Codexis, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Codexis develops and sells industrial enzymes and related products for pharmaceutical, biofuel and chemical applications. Its activities include pharmaceutical product sales, research collaborations and development of cellulase enzymes and bio-based chemicals.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $31.1 million | $31.0 million |
| Product revenue | $15.2 million | $12.9 million |
| Collaborative R&D revenue | $14.6 million | $17.5 million |
| Government grants | $1.4 million | $0.6 million |
| Product gross profit / margin | $2.5 million / 17% | $1.3 million / 10% |
| Operating loss | $7.3 million | $3.4 million |
| Net loss / diluted loss per share | $7.5 million / $0.21 | $3.5 million / $0.10 |
| Operating cash flow | $0.6 million | $7.3 million |
Operating costs and expenses rose 12% to $38.4 million, including R&D expense up 19% to $16.3 million. Product gross margin improved with a shift toward higher-margin sales. Operating and net loss margins were approximately 23% and 24% of revenue, respectively, in Q1 2012.
Liquidity, debt and balance sheet
At March 31, 2012, cash and cash equivalents were $26.6 million, current marketable securities $26.7 million, and non-current marketable securities $8.9 million. Working capital was $47.5 million; current assets were $80.7 million versus current liabilities of $33.2 million. The balance sheet does not list borrowings or provide a clear debt balance. Total assets were $134.6 million, stockholders’ equity $96.3 million and accumulated deficit $192.2 million. Cash increased $0.8 million during the quarter.
Material changes, outlook and risks
- Revenue was nearly flat year over year: product sales increased 17%, offset by a 16% decline in collaborative R&D. Shell contributed $13.9 million, or 45% of revenue; the five largest customers supplied 83%.
- Management attributed lower Shell revenue to the reduction in funded collaboration staff from 128 to 116 FTEs in August 2011. The Shell collaboration is a major source of revenue and is scheduled to expire in 2012 unless extended. The filing cites October 2012 in one section and November 2012 in other sections, so the precise expiration date is unclear in the filing text.
- Management stated existing cash, cash equivalents and marketable securities were expected to fund operations, planned capital expenditures and working capital for at least 12 months. No quantified revenue or earnings guidance was provided.
- A DOE grant rate adjustment added $530,000 of Q1 revenue for costs incurred in 2010 and 2011, reducing Q1 loss per share by $0.01. The grant ends in June 2012, with approximately $0.3 million remaining available.
- The company recorded $510,000 of restructuring costs in Q1 under a plan estimated at $567,000, involving employee terminations in Hungary and the United States; remaining costs were expected to be paid by year-end.
- After quarter-end, Shell and Iogen announced they would not pursue a planned cellulosic ethanol facility in Manitoba. Codexis expected its Iogen research program to wind down over the following two months, potentially affecting North American cellulosic ethanol development.
- Key risks include customer and Shell concentration, collaboration renewal and commercialization uncertainty, continued losses, product-margin variability, reliance on contract manufacturers, and the need to retain key personnel. The company was searching for permanent CEO and CFO appointments.
- Potential contingencies include an estimated $0.6 million VAT exposure related to an intercompany intellectual-property transfer; management considered the exposure more than remote but less than likely and recorded no accrual. Operating lease commitments totaled $22.1 million. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material litigation was reported.
Important facts for investors to verify
- Whether the Shell collaboration was extended and the confirmed expiration date, given inconsistent dates in the filing.
- How revenue and cash generation develop as DOE grant revenue ends and Shell funding remains reduced.
- Whether pharmaceutical product growth and improved product margins are sustainable, considering customer and product concentration.
- Progress in replacing or supplementing the Shell/Iogen cellulosic ethanol program and obtaining formal Shell approval for work with Raízen in Brazil.
- Execution of the restructuring plan, management appointments, the VAT contingency and the approximately $22.1 million lease commitment.