing debt balance is identified in the reported balance-sheet information.
Material changes and management commentary
- Q3 revenue rose 133% year over year, primarily because of the GSK and Merck milestones. Nine-month revenue rose 43%.
- Product sales declined 29% in Q3 and 17% for the nine-month period, which management attributed mainly to customer-demand timing. Exela revenue sharing fell 31% in Q3 and 28% year to date as generic competition followed expiration of the argatroban formulation patent.
- Nine-month operating expenses declined 12% year over year. R&D expense fell 13%; management noted that prior-year expense included impairment charges and a gain related to the Hungarian subsidiary sale.
- Management said existing cash and cash equivalents were expected to fund ongoing operations, planned capital expenditures, and working capital needs for at least 12 months, based on current operations and assumptions. It also expected to receive $11.5 million in Q4 2015 milestone payments from Merck and GSK. These were expectations, not reported receipts.
- No formal revenue or earnings guidance is provided. Management said it was pursuing additional customer collaborations and believed products and services could support future revenue and gross-margin growth.
Agreements, risks, and contingencies
- Under the 2015 Merck agreement, Codexis received a $5.0 million upfront fee and earned a $5.0 million first milestone in Q3; a further $8.0 million is contingent on a technology-transfer milestone. The agreement also provides for potential payments of up to $15.0 million per qualifying commercial API.
- Under the GSK agreement, Codexis earned a $6.5 million second milestone in Q3; a further $7.5 million is contingent on completion of technology transfer. Additional project payments and royalties depend on future outcomes and are not assured.
- Revenue is concentrated: two customers accounted for 39% and 40% of Q3 revenue, respectively. Those customers represented 42% and 47% of accounts receivable at quarter-end.
- Codexis disclosed a possible $0.6 million VAT exposure relating to a historical transaction; it had not accrued a liability because management viewed the outcome as more than remote but less than likely. The company also cited ongoing tax audits and potential additional tax assessments, and REACH compliance costs or delays as risks.
- Operating leases totaled $12.0 million in future minimum payments. The filing reports no material litigation and no off-balance-sheet arrangements. Management maintained a full valuation allowance against most deferred tax assets.
Most important facts for investors to verify
- Whether the expected $11.5 million of Q4 milestone payments were received, and how milestone timing affects future reported revenue and cash flow.
- Whether collaboration revenue can be sustained after the current technology-transfer milestones, including progress on contingent payments, commercial APIs, and royalties.
- Cash conversion and receivable collection, given the milestone-related receivable increase and customer concentration.
- The trajectory of product sales and margins, and the continuing effect of generic competition on Exela revenue.
- Developments in tax audits, the possible VAT exposure, and compliance with REACH requirements.