Codexis, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods. Codexis develops biocatalysts and enzyme-engineering technology, primarily for pharmaceutical customers, and is expanding into fine chemicals.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $7.5m | $3.9m | $21.1m | $22.4m |
| Operating loss | $4.3m | $9.2m | $19.6m | $31.3m |
| Net loss | $4.6m | $9.3m | $19.4m | $31.5m |
| Basic and diluted loss per share | $0.12 | $0.24 | $0.51 | $0.83 |
| Cash used in operating activities | Not separately presented for the quarter | $4.7m | $19.1m |
- Q3 revenue rose 90% year over year: product sales were $2.6m, research and development revenue $3.4m, and revenue-sharing revenue $1.5m. The filing attributes growth to food-related enzyme sales, increased pharmaceutical customer services, and Exela’s argatroban sales.
- Nine-month revenue fell 6%, mainly because of lower product sales, including the expected decline in hepatitis C-related sales. Higher R&D and revenue-sharing revenue partly offset this decline.
- Q3 cost of product sales was $1.5m on $2.6m of product revenue; nine-month cost was $6.2m on $8.3m of product revenue. These imply product gross margins of approximately 40% and 26%, respectively, versus approximately 54% and 35% in the comparable 2013 periods.
- Operating expenses fell 11% in Q3 and 24% for the nine months. Reduced R&D and selling, general and administrative costs reflect restructuring and discontinued programs; nine-month R&D included approximately $2.7m of non-cash asset impairment charges.
Balance sheet and liquidity
- At September 30, 2014, cash and cash equivalents were $21.5m and marketable securities were $1.0m; short-term investments were zero. Combined cash, cash equivalents, short-term investments, and marketable securities totaled $22.6m, down from $25.9m at year-end 2013.
- Working capital was $17.2m, versus $24.6m at December 31, 2013. Total assets were $44.8m, total liabilities $19.6m, and stockholders’ equity $25.2m.
- Cash declined by $0.6m over the first nine months. Investing activities provided $4.7m, including $3.0m from investment maturities and $1.5m from the Hungarian subsidiary sale; financing activities used $0.6m.
- The filing reports no debt balance in the presented balance sheet and no off-balance-sheet arrangements. Lease payments under non-cancellable operating leases totaled $14.7m.
Material changes, outlook, and risks
- GSK agreement: In July 2014, Codexis licensed its CodeEvolver platform to GSK and received a $6.0m upfront fee, recognized over a three-year technology-transfer period; $5.5m remained deferred at quarter-end. Codexis may receive up to $19.0m in transfer-related contingent payments over three years, additional project-based payments, and possible royalties. These amounts depend on milestones or future GSK activity and are not assured. Management expected $5.0m in cash from the agreement during the remainder of 2014.
- Cost restructuring and asset actions: Codexis wound down its CodeXyme cellulase program and stopped further CodeXol detergent-alcohol development. It sold its Hungarian subsidiary in March for $1.5m and recorded a $0.8m gain; management estimated approximately $3.0m in annual operating-expense reductions, excluding depreciation. A $1.8m impairment charge was recorded in 2014 for CodeXol-related equipment, in addition to other equipment impairment and disposal charges.
- Management outlook: Management said existing cash, cash equivalents, and marketable securities were expected to fund ongoing operations, planned capital expenditures, and working capital for at least the next 12 months. It sought revenue and gross-margin growth through customer collaborations and new products and services. The filing gives no specific revenue or earnings guidance and cautions that additional capital could be needed if plans or assumptions change.
- Key risks: Product revenue depends on a limited number of pharmaceutical products and customers; two customers each represented over 20% of nine-month 2014 revenue. Codexis relies on third-party enzyme manufacturing, principally Lactosan, and disclosed recent delays related to viral contamination; it had no supply agreement with manufacturers other than Lactosan. The Exela revenue-sharing stream may face competition following expiration of a third-party patent related to argatroban production.
- Contingencies: A potential VAT obligation of approximately $0.6m related to a 2009 intellectual-property transaction was considered more than remote but less than likely, and no accrual was recorded. The filing says ordinary-course legal matters were not expected to have a material adverse effect; the previously disputed Dyadic notice was withdrawn in February 2014.
- Management reported disclosure controls and procedures were effective as of September 30, 2014, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the GSK technology transfer proceeds on schedule and whether contingent payments or royalties are achieved; distinguish cash received from revenue recognized over time.
- Whether Lactosan’s contamination-related manufacturing delays continue, and whether Codexis secures reliable alternative supply capacity.
- Whether product revenue concentration, hepatitis C-related declines, and competition in the Exela argatroban business affect future revenue and margins.
- Whether cost reductions and collaboration growth are sufficient to reduce operating losses and cash use, and whether management’s stated 12-month liquidity expectation remains supportable.
- The outcome of the potential VAT exposure and future impairment assessments for long-lived assets and goodwill.