Codexis, Inc. 10-Q Summary: Quarter Ended June 30, 2012
Business Context and Reporting Period
Codexis, Inc. is a producer of custom industrial enzymes enabling sustainable processes for biofuels, chemicals, and pharmaceutical ingredients. The company utilizes its CodeEvolver directed evolution technology platform. This report covers the three and six months ended June 30, 2012. The company operates as a single reporting segment with significant international operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Revenues | $22,909 | $54,045 |
| Net Loss | $(5,519) | $(13,009) |
| Net Loss Per Share (Basic & Diluted) | $(0.15) | $(0.36) |
| Operating Cash Flow | Not provided for quarter | $(3,292) |
| Cash and Cash Equivalents | $16,693 | $16,693 |
| Working Capital | $49,188 | $49,188 |
| Accumulated Deficit | $(197,708) | $(197,708) |
Revenue Composition (Six Months 2012): Product revenues were $21.9 million (41% of total), Collaborative R&D was $30.5 million (56%), and Government awards were $1.6 million (3%).
Margins: Product gross margin was 14% for the quarter and 16% for the six-month period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 12% ($3.1 million) for the quarter and 5% ($3.0 million) for the six months compared to the same periods in 2011.
- Collaborative R&D: Revenues from Shell, the primary collaborator, decreased due to a reduction in funded Full-Time Equivalents (FTEs) from 128 to 116 in August 2011. Additionally, the termination of a carbon management collaboration with Alstom in late 2011 reduced revenue.
- Product Sales: Product revenues decreased 19% in the quarter due to lower sales of dementia and statin-family products, though they increased 3% for the six-month period.
- Operating Expenses: Selling, General, and Administrative (SG&A) expenses decreased 27% in the quarter and 12% for the six months, driven by restructuring actions and the departure of former executive officers. R&D expenses increased 5% in the quarter and 11% for the six months due to higher headcount and lab supply costs.
- Net Loss: Net loss increased to $5.5 million for the quarter and $13.0 million for the six months, compared to $5.0 million and $8.5 million in the prior year periods, respectively.
Outlook, Risks, and Management Commentary
- Shell Agreement Expiration: The collaborative research agreement with Shell expires on November 1, 2012. Management does not currently expect continued FTE funding from Shell after this date unless a new agreement is reached. An Exclusive Negotiation Agreement signed in July 2012 allows Shell to negotiate terms for Codexis to sell cellulase enzymes to third parties, but no guarantee of success exists.
- Shell FTE Reduction: Under the new negotiation agreement, Shell can reduce funded FTEs by up to 48 with one day's notice starting August 31, 2012. Management expects this reduction to occur effective September 1, 2012, which will materially impact future revenues.
- Government Awards: The U.S. Department of Energy (DOE) award under the ARPA-E Recovery Act expired on June 30, 2012. No further revenue is expected from this specific award.
- Liquidity: The company had $16.7 million in cash and $34.7 million in marketable securities as of June 30, 2012. Management believes these resources are sufficient for operations for at least the next 12 months, though additional capital may be required.
- Restructuring: A 2012 restructuring plan to reduce costs was initiated in Q1. Total estimated costs were $567,000, with $563,000 recognized by June 30, 2012. No further charges are anticipated.
- Key Risks: Dependence on Shell for a significant portion of revenue; failure to achieve profitability; reliance on a limited number of customers and contract manufacturers; and the need to secure rights/licenses from Shell to commercialize biofuels technology independently.
Investor Verification Checklist
- Verify the status of negotiations with Shell regarding the post-November 2012 collaboration and the potential reduction of 48 FTEs effective September 1, 2012.
- Confirm the timeline and financial impact of the expected Shell FTE reduction on Q3 and Q4 2012 revenue guidance.
- Assess the company's ability to replace Shell funding through new collaborations or product sales given the expiration of the DOE award.
- Review the progress of the CodeXyme cellulase enzyme commercialization and CodeXol detergent alcohol development.
- Monitor the search for a permanent Chief Financial Officer, as the company currently operates with an Interim Controller.