Codexis, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Codexis develops and sells engineered proteins and enzymes, primarily for pharmaceutical manufacturing, and conducts customer-funded research and development. Its CodeEvolver platform is also used in fine chemicals and early-stage biotherapeutic programs, including a potential PKU treatment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $10.347 million | $16.002 million | $18.317 million | $23.998 million |
| Product sales | $6.600 million | $3.280 million | $12.186 million | $7.020 million |
| Research and development revenue | $3.391 million | $12.064 million | $5.391 million | $15.598 million |
| Operating income (loss) | $(6.337) million | $2.249 million | $(13.814) million | $(4.732) million |
| Net income (loss) | $(6.280) million | $2.239 million | $(13.740) million | $(4.735) million |
| Basic and diluted EPS | $(0.13) | $0.06 basic; $0.05 diluted | $(0.31) | $(0.12) |
- Product gross margin improved to 43% in Q2 and 44% for the first half, versus 32% and 33%, respectively, in 2016, primarily due to product mix.
- Research and development expense was $6.348 million in Q2 and $12.187 million for the first half; SG&A was $6.546 million and $13.152 million, respectively.
- For the six months, operating cash flow was negative $11.558 million, investing cash flow was negative $0.602 million, and financing cash flow was positive $21.737 million. Cash and cash equivalents rose $9.577 million to $28.817 million.
- At June 30, current assets were $40.390 million and current liabilities $13.227 million; working capital was $27.163 million. Marketable securities were $1.305 million and restricted cash was $1.576 million.
- Total liabilities were $19.147 million. Capital-lease obligations had a $0.643 million present value. The company had no borrowings under its new credit facility at quarter-end.
Material changes and drivers
- Q2 revenue fell 35% and first-half revenue fell 24% year over year. The principal cause was the prior-year recognition of a $7.5 million GSK technology-transfer milestone and related deferred revenue, alongside completion of GSK and Merck platform transfers in 2016.
- Product sales rose 101% in Q2 and 74% for the first half, reflecting higher demand for enzymes used in generic and branded products. Research and development revenue fell 72% and 65%, respectively; Exela revenue-sharing revenue declined 46% in both periods.
- Q2 net income in 2016 turned to a loss in 2017, chiefly reflecting the prior-year GSK milestone and deferred revenue recognition, partly offset by stronger product sales. R&D costs increased with outside services and headcount; SG&A was nearly flat.
- In April 2017, Codexis issued 6.325 million shares at $4.00 per share and received approximately $23.3 million net proceeds, increasing shares outstanding.
Outlook, risks and notable items
- Management expected full-year R&D revenue to be below 2016 levels, which included GSK and Merck transfer-related revenue, and product revenue to be higher on increased enzyme demand. It cautioned that Exela revenue-sharing revenue may decline with increased generic competition. No specific numerical revenue or earnings guidance was provided.
- Management said existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital for at least the next 12 months, based on the then-current level of operations. It noted that changed plans, revenue shortfalls or failure to control costs could require additional capital.
- The June 30 credit facility provides up to $10 million in term debt and up to $5 million in revolving advances, subject to an eligible-receivables borrowing base. It is secured by substantially all personal property except intellectual property, has financial and restrictive covenants, and carries variable interest rates. Codexis was in compliance at quarter-end. Covenant breaches could trigger acceleration and foreclosure, including against cash.
- Customer concentration is significant: Customer A represented 45% of Q2 revenue and 42% of first-half revenue, and 59% of accounts receivable at June 30. The filing does not identify the customers by name in this concentration disclosure.
- Codexis reported a patent and trade-secret lawsuit against EnzymeWorks and an individual defendant. After quarter-end, the court granted summary judgment on patent infringement; damages, willfulness, individual liability and other claims remained unresolved. The company could not predict the timing or outcome.
- Management expected adoption of the new revenue-recognition standard in January 2018 to materially affect disclosures; the financial-statement impact was still being evaluated. Product demand, customer manufacturing schedules, third-party manufacturing capacity, collaboration milestones, competition and the ability to raise capital are additional uncertainties.
Important facts for investors to verify
- Whether product-sales growth and improved product margins continue, and whether they offset lower collaboration and milestone revenue.
- Cash burn, the stated minimum 12-month liquidity outlook, and progress in meeting credit-facility covenants and product-revenue requirements.
- Customer concentration, receivable collections, and the effect of customer manufacturing schedules on quarterly results.
- Developments and any potential recovery in the EnzymeWorks litigation, including damages and remaining claims.
- The ultimate revenue-recognition transition impact and any dilution or financing needs following the 2017 stock offering.