Codexis, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 12, 2014. Codexis develops engineered biocatalysts, primarily for pharmaceutical manufacturing, and began pursuing fine-chemicals opportunities in 2013.
Financial performance and position
- Revenue: $31.9 million, down 64% from $88.3 million in 2012. Product revenue was $20.4 million; collaborative research and development revenue was $6.9 million; revenue-sharing revenue was $4.6 million; government-award revenue was zero.
- Profitability: Operating loss was $41.1 million and net loss was $41.3 million, compared with net losses of $30.5 million and $30.9 million, respectively, in 2012. Loss per share was $1.08 versus $0.84. The company reported a $256.9 million accumulated deficit.
- Margins and expenses: Product gross margin increased to 29% from 15%, mainly because sales shifted away from lower-margin generic statin products. Research and development expense fell to $31.6 million from $56.8 million; selling, general and administrative expense fell to $26.9 million from $31.4 million.
- Cash flow: Operating activities used $23.0 million, versus $11.9 million in 2012. Investing activities provided $13.3 million, largely from marketable-security maturities; capital expenditures were $1.2 million. Cash and cash equivalents fell to $22.1 million from $32.0 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $25.9 million at year-end, including $0.8 million of non-current marketable securities. Working capital was $24.6 million, down from $43.5 million. The filing reports no financing obligations at year-end. Operating lease commitments totaled $17.6 million.
- Fourth quarter: Revenue was $9.5 million and net loss was $9.8 million, compared with revenue of $7.9 million and net loss of $15.5 million in fourth-quarter 2012.
Material changes versus 2012
- The Shell research collaboration ended in August 2012. Shell had represented 51% of revenue in 2012; it provided no revenue in 2013. The resulting revenue decline was the main reason annual revenue fell.
- Product revenue declined 43%, to $20.4 million, primarily as generic statin-family sales fell by $17.5 million and hepatitis C product revenue declined by $2.9 million. On-patent product sales increased to $13.1 million from $10.6 million.
- Revenue from the top five customers was 81% of total revenue, versus 83% in 2012. Merck contributed 39%, Exela 15%, and Novartis 14%, leaving significant customer concentration.
- Management reduced costs after the Shell collaboration ended and announced a further 2013 restructuring after winding down the CodeXyme cellulase program and stopping CodeXol detergent-alcohol development. The 2013 plan included 15 U.S. employee terminations; management estimated approximately $3.4 million of U.S. expense savings in 2014.
- Fine chemicals activity began with a joint development agreement in the food-ingredients market; a customer was also using Codexis technology to manufacture a butadiene intermediate.
Outlook, risks and unusual items
- Management said existing cash, cash equivalents and marketable securities were expected to fund operations, planned capital expenditures and working capital for at least 12 months from the filing’s outlook date. It also said additional capital could be needed if plans or assumptions changed. No formal revenue or earnings guidance was provided.
- Management expected pharmaceutical product sales, particularly on-patent products, to increase, but cautioned that orders and deliveries may fluctuate. It did not expect statin-family and hepatitis C products to be a significant share of future revenue.
- In 2013, the company recorded $1.6 million of impairment charges to reduce excess research equipment classified as held for sale to estimated fair value, and $0.8 million of restructuring expense. It recorded no goodwill or intangible-asset impairment; the impairment assessment depended on projected cash flows and other estimates.
- Customer and product concentration, continued operating losses and cash use, competition and commercialization risk in fine chemicals, and dependence on Lactosan for substantially all commercial-scale pharmaceutical enzymes are material risks. Management also identified the possibility of needing additional financing.
- Dyadic’s 2013 notice alleging breach of a license agreement was withdrawn in early 2014 following the decision to wind down CodeXyme. The withdrawal did not waive Dyadic’s potential claims or Codexis’s defenses. The filing also disclosed a possible $0.6 million foreign value-added-tax exposure for which no liability was accrued.
- The company reported effective disclosure controls and effective internal control over financial reporting at year-end; its auditor issued unqualified opinions on the financial statements and internal controls. A prior-year material weakness involving complex, non-routine accounting was reported as remediated.
Important facts for investors to verify
- Whether new pharmaceutical collaborations and on-patent product sales can replace revenue lost from Shell and declining generic-product demand.
- Whether operating cash burn moderates enough for the stated liquidity runway, and whether additional financing will be required.
- Customer concentration, including Merck’s 39% share of 2013 revenue and Novartis’s 50% share of year-end accounts receivable.
- Whether Codexis can qualify alternative commercial enzyme suppliers and reduce its dependence on Lactosan.
- Progress, customer adoption and regulatory pathway for fine-chemicals and food applications, alongside any further costs or asset-sale proceeds from discontinued programs.
- Potential outcomes of the Dyadic license dispute and the unaccrued tax contingency.