Codexis, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report; selected fourth-quarter figures are noted below. Codexis engineers enzymes for pharmaceutical, biofuel and chemical production. After the Shell collaboration ended, pharmaceuticals became the company’s primary business focus.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $88.3 million | $123.9 million |
| Product revenue | $35.9 million | $49.0 million |
| Collaborative R&D revenue | $50.1 million | $71.4 million |
| Operating loss | $30.5 million | $15.9 million |
| Net loss | $30.9 million | $16.6 million |
| Net loss per share | $0.84 | $0.46 |
| Operating cash flow | $(11.9) million | $(0.5) million |
- Product gross margin was 15% in both years; product gross profit declined to $5.3 million from $7.2 million.
- At year-end, cash and cash equivalents were $32.0 million, current marketable securities $13.5 million, working capital $43.5 million, and total assets $100.0 million. Including non-current marketable securities, marketable securities totaled $17.1 million.
- The company reported no current or long-term financing obligations. Operating lease commitments totaled $20.6 million.
- Fourth-quarter 2012 revenue was $7.9 million and net loss was $15.5 million; fourth-quarter 2011 revenue was $33.5 million and net loss was $5.3 million.
Material changes versus prior periods
- Revenue fell 29% year over year. Shell contributed $45.3 million, or 51% of FY 2012 revenue, before its collaboration ended effective August 31, 2012. Codexis received a final $7.5 million payment under the termination agreement and expects no further Shell collaboration funding.
- Product revenue declined 27%, principally due to lower statin-family sales after customers’ inventory buildup ahead of Lipitor’s patent expiration, and lower orders for certain on-patent pharmaceutical products.
- The November 2012 Arch agreement shifted the relationship from Codexis selling APIs and intermediates made by Arch to Codexis supplying enzymes to Arch. Management expects lower product revenue in future periods but expects product gross profit to be comparable with historical levels; this outcome is not assured.
- Net loss widened as revenue declined, despite lower operating expenses. Codexis reduced headcount by approximately 173 employees, closed its Singapore research facility, and recorded $2.4 million of planned restructuring costs.
Outlook, risks and unusual items
- Management estimated 2013 cost reductions of approximately $29.2 million in total: $22.1 million from U.S. restructuring and $7.1 million from closing Singapore operations. It also expected 2013 capital expenditures of approximately $2.5 million.
- Management stated that available cash, cash equivalents and marketable securities were expected to fund operations, planned capital expenditures and working capital for at least 12 months, based on then-current plans and assumptions. Additional capital may be needed if those assumptions change.
- Codexis was seeking partners or other strategic options for its CodeXyme cellulase and CodeXol detergent-alcohol programs. It reported early-stage discussions, but no assurance of agreements; absent funding, the company might have to self-fund or suspend development. CodeXol pilot testing with Chemtex was expected in 2013.
- Codexis may receive a one-time $3.0 million Shell milestone if specified qualifying first-sale conditions are met. No other future Shell R&D funding is expected.
- Customer and product concentration are significant: Shell was 51% of FY 2012 revenue, Merck 13%, and two pharmaceutical product families represented 78% of product revenue. The filing gives differing top-five customer concentration figures in separate sections (81% and 83%); investors should verify the figure in the audited disclosures.
- Substantially all commercial pharmaceutical enzymes were manufactured by Lactosan, creating supplier-concentration risk. The company also reported a material weakness in financial reporting controls relating to accounting for complex, non-routine transactions; controls were deemed ineffective at year-end and remediation was not complete. The auditor issued an adverse opinion on internal control, while expressing an unqualified opinion on the financial statements.
- Codexis recorded a $0.8 million impairment of its CO₂ Solutions investment. It recorded no goodwill or long-lived-asset impairment; the long-lived asset recoverability test showed estimated undiscounted cash flows only about 14% above carrying value and included probability-weighted potential strategic transactions for CodeXyme and CodeXol that were not supported by signed agreements.
Most important facts for investors to verify
- Whether pharmaceutical revenue and cash generation can replace the terminated Shell funding and offset the expected decline in sales under the new Arch arrangement.
- Actual 2013 restructuring savings, including whether the Redwood City space was subleased, and cash runway relative to operating losses.
- Progress and funding terms for CodeXyme and CodeXol partnerships or strategic alternatives, and whether the forecast assumptions underlying asset recoverability are achieved.
- Remediation of the material weakness, any subsequent control findings or financial statement adjustments, and the accuracy of complex revenue and contract accounting.
- Customer concentration, product-family concentration, Lactosan supply continuity, and the precise top-five customer revenue percentage.