Codexis, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012. Unaudited consolidated financial statements. Codexis engineers enzymes, with pharmaceuticals its primary commercial focus; it is also developing biofuel and bio-based chemical programs.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $11.481 million | $31.136 million |
| Product revenue | $9.137 million | $15.167 million |
| Collaborative R&D revenue | $2.344 million | $14.612 million |
| Government awards | None | $1.357 million |
| Product gross profit / margin | $3.472 million / 38% | $2.525 million / 17% |
| Operating loss | $9.630 million | $7.250 million |
| Net loss | $9.623 million | $7.490 million |
| Basic and diluted loss per share | $0.25 | $0.21 |
| Cash used in operating activities | $3.487 million | Cash provided: $0.593 million |
At March 31, 2013, cash and cash equivalents were $31.231 million; marketable securities totaled $14.883 million, including $1.939 million classified as non-current. Working capital was $39.593 million, down from $43.486 million at December 31, 2012. Total assets were $93.642 million and stockholders’ equity was $70.745 million. The filing presents no borrowings or interest-bearing debt balance; liabilities primarily comprise payables, accruals, deferred revenue, and other long-term liabilities. Management stated existing cash, cash equivalents, and marketable securities were expected to fund operations, planned capital expenditures, and working capital for at least 12 months, subject to current plans and assumptions.
Material changes versus Q1 2012
- Revenue fell 63% ($19.655 million), chiefly because Shell collaboration revenue fell from $13.9 million to zero following termination of the Shell Research Agreement in August 2012. Shell had represented 45% of Q1 2012 revenue.
- Product revenue declined 40%. Lower statin-family API and intermediate sales (about $8.6 million) and a delayed hepatitis C customer shipment were partly offset by a one-time $2.1 million enzyme-inventory sale to Arch and $3.0 million growth in products used in certain on-patent therapies.
- Product gross margin rose to 38% from 17%, reflecting a more favorable mix, lower sales of lower-margin statin products, and higher-margin enzyme sales. Management expects the Arch supply arrangement to lower product revenue in future periods, while anticipating comparable product gross profit based on higher margins.
- R&D expense decreased 55% to $7.322 million, and SG&A decreased 14% to $8.124 million, largely following the 2012 workforce and facility restructuring. Operating loss nevertheless widened as sharply lower revenue more than offset expense reductions.
- Top five customers generated 94% of Q1 2013 revenue, versus 83% in Q1 2012, increasing concentration risk.
Outlook, risks, and unusual items
- Cost actions: Codexis expected $29.2 million of total 2013 operating cost reductions from the restructuring—$22.1 million in the United States and $7.1 million in Singapore. It estimated annual employee-compensation savings of $20.9 million ($17.6 million in R&D and $3.3 million in SG&A). The remaining $158,000 restructuring accrual was expected to be paid in Q2 2013; management anticipated no further charges under that plan.
- Growth programs: The company continued to pursue external funding, collaborations, or other strategic options for CodeXyme cellulase enzymes and CodeXol detergent alcohols. Discussions were early-stage, with no assurance of an agreement. Self-funding could materially harm liquidity; suspending programs could harm prospects.
- Revenue timing and deferred fees: Merck paid $2.5 million in Q1 for an annual Sitagliptin technology license fee, recorded as deferred revenue; $328,000 was recognized during the quarter. Product orders and delivery timing may cause quarterly revenue fluctuations. Exela-related royalty revenue was $1.0 million, and management expected it to continue for the remainder of 2013.
- Liquidity and financing: Operating cash use was $3.5 million. Management warned that changed assumptions or weaker pharmaceutical performance, inability to secure partners, or higher development spending could require additional capital; equity financing could dilute shareholders and debt financing could impose restrictive covenants.
- Controls: Disclosure controls were deemed ineffective as of March 31, 2013 because a material weakness remained: insufficient qualified personnel to account timely for complex, non-routine transactions. Remediation efforts were underway, but no completion timeframe was provided. Management nevertheless stated the financial statements fairly presented the reported periods.
- Contingencies: A potential foreign value-added tax exposure was estimated at $0.6 million if an intra-company transaction were treated as R&D services; no accrual was recorded. Indemnification obligations can be uncapped, though no related accrual was recorded. The company reported no material litigation and no off-balance-sheet arrangements.
- Other items: The 2012 comparison included $530,000 of catch-up DOE award revenue for prior-period costs. The CO2 Solutions investment was valued at $0.9 million at quarter-end, with an unrealized gain recorded in other comprehensive income; a $0.8 million impairment had been recorded in 2012.
Key facts investors should verify
- Whether pharmaceutical demand, delayed orders, and the Arch enzyme-supply transition support revenue and gross profit as management anticipated.
- Whether the forecast restructuring savings are realized and whether operating cash burn stabilizes; management’s 12-month liquidity view depends on its stated assumptions.
- Whether new partners or strategic alternatives emerge for CodeXyme and CodeXol, and what ongoing funding those programs require.
- Whether customer concentration, especially the 94% share attributable to the top five customers, changes materially.
- Whether the material weakness is remediated and whether complex revenue recognition and contractual accounting remain reliable.
- The status of the potential $0.6 million tax exposure and the impact of lease commitments, including $19.772 million of future operating lease payments.