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

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Form 10-Q for CODEXIS INC


9-Aug-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 and supply enzyme-related products. 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.
Our primary business focus is the pharmaceuticals market, where we have commercialized our technology and products. 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. In addition, we have formed a number of partnerships with key customers to assist with future commercialization efforts and explore new market opportunities served by our biocatalyst processes.
We engineer new enzymes 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. We continue to develop 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 in discussions with potential 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. Our receipt of the Dyadic notice may interfere with our ability to find a collaboration partner for our CodeXyme® cellulase enzyme program and our strategic options in respect of this program may be limited until the matter is resolved. For a further discussion of the notice we received from Dyadic and the potential impact termination of the license agreement would have on Codexis and its businesses, please see Note 13 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
Results of Operations Overview
For the second quarter of 2013, revenues totaled $7.0 million, compared to $22.9 million for the second quarter of 2012. Revenues from collaborative research and development decreased to $2.0 million from $15.9 million in the prior year as a result of the termination of the Shell Research Agreement. Product revenues decreased to $5.0 million from $6.8 million in the prior year as a result of reduced shipments primarily due to the decrease in sales of our statin-family of products partially offset


by increased sales of products used in on-patent pharmaceuticals in hepatitis C therapies. While we expect pharmaceutical product sales to increase in future periods, the timing of orders and delivery of product will continue to fluctuate from quarter-to-quarter, and may not be comparable on a sequential or year over year basis.
Costs and operating expenses for the second quarter of 2013 totaled $19.4 million, compared to $28.3 million for the second quarter of 2012. Cost of product revenues decreased to $3.6 million from $5.8 million in the prior year as a result of reduced shipments to Arch of statin-family products that were relatively lower in gross margins under the prior manufacturing agreement with Arch. Research and development expense decreased to $8.6 million from $15.7 million as a result of reduced headcount-related costs following our restructuring efforts undertaken as a result of the termination of the Shell Research Agreement in the third quarter of 2012.
Net loss for the second quarter of 2013 totaled $12.6 million compared to $5.5 million net loss for the second quarter of 2012. The increased loss is primarily related to the lower revenues from collaborative research and development, partially offset by reduced research spending and reduced product costs. Cash, cash equivalents and marketable securities balances declined to $38.9 million as of June 30, 2013 compared to $49.2 million as of December 31, 2012. We are in discussions with potential collaboration partners to assist us with the development and commercialization of CodeXyme® cellulase enzymes and CodeXol® detergent alcohols which, if such collaborations were entered into, would reduce our cash requirements for research and development costs for these products in future quarters. We are actively partnering with new and existing pharmaceutical customers and we believe that we can utilize our products and services, and develop new products and services that will increase our revenue and gross margins in future periods.
Termination of Shell Collaboration

The Shell Research Agreement 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 $13.9 million for the three months ended June 30, 2013 and 2012, respectively.
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 half of 2013, we made cash payments of $0.3 million and recorded $0.03 million in adjustments to previously recorded accruals for changes in estimated liabilities. As of June 30, 2013, we have paid out substantially all of the costs estimated under the Q3 2012 Restructuring Plan. We anticipate our annual cost reductions resulting from the Q3 2012 Restructuring Plan in the United States will be approximately $22.1 million. Our annual 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 $21.0 million. The remaining cost reduction measures will generate annual cost savings primarily related to outside services, information technology and laboratory equipment expenses, facilities expenses, and recruiting and relocation costs.
Arch Collaboration

Since 2006, Arch of Mumbai, India has manufactured substantially all of our commercialized intermediates and APIs for sale to generic and innovator pharmaceutical manufacturers. In November 2012, we entered into a new commercial arrangement with Arch by simultaneously terminating all of our existing supply agreements with Arch and entering into the New Arch Enzyme Supply Agreement pursuant to which Arch agreed to exclusively purchase 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 enzymes to Arch at an agreed upon price for use in such manufacture. Under the New Arch Enzyme Supply Agreement, Arch will no longer produce atorva-family APIs and intermediates for us. Arch will instead market these products directly to end customers, and as a result Arch will no longer pay us royalties on their sale of such APIs and intermediates to customers and we will no longer have exclusive rights to market such APIs and intermediates in certain markets. For the six months ended June 30, 2013, we recognized $2.1 million in product revenue for the one-time sale of enzyme inventory to Arch pursuant to the New Arch Enzyme Supply Agreement.


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

Revenues
                          Three Months Ended                                       Six Months Ended
                               June 30,                      Change                    June 30,                    Change
(In Thousands)             2013            2012           $            %           2013          2012           $            %
Product              $    4,948         $  6,782     $  (1,834 )      (27 )%   $   14,085     $ 21,949     $  (7,864 )      (36 )%
Collaborative
research and
development               2,026           15,868       (13,842 )      (87 )%        4,370       30,480       (26,110 )      (86 )%
Government awards             -              259          (259 )     (100 )%            -        1,616        (1,616 )     (100 )%
Total revenues       $    6,974         $ 22,909     $ (15,935 )      (70 )%   $   18,455     $ 54,045     $ (35,590 )      (66 )%

Revenues decreased $15.9 million and $35.6 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012 due to decreased sales from product sales, collaborative research and development projects, and government awards.
Product revenues decreased $1.8 million and $7.9 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012 as a result of reduced shipments primarily due to the decrease in sales of our statin-family of products of $4.9 million and $13.6 million, respectively, partially offset by increased sales of products of $3.1 million and $5.7 million, respectively, used in on-patent pharmaceuticals in hepatitis C therapies. As a result of the New Arch Enzyme Supply Agreement signed in November 2012, we expect the sales of statin-family of products will decrease in all future periods when compared to 2012 and prior periods.
While we expect pharmaceutical product sales to increase in future periods, the timing of orders and delivery of product will continue to fluctuate from quarter-to-quarter, and may not be comparable on a sequential or year over year basis.
Collaborative research and development revenues decreased $13.8 million and $26.1 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012 primarily from a $13.9 million and $27.8 million reduction, respectively, due to the termination of the Shell Research Agreement in 2012.
Government award revenues decreased $0.3 million and $1.6 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 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 June 30, 2013, we do not have any government awards from which we expect to receive revenues in future periods.

Our top five customers accounted for 73% and 85% of our total revenues for the three and six months ended June 30, 2013. Accounts receivable balances for the top five customers were 70% and 84% of total balances as of June 30, 2013 and December 31, 2012, respectively.

Cost of Product Revenues
                            Three Months Ended                                 Six Months Ended
                                 June 30,                   Change                 June 30,                  Change
(In Thousands)               2013          2012          $           %         2013         2012          $           %
Product revenues         $    4,948      $ 6,782     $ (1,834 )    (27 )%   $ 14,085     $ 21,949     $ (7,864 )    (36 )%
Cost of product revenues      3,631        5,829       (2,198 )    (38 )%      9,296       18,471       (9,175 )    (50 )%
Product gross profit     $    1,317      $   953     $    364       38  %   $  4,789     $  3,478     $  1,311       38  %
Product gross margin %           27 %         14 %                                34 %         16 %


Our cost of product revenues decreased $2.2 million and $9.2 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012 primarily due to the decrease of our statin-family product sales to Arch. Our product gross margins improved from 14% for the three months ended June 30, 2012 to 27% during the three months ended June 30, 2013, and from 16% for the six months ended June 30, 2012 to 34% during the six months ended June 30, 2012. Gross margins in the three months ended June 30, 2013 increased due to sales mix change of $3.1 million in product sales from higher margin on-patent products offset by a decrease of $4.9 million in product sales of lower margin statin-family of APIs and intermediates. Gross margin also benefited from $0.3 million in supplier credits for on-patent products delivered in prior quarters. As a result of the New Arch Enzyme Supply Agreement signed in November 2012, we expect our gross margins to be higher in all future periods when compared to 2012 and prior periods due to a decrease in sales of lower margin statin-family of products.

Operating Expenses
                            Three Months Ended                                    Six Months Ended
                                 June 30,                     Change                  June 30,                   Change
(In Thousands)               2013            2012          $           %          2013          2012           $           %
Research and
development            $     8,624        $ 15,650     $ (7,026 )    (45 )%       15,946       31,999     $ (16,053 )    (50 )%
Selling, general and
administrative               7,169           6,789          380        6  %       15,293       16,184          (891 )     (6 )%
Total operating
expenses               $    15,793        $ 22,439     $ (6,646 )    (30 )%   $   31,239     $ 48,183     $ (16,944 )    (35 )%

Research and development expenses decreased $7.0 million and $16.1 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012. The lower expense levels were 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 164 employees from 250 employees at June 30, 2012 to 86 employees at June 30, 2013. As a result of the restructuring program, we reduced compensation and related costs by $4.3 million and $9.7 million, lab supply costs by $1.1 million and $2.2 million, and outside services costs by $0.9 million and $1.6 million, respectively, for the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012. Depreciation cost decreased $0.7 million and $1.3 million as a result of excess equipment disposed as part of the restructuring efforts. We reduced facility costs by $0.3 million as a result of closing our Singapore research facility for the six months ended June 30, 2013, as compared to the same period of 2012. Research and development expenses included stock-based compensation expense of $0.5 million and $1.7 million during the three and six months ended June 30, 2013. Research and development expenses included stock-based compensation expense of $0.8 million and $1.5 million during the three and six months ended June 30, 2012.

Selling, general and administrative expenses increased $0.4 million and decreased $0.9 million during the three and six months ended June 30, 2013, respectively, as compared to the three and six months ended June 30, 2012. Expenses increased for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 primarily because we recorded a charge of $0.4 million to write-down supplier advances for which recovery was determined to be uncertain. Expense levels decreased for the six months ended June 30, 2013 compared to the six months ended June 30, 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 28 employees from 89 employees at June 30, 2012 to 61 employees at June 30, 2013. As a result of the restructuring program, we reduced compensation and related costs by $1.1 million during the six months ended June 30, 2013, as compared to the same period of 2012. Selling, general and administrative expenses included stock-based compensation expense of $0.8 million and $1.0 million during the three and six months ended June 30, 2013. Selling, general and administrative expenses included stock-based compensation expense of $1.1 million and $1.6 million during the three and six months ended June 30, 2012. The stock awards granted in the second quarter of 2013 included our PSU awards which resulted in $0.1 million and $0.3 million of stock compensation expense in the three and six months ended June 30, 2013.


Restructuring Charges
During the first quarter of 2012, our board of directors approved and committed to the Q1 2012 Restructuring Plan to reduce our cost structure which included approximately 13 employee terminations in Hungary and the United States. The total cost of the Q1 2012 Restructuring Plan was $0.6 million comprised of employee severance and other termination benefits. During the six months ended June 30, 2012, we made cash payments of $0.4 million. All costs under the Q1 2012 Restructuring Plan were paid by December 31, 2012.
The table below summarizes the changes in our restructuring accrual for the Q1 2012 Restructuring Plan during the six months ended June 30, 2012 (in thousands):

                                                                       Severance,
                                                                      benefits and
                                                                   related personnel
                                                                         costs
Balance at December 31, 2011                                       $            -
Restructuring charges                                                         563
Cash payments                                                                (446 )
Adjustments to restructuring charges                                          (49 )
Balance at June 30, 2012                                           $           68

During the third quarter of 2012, our board of directors approved and committed to the Q3 2012 Restructuring Plan to reduce our cost structure which included approximately 173 employee terminations in the United States and Singapore and the closing of our Singapore facility. Approximately 150 of the total 173 employee terminations impacted the research and development functions with the remaining 23 employees impacting the selling, general and administrative functions. 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.
Our cost of the Q3 2012 Restructuring Plan was $2.4 million, comprised of $1.1 million of leasehold improvements write down, $0.7 million for employee severance and other termination benefits, $0.3 million for facility lease termination costs and $0.3 million for equipment disposal charges. As of December 31, 2012, $0.1 million was recorded in accrued compensation and $0.3 million recorded as accrued expenses on our condensed consolidated balance sheet. We made cash payments of $0.3 million and recorded $0.03 million of reductions in previously recorded accruals for changes in estimated liabilities during six months ended June 30, 2013. As of June 30, 2013, $0.05 million was recorded as accrued expenses on our condensed consolidated balance sheet. We anticipate recording no further costs under this restructuring plan. We anticipate the remaining costs under the Q3 2012 Restructuring Plan will be paid in the third quarter of 2013.
The table below summarizes the changes in our restructuring accrual for the Q3 2012 Restructuring Plan during the six months ended June 30, 2013 (in thousands):

                                              Severance,
                                             benefits and
                                                related
                                            personnel costs    Facility costs         Total
Balance at December 31, 2012                $        100      $         320       $        420
Cash payments                                        (74 )             (272 )             (346 )
Adjustments to restructuring charges                 (26 )                -                (26 )
Balance at June 30, 2013                    $          -      $          48       $         48

Interest income and other expenses

                                Three Months Ended                                Six Months Ended
                                      June 30,                  Change                June 30,                 Change
(In Thousands)                   2013           2012         $          %          2013         2012        $          %
Interest income              $       16       $    74     $  (58 )    (78 )%   $      43      $  149     $ (106 )    (71 )%
. . .
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