Codexis, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Codexis develops biocatalysts and related products and services, primarily for pharmaceutical customers, and is expanding into fine chemicals.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $7.1 million | $11.5 million; down 38% |
| Operating loss | $6.4 million | $9.6 million |
| Net loss | $6.4 million; $0.17 per share | $9.6 million; $0.25 per share |
| Product gross margin | 15% | 38% |
| Cash used in operating activities | $2.4 million | $3.5 million |
| Cash, cash equivalents and marketable securities | $25.6 million at March 31 | $25.9 million at December 31, 2013 |
| Working capital | $21.2 million at March 31 | $24.6 million at December 31, 2013 |
Revenue comprised $3.0 million of biocatalyst products, $2.1 million of research and development, and $1.9 million from revenue sharing. Total assets were $56.0 million and total liabilities were $19.4 million at quarter-end. The balance sheet does not report borrowings; operating lease commitments totaled $16.0 million.
Material changes and unusual items
- Product revenue fell 67%, mainly from lower hepatitis C shipments and the absence of a $2.1 million one-time enzyme inventory sale to Arch recorded in Q1 2013. Management said statin-family and hepatitis C products are not expected to be significant revenue sources going forward.
- Research and development revenue rose 65%, and revenue-sharing revenue rose 86%. Revenue sharing from Exela included $1.9 million in Q1 2014; Exela is a related party.
- Research and development expense declined 34% and SG&A declined 25%, reflecting restructuring, reduced headcount and lower outside services. R&D also benefited from a $0.8 million gain on the sale of the Hungarian subsidiary.
- The Hungarian subsidiary sale closed in March for $1.5 million in cash proceeds. The buyer assumed related employment and facility lease obligations; Codexis estimated annual operating expense savings of approximately $3 million, excluding depreciation.
- Product gross margin fell to 15%, which management attributed to a less favorable sales mix. Cash from investing activities was $3.6 million, including the Hungarian sale proceeds and marketable-security maturities.
Outlook, risks and contingencies
Management expects product sales to increase over time but cautioned that order timing can make quarterly results fluctuate. It is pursuing pharmaceutical collaborations and expects current cash, cash equivalents and marketable securities to fund operations, planned capital expenditures and working capital for at least 12 months, based on current plans. No specific revenue or earnings guidance was provided. Management noted that changed assumptions or insufficient revenue could require additional capital, potentially on dilutive or restrictive terms.
- The CodeXyme cellulase program was being wound down and further CodeXol detergent-alcohol development stopped. The company said it did not expect additional costs under its Q4 2013 restructuring plan.
- Customer concentration is high: the top five customers represented 90% of Q1 revenue. Novartis, Exela and Merck each accounted for more than 10%.
- A potential foreign VAT exposure of approximately $0.6 million was disclosed without an accrual; management described the likelihood as more than remote but less than likely. A separate approximately $0.4 million VAT payment related to equipment transferred before the Hungary sale was expected to be recoverable within 12 months.
- Dyadic withdrew its 2013 notice alleging breach of a license agreement after Codexis decided to wind down the cellulase program; the filing says future allegations cannot be ruled out. The company reported no material litigation and no material change to previously disclosed risk factors.
Investor facts to verify
- Whether new pharmaceutical R&D and revenue-sharing growth can offset continuing declines in legacy product sales, and how variable product orders affect results.
- Whether the 15% product gross margin can improve as product mix and sales volumes change.
- Actual cash burn and runway relative to management’s at-least-12-month liquidity assessment.
- Realization of the expected cost savings from the Hungary sale and recovery of the disclosed VAT amounts.
- Customer concentration, Exela-related revenue, and any developments in the potential VAT exposure or Dyadic license matter.