Codexis, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Codexis develops and sells industrial enzymes for pharmaceutical, biofuel and chemical applications. Financial figures below are in U.S. dollars; “million” amounts are rounded.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $26.3m | $33.3m | $80.4m | $90.4m |
| Operating loss | $2.2m | $2.3m | $14.8m | $11.0m |
| Net loss | $2.3m | $2.7m | $15.3m | $11.3m |
| Product gross margin | 10% | 18% | 15% | 14% |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $(7.2)m | $2.4m |
- Q3 revenue fell 21% year over year. Product revenue was $7.1m, collaborative research and development revenue $18.6m, and government awards $0.6m.
- Nine-month revenue declined 11%; product revenue decreased 13% and collaborative research and development revenue decreased 9%.
- At September 30, cash and cash equivalents were $25.6m; marketable securities were $28.4m, including $3.6m non-current. Working capital was $54.1m. The company reported no debt balance in the provided financial statements.
- Total assets were $119.0m and stockholders’ equity $93.0m. Operating cash use was $7.2m for the nine months, versus cash provided of $2.4m in 2011.
Material changes and management commentary
- The Shell research collaboration ended effective August 31, 2012. Shell represented 66% of Q3 revenue and 56% of nine-month revenue. A final $7.5m payment was recorded as a receivable; Codexis reported no further Shell research funding, though certain license, royalty and milestone rights remain.
- Management said it was in early discussions with potential partners to fund the advanced biofuels program, with no assurance those discussions would produce collaborations. It did not expect development funding from Raízen.
- In August and September, Codexis implemented a restructuring that it said eliminated approximately 55% of its global workforce and closed its Singapore facility. Estimated costs were $2.5m; $0.7m had been recognized by quarter-end, with the balance expected in Q4 2012 and Q1 2013.
- A November 2012 Arch enzyme supply agreement, disclosed as a subsequent event, replaces prior supply arrangements. Arch will buy specified enzymes exclusively from Codexis, but will no longer make APIs or intermediates for Codexis or pay related royalties. Management expected lower future product revenue but product gross profit comparable to historical levels.
- Management stated that existing cash, cash equivalents and marketable securities were expected to fund operations, planned capital spending and working capital for at least 12 months, based on then-current assumptions. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Customer and funding concentration is significant; the end of Shell funding creates a risk of lower revenue and greater losses. Top five customers accounted for 85% of nine-month revenue.
- Product sales were affected by delayed orders from certain on-patent pharmaceutical customers. Q3 product gross margin fell to 10%, partly due to lower sales mix of higher-margin products.
- Codexis recorded a $0.8m other-than-temporary impairment on its CO₂ Solutions investment.
- Operating lease commitments totaled $21.5m. The filing describes a possible $0.6m value-added-tax exposure related to an intercompany intellectual-property transfer; no accrual was recorded. Management stated that ordinary-course legal matters were not expected to have a material adverse effect; no material litigation was reported.
- Management cited ongoing losses, dependence on collaborators and a limited customer base, commercialization and funding uncertainty for cellulosic biofuels, competition, contract-manufacturer reliance, and risks from the workforce reduction. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the $7.5m Shell receivable was collected, and the resulting cash runway after Shell revenue ceased.
- Whether new collaborators or other funding were secured for the advanced biofuels program.
- The realized revenue, margins and royalty effects of the revised Arch agreement, including whether minimum-purchase and exclusivity terms were met.
- Actual restructuring costs, cash payments, and effects of the workforce reduction on operations and development programs.
- Future pharmaceutical order timing, product mix and margins, given customer concentration and the Q3 margin decline.