Codexis, Inc. Q1 2011 Financial Summary
Business Context and Reporting Period
This summary covers the quarterly period ended March 31, 2011. Codexis, Inc. is a developer of proprietary biocatalysts used in pharmaceutical manufacturing and advanced biofuels. The company operates primarily through collaborative research and development (R&D) agreements, product sales, and government grants. As of March 31, 2011, the company had an accumulated deficit of $171.6 million and does not expect to achieve profitability prior to at least 2012.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $31.0 million | $25.7 million |
| Net Loss | $(3.5) million | $(1.4) million |
| Loss Per Share (Basic & Diluted) | $(0.10) | $(0.50) |
| Operating Cash Flow | $7.3 million | $(12.0) million |
| Cash and Cash Equivalents | $53.2 million | $29.2 million |
| Working Capital | $51.9 million | $64.7 million |
| Product Gross Margin | 10% | 17% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 21% year-over-year, driven primarily by a 106% increase in product revenues ($12.9M vs $6.3M) due to higher sales to Merck and generic pharmaceutical customers.
- Collaborative Revenue Shift: Related party collaborative R&D revenue (primarily from Shell) decreased 8% to $14.8M, largely due to the absence of a $1.4M milestone payment recognized in Q1 2010. Non-related collaborative R&D revenue increased 303% to $2.7M.
- Government Grants: Revenue from government grants declined 77% to $0.6M, following a $2.7M grant recognition in the prior year.
- Expense Increases: Cost of product revenues rose 123% to $11.7M, outpacing revenue growth and compressing product gross margins from 17% to 10% due to a shift toward lower-margin product sales. R&D expenses increased 6% to $13.8M, and SG&A expenses increased 5% to $9.0M.
- Cash Flow Improvement: Operating cash flow turned positive at $7.3M, compared to a $12.0M outflow in the prior year, aided by changes in working capital and non-cash adjustments (stock-based compensation of $2.3M).
Outlook, Risks, and Management Commentary
- Profitability Outlook: Management does not expect to achieve profitability on an annual basis prior to at least 2012 due to continued heavy investment in R&D and infrastructure.
- Shell Collaboration: The company remains heavily dependent on its collaboration with Shell for biofuels development. Shell accounted for 48% of total revenue in Q1 2011. Shell retains the right to reduce funded Full-Time Equivalents (FTEs), which could materially impact future revenues.
- Customer Concentration: The top five customers accounted for 85% of total revenue. The company relies on a limited number of contract manufacturers for biocatalyst production.
- Capital Resources: The company holds $53.2 million in cash and cash equivalents and $28.8 million in marketable securities. Management believes these resources are sufficient for at least the next 12 months.
- Lease Commitments: In March 2011, the company entered into a lease amendment extending its Redwood City facility lease through 2020, with future minimum payments totaling $24.1 million.
Investor Verification Checklist
- Verify the sustainability of the 106% increase in product revenue and the reasons for the decline in product gross margins to 10%.
- Assess the stability of the Shell collaboration, specifically the risk of FTE reductions and the timeline for biofuel commercialization.
- Review the concentration risk associated with the top five customers representing 85% of revenue.
- Monitor the company's burn rate and cash runway given the expectation of continued losses through 2012.
- Confirm the status of government grants and the likelihood of future funding given the 77% decline in this revenue stream.