BioAmber's (BIOA) CEO Jean-Francois Huc on Q2 2016 Results - Earnings Call Transcript

| About: BioAmber (BIOA)

BioAmber Inc. (NYSE:BIOA)

Q2 2016 Earnings Conference Call

August 9, 2016 16:30 PM ET

Executives

Jean-Francois Huc - Chief Executive Officer

Mario Saucier - Chief Financial Officer

Analysts

Jennifer Kim - Credit Suisse

Amit Dayal - Rodman & Renshaw

Carter Dunlap - Dunlap Equity Management

Steve Hansen - Raymond James

John Quealy - Canaccord Genuity

Operator

Good day, ladies and gentlemen, and welcome to BioAmber Inc.’s Second Quarter 2016 Results Conference Call. My name is Sophie and I will be your operator for today. At this time, all participants are in a listen-only mode, but later we will conduct a question-and-answer session. As a reminder, note that the conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Jean-Francois Huc, President and CEO. Please go ahead, sir.

Jean-Francois Huc

Thank you, Sophie. I’m here with Mario Saucier, our Chief Financial Officer. And before we begin, 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. 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 earnings press release, which we issued at 4:05 today, you’ll find reconciliation to the most comparable GAAP financial measure for any non-GAAP financial measures that we discuss on this call. Our Q2 2016 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 be available on our website starting two hours after the end of our conference call.

For those of you who had a chance to scan our earnings press release, you’ll know that we had a very good quarter. We hit our revenue target and so growing demand for our bio-succinic acid. We also saw the continued emergence of new applications that hold considerable promise for future succinic acid demand. The performance of our Sarnia facility is on track and continued to improve during the quarter and we experienced growing interest from potential strategic partners, who could help accelerate our future growth. Our cover these highlights and then Mario will present our financial results.

Sales in the second quarter were 2.1 million, meeting the guidance we had previously given. We saw sales increase in all three markets, the U.S., Europe and Asia. Overall, our product sales were up 73% relative to the previous quarter. We’ve already secured a number of purchase orders for Q3 and we’re forecasting strong quarter-over-quarter sales growth for Q3 relative to Q2.

Our customer base continued to broaden as companies that had previously qualified our bio-succinic acid began the purchase product Sarnia. We also saw growing interest in new areas that offer the prospect of significant future sales volumes. These included the use of succinic acid as an additive in PET, which is a large volume plastic used to make soft drinks and water bottles and succinic acid is also used in animal feed and pet food and succinic acid in descaling in corrosion inhibition.

Our commercial manufacturing facility in Sarnia made meaningful gains during the quarter in terms of plant uptime, which is a key performance indicator. In our last earning call in May, we were running at 70% uptime and we improved steadily over the next two months, hitting an average uptime of over 80% for the month of June. This internal loudest increase saw an output of succinic acid, which was up 80% in the second quarter relative to the first quarter.

We also made significant progress in terms of product quality, another key performance indicator. In the first quarter 37% of our product was off-spec due to the problem that we had previously disclosed and resolved. In the second quarter, less than 7% of our product was off-spec and we saw a very encouraging trend, with the last seven weeks of the quarter having 100% of the bio-succinic acid produced on-spec and no recurrence of the problem we had experienced in Q1.

The high rate of on-spec bio-succinic acid in turn minimized our need to reprocess product, which contributed to a drop in our unit cost. We also improved the efficiency of our steam and electricity consumption, leading to a significant drop in the utilities consumed per ton of output. Finally, we benefited from corn and natural gas prices that were below our budget estimates. The cumulative effect of these improvements was a 30% reduction in our unit cost of goods sold in Q2 relative to Q1.

During the second quarter, we achieved our 2016 target for variable cost and we see the potential for further reductions this year. As we increased the plant’s output, our utility consumption per ton of succinic acid produced will drop further and we also expect to make gain in recovery yield during the second half of the year. Another opportunity for cost reduction will come from the co-products of our process. Currently, we pay a fee to dispose of these co-products, but we’re in the process in obtaining regulatory approvals to sell them as sources of nutrients for the animal feed industry. As we obtain the necessary approvals, these costs will be progressively reduced.

Since the Sarnia start up, we’ve made a number of improvements to the plant, learned to better operate key pieces of equipment and put in place a maintenance plan. In August, we’ll be stopping Sarnia production for 10 days for schedule maintenance. These shutdowns are normal and planned twice a year. The shutdown will allow us to thoroughly clean the plant and undertake preventative maintenance that is not possible while the plant is up and running. It will also allow us to make improvements to specific pieces of equipment. We expect these improvements to further increase the plant’s performance and reliability in the second half of the year.

We’ve built up 1,200 tons of finished product inventory so that we can meet customer needs during the scheduled shutdown. The Sarnia facility is our greatest marketing tool. We’ve already had many visitors, customers and prospective customers, representatives from various government agencies and prospective partners that are active in the fields of chemicals and/or industrial biotechnology. Everyone that went through our plant was impressed by its scale and layout, the size of the fermenters, the state of the art equipment we use and the materials of construction, our high tech labs and the highly automated nature of our control systems.

For customers and prospects, our plant is living proof that we can be a reliable supplier and compete effectively with the petrochemical industry. This not only applies to our customers, but also the customers of our customers. As an example, a leading automotive company recently toured our plant, along with one its suppliers of rigid phones, both companies came away impressed with how real our business was and motivated to develop rigid phones containing bio based succinic acid, so that they could be used to make automotive parts. This is a good example of how a world scale operating plant that showcases competitive technology can generate opportunities and momentum through the entire value chain.

Similarly, we’ve had positive responses from the government agencies that have toured our Sarnia facility. They’ve been impressed by our ability to produce bio-succinic acid from renewal resources at commercial scale with a very low carbon footprint and with a cost structure that competes with traditional petrochemicals without any subsidies. There are a number of programs in the U.S. and Canada that exist to support the deployment of clean technologies. By showcasing our biotech at commercial scale, we were able to position our next plant as low risk project that leverages proven technology. Thanks in large part to Sarnia. We’re making very good progress on both sides of the border in our efforts to secure low interest government loans for our next plant.

We’re also attracting growing interest from potential strategic partners, including chemical and fermentation companies. Seeing our technology operate at commercial scale differentiates us. We’re not a science project. Potential partners can see how our best in class biotechnology is operating in a world scale production facility and generating a competitive cost structure, which few startups in our field have been able to deliver. Seeing our Sarnia plant operate, makes it real and allows these companies to better assess potential business synergies. We’re seeking a leveraged as heightened interest and explore partnership opportunities that would allow us to accelerate our growth plans. Our goal is to make meaningful progress and be in a position to announce some of these strategic initiatives in the coming months.

Now, that wraps up our business update. I’ll now turn the call over to Mario, who will walk you through the financial highlights for the quarter. Mario?

Mario Saucier

Thank you, JF. Revenues for the quarter were 2.5 million, an increase of 72% over the previous quarter. The increase in revenue was the result of volume growth with no material change in the average selling price.

Gross loss for the quarter was 1 million, compared to 1.6 million for the previous quarter. The lower loss was the result of the greater volume of succinic acid produced and sold, along with improvements in the production process and the reduction of off-spec product and the associated reprocessing costs.

Research and development expenses for the quarter decreased 1.5 million, from 5 million from the same period last year. The higher cost recorded last year were the result of certain commissioning and startup costing incurred in the quarter and recorded as research and development expenses. There was also reduction in research cost this quarter, relative to the same quarter last year due to the fact that the technology is now operating at commercial scale.

Sales and marketing expenses for the quarter decreased to 584,000, from 1.1 million for the same period last year. This drop was driven by a decrease in stock-option compensation expenses due to stock-options granted in 2016 with a lower fair value and a decrease in salaries and benefits in the first quarter of 2016.

General and administrative expenses for the quarter were unchanged at 3 million, compared to the same period last year.

Depreciation of property and equipment and amortization of intangible asset expense increased to1.2 million for the quarter, from 93,000 for the same period last year. This increase was due to the depreciation of Sarnia facility assets following the beginning of production.

For the quarter ended, the Company incurred net financial income of 11.3 million, compared to a charge of 3.8 million for the same period last year. There was a financial charge of 662,000 resulting from interest expense on long-term loans, which was offset by a non-cash gain of 11.9 million related to change in the fair market value of the warrants issued in connection with the Company's initial public offering the IPO Warrants and warrants issued in 2009 and 2011, the Legacy Warrants.

The Company recorded a net income attributable to BioAmber shareholders of 4.8 million, or an income of $0.17 per share for the quarter, compared to a net loss of 14.0 million, or a loss of $0.58 per share for the same period last year.

The adjusted net loss attributable to BioAmber shareholders for the quarter was 7.1 million, or a loss of $0.25 per share, compared to an adjusted net loss attributable to BioAmber shareholders of 9.5 million, or a loss of $0.39 per share for the same period last year.

Adjusted net loss attributable to BioAmber shareholders is a non-GAAP financial metric that excludes, for the quarter ended June 30, 2016, the impact of the change in fair value of the IPO and Legacy Warrants and excludes, for the quarter ended June 30, 2015, the impact of the change in fair value of the IPO and Legacy warrants, the non-cash inventory reserve expense and the intangible asset impairment related to the DuPont technology that we had previously licensed and further developed.

In conclusion, I’d like to highlight the fact that our balance sheet is healthy [ph] was at the end of 2015. Our accounts payable we reduced significantly from 15.8 million to 5.8 million. 4.8 million of debt has been reimbursed this year and our inventory has increased from 1.7 million to 2.8 million, most of which we expect to monetize in the coming quarter. Finally, we just closed on the 7.6 million BDC capital loan that were announced last quarter, which bring our effective cash balance to 13 million as of the end of the second quarter.

I’ll now turn the call to the operator, so we can field any questions. Operator?

Question-and-Answer Session

Operator

Thank you, Mr. Saucier. [Operator Instructions] And your first question will be from Patrick Jobin at Credit Suisse. Please go ahead.

Jennifer Kim

Hey, this is Jennifer Kim on the line for Patrick. Thanks for taking the question. What’s your margin and ASP outlook for the next few quarters?

Jean-Francois Huc

So I think we’ll let - hi Jennifer, we’ll let Mario field that question.

Mario Saucier

Well, in terms of - I guess you’re referring to the operating margin. I mean, we’ve already hit our gross margin target in 2016 and we’re very happy with it. If we were running at full capacity today, which is not the case, with the average selling price that we’ve seen so far since the beginning of the year, our operating margin would hit the target that we guided to in the past.

Jennifer Kim

Can I know what that target is?

Mario Saucier

It was 35%, 40% operating margin. So we’re still confident that - and so far I mean, considering the plant level we’re very satisfied.

Jennifer Kim

Great and do you still expect to have 7,000 tons per quarter by the end of the year?

Mario Saucier

Well, maybe I can leave JF.

Jean-Francois Huc

So no, we’re projecting strong quarter-over-quarter sales growth in Q3, the order of 50% or more. But our goal is - and our goal is to maintain that 50% quarter-over-quarter growth rate moving forward until we achieve full capacity in 2017. But the ramp rate that would give us full capacity at the end of the year is too aggressive of a guidance to give at this time.

Jennifer Kim

Got it and how is pricing trending in your supply agreements?

Jean-Francois Huc

We have two types of customers, first are those that replace petro-succinic acid or that need bio based succinic acid. We’ve not seen a material change in pricing for these customers. The other types of customers are seeking to replace adipic acid or other organic acids and these require lower prices that are more in line with the petro drive adipic acid prices, which are co-related with oil and therefore relatively low at the moment. As we bring one or more of these customers on, we may see to some extent price erosion, but the good news is that contracts tend to be indexed to the feedstock and customers seem to have increasing appetite for indexing against - to corn instead of benzene.

Jennifer Kim

Great, that’s helpful. And could you just, as a housekeeping question, remind us of what your corporate cash burn will be for the year?

Jean-Francois Huc

We had given guidance of under 14 million and we’ve been bringing that down further. So we’re not going to move off that guidance, but as Mario pointed out in the call earlier, we’re taking steps to ensure that our corporate burn is as low as possible.

Jennifer Kim

Great, thanks for taking the questions.

Jean-Francois Huc

Thank you. Thank you, Jennifer.

Operator

Thank you. Next question will be from Amit Dayal at Rodman & Renshaw. Please go ahead.

Amit Dayal

Thank you. Mario, I just like to touch on the gross margin side a little bit if you will. There’s still negative - is this primarily due to end market pricing and I think JF you touched on some of it in your commentary right now, but how much of it is volume driven, could you give a sense of whether we will be in positive territory by the end of the year on this front.

Mario Saucier

Well, first of all if you look at the year-to-date gross margin, you got to take into consideration that at the beginning of the year, we were ramping up. So the negative gross margin you currently see is because of the underutilization of the plant. I mean, fixed cost - we’ve incurred about 2.2 million of fixed cost in the gross margin charged to COGS, so is mainly related to volume. As I said earlier, we are very happy with the direction of our COGS with our cost of goods sold in terms of variable cost, so it’s a question of volume and ramping up the plant.

Amit Dayal

I understood, I just wanted to double check on that. Thank you for that. Do you have a target for your finished product inventory or are these the levels travels to 1,500 that we will see going forward?

Mario Saucier

Yes, in terms of inventory we would like to maintain 30 to 60 days of inventory, obviously I mean, we manage our cash very carefully, so we don’t want to over inventorize if I may say. So that’s that something that we are monitoring very closely, so say between 30 and 60 days of inventory would be a fair target.

Amit Dayal

Okay, perfect. Again with the winter months coming, I mean do we foresee any operational issues, anything - this is going to be your first time in the winter period, I mean is there anything that we should be aware of that could disrupt production et cetera, just from a weather perspective?

Jean-Francois Huc

We started production last fall, last October, so we’ve already run that plant through one full winter, so we don’t expect any other issues related to operating in the winter.

Amit Dayal

Awesome. Thank you and maybe a last question on your leverage I guess in the operating side of the business, I mean do we need to spend more resources et cetera as we scale up or are these generally what we will incur in terms of operating expenses over the next few quarters.

Jean-Francois Huc

No, it’s generally the opposite. We’re an operating company and more focused on - we’re focused on executing ramping up the plant and selling out the plant. I think that you’re seeing that while our sales are growing, our marketing and sales costs are coming down, our cost of goods are coming down and we have the organization in place. Our R&D costs have come down because we’re not developing technology anymore. We’re continuously improving technology which doesn’t require the same level of effort. So we scale back on a lot of these things because we’re commercial and our technology is performing, I would say beyond the expectations. So you shouldn’t anticipate any incremental corporate burn unless we were to announce and undertake additional projects that would be driving growth.

Amit Dayal

Understood and in your commentary earlier, you highlighted that you have sales in Europe, Asia, U.S., now where do you see stronger demand I guess in the near term?

Jean-Francois Huc

Our greatest demand right now is in Asia, but greatest potential is in North America and Europe. We see a lot of the growth coming there. The U.S. has the advantage of being in proximity to our plant, so logistics costs and the cost to deliver products to the end user are the lowest and Europe I would say, has greater appetite in general for bio based renewable products. So while we see tremendous growth in the U.S. and Europe, the greatest percentage of our sales today are going to Asia, but I would qualify that and say, not in China.

Amit Dayal

Understood, so is that market - is China still an opportunity for you or you’re not focused there yet?

Jean-Francois Huc

China is an opportunity for us, but we review with the pressed oil prices and the pressed petrochemical prices in general. China is a difficult market to sell into, when your production is halfway around the world. Longer term, China will require domestic production or Asian production in proximity to that market which can more effectively serve it. So today we’re very opportunistic in our approach to China because we don’t see - we just see an erosion, an unnecessary erosion of margins by trying to push product into that market.

Amit Dayal

That makes sense. Thank you so much. I’ll get back in queue.

Jean-Francois Huc

Thank you.

Operator

Thank you. Next question will be from Carter Dunlap at Dunlap Equity Management. Please go ahead. Please go ahead Mr. Dunlap.

Carter Dunlap

I apologize, I had a mute on. I’m sitting in for Chris, so I apologize for the simplicity of my question, but going back to the topic of gross margin, Mario gave the answer on a six month basis, but looking at the press release and just the June quarter, I understand there’s fixed - well, two things. One, you spoke to hitting your gross margin target, but I’m not sure what that is, so maybe you could repeat that. And secondly, I understand there’s fixed cost, but in Q2 were there unusual fixed cost and/or just the normal fixed cost which will be the part of the run rate going forward?

Jean-Francois Huc

So, we don’t disclose the gross or variable margin, but I think what’s important is that the variable margin less the fixed cost is what gives you your operating margin. And as far as the fixed cost go, we’re still early days and so we have - I would say that we have extra people working in Sarnia, engineers, there’s extra support there until the plant is - for the first couple of years we’ll see fixed cost in Sarnia a little higher. They’ll come down overtime, but you should anticipate 2.2, 2.3, somewhere around there quarterly cost in Sarnia for the next several quarters and then gradually coming down a little bit.

Carter Dunlap

Okay, fixed cost as that are in COGS?

Jean-Francois Huc

Fixed cost that are in COGS, right. And those certainly - go ahead.

Carter Dunlap

No, qualitatively what - if you reprocess a ton off-spec ton to back to spec, how much - is that half the fixed cost? I’m sorry, half the COGS or how much is the incremental cost on bringing an off-spec ton to spec?

Jean-Francois Huc

It’s relatively small. You’re talking about taking final product, re-dissolving it in water and running it back through a drier, final crystallization and a drier bagging. So you’re losses are non-existent, you’re really talking about the energy that goes into drying - to crystallizing and drying the product and when you re-dissolve it, you dissolve it at a fairly high concentration. So it’s marginal compared to the initial cost, you’re spending extra money to buy sugar or any of the other chemicals used in processing.

Carter Dunlap

Okay and last - so in terms of hitting the operating margin targets later in the year, whenever. It’s really volume - could mix be an uplift or a headwind or is that pretty much set in your mind as a variable?

Jean-Francois Huc

Pardon me, mix?

Carter Dunlap

Mix in terms of what type of customer take your product, did I understand that your different contracts have - I thought had different pricing and based on what they’re spec requirement was.

Jean-Francois Huc

Well, we do have different customers, which is why we always talk about an average selling price, because you have customers that require food grade product, you have - we do have a few different grades. But I mean, the variable costs of production are pretty well set, they don’t change much with volume. What volume brings you is - you’re dividing a - the greater the volume, the less the fixed costs are per unit and so that’s - as we get up over $7 million, right, the breakeven point is somewhere around $7 million in quarterly sales. So as we get up over that we start to contribute EBITDA at the plant level and those fixed costs are all covered.

Carter Dunlap

I’m sorry; I used the term mix, but great. I mean whether something goes out to - I don’t what your highest grade is, pharmaceuticals versus form or something, I mean is that a big impact on your gross margin across those different grades?

Jean-Francois Huc

No.

Carter Dunlap

Okay, I thought - I just thought the higher - I thought the higher spec people paid more, I misunderstood.

Jean-Francois Huc

There are additional certifications and quality requirements that I would say are more around the administrative side, but as far as the different - as far as the cost of production of our different grades, they’re very similar.

Carter Dunlap

No, no, I’m asking you not cost; price, what customers pay you, do they pay you more for - as your spec is -

Jean-Francois Huc

Absolutely right, at different pricing points, which is - but we only talk about average pricing in our calls and in our disclosure to the street.

Carter Dunlap

Okay, I’m just trying to understand. All things being equal, volume is the main variable to get us to those operating margin goals.

Jean-Francois Huc

Yes.

Carter Dunlap

Okay. Thank you.

Jean-Francois Huc

Thanks.

Operator

Thank you. Next will be Steve Hansen at Raymond James. Please go ahead.

Steve Hansen

Yeah, good afternoon guys. Yeah, I might have missed some of your earlier commentary, so I apologize. But could you still add a little more color on the one or two key items you’ve been able to improve that got the utilization rates up so nicely quarter-over-quarter. And then I guess, subsequent to that how the plant was actually running in July and what you actually expect to fix as part of the plant maintenance down time to get rates even higher going forward. I’m just trying to understand that sequence or cadences to what’s been fixed and how permanent it is and/or just general handle on how things are progressing. Thanks.

Jean-Francois Huc

Yes, Steve. So the short answer is that there was - there weren’t any fundamental problems. We had one issue that was related to steam that we used in our process, that wasn’t even our process. It was contaminant in the steam, we resolved that. We have not seen a reoccurrence of that problem, everything else has to just to do with what was put in the press release in the cote, which is - and we use the term entrenching our operating routine, it’s really just getting our operators better and better trained, refining our SOPs, better understanding how to run equipment, sequencing, the frequency with which we clean certain pieces of equipment while in operation, these are all just I would say operational learning’s that allowed us to - continuous improvement program that allows you to master the equipment in the process if you will. So I would say that - I would attribute the high percentage of on-spec product and the increasing uptime purely to that. There were no significant equipment problems that we had to replace or change.

As far as the maintenance goes, this is a fermentation plant, it’s like a brewery and so you’re working in a water based system, you’re working at atmosphere pressure, at for all instance and purposes room temperature, and so a couple of times a year, you do have to stop the plant and just clean everything out and early days, it’s an opportunity to bring improvements. So I’ll give you an example. The floors that are made of concrete around certain pieces of equipment get exposed to some succinic acid and that can cause some corrosion, so you sometimes need to resurface and put down acrylic finishes or a partly [ph] finishes pardon me to protect that cement from corrosive succinic acid that might fall on it. So these are the types of things, small improvements to the existing equipment, nothing major. Just making some changes to electrical systems, electrical systems are things that you can’t really change when the process up and running or to the DCF system, the control system, you can’t make those changes on the fly when a plant is running or down for a couple of hours.

So you accumulate these things and you make those changes a couple of times a year when you have a - what’s commonly called the turnaround or a brief shutdown. But these are not at all what you would typically see in a chemical industry because we - the materials or construction we have don’t result much in the way of corrosion or heavy ware. So might be changing the seals on some pumps, we may make some changes to some elbows or some pipes, we take advantage of downtime to re-weld some elbows or change some piping, make it more - lot more efficient. We’ll check safety valves and other things like this, but it’s really not an overhaul of the process in anyway. So you really have to think about this as us getting to know the plant and making incremental improvements after that to just get better and better at running it.

Steve Hansen

Okay, that’s helpful. I’m just trying to get some context for how confident you are today in getting out towards your full utilization target versus the past. It sounds like the fixes have been mostly incremental and nothing wholesale, so it really just further blocking and tackling is the way to think about it going forward?

Jean-Francois Huc

That’s right. And we’ve said this past calls, as we increase the ramp rate, we’ll run into some other problems that only occur when you’re ramping up, when you’re hitting higher levels of throughput, but we’re confident that we have the team in place and we have a robust process and we can handle those problems. It’s just - these will hit our stride and will go up to the next level and then we might encounter some problems that we have to fix and then we’ll go up the next level after that. But with the ramp up in sales, we have time to think those two things up and as Mario mentioned, not to max unnecessary levels of inventory in the interim.

Steve Hansen

Great that’s helpful. And just one last one if I may, it’s just around the contract structures that you suggested there’s some customers willing to entertain some new linking mechanisms the corn for example or input house anyway. Could you just elaborate on that a little bit and how you see that process evolving and will it be influential in material on to your total contract basket overtime or just kind of how should we get our heads up around that?

Jean-Francois Huc

Well, when we’re substituting other petrochemicals, particularly products like adipic acid. Adipic acid tends to be sold on multi-year contracts, but it’s indexed to the price of the raw material, generally benzene or cyclohexane. And so customers are used to those types of contracts. When you look at the volatility of corn and the sugar that’s derived from corn, as compared to some of these feedstock’s and how they’re linked to oil, the volatility for a sugar is significantly less than the volatility for benzene for example, if you look at whether it’s the last three, five years or the last 20. And so as customers think about signing contracts, we’re seeing a lot of customers that are intrigue, they’re not as familiar with corn markets because these aren’t necessarily people who have the habit of buying corn, so they have to get familiar with this commodity. But they’re very intrigue that the prospect of linking their chemical pricing to a feedstock that has inherently less volatility than what they’ve typically seen.

Steve Hansen

Okay, helpful. Thanks guys, I appreciate.

Jean-Francois Huc

Thank you.

Operator

Thank you. Next question will be coming from John Quealy at Canaccord Genuity. Please go ahead.

John Quealy

Hey, good afternoon folks. Hey JF, quick question and I’m sorry if I missed this. Did you talk about production in Q2 and what that was?

Jean-Francois Huc

Yeah, so we said it was up 80% on Q1 and if you just take sort of - if you take the calculations through, you’d see about 2,400 tons.

John Quealy

Got you and in terms of Q3 now, the step down for maintenance and things like that, you’re going to - again remind me, you’re going to sell about 1,400 in inventory out of that, so we’re going to have another inventory balance in Q4, I’m just trying to figure out working capital expectations.

Jean-Francois Huc

Sorry John, can you repeat the question, I’m not sure. What’s the production going to be in Q3?

John Quealy

Yeah, because it sounds like you’re coming down for typical maintenance for a while, is that right.

Jean-Francois Huc

Yeah, that will be about 10 days.

John Quealy

Okay, so it’s not going to be huge. Okay.

Jean-Francois Huc

It’s not going to be huge over the course of a quarter and I think that given that our uptime is up over 80%, you might be looking at 75% instead of 80%, but based on 50% - even a 50% throughput rate with 75 instead of let’s call it 83%, 84% uptime because of the down days and take something around 7% off-spec products, you’re still looking at 2,600 tons for the quarter.

John Quealy

Yeah, okay and that’s helpful. And then should there be - just as we again get starting up continuously for the back half of ‘16 and ‘17, should we be building inventory or we should be at a pretty tight of inventory levels moving forward.

Jean-Francois Huc

I think you should stick to the 30 to 60 days that Mario has given you and in the near-term we’ll be closer to the 30 than the 60.

John Quealy

Yeah, okay. Back to the customer acceptance, I know - and previous calls, maybe you don’t want to give exact numbers of who’s seen it, who’s tried it out, who’s come back and approved it, but overall can you give us an update in terms of how many folks you think are or newer customers are going to buy this in the back half of the year, just something around that customer acceptance would be helpful.

Jean-Francois Huc

I believe we had 160 companies that have approved succinic acid, approved our succinic acid or tested it and validated it and I believe - sorry Mario, we’re expecting -

Mario Saucier

I’ll add that 160 ton did not qualify our product, so most of our product was qualified like - more than 150 customers, which is huge.

John Quealy

That’s right. And I assume a large percentage of them aren’t buying huger volumes yet, is that fair?

Jean-Francois Huc

Sorry, John?

John Quealy

I assume, the majority of them aren’t buying gigantic volumes of what they could yet. I assume many aren’t even buying anything yet.

Jean-Francois Huc

That’s right. I would say a majority of them are in their own internal processes of starting to ramp up, so we expect a number. We’re seeing some new customers already this quarter that haven’t previously bought and we expect that over the next 6 to 12 months, the majority of these will start buying. Some are smaller volume customers, some have potentially larger volumes and that’s why we’re seeing this sort of accelerating ramp and we expect - our goal is to hit 50% quarter-over-quarter for a number of quarters now in terms of sales ramp. And that’s predicated on more and more of these customers starting to buy and coming on top - one on top of the other.

John Quealy

Yeah, that makes sense. And then lastly maybe for Mario, in terms of the modeling, R&D coming down as expected as you transition a commercialization, can you talk about run rate levels for R&D and G&A as we move forward, just what we should be expecting in the back half of the year. Thanks guys.

Mario Saucier

Sure, I mean as JF mentioned, I mean we’ve disclosed a run rate of 14 million for corporate, but clearly we’re going down because we’re ramping production. So you can expect that number to be reduced even further more in the next quarters, so it’s going in the right direction.

Operator

Thank you. [Operator Instructions] And currently gentlemen, we have no other question. So I’d like to turn the call back over to you.

Jean-Francois Huc

Okay, thanks everyone. That’s it for our call. Enjoy your evening.

Operator

Thank you. Ladies and gentlemen, this does indeed concludes your conference call for today. Once again thank you for attending. And at this time we do ask that you please disconnect your lines. Have yourselves a lovely evening.

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