BioAmber's (BIOA) CEO Jean-François Huc on Q2 2014 Results - Earnings Call Transcript

Aug. 9.14 | About: BioAmber (BIOA)

BioAmber (NYSE:BIOA)

Q2 2014 Earnings Conference Call

August 07, 2014, 04:30 PM ET

Executives

Michael Hartmann - Executive Vice President

Jean-François Huc - President, Chief Executive Officer and Director

Andrew Ashworth - Chief Financial Officer

Analysts

Patrick Jobin - Credit Suisse

Weston Twigg - Pacific Crest Securities

Peter Clark - Societe Generale

Andreas Heine - Barclays

Operator

Good day, ladies and gentlemen, and welcome to BioAmber Inc. second quarter 2014 earnings conference call. My name is Joanna, and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to your host for today Mr. Mike Hartmann. Please go ahead.

Michael Hartmann

Thank you, Joanna. Good afternoon, everyone, and thank you for joining BioAmber's second quarter 2014 earnings conference call. My name is Mike Hartmann, Executive Vice President of BioAmber. And with me today are JF Huc, our Chief Executive Officer; and Andy Ashworth, our Chief Financial Officer.

I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's view as of today, August 7, 2014. BioAmber disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control.

Please refer to today's earning release and BioAmber's filing with the SEC for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

In our second quarter's earnings press release you'll find reconciliations to the most comparable GAAP financial measures for any non-GAAP financial measures discussed on this call. Our Q2 2014 earnings release is available on the Investor Relations page of our corporate website at www.bio-amber.com. An audio replay of this call will also be available on the company's website starting two hours after the end of this conference call.

I will now like to turn the call over to JF, who will provide you with the business update.

Jean-François Huc

Thanks Mike. Good afternoon, everyone, and welcome to BioAmber's second quarter earnings call. We continue to make good progress in the past quarter, building on the momentum that we had generated in Q1.

During this call I will highlight our progress, beginning with an update of the construction of our Sarnia plant and the non-diluted funding that we have secured for the plant. I'll then cover our recent succinic acid take-or-pay agreement with Vinmar, which is significantly derisk the Sarnia plant and sets out a clear roadmap for future growth. I'll touch on the equity raise, we completed after the end of the quarter; and our CFO, Andy Ashworth, will provide a summary of our second quarter financial results.

We always emphasize the budget and schedule for our Sarnia plant, which are evidently key performance measures for the company, but another equally important objective for BioAmber is safety. While we do not report safety statistics, they are of utmost importance to the company, its engineering and construction firms and the various subcontractors we employ on and off-site.

Over the past quarter, the pace of construction has picked up considerable, and we now average close to 100 workers on-site everyday. As congestion increases, so does the risk of an accident, and we're being even more vigilant in applying rigorous safety standards. I am pleased to report that to date we work close to 300 days on-site without lost time injury, nor have we had any reportable injuries.

Now, the Sarnia construction continues to advance well. The warehouse is completed, the office building is nearing completion and the process building is going up in sequences to allow the various trades to work safely and effectively on site. We have also completed the excavation of a large storm water pond.

We've completed over 85% of the detailed engineering to date. What remains today is some piping work for certain process building sequences, some electrical and instrumentation work and some equipment setting. Engineering focus is now shifting to support of our field direction efforts.

In the last call I mean mentioned that the detailed design of the plant has been broken up into 90 different engineering work packages for bid and execution. We've now issued 86 of these 90 packages, three of the remaining four packages have been sent out for bid and none are on the critical path. They include minor packages like site paving, some non-essential duct work and a few equipment setting.

We have not encountered delays with respect to the scheduled equipment deliveries, and to date 78 pieces of equipment have been delivered and another 28 are expected in the coming week. We are on track to complete construction in early 2015.

We also continue to see our cost coming in on budget. We have committed approximately 85% of the total cost for the project and we are on budget for the cumulative total of these committed costs. Our overall trend continues to show a total capital expenditure within our CAD125 million plus or minus 10% estimate.

Since our last earnings call, we have added six employees to the commissioning and startup team. We have set up classrooms in Sarnia, and are engaged in operator training on the production process, to prepare for the commissioning and startup. We've made good progress with respect to drafting our standard operating procedures for the plant, safety training, the maintenance plant and it's supporting IT system.

For the coming quarters, our focus will be on training operators on the control logic of the plant, setting up the procurement and supply chains processes that support plant operation, continue work on the maintenance plant and IT system and finalize the quality control lab procedures. We will also be setting up the ERP systems for the plant, focusing first on financial control and then on operations management. Both of these modules should be live by January 1, 2015.

In the second quarter, we secured additional non-dilutive financing for the Sarnia plant as well. We successfully concluded the CAD20 million loan agreement with the banking syndicate that was led by Export Development Canada or as we refer to them EDC, and that also included Farm Credit Canada and Comerica Bank.

The interest rate is pegged to the prime rate. It was initially 8% at the time of signing, but was subject to a 1% reduction in interest rate in the event that 50% of Sarnia's sales were under take-or-pay agreement, which is now the case.

The principal on interest on the loan are repayable over six-and-a-half years, beginning three months after the plant starts up. This loan was an important milestone for three reasons: first, it delivered on additional non-dilutive financing that we had promise at the time of our IPO.

Second, it was a commercial loan structured as project financing, in much the same way we expect project financing for our future plants to be structured. We were subjected to rigorous due diligence by a third-party engineering firm and had to pass the financial hurdles that are typical for project financing.

The experience we gained from the due diligent process, including the independent scrutiny given to our technology, plant design, economic model and commercial plant, should help us to manage future project financings effectively. And finally, this loan allowed us to establish relationships with important lending institutions that could partner in the future.

Comerica is a leading U.S. bank, while EDC is a Canadian Crown corporation that has several means at its disposal to assist manufacturing companies to produce, export and expand capacity, including financing, insurance and bonding. Cleantech is a priority for EDC and it's recently issued CAD300 million green bond as a funding vehicle for supporting clean technology projects such as ours.

Given that our next plant will be built in North America, we hope to leverage these newly forged relationships in putting together project financing. Now, just after the quarter ended, we announced an additional CAD7 million grant from Sustainable Development Technology Canada, and we refer to more commonly as SDTC.

The additional support from SDTC was the result of increased capacity for the Sarnia plant, growing from 17,000 to 30,000 tons per year in capacity, and the switch from our E. coli organism to the yeast organism that we had licensed from Cargill. SDTC is a preeminent technology assessment and funding organization in Canada, that supports clean and sustainable technologies. Obtaining additional support from SDTC was a testament for the robustness of our technology platform and the Sarnia project.

When taken on a cumulative basis BioAmber has been able to secure CAD72 million for the Sarnia project, CAD22 million in interest fee loans, CAD15.5 million in low interest loans, CAD20 million in commercial loans, and CAD14.5 million in grant. This represents 53% of the total cost of the Sarnia plant.

The leverage for BioAmber shareholders is significant. The company has secured 70% of the equity and approximately 80% of the free cash flows from the plant, in exchange for an equity contribution that amounts to 33% of the total capital cost. This is a great example of how government programs can stimulate investment in cleantech manufacturing, create jobs and recover their money.

With the strong cash flows we project from the plant once it is operating, Sarnia will be able to pay back the principal and interest owed to the various government programs over the next five to 10 years, and help also fund future growth for the company.

The take-or-pay agreement we signed with Vinmar in early July is the most significant commercial agreement that we have signed to date. And it should help transform the company over the next five to 10 years. The Vinmar deal is important for BioAmber in several respects.

First, it provides a minimum of 10,000 tons per year of guaranteed sales for Sarnia over the next 15 years. When added to the PTTMCC off-take agreement that we signed in May 2014, we now have 50% of Sarnia's initial capacity under take-or-pay during the first three years of operation and 33% of the capacity for the next 12 years.

This initial period is typically when the selling risk is greatest and this guaranteed volume will allow us to plan for a smooth production ramp. When combined with the supply agreements and MOUs previously announced, our total demand under contract significantly exceeds the initial capacity of the Sarnia plant.

The Vinmar agreement also represents an important shift in commercial strategy for our Sarnia joint venture with Mitsui. We have concluded that there are three distinct channels to the global succinic acid market and each channel requires a tailored approach. To date, our efforts have been focused on the key account channel, where customers require value beyond the sale of bio-succinic acid.

For example, they need special grades of succinic acid or derivatives of succinic acid such as salts and esters, or they require technical support, or they seek to jointly develop applications with us. These customers place value on our products and services, which often lead to value-based pricing and some from of privileged or exclusive supply. Most of the supply agreements we have singed to date have been with these types of key accounts, which BioAmber and Mitsui have been targeting together.

Next to this, there's a merchant market channel that is seeking market-based pricing for succinic acid. Customers in this segment do not differentiate succinic acid sourcing and their purchase decisions are driven by price.

They are increasingly sensitive to price of other chemicals in succinic acid that succinic acid can substitute, including adipic acid and maleic and hydride. They are not seeking value-added services, but rather economic incentives that are typically provided by large suppliers, things like favorable terms, just-in-time delivery and savings on logistics.

Vinmar International is ideally positioned to penetrate this market segment. Vinmar sells over 3 million tons of chemicals and polymers per year, has over 5,000 customers around the world and had sales of over CAD4.5 billion in 2012. With over 450 employees in 30 countries, Vinmar has the capability and the back office needed to identify customers, do credit check, handle logistics and manage invoicing and receivables on a global basis.

By allocating one-third of our Sarnia capacity to Vinmar, we will minimize the need for a back office that can manage hundreds of customers in this segment. Vinmar will pickup the succinic acid at our plant and we will have a single customer to invoice.

Vinmar also benefits from volume economies with respect to logistics, given the quantities of chemicals they move, and will pass on these savings to us. This reduces cost and risks for our Sarnia joint venture and should accelerate the growth of our succinic acid sales into the merchant market channel.

The third channel we are targeting is strategic customers such as PTTMCC Biochem, who purchase large volumes for captive use and seek strategic pricing in return for volume commitment. These customers are captive users of succinic acid and their volumes are strategic, because they help base load plant and they keep important volume away from competitors. This channel is expected to grow as new on-purpose manufacturing requiring succinic acid gets deployed.

Now, the Vinmar agreement also offers independent validation that the market for bio-succinic acid has considerable growth potential and that BioAmber is well-positioned to compete in the market. Vinmar carefully evaluated BioAmber and the broader succinic acid market prior to committing to the take-or-pay contract.

And finally, the Vinmar agreement lays out a very clear path for future growth. The take-or-pay commitment is for a total of 210,000 tons of succinic acid per year, once all three plants are constructed, which comes on top of the previously announced 100,000 tons per year of 1.4-BDO off-take.

If we apply conservative selling prices to these volumes the cumulative sales over the life of these two agreements exceed CAD10 billion. With a proven plant operating in Sarnia and this level of committed sales, we anticipate being able to secure significant project financing and to limit the equity we need to directly contribute the future plans.

Our second quarter sales were CAD415,000, an increase of 18% over the previous quarter. The volume increase in Q2 over Q1 was more than significant, but was partially offset by lower average selling price. We continue to manage our sales with the objective of being to limit the volume sold and to build up our inventory levels.

With the expected start up of the Sarnia plant in early 2015, we would like to end the year with enough inventory, so that we do not need to extend our tolling agreement in France into 2015. The cost of producing in the French demo plant is significantly higher than Sarnia due to the higher input and labor cost, and it has increased as higher tolling fees have kicked in. They will be even higher in 2015, if we require the toll manufacturer services.

By limiting the volumes we sell to customers in the near-term, we can minimize losses from the sale of succinic acid produced in France. Our goal today is not to increase sales in the demo plant, but rather to manage our existing customers' transition to Sarnia, to secure new customers in advance of Sarnia and to continue to sample prospective customers.

With respect to our corporate expenses, we were able to maintain our monthly cash burn to under CAD2 million per month in the second quarter of 2014. We continue to manage our expenses carefully. Our headcount at the end of the quarter was 71, of which 22 were working for our Sarnia joint venture.

After the end of the quarter, we successfully concluded an equity offering, selling a total of 3.22 million shares at a price of CAD12 per share for net proceeds of approximately CAD36 million. This offering allowed us to strengthen our balance sheet and bridge the shortfall that had existed since our IPO.

At the time of our IPO, we intended to raise a CAD125 million, but secured CAD80 million due to difficult market conditions. A CAD25 million loan from Hercules helped bridge the gap, but it was a short-term measure, and as we have now begun paying back principal and the entire loan and interest is scheduled to be reimbursed by the summer of 2016.

The additional cash we recently raised will allow us to reimburse Hercules, fund ongoing operation and have a cushion to face unforeseen issues. With the proceeds from the offering, we believe we have sufficient cash to become cash flow positive, excluding any equity contribution we would make towards the next plant.

The offering received strong support from our existing shareholders and was oversubscribed allowing our banking syndicate to exercise its full 15% over-allotment option and sell an extra 420,000 shares. Despite healthy interest, we chose not to upsize the deal. We felt selling 3.2 million shares in total was the right balance between strengthening our cash position and diluting our shareholders.

So to wrap up the business update, 2014 is shaping up to be an excellent year for the company. We've already achieved most of our 2014 objectives. We have surpassed our goal of raising CAD30 million in non-dilutive financing for Sarnia, bringing in a total of CAD37 million this year, 23% above the target.

We sold 50% of Sarnia's capacity under take-or-pay contract to PTTMCC Biochem and to Vinmar. We have also sold a 100% of the production from a future BDO plant at Vinmar along with an equity commitment of at least 10% and we secured off-take for two additional succinic acid plants totaling 200,000 tons per year of future sales once those plants are built and running.

We continue to be on track to complete Sarnia on budget in early 2015, and we are making strides to develop new succinic acid applications that can fuel further market growth. Most recently, we strengthened our balance sheet with the successful equity offering and we continue to manage our cash burn diligently.

This concludes our business update. And I would like to turn the call over to our CFO, Andrew Ashworth, who will outline our financial results for the quarter.

Andrew Ashworth

Thank you, JF. Good evening, everyone. I will now walk everyone through the financial highlights for the quarter. Revenue for the quarter ended June 30, 2014, decreased to CAD415,000 from CAD1,028,000 for the same period in 2013. The decrease was due to sales to two customers in Q2 2013 that will not recur until the Sarnia plant comes on line.

Excluding these sales, the volume sold in the second quarter of 2014 was 40% higher than the same period in 2013. The company continue to manage its sales volumes in an effort to increase inventory levels in advance of the Sarnia startup, with inventory volume increasing by 18% at June 30, 2014, relative to March 31, 2014.

Gross loss in the quarter ended June 30, 2014, was CAD1,836,000 compared to a gross loss of CAD383,000 for the same period in 2013. The increased loss was due to the recording of a non-cash charge for an inventory reserve in the amount of CAD1,635,000. The reserve was taken to bring the recorded value of inventory in line with its net realizable value.

In the second quarter of 2014, we generated a negative gross margin of CAD200,000 before taking this reserve into account due to two factors. Much of the inventory we sold in the second quarter was produced in the third quarter of 2013, and had a significantly higher cost than in previous quarters. This was due to the higher fees we paid to ARD for total manufacturing services. Our agreement requires us to reimburse ARD for plant depreciation from July 2013 to the end of 2014.

The other factor that impacted margin in the quarter was our lower average selling price. The company's average selling price remains approximately twice the average selling price projected for Sarnia, but is declining as certain customers request Sarnia pricing in advance of the plant commencing production.

Research and development expenses for the quarter ended June 30, 2014, were basically unchanged at CAD4.3 million with only a slight increase of CAD38,000 from the same period in 2013. Sales and marketing expenses in the quarter ended June 30, 2014, were CAD1.7 million, up from CAD1.6 million in the same period in 2013. The increase was due to an increase in incentive remuneration and stock-based compensation expense, and was partially offset by a small decrease in salaries, benefit cost and travel expenses.

General and administrative expenses for the quarter ended June 30, 2014, increased by CAD600,000 to CAD2.9 million from CAD2.3 million for the same period in 2013. The increase was primarily due to additional cost related to compliance and public company operations. The company also incurred a CAD1,853,000 non-cash stock-based compensation charge due to the cancellation of some stock options following their voluntary forfeiture by certain employees and company advisors.

Foreign currency gains in the quarter ended June 30, 2014, were CAD379,000 as compared to a gain of CAD28,000 for the same period in 2013. The increase was driven by a strengthening of the Canadian dollar versus the U.S. dollar in the second quarter of 2014, which positively impacted the value of Canadian dollar cash balances carried to meet Sarnia vendor obligations.

During the quarter ended June 30, 2014, the company incurred financial charges of CAD3.9 million as compared to a gain of CAD10.6 million in the same period in 2013. The financial charges in the quarter were a result of CAD870,000 of interest expense and an end-of-term charge accretion on the loan from Hercules Technology Growth Capital, and a CAD3 million non-cash charge related to changes in the fair market value of the warrants issued in connection with the IPO.

In the second quarter of 2013, the company had recorded a non-cash gain of CAD11.7 million related to changes in the fair market value of these warrants. The warrants will be revalued in each reporting period, resulting in a non-cash amount being recorded in the statement of operations for as long as the warrants remain outstanding.

The company recorded a net loss attributable to shareholders of CAD14.1 million or a loss of CAD0.75 per share for the quarter ended June 30, 2014, as compared to a net loss of CAD7.2 million or a loss of CAD0.47 per share for the same period in 2013.

The adjusted net loss attributable to BioAmber Inc. shareholders for the quarter ended June 30, 2014, was CAD7.5 million or a loss of CAD0.40 per share compared to an adjusted net loss attributable to BioAmber Inc. shareholders of CAD9.7 million or a loss of CAD0.65 per share for the same period in 2013.

Adjusted net loss attributable to BioAmber Inc. shareholders is a non-GAAP financial metric that excludes for the quarter ended June 30, 2014, the impacts of the change in fair value of the warrants issued in connection with the IPO, the non-cash expense resulting from the cancellation of certain employee stock options and the non-cash reserve taken on the recorded value of inventory.

For the quarter ended June 30, 2013, it excludes the impact of the change in the fair value of the warrants issued in connection with the IPO, the non-cash stock options expenses related to the vesting of certain options as a result of our IPO and a non-cash charge related to the impairment of in-process research and development and construction in progress.

Please refer to Annex A, non-GAAP financial information, adjusted net loss attributable to BioAmber Inc. shareholders for more information regarding this non-GAAP financial metric.

Finally, we ended the quarter with CAD54 million of cash and add at another CAD36 million to our cash balance in July with our successful equity offering.

I would like now to turn the call over to the operator, so we can open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Patrick Jobin from Credit Suisse.

Patrick Jobin - Credit Suisse

Congratulations on all the progress. $10 billion of contracted agreements is very significant. So congratulations. A question I have for you, first one, with these supply agreement in hand how have the conversations changed with potential strategics or entities to provide financing for the next round of plants? Just help us understand that how those conversations have changed and any ideas on CapEx? Then I have a follow-up.

Jean-François Huc

So I would say it's still early days, given the recent announcements, particularly at the Vinmar succinic acid take-or-pay agreement. I'd say it's premature at this point to say how that's impacted strategics. I think it has raised the visibility. A lot of our customers in Europe have been away on vacation, and are not all that reachable, but so far the feedback has been positive, but it has not impacted any ongoing discussions we've had.

Patrick Jobin - Credit Suisse

And then a question on Sarnia. Just thinking through with the dramatic decline we've seen in corn prices, clearly that bodes well, that's an input cost for you. How are you thinking about what the margin potential would be given your visibility to the selling price, is kind of the first part of the question?

The second part of the question is kind of how we think about early 2015 milestones for plant completion. Just maybe help us understand how you have kind of laid out the commissioning process just from timing expectation and kind of when you would anticipate first production, et cetera?

Jean-François Huc

So evidently, the corn prices right now have been growing in the favorable direction for us, as have natural gas prices. We have steam agreements that are pegged to natural gas prices. So I'd say that from an input standpoint, everything is really going in our favor. But we don't need that to generate good margin. So right now, we continue to assume slightly higher corn prices in our models. But we definitely have some upside in margin or some buffer in the events that prices started to erode over time.

With respect to the second part of your question, which is the timing, our goal is to begin some aspects of commissioning before the plant is mechanically complete. But we are planning right now for our five months commissioning in startup process.

We might be able to do it a little faster, but I think the realistic expectation is that we would be selling product by the middle of the year, and possibly sooner, depending on who the customers are. But these plants when they startup, they do take time and you need to do things sequentially and carefully or you can run into problems down the line.

Operator

Your next question comes from Weston Twigg of Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities

Just actually following-up on that question. Do you still think you will hit on an annual basis 45% of the nameplate capacity at Sarnia in 2015?

Jean-François Huc

That's our goal. That's our goal is to get to around 13,500 to 14,000 tons in 2015.

Weston Twigg - Pacific Crest Securities

And then ramping to 80% in 2016, I believe?

Jean-François Huc

Correct.

Weston Twigg - Pacific Crest Securities

Next question, I was wondering about your decision process in terms of whether to ramp Phase 2 of Sarnia, the expansion there or starting construction on the BDO succinic acid plant with Vinmar or would you do those simultaneously.

Jean-François Huc

So we are going to assess that. That's a very good question. I'd say that I'm not sure we'll have an answer to that question until the fall of next year. It's going to depend on the speed with which we get Sarnia running, it's going to depend on the demand that we're seeing from customers.

But given that we've increased the scope of the second plant, our preference would be if we can get that plant financially closed, so the site selected and financially closed by late next year, our preference is to run only one project at a time, not have two projects running simultaneously. And so we might get preference for getting that second plant with 70,000 metric tons of capacity up and running in 2017 and eventually bring on a Sarnia expansion a little later.

But it's premature for us to decide. There are number of factors that will play on this. And what we don't want to do is have significant demand that we can't respond to and that ends up in the hands of competitors. So we will have to assess that over the coming year.

Weston Twigg - Pacific Crest Securities

And then could you just remind me what the expected CapEx requirements would be for that combined BDO and succinic acid plant?

Jean-François Huc

We had originally given guidance of somewhere in the CAD330 million for the BDO plants, adding 70,000 tons of succinic acid. Now, keep in mind we have not done details engineering on this, so this is a rough CapEx estimate, but we're pegging it around CAD400 million total.

Operator

Next question comes from Peter Clark of Societe Generale.

Peter Clark - Societe Generale

The first question is actually on the customers that did one-time buys in 2013 Q2. Obviously, you don't want to give too much information about them. I'm just wondering if there's more that potentially will do a similar thing this year. I know it's not big issue what the performance is this year, it's more about when Sarnia ramps up. So just give a feel for the delivery on that and potentially what industry is doing, it was obviously expected, I presume?

And then the R&D costs, obviously for this year, we are indicating that probably they would slightly drift down on the basis of the Cargill deal on the succinic acid side being done. I'm just wondering, if they have gone up a little bit, I assume that's looking at the BDO and the C6 development work, so actually those are the two questions.

Jean-François Huc

What I'd suggest is, I will answer the first comment and then maybe Andy can cover the second one on R&D expenses. So with respect to the customers, we in fact are trying to encourage as many customers as we can to sign on with us, but really ramp up their needs once Sarnia is online as opposed to starting to sell to them today.

The two customers that bought significant amounts in second quarter last year, I can disclose one, because we've disclose them as a customer. The other one I will refrain from, but it will give you a good sense. One is Mitsubishi Chemical. They've bought a significant volume in the second quarter of last year in order to make bio-based PBS, in anticipation of feeding for their plant. But now that they are --

Peter Clark - Societe Generale

I suspected that might be the question.

Jean-François Huc

Yes. So their plant now is a long ways along. And so they are now preparing to start that plant up. The quantities and the quality that we supplied and the pricing we supplied helped us to secure that three-year take-or-pay agreement for a minimum of 80% of their needs out of the Thailand plant.

But at this point, neither we are all that interested in supplying more products at small scale, nor is Mitsubishi really interested. The purpose of those sales last year was to secure the take-or-pay agreement, position ourselves relative to our competitors and we were successful in doing that.

Another customer was a similar situation. And we have had some other customers that have bought relatively small quantities today to validate or just to qualify it, but the real volumes come when Sarnia starts up.

Andrew Ashworth

With respect to the R&D expenses, generally they're only up slightly. If you look internally, we are not adding a lot of people there. We are not reducing it there much either. But what's happened is we are shifting a bit. We don't have as much outside expenses for the R&D programs that we're working on, but we did have a bit of stock compensation expense to kind of fill in that gap, if you will, in the second quarter, which basically brought it level.

So essentially, if you pull that out, they have drifted down a little bit, but that's reflecting the development of yeast being more or less complete, and where we are with BDO and our C6 programs.

Peter Clark - Societe Generale

Can I ask one follow-up? Actually it's on the BDO market, where I think I alluded to you, JF, that BSF still very much see this bio BDO as a niche product. Obviously, they probably would, because they have such a dominant position on the commodity petrochemical product. But obviously, that was not the way Vinmar see it or you see it at this stage, because BSF still have not committed to a larger scale plant, they are still trying to test the market, et cetera. Just your comments on that?

Jean-François Huc

Our view Peter is that we will be the lowest cost producer of BDO, independently of whether it's bio-based or not. Our process will get it to the lowest cost structure. And as the lowest cost producer of BDO, we believe that we can bring capacity online and that we can generate better margin than any other BDO producer in the market.

The fact that we can sell at market price whatever those market prices are and offer BDO that's bio-based and has an excellent carbon footprint it's simply going to give us an edge in terms of switching. We're not suggesting that people will pay more for BDO, because it's bio-based.

So that's there is a huge market for today, but I think we seem recently announcements by in Invista for bio-based Lycra. There is growing demand, there are more and more applications where people would prefer a building block that has a favorable carbon footprint, if they doesn't cost them more money. So we are coming at this BDO market as a low cost producer. And the fact that it's bio-based is a nice to have.

Operator

And next question comes from Andreas Heine of Barclays.

Andreas Heine - Barclays

I'd like to come back to the BDO. If the technology you have together with Evonik, is that already proven and on a solid state, or do you need more progress to be meant that this technology works? Secondly on the P&L and cash flow, I've seen that the change in working capital helped in the cash flow statement and that was due to payables. Is that something what you can continue so will payables ramp up more as kind of finance until Sarnia is running?

And on the write-off of inventories, so do I understand that inventories you're building up now for Sarnia basically on a substantially higher price and what you can sell this for. So the further increase in inventories will finally end up in losses basically to secure the deliveries ahead of the Sarnia plant? Is that the right understanding?

Jean-François Huc

So I'll answer the first question on BDO, Andreas, and then perhaps Andy can answer your second. We may asked you to just repeat the first part around the P&L and I'm not sure I -- did you understand the first part of question?

Andrew Ashworth

I think it was the run-up in our payables.

Jean-François Huc

So we'll address that in a minute. So for the first part, Andreas, with respect to -- do you want to answer that? Why don't you answer that?

Andrew Ashworth

Let me address your questions on the payables. That is correct. There was a run-up, which is really commensurate with the amount of billings that we're getting from the facility in Sarnia. There is a lot of billings that come in very much at the end of the quarter, at the end of a period. And therefore, hits payables.

So that did, in fact, give us a lower cash used in operations for the period. But I think that's also goes to what JF had said earlier is, is that if you kind of smooth that out and take some normalization on that, we still are maintaining our spending on a cash basis at around CAD2 million a month. So we haven't really moved off of that even thought it appears so in that particular metric.

And that will probably continue the same for a few more quarters, because we are into the heart some spending at the plant and the buildings coming in from the plant. But then that should start to work its way down more towards the end of the project and back to a more normalized basis.

Jean-François Huc

So Andreas, yes, we anticipate that, barring an additional reduction in our continued slide in our average selling prices, with this adjustment now, it should be sold at about overall on a blended basis, if we're able to allocate volumes to some higher paying customers, we should be breaking even on those inventories. But there is the risk if average selling prices decline further or we were forced to sell some larger volumes to customers that pay lower prices. There is the risk that we could generate some losses on some of that inventory.

Andreas Heine - Barclays Capital

Is that only on the inventory you have right now or also what you build up ahead of Sarnia starting up?

Jean-François Huc

Well, I would say, it was based on the inventory we have now and that we would add to over the coming months while we still have access to the French demo plant. The demo plant is just that. It's been a phenomenal tool for us to prove out the technology, improve the technology, get the quality right, get the design right and a lot of those learnings went into -- all of those learnings went into the Sarnia design and construction. However, it is a plant that has a much higher cost structure.

And with the renegotiation and extension of the agreement, one of the things that we needed to accept in order to secure longer access to this plant was to pay the depreciation on that plant, and that was a CAD30 million plant. So you can imagine the depreciation cost, even if we're only paying for 60% excess are quite significant for the last 18 months that we have accessed.

So some of the inventory that we were producing last fall, we're now selling, so we've seen that and an increase in the tolling rate kick in. And you have to understand from our partners' standpoint, they have a plant that they can no longer produce succinic acid with, it was designed to make succinic acid and we are moving away in the coming months. So they have to try and also monetized some of their investment. So it's understandable that they would have increasing costs.

It's still for us a very manageable situation, because of the fraction of the capital that we would have otherwise tried to investment, and we end up with locking away from this at the end of the year without any kind of write-off on capital or later issues with French labor laws and employees that we would have to terminate.

So it's a very favorable situation for us overall. But we are in this transition period right now, where customers they just -- we're getting so close to Sarnia being there that some of them don't really see the need to pay premium pricing, just because it happens to be made in France right now, when it's going to be made in Sarnia in a few months.

Andreas Heine - Barclays

Maybe the last one on the BDO technology is that fully [Multiple Speakers]?

Jean-François Huc

So the BDO technology is a good point. And I probably should have covered that in the conference call actually, it was an oversight of mine. But as we've described in previous quarters, we have produced BDO at pilot scale in Germany with product that was produced in France. We have produced very high quality product. We've sampled over 30 customers. They've all confirmed that the product is on spec and equivalent to petroleum BDO that they have a wide use.

What that pilot does not do, however, is provide a scale of operation on which you can build engineering for our commercial plant. And that's the reason we've been talking for some time about the need to build a demonstration plant that could convert succinic acid produced in Sarnia and converted into BDO at a scale that would allow us to both feed the market, but more importantly demonstrate the technology and generate the engineering and understanding of a process that we need to build a commercial plan. And more importantly to de-risk from the design and engineering standpoint a large scale commercial plant, so that we can secure project financing.

Now, we have not yet pulled the trigger on that CAD10 million toll manufacturing investment. We have been exploring options that could perhaps get us the same result, so get us the de-risk engineering that we need, without necessarily the CAD10 million capital investment.

So we are making progress on an option that could do that. And we hope to announce that by the next earnings call that we are on track for BDO that we have de-risk technology that we have the solution that is acceptable to vendors, but that avoids us having to outlay significant time and money into getting a demonstration plant operating.

Operator

There are no further questions at this time. You may proceed.

Jean-François Huc

Thank you, operator. So that wraps up our second quarter earnings call. We would like to thank everyone who listened-in, and in particularly we'd like to thank our shareholders for the continuing and strong support. We would also like to thank the analyst for the questions and their ongoing coverage of BioAmber.

We wish everyone a good evening, especially those who are in Europe, it's a late evening. And we look forward to continuing to meet our milestones and making progress for our shareholders. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating. And we ask that you please disconnect your lines.

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