Codexis, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts below are in millions of dollars, except per-share data. Codexis develops biocatalysts, sells products primarily to pharmaceutical customers, and conducts development collaborations in biofuels and other bioindustrial markets.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $33.3 | $27.1 | $90.4 | $77.3 |
| Operating loss | $(2.3) | $(2.5) | $(11.0) | $(6.8) |
| Net loss | $(2.7) | $(2.7) | $(11.3) | $(8.0) |
| Basic and diluted loss per share | $(0.08) | $(0.08) | $(0.32) | $(0.38) |
| Operating cash flow | Not separately provided | Not separately provided | $2.4 | $(16.1) |
- Revenue mix, nine months: Product revenue was $33.5 million, collaborative R&D $54.1 million, and government grants $2.8 million. Total revenue increased 17% year over year.
- Margins: Product gross margin was 18% in Q3 versus 10% a year earlier, reflecting a shift toward higher-margin innovator products. For the nine-month period, it was 14% versus 18%, as the first-half product mix leaned toward lower-margin sales.
- Cash and liquidity: At September 30, cash and cash equivalents were $30.1 million; marketable securities totaled $40.5 million, including current and non-current holdings. Working capital was $42.6 million, down from $64.7 million at year-end 2010. Management stated 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.
- Cash flow and investment: Nine-month operating cash flow was positive $2.4 million despite the net loss, with noncash expenses and working-capital movements contributing. Investing used $47.3 million, including $50.9 million of securities purchases and $7.8 million of capital expenditures; financing provided $2.5 million, primarily from option exercises. Cash declined $42.3 million, in part as funds were shifted into marketable securities.
- Debt and obligations: The GE Capital/Oxford Finance loan had been paid off; the balance sheet reports no borrowings. Current liabilities were $34.4 million. Future minimum operating lease payments were $23.8 million, including leases extending beyond 2016.
Material changes and business developments
- Q3 revenue rose 23% year over year, led by product sales (+29%), collaborative R&D (+11%) and government grants. Nine-month product sales rose 38%; collaborative R&D increased 9%, while grants declined 23%.
- Q3 operating loss narrowed slightly, but the nine-month operating loss widened by $4.2 million. Nine-month R&D and SG&A expenses rose 17% and 8%, respectively; higher R&D costs included amortization of acquired Maxygen intellectual property and increased staffing and facility expenses.
- Shell generated $47.0 million, or 52% of nine-month revenue, compared with $46.9 million, or 61%, in the prior-year period. Shell reduced funded collaboration staff from 128 to 116 effective August 2011; contractual rate increases partly offset the reduction.
- In June, Shell transferred its Codexis shareholding and board appointment right to Raízen, which became the largest shareholder. Codexis continued its Shell collaboration and entered a separate Raízen development agreement in September; there had been no material financial activity under that agreement by quarter-end.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said it intended to increase R&D investment and cautioned that interim results are not necessarily indicative of full-year results.
- Codexis continued to report losses and had an accumulated deficit of $179.4 million. Management warned that profitability is uncertain and depends on collaboration funding, product sales and successful development and commercialization.
- Customer and collaboration concentration remains significant: Shell accounted for 52% of nine-month revenue, and the top five customers accounted for 78%. The Shell agreement expires in November 2012 unless extended; Shell may reduce funded FTEs or terminate under specified terms.
- Key business risks include dependence on collaborators and a limited set of pharmaceutical products and customers; uncertain commercial viability of cellulosic biofuels and bio-based chemicals; manufacturing and supply constraints; competition, intellectual-property protection, regulation, foreign currency exposure and possible need for additional capital.
- The filing reports no current material litigation and no off-balance-sheet arrangements. A potential foreign VAT exposure of approximately $0.6 million was described as more than remote but less than likely and was not accrued. Indemnification maximums are uncapped, though no related accrual was recorded.
- Management concluded disclosure controls were effective as of September 30, 2011. The company noted its year-end Section 404 internal-control evaluation and auditor review were still pending.
Most important facts for investors to verify
- Whether Shell’s funded FTE count, collaboration term and funding remain stable, and how any further reductions affect revenue.
- Whether product growth can continue while improving nine-month product margins, and whether revenue remains concentrated among a few customers and products.
- Cash use and liquidity runway, including the distinction between cash and marketable securities, planned R&D spending, capital expenditures and lease commitments.
- Progress, funding and commercial prospects under the Raízen agreement and other bioindustrial collaborations; the filing provides no quantified commercial outlook.
- Resolution or reassessment of the unaccrued VAT exposure and completion of the year-end internal-control evaluation.