Codexis Inc (CDXS) 2012 Q2 法說會逐字稿

Welcome to Codexis' Second Quarter of 2012 Earnings Conference Call. This call is being webcast live on the investor of section of Codexis' website at Condexis.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' website.

I would like to turn the call over to Mr. Doug Sheehy, Codexis' General Counsel. You have the floor, sir.

Thank you, and good afternoon. Today after the market close, we announced our fiscal second quarter 2012 financial results. The press release is available on the investor's page on our website at Condexis.com. With me today is John Nicols, our President and Chief Executive Officer, and Mark Ho, Interim Controller and Senior Director of Accounting at Codexis.

During the course of today's call, management will make a number of forward-looking statements. This forward-looking statements include our 2012 forecast for revenue, adjusted EBITDA, total cash burn and total pharmaceutical product sales, our ability to advance out position in pharmaceuticals and to deliver against opportunities in fuels and chemicals, including development timelines for our CodeXol Detergent Alcohol project, out ability to monetize our technology, our ability to develop our enzyme package for second generation ethanol, our ability to obtain to market our enzymes in the biofuels field to parties other than Shell, our expectation that Shell will notify us of a reduction in funding of FTEs under our collaboration with Shell effective September 1, 2012, and discontinued FTE funding after October 31, 2012 and our expected cost reduction measures.

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 10-Q filed with the Securities and Exchange Commission today, August 9, 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 statement, 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 deprecation, 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 would like to introduce John Nicols.

Thank you for joining our second quarter 2012 results conference call and good afternoon. To begin, let me start by saying how excited I am to be here with you for my first quarterly earnings call as leader of this great company, Codexis.

As you all know I recently joined after a 22-year career with Albemarle Corporation, one of the world's most successful specialty chemical companies with roughly $3 billion in annual revenue.

At Albemarle I held several leadership roles, each one driving significant sustained value creation and, importantly, those successes were delivered with business models as well as in markets that are highly applicable to building shareholder value here at Codexis.

In my most recent role as head of Albemarle's Catalyst division, a $1 billion-plus business with a large majority of its sales serving existing and emerging global energy markets, the hallmarks of growth were successful market penetration of multiple new innovative catalysts, the establishment of new global manufacturing beachheads and partnerships and the near doubling of profit margins through value based pricing and operational cost efficiencies.

In my prior role as head of Albemarle's Fine Chemicals division, I lead a strategic redirection of that portfolio that turned around prior profit declines. Key to that turn around success was intensifying focus and building up capabilities to serve the highly competitive needs of pharmaceutical and other fine chemical industry clients. I think you can see that these are highly relevant experiences to apply there at Codexis.

When Codexis' Board of Directors approached me for the CEO position earlier this year, I was once again drawn to the opportunity to create value at a dramatic scale. My ensuing due diligence uncovered a number of near term challenges confronting the Company, but it also uncovered a best-in-class platform in directed evolution and established competitively advantaged pharmaceutical products and services business, real step-out commercial potentials to serve emerging fuels and chemicals markets, and a healthy debt free balance sheet.

I saw an opportunity to lead an R&D focused company into a new phase of commercial execution, and impart an efficient profit driven culture throughout the organization. Codexis presents me with the opportunity to deliver substantial long-term value creation, and that prospect ignites my primary passions and modifications.

Since starting here in mid-June, I have been delighted by the embrace of the Company's employees and key partner base in my efforts to gain deeper insights into the Company's situation and prospects. At this point the big picture is clear.

First, 2012 will be an important transition year for Codexis. We are in the midst of that transformation and as we conclude 2012 a new vibrant and redirected Codexis will clearly emerge to you.

Second, we must and will clarify our vision and mileposts of success in, A, driving profit growth in our pharmaceutical products and services business, and, B, the commercialization of future revenues and profits in the fuels and chemicals markets leveraging our unique technology platform.

Before getting into the key points in more detail, I would like Mark Ho, our Interim Controller to present the highlights of our second quarter financial results to you. Mark?

Thanks, John, for the second quarter 2012, we reported total revenues of $22.9 million, which compares unfavorably to the $26.1 million in total revenues for the same quarter last year.

The $3.1 million decline from the prior year quarter is due to the following three items. First, our collaborative R&D revenue from Shell was down $1 million versus the prior year quarter, due to Shell's 2011 funding reduction under our collaborative R&D agreement. As a reminder, in August, 2011, Shell reduced its funding commitments from 128 full time employee equivalents, or FTEs, to our current level of 116 FTEs.

Second, collaborative R&D revenue from non-Shell sources was down about $600,000 versus the second quarter of 2011. The decline was primarily due to the discontinuation of our carbon capture program with Alstom, effective November 2011. This decline was partially offset by a one time milestone payment we earned from one of our pharmaceutical customers related to FDA approval of the use of our enzymes in the manufacture of a leading pharmaceutical product.

Third, our product revenue was down by $1.6 million or 19% versus second quarter of 2011. As you are aware quarter-to-quarter deviations in our product revenue are not unusual with our Pharmaceuticals business.

In the second quarter our results were also affected by the six-month generic exclusivity period for Atorvastatin. Many of our customers were stocked up in anticipation of this event, paused manufacturing activity due to gauge demand and manage inventory amidst the industry-wide Atorvastatin launch. We do not anticipate a significant impact from Atorvastatin inventory reductions in the second half of 2012.

Turning to margins. Product gross margins in the second quarter of 14% compared to 15% in the prior year quarter. The 1% reduction in gross margin was due to a higher percentage of sales for generic products in the second quarter of 2012. Total gross profit from products in the second quarter was $1 million, down from $1.3 million in the prior year quarter.

Turning to operating expenses, our total expenses for the quarter was $22.4 million, down 7% versus the prior year quarter. The change was driven by a 27% decrease in SG&E expense in the second quarter. This decrease to $6.8 million from $9.3 million in the prior year quarter was due to reductions in headcount and reductions in other discretionary expenses that were taken early in the second quarter of 2012.

R&D expense was $15.7 million, up $0.7 million or 5% from the second quarter 2011. The increase was primarily due to headcount additions in the second half of 2011 for the development of CodeXol Detergent Alcohol.

Sequential reductions in total operating expenses of 13% for the second quarter of 2012 compared to the first quarter were deliberate, largely sustainable, and helped to improve our sequential quarterly net income result by $3.3 million.

Finishing the consolidated statement of operations, net losses for the quarter were $5.5 million or a loss of $0.15 per share, slightly unfavorable with compared with the loss of $0.14 per share for the same quarter of last year. For adjusted EBITDA, our second quarter loss was $0.4 million, compared to a gain of $0.1 million in the prior year quarter. The change is primarily due to reduced collaborative R&D revenue and product gross profits, partially offset by reductions in overall operating expenses.

We ended the quarter with cash, cash equivalents and marketable securities of $57.4 million, compared to $62.2 million on March 31, 2012. Capital expenditures were $0.4 million in the quarter.

Now, let me turn the call back to John.

Thanks, Mark. Overall financial results for the first half of 2012 find us below our expectations. Furthermore, given the recently announced exclusive negotiation agreement we entered into with Shell, we are expecting and area planning for Shell to deliver notice of a reduction in funding under our collaborative agreement by 48 FTEs, effective September 1, 2012.

In addition, although we have not received any formal notice from Shell, we do not currently expect continued Shell FTE funding after October 31, 2012.

In pharmaceutical products, we are revising our forecast to account for a shift in timing of orders for certain unpatented products. As a result we now forecast total product sales in line with last years result of $49 million. In light of these factors, we now forecast a decline in overall 2012 revenue versus our prior outlook of meeting or exceeding our 2011 revenues of $124 million.

Given the new lower revenue expectations we are finalizing our plans to reduce our operating expenses. We will provide further information on these cost reduction measures when they become necessary to implement. These forward realities and our necessary responses form the basis for my opening remarks referring to 2012 as a year of important transition for Codexis.

At this point, I am confident to put forward the following remarks about the Company on the other side of this transition. First, the raw innovative capacity of this company will surely remain intact, despite expected smaller headcount. Shrinking will liberate efficiencies, and those resulting productivity enhancements are an integral part of the cost reduction planning process we are under taking.

Second, the financial impact of the revenue and cost reduction changes will be aligned to ensure that the resulting cash burn, post-transition, will remain in the single digit millions per year.

Finally, we expect significant one-time cash out lays to effect the transition. We intend to book these one-time costs as a special item in the quarter this year in which these costs are accounted for. These costs details are still being refined.

Excluding this anticipated special item our end balance of cash, cash equivalents, and marketable securities will be approximately $50 million. As a reminder our cash, cash equivalents, and marketable securities balance at the end of fiscal 2011 was $63.8 million.

Turning to our guidance for adjusted EBITDA, we are now forecasting a loss for fiscal 2012. While these transition items remain the priority focus for executive management at Codexis in the short run, the growth of our pharma project pipeline and the commercialization of our technology and fuels and chemicals continue to advance. I will close out the formal part of the call with key highlights in each of these areas.

Let me start with CodeXyme cellulase enzymes for fuels and our efforts to develop and market competitively advantaged performing cellulase enzymes for the hydrolysis of cellulosic biomass to sugars. At present our ability to address the fuels market is limited by our partners Shell and Raizen. One of the key milestones to building long-term value of CodeXyme is to expand our market rights beyond these 2 companies, and here we are encouraged.

As we announced recently, we have entered into exclusive good faith negotiations with Shell through September 1, 2012 with the expectation that we will gain the right to market our CodeXyme cellulase enzymes to third parties worldwide.

This negotiation with Shell excludes Brazil where we are currently in discussion with Raizen regarding potential co-development and commercialization of CodeXyme cellulase enzymes for future second-generation ethanol facilities in that country.

Outside Brazil we are encouraged to team up with other second-generation partners once our discussions with Shell are finalized. We continue to make improvements to our proprietary cellulase enzyme products, and we remain confident that we can ultimately launch the world's most effective cellulase enzymes.

Switching to CodeXol Detergent Alcohols, our development and commercialization efforts continue to progress. Our strain development efforts are proving successful and we are on tract to finalize an early commercial strain by Q4 of this year. We also made progress with our partner Chemtex on our 1,500 liter integrated demonstration scale facility in Rivalta, Italy. Construction is underway, and we expect start up in the first half of 2013.

Switching to pharmaceuticals. We notched off several notable milestones during this second quarter. In May, we extended our collaboration with Merck to 2015 for the development of enzymes in use in pharmaceuticals manufacturing. This collaboration dates back to 2007 and counts enzymes to manufacture Januvia amongst its successes.

We look forward to developing more enzymes with Merck that enable novel and cost advantage manufacturing pharmaceutical processes, and we are confident the collaboration will continue to add more promising product candidates to our already robust pipeline.

In the second quarter we also announced that we were granted a key patent covering intermediates for Hepatitis C therapeutics. In addition, we received our third Presidential Green Chemistry Award, this one for the development of a novel enzymatic process to manufacture Simvastatin, one of the worlds leading cholesterol-lowering drugs.

Even through 2012 was set up to be a relatively flat year for us in pharma, we continue to be encouraged by the quality and growth of our pharma products and services pipeline and its prospects to drive revenue growth into the future. With confidence in driving that pipeline we can increasingly focus on growing product to profit margins in parallel. We plan to provide more visibility on the pharma pipeline and greater detail on margins in upcoming conference calls.

In closing reflecting on my first 2 months as President and CEO of Codexis it has been an extremely dynamic and exciting start. I am very glad to be here. There is significant work to be done, but I am confident that Codexis will build substantial long-term value for its shareholders and I look forward to being a key part of that.

Thank you for your attention. Now, I would like to ask the Operator to open the line for questions.

(Operator Instructions)

Your first question comes from the line of Edward Westlake with Credit Suisse. Please proceed.

Hello, John, welcome aboard.

Thank you.

Just, I guess, a quick question. The pharma revenue, you say it is lumpy, but so far it has been relatively steady and the margins have changed with the mix. You talk about an exciting pipeline going forward, but maybe just give us some comfort around what happened in the quarter and why that might not happen again.

Yes, sure, Ed, thanks. Pharma -- overall we are looking at pharma revenues this year to be flat with that of last year. I think prior outlook would have had us having growth in the pharma revenues for 2012. So really the two explanations for the flatness this year are explained in the second quarter results partially by the 6-month exclusivity expiration on Atorvastatin creating a little bit of a down draft in the second quarter for our generics business.

And secondarily, in the out look going forward into the second half we now see some of the on patent revenues slipping into 2013. So those are the two primary explanations for short term. And, again, as I kind of elaborated to some extent on the opening remarks we are feeling good about the outlook beyond the second half of 2012.

Our pipeline, the number of companies that we are working with to apply our enzymes technology is growing. We have a larger list of customers that we are currently working with than we have had any time in the recent past, so that is a sign of encouragement.

More and more companies in the pharmaceutical space are seeing opportunities to apply the enzyme technology and further some of the key products that have been more recently launched. For example, the Hep-C products and Sitagliptin are set up for some good year-on-year growth and revenues next year versus 2012.

So hopefully that gave you some deeper color on the pharmaceutical revenue situation.

Thank you that is helpful. And then coming to the managing the adjustments that obviously have to come. Is it possible to give us a range of R&D spend, say just in pharmaceuticals and maybe for CodeXol? Just so we can get some idea of how deep the R&D budget could temporarily be curtailed while other revenue sources are building up.

Yes, let me give you an answer, I am not sure its going to directly answer but I think it will give you a feel for what we are thinking about cost reductions, Ed.

At first it starts with what we have now made very clear our expectations for revenue forward from Shell. And as we have made explicitly clear we do not expect reductions in FTEs for the month of September and October, including months of the contact that we have had with Shell and our current belief and expectation is that starting November 1, 2012, revenues directly from Shell will cease.

Today we have 116 FTEs in our R&D directly against the Shell program. Admittedly, we make some margin off of those FTEs so we are going to make reductions in cost, in account reductions beyond that 116 if we are going to live up to the work that we put very clearly forward to you guys (inaudible) and operate once we are done with this transition at the [single] digit millions cash burn rate, ultimately.

So those set the mile posts for how we are going to structure the P&L and it makes it very clear what we need to do in terms of how much costs need to be reduced given those revenue realities starting in November and given the goal of a modest cash burn as we have outlined.

So there is going to be a substantial R&D remaining, of course, it is substantially less than we currently have on our P&L, today. The trick there is to make that R&D as productive as possible, the remaining R&D and to make sure we can continue the acceleration in the pharmaceutical business that we have enjoyed over the last few years and that we expect for next year.

So we are going to basically put the R&D in place to ensure that we continued to grow the top line in gross profit of the pharma business. And we will have additional R&D remaining to continue fuel and chemicals. And we believe we can continue to drive a key R&D program milestone development at R&D that will remain.

So, hopefully, that will give you a sense and maybe indirectly answered the question that you asked, Ed.

And I guess at this point, although, you are going to give us a little bit more detail the pharma pipeline plus your initial thoughts on the reduction R&D helps you get down to that single digit burn and some confidence factor there.

Yes, obviously, in that analysis where calculating what we believe a contributions from the pharma will be, pharma business will be, we are going to be looking extremely hard not only at R&D headcount, but also the G&A side of our side of our cost spend operations.

You know all things equal, you know we are going to be growing the long-term value of this company primarily leveraging R&D and our enzyme and microorganism technology platform. So we are going to preferentially look to keep this much money in R&D as we can coming out of this transition to enable the best long term value creation growth coming out 2012 and 2013.

Thank you.

You are welcome.

Our next question comes from the line of Ben Kallo of Robert W. Baird. Please proceed.

Thanks. Welcome aboard, John.

Thank you.

Can you talk a little bit about the relationship with JV down in Brazil -- how it is progressing if there has been a stand still since there ahs been some changes and obviously you joining, your conversations with them? And also on the chemical side too -- have things been pushed out because of the changes at Codexis? I will stop there.

Okay, good. Yes, Raizen is Codexis' largest shareholder. They have one of there very top executives sitting on the Board. He and I have worked very closely together, even before I joined the Company. Actually, the conversations and the energies between Codexis and Raizen have accelerated up to my arrival and through the first two months of my being on the job.

So I am encouraged by how the conversations are advancing. It is a little early to forecast to put a specific milestone expectation in place with these guys, but it is a primary goal for Codexis to deliver an excellent ongoing partnership with Raizen as a primary commercialization of pathway for CodeXyme cellulase enzyme. So it is actually been a very encouraging partnership advancement over the last several months with Raizen in Brazil.

On Chemicals I will speak directly to CodeXol. There has been shift since there has been changes in management. CodeXol project continues to encourage us as I outlined at a high level in my opening remarks. The pilot plant progress is approved by the Board and is being constructed now. The partnership efforts with Chemtex are very solid. The real key for us is going to be to ink up a commercialization partner, somebody who is willing to license this technology and to invest in a real operating plant to produce detergent alcohols based on our technology, and that is obviously a high priority activity for Codexis.

Could you talk a bit about -- I think it is something that we struggle with, the visibility on the pharma side of the business. Could you talk about your internal visibility now that you have been sitting in the chair for a little bit?

Yes, internal visibility is definitely a place you would rather be. We are going to provide more visibility for you guys. At least provide you with traditional metrics of how many projects we have in the pipeline, where they sit in terms of stage of development with pharmaceuticals, how that is tracked over time. That is the kind of metrics that, you know when I used to run a pharmaceutical serves business at another company, that is the kind of metrics we worked hard to provide.

We have all that data here, actually I am very encouraged by the way Codexis runs the pharmaceuticals products and services business. It is, frankly, every bit as sophisticated in terms of the development of R&D the access to customers as I was used to at the great company of Albemarle. So, I am real happy with it. So, I think we are really going to be very proud to put forward our views in more detail and give you guys a better handle on the pharmaceutical prospects here at Codexis.

I am just begging for a little bit of time and we will have that for you, certainly, for our next call and beyond.

Great. And, finally, could you just give us an update on the CFO search and I'll just back in queue. Thanks.

Good. CFO search is progressing well. We have hired months ago a leading recruiting company to help us in that. They have provided us with many good candidates. We have short-listed the set of candidates down to a very few who are in second and third round interviews. I am quite hopeful and actually planning for having a CFO on our next call for the third quarter, hopefully significantly sooner.

Our next question comes from the line of Weston Twigg with Pacific Crest Securities: Please proceed.

Hello, thanks for taking my question. Actually, just a couple of quick questions. The first one is you mentioned you expect to get rights to sell CodeXyme outside of Shell. I was just wondering how quickly you expect that you would be able to generate revenue with that product and at what scale.

Okay good. Well first we really can't engage in serious discussions with anybody until we earn these rights from Shell. And as we have made clear both in the prior release and in this call we are in these exclusive good faith negotiations with Shell that should expire this month.

So on the basis of the expectations that we earn those rights from Shell by the end of September -- I'm sorry, by the end of August or September 1, 2012, we are going to be immediately able to step into real negotiations with the multiple other parties who would have, clearly, an interest in our CodeXyme technology and we would be seeking to advance those conversations to real deal making conversations that we would hope we could disclose end of this year, early next year if things go well.

From there it is a matter of getting installed, probably getting installed in later stage facility build outs than the host of build outs that have already been announced in the industry for second generation ethanol. It is maybe possible we could get an announcement that says we get installed in some of these already announced capacities but that seems pretty optimistic.

So you know, Wes, the time line for the build outs of the existing now second-generation ethanol plants, so I would say that realistically a build out for revenue for us outside of Shell and outside of Raizen is a 2015 kind of timeframe. Maybe 2016.

Okay and is there any possibility to displace enzyme companies that are already engaged in the existing build out infrastructure?

Sure there is a prospect. Maybe I wasn't clear in my answer. There is some opportunity we would certainly target that. But reality says that they would have had to line up their enzyme partners as part of their confidence to announce and so we will target those and we will work toward those but I think it is probably a low probability expectation that we could displace who they are already working with.

All right. Good. And then, just to clarify -- shell funding after FTE funding drops off after November, does that mean milestone payments and tech access fee also goes away? It seems like it would.

Yes that is correct, Wes.

Okay. And so, you will be left with really no collaborative R&D except on the pharma side and the pharma revenue?

Today that is what we have. So without Shell unless we find some additional collaborative R&D revenue opportunities, which frankly we are working on, then you would be correct.

Okay. And, any government grant recognition or left? Or has that all been recognized? I think there was some Singapore, I am just trying to remember in my notes here, but is there anything left on the grant side.

There is, we are expecting a modest payment from the Singapore EDB grant, sometime in Q3.

Okay. Perfect.

Okay thanks.

Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Thanks for taking my question guys. In retrospect do you think that Shell's decision earlier in the year to withdraw its collaboration with Iogen was a precursor or a warning signal of sorts in terms of ending the FTEs with you?

You know I can't speak for Shell. When Shell obviously had been working with Iogen on how they were going to proceed beyond their historical relationship and you know the result. During that period of time we were still managing multiple options with Shell about our path forwards with Shell. Over the last several months, especially, certainly since the last call Shell's intentions have been come clearer and clearer to Codexis.

Okay, understood. And then, following the conclusion, if in fact it happens, the FTEs, would you be open to a looser collaboration with Shell that would not contain any exclusivity, but perhaps would offer some benefits to you guys?

We certainly we would but our primary energy has been focused on a partnership with Shell's joint venture in Brazil, Raizen. And I see the prospects there being of greater probability and have taken the majority of our attentions as we work with Shell and its affiliates.

Okay, appreciate it guys.

Sure.

Our next question comes from the line of Michael Klein of Sidoti and Company. Please proceed.

Hello, good afternoon. So with the demo plant being built with Chemtex in Italy, how quickly can this come online and how long do you think it will take before you have samples in potential partners hands?

Good. We are in the early stages of construction, we expect start up in the first half. We would in parallel continue to develop our strain to get it as advanced as it can be by the time we start up the Rivalta 1,500 liter plant. So we would start up, we would operate for some period of time, we would line it out somewhere in the middle of the year. And we would be putting product in peoples hands -- the data on productivity in commercial partners hands at that point.

Yes, we are looking at midyear. It is a matter of how long it takes us to line out the facility and to demonstrate, and how much time and effort we put in to not only hit spec but also to hit productivity targets that all commercial partners are going to be interested as well.

Sure, understood. With the types of partners that you are talking to right now is it likely to be one partner or several partners. Just to get the ball rolling for the first commercial plant?

I think for the first commercial plant we are likely to hit one company but our prospects hit across multiple companies so it could be that we roll out with a more diverse set of potential operators. If we have a great commercialization plan with one we may focus on that one for some period of time. So, it is really kind of early to say. So, I think both options are available and could transpire for us.

Okay. And can you just talk about the conversation with Raizen over Gen 1 ethanol?

Yes, Gen 1 ethanol has been a program area for the Company in the recent past. I took a look at where the group was with this advancement, I got directly engaged with the executive leadership at Raizen. The Gen 1 program really as we consider focus and limited resource didn't stack up in terms of prospect for Codexis and/or Raizen in terms of really focusing on Gen 2, so we are kind of parking our efforts in Gen 1 for the time being and really focusing the discussions on Generation 2 ethanol technology.

Okay. And last question. On the collaborative R&D you get from pharma can you just quantify just how much that is roughly?

Just to be clear is this for Q2 or are you talking about the projections for the rest of the year?

On an annual basis, just trying to look at with the revenue, what is going to be the revenue mix going forward assuming Shell FTE funding is out.

It is going to be in the single digit millions on an annual basis.

Okay. That is all I have.

Okay. Thanks, Michael.

(Operator Instructions)

Up next we have Mike Ritzenthaler with Piper Jaffray. Please proceed.

Good afternoon, guys.

Hello, Mike.

Just a quick couple questions here. If Shell does decide to pull out in October as you sort have been planning for and structuring for, will there still be milestone payments due for work done prior to termination?

Yes there will. And we are finalizing that kind of important detail as we have this call.

Okay. And then -- let's see -- is the pilot plant that you are constructing with your partner Chemtex, is that going to be permitted for sales? And have all the proper permits and things like that in place to do sales or is it just for sampling to your customers?

Well, it is really for development and for demonstrating the technology and refining the technology. And it is very small in terms of its scale, so I don't think it would be economic to run the plant for some product. Probably the OpEx would exceed the revenue you could generate. So, I think we are just going to utilize that facility to continue to refine our technology offering and our license package to commercialization partners.

Okay. And then this is something that hasn't come up too often. I guess, I had quite a few more questions prepared on the pharma side, but it sounds like you kind of want us to hold off on that. On the waterside is there -- are you continuing R&D efforts on those types of fronts or is that all taking a back burner until you get the other thing straight?

Yes -- no direct comments on water, Mike. Kind of go back to the way I answered Ed's question. We are rightsizing our R&D, we are focusing on pharma for sure. The remainder of R&D capacity is going to be directed efficiently at the best portfolio from there. There could be some prospect that the water opportunities would stack up but we are still, as you have heard, encouraged in fuels and CodeXol. So, I would say it is unlikely that it would take much of our R&D capacity in the near term.

Okay. Thanks guys.

Good, thank you.

At this time I would like to turn the presentation back over to Mr. John Nicols for closing remarks.

Okay, folks, well, thank you very much, I really appreciate the energy and questions, and I look forward to follow-ons with you and for future conference calls. Appreciate it very much. Thank you.

Ladies and gentlemen this does conclude today's presentation. Thank you once again for your participation, you may now disconnect. Have a great day.