BioAmber, Inc. (NYSE:BIOA)
Q2 2013 Earnings Conference Call
August 12, 2013 / 4:30 p.m. ET
Mike Hartmann – Executive Vice President
Jean-Francois Huc – President and Chief Executive Officer
Andy Ashworth – Chief Financial Officer
Patrick Jobin - Credit Suisse
Good day, ladies and gentlemen, and welcome to the Second Quarter of 2013 BioAmber Inc. Earnings Conference Call. My name is Jackie and I will be your coordinator today. At this time, our participants are on a listen only mode following the prepared remarks, there will be a question and answer session. (Operator Instructions).
I will now like to turn the presentation over to Mr. Mike Hartmann, Executive Vice President. Please proceed.
Mr. Mike Hartmann
Thank you, Jackie. Good afternoon everyone and thank you for joining BioAmber’s Second Quarter 2013 Earnings Conference Call. Our current is the public company’s enter IPO on the NYSE, the Euronext on May 10th 2013. I’m Mike Hartmann, Executive Vice President of BioAmber and with me today Jean-Francois Huc or JF for short, our President and Chief Executive Officer; and Andy Ashworth, our Chief Financial Officer.
Before we get started, please be reminded that the conference call contains estimates and forward-looking statements that represent the Company’s view as of today, August 12th 2013.
BioAmber disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not base undue reliance on these forward-looking statements because they involve no – and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to page earning release and BioAmber’s filling with the SEC for information concerning factors that could cause actual results to differ materially from those expressed or employed by such statements.
In our Second Quarter Earnings Release, you’ll also find reconciliations to the most comparable Gap Financial Measures for any non-gap financial measures discussed on this call. Our Second Quarter Earnings Release is available on the Investor Relations page of our corporate website, that’s www.bio-amber.com. An audio-replanted call will also be available on the company’s website starting two hours after the end of this conference call.
JF will begin with a review of our recent highlights and progress for BioAmber. He will then turn the call over to Andy to review our plans to result for the quarter. We will then field questions and JF will wrap up the call with closing comments.
I will now turn it over the JF, CEO of BioAmber.
Thanks, Mike. I’d like to welcome everyone to BioAmber’s First Earnings Call. I’m going to share with you business highlights from the past quarter including our recent fund raising efforts, our commercial progress, the exciting results that we’re seeing from our youth technology and status of our Sarnia plant.
Our first highlight was the successful IPO on the New York Stock Exchange, which we priced on May 9th and began trading the following day. Despite the difficult environment for clean tech. companies, we were able to price the IPO and raise approximately $72 million in net proceeds.
These funds will be used to build our first commercial scale facility on Sarnia Canada. In order to complete the IPO, we structured our offering with unit. Each unit combining one share of common stock with one warrant entitling the holder to purchase one-half of a share of common stock at a price of $11.00 per share.
Now, the warrants have a four-year term, on June 10th – thirty days after the trading – these units expired in our common stock and warrant began trading separately on the NYSE.
The common stock under the symbol BIOA and the warrant under the symbol BIOA.WS. On the next day, June 11th, our common stock also listed on the professional segment of the NYSE EurOmax in Paris. Under the same symbol, inclusive as the New York Stock Exchange. BioAmber became the first U.S. based company to complete a dual-listed IPO on the New York and Euronext Stock Exchanges.
This dual listing gives European investors the opportunity to trade our common stock in Euros on a European exchange as an alternative to the NYSE. Now, our successful IPO also gave us the opportunity to advance discussions with Canadian government agencies, which could collectively provide another $25 million in low * interest and interest-free loans for the Sarnia plant.
Now, in order to grant us these loans, these lenders require that BioAmber have on hand its portion of the cash needed to build Sarnia. So, the IPO allowed us to meet this requirement, and since then, we’ve made progress with these lenders. Our goal is to finalize in the coming months $25 million in additional loans for Sarnia.
Now, we continue to estimate a capital cost of approximately $125 million for the 30,000 metric ton Sarnia plant. Taking into account the $35 million in government subsidies that we have already secured and drive down on, and, the 30% equity contribution from our joint venture partner Mitsui & Co., our cash contribution for the Sarnia plant will be approximately $45 million if we are able to secure the $25 million in additional loans or $63 million if we’re not able to secure any additional loans.
Now, given our cash on hand of $103 million at the end of the second quarter and our recent trend in monthly cash burn, * we believe we have enough cash on hand to fund the construction and start up of the Sarnia plant. We’re also pleased with the commercial progress we’ve made over the past quarter. We saw growing demand for our bio-succinic acid across the various market segments and applications that we’re targeting.
Succinic acid sales grew in the polyurethane, polyester, food and flavor, personal care, and coatings* markets. We also saw growing interest in the lubricants, plasticizers, and in applications such as salt-reduction and MSG– substitutions.
Andy, our CFO is going to cover the financials in greater detail. But, I would like to highlight that BioAmber achieved record quarterly bio succinic acid product sales of $1million. All the bio succinic acid we sold was produced in the French demonstration plant.
Now, we have brought on nine new customers since the beginning of the year. We’ve also signed agreements with several distribution partners that offer capabilities and relationships that are complementary to our in-house efforts, and that helped expand our market access.
These include Brenntag, the world’s largest chemical distributor for succinic acid sales in the Americas; and IMCD*, the world’s sixth largest chemical distributor and fourth largest in Europe for distribution in the European Coatings and (inaudible) channel.
Now, over the past quarter, we made good progress in the development of our yeast * in collaboration with Cargill from whom we have exclusively licensed the yeast technology. Having proximity to the Cargill technical teams and labs, we’re only a few miles apart – or away from our lab – we’re working closely with some on-yeast enhancement and scale up, and that has allowed us to compress our development timeline and exceed our original performance targets.
Cargill has many years of commercial experience with their yeast in the production of lactic acid. The molecular engineering, fermentation, scale up, and operating experience that Cargill has accumulated over the past ten years for lactic acid has been of tremendous value to BioAmber.
Now, we successfully operated our yeast and purification process* at large scale in the demonstration plant in Pomacle *a, France. This scale-up confirmed the superior yield and quality that we had seen with our yeast at smaller scale. Given these exciting results over the past two quarters, which far exceeded our E. coli performance, we made the decision to formally switch to the yeast.
This decision is expected to provide significant benefits for our Sarnia plant along with certain accounting consequences that Andy is going to cover in a few minutes.
During the past quarter, we also made good progress on our 1,4 BDO technology and our adipic acid development program. Together with our partner Evonic, we continued to improve the BDO catalyst we have under license from DuPont. We’re striving to bring 2,000 to 4,000 tons of bio BDO capacity online at a toll manufacturing facility by the end of 2014.
In the last quarter, we also achieved a development milestone related to the Cargill * yeast, which we have under exclusive license for adipic acid production in addition to succinic acid. Now, this adipic acid milestone triggered a payment to Cargill, and we subsequently decided to bring more of the adipic acid development work in-house leveraging our succinic acid experience with the Cargill yeast.
Given the benefits of our yeast technology, our Sarnia plant is being designed and built to accommodate our yeast and our purification process. The current performance of the yeast already exceeds Sarnia’s engineering design basis, so that the actual capacity at full production is expected to exceed nameplate capacity. Overall, the switch from the E. coli to the yeast will result in lower capital intensity, reduced sugar and energy consumption, and better start-up and operability.
This is in part because the yeast is far more robust than the bacteria and is much less susceptible to contamination particularly at the low PH’s at which we operate at.
Now, we’re also pleased with the progress that we’ve made on the Sarnia project over the past quarter. We’ve assembled a highly qualified, experienced project team to oversee the engineering, construction and start-up.
Most of the key people are locally based and have a unique combination of both large-scale project experience and knowledge of Sarnia. We have frozen the engineering design to the plant, we’ve been working on detailed engineering and have engaged various equipment vendors for the procurement of long lead-time equipment.
We’ve begun site work and are currently finalizing the selection of the firm that will oversee the construction of the plant. We’re moving ahead as planned and we are on schedule to mechanically complete the plant in the fourth quarter, 2014th.
We are actively recruiting additional staff in Sarnia to support construction, oversee the start-up and commissioning and the subsequent operation of the plant. We’re impressed with the quality of the labor pool that’s available in Sarnia. It was one of the key considerations in our site selection process, but we’re nevertheless positively surprised by the quality of the candidates available. Many of whom have brought experience in chemical or fermentation plants.
We also hope to benefit from the rich agricultural land located in and around Sarnia that has produced competitive corn prices. As of last Friday, August the 9th, local corn futures for December 2013 in the area are trading it $3.80 per bushel – which is roughly 75 basis point below the Chicago Board of Trade.
Equally important, our project continues to garner strong support from the local community, from the city, from the regional and provincial government and from the government of Canada. Our bio succinic acid plant will be first Bio-based chemicals plant in Canada and will convert local agriculture into value-added product that will be largely exported while offering a very favorable carbon footprint.
So, at this point I’d like to turn the call over to our CFO, Andy Ashworth – who’ll present our financial results for the second quarter.
Thank you, JF, and good afternoon everyone. This quarter we reported revenue of $1 million compared to $606,000 to the same period in 2012. The increase in revenue resulted from the company increasing its volumes of bio succinic sold. Gross process (decreased) to a loss of $383,000 in the three months end of June 30th 2013 from a gain of $868,000 in the same period of 2012.
The difference was due in part to a $744,000 inventory reserve reversal recorded in 2012 that increased the gross profit from $124,000 to $868,000. The difference was also due to lower than average selling prices in 2013 and in 2012 as a result of our decision to sell larger volume that lowered the prices as part of our market penetration strategy.
General administrative expenses decreased by $267,000 to $2.3 million for the three months ended June 30th 2013. As compared to $2.6 million for the three months ended June 30th 2012. The decrease was primarily due to a $343,000 decrease in payroll expenses as a result of lower headcount.
Sales and marketing expenses increased by $588,000 to $1.7 million for the three months ended June 30th 2013 as compared to $1.1 million for the three months ended June 30th 2012. Primarily due to a $315,000 increase in salaries and benefits resulting from an increase in headcount and a related $349,000 increase in stock base compensation expense – all as we expanded our development team – to continue to develop the succinic acid market and increase sales.
Research and development expenses decreased by $1 million to $4.2 million in the fiscal second quarter from $5.2 million for the same period as 2012. This was driven primarily by the decrease in research expenses due to completion of projects and a reduction in cost performed by third parties due to bringing more of our R and D in-house.
This was partially off-set by a $418,000 increase over the prior year attributable to the intensification of yeast development and scale-up work. Due to the advances in the performance of our yeast technology compared to our E. coli technology and to the successful scale up of the yeast in the large scale demonstration facility in France – we have decided to solely use the yeast technology on our plant facility in Sarnia.
As a result, we report a non-(inaudible) to charge, a base point $6 million for acid impairment to our E. coli technology – of which $7.8 million was related to the E. coli in process, research and development that is no longer applicable to the Sarnia plant. And, $834,000 was related to Sarnia construction and progress – related to E. coli technology that will no longer be used.
We also incurred a $724,000 non-cash charge for the accelerated dusting of certain employees’ stock options that resulted from the IPO. The company reported an $11.7 million non-cash gain related to changes in the fair market value that the warrant issued in our IPO.
The warrants will be re-valued in each reporting period resulting in a non-cash amount being recorded in the company’s statement of operation while the warrants remain outstanding.
For the second quarter of 2013, we reported an adjusted net loss attributable to BioAmber’s shareholders of $8.6 million or $0.57 per share as compared to a loss of $8.4 million or $0.81 per share for the quarter ended June 30th 2012.
This non-gap measure excludes the change in fair value of the warrants issued in connection with our IPO, the acceleration of the vesting of certain employee stock options resulting from the IPO and the charges related to the impairment of the E. coli. Finally, our tax position was significantly enhanced by IPO in May.
Total proceeds after expenses from the offering were $71.7 million. We also closed on a three-year $25 million term loan with Hercules Growth Technology capital at the end of the quarter. As a result of these two significant fund-raising transactions, we finished second quarter with $103 million of cash on hand.
I will now turn the call over to the operator so we can open up the call for any questions.
Ladies and gentlemen, we are ready to open the lines up for your questions.
(Operator Instructions). Please stand by for your first question.
And, your first question comes from the line of Patrick Jobin with Credit Suisse please proceed.
Patrick Jobin - Credit Suisse
Hi, good evening and welcome to the public markets.
Thank you, Patrick.
Patrick Jobin - Credit Suisse
There are a few questions from us – so, so first I want to dig into the capital position a little bit. You’ve mentioned you have a fully funded plan which we agree with , and I just want to cross the T’s and dot the I’s a bit. So, I guess there’s – two parts of my question.
So first, is it possible to maybe walk us through your cash burn outlook for the remainder of the year or how you expect operating expenses to trend? And then, the second part is that additional $25 million of government related low interest funding, just any update on the process there. Thanks.
Yes. So, Patrick I think we’ll – maybe Andy can answer the first part of that which is our burn rate and then I’ll come back to the question on the additional non-dilutive* funding for Sarnia.
Yes, if you know Patrick – we’ve addressed this as we went out public and over time and our goal has been and continues to be, and we think we’ll achieve it of staying * under $2 million a month on our cash burn.
I think we were successful with that in this last quarter. And, that is going to continue to be our goal, and this would be our normal core operating expenses. This would be exclusive of the capital that we would – would actually expend on Sarnia facility.
And, Patrick, the second part of your question with respect to additional government funds, we do have a line of sight on additional monies. We had been in discussions with certain government organizations prior to the IPO.
The IPO has simply allotted to move ahead in those negotiations. We do have a term sheet from a lending group for an additional $20 million, and we are currently negotiating that and our objective is to close that by the end of – before the end of the year.
And, we also have – we’re also continuing discussions with another group, another government group for an interest-free loan of up to $10 million. And so, what we’re hoping is to achieve $25 million or more of non-dilutive funding by the end of the year.
Patrick Jobin - Credit Suisse
Got it. Thank you for that color. So, my second question’s a bit broader, but now that you are public and Sarnia is funded, I guess has the level of interest from both potential customers or potential partners changed? I guess, thinking about the opportunities that you have in front of you, you are in a* your unique position with supply agreements that at least exceeds our forecast, but just thinking through the different partnerships that are up there or what you’re thinking about from the customer front and from the potential partnership front. Thanks.
So, right now, we have a strong partnership with Mitsui for Sarnia. We have number of customers. We will continue to strengthen our market access through distribution agreements like the ones we signed with Brenntag and IMCD.
But, our focus, in terms of partnerships right now are turning more towards our first BDO plant and to BDO off-take and also partnership in the – that will allow us to accelerate or share in the cost of our C6 platform and help us to accelerate the development of that platform.
Patrick Jobin - Credit Suisse
Got it. Thank you.
(Operator Instructions). And, you next question comes from the line of Weston Twigg with Pacific Crest Securities. Please proceed.
Hi, this is Daniel Bosch calling in for West. Thanks for taking my questions. So, I was just wondering, related to Patrick’s question, how shall we think about your capital spend on Sarnia from now to Q4 2014? Is it pretty much evenly distributed every quarter or should we expect some lumpiness?
There’ll be a – there’ll be a little bit of lumpiness, I would say. So, there’ll be some initial – related to a quick cost, maybe Andy could kind of walk you through – roughly speaking. But, since there’ll be some cost early on related to our construction partner and to ordering long lead time equipment, and then, Andy, do you want to just give a little more color around (multiple speakers)?
Yes, I mean exactly to say that point, especially in the third quarter, you know, we’ll start to see the beginning of the spending, but we’ll see that probably double in size in the fourth quarter because we’ll make a concerted effort to be – how I say it – installed and in size, you know, before the winter*.
And then the – and then, it’s just going to be a little bit lumpy depending on long lead equipment or whatever else occurs over the next two quarters – let’s say, you know, based on that. So, it’ll start a little bit slow and then be lumpy for sure, you know, in the fourth quarter versus the third quarter and probably in the first quarter of next year.
OK. Great. And then, so, related to your Hercules loan*, kind of a two part question – first, do you plan to exhaust the full $25 million to partially fund Sarnia and then, two if so, should we assume something like $2.5 million in interests going basically on an annual basis?
Yes. So, we have drawn* down on the full amount at (inaudible) and, I think that assumption for interest is correct.
OK. Great. And then, I also had a question on margins. So, kind of – you stated previously you can produce bio succinic acid ,that is cost competitive with succinic acid produced from oil of around around $35 a barrel. So, I was just wondering if you could comment on the long term margin profile you expect once Sarnia is producing at full capacity.
Well, the guidance we’ve given in the IPO is that we expected that with corn prices around $6.5 a bushel and with the average selling prices that we’re anticipating which are significantly lower than what we see today, we can generate 50% gross margin.
So, you previously mentioned in your prepared comments that corn trading around $3.80, so would that $35 a barrel be now something like $20 a barrel or…?
I don’t have it right off the top of my head, but it would definitely be closer to 20’s and 35 where exactly it would be, but I mean it does make us even more competitive with oil prices.
Okay. Great. And you also provided a little colorin your prepared comments about your partnership with Cargill. I was just wondering if -- you previously mentioned that there’s basically a 30% reduction on your variable costs using yeast instead of E. coli. So, I don’t know if there’s any updates you’d like to share around numbers related to the cost benefits of using yeast.
What we can say is that the performance we see today exceeds the design basis. In other words, we already have some built in upside in terms of capital intensity or nameplate capacity as I mentioned in my opening remarks, but also in terms of cost of goods. And, that’s related to the yields on sugar, it’s related to the simplicity of the process and the utility cost or utility consumption associated with it.
And we are continuing to make progress with the yeast. We’re far from having it tapped out in terms of the performance. So, we see over the next three to five years an opportunity to significantly further reduce the cost of our succinic acid with these incremental improvements or continuing improvements associated with the yeast.
And this is important not only for the succinic acid itself, but also because our succinic acid is the feedstock to further conversion to BDO.
So, the more we reduce the cost of our succinic acid, the more competitive our BDO cost structure will also be.
Okay. Got it. That’s all I got. I appreciate the time.
(Operator Instructions) Your next question comes from the line of Patrick Jobin with Credit Suisse, please proceed.
Patrick Jobin - Credit Suisse
Hi, sorry, just a follow-up question. On the 125 million CapEx * for Sarnia, I know during the IPO, there was a certain variance associated with that as you started to do more of the engineering work. I guess today, are you able to kind of pinpoint more closely what you think that variance might be or remind us what contingency you’ve built in?
And then related to that, on the long lead items, can you maybe walk us through, what we should be looking for the next few quarters on the long lead items and the availability? Thanks.
Sure, Patrick. So, these are good questions. So, are you work through engineering your estimate become more and more precise as you do more and more of your detailed engineering. So, we have a – I’d say – the good news is this – as we drill into more and more detailed engineering and frozen our process around the yeast, we’ve seen that the number – the CaPeX number has not changed but the – I would say the – plus or minus – has come down.
So, whereas, four months ago it would have been more around the plus or minus 20, it’s now down to a plus or minus 10. And, we’re still looking at a number of approximately 125 million. So, we’re increasing confidently about that CaPex number.
As far as the equipment goes, to get to those kinds of numbers, you have to be – you have to expect your equipment, you have to have cited out quote from your vendors and determine what – what’s your vendors can deliver.
Now, we’re in the process having selected vendors, of negotiating with them, equipment vendors and fine tuning performance guarantees around the equipment, delivery timelines. And, so, I would say that those are still underway. We’re anticipate – we do have a few longer lead time equipment, longer lead time equipment purchases. And, so, we’re in the process of nailing that all down. But, until we’ve completed all of the contracting around that key equipment, which will be in the fourth quarter, we won’t have a precise date for the delivery of all the equipment.
Patrick Jobin - Credit Suisse
OK, then, just a last question – just following up on yield. You mentioned the Sarnia reference design was, you kind of locked in, all right, but the yield performance you’re getting exceeds that reference design. I guess, at what point do you have to worry about downstream bottlenecks in processing? Or, I guess, how much up-side would there be if yeast performs like you’ve demonstrated in France. Thanks.
So, we anticipate – so, there’s two parts to that question. There’s a yield on sugar – which – as it improves, it reduces your cost of goods and it doesn’t really on the, on the nameplate capacity. But, then, you’ve got the productivity of the organism – and how much you can produce and that – in the fermentor – in terms of tighter and in terms of time stakes, which does have an impact on how much succinic is actually being produced in the fermentor. And, to your point, if you don’t have sufficient downstream, it becomes a bottleneck.
I would say that the way that our equipment has been designed in our downstream has been designed – we can, we can accommodate 15 to 20 percent additional succinic acid production in the fermentor without any, any major bottlenecks.
Patrick Jobin - Credit Suisse
Got it. And then, just a real small housekeeping item I think in your prepared remarks you mentioned there was a milestone payment during the quarter. Was that expensed and what was that payment amount?
We paid Cargill $250,000 for having achieved a milestone with respect to the production of the adipic acid in the Cardio yeast. Which, as you know, we also have under exclusive license for – for the production of adipic in addition to the production of succinic acid.
We had been – we had been accruing for that payment and so, that payment has been largely expensed.
Patrick Jobin - Credit Suisse
Great. Thank you.
Ladies and gentlemen, with no further questions, I would like to turn the presentation over to Mr. JF Huc for closing remarks. You may proceed Mr. Huc.
Thank you, Jackie. So, I’d just like to take this opportunity to thank everyone at BioAmber for their hard work and commitment, including our Board of Directors and our various advisors.
On behalf of BioAmber, I also want to thank our business and financial partners – as well as our investors – for their continued support.
We have the technology, we have the people and we have the funding that’s needed to build the world’s largest bio succinic Acid plant. We believe our Sarnia plant will be the low cost producer of succinic acid and it will deploy a sustainable carbon neutral chemical production process that can positively impact climate change.
We’re very proud of what we’ve accomplished today and we’re determined to make Sarnia a success.
And, we’re excited about the long term growth prospect for our company, for succinic acid and for the green chemical industry as a whole.
I’d like to thank everyone and wish you all a good evening. And, we will be available if anybody likes to follow-up with us after the call. Thank you.
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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