Codexis, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results; comparisons are with the corresponding 2010 periods. Codexis develops biocatalysts, sells products to pharmaceutical customers, and conducts research collaborations, notably with Shell in advanced biofuels.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $26.1 million | $24.5 million | $57.1 million | $50.2 million |
| Operating loss | $5.3 million | $3.3 million | $8.7 million | $4.4 million |
| Net loss | $5.0 million | $3.9 million | $8.5 million | $5.3 million |
| Net loss per share | $0.14 | $0.15 | $0.24 | $0.36 |
| Product gross margin | 15% | 28% | 12% | 23% |
- Q2 revenue grew 6%; six-month revenue grew 14%. First-half product revenue rose 45% to $21.3 million, while collaborative R&D revenue excluding related parties increased to $5.2 million from $1.5 million. Lower government grant revenue and related-party R&D revenue partly offset those gains.
- Q2 product revenue was nearly flat, but product costs increased 17%; management attributed the margin decline to a shift toward lower-margin generic sales. First-half product costs rose 66%, faster than product revenue.
- Research and development expense rose 15% in Q2 and 11% for the first half; SG&A rose 7% and 6%, respectively. Higher expenses included amortization of Maxygen intellectual property, personnel, facilities and research costs.
- Loss from operations equaled approximately 20% of Q2 revenue and 15% of first-half revenue, versus approximately 13% and 9% in the comparable 2010 periods. The lower loss per share despite higher net losses reflects a larger weighted-average share count.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $32.1 million; marketable securities totaled $40.4 million, for combined cash and securities of approximately $72.4 million. The company reported working capital of $39.9 million, down from $64.7 million at year-end, as cash was invested in marketable securities, including non-current securities.
- Operating activities used $0.3 million in the first half, versus $18.7 million in 2010. Investing activities used $42.4 million, including $38.2 million of net marketable-security purchases and $4.2 million of capital expenditures. Financing provided $2.4 million, primarily from option exercises.
- The filing states existing cash, cash equivalents and marketable securities were expected to fund operations, planned capital expenditures and working capital for at least the next 12 months, based on current plans and assumptions.
- The GE Capital loan had been paid off; the balance sheet lists no debt line item. Operating lease commitments totaled $23.5 million, including $11.0 million for 2016 and beyond. The expanded Redwood City lease runs through January 2020, with extension options.
Material developments, outlook and risks
- Shell represented 57% of Q2 revenue and 52% of first-half revenue. Shell notified Codexis in July that it would reduce funded research staff by 12, effective August 2011. The company said Shell collaboration revenue provided near-term visibility, but the contract allows further FTE reductions and Shell may terminate on notice.
- Shell transferred its equity interest and board appointment right to Raízen in June; Raízen became the largest shareholder with approximately 15.5%. The Shell research agreement itself was not transferred.
- Management expected continued losses and did not expect annual profitability before at least 2012. The filing also warns that results may fluctuate and that profitability is uncertain.
- Key risks include customer and product concentration, dependence on Shell and other collaborators, uncertain commercial-scale economics and adoption for cellulosic biofuels and bio-based chemicals, manufacturing and supply constraints, competition, intellectual-property risks, and the need for additional capital if plans or assumptions change.
- A foreign-subsidiary intellectual-property transfer could trigger an estimated $0.6 million value-added-tax payment if treated as research services; no accrual was recorded because the exposure was assessed as more than remote but less than likely. Codexis reported no material litigation and no off-balance-sheet arrangements.
- Disclosure controls were deemed effective as of June 30, 2011. Management noted it had not yet completed a Section 404 evaluation of internal control over financial reporting.
Important facts for investors to verify
- Whether Shell’s 12-FTE reduction, or subsequent changes to funding, materially affects collaboration revenue, staffing and research plans.
- Whether product mix, pricing and manufacturing costs improve after the decline in product gross margin.
- Whether cash burn, capital spending and liquidity remain consistent with management’s stated at-least-12-month funding outlook.
- Progress toward commercial adoption and revenue from biofuels, bio-based chemicals and other non-pharmaceutical markets.
- Resolution of the potential $0.6 million VAT exposure and completion of the company’s internal-control evaluation.