Codexis, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Codexis engineers enzymes and related products, with pharmaceuticals as its primary business focus.
Financial results and liquidity
Amounts below are in millions of U.S. dollars except per-share data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3.9 | $26.3 | $22.4 | $80.4 |
| Operating loss | $(9.2) | $(2.2) | $(31.3) | $(14.8) |
| Net loss | $(9.3) | $(2.3) | $(31.5) | $(15.3) |
| Net loss per share, diluted | $(0.24) | $(0.06) | $(0.83) | $(0.42) |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(19.1) | $(7.2) |
- Q3 product revenue was $1.1 million and collaborative research and development revenue was $2.9 million; there was no government-award revenue. Product gross margin was 54%, compared with 10% in Q3 2012. Nine-month product gross margin was 35%, versus 15%.
- At September 30, cash and cash equivalents were $26.9 million and marketable securities were $4.1 million in total, or approximately $31.0 million combined. Working capital was $27.4 million, down from $43.5 million at year-end 2012. Total current liabilities were $9.2 million.
- Total assets were $66.4 million, down from $100.0 million at December 31, 2012. The filing reports $5.2 million in other long-term liabilities and deferred revenue; it does not identify borrowings or provide a clear total debt figure. Operating lease commitments totaled $18.2 million.
Material changes and management outlook
- Revenue fell 85% in Q3 and 72% over the first nine months year over year. The principal driver was the August 2012 termination of the Shell research agreement, which eliminated Shell revenue in 2013; Q3 2012 included a significant Shell-related payment. Lower statin-family product sales also reduced revenue.
- Operating expenses declined, chiefly following the 2012 restructuring and reduction in research and development staffing. Despite these cost reductions, the larger revenue decline drove higher operating and net losses. Nine-month operating cash use increased to $19.1 million from $7.2 million.
- Management said existing cash, cash equivalents and marketable securities should fund operations, planned capital spending and working capital for at least the next 12 months, based on current operations and assumptions. Management expected pharmaceutical products and partnerships to support future revenue and margin growth, while noting that product order and delivery timing may fluctuate. No quantified revenue or earnings guidance was provided.
- After quarter-end, Codexis announced it would wind down its CodeXyme cellulase program; it had stopped further CodeXol detergent-alcohols development in Q3. A workforce reduction of approximately 16 employees was planned, with an expected Q4 2013 charge of about $0.7 million and cash payments expected through Q1 2014. The company may continue seeking strategic transactions for both programs.
Risks, contingencies and unusual items
- Dyadic alleged a breach of its license agreement and threatened termination. Codexis extended its response deadline to November 15, 2013 while negotiations continued. The notice did not seek damages or allege unpaid fees or royalties. Management recorded no financial-statement impact at September 30.
- Customer concentration is substantial: the top five customers represented 59% of Q3 revenue and 81% of nine-month revenue; they held 89% of receivables at September 30. The filing also says Arch was experiencing financial difficulty and Codexis had stopped enzyme shipments pending confidence in timely payment.
- Disclosure controls were not effective at September 30 because a material weakness involving staffing and accounting for complex, non-routine transactions had not been remediated. Management expected remediation to take at least through year-end 2013.
- Codexis tested long-lived assets for impairment after identifying indicators including operating losses, the Dyadic notice and a falling share price. It recorded no impairment; estimated fair value of the core intellectual property exceeded carrying value by 38%. No goodwill impairment was reported.
- The stockholder rights plan expired September 2, 2013; Codexis recorded a related Q3 expense of $0.3 million. Separately, the filing disclosed a possible foreign value-added-tax exposure estimated at $0.6 million, but no accrual was recorded because the outcome was considered more than remote but less than likely.
Key facts investors should verify
- Whether pharmaceutical sales, customer orders and gross margins can grow enough to offset the loss of Shell-related revenue and continuing cash burn.
- Whether Arch can pay outstanding amounts and resume or sustain purchases, and how customer concentration and receivable collectability evolve.
- The outcome of the Dyadic license dispute and any effect on intellectual property, operations or potential strategic transactions.
- Actual restructuring costs and savings from the CodeXyme wind-down and planned workforce reduction, plus the status of any strategic transactions for CodeXyme or CodeXol.
- Whether the material weakness is remediated and whether cash and securities remain sufficient under actual operating results and funding needs.