Basis of Presentation and Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation and Principles of Consolidation |
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Codexis, Inc. and its wholly-owned subsidiaries in the United States, Brazil, Hungary (through the sale date of March 13, 2014), India, Mauritius, the Netherlands, and Singapore (dissolved in October 2014). All significant intercompany balances and transactions have been eliminated in consolidation. |
Use of Estimates |
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We regularly assess these estimates which primarily affect revenue recognition, accounts receivable, inventories, the valuation of investment securities and marketable securities, assets held for sale, intangible assets, goodwill arising out of business acquisitions, accrued liabilities, stock awards and the valuation allowances associated with deferred tax assets. Actual results could differ from those estimates and such differences may be material to the consolidated financial statements. |
Segment Reporting |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is Codexis' Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenues by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results beyond revenue goals or plans for levels or components below the consolidated unit level. Accordingly, the Company has a single reporting segment. |
Foreign Currency Translation |
The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional currencies into United States dollars at the exchange rates in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded in the consolidated statement of comprehensive loss. Revenue and expense amounts are translated at average rates during the period. |
Where the United States dollar is the functional currency, nonmonetary assets and liabilities originally acquired or assumed in other currencies are recorded in United States dollars at the exchange rates in effect at the date they were acquired or assumed. Monetary assets and liabilities denominated in other currencies are translated into United States dollars at the exchange rates in effect at the balance sheet date. Translation adjustments are recorded in other expense in the accompanying consolidated statements of operations. Gains and losses realized from transactions, including intercompany balances not considered as permanent investments, denominated in currencies other than an entity’s functional currency, are included in other expense in the accompanying consolidated statements of operations. |
Revenue Recognition |
We recognize revenue from the sale of our biocatalyst products, biocatalyst research and development agreements and revenue sharing arrangements. Revenue is recognized when the related costs are incurred and the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Where the revenue recognition criteria are not met, we defer the recognition of revenue by recording deferred revenue until such time that all criteria of revenue recognition are met. |
Revenue from Multiple Element Arrangements |
We account for multiple element arrangements, such as license and platform technology transfer agreements in which a licensee may purchase several deliverables, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-25, “Multiple Element Arrangements.” For new or materially amended multiple element arrangements, we identify the deliverables at the inception of the arrangement and each deliverable within a multiple deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Revenue allocated to each element is then recognized based on when the basic four revenue recognition criteria are met for each element. |
Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue or as an accrued liability and recognized as a reduction of research and development expenses ratably over the term of our estimated performance period under the agreement. We determine the estimated performance periods, and they are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated performance period and, therefore, to revenue recognized, would occur on a prospective basis in the period that the change was made. |
Biocatalyst Product Sales |
Biocatalyst product sales consist of sales of biocatalyst intermediates, active pharmaceutical ingredients and Codex® Biocatalyst Panels and Kits. Biocatalyst product sales 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. Shipping and handling costs charged to customers are recorded as revenue. |
Biocatalyst Research and Development |
Biocatalyst research and development agreements typically provide us with multiple revenue streams, including: research services fees for full time employee ("FTE") research services, up-front licensing fees, technology access, contingent payments upon achievement of contractual criteria, and royalty fees based on the licensee's product sales or cost savings achieved by Codexis' customers. |
We perform biocatalyst research and development activities as specified in each respective customer agreement. Payments for services received are not refundable. Certain research agreements are based on a contractual reimbursement rate per FTE working on the project. We recognize revenue from research services as those services are performed over the contractual performance periods. When up-front payments are combined with FTE services in a single unit of accounting, we recognize the up-front payments using the proportionate performance method of revenue recognition based upon the actual amount of research 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. |
We recognize revenue from nonrefundable, up-front license fees or technology access payments that are not dependent on any future performance by us when such amounts are earned. If we have continuing obligations to perform under the arrangement, such fees are recognized over the estimated period of continuing performance obligation. |
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, as of the date the arrangement is entered into, substantive uncertainty 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 the 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. |
We recognize revenue from other payments received which are contingent solely upon the passage of time or the result of a customer's performance when earned in accordance with the contract terms and when such payments can be reasonably estimated and collectability of such payments is reasonably assured. |
We recognize revenue from royalties based on licensees’ sales of our biocatalyst products or 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. For the majority of our royalty revenue, estimates are made using notification of the sale of licensed products from the licensees. |
Revenue Sharing Arrangement |
We recognize revenue from a revenue sharing arrangement based upon sales of licensed products by our revenue share partner Exela PharmSci, Inc. ("Exela") (see Note 16, "Related Party Transactions"). We recognize revenue net of product and selling costs upon notification from our revenue share partner of our portion of net profit based on the contractual percentage from the sale of licensed product. |
Sales Allowances |
Sales allowances primarily relate to product returns and prompt pay sales discounts, and are recorded in the same period that the related revenue is recognized, resulting in a reduction in biocatalyst product sales revenue. |
Government Awards |
Through 2012, 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. |
Cost of Biocatalyst Product Sales |
Cost of biocatalyst product sales comprises 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 biocatalyst product sales. Shipping costs are included in our cost of biocatalyst product sales. Such charges were not significant in any of the periods presented. |
Cost of Research and Development Services |
Research and development expenses related to FTE services under the research and development agreements approximate the research funding over the term of the respective agreements and are included in research and development expense. |
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 external costs, 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. |
Advertising |
Advertising costs are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. Advertising costs were $0.3 million in 2014, $0.5 million in 2013 and $0.4 million in 2012. |
Stock-Based Compensation |
We use the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under Codexis' equity incentive plans. The Black-Scholes-Merton option valuation model requires the use of assumptions, including the expected term of the award and the expected stock price volatility. We used the "simplified" method as described in Staff Accounting Bulletin No. 107, "Share-Based Payment," for the expected option term because Codexis' historical option exercise data is limited due to its initial public offering in 2010. We used Codexis' historical volatility to estimate expected stock price volatility. The risk-free rate assumption was based on United States Treasury instruments whose terms were consistent with the expected term of the stock option. The expected dividend assumption was based on Codexis' history and expectation of dividend payouts. |
Restricted Stock Units (RSUs), Restricted Stock Awards (RSAs) and performance-contingent restricted stock units (PSUs) were measured based on the fair market values of the underlying stock on the dates of grant. PSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. At the end of the performance period, if the goals are attained, the awards are granted. |
Stock-based compensation expense was calculated based on awards ultimately expected to vest and was reduced for estimated forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. The estimated annual forfeiture rates for stock options, RSUs, PSUs, and RSAs are based on Codexis' historical forfeiture experience. |
The estimated fair value of stock options, RSUs and RSAs is expensed on a straight-line basis over the vesting term of the grant and the estimated fair value of PSUs is expensed using an accelerated method over the term of the award once management has determined that it is probable that performance objective will be achieved. Compensation expense is recorded over the requisite service period based on management's best estimate as to whether it is probable that the shares awarded are expected to vest. Management assesses the probability of the performance milestones being met on a continuous basis. |
We account for stock awards issued to non-employees based on their estimated fair value determined using the Black-Scholes-Merton option-pricing model. Compensation expense for the stock awards granted to non-employees is recognized based on the fair value of awards as they vest, during the period the related services are rendered. |
We have not recognized, and do not expect to recognize in the near future, any income tax benefit related to employee stock-based compensation expense as a result of the full valuation allowance on our deferred tax assets including deferred tax assets related to Codexis' net operating loss carryforwards. |
Restructuring Costs |
We apply applicable accounting guidance on accounting for costs associated with restructuring, including exit or disposal activities, which requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. Our restructuring activities have primarily been related to severance, benefits and related personnel costs and facility closing costs. We determined the facility accrual based on expected cash payments, under the applicable facility lease, reduced by any estimated sublease rental income for such facility (see Note 18). |
Cash and Cash Equivalents |
We consider all highly liquid investments with maturity dates of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds. The majority of cash and cash equivalents is maintained with major financial institutions in North America. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits. Cash and cash equivalents totaled $26.5 million and was comprised of cash of $11.9 million and money market funds of $14.6 million at December 31, 2014. Cash and cash equivalents totaled $22.1 million and was comprised of cash of $6.0 million and money market funds of $16.1 million at December 31, 2013. |
Investment Securities |
We invest in debt and equity securities and we classify those investments as available-for-sale. These securities are carried at estimated fair value (see Note 6, “Investment Securities,” below) with unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity. Available-for-sale equity securities and available-for sale debt securities with remaining maturities of greater than one year are classified as long-term. |
We review several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value, the length of the time and the extent to which the market value of the investment has been less than cost and the financial condition and near-term prospects of the issuer. Unrealized losses are charged against “Other expense” when a decline in fair value is determined to be other-than-temporary. |
Amortization of purchase premiums and accretion of purchase discounts and realized gains and losses of debt securities are included in interest income. The cost of securities sold is based on the specific-identification method. |
Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and we consider counterparty credit risk in our assessment of fair value. Carrying amounts of Codexis' financial instruments, including cash equivalents, short-term investments, marketable investments, accounts receivable, accounts payable and accrued liabilities, approximate their fair values as of the balance sheet dates because of their generally short maturities. |
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: |
| | |
• | Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. | |
| | |
• | Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument. | |
| | |
• | Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions. | |
For Level 2 financial instruments, our investment adviser provides monthly account statements documenting the value of corporate bonds and U.S. Treasury obligations based on prices received from an independent third-party valuation service provider. This third party evaluates the types of securities in our investment portfolio and calculates a fair value using a multi-dimensional pricing model that includes a variety of inputs, including quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and default rates that are observable at commonly quoted intervals. As we are ultimately responsible for the determination of the fair value of these instruments, we perform quarterly analyses using prices obtained from another independent provider of financial instrument valuations, to validate that the prices we have used are reasonable estimates of fair value. |
Accounts Receivable |
We currently sell primarily to pharmaceutical companies throughout the world by the extension of trade credit terms based on an assessment of each customers’ financial condition. Trade credit terms are generally offered without collateral and may include a discount for prompt payment for specific customers. To manage our credit exposure, we perform ongoing evaluations of our customers’ financial conditions. In addition, accounts receivable includes amounts owed to us under our collaborative research and development agreements. We recognize accounts receivable at invoiced amounts and we maintain a valuation allowance for doubtful accounts. |
Allowances |
We estimate an allowance for doubtful accounts through specific identification of potentially uncollectible accounts receivable based on an analysis of our accounts receivable aging. Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows. |
Restricted Cash |
Restricted cash consisted of amounts invested in savings accounts primarily for purposes of securing a standby letter of credit as collateral for Codexis' Redwood City, California facility lease agreement. |
Concentrations of Credit Risk |
Our financial instruments that are potentially subject to concentration of credit risk primarily consist of: cash equivalents, short-term investments, accounts receivable, marketable securities, and restricted cash. We invest cash that is not required for immediate operating needs principally in money market funds and corporate securities through banks and other financial institutions in the United States, as well as in foreign countries. |
Inventories |
Inventories consist of raw materials and work-in-process and finished goods related to the production of our biocatalysis products. Raw materials include active pharmaceutical ingredients and other raw materials. Work-in-process and finished goods include third party manufacturing costs and labor and indirect costs we incur in the production process. Included in inventories are materials that may be used as clinical products, which are charged to research and development expense when consumed. |
Inventories are stated at the lower of cost or market value. Cost is determined using a weighted-average approach, assuming full absorption of direct and indirect manufacturing costs, based on our product capacity utilization assumptions. If inventory costs exceed expected market value due to obsolescence or lack of demand, reserves are recorded for the difference between the cost and the estimated market value. These reserves are determined based on significant estimates. |
Concentrations of Supply Risk |
We rely on a limited number of suppliers for our products. We believe that other vendors would be able to provide similar products; however, the qualification of such vendors may require substantial start-up time. In order to mitigate any adverse impacts from a disruption of supply, we attempt to maintain an adequate supply of critical single-sourced materials. For certain materials, our vendors maintain a supply for us. We outsource the large scale manufacturing of our products to contract manufacturers with facilities in Austria and Italy. |
Property and Equipment |
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization and depreciated using the straight-line method over their estimated useful lives as follows: |
|
| | |
| Asset classification | Estimated useful life |
| Laboratory equipment | 5 years |
| | |
| Computer equipment and software | 3 to 5 years |
| | |
| Office equipment and furniture | 5 years |
| | |
| Leasehold improvements | Lesser of useful life or lease term |
Property and equipment classified as construction in process includes equipment that has been received but not yet placed in service. Normal repairs and maintenance costs are expensed as incurred. |
Intangible Assets |
Our intangible assets are finite-lived and consist of customer relationships, developed core technology, trade names, and the intellectual property (“IP”) rights associated with the acquisition of Maxygen Inc.'s ("Maxygen") directed evolution technology in 2010. Intangible assets were recorded at their fair values at the date Codexis acquired the assets and, for those assets having finite useful lives, are amortized using the straight-line method over their estimated useful lives. |
Assets Held for Sale |
We reclassify long-lived assets to Assets Held for Sale when all required criteria for such reclassification 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 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 cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. The assumptions about equipment sales prices require significant judgment related to equipment condition and certain selling costs. Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analyses and may result in additional impairments if market conditions deteriorate. |
Impairment of Long-Lived Assets |
Our long-lived assets include property and equipment and intangible assets. We determined that Codexis 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 activities, and represents the basis for all of Codexis' identifiable cash flow generating capacity. Consequently, we do not believe that identification of independent cash flows associated with Codexis 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 Codexis' consolidated balance sheet as of December 31, 2014. There has been no significant change in the utilization or estimated life of the Core IP since we acquired the technology patent portfolio from Maxygen. |
The carrying value of Codexis' 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 Codexis' 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 Codexis' 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 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. Codexis' anticipated future cash flows include our estimates of existing or in process product sales, 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 the 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 indications of impairment. |
As a result, in 2012 we performed the recoverability test and calculated estimated cash flows through the remaining period of the estimated useful life of the Core IP. The undiscounted cash flows included revenue and expense from Codexis' biocatalyst business, both from the pharmaceuticals market and from enzyme markets adjacent to its business in the pharmaceuticals market, including fine chemicals markets. |
Codexis typically receives revenues from the pharmaceuticals market and expects to receive revenues from other enzyme markets adjacent to its 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 its CodeXyme® and CodeXol® programs, as described below. |
In our 2012 impairment analysis, approximately 69% and 31% of Codexis' revenues included in the estimated undiscounted cash flows (excluding cash flows from potential strategic transactions with respect to Codexis' 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. |
Codexis' pharmaceuticals revenues were estimated based on existing commercial relationships, signed agreements or contracts, and conservative estimates for the capture of additional market share that we 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 Codexis' core pharmaceutical business, including research and development services revenue from partners and customers, which we 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 part for the research and development required to engineer the enzymes required. |
In determining which adjacent enzyme markets to exploit, we assessed various segments of the large and growing enzyme markets and selected those adjacent markets where we already had entry points through our existing pharmaceutical business relationships, such as fine chemicals markets. Estimated revenues associated with these adjacent markets were based on market penetration and adoption rates that we determined to be reasonably achievable. |
The expected residual value was determined by applying a Gordon Growth Model to normalized net cash flows using a discount rate of 18.0% (“Estimated Weighted-Average Cost of Capital”) and a long term growth rate of 2%. The 18.0% discount rate reflects the nature and the risk of the underlying forecast, and includes such financial components as the risk free rate, systemic stock price risk based on an evaluation with peer companies (“beta”), equity risk premium, size premium, and company specific risk. The long term growth rate of 2% reflects projected inflation and general economic conditions. Based on the results obtained, we determined there was no impairment of Codexis' intangible assets as of December 31, 2012. |
We also included in the undiscounted cash flows an estimate of cash flows from potential strategic transactions with respect to the Codexis' existing CodeXyme® cellulase enzymes and CodeXol® detergent alcohol programs. The amount of estimated cash flows related to CodeXol® and CodeXyme® represented 38% of the total undiscounted cash flows associated with the Asset Group. These amounts were not based on any existing contracts or agreements. |
The results of our fourth quarter 2012 impairment analysis indicated that the undiscounted cash flows for the Asset Group were greater than the carrying value of the Asset Group by approximately 14%. Based on the results obtained, we determined there was no impairment of the Company's intangible assets as of December 31, 2012. |
2013 Analysis |
In the fourth quarter of 2013, we determined that Codexis' continued annual operating losses and a decline in market price of the Codexis' common stock, reduced anticipated future cash flows related to potential CodeXyme® cellulase enzyme and CodeXol® detergent alcohols transactions and reduced future revenue growth to reflect our most recent outlook were indicators of impairment. |
As a result, in the fourth quarter of 2013 we performed the recoverability test and calculated estimated cash flows through the remaining period of the estimated useful life of the Core IP. The undiscounted cash flows included revenue and expense from Codexis' biocatalyst business, both from the pharmaceuticals market and from enzyme markets adjacent to its business in the pharmaceuticals market, including fine chemicals markets. |
The methodology employed in our 2013 analysis was consistent with that used in our impairment analysis performed as of December 31, 2012, although certain assumptions changed in 2013 based on new developments, including reduced anticipated future cash flows related to potential strategic transactions with respect to the Codexis' CodeXyme® and CodeXol® programs, and reduced future revenue growth to reflect our most recent outlook and an increase in the our fine chemicals activities. |
In our 2013 impairment analysis, approximately 90% and 10% of Codexis' revenues included in its estimated undiscounted cash flows (excluding cash flows from potential strategic transactions with respect to its CodeXyme® and CodeXol® programs) through the estimated useful life of the Core IP were derived from the pharmaceuticals market and from adjacent enzyme market opportunities, respectively. |
The expected residual value was determined by applying a Gordon Growth Model to normalized net cash flows using a discount rate of 19.5% (“Estimated Weighted-Average Cost of Capital”) and a long term growth rate of 2%. The 19.5% discount rate reflects the nature and the risk of the underlying forecast, and includes such financial components as the risk free rate, systemic stock price risk based on an evaluation with peer companies (“beta”), equity risk premium, size premium, and Codexis' specific risk. The long term growth rate of 2% reflects projected inflation and general economic conditions. |
The Company also included in the undiscounted cash flows an estimate of cash flows from potential strategic transactions with respect to the Company’s CodeXyme® cellulase enzymes and CodeXol® detergent alcohol programs. The amount of estimated cash flows related to CodeXol® and CodeXyme® represented 7% of the total undiscounted cash flows associated with the Asset Group. These amounts are not based on any existing contracts or agreements. |
The results of our fourth quarter 2013 impairment analysis indicated that the undiscounted cash flows for the Asset Group were greater than the carrying value of the Asset Group by approximately 37%. Based on the results obtained, we determined there was no impairment of Codexis' intangible assets as of December 31, 2013. |
Although our analysis indicated that the estimated future undiscounted cash flows exceeded the carrying value of the Asset Group, we performed a supplemental analysis to determine the fair value of the Core IP. In determining the fair value, we prepared cash flow forecasts over the remaining economic life of the Core IP consistent with the time period for final patent expiration from the Maxygen patent portfolio. We utilized the multi-period Excess Earnings model and obtained key financial inputs from a review of market participants, Codexis specific factors and generally accepted valuation methods. We used a discount rate of 19.5% which reflects the nature and the risk of the underlying forecast and includes other financial components. Based on these estimates, judgments and factors, we determined that the fair value of the Core IP exceeded its carrying value by 44% as of December 31, 2013. |
2014 Analysis |
The Company performed an analysis to estimate cash flows from equipment used in potential strategic transactions with respect to the Company’s CodeXyme® cellulase enzymes and CodeXol® detergent alcohol programs. Based on this analysis the Company determined there were no future cash flows and recognized a $1.8 million impairment charge, which is reflected in research and development expense. |
In the fourth quarter of 2014, we determined that there were no events or changes in circumstances which indicated that the carrying amount of our Asset Group might not be recoverable. We concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed. No impairment charges for intangible assets were recorded during the year ended December 31, 2014. |
Goodwill |
We determined that Codexis has only one operating segment and reporting unit under the criteria in ASC 280, "Segment Reporting." Accordingly, our review of goodwill impairment indicators is performed at the Codexis level. We review goodwill impairment annually in the fourth quarter of each of Codexis' fiscal years and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. |
The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit to Codexis' carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. |
We use Codexis' market capitalization as an indicator of fair value. We believe that since its reporting unit is publicly traded, the ability of a controlling stockholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of Codexis' reporting unit as a whole to exceed its market capitalization. However, we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of Codexis' common stock, but also can consider the impact of a control premium in measuring the fair value of its reporting unit. |
If we were to use an income approach, it would establish a fair value by estimating the present value of Codexis' projected future cash flows expected to be generated from its business. The discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Our discounted cash flow methodology would consider projections of financial performance for a period of several years combined with an estimated residual value. The most significant assumptions we would use in a discounted cash flow methodology are the discount rate, the residual value and expected future revenue, gross margins and operating costs, along with considering any implied control premium. |
Should Codexis' market capitalization be less than the total stockholder's equity as of our annual test date or as of any interim impairment testing date, we would also consider market comparables, recent trends in Codexis' stock price over a reasonable period and, if appropriate, use an income approach to determine whether the fair value of its reporting unit is greater than the carrying amount. |
The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities. We base our fair value estimates on assumptions we believe to be reasonable. Actual future results may differ from those estimates. |
Goodwill amounts have been recorded as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value, by applying the purchase method. Goodwill is not subject to amortization. Goodwill was tested for impairment in the fourth quarter of 2014. We concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed. Based on the results obtained, we determined there was no impairment of Codexis' goodwill as of December 31, 2014 and 2013. |
Income Taxes |
We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that will more likely than not be realized. |
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to Codexis' tax provision in a subsequent period. |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future. We have recorded a deferred tax asset in jurisdictions where ultimate realization of deferred tax assets is more likely than not to occur. |
We make estimates and judgments about Codexis' future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required. With the sale of the Hungarian subsidiary in the quarter ended March 31, 2014, the related net operating losses and other tax attributes are no longer available to Codexis. The related deferred tax assets had a full valuation allowance and, as a result, their removal did not have a material impact to the financial statements. |
We account for uncertainty in income taxes as required by the provisions of ASC Topic 740, "Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating Codexis' tax positions and tax benefits, which may require periodic adjustments and may not accurately anticipate actual outcomes. |
The Tax Reform Act of 1986 and similar state provisions limit the use of net operating loss carryforwards in certain situations where equity transactions result in a change of ownership as defined by Internal Revenue Code Section 382. In the event Codexis should experience such a change of ownership, utilization of Codexis' federal and state net operating loss carryforwards could be limited. |
We maintain a full valuation allowance against net deferred tax assets as we believe that it is more likely than not that the majority of deferred tax assets will not be realized. |
Recently Issued and Adopted Accounting Guidance |
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption. |
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers". This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The main principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 provides companies with two implementation methods: (i) apply the standard retrospectively to each prior reporting period presented (full retrospective application); or (ii) apply the standard retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. We are currently in the process of evaluating the impact of the pending adoption of ASU 2014-09 on Codexis' consolidated financial statements. |
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Sub Topic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern". This ASU provides guidance to an entity’s management with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by entities today in the financial statement footnotes. This ASU is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We are currently evaluating the impact of this ASU on our consolidated financial statements and footnote disclosures; however, we do not expect it to have any impact. |