Codexis Inc (CDXS) 2012 Q1 法說會逐字稿

Good afternoon and welcome to Codexis First Quarter of 2012 Earnings Conference Call. This call is being webcast live on the investor section of Codexis's website at codexis.com. This call is property of Codexis and any recording, reproduction or transmission of this call without the express written consent of Codexis is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the investor section of Codexis's website. At this time, I would now like to turn the call over to Doug Sheehy, Codexis Senior Vice President and General Counsel. Sir, you may proceed.

Thank you and good afternoon. Today after the market closed, we announced our fiscal first quarter 2012 financial results. The press release is available on the investor's page on our website at Codexis.com. With me today are Peter Strumph, our Interim President and Chief Executive Officer and Brian Dowd, our Interim Chief Financial Officer.

During the course of today's call, management will make a number of forward looking statements. These forward looking statements include our projected full year 2012 revenue, adjusted EBITDA and cash burn, the ability of our technology platform to meet our customer's changing needs. The ability of our CodeXyme cellulose enzymes to enable cost advantaged conversion of biomass to sugars, the initiation of pilot scale production of CodeXol and the delivery of kilogram sized samples of CodeXol to customers this year.

The timeline for the completion of a CodeXol demonstration facility and the ability of this facility to generate data that will enable the design, financing and construction of a commercial facility for CodeXol. The timeline for the construction of and the first commercial production from a commercial scale CodeXol facility, expected growth in our pharmaceutical product sales and gross profits, the timeline for first commercial deployment of our first generation ethanol theology in Brazil and our ability in 2012 to produce larger volumes of CodeXyme cellulose enzymes and to sample customers.

These forward looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ significantly from those projected. Given these risks and uncertainties, you should not place undue reliance on these forward looking statements.

Please refer to our form 10Q filed with the securities and exchange commission today, May 10, 2012 for some of the important risk factors that could cause actual results to differ materially from the forward looking statements made on this call. Except as required by law, we disclaim any obligation to publicly update or revise any forward looking statements to reflect events or circumstances that occur after this call.

During today's call, we will discuss certain non GAAP financial measures for comparison purposes only. The non GAAP amount of adjusted EBITDA is calculated by adding depreciation, amortization, net interest expense, income taxes, warrant related costs and stock compensation to our net loss. This non GAAP measure is in addition to, not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Please refer to our press release today for a reconciliation of non GAAP financial measures to GAAP. Now, I'll introduce Peter to discuss the quarter.

Good afternoon and thank you for joining us. On today's conference call we will review in detail our first quarter financial results, provide an overview of our business strategy and reaffirm our annual guidance. But first, I'd like to discuss my view of Codexis business portfolio at our execution strategy. Shortly after I took the CEO position in February, it became clear to me that three assets continue to be our core value drivers, our CodeXyme cellulose enzyme, our bio based chemicals pipeline with CodeXol detergent alcohol as being our first go to market opportunity and our established and growing pharmaceutical business.

As many of you know, I joined Codexis two years ago to run the pharmaceutical business and I've had the privilege of leading that business through a period of robust growth. I've seen firsthand how Codexis's ability to rapidly version products. That is to tailor and improve product performance for specific customers and projects creates a value in the pharmaceuticals market. I believe this capability is unique, best in class and difficult to replicate. It is the basis of our competitive strength in pharmaceuticals and I believe it will be the basis of our competitive advantage in the bio based fuels and chemicals markets.

Codexis's partnership driven strategy for CodeXyme cellulose enzymes and CodeXol detergent alcohol allows us to leverage our unique strengths. Similar to the software industry today, the cellulose enzyme market will involve continuous improvement in enzyme performance over time. This puts us in a strong competitive position. Our code evolver directed evolution technology enables us to meet our customer's changing needs rapidly and effectively. Our goal is to market CodeXyme as the world's most valuable cellulose enzyme package enabling cost advantage conversion of biomass to sugars for the production of bio based fuels and chemicals worldwide.

We believe our partnerships in fuels and chemicals continue to be our key to long term success in both fields. In fuels we are focused on delivering the best performing CodeXyme cellulose enzymes and ethanol producing yeast to our partner Shell and we are in ongoing discussions regarding the nature of our collaborative work beyond 2012. I will address our discussions with Shell in greater detail later in the call. We have consistently demonstrated an ability to meet exacting product specifications in our pharmaceuticals business.

This capability will be key to our success in creating drop in bio based chemicals for existing markets. Our most advanced project in bio based chemicals is CodeXol detergent alcohol, which we are developing in collaboration with Chemtex. In this collaboration, Codexis is providing optimized CodeXyme cellulase enzymes, the CodeXol detergent alcohol producing micro organism and process expertise. While Chemtex is providing their world class pre treatment system and engineering capabilities.

The goal of this collaboration is to develop a fully integrated (technical difficulty) cellulosic feed stocks to drop in CodeXol to address the existing $4 billion detergent alcohol market. We recently commenced pilot scale CodeXol operations in our 650 liter fermerter in Redwood City. This facility will generate our first kilogram sized samples which will provide -- which we will provide to potential customers this year. We are also in advanced discussions with Chemtex on the design and operation of a 1,500 liter integrated demonstration facility in Italy.

Both we and Chemtex believe this facility will mark the final scale of step enabling the design, financing and construction of a commercial production facility in 2014, capable of starting commercial production as early as 2015.

Our pharmaceuticals business continues to deliver valuable enzymes, intermediates and services to customers with the most exacting specifications. To this end, the FDA recently approved a new process codeveloped by Codexis for the manufacture of sitagliptin, the active pharmaceutical ingredient in Merck's type two diabetes drug Januvia.

We were also pleased to announce the publication of the peer reviewed article on the development of our enzyme route for Merck's hepatitis C drug Boceprevir in the Journal of the American Chemical Society. With our growing portfolio of commercial and development products we expect continued growth in Codexis pharmaceutical product sales, pharmaceutical collaborative R&D revenue and gross profits for the foreseeable future.

Lastly, in the first quarter we strengthened our patent portfolio with the issuance of a key patent related to the CodeXyme cellulase enzymes. This patent covers variance of beta glucosidase, an essential component of our CodeXyme Cellulase enzyme package. This adds to our already strong IP portfolio including numerous patents covering our pharmaceutical products and our proprietary code of all of our technology platform. Before I turn to our strategic objectives in 2012, I'll hand the call over to Brian Dowd to discuss our first quarter financial results. Brian?

Thank you, Peter. I will start by going over first quarter results, and then I will provide our outlook for the full fiscal year of 2012. Revenue for the first quarter was $31.1 million, in line with the first quarter of 2011. Sales of pharmaceutical products were $15.2 million for the quarter, up 17% over the prior year quarter. Growth in the quarter was primarily driven by increased demand for atorvastatin related products. Pharmaceutical product gross margins were 17% in the quarter, up 7 points from the prior year quarter due to a shift in innovator sales toward higher margin products.

Revenue from collaborative R&D was $14.6 million in the first quarter, down $2.9 million or 16% from the prior year quarter. The year over year reduction in collaborative R&D revenue was driven primarily by the termination of our carbon capture program with Alstom in the fourth quarter of 2011 and by the mid 2011 reduction in FTE funding under our current collaborative agreement with Shell.

Turning to operating expenses, our total expense for the quarter was $25.7 million, up $3 million versus the prior year quarter. R&D expense was $16.3 million, a 19% increase over the prior year quarter primarily due to our continued development of CodeXol detergent alcohol. SG&A expense was $9.4 million, a 4% increase compared to the prior year quarter.

For adjusted EBITDA, our first quarter loss was $3.1 million compared to a gain of $1.8 million in the prior year quarter. The change is primarily due to reduced collaborative R&D revenue and increased R&D spending, related to CodeXol.

We ended the quarter with cash, cash equivalents and marketable securities of $62.2 million, compared to $63.8 million on December 31, 2011. Capital expenditures were $2.1 million, driven primarily by improvements in our R&D facilities and purchases of lab equipment.

Now, let me turn to our outlook for 2012. Recall that our guidance policy is to give annual guidance which we will update each quarter. For the full year, 2012, we are reaffirming our prior guidance. We continue to expect revenue in line with -- or exceeding our 2011 results, positive adjusted EBITDA and cash burn levels similar to 2011. With that, I will turn the call back to Peter.

Thank you, Brian. I would like now to provide an update on our business development efforts and key strategic initiatives for 2012. As you are aware, Shell and Iogen recently announced a significant reduction in staff at Iogen Energy and cancellation of the planned Manitoba Cellulosic Ethanol facility. We are working with Shell to determine the effect of this announcement will have on our ongoing collaborative efforts.

She has reaffirmed its commitment to advanced biofuels, providing a foundation for our continued collaborative development of cellulosic ethanol. We are in ongoing discussions with Shell regarding our potential collaboration after October 31st. Elements of our discussion include the level of FTE funding for our continued collaboration in cellulase enzyme development and our ability to market CodeXyme cellulase enzymes to biofuels customers beyond Shell and its affiliates.

In addition, we have initiative discussions with [Hyacin], our largest shareholder and the world's largest producer of ethanol from sugarcane on potential use of our CodeXyme cellulase enzyme and yeast for the production of second generation ethanol from sugarcane [begose] tops and leaves in Brazil.

Meanwhile, our work with CodeXyme cellulase product development continues to show significant progress. We have initiated activities with contract manufacturing organizations to secure access to larger scale CodeXyme manufacturing capacity. This capacity will enable us to supply demonstration scale and early commercial quantities of CodeXyme cellulase to our bio based chemicals customers.

We are planning for larger scale CodeXyme production in the second half of 2012 with these CMOs. We continue to make significant strides in our CodeXol detergent alcohol program. We believe we now have the tailored mix of C12 and C14 molecules to meet drop in product requirements. We expect to provide kilogram scale samples from our 650 liter fermenter in Redwood City to several potential customers this year.

We are also in advanced discussions on the construction of a demonstration facility at a Chemtex owned site in Italy with planned start up in the first half of 2013. We anticipate data from this integrated facility will enable us to attract industry leading partners for the financing design and construction of a commercial plan. With this timeline, construction of 40,000 to 60,000 ton commercial plan could start as early as 2014 with commercial production beginning as early as 2015.

In Brazil we are collaborating with our partner Hyacin on the development of a cost advantage process for first generation ethanol. We continue to make progress with the development of our enhanced year and we are currently in discussions with Hyacin on commercial payment terms. We anticipate commercial deployment of this technology in 2014.

We expect strong pharmaceuticals product sales growth in 2012 on increased demand for a number of our products. These include atorvastatin intermediates, hepatitis C therapy intermediates and enzymes for Januvia. Our pipeline of pharmaceutical development projects is growing and our products and services have been used in process development by over 50 pharmaceutical customers worldwide.

We are very enthused about Codexis's future. We continue to grow existing product sales and we are executing a strategy to unlock the tremendous value of our CodeXyme cellulase enzymes and CodeXol detergent alcohols. We believe our biological expertise is best complimented by partners who bring the capital and operational know how to execute on commercialization. To this end, we have placed renewed emphasis on partnerships and CMO relationships that can enable capital efficient manufacturing. We believe the rewards for Codexis, our shareholders, and our partners will be significant. We look forward to updating you throughout the year on our progress. Now, I'd like to ask the operator to open the line for questions.

(Operator instructions)

And our first question comes from the line of Patrick Jobin with Credit Suisse. You may proceed.

Hi, good afternoon and glad to see the 2012 outlook is intact.

Thank you Patrick.

So, Peter, on the R&D investment plans, could you maybe walk us through maybe kind of current outlook for -- or maybe by headcount between CodeXyme, CodeXol and pharma?

Sure, so for pharma, we have probably 30 FTEs engaged in R&D and then a number of FTEs engaged on operational and delivery and manufacturing activities. We have in CodeXyme, we have approximately 100 people on the enzyme development and if you add yeast development in there, it gets up to approximately 120. And then that's the funded portion by Shell, which is at present 116. We have additional resources dedicated to enzyme development that were specifically working on towards bio based chemicals and that's probably 30 and then we have approximately 40 people engaged in CodeXol R&D.

Great, and then it sounds like you're making great progress with CodeXol with the 650 liter pilot being completed today and samples on track for this year. I guess, are there any milestones that need to be met to kind of start construction of that 1500 liter facility you mentioned, or anything that we should be looking out for?

Well, what we are doing prior to getting into that 1500 liter facility is we are continuing to work on the biology. So, as I described in my prepared remarks, we have the C1214 chain length at sort of drop in levels. And so where the microorganism is producing the product we desire to have it produce and a product that meets drop in requirements of our customer. So we are on that never ending now development effort that is to improve the production performance metrics associated with that microorganism.

As we move into next year's demonstration facility, we hope to have a microorganism that pencils to with commercial enabling production performance characteristics. But really, we have next year to get there as we're working in the demonstration facility.

And as I mention the demonstration facility, it think it's an opportunity for me to specifically define what we mean by demonstration facility. I know that a lot of companies in the industry throw around different terms and they have different meanings. So for us, what it means is a couple very clear things. One is that it's a fully integrated facility. So, we're not just talking about dropping a fermenter somewhere and bringing in sugar from someplace else and doing the DSP someplace else. This is fully integrated from feedstock, pulling it off the fields, the biomass off the fields, processing it, turning into sugar, putting it into the fermenter, doing the downstream processing and ending up with a product that could be sold to customers, all from collocated unit operations.

The other thing that we mean -- the other element of what we mean when we say demonstration facility is we intend that data from this facility will be the data set that enables design construction and financing for a commercial facility. So that's the effort that we're embarking on in terms of preparations for it this year, later in the year we should be -- we anticipate starting construction and we anticipate having that demonstration facility online next year.

Great, thanks Peter.

Our next question comes from the line of Weston Twigg of Pacific Crest Securities. You may proceed.

Hi, yes. This is one is probably a harder one to answer, but I'm wondering if there's a way you can get us -- help us feel more comfortable with the potential opportunity for CodeXyme given the uncertainty around Shell moving forward, or maybe you can make us feel more comfortable with what the Shell outcome might look like in 2013 and beyond?

Let me just provide the information I know and you can figure out whether it makes you feel more comfortable. So the opportunity with Shell and continuation of funding has some uncertainty associated with it. If I believe it's the same uncertainty now as has existed over the last several weeks and months. I would very much like to have those discussions behind us, but we don't.

The fact of the matter is is that I think with the recent Iogen announcement it actually potentially creates an opportunity for us, and this is what I mean by that, our view at Codexis is that the players in the new sugar economy wouldn't be the players that were defined by legacy partnerships, they will be the entities that provide the very best technology in their respective areas and where we provide our technology is in the very specific area of enzymes.

And we think we make the world's best enzymes and to be now be able to have our enzyme package evaluated by our partner Shell and not have to be linked to what I would call an esoteric feedstock [weed straw], it's not going to be the dominant feedstock in the new sugar economy and tied to specifically the Iogen pretreatment, which is a fine pretreatment, but in the years that we've been collaborating with Shell, there are other pretreatment technologies that have developed. So to have us -- to have Shell be able to make the assessment independent of those other integrated elements of just our enzyme technology I think sets us up better for our ongoing discussions with Shell.

I'd also -- in terms of those discussions with Shell, there is some uncertainty there, so while we are engaging with Shell and I'm comforted by the good level of engagement that we do have with Shell at all levels in the organization. To get to the answer that we all want to get to.

While we're doing that, at Codexis, are also preparing contingency plans. Preparing plans for various outcomes of those discussions so that at the time that those discussions reach conclusion and we announce them to the world, we will also have plans in place and not be caught flat footed, and the objectives of those -- of that planning process is really two fold. One is to prioritize our research programs so that we can focus our resources on the projects that create the most value for shareholders and the second very important objective is to create plans that are balance sheet sparing, so that we don't erode our balance sheet. So, that's what we're doing while we are engaged in those discussions with Shell.

Okay, and good, that's helpful. And just on a related note, you mentioned I think in the earlier part of yet discussion that you are in fact working on gen two technology with Hyacin. Does that mean then you have approval from Shell now to move forward with potentially the cellulosic solution with Hyacin.

Yes, so we have initiated discussions with Hyacin about how our technology could be used to help them meet frankly one of their strategic objectives. And so Hyacin was a -- the formation of Hyacin was a 2011 event. It was a very large joint venture, $12 billion joint venture, as you know, and they worked through essentially in 2011 the integration of [Cocon] and Shell assets to create Hyacin.

Recently, in 2012, Hyacin identified as one of their strategic objectives how they regard technology and they -- it was stated quite clearly to me that they regard technology as an opportunity to get more productivity out of their fixed assets and they regard their fixed assets as both their landholdings that produce the biomass as well as their fixed asset plants. Their ethanol facilities and our first gen and second gen technology play perfectly and are lined up with that strategic objective for Hyacin. So we have initiated discussions with Hyacin on second gen. We're well underway with first gen and Shell is aware of all of these discussion that are ongoing.

Okay, and then just to bring it full circle then, is there also -- is one possible outcome that Shell would lean on Hyacin to take over the cellulosic ethanol development program and sort of then use Hyacin as their ethanol program source I guess?

I suppose that is possible. It's clearly one of the scenarios that we're thinking through is as this collaboration moves forward, who's writing the checks to us, Shell or Hyacin, I suppose we're indifferent to there's a lot of -- it makes a lot of sense to have a second generation ethanol program that is taking advantage of the Brazilian geography versus the Canadian geography.

Okay, very helpful. Thanks a lot.

The next question comes from the line of Michael Klein with Sidoti and Company. You may proceed.

Hi, Michael.

I think he may have disconnected, sir.

Okay. We can take the next question operator.

Okay, our next question comes from the line of [Pavel Machinov]. You may proceed.

Thanks very much, guys. Just wanted to clarify the sequencing on two things and both of these kind of going back to the analyst's day in December, the gen one deployment with Hyacin, I think it was at the [Bonseam] mill is that - has that happened at a pilot level in 2012 or second half of the year?

Hi, Vel. So it's Peter. So you have two questions. You want to just get them out and then I can fire off my answers.

Okay, that was the first one and the second one is the trajectory for commercializing CodeXol, is it still demo in 2013 and commercialization -- or first commercial sales in 2014?

So, yes. I'll take those in order. Thank you, Pavel. So with regards to gen one with Hyacin, we are in discussions with them right now to finalize commercial terms for what will be a two year project. We have been reviewing project plans, we had several projects that we were considering and we've identified one high priority project that makes sense with regards to our technology against their requirements. And I would expect to commence that project this year and pilot next year and then commercial deployment in 2014.

When we do pilot, I'm not sure that we actually will pilot in the Bonseam mill, as we've been developing and refining our plans, the actual development plans for this project, we have realized that there might not be a requirement to pilot in the Bonseam mill, there are various options from going into pilot scale to going right into some unutilized commercial scale fermenters. So the exact piloting sequence is still TBD and as I said, that's a two year project so commercialization in '14.

All right. Appreciate it guys.

So, with regards to your CodeXol question, the sequence is that we will -- are working on biology this year and later in the year anticipate beginning construction on that pilot facility with Chemtex. Now that pilot facility we're building is not -- I described as a fully integrated facility. The portion that we're building is the portion downstream of the sugar that Chemtex is supplying. So Chemtex is doing the -- they have access to the bio mass and they're doing the processing and the pretreatment and the purification to create the sugar stream.

We're of course working on -- with them on that creation of the sugar stream with our enzymes, but then, once we get the sugar stream, what we are building on their facility is a fermentation and downstream processing. And so that build will -- we anticipate will happen this year and construction to be completed next year for operation of that -- integrated demonstration facility in 2013.

As I said, we expect and we're working towards creating a data set from that integrated demonstration facility that will enable design construction, financing of a commercial facility and if we start building that in 2014 with a year and a half -- two year construction build, we think that we could be commercial as soon as 2015.

Okay, understood. Appreciate the color on all that.

(Operator Instructions)

Our next question comes from the line of Mike Ritzenthaler with Piper Jaffray. You may proceed.

Good afternoon, guys.

Hi, Mike.

I'm wondering if you could reflect a little bit more on the Shell hedge and development. Is it -- so it sort of leaves Codexis, like you had said in your prepared comments and I think in response to an earlier question, it leaves you free to work with other process technologies. How easy is that to layer in to the existing agreements you have with Shell and maybe that you're working on with Hyacin? Do you - can you work with Chemtex there kind of as you wish or I guess how many stamps of approval are needed before another pretreatment process can be selected for your -- for the biofuels piece?

Great question. So while we were working with Iogen and Shell for a historical collaboration, the agreement was always between Codexis and Shell and we take direction from Shell on what pretreatments, what feed stocks, what geographies they would like to deploy our research efforts against and so there's nothing in the agreement as its currently structured that causes any interference towards working with different feed stocks, pretreatments or geographies. So the work we've done to date is very fungible towards different feedstock and pretreatment combinations.

So, as we are working with Shell to define the exact targets for our continued collaboration we are discovering and being able to utilize the technology that we've developed against different targets, and in fact, we started working with Chemtex for -- with their pretreatment about a year ago and the objective of that collaboration was specifically for enzymes and converting biomass into a sugar stream to be used with bio based chemicals. But that work also gives us confidence that the work we've been doing on the Iogen platform is very fungible on these other pretreatment modalities.

Okay, so just to kind of summarize that, I guess. You're sort of free to work with whomever you think ahs the best pretreatment technology obviously right now you think that's Chemtex. And so on the biofuel side, that collaboration could be extended without too much added red tape, I guess.

Yes, I would agree with that assessment.

Okay, and then just a couple questions on the pharma side, that seems to be just a key piece of the business over the next couple of years as some of the other catalysts align in the biofuels and chemicals part. So on the boceprevir with Merck, is this something that will take a couple of years for the FDA approval of that process, similar to the sitagliptin process and I guess secondly, around the campus, understand sort of the market opportunities for the drugs within Codexis i.e. if all the boceprevir is made with Codexis's process what -- just kind of give us a sense for what the revenue pools could look like.

So, just to be clear, we have been working with the hepatitis C franchise now for several years and it's the sitagliptin which is the new piece of commercial activity for us by their recent approval. So it just so happens that sitagliptin was a process that required specific FDA approval, because it was using our enzymes in the panels that manufacturing stuff. Within the GMP envelope. Our other processes to date have not had that requirement. So we have en free to introduce -- our sponsors have been free to introduce our technology without seeking prior FDA approval. So the sitagliptin was the first instance where that was a milestone and so there hasn't been a similar restriction for our other products. So we've been off and running with our other products now without having to wait for FDA approval.

With regards to giving you some color on the various individual drugs that we have participated in with sponsors, I actually think sort of the way I like to represent the pharma business is more of a portfolio business where we have built a business from $21 million to $35 million to $54 million over the last several years and we are doing that with a portfolio of current commercial projects, as well as a growing portfolio of our -- of development and pipeline activities within that pharma practice. So I don't want to speak to sort of the prospects of any one product, but rather direct you to how the portfolio concept is working and hopefully over time the way that will manifest itself is in continued growth in our pharma business and maybe a smoothing of the lumpiness as we move forward and the portfolio starts to take effect.

Okay, that all makes sense, thanks for that. And then finally, on the mix of generic to innovator, you had provided some color on the mix of innovator had gone up in the quarter, that helped gross margins. Can you provide what the mix was this quarter and if now, maybe you could just kind of compare it to previous quarters on a relative basis.

We're not providing that comparison, so within the innovator side, we did have a nice mix of some of our more profitable innovator products in the last quarter.

On the generic side, we also saw continued growth of our generic franchise, which is essentially -- I'll step away from the portfolio perspective here because the generics business is mostly to supply statins and mostly to -- or intermediates for statins and mostly to provide intermediates for atorvastatin. So, as you know, atorvastatin recently went generic in the US and there has been -- we have seen an increase in demand for that intermediate. But it's one of our lower gross margin intermediates. So it adds nicely to revenues, but it creates a mathematical challenge to increase the overall gross margin when that piece of the business is increasing.

All right, guys. Thanks very much.

Our next question comes from the line of Chris Kovacs with Robert Baird. You may proceed.

Hi, thanks for taking my question. Before you guys kind of went down the CodeXol path, you kind of give us some preliminary estimates in terms of the economics around the plants. As you get closer to -- now I know you're still [involved with] the work with Hyacin, but on the gen one ethanol, do you have any color at this point on what potential economics could be or how that compares to gen two for your guys.

Well, gen one, I guess a couple things to say, first of all the gen one opportunity is not as big as the gen two opportunity, so it is not one of our main core three assets that I indicated, however it's a great place where our technology can create some value relatively quickly. I would expect that the economics are not going to be substantial. We're not providing guidance on it right now.

And then the third point to remember with regards to our gen one work with Hyacin is it has a great deal of strategic value for us because it gets us working with Hyacin, and it also shows Hyacin how our technology can help them achieve their goal of increasing productivity through their fixed assets.

Okay, thank you for that color. And then you guys have any update on the CFO and the CEO searches there?

I do not have an update, I guess what has -- what is updated is that we are -- a little bit of time has passed, but you know when you step back really not that much time. It's been less than three months since I've take over the position of the interim CEO and I think any thoughtful process to review candidates and identify the very best person to create shareholder value in the CEO chair will take a while. So the board is engaged. They have a process that they've been working on. I know that they're making progress, but this is exactly the type of thing that is -- I would not want to make predictions on specific timing other than to tell you that it's being worked on by a very engaged board, which is all very good.

Sort of following that, there will be no decision or movement on the CEO -- excuse me the CFO position until the CEO position is filled.

Okay, thank you very much.

(Operator Instructions)

And our next question comes from the line of Michael Klein with Sidoti and Company. You may proceed.

Hey, guys, sorry about that before.

Welcome back, Michael.

I apologize if some of these have been asked already. Have you always been able to communicate with Hyacin on gen two opportunities or had you previously only been in talks with Shell?

That's a bit of a nuanced question. So, I mean we have a Hyacin member on our board and we have discussions with Hyacin face to face over the phone, we've been talking to Hyacin for some time, so you know it's - we haven't had a bright line around the ability to talk about how our technology works in second generation.

What I think has recently changed is that those discussion where we become aware of their strategic interests, we become aware of the problems where our technology could -- that our technology could help solve and they become aware of our technology. All those have been going on for as long as Hyacin has been in existence. What has changed is that now we're talking about specific projects, specific ways in which our technology could be deployed and these discussions are now more formal. Let's move towards defining a project rather than let's understand each other's capabilities and problems.

Sure. Understood. Okay. And in regards to I guess the change with Iogen and if Shell was to go with a different pretreatment technology, would that delay at all the timeline of commercialization or would your technology be able to sync up relatively quickly?

We believe our technology will sync up in good concordance with how the market will be developing. So, the market right now for second generation is one that I think is at a very transformative period of time. If you look back several years, no one was building demonstration facilities because when you penciled out the economics the economics didn't work.

Just recently that penciling out exercise has resulted in an answer that says that the economics work, and so demonstration facilities are being built to demonstrate that that is in fact the case. Subsequent to that experiment being run and if its -- if those experiments are successful and those are extensive experiments. But if they are successful, commercial scale facilities will start getting built.

So when you sort of lay that out on a timeline, I don't see commercial scale second gen ethanol facilities being built much before 2015 as these half doesn't demonstration plants yield successful results and that turns into the design construction of commercial facilities so Shell at this point transitioning from one -- transitioning away from or reducing their commitment to one pretreatment technology to considering other pretreatment technologies to get to cellulosic ethanol I don't think introduces any delays in the development timeline.

Okay, great. And lastly, are you still comfortable with the balance sheet? Obviously you are for 2012, but as we look out further towards the 2014, 2015 timeline, are you still comfortable with the balance sheet strength now?

Well, more is better, so I could always be made more comfortable. But we -- working with what we have, the way in which we're getting comfort around our balance sheet is knowing that we have plans to respond to various scenarios that would not waste that precious balance sheet resource so we can respond quickly to sort of whatever these -- however these discussions end up, we'll have a plan in place to execute with the idea of balance sheet preservation being one of the main objectives. So I'm comforted by the idea that we are aware of the number we have and we have plans to preserve it as much as possible and we're being very thoughtful about how we deploy our resources.

Okay, great. Thanks so much.

And we have no further questions at this time. I would now like to turn the presentation back over to Peter Strumph for any closing remarks.

Our closing remarks are simply thanking everyone for their participation on the call and I look forward to updating you again soon.

Ladies and gentlemen, that concludes today's conference, thank you so much for your participation. You may now disconnect, have a great day.