Codexis, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Codexis develops engineered biocatalysts and related technology, products, and services, primarily for pharmaceutical customers.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $16.0 million | $6.0 million | $24.0 million | $12.8 million |
| Operating income (loss) | $2.2 million | $(5.7) million | $(4.7) million | $(11.2) million |
| Net income (loss) | $2.2 million | $(5.4) million | $(4.7) million | $(10.9) million |
| Net income (loss) per share, diluted | $0.05 | $(0.14) | $(0.12) | $(0.28) |
| Operating cash flow | Not separately stated | Not separately stated | $0.2 million | $(8.0) million |
Q2 revenue comprised biocatalyst product sales of $3.3 million, research and development revenue of $12.1 million, and revenue sharing of $0.7 million. Product gross margin was 32% for Q2 and 33% for the first half, down from 38% and 47%, respectively, in 2015. The filing does not provide a consolidated gross margin across all revenue streams.
At June 30, cash and cash equivalents were $22.4 million, marketable securities were $1.1 million, working capital was $15.5 million, and total liabilities were $17.2 million. Total assets were $36.9 million. The balance sheet does not present a borrowing-debt balance. Six-month investing cash use was $0.4 million and financing cash use was $0.7 million; cash declined $0.9 million from year-end 2015.
Changes versus comparable periods
- Q2 revenue rose 166% year over year; first-half revenue rose 87%. The largest driver was the $7.5 million final GSK technology-transfer milestone, along with $2.5 million of previously deferred GSK license revenue recognized in Q2 after early completion.
- Product sales increased 62% in Q2, primarily on higher Merck sitagliptin enzyme demand, but product gross margin fell as sales shifted toward lower-margin products.
- Revenue-sharing income from Exela fell 55% in Q2 and 54% for the first half, reflecting lower argatroban sales amid generic competition following patent expirations.
- Q2 shifted from a net loss to net income. The first-half net loss narrowed by $6.2 million from 2015. SG&A increased 21% in Q2 and 22% for the first half, including higher legal, consulting, and marketing costs; R&D was broadly stable.
- Cash from operations improved to $0.2 million from $8.0 million used in the first half of 2015. Accounts receivable fell $4.0 million, while deferred revenue fell $3.7 million.
Outlook, commentary, and risks
- Management said existing cash and cash equivalents would fund ongoing operations, planned capital expenditures, and working capital requirements for at least the next 12 months, based on the current operating level. It cautioned that additional capital may be needed if plans or assumptions change.
- Management expected an $8.0 million payment in the second half of 2016 upon achievement of a Merck collaboration milestone. The filing also describes potential future GSK contingent payments of $5.75 million to $38.5 million per project and Merck payments of up to $15.0 million per qualifying commercial API; these are contingent, not assured guidance.
- No specific revenue or earnings forecast was provided. Management said revenue can fluctuate with customer manufacturing schedules and clinical-trial timing, and noted dependence on third-party manufacturers for commercial-scale enzyme production.
- Customer concentration is significant: Customer B generated 63% of Q2 revenue and 44% of first-half revenue; Customer A generated 17% and 24%, respectively. Customer A represented 59% of accounts receivable at quarter-end.
- Codexis is pursuing litigation alleging patent infringement, trade-secret misappropriation, and related claims against EnzymeWorks and an individual. Defendants sought dismissal of certain claims; the company said timing and outcome could not be determined.
- The company reported no material risk-factor changes from its 2015 Form 10-K and no material change in market-risk exposures. Its $1.1 million CO₂ Solutions investment is exposed to share-price and currency movements. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of the Q2 earnings and revenue increase reflects the non-recurring GSK transfer milestone and accelerated deferred-revenue recognition, versus repeatable customer activity.
- Whether the expected $8.0 million Merck milestone was achieved and collected, and the timing and conditions for other collaboration payments.
- Whether product gross margins recover and whether higher product demand can be sustained despite reliance on third-party manufacturing.
- How customer concentration, declining Exela revenue, and the litigation affect future results, receivables, and cash needs.
- Whether cash generation and operating costs support management’s stated 12-month liquidity outlook.