Codexis, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Codexis develops biocatalysts and related technologies, primarily for pharmaceutical customers, with newer activity in fine chemicals.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.6 million | $7.0 million | $13.6 million | $18.5 million |
| Operating loss | $8.9 million | $12.5 million | $15.3 million | $22.1 million |
| Net loss | $8.5 million | $12.6 million | $14.9 million | $22.2 million |
| Net loss per share | $0.22 | $0.33 | $0.39 | $0.59 |
| Operating cash flow | Not separately presented for the quarter | $(6.3) million | $(10.6) million |
- Q2 revenue comprised $2.8 million in biocatalyst products, $1.7 million in research and development, and $2.1 million in revenue sharing. Product gross margin was 24%, versus 27% a year earlier; for the first half it was 19%, versus 34%.
- Cash, cash equivalents and marketable securities totaled $21.5 million at June 30, down from $25.9 million at December 31, 2013. Working capital was $16.1 million, versus $24.6 million at year-end.
- Total assets were $45.2 million and total liabilities were $15.9 million. The balance sheet does not report a borrowing balance; it does disclose operating lease commitments totaling $15.4 million.
Changes and significant items
- Q2 revenue fell 6% year over year; first-half revenue fell 26%. Lower product sales—related to expected loss of hepatitis C marketplace sales and the prior-year Merck boceprevir campaign—were partly offset by higher Exela revenue sharing and research services.
- Q2 net loss narrowed to $8.5 million from $12.6 million, reflecting lower operating expenses, including reduced spending after the CodeXyme cellulase program wind-down. R&D and SG&A decreased 10% and 22%, respectively, in Q2.
- Q2 R&D included approximately $2.5 million of non-cash impairment charges. The filing identifies a $1.8 million write-down of CodeXol assets and additional impairment related to excess equipment.
- In March, Codexis sold its Hungarian subsidiary for $1.5 million and recorded a $0.8 million gain. Management estimated the sale would reduce annual operating expenses by approximately $3.0 million, excluding depreciation.
- In July, after quarter-end, Codexis entered a GSK platform-technology license agreement. It received $6.0 million upfront and may receive another $19.0 million over two years subject to technology-transfer milestones, additional project milestones, and royalties. Management also stated it expected $5.0 million in cash during the remainder of 2014; the filing does not clearly reconcile that estimate with the stated upfront payment and milestone schedule.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided. Management believes existing cash, cash equivalents and marketable securities are sufficient for operations, planned capital expenditures and working capital for at least the next 12 months, based on current operations.
- Management expects product revenue and delivery timing to fluctuate. It believes customer collaboration and new or existing products could increase revenue and gross margins, but results depend on customer demand, product mix and execution.
- Revenue is concentrated: in Q2, Exela accounted for 32%, Merck 28%, and Novartis 12%. Exela is a related party; its increased argatroban sales drove much of the revenue-sharing increase.
- The company continues to incur operating losses and use cash. It cautions that changed assumptions or insufficient revenue could require additional capital, potentially dilutive equity or restrictive debt financing, or reductions to development activities.
- A possible foreign VAT exposure of approximately $0.6 million was disclosed but not accrued; management assessed payment as more than remote but less than likely. The Dyadic license termination notice was withdrawn in February 2014, though future disputes are not ruled out. The company reported no material litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the GSK technology-transfer milestones are achieved, and the timing and meaning of the filing’s $5.0 million remainder-of-2014 cash estimate relative to the $6.0 million upfront payment.
- Whether Exela revenue sharing and other concentrated customer revenues are sustainable, and how they compare with declining product sales.
- Cash burn, liquidity runway and progress toward management’s stated 12-month funding expectation.
- Effects of the CodeXol and equipment impairments, restructuring, and Hungarian subsidiary sale on ongoing expenses and future operating results.
- Resolution of the potential VAT exposure and any renewed Dyadic license dispute.