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CDXS > SEC Filings for CDXS > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for CODEXIS INC


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on April 2, 2013. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,( the "Exchange Act"). These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate," or "continue," and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this Report. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.


Overview
We engineer enzymes for pharmaceutical, biofuel and chemical production. Our proven technologies enable scale-up and implementation of biocatalytic solutions to meet customer needs for rapid, cost-effective and sustainable process development, from research to manufacturing.
We have commercialized our technology and products in the pharmaceuticals market, which is our primary business focus. There are currently over 50 pharmaceutical firms using our technology, products and services in their manufacturing process development, including in the production of some of the world's bestselling and fastest growing drugs.
We are developing our CodeXyme® cellulase enzymes to convert non-food plant material, or cellulosic biomass, into affordable sugars, which can then be converted into renewable fuels and chemicals. We are also developing our own manufacturing process for CodeXol® detergent alcohols, which are bio-based chemicals. Detergent alcohols are used to manufacture surfactants, which are key, active cleaning ingredients in consumer products such as shampoos, liquid soaps and laundry detergents. We are seeking collaboration partners to assist us with the development and commercialization of CodeXyme® cellulase enzymes and CodeXol® detergent alcohols, and we are also exploring other strategic options with respect to these products and technologies.
We create our products by applying our CodeEvolver® directed evolution technology platform, which introduces genetic mutations into microorganisms, giving rise to changes in the enzymes that they produce. Once we identify potentially beneficial mutations, we test combinations of these mutations until we have created variant enzymes that exhibit marketable performance characteristics superior to competitive products. This process allows us to make continuous, efficient improvements to the performance of our enzymes. Results of Operations Overview
To date, we have generated revenues primarily from collaborative research and development funding, pharmaceutical product sales and government awards. Our revenues in 2012 were $88.3 million which is down significantly compared to our 2011 revenues of $123.9 million and our 2010 revenues of $107.1 million. Our revenues of $11.5 million for the three months ended March 31, 2013 were down significantly from the $31.1 million for the three months ended March 31, 2012. The decrease in revenues is primarily due to decreases in both our collaborative research and development revenue and pharmaceutical product sales. Most of our revenues since inception have been derived from collaborative research and development arrangements, which accounted for 57%, 58% and 66% of our revenues in 2012, 2011 and 2010, respectively. Collaborative research and development arrangements accounted for 20% and 47% of our revenues for the three months ended March 31, 2013 and 2012, respectively.
Our collaborative research agreement with Shell terminated effective August 31, 2012 and as a result, we no longer receive collaborative research and development revenues from Shell subsequent to August 31, 2012. This has significantly decreased our revenues as compared to prior periods. Collaborative research and development revenues received from Shell were $45.3 million, $63.2 million and $66.1 million in 2012, 2011 and 2010, respectively, and accounted for 51%, 51% and 62% of our total revenues in 2012, 2011 and 2010, respectively. Collaborative research and development revenue received from Shell accounted for 0% and 45% of our revenues for the three months ended March 31, 2013 and 2012, respectively.
Our product sales accounted for 41%, 40% and 31% of our revenues in 2012, 2011 and 2010, respectively. Product sales accounted for 80% and 49% of our revenues for the three months ended March 31, 2013 and 2012, respectively, primarily as a result of the fact that we no longer receive collaborative research and development revenues from Shell. Our product sales in 2012 were $35.9 million which is down significantly compared to our 2011 product sales of $49.0 million and only a marginal increase compared to our 2010 product sales of $32.8 million. Our product sales in the first quarter of 2013 were $9.1 million which is down significantly compared to our first quarter of 2012 product sales of $15.2 million. The decrease in product sales in the first quarter of 2013 as compared to 2012 is primarily due to the timing of an innovator pharmaceutical product order that was delayed until the second quarter of 2013 and the New Arch Enzyme Supply agreement which became effective on November 1, 2012, as described below.
We have experienced significant losses as we have invested heavily in research and development and administrative infrastructure in connection with the growth in our business. We intend to continue our investment in research and development. As of March 31, 2013, we had an accumulated deficit of $225.2 million. We incurred net losses of $30.9 million, $16.6 million and $8.5 million in the years ended December 31, 2012, 2011 and 2010, respectively. We incurred net losses of $9.6 million and $7.5 million in the three months ended March 31, 2013 and 2012, respectively.


Termination of Shell Collaboration
In September 2012, we entered into the New Shell Agreement, which terminated our collaboration with Shell under the existing Shell Research Agreement and amended the existing Shell License Agreement. See "Collaborations and License Agreements-Shell" in Part I, Item 1 of our Annual Report on Form 10-K filed with the SEC on April 2, 2013 for a description of the New Shell Agreement. The New Shell Agreement required Shell to pay us $7.5 million as full, complete and final satisfaction of amounts that Shell may have owed to us under the Shell Research Agreement with respect to (i) FTEs assigned by us to perform our obligations under the Shell Research Agreement and (ii) milestones achieved or achievable by us under the Shell Research Agreement. We recognized this $7.5 million payment as collaborative research and development revenues during the year ended December 31, 2012. Beginning September 1, 2012, we had no further obligations to Shell under the Shell Research Agreement to provide any FTEs to perform work under or after the collaboration and Shell correspondingly had no future obligations to us under the Shell Research Agreement to provide funding for FTEs to perform work under or after the collaboration. Following the New Shell Agreement, Shell no longer accounts for a significant portion of our total revenues.
Prior to the New Shell Agreement, Shell had an obligation under the Research Agreement to fund us at specified rates for each FTE, which as of 2012 were equal to $460,000 on an annual basis for each FTE in the United States and $399,000 on an annual basis for each FTE in Hungary. As of August 31, 2012, the number of FTEs assigned by us to perform our obligations under the Research Agreement was 116.For the three months ended March 31, 2012, Shell accounted for 45% of our total revenues. For the year ended December 31, 2012, Shell accounted for 51% of our total revenues.
As a result of the termination of the Shell Research Agreement, we initiated a series of cost reduction measures and refocused our business on the pharmaceuticals market. We terminated approximately 173 employees worldwide, consisting of 150 research and development staff and 23 general and administrative staff. We also closed our Singapore research and development facility. We estimated that we would incur $2.4 million in restructuring expenses related to these cost reduction measures, including severance for terminated employees, and other exit-related costs arising from contractual obligations associated with closed facilities under lease and equipment disposals. During the first quarter of 2013, we made cash payments of $0.2 million and recorded $14,000 of reductions in previously recorded accruals for changes in estimated liabilities. We anticipate the remaining costs under the Q3 2012 Restructuring Plan will be paid in the second quarter of 2013.
We anticipate our expected 2013 cost reductions resulting from restructuring our operation in the United States will be $22.1 million. Our total expected 2013 cost reductions resulting from closing our operations in Singapore are expected to be $7.1 million. We anticipate that these cost reduction measures will generate annual cost savings related to employee compensation costs of $20.9 million, specifically $3.3 million in general and administrative costs and $17.6 million in research and development costs. The remaining cost reduction measure will generate annual cost savings primarily related to outside services, information technology and laboratory equipment expenses, facilities expenses, and recruiting and relocation costs.
Despite the termination of the Shell Research Agreement, we expect to continue our advanced biofuels program, primarily focusing on developing our CodeXyme® cellulase enzymes for use in producing advanced biofuels. We are actively seeking third party funding to support our CodeXyme® cellulase enzyme program. We are in early stage discussions with multiple parties about potential collaborations, but there can be no assurances that any of our discussions will lead to collaborations or that any new collaboration will fully substitute for the termination of the Shell collaboration. We are exploring other strategic options for the program. If we are unable to agree to terms with new collaborators that provide us with the financial assistance and infrastructure necessary for us to develop and commercialize our products and execute our strategy with respect to CodeXyme® cellulase enzymes, or if we are unable to identify and effect attractive strategic options for that program, we will need to continue to fund this development ourselves, which will have a material adverse effect on our liquidity and financial condition, or we may need to suspend the program, which may have a material adverse effect on our business and prospects.
CO2 Solutions Investment
Our investment in CO2 Solutions and the joint development agreement we signed with CO2 Solutions in 2009 was our initial entry into carbon management. We estimated the fair value of our investment in 10,000,000 common shares of CO2 Solutions using the market value of common shares as determined by trading on the TSX Venture Exchange. As of March 31, 2013, the fair value of our investment in CO2 Solutions' common stock was $0.9 million with an unrealized gain recorded in other comprehensive income of $0.2 million, net of $0.1 million of tax. Arch Collaboration
Since 2006, Arch of Mumbai, India has manufactured substantially all of our commercialized intermediates and APIs for sale to generic and innovator manufacturers. We were party to a number of agreements with Arch that govern the commercialization of


various current and future products for supply into the generic and innovator marketplaces. In November 2012, we entered into the New Arch Enzyme Supply Agreement, which terminated our existing supply agreements with Arch. Under the New Arch Enzyme Supply Agreement, Arch agreed to exclusively purchase our proprietary enzymes from us for use in the manufacture of certain of Arch's products and we agreed to exclusively supply, with limited exceptions, certain of our proprietary enzymes to Arch at an agreed upon price for use in such manufacture. Arch will no longer produce API and intermediates for us to market and sell and Arch will no longer pay us royalties on the sale of APIs and intermediates to customers. We expect that selling our proprietary enzymes to Arch rather than selling the resulting APIs or intermediates that Arch manufactured for us will result in a decrease in our product revenues in all future periods. However, we expect that our product gross margin will be higher, which we expect to result in a product gross profit comparable with our historical product gross profit.
Revenues and Operating Expenses
Revenues
Our revenues are comprised of product revenues, collaborative research and development revenues and government awards.

•         Product revenues consist of sales of biocatalysts, intermediates, APIs
          and Codex® Biocatalyst Panels and Kits.


•         Collaborative research and development revenues include license,
          technology access and exclusivity fees, FTE payments, milestones,
          royalties, and optimization and screening fees.


•         Government awards consist of payments from government entities. The
          terms of these awards generally provide us with cost reimbursement for
          certain types of expenditures in return for research and development
          activities over a contractually defined period. Historically, we have
          received government awards from Germany, Singapore and the United
          States.

Cost of Product Revenues
Cost of product revenues includes both internal and third-party fixed and variable costs including amortization of purchased technology, materials and supplies, labor, facilities and other overhead costs associated with our product revenues.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities. These costs include our direct and research-related overhead expenses, which include salaries and other personnel-related expenses (including stock-based compensation), occupancy-related costs, supplies, depreciation of facilities and laboratory equipment and amortization of acquired technologies, as well as research consultants, and are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed when incurred.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation expenses (including stock-based compensation), hiring and training costs, consulting and service provider expenses (including patent counsel related costs), marketing costs, occupancy-related costs, depreciation and amortization expenses, and travel and relocation expenses.
Critical Accounting Policies and Estimates The interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of our condensed consolidated financial statements requires our management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our condensed consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Financial Operations Overview
The following table shows the amounts from our condensed consolidated statements of operations for the periods presented (in thousands).


                                            Three Months Ended
                                                 March 31,                % of Total Revenues
                                             2013          2012           2013            2012
Revenues:
Product                                  $    9,137     $  15,167           80  %            49 %
Collaborative research and development        2,344        14,612           20  %            47 %
Government awards                                 -         1,357            -  %             4 %
Total revenues                               11,481        31,136          100  %           100 %
Costs and operating expenses:
Cost of product revenues                      5,665        12,642           49  %            41 %
Research and development                      7,322        16,349           64  %            53 %
Selling, general and administrative           8,124         9,395           71  %            30 %
Total costs and operating expenses           21,111        38,386          184  %           123 %
Loss from operations                         (9,630 )      (7,250 )         nm               nm
Interest income                                  27            75            -  %             - %
Other expenses                                  (85 )        (118 )         nm               nm
Loss before provision (benefit) for
income taxes                                 (9,688 )      (7,293 )         nm               nm
Provision (benefit) for income taxes            (65 )         197           (1 )%             1 %
Net loss                                 $   (9,623 )   $  (7,490 )         nm               nm

Three months ended March 31, 2013 compared three months ended March 31, 2012

Revenues
                                           Three Months Ended
                                                March 31,                    Change
(In Thousands)                               2013           2012           $           %
Product                                $     9,137        $ 15,167    $  (6,030 )    (40 )%
Collaborative research and development       2,344          14,612      (12,268 )    (84 )%
Government awards                                -           1,357       (1,357 )   (100 )%
Total revenues                         $    11,481        $ 31,136    $ (19,655 )    (63 )%

Revenues decreased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 due to decreased revenues from all three revenue categories including product sales, collaborative research and development projects, and government awards.
Product revenues decreased $6.0 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to the expected decrease in sales of our statin-family of products resulting from the New Arch Enzyme Supply Agreement. The decrease in statin-family APIs and intermediates was approximately $8.6 million, which was partially offset by $2.1 million increase in sales related to a one time sale of enzyme inventory to Arch pursuant to the New Arch Enzyme Supply Agreement. Our sales of products used in on-patent pharmaceuticals in cancer, dementia and diabetic therapies increased $3.0 million as a result of pharmaceutical manufacturers increasing use of our products in their manufacturing processes. This was partially offset by a $2.3 million decrease in sales of products used in on-patent pharmaceuticals in hepatitis C therapies due to a customer shipment delayed until the second quarter of 2013. While we expect on-patent pharmaceuticals sales to continue, the timing of orders and delivery of product will continue to fluctuate from quarter-to-quarter.


Collaborative research and development revenues decreased $12.3 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily from a $13.9 million reduction due to the termination of the Shell Research Agreement in 2012 partially offset by a $1.6 million increase from collaborations with our pharmaceuticals customers. The $1.6 million increase from collaborations with our pharmaceuticals customers includes $0.9 million increase in revenue recognized from Exela as a result of their commercial launch of argatroban. We expect this royalty revenue to continue for the remainder of 2013. We consider Exela a related party as a member of our board of directors is also on the board of directors of Exela.
Government award revenues decreased $1.4 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 as our award from the DOE under the ARPA-E Recovery Act program expired on June 30, 2012, and our award revenue from the Singapore Economic Development Board was terminated in 2012. As of March 31, 2013, we do not have any government awards from which we expect to receive revenues in future periods. We may bid on additional awards from the United States and other governments in the future, but we cannot be certain that we will receive any such awards.
Our top five customers accounted for 94% and 83% of our total revenues for the three months ended March 31, 2013 and 2012, respectively. Cost of Product Revenues

                          Three Months Ended
                               March 31,                 Change
(In Thousands)             2013          2012          $          %
Revenues:
Product                $   9,137      $ 15,167       (6,030 )   (40 )%
Cost of revenues:
Product                $   5,665      $ 12,642     $ (6,977 )   (55 )%
Gross profit:
Product                $   3,472      $  2,525     $    947      38  %
Product gross margin %        38 %          17 %

Our cost of product revenues decreased $7.0 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to the $6.0 million decrease in our product sales. The decrease in product sales was primarily due to $8.6 million decrease in sales of our statin-family of API and intermediate products to generic manufacturers, which generally produce lower gross margins partially offset by $2.1 million increase in sales related to a one time sale of enzyme inventory to Arch pursuant to New Arch Enzyme Supply Agreement which generated higher margins. Additionally, our sales mix showed an increase in product sales of our on-patent, higher margin products in the first quarter of 2013 compared to first quarter of 2012.
Our product gross margins improved from 17% to 38% during three months ended March 31, 2013 compared to the three months ended March 31, 2012 due to the decreased sales of our lower margin statin-family of APIs and intermediates, an increase in product sales of our on-patent, higher margin products in the first quarter of 2013 and the increased sales of higher margin enzymes under the new New Arch Enzyme Supply Agreement.
Our inventory balance increased $0.4 million, or 29%, from $1.3 million as of December 31, 2012 to $1.7 million as of March 31, 2013 in anticipation of product deliveries in the second and third quarters of 2013.

Operating Expenses
                                         Three Months Ended
                                              March 31,                    Change
(In Thousands)                             2013           2012           $          %
Research and development             $     7,322        $ 16,349    $  (9,027 )   (55 )%
Selling , general and administrative       8,124           9,395       (1,271 )   (14 )%
Total operating expenses             $    15,446        $ 25,744    $ (10,298 )   (40 )%


Research and Development. Research and development expenses decreased $9.0 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to the restructuring the Company initiated in the third quarter of 2012 subsequent to the termination of the Shell Research Agreement. Our research and development headcount decreased approximately 164 employees from 250 employees as of March 31, 2012 to approximately 86 as of March 31, 2013. As a result of this staffing decrease, our compensation and other employee benefit costs decreased $5.5 million in first quarter of 2013 compared to the first quarter of 2012. Lab supply and small equipment costs decreased $1.2 million and outside services and consultants decreased $0.7 million as a result of the termination of the Shell Research Agreement and the resulting headcount reductions. Depreciation cost decreased $0.6 million as a result of disposed equipment as part of the restructuring efforts. We reduced facility costs by $0.2 million as a result of closing our Singapore research facility. We reduced travel costs by $0.1 million as part of our cost control efforts. Stock compensation decreased $0.2 million due to the reduced headcount and fewer outstanding stock awards. Research and development expenses included stock-based compensation expense of $0.5 million and $0.7 million during the three months ended March 31, 2013 and 2012, respectively.
Selling, General and Administrative. Selling, general and administrative expenses decreased $1.3 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to the restructuring the Company initiated in the third quarter of 2012 subsequent to the termination of the Shell Research Agreement. Our selling, general and administrative headcount decreased approximately 28 employees from 89 employees as of March 31, 2012 to approximately 61 as of March 31, 2013. As a result of this staffing decrease, our compensation and other employee benefit costs decreased $1.8 million in the first quarter of 2013 compared to the first quarter of 2012. Stock compensation costs increased $0.5 million during the . . .

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