Metabolix's (MBLX) CEO Joe Shaulson on Q2 2014 Results - Earnings Call Transcript

Aug.10.14 | About: Metabolix, Inc. (MBLX)

Metabolix, Inc. (NASDAQ:MBLX)

Q2 2014 Earnings Conference Call

August 6, 2014 04:30 PM ET

Executives

Lynne Brum – Vice President, Marketing and Corporate Communications

Joe Shaulson – Director, President and Chief Executive Officer

Johan van Walsem – Chief Operating Officer

Joe Hill – Chief Financial Officer.

Analysts

JinMing Liu – Ardour Capital

Laurence Alexander – Jefferies and Company

Operator

Good afternoon, and welcome to the Metabolix's Second Quarter 2014 Conference Call. Today's call is being recorded for Internet replay. You may access an archived version of the call on Metabolix's website at www.metabolix.com. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference call.

I will now like to turn the call over to Ms. Lynne Brum, Metabolix's VP of Marketing and Corporate Communications. Please proceed, Ms. Brum.

Lynne Brum

Thanks, Danielle. Good afternoon, everyone. Welcome to Metabolix's second quarter 2014 conference call.

If you do not have a copy of our second quarter news release, which was issued earlier this afternoon, one can be found on the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on Metabolix's website on the Events and Presentations page in the IR section.

Please turn to Slide 2. Please note that as a part of our discussion today, management will be making forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. Investors are also cautioned that statements that are not strictly historical constitute forward-looking statements.

And such forward-looking statements are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those anticipated. These risks included risks and uncertainties detailed in Metabolix's filings with the Securities and Exchange Commission, including the earnings release filed this afternoon in the company's most recent 10-K. The company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call.

On the call with me today are Joe Shaulson, President and Chief Executive Officer, Johan van Walsem, Chief Operating Officer, Joe Hill, Chief Financial Officer.

With that, I would like to turn the call over to Joe Shaulson. Joe?

Joe Shaulson

Thanks, Lynne. Hello, everyone and thanks for joining us today. Please turn to Slide 3. Earlier this year, we outlined the plan to raise to $50 million to $60 million over the 12 months to 15 months to execute our business plan and we said the capital might be raised in stages.

Consistent with that plan on Monday, we announced that we entered into a private placement agreement for $25 million of new equity financing with Jack Schuler, Oracle Investment Management, Birchview Capital, some of our Board and Executive team members and certain other investors.

The closing of the financing is contingent on securing a financial viability exception from the NASDAQ shareholder approval rules. We submitted our application to NASDAQ on Monday and are working with them to expedite the review of our case.

Given the limited runway, we had entering 2014 and our need for a substantial amount of new capital this proved to be a challenging financing. In that regard, I want to thank the Investor Group, led by Jack Schuler, Oracle and Birchview, who are stepping up with the vote of confidence in the Company and our management team's ability to execute the business plan, we outlined earlier this year.

I also want to thank all of our shareholders for their patience as we worked on financing. We look forward to deploying this new capital and our efforts to build a commercially successful Specialty Biopolymers business and in the process create value for you.

Finally, I want to thank our employees who have remained focused on achieving our operational goals during this process. As we have discussed in prior calls, we plan use this capital towards building an intermediate scale specialty polymers business based on our PHA biopolymer additives that will serve as the foundation for our longer range plans and our future growth.

Please turn to Slide 4, during the financing process. We were not standing still. We made excellent progress moving the business forward. What I feel, when I'm with our commercial team, who are in the field everyday working with customers is tangible traction.

Customers are seeing value our PHA additives can bring to their products and processes'. While we can't mention any specific customers at this time, but pipeline of commercial opportunities is building at all stages of development and testing and there are several customers progressing through later stage evaluations, who are dedicating development resources and making investments in facility modifications for a large scale trials and qualification of our PHA performance additives.

I'm pleased with the work; we are doing with these customers and in a moment will hand the call over to Johan, who can provide additional detail on our commercial progress. Another important element of our plan is manufacturing. Please turn to Slide 5, earlier this year, we said we were evaluating several manufacturing scenarios and our goal on the manufacturing front was to select a site and have intermediate scale biopolymer production up and running in 2015.

This effort remains on track, once we have secured our financing. We will be ready to move forward with the preliminary engineering study and implementation planning for the retrofit of an existing contract manufacturing facility, we have targeted for commercial PHA production.

We plan to use the results of this study to develop a detailed budget and definitive construction in commissioning schedule and if everything meets our expectations, we hope to be in a position to commit to this manufacturing facility and sign a formal manufacturing agreement with the owner of the site, later this year.

With that, I'll turn the call over to Johan for an update on commercial operations. Johan?

Johan van Walsem

Thank you, Joe. Please turn to Slide 6, we also continued to make important progress on the commercial front to validate our vision of creating a specialty polymers business based on PHA. We are intensifying product and application development and are working very closely with our customers.

We believe, our specialty PHA materials are unlikely positioned as performance additives and our interactions with customers are further confirming that belief. There are number of applications that have generated increased interest from our customers and we are highly encouraged by these opportunities.

In our Q4 call, we outline to process we are using to bring customers from initial interest in our product through to commercial launch. Identified the key stages as one, initial data demonstration; Two, product and process validation; three, large scale trails; four, product validation and qualification and; five, commitment for commercial purchases.

In that regard, on the Q1 call. We mentioned, we had made progress with a couple of customers to launch scale meaning, tonnage-scale trials, a significant step in the commercialization of our product in PVC applications.

The goal of the tonnage-scale trials is to, we use finished product on actual commercial converting equipment. Once the product is made, it taken through final validation steps by the customer for product qualifications and in some cases require validation by third parties.

While we cannot mention the customers or their products at this time. We can say that both products are construction materials. One is based on highly [indiscernible] rigid PVC and the other is based on recycle PVC in a flexible application. So we are pleased, that these customers are moving through the qualification process and are progressing through the commercial stage.

Throughout 2014, we have also placed emphasis on the unique performance improvements that our PHA can bring to PLA. The leading biobased combustible bioplastic.

We have shown that, PHA improves the softness and flexibility of PLA, while maintaining bio content and combustibility. We are working with several customers, who are developing applications in foam, fibers and injection molded pots and two of our customers have reached the commercial stage and have launched commercial products based on PLA, PHA this year.

We have numerous customers at the earlier stages of the cycle and expect to stay commercially active in the space given the performance we are seeing with PLA, PHA compounds. Our PHA also enables the production of biobased and marine degradable micropowders and microbeads.

Well, PHA is potentially unique in the space, as it can provide the texture needed for microbeads used in cosmetics and personal care products, while being fully marine degradable because of this differentiation. We are seeing a high level of interest from cosmetics companies and supplies in this space.

In addition, earlier this year we discussed the progress we are making with PHA latex coatings for paper and cardboard. We continue to engage leading brand owners and converters who are interested in our PHA latex coatings, Tile [ph] layers and unique marine applications. We are excited about the ongoing testing and development work in this application phase.

In third quarter, we will continue to guide our customers through the product validation process using both existing inventory and pilot planned products. This will allow us to better define our customers anticipated product volume requirements as we plan our product mix and volumes for the new manufacturing facility.

I will now turn the call over to Joe Hill. Joe?

Joe Hill

Thank you, Johan and thank you all for joining us today. We were excited to announce, to announce earlier this week, that we entered into Securities purchase agreement with certain investors for $25 million. Even if the financing is completed as planned, we will during 2015 require significant additional financing to continue to fund our operations into support our capital needs.

The timing, structure and vehicles for future financing are under consideration by the company and then maybe accomplished in stages. I will now focus on the financial results for our second quarter ended June 30, 2014.

Please turn to Slide 7, we'll review product orders and associated revenue recognized. Product revenue for the second quarter of 2014, was $662,000. Which primarily represents revenue deferred from Q1 product shipments?

We shipped and billed $588,000 of product in Q2, 2014 nearly all of which will be deferred and recognized in Q3, 2014 as a result of the Company's revenue recognition policy. The way of comparison during the second quarter of 2013, the Company recognized $822,000 of product revenue.

We continue to hold significant product inventory in the form of resins and blended material, which we are using together with pilot production of newer products to support market development with customers and prospective customers. Cost of product revenues has decreased from $1.2 million in the second quarter of 2013 to $774,000 in the second quarter of 2014.

The decrease of $422,000 was primarily attributable to shipping fewer pounds of excess raw materials to customers during Q1, 2014 for which the revenue and cost of product were deferred and recognized during Q2.

Cost of goods sold also includes the cost of sample inventory, shipped to prospective customers. Where housing and product packaging cost and certain freight charges. Through the first six months of 2014, ending June 30 product orders shipped and billed were $1.2 million as compared to $1.1 million during the first six months of 2013.

Product revenue recognized during the first half of 2014 was $1.2 million as compared to $1.6 million for the comparable period of 2013. The decrease in recognized revenue is mainly attributed to higher raw material sales recognized in the first half of 2013.

Cost of product revenue was $1.5 million during the six months ended June 30, 2014 compared to $1.8 million for the comparable period of 2013. Now turning to Slide 8, for review of financial results. You will notice that in the second quarter of 2014. The research and development expenses were $4.5 million which is $466,000 lower than Q2, 2013 which is primarily due to a decrease in employee compensation and relative benefit expenses.

Selling, general and administrative expenses were $266,000 lower in Q2, 2014 versus Q2, 2013. Through the first six months of 2014, research and development expenses were $9.4 million versus $9.8 million for the same period of 2013. Selling, general and administrative expenses were $6.8 million for the six months of 2014 as compared to $6.7 million for the comparable six months period in 2013.

Net loss for the second quarter was $7.2 million or $0.21 per share as compared to a net loss of $7.9 million or $0.23 per share for the second quarter of 2013. Net loss for the first half of 2014 was $15.4 million or $0.44 per share compared to a net loss of $14.6 million or $0.43 per share in the same period of 2013.

Please turn to Slide 9 for the review of cash usage. As we look at cash usage, you can see at the bottom of the table, we had unrestricted cash in investments of $5.5 million as of June 30, 2014. This compares to $31.7 million at June 30, 2013. For the second quarter, net cash used in operating activities was $4.9 million as compared to the first quarter of 2014, where total cash usage was $9 million.

This represents a plan decrease in net cash usage of $4.9 million [ph] which is mainly attributable to the timing of annual variable compensation payments of $1.7 million reductions in operating expenses and timing of vendor disbursements.

This compares to the second quarter of 2013, were total cash usage was $5.8 million. Ignoring one-time cash usage items as highlighted on the slide. Normalized cash usage decreased in Q2, 2014 over Q2, 2013 by $100,000. Through the first six months of 2014, ending June, 30. Net cash used in operating activities was $13.8 million as compared to a net usage of $14.3 million for the comparable period of 2013.

The decrease of $500,000 was mainly attributable to a decrease in operating expenses and now let's open the call to your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session.(Operator Instructions) our first question comes from JinMing Liu with Ardour Capital. Please proceed with your question.

JinMing Liu – Ardour Capital

First, on regarding the financing. Is that possible for you to share with us, the split of that $25 million between insider and the outside investments?

Joe Shaulson

Jin Ming, there is a list with the allocation of the shares to the various participants that was filed with our 8-K yesterday. I don't have the calculation handy in front of me.

JinMing Liu – Ardour Capital

Okay, I'll look it up. And regarding the future, I mean the facility you guys going to retrofit. Can you share more information with us, about that facility and also the upfront how much, the upfront and the nearing cost will be?

Joe Shaulson

So the upfront engineering cost that we are talking about is, less than $1 million in terms of additional details it's an existing contract manufacturing facility, what we don't want to do is get too far ahead ourselves given the experience we've had, getting ahead of ourselves with respect to manufacturing, but it's an existing contract manufacturing facility and it's owned and operated a well-known and quite reputable contract manufacturer.

JinMing Liu – Ardour Capital

So does it have the fermentation assets already in place?

Joe Shaulson

Fermentation assets in place and the bulk of our investment in the site would be around recovery.

JinMing Liu – Ardour Capital

Okay, so I got the idea. Okay, roughly are you interesting to see, you mentioned that the potential sales into micro polymer market? How big is that market?

Johan van Walsem

Jin Ming, Johan here. Good to speak with you. The micro polymer market is highly specialized market and there is a variety of usage and cosmetics and other applications. It's in the range of approximately less than 10 kiloton in aggregate, but it's very high value use of PHA that we look at there.

JinMing Liu – Ardour Capital

Okay, got that. Thanks a lot.

Operator

(Operator Instructions) our next question comes from Laurence Alexander of Jefferies and Company.

Laurence Alexander – Jefferies and Company

I guess, couple of questions. I guess, one I'm not sure to what degree you can help us on this, but to the extent that the executive team and the board member is, who participated has some knowledge of previous history with cash costs and process economics? Where the other participants in the private placements brought up to the same level of information?

Joe Shaulson

Yes, Laurence. I'm not sure, that one I can really help you with. Wouldn't want to sort of start digging into what due diligence process was among the investors.

Laurence Alexander – Jefferies and Company

Okay, you've kept the crops plants forms seeking partnership for the crops platforms is sort of, one of the key bullet points. can you give us some sense, how you're thinking about that in terms of timing, potential expenditures you might need to make how the value capture equation might look, you know just to sort of help frame that?

Joe Shaulson

Yes, I'm not sure, I much I can help frame those specific points, but I would say is, we are particularly focused on engaging with companies that might be interested in the more recent traits that we have been working on, which are focused on yield and stress tolerance. As oppose to necessarily focusing on the work that we did, with producing PHA in the plants.

Laurence Alexander – Jefferies and Company

Can you elaborate on that?

Joe Shaulson

I can't elaborate a ton on it. But in the course of, doing our work around growing PHA in the plants. One of the things that we focused our efforts our was helping the plants to survive and thrive while they were doing something that they're not actually designed by nature to do and in the course of that, we've come across some traits and we've done some work on those traits that help the plants to thrive and to tolerate stress and to grow at higher yields than they might to do ordinarily.

And we're looking at the applicability of that work across range of different crops, not just the ones that where the focus of our PHA efforts and our plan is to engage with folks out in industry, who might be interested in those sorts of attributes.

Laurence Alexander – Jefferies and Company

If memory serves, you had a technology license a couple years ago, what I believe it was Abbott around your ability or you competency being able to displace multiple genes and closely together more precisely than other people technology, I guess there is stacking more efficient way.

Is this, trait work building on that or is this a completely separate avenue?

Johan van Walsem

Laurence that was specific very useful to [indiscernible] tools that were developing crops in that border applicability that quickly of interest to Abbott. The traits that Joe just described are really related to stress response of crops specifically.

Laurence Alexander – Jefferies and Company

No, I guess what I'm asking is, when you say traits, are you really speaking of specific traits or you speaking like a stacked modification which were then build off of that other competency? Just trying to understand exactly what the play?

Johan van Walsem

They're not directly related. It's the same general tool set, but it's not that.

Laurence Alexander – Jefferies and Company

Okay, separately on the just to follow-up the question about the cosmetics and personal care. Can you give sort of sense on how you're approaching sort of the product testing for that or how you think or how your customers are indicating that will be shared between you and their R&D departments?

Johan van Walsem

So I mean in general, we work very closely with the customers. The product and applications development and this is certainly a case where that even more amplified because a value chain where there is the ultimate brand owners and cosmetics companies producers of micropowders and formulators of micropowders. We are discussions across the value chains, as we've indicated and working very closely with some of the key and finding where in that channel, we best participate, but the plan would be to interact very closely in partnership there.

Our focus is on optimizing the relevant grades of PHA for particular microbeads we have a lot of flexibility on that regards, softer and more abrasive microbeads for different purposes.

Laurence Alexander – Jefferies and Company

Got it, okay. Thank you.

Operator

Thank you. At this time, we've reached the end of our Q&A session. I will now turn the conference back to over Joe Shaulson for closing comments.

Joe Shaulson

While with the first phase of our financing underway. We plan to continue executing on the business plan outlined earlier in the year. We still have work to do on manufacturing, but have also made good progress on our plans to have production up and running in 2015. Our PHA products are providing a highly differentiated performance profile that is resulting in strong interest in engagement from our customers, which gives us confidence that our performance additive strategy is on point and with that, I would like to thank everyone for joining us today.

We look forward to talking with you again soon and wish you a good evening.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

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