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CDXS > SEC Filings for CDXS > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for CODEXIS INC

Form 10-K for CODEXIS INC


13-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or 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 I, Item 1A of this Annual Report on Form 10-K and elsewhere in this report. The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Business Overview
We develop biocatalysts for the pharmaceutical and fine chemicals markets. 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.
Biocatalysts are enzymes or microbes that initiate and/or accelerate chemical reactions. Manufacturers have historically used naturally occurring biocatalysts to produce many goods used in everyday life. However, inherent limitations in naturally occurring biocatalysts have restricted their commercial use. Our proprietary technology platform is able to overcome many of these limitations, allowing us to evolve and optimize biocatalysts to perform specific and desired chemical reactions at commercial scale.
We have commercialized our technology and products in the pharmaceuticals market, which is our primary business focus. Our pharmaceutical customers, which include several of the largest global pharmaceutical companies, use 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 have recently begun to use our technology to develop biocatalysts for use in the fine chemicals markets. The fine chemicals market is similar to our pharmaceutical business and consists of several large market segments, including food, animal feed, polymers, flavors and fragrances and agricultural chemicals, and so it is a natural fit for our technology.
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


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In 2013, revenues totaled $31.9 million, compared to $88.3 million in 2012. Product revenues decreased to $20.4 million in 2013 from $35.9 million in 2012 as a result of reduced shipments primarily due to the decrease in sales of our statin-family of products for off-patent applications. Revenues from collaborative research and development decreased to $6.9 million in 2013 from $50.0 million in 2012 as a result of the termination of our collaborative research agreement with Shell (the "Shell Research Agreement") in 2012. Revenue sharing arrangement revenues increased to $4.6 million in 2013 from $0.2 million in 2012 as a result of volume shipments of Argatroban and more frequent reporting from our partner, Exela. 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 in 2013 totaled $73.1 million, compared to $118.8 million in 2012. Cost of product revenues decreased to $14.6 million in 2013 from $30.6 million in 2012 as a result of lower product revenues. Our gross margin percentage increased to 29% in 2013 compared to 15% in 2012 as a result of reduced shipments of lower margin statin-family products. Research and development expense decreased to $31.6 million in 2013 from $56.8 million in 2012 as a result of reduced headcount-related costs following our restructuring efforts as a result of the termination of the Shell Research Agreement in 2012. Selling, general and administrative expenses decreased to $26.9 million in 2013 from $31.4 million in 2012 as a result of reduced headcount-related costs following our restructuring efforts as a result of the termination of the Shell Research Agreement in 2012.
Net loss for the twelve months ended December 31, 2013 totaled $41.3 million compared to $30.9 million net loss for the twelve months ended December 31, 2012. The increased loss is primarily related to lower collaborative research revenues related to the terminated Shell Research Agreement, partially offset by reduced research spending.
Cash, cash equivalents and marketable securities balances declined to $25.9 million as of December 31, 2013 compared to $49.1 million as of December 31, 2012. 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. We believe that, based on our current level of operations, our existing cash, cash equivalents and marketable securities will provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.
CodeXyme® Cellulase Enzyme and CodeXol® Detergent Alcohols Businesses During 2013 we continued a reduced level of spending in biofuels research while efforts were made to obtain funding or sell the rights for this business. In the fourth quarter of 2013, we announced that we would begin winding down our CodeXyme® cellulase enzymes program and stop further development of our CodeXol® detergent alcohols program. As a result, we have committed to a restructuring plan to reduce our cost structure to align with our projected future revenues from our pharmaceutical business. The restructuring plan includes a reduction of employees in the United States and Hungary and the sale of excess assets which will reduce future research and development costs and related expenditures. We have recorded restructuring charges of $0.8 million in the year ended December 31, 2013, which included a total of 15 employee terminations in the United States. We also recorded $1.6 million in asset impairment charges related to excess equipment reclassified as held for sale as of December 31, 2013. Termination of Shell Collaboration
The Shell Research Agreement was terminated effective August 31, 2012 and as a result, we no longer receive collaborative research and development revenues from Shell. This has significantly decreased our revenues as compared to prior periods. We received no revenues from Shell for the twelve months ended December 31, 2013. Collaborative research and development revenue received from Shell accounted for $45.3 million and $63.2 million for the twelve months ended December 31, 2012 and 2011, respectively.
As a result of the termination of the Shell Research Agreement, we initiated a series of cost reduction measures in 2012 and refocused our business on the pharmaceuticals market. We terminated approximately 173 employees worldwide in the fourth quarter of 2012, consisting of 150 research and development staff and 23 general and administrative staff. We also closed our Singapore research and development facility in December 2012. We incurred $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 2013, we made cash payments of $0.3 million. As of December 31, 2013, we had paid out substantially all of the costs under this restructuring plan.
Arch Contract Manufacturing Collaboration From 2006 through November 2012, Arch Pharma Labs of Mumbai, India manufactured substantially all of our commercialized intermediates and APIs for sale to generic and innovator pharmaceutical manufacturers. Prior to November


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2012, Arch produced atorva-family API's and intermediates for us and we sold these directly to end customers primarily in India. In November 2012, we entered into a new commercial arrangement with Arch (the "New Arch Enzyme Supply Agreement") whereby we will supply Arch with enzymes for use in the manufacture of atorva family products and Arch will market these products directly to end customers. During 2013, Arch was unable to competitively supply these products to end customers, resulting in a significant decrease in revenues. For the twelve months ended December 31, 2013, we recognized $2.1 million in product revenue for the sale of enzyme inventory to Arch pursuant to the New Arch Enzyme Supply Agreement. During 2013, we recorded an allowance for bad debt of approximately $0.4 million due to a write-off of an accounts receivable from Arch. The 2013 revenue for the sale of enzyme inventory related to a sale of inventory that occurred in 2012 for which the recognition of revenue was deferred until 2013 when all of the revenue recognition criteria were met. We do not anticipate significant Arch product revenues in future periods.

Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The 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 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 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.
The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
Revenues are recognized when the four basic revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) products have been delivered, transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
Our primary sources of revenues consist of product revenues, collaborative research and development agreements, revenue sharing arrangement and government awards. Collaborative research and development agreements typically provide us with multiple revenue streams, including up-front fees for licensing, exclusivity and technology access, fees for full-time employee ("FTE") services, milestone payments recognized upon achievement of contractual criteria, and royalty fees based on licensees' sales of products using our technologies. Product revenues are recognized once passage of title and risk of loss has occurred and contractually specified acceptance criteria, if any, have been met, provided all other revenue recognition criteria have also been met. Product revenues consist of sales of biocatalysts, intermediates, active pharmaceutical ingredients and Codex Biocatalyst Panels and Kits. 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.
Revenue sharing arrangement revenues are recognized based upon sales of licensed products by our revenue share partner Exela. Revenue share amounts received are net of product and selling costs. Revenue is recognized as earned in accordance with contract terms, and is recorded when revenue share amounts can be reasonably estimated and collectability is assured. We base our estimates on notification of the sale of revenue sharing products and related costs by our revenue share partner.
Up-front fees received in connection with collaborative research and development agreements, including license fees, technology access fees, and exclusivity fees, are deferred upon receipt, are not considered a separate unit of accounting and are recognized as revenues over the relevant performance periods related to the combined units of accounting appropriate for each customer arrangement.
Revenues related to FTE services recognized as research services are performed over the related performance periods for each contract. We are required to perform research and development activities as specified in each respective agreement. The payments received are not refundable and are based on a contractual reimbursement rate per FTE working on the project. When up-front payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using


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the proportionate performance method of revenue recognition based upon the actual amount of research and development labor hours incurred relative to the amount of the total expected labor hours to be incurred by us, up to the amount of cash received. In cases where the planned levels of research services fluctuate substantially over the research term, we are required to make estimates of the total hours required to perform our obligations. Research and development expenses related to FTE services under the collaborative research and development agreements approximate the research funding over the term of the respective agreements.
A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can only be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) results in additional payments being due to us. Milestones are considered substantive when the consideration earned from the achievement of the milestone (i) is commensurate with either our performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from its performance, (ii) relates solely to past performance, and
(iii) is reasonable relative to all deliverable and payment terms in the arrangement. Other payments received for which such payments are contingent solely upon the passage of time or the result of a collaborative partner's performance are recognized as revenue when earned in accordance with the contract terms and when such payments can be reasonably estimated and collectability is reasonably assured. We recognize revenues from royalties based on licensees' sales of products using our technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. We base its estimates on notification of the sale of licensed products from licensees. Though we received payments from government entities for work performed in the form of government awards. Government awards are agreements that generally provide us with cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues from government awards are recognized in the period during which the related costs are incurred, provided that the conditions under which the government awards were provided have been met and we have only perfunctory obligations outstanding. Shipping and handling costs charged to customers are recorded as revenues. Shipping costs are included in our cost of product revenues. Such charges were not significant in any of the periods presented. Stock-Based Compensation
We recognize compensation expense related to share-based transactions, including the awarding of employee stock options, restricted stock units ("RSU"), restricted stock awards ("RSA") and performance stock units ("PSU"), based on the estimated fair value of the awards granted.
We estimate the fair value of our stock option grants using the Black-Scholes option-pricing model. We calculate the estimated volatility rate based on historical volatility of our common stock. Due to our limited history of grant activity, we calculate the expected life of options granted to employees using the "simplified method" permitted by the United States Securities Exchange Commission, or SEC, as the average of the total contractual term of the option and its vesting period. The risk-free rate assumption was based on United States Treasury instruments whose terms were consistent with the terms of our stock options. The expected dividend assumption was based on our history and expectation of dividend payouts. The fair value of each restricted stock unit grant and each performance stock unit grant is based on the underlying value of our common stock on the date of grant. In addition, we estimate the expected forfeiture rate and only recognize expense for those awards expected to vest. We estimate the forfeiture rate based on historical experience and to the extent the actual forfeiture rate is different from the estimate, share-based compensation expense is adjusted accordingly.
We account for stock awards issued to non-employees based on their estimated fair value determined using the Black-Scholes option-pricing model. The fair value of the awards granted to non-employees is re-measured as they vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered. Assets Held for Sale
We reclassify long-lived assets to Assets Held for Sale when all required criteria are met. The assets are recorded at the lower of the carrying value or fair value less costs to sell. Assets held for sale must meet the following conditions: 1) management, having authority to approve the action, commits to a plan to sell the asset, 2) the asset is available for immediate sale in its present condition, 3) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, 4) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed


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sale, within one year, 5) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and 6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. In determining the fair value of the assets less cost to sell, we consider factors including current sales prices for comparable assets, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value, less the cost to sell an asset, is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analyses. The assumptions about equipment sales prices require significant judgment related to equipment condition and certain selling costs. We calculate the estimated fair values of assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in additional impairments if market conditions deteriorate. Impairment of Long-Lived Assets and Intangible Assets Long-lived and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate.
Our intangible assets with finite lives consist of customer relationships, developed core technology, trade names, and the intellectual property ("IP") rights associated with the acquisition of Maxygen's directed evolution technology in 2010. Intangible assets were recorded at their fair values at the date we acquired the assets and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives. Our long-lived assets include property, plant and equipment, and other non-current assets.
We determined that the Company has a single entity wide asset group ("Asset Group"). The directed evolution technology patent portfolio acquired from Maxygen ("Core IP") is the most significant component of the Asset Group since it is the base technology for all aspects of our research and development, and represents the basis for all of our identifiable cash flow generating capacity. Consequently, we do not believe that identification of independent cash flows associated with our long-lived assets is currently possible at any lower level than the Asset Group.
The Core IP is the only finite-lived intangible asset on our balance sheet as of December 31, 2013 and is considered the primary asset within the Asset Group. The remaining useful life of the Core IP extends through the fourth quarter of 2016. There has been no significant change in the utilization or estimated life of our Core IP since we acquired the technology patent portfolio from Maxygen. The estimated remaining useful life of our Core IP is not impacted by the termination of the Shell Research Agreement or our exiting the biofuels market. The carrying value of our long-lived assets in the Asset Group may not be recoverable based upon the existence of one or more indicators of impairment which could include: a significant decrease in the market price of our common stock; current period cash flow losses or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the assets; slower growth rates in our industry; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the assets; loss of significant customers or partners; or the current expectation that the assets will more likely than not be sold or disposed of significantly before the end of their estimated useful life.
We evaluate recoverability of our long-lived assets and intangible assets based on the sum of the undiscounted cash flows expected to result from the use, and the eventual disposal of, the Asset Group. We make estimates and judgments about the future undiscounted cash flows over the remaining useful life of the Asset Group. Our anticipated future cash flows include our estimates of existing or in process product revenues, production and operating costs, future capital expenditures, working capital needs, and assumptions regarding the ultimate sale of the Asset Group at the end of the life of the primary asset. The useful life of the Asset Group was based on the estimated useful life of the Core IP, the primary asset at the time of acquisition. There has been no change in the estimated useful life of the Asset Group. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant judgment involved in determining the cash flows attributable to our Asset Group over its estimated remaining useful life. 2012 Analysis
As of December 31, 2012 we determined that our continued operating losses and the termination of the Shell Research Agreement were indicators of impairment.


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As a result, in 2012 we performed the recoverability test and calculated estimated cashflows through the remaining period of the estimated useful life of the Core IP. The undiscounted cash flows included revenue and expense from our biocatalyst business, both from the pharmaceuticals market and from enzyme markets adjacent to our business in the pharmaceuticals market, including fine chemicals markets.
We typically receive revenues from the pharmaceuticals market and expect to receive revenues from other enzyme markets adjacent to our pharmaceutical business in the form of one or more of the following: up-front payments, milestone payments, payments based upon the number of FTEs engaged in related research and development activities and licensing fees and royalties. Our best estimate of future cash flows did not include any CodeXol® and CodeXyme® revenues associated with collaboration research and development agreements, but did include an estimate of cash flows from potential strategic transactions with respect to our CodeXyme® and CodeXol® programs, as described below. In our 2012 impairment analysis, approximately 69% and 31% of total Company revenues included in the estimated undiscounted cash flows (excluding cash flows from potential strategic transactions with respect to our CodeXyme® and CodeXol® programs) over the remaining useful life of the Core IP were derived from the pharmaceuticals market and from adjacent enzyme market opportunities, respectively.
Our pharmaceuticals revenues were estimated based on existing commercial relationships, signed agreements or contracts, and conservative estimates for the capture of additional market share that management determined to be reasonably achievable. For existing and in process customer revenues we assumed a modest rate of growth based on our historical business model for our core pharmaceutical business, including research and development services revenue from partners and customers, which management determined to be reasonably achievable. We have historically worked closely with our pharmaceutical partners to evolve, engineer and develop enzymes that meet their specific needs. Our business model is based on having our partners and customers pay in whole or in . . .

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