Codexis, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited financial statements. Codexis engineers enzymes for pharmaceutical, biofuel and chemical production; pharmaceuticals are its primary business focus.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $7.0m | $22.9m | $18.5m | $54.0m |
| Operating loss | $12.5m | $5.4m | $22.1m | $12.6m |
| Net loss | $12.6m | $5.5m | $22.2m | $13.0m |
| Net loss per share | $0.33 | $0.15 | $0.59 | $0.36 |
| Product gross margin | 27% | 14% | 34% | 16% |
- Q2 product revenue was $4.9m, down 27%; collaborative R&D revenue was $2.0m, down 87%. No government-award revenue was recorded in 2013.
- For the first half, product revenue fell 36% to $14.1m and collaborative R&D revenue fell 86% to $4.4m. The filing attributes most of the collaborative revenue decline to the Shell Research Agreement ending in 2012.
- Higher product margins reflected a shift away from lower-margin statin-family products toward higher-margin hepatitis C-related products, as well as $0.3m of supplier credits. The six-month margin comparison is 34% versus 16%.
- Operating expenses were $19.4m in Q2, down from $28.3m, chiefly due to lower R&D spending after the 2012 workforce and facility restructuring. The lower costs did not offset the sharp revenue decline.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $32.4m; marketable securities totaled $6.5m, including $1.0m non-current. Combined cash, cash equivalents and marketable securities were $38.9m, versus $49.2m at December 31, 2012.
- Working capital was $32.0m, down from $43.5m at year-end. The balance sheet lists no debt balance; it reports $4.6m of current and long-term other liabilities, in addition to deferred revenue and current operating liabilities.
- First-half operating cash use was $10.6m, compared with $3.3m in 2012. Investing activities provided $10.7m, mainly from marketable-security maturities; financing provided $0.3m. Cash and cash equivalents increased $0.4m during the period.
- Management said existing liquidity was expected to fund operations, planned capital expenditures and working capital for at least the next 12 months, based on current plans and assumptions. Additional capital may be needed if assumptions change.
- Future operating-lease payments totaled $18.9m as of June 30. A possible $0.6m foreign value-added-tax exposure was disclosed but not accrued; the company described the exposure as more than remote but less than likely.
Material changes, outlook and risks
- The Shell research collaboration ended effective August 31, 2012. Codexis reported no further Shell collaboration revenue after that date and refocused on pharmaceuticals. Its 2012 restructuring affected approximately 173 employees and closed the Singapore facility. Management estimated annual savings of approximately $22.1m in the United States and $7.1m from Singapore-related reductions; substantially all restructuring costs had been paid by June 30.
- The November 2012 Arch arrangement ended Codexis’s prior royalty and marketing economics for atorva-family APIs and intermediates. Codexis recorded a one-time $2.1m enzyme-inventory sale to Arch in the first half. The filing also says Arch was experiencing financial difficulty and had not paid for some previously supplied enzymes; Codexis had stopped shipments pending confidence in timely payment.
- Management expected pharmaceutical product sales to increase over time, but cautioned that order and delivery timing would fluctuate. It expected future product margins to benefit from a lower share of statin-family sales. These are expectations, not quantified revenue or earnings guidance.
- Cellulase and detergent-alcohol programs depend substantially on outside funding or strategic partners. On July 30, 2013, after quarter-end, Dyadic alleged a breach of the license used in Codexis’s CodeXyme cellulase program and threatened termination unless the alleged breach was cured within 60 days. Codexis disputed the allegation. The company warned that the dispute could hinder partnering and could require it to replace the technology, suspend the program, or consider impairment of related assets.
- Disclosure controls were assessed as ineffective at June 30 because a previously identified material weakness remained unresolved: insufficient qualified personnel to account for complex, non-routine transactions. Management expected remediation would not be completed before year-end 2013.
- Revenue and receivables were concentrated: the top five customers represented 73% of Q2 revenue and 70% of receivables at June 30. The company also reported continued net losses and dependence on a limited number of products and customers.
Important facts for investors to verify
- Progress and outcome of the Dyadic dispute, including any effect on CodeXyme rights, partnering plans, or asset values.
- Actual operating cash burn and whether the stated 12-month liquidity expectation remains supportable as revenue declines.
- Arch’s payment status, Codexis’s shipments to Arch, and the resulting effect on product revenue and receivables.
- Whether pharmaceutical growth and improved product margins offset the loss of Shell funding and lower statin-family sales.
- Remediation of the material weakness in financial reporting controls and any related costs or reporting consequences.
- Whether customer concentration, lease commitments, and the potential $0.6m tax contingency change materially.