Codexis, Inc. — Q3 2016 Form 10-Q
Business context and period. Codexis develops engineered biocatalysts and protein-engineering technology for pharmaceutical and fine-chemicals customers, with an early-stage enzyme therapeutic program. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $14.9 million | $17.4 million | $38.9 million | $30.2 million |
| Operating income (loss) | $1.4 million | $5.7 million | ($3.3 million) | ($5.5 million) |
| Net income (loss) | $1.4 million | $5.4 million | ($3.3 million) | ($5.5 million) |
| Diluted earnings (loss) per share | $0.03 | $0.13 | ($0.08) | ($0.14) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | ($7.0 million) | ($7.6 million) |
- Revenue mix: Q3 product sales were $4.1 million, up 123%; R&D revenue was $10.4 million, down 29%; revenue-sharing revenue was $0.4 million, down 58%. Nine-month product sales rose 60% to $11.1 million and R&D revenue rose 35% to $26.0 million; revenue sharing fell 55% to $1.8 million.
- Margins and costs: Q3 product gross margin was 32%, versus 28% a year earlier. The nine-month product gross margin is inconsistent in the filing: the table reports 33%, while MD&A text says 28% versus 42% in 2015. Total operating expenses increased 15% in Q3 and 18% for the nine months.
- Liquidity: September 30 cash and cash equivalents were $14.9 million, marketable securities $1.5 million, and restricted cash $1.7 million. Working capital was $18.4 million. Cash declined $8.4 million from year-end 2015. Nine-month investing and financing cash uses were $0.7 million and $0.6 million, respectively.
- Balance sheet: Total assets were $38.5 million and total liabilities $15.7 million. The filing does not report a borrowing balance or identify funded debt. Current deferred revenue was $4.2 million and long-term deferred revenue $0.7 million. Operating lease and other commitments are discussed below.
Changes versus prior comparable periods
- Q3 revenue declined 15% and net income declined from $5.4 million to $1.4 million, chiefly reflecting the timing of platform-transfer milestone revenue and lower Exela revenue sharing; higher product sales partly offset the decline.
- Nine-month revenue increased 29%, while the net loss narrowed by $2.2 million. Growth reflected milestone and other R&D revenue and product sales.
- Codexis completed the technology transfers to GSK and Merck and recognized related milestones. The $8.0 million Merck milestone was earned in September but paid in October 2016. GSK’s final $7.5 million transfer milestone was earned and paid in Q2 2016.
- Cash used in operations improved to $7.0 million from $7.6 million for the first nine months, but milestone recognition increased receivables and reduced deferred revenue.
Outlook, commentary, and risks
- Management stated that existing cash, cash equivalents, and marketable securities were expected to fund ongoing operations, planned capital expenditures, and working capital for at least 12 months. No specific financial guidance or quantified forecast was provided; management said additional capital could be needed if plans or assumptions change.
- Further collaboration-related payments are possible, including GSK contingent payments of $5.75 million to $38.5 million per project and Merck payments of up to $15.0 million per commercial API. These depend on customer development and commercialization outcomes and timing is uncertain.
- Customer concentration is significant: one customer represented 76% of Q3 revenue and 80% of receivables at quarter-end. The filing does not identify that customer in the concentration table. Merck’s $8.0 million milestone was included in the customer concentration disclosure and paid after quarter-end.
- Management expects Exela revenue sharing may continue to decline as generic competition increases following expiration of an argatroban-related patent. Product sales also depend on customer demand and third-party manufacturing capacity; orders may be revised or canceled.
- Codexis began liquidating its Indian subsidiary and held $0.9 million of cash in a restricted trustee account for related obligations. The company also reported a patent, trade-secret, contract, and unfair-competition lawsuit against EnzymeWorks and an individual; the court denied most of defendants’ motion to dismiss, but timing and outcome remain uncertain.
- Operating leases required $9.2 million of minimum payments as of September 30, before future sublease receipts. In October, Codexis extended a facility lease through January 2022, with estimated payments of $2.3 million, and entered a cancellable manufacturing-process services agreement that could involve up to $1.4 million. A separate manufacturing and supply agreement carries commitments of up to $1.8 million, payable in December 2022 or later.
- The filing reports no off-balance-sheet arrangements and no material changes to the previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2016.
Key facts for investors to verify
- Reconcile the reported nine-month product gross margin: 33% in the table versus 28% in MD&A narrative.
- Track conversion and collection of milestone revenue, including the $8.0 million Merck payment received in October, and the customer concentration represented by Customer A.
- Assess cash use and liquidity against management’s 12-month sufficiency statement, especially if milestone receipts, product demand, or collaboration activity vary.
- Monitor commercial product margins, Merck sitagliptin volumes and pricing, and the continued decline in Exela revenue sharing.
- Follow the EnzymeWorks litigation, India subsidiary liquidation, and the financial impact of lease extensions and supplier commitments.