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CDXS > SEC Filings for CDXS > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CODEXIS INC

Form 10-Q for CODEXIS INC


8-May-2014

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, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 13, 2014. 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 set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 13, 2014, as incorporated herein and referenced 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. 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 best selling and fastest growing drugs.
We have recently begun to use our technology to develop biocatalysts for use in the fine chemicals market. 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. 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
For the first quarter of 2014, revenues totaled $7.1 million, compared to $11.5 million for the first quarter of 2013. Revenues from biocatalyst research and development increased to $2.1 million from $1.3 million in the prior year's first quarter as a result of additional funded research for pharmaceutical customers. Biocatalyst product revenues decreased to $3.0 million from $9.1 million in the prior year's first quarter as a result of reduced shipments primarily due to the decrease in sales of hepatitis C products in the first quarter of 2014 and a one-time enzyme inventory sale of $2.1 million to Arch recorded in the first quarter of 2013. We do not expect statin family and hepatitis C product revenues to be a significant portion of total revenues in future periods as a result of both unfavorable market pricing and newer products entering the market. While we expect biocatalyst 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 first quarter of 2014 totaled $13.5 million, compared to $21.1 million for the first quarter of 2013. Cost of biocatalyst product revenues decreased to $2.5 million from $5.7 million in the prior year as a result of lower hepatitis C product sales in the first quarter of 2014 and a one-time enzyme inventory sale in the first quarter of 2013. Research and development expense decreased to $4.8 million from $7.3 million due to reduced headcount-related costs following our restructuring efforts undertaken as a result of exiting the CodeXyme® cellulase enzyme program in the fourth quarter of 2013 and a gain of $0.8 million from the sale of our Hungarian subsidiary in March 2014. Selling, general and administrative expense decreased to $6.1 million from $8.1 million as a result of reduced headcount-related costs and outside services.
Net loss for the first quarter of 2014 totaled $6.4 million compared to $9.6 million net loss for the first quarter of 2013. The reduced loss is primarily related to reduced research spending as a result of exiting the CodeXyme® cellulase enzyme program in the fourth quarter of 2013.
Cash, cash equivalents and marketable securities balances decreased to $25.6 million as of March 31, 2014 compared to $25.9 million as of December 31, 2013. Net cash used in operating activities decreased to $2.4 million in the first quarter of 2014 compared to $3.5 million in the first quarter of 2013. We are actively collaborating 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. Sale of Hungarian Subsidiary


On March 13, 2014, we entered into an agreement with Intrexon Corporation to sell 100% of our equity interests in our Hungarian subsidiary, Codexis Laboratories Hungary Kft. On March 15, 2014, the sale transaction closed and we received gross proceeds of $1.5 million from the sale and recorded a net gain of $0.8 million which was included in research and development expenses in connection with the sale. As part of the purchase, the buyer assumed all employment and facility lease related contract obligations. There were 32 employees at the time of the sale. There were no transaction related costs incurred other than legal fees, which were recorded in selling, general and administrative expenses. As a result of the sale of our Hungarian subsidiary, we estimate that we will reduce our operating expenses, not including depreciation, by approximately $3 million per year. Prior to the sale of our Hungarian subsidiary, we transferred certain of its equipment to another European subsidiary of the Company and incurred a VAT liability of approximately $0.4 million. We will pay this VAT amount in the second quarter of 2014 and expect to recover the VAT payment within the next 12 months.
CodeXyme® Cellulase Enzyme and CodeXol® Detergent Alcohols Businesses During 2013 we maintained a reduced level of spending in biofuels research while seeking 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 enzyme program and stop further development of our CodeXol® detergent alcohols program. As a result, we committed to the Q4 2013 Restructuring Plan to reduce our cost structure to align with our projected future revenues from our pharmaceutical business. The Q4 2013 Restructuring Plan included 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 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. Arch Collaboration
Since 2006, Arch Pharma Labs of Mumbai, India has manufactured substantially all of our commercialized intermediates and APIs for sale to generic and innovator pharmaceutical manufacturers. Prior to November 2012, Arch produced statin-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 agreed to supply Arch with enzymes for use in the manufacture of certain of Arch's products and Arch agreed to market these products directly to end customers. For the three months ended March 31, 2014 and 2013, we recognized $39,000 and $2.1 million, respectively, in product revenue for the sale of enzyme inventory to Arch pursuant to the New Arch Enzyme Supply Agreement. We do not anticipate significant Arch revenues in future periods. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2013.
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
                                         2014          2013         2014          2013
Revenues:
Biocatalyst products                 $    2,985     $  9,137         42  %          80  %
Biocatalyst research and development      2,146        1,300         30  %          11  %
Revenue sharing arrangement               1,943        1,044         28  %           9  %
Total revenues                            7,074       11,481        100  %         100  %
Costs and operating expenses:
Cost of biocatalyst product revenues      2,524        5,665         36  %          49  %
Research and development                  4,834        7,322         68  %          64  %
Selling, general and administrative       6,112        8,124         86  %          71  %
Total costs and operating expenses       13,470       21,111        190  %         184  %
Loss from operations                     (6,396 )     (9,630 )      (90 )%         (84 )%
Interest income                               9           27          -  %           -  %
Other expenses                             (118 )        (85 )       (2 )%          (1 )%
Loss before income taxes                 (6,505 )     (9,688 )      (92 )%         (84 )%
Benefit from income taxes                  (130 )        (65 )       (2 )%          (1 )%
Net loss                             $   (6,375 )   $ (9,623 )      (90 )%         (84 )%

Revenues
Our revenues are comprised of biocatalyst product revenues, biocatalyst research and development revenues and revenue sharing arrangements.
• Biocatalyst product revenues consist of sales of biocatalysts intermediates, APIs and Codex Biocatalyst Panels and Kits.

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

• Revenue sharing arrangement revenues are recognized based upon sales of licensed products by the Company's revenue share partner Exela.

                                          Three Months Ended March 31,             Change
(In Thousands)                                 2014            2013            $            %
Biocatalyst products                      $       2,985     $   9,137     $  (6,152 )       (67 )%
Biocatalyst research and development              2,146         1,300           846          65  %
Revenue sharing arrangements                      1,943         1,044           899          86  %
Total revenues                            $       7,074     $  11,481     $  (4,407 )       (38 )%

Total revenues decreased $4.4 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily due to decreased biocatalyst product sales, which was partially offset by increases in biocatalyst research and development revenue and revenue sharing arrangements. Biocatalyst product revenues decreased $6.2 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily as a result of a $3.1 million decrease in the first quarter of 2014 in shipments of enzymes used in hepatitis C intermediaries and a one-time enzyme inventory sale of $2.1 million to Arch PharmaLabs Ltd recorded in the first quarter of 2013. We do not expect statin family and hepatitis C product revenues to be a significant portion of total revenues in future periods as a result of both unfavorable market pricing and newer products entering the market. While we expect biocatalyst 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.
Biocatalyst research and development revenues increased $0.8 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 primarily from increased royalty revenue and fees for FTE services.


Revenue sharing arrangement revenues increased $0.9 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 as our sales of argatroban through our partner Exela increased. In the first quarter of 2013, we recognized $1.0 million in milestone revenue as a result of Exela's commercial launch of argatroban.
Our top five customers accounted for 90% and 94% of our total revenues for the three months ended March 31, 2014 and 2013, respectively. Accounts receivable balances for the top five customers were 82% and 93% of total balances as of March 31, 2014 and 2013, respectively.
Cost of Biocatalyst Product Revenues
Cost of biocatalyst 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.

                                               Three Months Ended March 31,               Change
(In Thousands)                                    2014               2013             $            %
Biocatalyst product revenues                $       2,985       $       9,137     $ (6,152 )       (67 )%
Cost of biocatalyst product revenues                2,524               5,665       (3,141 )       (55 )%
Biocatalyst product gross profit            $         461       $       3,472     $ (3,011 )       (87 )%
Product gross margin %                                 15 %                38 %

Our cost of biocatalyst product revenues decreased $3.1 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 primarily due to the decrease of contract manufacturing costs related to reduced hepatitis C product sales, as well as costs associated with the sale of inventory to Arch in the first quarter of 2013. Our product gross margins decreased to 15% for the three months ended March 31, 2014 from 38% during the three months ended March 31, 2013 due to a less favorable sales mix from lower margin products.

Operating Expenses
                                              Three Months Ended March 31,             Change
(In Thousands)                                    2014              2013           $            %
Research and development                    $         4,834     $    7,322     $ (2,488 )      (34 )%
Selling, general and administrative                   6,112          8,124       (2,012 )      (25 )%
Total operating expenses                    $        10,946     $   15,446     $ (4,500 )      (29 )%

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.
Research and development expenses decreased $2.5 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. The lower expense levels were primarily due to the restructuring plans completed by the Company throughout 2013 as well as the gain of $0.8 million recorded from the sale of our Hungarian subsidiary in March 2014. As a result of the restructuring programs, we reduced compensation and related costs by $0.9 million and lab supply costs by $0.1 million for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. Depreciation cost decreased $0.7 million as a result of excess equipment either sold or reclassified to assets held for sale as part of our restructuring efforts. Research and development expenses included stock-based compensation expense of $0.2 million as compared to $0.5 million during the three months ended March 31, 2014 and 2013, respectively.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation expenses (including stock-based compensation), hiring and training costs, consulting and outside services expenses (including audit and legal counsel related costs), marketing costs, building lease costs, depreciation and amortization expenses, and travel and relocation expenses.


Selling, general and administrative expenses decreased $2.0 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013. Expense levels decreased for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to lower outside services and reduced headcount as a result of the restructuring plans completed by the Company throughout 2013. Compensation expense was lower by $0.9 million, outside services was lower by $0.4 million and supplies were lower by $0.2 million.
Interest income and other expenses

                                 Three Months Ended March 31,            Change
(In Thousands)                      2014                2013           $        %
Interest income              $            9         $        27     $ (18 )   (67 )%
Other expenses                         (118 )               (85 )     (33 )    39  %
Total other income (expense) $         (109 )       $       (58 )   $ (51 )    88  %

Interest income decreased during the three months ended March 31, 2014, as compared to the same period last year, due to decreased investment balances. Other expenses increased slightly during the three months ended March 31, 2014, as compared to the same period of last year, and were primarily related to foreign currency fluctuations during the three months ended March 31, 2014. Other expenses remained consistent during the three months ended March 31, 2014, as compared to the same period of last year. Benefit from income taxes
We have recorded a tax benefit of $0.1 million for both the three months ended March 31, 2014 and March 31, 2013, with an effective tax benefit of 2% and 1%, respectively. The tax benefit for both the three months ended March 31, 2014, and March 31, 2013, primarily consisted of income tax expense attributable to foreign operations offset by the tax effect on the unrealized gain from our investment in CO2 Solutions.

Liquidity and Capital Resources
                                                        March 31,         December 31,
(In Thousands)                                            2014                2013
Cash and cash equivalents                           $        23,163     $        22,130
Marketable securities (1)                                     1,002               3,005
Accounts receivable, net                                      4,907               5,413
Accounts payable, accrued compensation and accrued
liabilities                                                   9,824               9,198
Working capital                                     $        21,151     $        24,582

(1) Includes only the current portion of our marketable securities

                                                          Three months ended March 31,
(In Thousands)                                              2014                 2013
Net cash used in operating activities                $        (2,405 )     $        (3,487 )
Net cash provided by investing activities                      3,606                 2,452
Net cash provided by financing activities                       (168 )                 263
Net increase (decrease) in cash and cash equivalents $         1,033       $          (772 )

We have historically experienced negative cash flows from operations as we continue to invest in key technology development projects, improvements to our biocatalysis technology platform, and expand our business development and collaboration with new pharmaceutical customers. Our cash flows from operations will continue to be affected principally by sales and gross margins from biocatalyst product sales to pharmaceutical customers, as well as our headcount costs, primarily in research and development. Our primary source of cash flows from operating activities is cash receipts from our customers for purchases of biocatalyst products or biocatalyst research and development services. Our largest uses of cash from operating activities are for employee-related expenditures, rent payments, inventory purchases to support our product revenue and non-payroll research and development costs.
Cash, cash equivalents and marketable securities balances totaled $25.6 million as of March 31, 2014 compared to $25.9 million as of December 31, 2013.


We are actively collaborating with new and existing pharmaceutical customers and we believe that we can utilize our current 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. However, we may need additional capital if our current plans and assumptions change. Our need for additional capital will depend on many factors, including the financial success of our pharmaceutical business, our spending required to develop and commercialize new and existing products, the effect of any acquisitions of other businesses, technologies or facilities that we may make or develop in the future, our spending on new market opportunities, including bio-based chemicals, and the potential costs for filing, prosecution, enforcement and defense of patent claims, if necessary.
If our capital resources are insufficient to meet our capital requirements, and we are unable to enter into or maintain collaborations with partners that are able or willing to fund our development efforts or commercialize any products that we develop or enable, we will have to raise additional funds to continue the development of our technology and products and complete the commercialization of products, if any, resulting from our technologies. If future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we raise debt financing, we may be subject to restrictive covenants that limit our ability to conduct our business. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and fail to generate sufficient revenues to achieve planned gross margins and to control operating costs, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research or development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business. Cash Flows from Operating Activities
Cash used in operating activities was $2.4 million during the three months ended March 31, 2014, which resulted from a net loss of $6.4 million adjusted for $3.0 million in non-cash charges, a $0.8 million gain on the sale of assets (cash proceeds included in investing activities) and a $1.7 million increase in cash associated with the net change in operating assets and liabilities. The non-cash charges primarily included depreciation and amortization of $1.9 million, stock-based compensation of $1.2 million and the gain on the sale of the Hungry subsidiary of $0.8 million. The net change in operating assets and liabilities . . .

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