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Verenium Corporation (NASDAQ:VRNM)

Q1 2010 Earnings Call Transcript

May 10, 2010 5:00 pm ET

Executives

Kelly Lindenboom – VP, Corporate Communications

Carlos Riva – President & CEO

Jamie Levine – EVP and CFO

Analysts

Sarah Martin – Lazard Capital Markets

Pamela Bassett – Cantor Fitzgerald

Amanda Sigouin – Jefferies

Paul Resnik – Olympia Capital Markets

Operator

Welcome to Verenium's first quarter 2010 financial results conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at the company's request.

At this time, I would like to introduce your host for today's call, Kelly Lindenboom. Please go ahead.

Kelly Lindenboom

Thank you for joining Verenium's first quarter 2010 conference call. I'm Kelly Lindenboom, Vice President, Corporate Communications. With me today are Carlos Riva, Verenium’s President and CEO; and Jamie Levine, our Chief Financial Officer.

The agenda for today's call is as follows

First, Carlos will review business highlights and the accomplishments in the first quarter, then Jamie will summarize our financial results for the first quarter of 2010 and provide an update on select corporate activities and then we wish to open the call up for your questions.

Before we begin, I would like to advise you that this discussion will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. These statements involve a high degree of risk and uncertainty and relates to matters such as our strategy, future operating plans, markets for our products, partnering, collaboration activities, public policy, financing activities, technical and business outlook.

Such statements are only predictions, and actual events or results may differ materially from these projected in such forward-looking statements. Factors that could cause or contribute to differences include, but are not limited to, risks related to our IP partners, competitors; and, regulatory and market forces. Certain of these factors and others are more fully described in our filings with the SEC, including, but not limited to our report on Form 10-Q for the quarter-ended March 31st, 2010.

I will now turn the call over to Carlos.

Carlos Riva

Thanks, Kelly. Good afternoon, everyone, and thank you for joining us on today's call. The first quarter has proven to be another productive quarter. And overall, we’ve had a strong start to the year in both our Biofuels and Specialty Enzymes business units.

Let me begin by discussing some of the more recent highlights from our Biofuels business. As we announced on April 1st, we extended our Galaxy joint development agreement with our partner, BP, rather than allowing the agreement to expire or continue to further extend on a month-to-month basis, we and BP collectively decided to extend the original terms of the agreement for an additional four months or until July 31st 2010.

During this period, or until another agreement is negotiated, BP and Verenium continue with ongoing joint development work to accelerate the development and commercialization of our cellulosic ethanol process.

As part of this agreement, Verenium will continue to receive $2.5 million per month from BP to co-fund activities at our San Diego Research Labs at our demonstration scale facility.

In addition, we entered into a related agreement with BP to which BP will provide a loan to Galaxy Biofuels, the special purpose entity that are jointly owned by Verenium and BP for the cost of certain activities to be agreed upon and conducted by Verenium at our demonstration plant.

Lastly, on the Biofuels front, we continue to make significant progress with the optimization process at the demonstration plant in Jennings. As previously mentioned, we’ve been running various campaigns to systematically evaluate the different stages of our process.

I’m happy to report that we’ve been continually increasing our mechanical operability and reliability of the plan, which is a direct result of the learning and know-how came through this important phase.

In addition, we’ve been able to run the process in an iterative manner between our pilot scale facility in San Diego and our demo facility in Jennings under varied condition to gain better understanding and insight into the optimal operating conditions.

Importantly, as we’ve continued to see advances to our process technology we’ve also seen key improvements in enzyme production and effectiveness, which are critical components and areas of continued research.

I now like to comment on our Specialty Enzyme business and recap its accomplishments since the beginning of the year. I’m happy to report that total product revenues for the first quarter of 2010 were up nearly 10% on a year-over-year basis and we continue to see signs of recovery within our core target enzyme markets which have been hampered by last year’s global economic recession.

Jamie will go into more financial detail in a moment, but let me touch on the highlights since the beginning of the year.

First, we together with our partner Danisco saw softening in the phytase animal feed market in the first half of 2009 due to the recessionary decline in consumer consumption. However, since late 2009, sales have increased as demand for poultry has begun to recover with improving economic conditions. Second, we also saw an increase in sales of our Fuelzyme and Veretase alpha amylases on a sequential basis as the corn ethanol industry rebound.

Next Purifine enzyme sales also increased in the first quarter and continue to gain strong traction with our customers in various stages of implementation. As we announced in early March, Molinos, the operator of the world's largest soybean processing plant located in Argentina, successfully completed a startup of the commercial-scale oil degumming process using Purifine. We expect that with the interest generated from Molinos’s use of Purifine, we will continue to see demand for this enzyme ramp up through 2010.

Lastly, in February, Xylathin xylanase. Xylathin is a highly active enzyme that improves the economics of processing wheat in to fuel ethanol. Verenium and its distribution partner, add food service to Add Food Service GmbH began selling Xylathin directly to wheat ethanol producers in the first quarter of 2010. The main markets for Xylathin in Europe and Canada.

Previously, we discussed our ability to take our existing enzyme products and apply them to new market opportunities. In the case of Xylathin we took an enzyme which we already sell into the pulp and paper industry, and adapted it for use in wheat processing for ethanol.

By marketing it through existing distributor relationships in Europe, we were able to commercialize Xylathin quickly and with a relatively low investment required to obtain regulatory approval. This is a successful example of the adjacency strategy for our Specialty Enzyme business that we’ve been actively exploring over the last several months and will continue focus on it.

Overall, I’m pleased with the performance of the Specialty Enzyme business in the first quarter. Our revenue mix continues to shift to a larger percentage of product revenue with an increasing contribution from our newer products, consistent with our strategy to grow a strong commercially oriented Specialty Enzyme business with the robust product portfolio.

On a final note, before I hand the call over to Jamie, I’d like to take a minute to further discuss the organizational change we recently announced. Following the departure of Greg Powers, Nelson Barton, Senior Vice President has assumed leadership of Verenium’s research and development activities.

Just a few words on Nelson, Ph.D. in Molecular and Cellular Biology. He joined the company in 2000 and has been an integral part of the R&D leadership team for the past several years. Nelson has extensive research experience in the field and is highly qualified to lead the R&D organization. I’ve every confidence that he and his team will continue to deliver the high quality work that our customers and partners have come to expect from us.

And with that, I'd now like to turn the call over to Jamie Levine, our Chief Financial Officer, to review our fourth quarter [ph] and full year 2009 [ph] financial results and other business highlights.

Jamie Levine

Thank you, Carlos. I'd like to start by reviewing the company's financial results for our first quarter of 2010 and we'll then provide an update on some of our ongoing corporate initiatives.

There are few key points I’d like to highlight in my remarks today. First, we continue to achieve commercial success with our sales of enzyme product and further transition our revenue base from contract research to product sales.

Second, in the first quarter, we saw a record for our gross margin from enzyme product sales of $5 million, making our Specialty Enzymes business an even more important source of cash contribution for the company.

Third, as Carlos mentioned, we extended our Galaxy partnership with BP, through July 31st which includes an ongoing $2.5 million per month in funding as well as the loan from BP to Galaxy to support additional agree upon activities related to the optimization of our technology at the Jennings demo plant.

Finally, regarding our cash position. We ended the first quarter with $15 million in unrestricted cash compared to the $25 million we had available at the end of 2009. This does not include the $4.9 million we received after the end of the first quarter from an extension of a grant from the Department of Energy.

With that I’ll turn to more detailed review of the numbers. I’m pleased to report another strong quarter of enzyme revenue and product gross margin performance. Our total product revenue of $11.6 million for the first quarter was up nearly 10% over the same period last year

More importantly, this was due not only to an increase Phyzyme revenues but we’ve also achieved an increase in revenues from our newer enzymes Veretase and Xylathin, which continue to gain acceptance in the green ethanol markets.

Our Fuelzyme enzyme return to revenue levels in line with the first quarter of 2009 indicating both the recovery in a core ethanol market as well as continued strong demand for this product.

In addition, we continue to see positive momentum with a soy oil processors for our Purifine enzyme for the soybean oil processing market, including the deployment of Purifine by Molinos in Argentina under the supply agreement we announced this past March.

In sum, product revenue 89% of our total revenues for the first quarter of 2010 compared to compared to 73% for the same period in 2009. Because of the variability in our reported revenue due to the revenue recognition treatment for Phyzyme. We think it’s more meaningful to focus on gross margin dollars as an indication of the net cash contribution to the company from our enzyme product sales.

During the first quarter of 2010 we saw a record total product gross margin of $5 million which is an increase from $4.4 million in the fourth quarter of 2009 and $4.8 million in the first quarter of 2009. We’re very pleased with the margin level we’ve been able to generate during the first quarter as well as the trend over the last year.

In terms of our operating expenses, we tend to look at our expenses on a non-GAAP pro forma basis after considering the impact of BP’s cost reimbursement as a better indicator of operating results than the gross expenses we report on a GAAP basis.

BP funded $7.5 million towards our expenses during the first quarter of 2010 and $7.9 million for the same period in 2009. This cost reimbursement is included below the operating expenses line in the caption entitled "Loss Attributed to Non-Controlling Interest in Consolidated Entities."

Excluding cost of product revenues and after considering the impact of BP’s cost reimbursement our non-GAAP operating expenses decreased to $17.2 million in the first quarter of 2010 from $19.1 million in the same period last year.

This decrease is primarily caused by a decrease in non-cash share-based compensation of approximately $2 million which means that our net cash based operating expenses have essentially remained flat over last year.

Due to the non-cash impact of the complex accounting related to our 8% to 9% notes, we think it’s important to understand our net loss on a non-GAAP basis. Excluding this non-cash impact, on a non-GAAP basis, our pro forma net loss was $13.4 million for the first quarter of 2010 compared to a non-GAAP pro forma net loss of $13.6 million for the same period in 2009. This is consistent with our ongoing expense management efforts and BP’s reimbursement of a portion of our costs to our Galaxy and Vercipia joint ventures.

Finally, I’d like to highlight a few items on our balance sheet. We ended our first quarter with unrestricted cash totaling $15.5 million compared to $25 million which excludes the cash we had consolidated from Vercipia as of December 31, 2009. As previously announced, we’re pleased to receive $4.9 million from the Department of Energy to fund activity performed at our demo plant as part of the optimization process.

This $4.9 million is an extension of the $10 million grant previously awarded to us in July of 2008 under the DOE’s program in support of the development to demonstration scale cellulosic ethanol by refinery plants. This will be booked as revenue and reflected in our cash for the second quarter of 2010.

With regard to the DOE’s loan guarantee program, our 50/50 joint venture company with BP, Vercipia is continuing in the process to secure loan guarantee for the financing of the construction of our first commercial scale plant in Highlands County, Florida. Overall, I’m very pleased with Verenium’s accomplishment to the first quarter.

I’ll now turn the call back to Carlos for a few closing remarks before opening the line up for questions. Carlos?

Carlos Riva

Thanks, Jamie. Thank you everyone for joining us this evening. We look forward to updating you on the company’s progress as we continue to build upon the achievements to-date in 2010.

At this point I’d like to turn it back to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Sanjay Shrestha of Lazard Capital Markets.

Sarah Martin – Lazard Capital Markets

Hi, this is Sarah Martin in for Sanjay. Can you give a sense of what BP is looking for to see it to get comfortable with a longer-term agreement?

Carlos Riva

Well, I think this time is being spent to work out the plans for continued development of the facilities in Louisiana, as well as the plan for continued research. And these are complicated arrangements and they’re taking more time than we had anticipated. That’s the situation.

Sarah Martin – Lazard Capital Markets

Okay. And can you comment at all on process economics as they stand right now?

Carlos Riva

Well, our targets that we’ve been talking about cost of ethanol remain our targets and those really haven’t changed. Again, a lot of complicating or complex factors, but what we’re looking to do is to validate those in the research between the demo plant and the pilot plant.

Sarah Martin – Lazard Capital Markets

Okay, thank you.

Carlos Riva

Thanks, Sarah.

Operator

Our next question comes from Pamela Bassett of Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Hi, everyone. Thanks for taking my questions. Can you give us some more details on the campaign runs at the Jennings plant and when you talk about mechanical operability, what does that entail? Are you talking about improvements in mechanical operability?

Carlos Riva

Let me start with the first part. The way we organize the R&D efforts is between Louisiana demo plant and San Diego, is that, we call a campaign at Jennings, would clearly are operating under a set of process conditions of feedstock, temperature, pressure, concentrations of nutrients, the whole raft of different variables. And what we’re able to do then is to take the output of that and take the samples to San Diego, where we’re able to run up to 30 different fermentations of smaller levels and using that interplay between the pilot plant and Jennings, we’re able to characterize the process much more effectively than if we had to do all of those at full scale of the demo plant.

And so, what we’re really trying to do is understand the operating profile across a variety of different conditions, much more effectively. So in a way, what it really represents is a way to amplify the working, or I shall say, the value, if you will, of a demonstration scale plant and understand the process a lot more. We also have the very extensive analytical capabilities in San Diego. So again, we can really much more fully understand the chemistry and biology of what’s going on in each of these various additional sets of experiments that are done for each campaign at Jennings.

In terms of the reliability, as we start to end an operability, we’ve been running the facility, we’ve learned an awful lot about, how to improve certain elements of it, ranging from how feedstock is handled in the first instance and putting to the hydrolyser, how the water treatment is done, how utilities are optimized. We learned a lot through this whole process over the last year.

And as a result of that the teams have come up with a series of recommendations from something which are very simple. The two others that are more complex to make modifications to the demo plant in order to have it be more reliable and more flexible at the time so that we can do broader ranges of experiments on it. So that’s what we refer to when we talk about improvements to the operability and reliability.

Pamela Bassett – Cantor Fitzgerald

Okay, great, thank you for that.

Carlos Riva

I’d say all of this by way of feeding into the design for the first commercial unit.

Pamela Bassett – Cantor Fitzgerald

Are these campaign runs strictly using energy cane at this point?

Carlos Riva

No, actually, we’ve done them with sorghum, most of that with energy cane, but some with the gas as well.

Pamela Bassett – Cantor Fitzgerald

Great. Will you update us on the feedstock, anything new in Florida? (inaudible)

Carlos Riva

The Florida’s main feedstock will be energy cane. We’ve considered supplementing that with sorghum and looking at other energy brasses but it’s principally above the energy cane and we have 200 acres currently under cultivation there, which we had over the last couple of years to understand the growing economics, again, which has been supportive of our process economics. We’ll be planting additional cane over the coming months to be the seed cane for developing the full plantation.

Pamela Bassett – Cantor Fitzgerald

And how is the negotiation process proceeding with DOE right now for the loan guarantee?

Jamie Levine

Right now, Vercipia, the joint venture has been (inaudible) I’m sorry, Pamela, I didn’t mean to cut you off.

Pamela Bassett – Cantor Fitzgerald

No, no, I say, I’m sorry, I meant Vercipia, sorry about that. And I apologize my phone is ringing at the same time that’s a little noise there.

Jamie Levine

No problem. So Vercipia is the applicant and Vercipia is the entity. It's in the process and as we say, the process continues. There’s really no specific update what we’ve said in the past remains true, which is from our perspective and next announceable event would be the signing of a definitive term sheet. We can’t give a forward view in terms of the overall timetable for that, but we do continue to be in discussions with the DOE over the types, structures that the DOE we’re looking for, to put in place, for a loan guarantee, in order for them to be comfortable with the overall project.

Pamela Bassett – Cantor Fitzgerald

What’s going on with DOE play into the negotiation for the joint venture term?

Jamie Levine

No, I think there’s really a connection between those two. I think overall we continue to move forward in partnership with BP, as Carlos was saying, and all the activities that we’re doing both in Jennings and San Diego, under the co-funding structure that we had in place, and that continues to begin appropriate structure for what we need to do now.

Pamela Bassett – Cantor Fitzgerald

Right. And turning to Specialty Enzymes for a minute. How many new Purifine plants do you think will come on line or I should say new plants using Purifine might we see over the balance of this year?

Carlos Riva

There’s a certain lag because there is a small capital improvement that’s made. That’s the nature of the partnership we have with all (inaudible). We’re actually can be contracted to come into make the modification, that’s something that Malinos had to do in order to be able to run the Purifine of their plant or finding as much as that is something people need to do. It’s not a hurdle in a significant way for people to adopt the enzyme. So, there’s a certain lag between the decision to move forward and the ability to start buying enzyme and using it in a process.

And so, we’re finding that there is a significant interest from some of the other large enzyme players in the area in terms of using Purifine, but at this stage, I think, it’s still too early days to really start predicting the kind of specific roll out in terms of number of plants. But we’ll take that at a time that we may look to try to provide some additional views on over time.

Pamela Bassett – Cantor Fitzgerald

Okay, great, thank you.

Jamie Levine

Thanks, Pamela.

Operator

Our next question comes from Laurence Alexander of Jefferies.

Amanda Sigouin – Jefferies

Hi, this is Amanda Sigouin on for Laurence. A question. Once the DOE does make its decision if you were to receive the funding, how do you see the time line playing out for the first commercial facility to be up and running at roughly a 70% operating rate?

Carlos Riva

I think we’re looking at about an 18 months construction schedule from the time you start digging. And I think it’s fair to say that once the funding was all secured that we would begin right away. And then at least in our program at six month period to come up the commercial production, that is for start up and debugging. It’s about 24 months.

Amanda Sigouin – Jefferies

Okay. On the enzyme side, you described the approach for the new Xylathin enzyme is something you’re focusing on more for that approach going forward. Is there any color you can give us on other products in the pipeline?

Carlos Riva

Well, I think we see an opportunity for taking our existing enzymes and seeing if they can be applied to other markets. And other markets are obviously in the Biofuels space. But also potentially in oil field chemicals, in other animal feed, so there’s a fair amount of possibility thereof taking the enzymes that already commercial and finding adjacencies.

I think the other thing to say is that we also have a very extensive inventory in library other enzymes that are not yet products, but that can be turned into commercial products by an investment in both getting the regulatory approvals and also the perfecting the manufacturing strategy and the formulation for them. This is part of a legacy of many years of doing the base research and screening through our sample libraries and isolating and identifying these specific enzymes.

Jamie Levine

And Amanda, there’s an ongoing process within our Specialty Enzymes business unit to continually look at those adjacencies, think about the regulatory hurdles that are required in order to make sure that we can market the products and then also think about the market uptake and marketing structure. So if we can put together what do we think are the right next steps and so there’s certainly is that going on very often, it’s fairly limited. As Carlos said in his comments in terms of the time and investment require to bring these to markets, so that’s an ongoing review that they do.

Amanda Sigouin – Jefferies

Thanks. And just one last one, if you could update us on an agreement announced I think in the third quarter with Value Prior to Pulping to test these five technologies?

Jamie Levine

Sure. Value Prior to Pulping, so for people’s information there was a partnership that was pulled together to look at the potential use of bolt-on technology to pulp and paper mills in order to use the heavy cellulose stream or other streams, coming out of the pulp and paper process, as an input for cellulosic ethanol process. And I think we continue to be in testing mode and in discussions with some of the partners within that initiative.

I believe the initiative itself has completed the work program that had set out for itself, but now we continue to talk to people who has seen the (inaudible) that we shared to that process and understand to see, if there’s other ways to move forward on a more bilateral basis rather than as part of the consortium. So, I think when we have any type of specific partnerships that come out of those discussions we will certainly be talking about them. But that was the intent behind joining the initiatives in the first place.

Amanda Sigouin – Jefferies

Thank you.

Jamie Levine

Thanks.

Operator

(Operator instructions) Our next question comes from Paul Resnik of Olympia Capital Markets.

Paul Resnik – Olympia Capital Markets

Good afternoon. In the fourth quarter, your R&D came in at $13.5 million and at that time you cautioned not to view that low level as something to be expected in the future. This quarter came in at $17 million. Could you give that similar kind of guidance since the $17 million kind of a higher than normal level or kind of a pace to be anticipated?

Jamie Levine

Paul, we don’t provide forward-looking guidance. What I’d say is if you look at the previous three quarters before the fourth quarter, you’re kind of starting from the first quarter of last year, it was about $17.8 million, then second quarter was $16.1 million, and the third quarter was $16.5 million. So coming in at about $17 million now, there are going to be swings with the level of activity that we have in R&D, but I think broadly, our view on the $13.5 million was that we should view that as a run rate I’d say. You can start to get a sense for the trend by looking at several quarters’ worth of data, and I think that’s all that I can really say. But we didn’t want to apply the downtick that occurred in the fourth quarter was an ongoing expectation for the level of run rate.

Paul Resnik – Olympia Capital Markets

All right, thank you.

Jamie Levine

Sure.

Operator

(Operator instructions) I’m not showing any further questions at this time. Would you like to continue with any further remarks?

Kelly Lindenboom

No, that will be all. Thank you for joining us tonight. This concludes Verenium first quarter earnings call. Have a nice evening.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now all disconnect. Everyone have a great day.

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