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Metabolix, Inc. (NASDAQ:MBLX)

Q4 2011 Earnings Conference Call

March 6, 2012 4:30 PM ET

Executives

James Palczynski – ICR

Rick Eno – President & CEO

Joe Hill – CFO

Analysts

Jeff Zekauskas – JP Morgan

Mike Ritzenthaler – Piper Jaffray

JinMing Liu – Ardour Capital

Laurence Alexander – Jefferies

Jeff Osborne – Stifel Nicolas

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix Incorporated fourth quarter and fiscal year 2011 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions.

I would like to turn the conference over to Mr. James Palczynski of ICR. Please go ahead.

James Palczynski

Thank you, operator, and good afternoon, everyone. Metabolix released fourth quarter and year-end 2011 financial results after the market closed today. If you do not yet have a copy, the press release one may be found on the website at www.metabolix.com in the Investor Relations section. In addition, for today’s call we have several slides that accompany the presentation, and I will note that these are running as part of our webcast, which is also available on our website. These slides will also become available on the Metabolix’s website following today’s call.

Making the presentation today will be Richard Eno, President and Chief Executive Officer of Metabolix; and Joseph Hill, Chief Financial Officer of the company. They are joined by Oliver Peoples, the co-founder of Metabolix and Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be put upon them. Investors are also cautioned that statements in the discussion today, which are not strictly historical statements constitute forward-looking statements.

Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including the following: increased risks and uncertainties relating to commercialization of our first and only product, Mirel, due to the termination of the ADM commercial alliance. We relied heavily on ADM for the successful implementation of our biopolymer commercialization; uncertainties relating to our ability to obtain sufficient biopolymer manufacturing and compounding capacity and to obtain raw materials in sufficient quantities or in a timely manner; uncertainties relating to the price of petroleum relative to the biobased feedstocks used to make Mirel and our other products; and other risks and uncertainties detailed in Metabolix's filings with the Securities and Exchange Commission. 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 today’s conference call.

With that, I’d like to turn the call now over to Rick Eno, President and Chief Executive Officer of Metabolix. Rick?

Rick Eno

Thank you, James. I’d like to welcome all of you to the fourth quarter and year-end 2011 earnings conference call for Metabolix. Today, I will provide you with a review of the Metabolix vision, and an update of each of our three platform areas, and then Joe will take you through the financials.

While I understand that for many of our long-term investors, a company overview is unnecessary, many of our newer investors find it valuable. I’ll take about a minute to provide some company context.

Metabolix is an innovation-driven bioscience company, which is focused on bringing sustainable solutions to the plastics, chemicals, and energy industries. We are developing and commercializing pathways and products that are intended to lessen the world's dependence on oil, reduce CO2 emissions relative to traditional materials, and address critical solid waste issues. We are founded on hard science and have exceptional capabilities in plant science, in fermentation, microbial and polymer engineering and in product and market development.

We’re leaders in producing and upgrading a broad family of materials called PHAs. PHAs are energy storage molecules found in nature, which have a number of useful properties as plastics and can also serve as a unique source of renewable chemical intermediates. As a result of our capabilities and work in PHAs, we have assembled a strong IP portfolio as an anchor for our commercial initiatives.

We currently have deployed our PHA technology across three business platforms. First, Mirel, a family of biobased and biodegradable polymers; second, Industrial Chemicals, initially focused on C4 and C3 chemicals; and third, crop-based activities, which include our programs in oilseeds, switch grass and sugarcane.

I’d like to begin with Mirel bio-polymers. Today I’m very pleased to announce that we have reached a final agreement with ADM on the winding down of the Telles joint-venture, effective as of today. On the call, I will update you on the agreement as well as the status of the launch of the biopolymers business.

Turning to slide 2 of the accompanying slides, as the result of the termination of the Telles LLC joint venture for PHA bioplastics with ADM, Metabolix retains exclusive rights to all Metabolix PHA technology and associated intellectual property. Metabolix also retains all existing inventory, both PHA product and compounding raw materials, as well as all product approvals, certifications and trademarks, including the trademarks from Mvera.

In addition, Metabolix will get the pilot plant equipment located outside of the Clinton plant. As a result, we now have more than 5 million pounds of inventory to supply core customer needs, a quantity we anticipate being adequate until new production comes online. In addition, we will use the inventory, and as needed the pilot plant to continue product development focused on high value-added applications. In connection with the termination agreement, Metabolix is paying approximately $3 million to ADM.

Consistent with the commercial alliance agreement, ADM retains its manufacturing plant in Clinton, Iowa, but has no residual rights to Metabolix technology, and given the amount of usable inventory we have obtained and the ability to access third-party sources of fermentation capacity, we have released ADM from its future manufacturing obligation to provide fermentation broth.

For those of you familiar with how the financial construct of the joint venture worked, there was a ledger balance that reflected the money that ADM had put into the business over the years, including the construction of a manufacturing facility, support payments to Metabolix and certain operating costs. This totaled about $433 million at the end of 2011. It originally would have had to be paid back by the JV prior to Metabolix receiving 50% of the earnings of the business. That balance has been eliminated.

Most importantly, with the termination of the joint-venture complete, our exclusivity with ADM for PHA bioplastics has ended, and we are free to speak with other potential partners. We are currently in discussions with numerous companies to discuss partnerships that will allow us to participate globally in the robust demand for biopolymers. I will elaborate on this point in a moment.

I’m now on slide three. As we noted on our conference call of January 12, we are launching PHA biopolymers as a metabolics business, and with the ability to define a new commercial model. There are a wide range of choices and possible models we can deploy with biopolymers moving forward. I want to describe why we are so excited about this biopolymers opportunity.

We have been asked by many investors, what are some of the things that Metabolix will look at differently going forward with regards to biopolymers. This is to give you some insight into our early thought process about the launch of our Metabolix biopolymers business. First of all from the customer and market perspective, the previous approach was very broad based. This was due to the large scale of the ADM plant and widespread market interest of PHAs. What we now plan to do is focus on the highly valued opportunities, which we have identified through our time in the market.

Our priority segments are still being analyzed, but we will focus on areas where superior biodegradation and performance characteristics of PHAs are valued. These include agricultural and horticultural products, compost and organic waste diversion applications, including anaerobic digestion, marine and aquatic uses, and sustainable packaging focused on single use items. Our launch will initially address existing markets, with segments being prioritized on their ability to quickly base load our manufacturing plant.

The initial design of the ADM plant was about 50,000 tons per year. We are developing a market entry opportunity in the 10,000 ton per year range, in essence reflecting a semi-works scale initial plant, in order to provide product to our strategic customers. This smaller scale can be basically sold-out to capacity much more quickly than a larger facility, and provide a demand foundation for future growth.

The technology base that was deployed at Clinton was a 2006 technology [ph] base, which performed well at a world-class industrial scale. However, since 2006 the technology has continued to advance rapidly and there are numerous elements that were not yet installed at Clinton. Going forward we would see elements of this 2012 technology-base being deployed.

What does that mean, we expect lower capital, improved yields, an experience we bring from across the entire value chain from fermentation right down to final product fabrication. With the combination of high valued segments, a smaller scale plant, and new process technology we expect to approach cash breakeven much sooner than under the previous model.

The value chain in the former construct of the ADM deal had manufacturing operations separate from commercial operations. Now we have the ability to integrate manufacturing with commercial. We also have an ability to integrate chemicals and plastics that we did not have before. That brings us closer to being able to deploy our technology in an integrated bioproducts complex, not too different from the current integrated petroleum-based chemical complex.

With regards to the Metabolix earnings potential, the way the joint venture was structured, Metabolix would not generate earnings until larger balance was paid off by the Telles joint-venture. Going forward, we have numerous different options available to us for how we want to structure our biopolymer venture. We have no clear preference on structure at this point and are keeping an open mind relative to ideas proposed to us.

I would now like to update you on some recent activities. These are partnering activities, progress with the FDA, and enabling out license of our technology. Partnering activities, first of all, we have experienced significant partner interest to participate with us in the biopolymers business. Enquiries have been received from potential feedstock, fermentation and off-take partners, and we have reached out to other potential partners.

Partners range widely in terms of specific interest, but to give you a sense of the opportunity set, we are in discussions with about 15 potential off-take partners and considering about 10 different manufacturing options. In recent conversations with investors, we have been asked several questions including the timing of a partnership, possible structures and the resulting financial implications. With the recent changes in the business, these are fair questions, however, we do need some time while we work through the options set that we can provide you with solid information on our commercial model as we go forward.

FDA clearance, while we have continued to build value in our Mirel product line. This quarter we received FDA clearance for food contact applications for the next generation of Mirel technology. Next-generation Mirel technology was developed since the deployment of the original Clinton technology, and includes an improved recovery system, as well as reactive extrusion technologies. This new FDA clearance creates broader options for food contact applications, consistent with our next generation Mirel technology.

Finally on biopolymers, as a leader in the development of biobased polymer technology, Metabolix has assembled a broad intellectual property portfolio covering key elements of making and using advanced biomaterials, including biopolymer blends. For areas outside of our technical and commercial focus, we are amenable to licensing arrangements that provide Metabolix the opportunity to receive licensing income and pave the way for the introduction of new materials to the marketplace. With that interest, we recently issued a sublicense under a University of Massachusetts patent we control for biopolymer trends to NatureWorks, a global leader in the PLA biopolymers industry. This intellectual property helps NatureWorks expand the market for bioplastics through blending its PLA product with other bioplastics.

Let me now move on to the other Metabolix platforms. These are our industrial chemicals and crop programs. In industrial chemicals, we are leveraging our PHA gene technology to enable chemicals that are currently being produced from fossil fuels to be produced from renewable raw materials. We're utilizing a fermentation process and an efficient, integrated, thermal recovery process to produce our targeted chemicals, which we call FAST; Fast Acting Selective Thermolysis. The PHA approach is a unique platform which enables a pipeline of chemical product opportunities for Metabolix.

Our competitive assessment has indicated that our PHA fermentation technology, plus a simple recovery process results in a highly competitive production platform for biobased chemicals. We have selected the C4 family followed by the C3 family of chemicals as our entry strategy into this space.

Our technology is unique and at the same basic process can produce both families of products with only relatively minor tailored purification modifications based on the specific molecule being produced. We have also established intellectual property around the C5 family of products, but as many of you know, this is a smaller market in the $10 billion C3 and C4 market and as such it is currently a lower priority for us. We continue to evaluate other applications of our PHA fermentation and FAST recovery process.

I’m now turning to slide four, which provides an overview of the recent accomplishments in our chemicals platform. We continue to move ahead well in our industrial chemicals platform and are meeting all of our milestones. Let me recap our milestones and our 2011 progress. First we sent samples of our C4 product to customers in Q1. This as you know was completed.

Second, we generated feedback from C4 customers in Q2. This has also been completed. We received very favorable feedback from targeted customers, both with respect to purity of product and successful conversion of our product through key chemical derivatives. We noted that we made additional sample shipments in Q3 in order to extend the testing. This was also completed and the feedback on the product quality was again very positive.

Our third target was ready to begin engineering design for our commercial facility by the end of the year. We are ready to do so, having scaled up fermentation to 60,000 liters, and gained ongoing operating experience from our recovery facility. Our fourth target was to provide tonnage quantities of C4 product to allow customers to test product in large-scale trials, and we have completed this also.

Also since our last earnings call, we have validated that our C4 chemicals process is expected to be cost competitive with petroleum sourced DDO [ph] at oil prices above about $90 per barrel. Our GBL product cost is expected to be at the low end of the petroleum based cost curve. Over the last quarter, we continued work with our C4 chemicals joint development partner, CJ CheilJedang towards commercialization of the C4 chemicals platform. We are actively involved in site and market analysis, as well as reviewing the feedstock markets.

Now onto our C3 chemicals program. We are also now in a range of discussions with potential feedstock manufacturing and off-take partners for our renewable C3 chemicals technology. There is a high degree of market interest around biobased C3 chemicals, where acrylic acid is a key derivative market. Our development here, obviously leverage much of our C4 work in equipment. Technology development is expected to follow the C4 program by about one year.

Our third Metabolix platform is our crop based activity, including our programs in oilseeds, switch grass and sugarcane. Long term this is an exciting opportunity, and historically we have leveraged government grants and academic research collaborations to move this work forward. All-in-all, we are excited about this platform as we can see the pathways we are developing ultimately replacing capital intensive operations, such as oil and gas exploration and production, refining, olefins and polymerization by producing polymer directly in crops. Our crop programs offer numerous options to produce low cost chemicals, plastics and fuels in a very sustainable manner.

Slide five is focused on the DOE grant. This past quarter we made progress in our work on the $6 million Department of Energy grant for the development of our Biomass Program. This funding work will allow us to work on increasing the PHA levels expressed in switch grass and conduct pilot testing of the production of chemical intermediates via our FAST process. PHB is one of the key PHA structures, which we can express in the leaf tissue of plants. In this approach, we will feed biomass containing PHBs to our FAST recovery process, recovering commodity chemicals which can serve as a basis from maleic anhydride, butenal and propylene among other products.

Our residual is a densified biomass suitable for firing on-site, converting to fuels are being effectively transported to other users. This quarter, given the termination of our relationship with ADM, we have scaled back our efforts for our oilseed crop, camelina. The business model for PHB in camelina was based on the production of biopolymers as opposed to biochemicals.

We are in the process of capturing intellectual property gains in our working camelina, and later this year will be evaluating the possibilities of monetizing that intellectual property. Finally from a corporate perspective, I would like to mention that we have recently add two individuals to our board of directors. We named Celeste Beeks Mastin to the board in January. Celeste has a very impressive background and track record in chemicals and performance materials. And yesterday we announced that Matt Strobeck is returning to the board. We are delighted to have him back, as we will benefit from this experience as a biotechnology investor.

That wraps up the business review, and I will now turn the call over to Joe for a review of our financial results for the quarter and the year.

Joe Hill

Thanks Rick, and thank you all for joining us today. Turning to slide six of the accompanying slides, I will now focus on the financial results for our fourth quarter ended December 31, 2011. As always, we managed our finances with an emphasis on strict cash flow management. We have maintained this focus and ended the fiscal year with $78.4 million in cash and investments.

For the fourth quarter, net cash used in operating activities was $8.6 million, which represents a planned increase in cash usage from $7.8 million used during the third quarter of 2011 and is an increase over the $8.1 million used during the comparable period of 2010. Net cash used in operating activities reflects the company’s activities in sales and marketing development, as well as research and product development.

The increase in net cash usage for the fourth quarter 2011 primarily related to increased piloting activities in our chemicals program. For the full year, net cash used in operating activities during 2011 was $31.7 million compared to $32 million to 2010. The decrease in net cash usage relates primarily to an increase in grant revenue received in 2011.

I will now give some additional detail on the company’s financial results for the fourth quarter of 2011 ended December 31. Total revenue for the fourth quarter was $400000, versus $100000 for the comparable period of 2010. Revenue in both quarterly periods resulted from revenue recognized from license fees and royalties in government research grants.

Revenue for the full years 2011 and 2010 was $ 1.4 million, and $400000respectively.

The year-over-year increase was primarily generated from work performed on the company’s new renewable enhanced feedstocks for advanced biofuels and bio-products grants and its existing blow molded bioproducts from renewable plastics grant.

Total operating expenses in the fourth quarter of 2011 were $10.1 million versus $9.6 million for the comparable period of 2010. Selling, general and administrative costs in the fourth quarter of 2011 were $4 million, versus $3.8 million in the fourth quarter last year. Research and development costs were $6.1 million versus $5.8 million from the fourth quarter of last year. Net loss for the fourth quarter was $9.6 million as compared to a net loss of $9.5 million for the fourth quarter of 2010.

For the full year, total operating expenses were $40.3 million, an increase of $900,000 from the 2010 level of $39.4 million. For the full year, total research and development expenses were $24.4 million as compared to $23.7 million for the comparable year ago period. This year-over-year increase is primarily attributable to increases in contract of research related to Mirel product development, and the company’s industrial chemicals program, employee compensation and related benefits, partially offset by a decrease in material production costs.

For the full year, total selling, general and administrative expenses were $15.8 million, as compared to $15.7 million in the year ago period. Our net loss for the full year ended December 31, 2011 was $38.8 million compared to $38.8 million in 2010. As in previous quarters, the fourth quarter loss is greater than cash used in operating activities as a result of non-cash expenses, including depreciation and stock based compensation expense.

Our net loss per share in the quarter was $0.28, compared to a net loss per share of $0.35 in the year ago period. For the full year of 2011, the net loss per share was $1.24 compared to a $1.45 in fiscal 2010. As I mentioned, our cash level at December 31, 2011, was $78.4 million. This compares to $87.2 million as of September 30, 2011, and $61.6 million at year end last year. In 2011, we raised 49.3 net proceeds in an offering of common stock and we continue to have no debt.

We are now on slide seven of the accompanying slides. After termination of the ADM commercial alliance in the first quarter of 2012, we restructured the biopolymers business and downsized operations to more appropriately align our 2012 business priorities and strategic plans with current cash and investment resources. We are retaining our core team in our biopolymer group to provide continuity with the technology manufacturing process in markets where we continue to work closely with customers during this transition to understand their product needs, and to match them to available inventory.

We have reduced our spend levels on our oilseeds crop camelina, and focused our crop efforts on achieving the milestones on our $6 million DOE grant, which offers a transformational approach for producing renewable chemicals. During the first quarter of 2012 in connection with the wind up of the Telles joint venture, Metabolix agreed to waive its rate to ADM fermentation services, and is making payment to ADM of approximately $3 million.

In return, ADM and Telles agreed to transfer to Metabolix all of Telles’ inventory, which refers to PHA related inventory of greater than 5 million pounds, raw materials for compounding, the trademarks owned by Telles, including Mirel and Mvera, and all product registrations, certifications and approvals for Telles’ PHA biopolymers.

Metabolix retains ownership of the pilot plant equipment used for the development of PHA biopolymers, and will assume certain Telles contract rights and obligations. Metabolix has no further performance obligations in connection with the commercial alliance, and as a result approximately $38.9 million of short-term and long-term deferred revenue at December 31, 2011 will be recognized by Metabolix during the first quarter of 2012.

As a result of ADM’s termination of our Telles joint venture, and subsequent decision to restructure our operations, we anticipate total cash usage during 2012 to be in the range of $28 million to $30 million. This cash usage takes into account ongoing net operating expenses, one-time restructuring charges of approximately $1 million, primarily from employee termination benefits, and the payment of approximately $3 million that Metabolix is making in connection with the settlement of the windup of the Telles joint-venture.

Additionally we have scaled back our spending on crop programs, with our main focus right now on the $6 million DOE grant we received in 2011 to use switch grass to coproduce crotonic acid and biomass, and deemphasizing our spend on oilseeds. We continue to believe we have adequate financing to fully support our development activities for at least the next two years, and anticipate ending 2012 with cash and cash equivalent balances of $48 million to $50 million, and anticipate ending 2012 with an annual cash usage run rate of about $24 million. That is excluding any additional partner funding, grant revenue, or other sources of income, including inventory sales. Since much of our development work is discretionary, we can manage our cash usage commensurate with our technological progress and partner interest.

With that, we will open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Jeff Zekauskas with JP Morgan.

Jeff Zekauskas – JP Morgan

Hi, good afternoon.

Rick Eno

Hi, Jeff.

Jeff Zekauskas – JP Morgan

Do you have any tentative targets for your Mirel production this year?

Rick Eno

Production or sales, Jeff?

Jeff Zekauskas – JP Morgan

Either.

Rick Eno

Yes, we – I mean, the access to the inventory allows us to begin to develop those plans. As we mentioned in the call, having that inventory allows us to serve customers. It allows us to base load future manufacturing, but we have not gotten to the point where we actually have – in a position to actually provide any guidance at this point. (inaudible)

Jeff Zekauskas – JP Morgan

And you mentioned I think earlier on about a relationship so that you would have access to a 10,000 ton production facility?

Rick Eno

I think – Jeff, I think what you are referring to is as we look at Metabolix launching the biopolymers business the type of facility that we are looking at would have a scale in the range of 10,000 tons as opposed to 50,000 tons. We do not yet have a specific facility in mind, and as we mentioned in the prepared remarks, we are looking at around 10 different manufacturing options. So I would use 10,000 tons as a level of expectation of what we are thinking about for an initial PHA polymers facility without necessarily having a specific facility uniquely targeted at this point.

Jeff Zekauskas – JP Morgan

So the idea is that over time you might want to buy or build a facility of that scale?

Rick Eno

That is right. That is exactly right, buy, build, partner, and the type of facilities we are looking at have, for example, fermentation capacity already in place, some have outside battery limits, utilities in place. There are other options that are coming forward that do not have those type of infrastructure advantages in place. So that is the process we’re right now resorting to a number of options using in the order of 10,000 tons as a reasonable initial plant that would provide a foundation for growth, allow us to serve our customers and get to a strong financial performance with that asset quickly.

Jeff Zekauskas – JP Morgan

And secondly, as you proceed with developing your various projects, in the light of the change in your relationship with ADM, are you also pursuing options having to do with the sale of the company concurrently, that is, is this a two stage process or a two part process, where you are looking at the options of sale or merger on the one hand and of growing and building independently on the other, or have you really focused simply on the rebuilding of your manufacturing and the continuance of the current business model?

Rick Eno

It is much more the latter Jeff. We have extensive experience in these PHA markets. We have technology that is rapidly advancing. It is a fantastic growth market, so we’re clearly focused on launching that, and seeking a range of models to do so. And we see a significant amount of opportunity in renewable chemicals, and we think this PHA fermentation platform we have, coupled with the thermal recovery process, is an outstanding platform from a cost competitive perspective and a scaling perspective, and our partner interest seems to have validated that. And we have had no discussions on any sale or merger of the company.

Jeff Zekauskas – JP Morgan

Okay. Thank you very much.

Rick Eno

Thank you.

Operator

Thank you, sir. And next we will hear from Mike Ritzenthaler with Piper Jaffray.

Mike Ritzenthaler - Piper Jaffray

Good afternoon. A couple of questions around the inventories and the kind of the use, I guess first the payment of the $3 million, is that – that is going to happen all in one chunk in this first quarter?

Rick Eno

Yes, it will.

Mike Ritzenthaler - Piper Jaffray

Okay, and then the acquisition of the 5 million pounds, I mean just some simple math, it looks like it is less than 0.60 a pound, is that significant somehow, or is it reflective of the cost to produce the resins, or the market value of the resins or something else?

Rick Eno

Yes, it was a negotiate agreement Mike.

Mike Ritzenthaler - Piper Jaffray

Okay, and then are the inventories a mixture of various grades or is it a single grade. I guess I’m trying to ask about what are the inventories that will enable the company to address all the end markets, or if it is a few that have to be segmented.

Rick Eno

It is a series of grades Mike. So part of what our job going forward is to match those grades to appropriate customers, which as we mentioned in the prepared remarks, the primary objective is to base load our manufacturing asset very effectively. So there is a process that our team is undergoing, mapping the customer interest to the varying grades, and determining how to best match the product to the customer.

So it is a series of different grades. There will probably be some blending we want to do with certain of the grades. Also there is some rework and allocation that we may choose to undertake as well. But that process is just beginning.

Mike Ritzenthaler - Piper Jaffray

Can you give us a sense of the pace, maybe by month [ph] there is something like that on sales prior to the ADM event, and then post, do you expect any change in the pace of sales?

Rick Eno

No, I think it is similar to the question Jeff just asked, just having gotten the inventory, we are now able to speak quite openly with customers around their plans and start to prioritize volumes relative to customers, at which point we will have a better sense of the sales level. But this process is really the process just closed today, which allows us to begin those discussions going forward.

Mike Ritzenthaler - Piper Jaffray

Sure. Okay, thanks.

Operator

Thank you, sir. And next we will hear from JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital

Thanks for taking the question. Of course the question relates to your inventory as well, say if you sell some of this PHA, so you are going to record revenue with a unit price of $2.50, but on the cost side, are you going to put in the cost 0.60 per pound, or what?

Joe Hill

Hi, JinMing. This is Joe. You are right. As we recognize revenue, it will be reflected in the financials. As we sell products, it will be reflected in the financial statement as revenue. And we’re finalizing the accounting of just how the inventory is going to be accounted for. But you are right that $3 million is going to be booked as inventory for sale at various valuation levels for different components of what is in the inventory.

JinMing Liu - Ardour Capital

So, we can safely use a ballpark number of 0.60 per pound for projection for this 5 million pounds?

Joe Hill

So, for…

JinMing Liu - Ardour Capital

For the 5 million pounds inventory.

Joe Hill

For modeling purposes, that is okay to use.

JinMing Liu - Ardour Capital

Okay, and last question relates with your choice of the potential of 10,000 tons of PHA production capacity, so is that something – basically I want to understand why you choose 10,000 metric tons, is a potential partner have some industry standard fermentation capacity you can use, or that is based on some future projections for CapEx, or construction time, basically what is your thought process to determine that?

Rick Eno

Yes, JinMing, Rick here. Again, it is an order of magnitude capacity we’re looking at. And we got there from two perspectives. One is looking at the fixed versus variable cost structure of fermentation-based assets, and understanding the dynamics of our technology, and as you know when you get to lower capacity levels the fixed cost become much more of a burden. As you get to the higher capacity levels, it takes more time to fill the asset out.

So we looked at those and we balanced fixed variable cost structure and 10 kilo tons seemed about right in terms of the right balance given typical scale of fermenters and how we see those loaded. And we compared that with what we had seen in the market, while we had the Telles joint-venture, and we could point to pretty specific opportunities leading up to that capacity. Mostly in existing, defined markets, which gives us the comfort that we should be able to load it up to a cash breakeven situation relatively rapidly we anticipate.

So both from a market perspective and cost perspective that is the range we are looking. Now if an opportunity comes to us that is attractive, available fermentation capacity, a bit less, a bit more than that, we will clearly look at it because that would an infrastructure I should add accelerate our time to market with those type of existing facilities. So it is what we are using to screen assets that are out there. But the final capacity may vary a bit depending on circumstances and partners.

JinMing Liu - Ardour Capital

Okay. Do you have a projection of CapEx, you would say, you will be able to for the 10,000 tons [ph]?

Rick Eno

We don’t have that yet. We have ranges we have looked at. But just to outline the wide range of capital potential, I mean everything from a brown field they call it, meaning that the site exists with idle fermentation capacity and sufficient utilities ranging all the way up to a Greenfield facility would be one dimensional by which the capital would be affected. The other dimension, which is pretty significant as well is in what geography the plant is constructed, US versus South America versus Asia.

So there is a wide range, and it is a little premature to say here is the number because the number could be dramatically different depending on which model we actually pursue.

JinMing Liu - Ardour Capital

Okay, thanks for that, and my last one. You mentioned that the cost of the termination of the relationship with ADM, you can look at multiple opportunities, including integrate PHA production with chemicals, so what can impact that approach have the impact on your commercialization say for chemicals?

Rick Eno

Yes. It is a good point in that the fermentation system that we use for Mirel biopolymers is virtually identical to that which we will use for C4 chemicals and potentially C3 chemicals. So you know, as we look at a biopolymers launch facility, particularly if there are existing fermentation facilities assets there, those assets could potentially be run on our PHA strains [ph] for C4 or C3 chemicals as that biopolymers plant is ramped up.

So we would in the FAST recovery technology, we anticipate being far less capital intensive than the polymer recovery technology, so it gives us an opportunity to take advantage of multiproduct site, optimize capacity utilization, and spread fixed cost. Clearly that is the early stage of our thinking, but it is something that we are able to do now that we hadn’t spent a lot of effort on before given the nature of our previous relationship.

JinMing Liu - Ardour Capital

Thanks.

Rick Eno

Thank you.

Operator

Thank you, sir. And next we will hear from Laurence Alexander with Jefferies.

Laurence Alexander – Jefferies

Good afternoon.

Rick Eno

Hi, Laurence.

Laurence Alexander – Jefferies

I guess first question is, of your previous Mirel – sorry, of your previous Telles customers or customer relationships, have any ended?

Rick Eno

Well, the Telles contracts were terminated with the demise of the venture. So we have had to formally terminate those contracts, but as I mentioned we have 15 or so potential downstream partners we are talking with. There still is a high degree of interest and differing forms of that interest in terms of maintaining market development with Mirel. But from a contractual perspective, those contracts were with Telles and they therefore had to end because Telles has ceased to exist.

Laurence Alexander – Jefferies

Maybe to come at it from a different angle, has any of the publicly disclosed downstream partners not renewed discussions, or should we view that it is still in play?

Rick Eno

I couldn’t answer contract by contract by contract, but with the access to the inventory, what we are doing is reaching out to customers to understand their needs and their requirements, and we are looking carefully at how the deployment of that inventory translates to a sales ramp up of a biopolymers facility. So discussions will be occurring with all of those previously announced customers, some of which I’m sure will be part of the launch plan, and others for either our choice, or theirs may not be, that process will proceed over the coming months.

Laurence Alexander – Jefferies

Now, in the past you have discussed how certain matters like trial volume that will be required for any particular customer for actually having commercial sales to that customer, as you look at the 5 million pounds of inventory, is it reasonable to assume that all of that will be monetized, or is there a significant portion that we should assume will effectively will not be monetized because they will just be used for trial volumes. And then as a follow on, on the same theme, is there a point in time in this year where you would be disappointed if you did not have a commercial production partner, because you will be losing momentum with your various potential downstream customers?

Rick Eno

I guess on the first question, I think it was JinMing that asked about the pricing. I would just assume that that inventory volume is used, and we will let you know otherwise as we get into it and begin to look at grades relative to customers, but the intent is that we will use that primarily for customer development activities in sales. That is not to say there maybe some developmental material in there. But I would certainly assume that that is used at this point in time. And no Laurence, we have not picked a date, so this is the date that we will become disappointed in not having a manufacturing partner. But, then, we’re just moving ahead as rapidly as we can with the assessment of about 10 different options for manufacturing right now.

Laurence Alexander – Jefferies

Now, when you do announce a partner just so we can appreciate the trade-offs associated with that partner, what would be – can you give a very, very rough slide of a benchmark for how much of Greenfield capacity for 10,000 tons would cost in the US?

Rick Eno

I think that was asked before, and I think at this point we will hold off from providing that number until we get just a little bit further along in terms of the nature of the relationships we established. And again, as we pointed out, we are looking outside of the US also.

Laurence Alexander – Jefferies

Okay, and then lastly, how steep is the cost curve for GBL?

Rick Eno

GBL cost curve mirrors the butanediol cost curve pretty well. So if you are familiar with that it has got quite many cost curves. It has got a few low-cost producers. It has got a tail at the high end. And the nice thing about our GBL product is that the metabolic pathways we use go right to GBL. Then we have to add some conversion cost as you know to get to butanediol, which is the primary article of commerce in the C4 market. But the C4 technology we have to GBL is very low cost, and as you mentioned the butanediol technology is in the cost curve right with the petroleum based materials, that what we see about $90 a barrel and above. And that obviously we spend a lot of time correlating sugar prices with crude oil prices, but it is by our assessment, and other assessments it is a very competitive technology.

Laurence Alexander – Jefferies

Thank you.

Rick Eno

Thank you.

Operator

Thank you, sir. And we will take our final question from Jeff Osborne with Stifel Nicolas.

Jeff Osborne - Stifel Nicolas

Hi, good evening. Just a follow up on the BDO question, the $90 figure that you mentioned is that the current cost curve, or is that the projected cost curve?

Rick Eno

It is a – what we do Jeff is we look at a range of different oil prices and sugar prices because there has been as you well know, there have been some correlation between them. And you know, from historical data and looking ahead, as we look at the crude oil price going above $90, we see at that point the lines cross in our technologies generating a return, a 15% return on everything above that line. So it is more at the point at which those lines cross, where the renewable technology becomes advantaged versus petroleum technologies based on historical correlations of sugar and crude oil pricing.

Jeff Osborne - Stifel Nicolas

Got you, and just three other quick ones here, for Joe, did I hear you right that 24 million was the run rate for cash burn exiting 2012?

Joe Hill

Yes, that is correct. That is our current projection.

Jeff Osborne - Stifel Nicolas

And that is excluding…

Joe Hill

Yes.

Jeff Osborne - Stifel Nicolas

Okay, and then a lot of discussion on the 10,000 ton facility around CapEx dollars, but can you just, since you did kind of lockdown the prior design in 2006, or 2007, can you just maybe touch on what you think the order of magnitude of cost improvement per pound would be, roughly is it 20%, 30% better, or worse than that, less than that, any kind of ballpark that you can draw as we look at – are you focusing on these high ASP markets that you are addressing, but as this new plant is announced and opened up, what type of cost improvement do you think you will be able to achieve versus what Clinton was at?

Rick Eno

I mean, when you look at, a lot depends on your local utility pricing and all that but something in the order of 0.20 a pound, 0.25 a pound is not unreasonable given new strains, and given improved utility cost. But again a lot of that will depend on which technology set we deploy, and local utility costs and so on.

Jeff Osborne - Stifel Nicolas

Got you. In just the last one from me, can you touch on when you – I missed the news on your agreement with NatureWorks there, but could you when you would expect any shipments to that, or potential customers announced that would be looking at a PHA, PLA blend?

Rick Eno

No. The way that works Jeff is they have no, NatureWorks now has the ability to blend its PLA with other materials, other bioplastics. So they will determine the pace at which that license is used. They will determine the commercialization strategy. The point being is that we are amenable to seeing technology that we control being utilized in the markets to grow bioplastics, and we’re amenable to NatureWorks doing that. Specifically they are focused on the PVS blend with PLA for this specific opportunity. But we don’t have a projection of when their sales will actually occur. But we’re glad to see that someone can make use of that license, and that they can grow the bioplastics business, which is good for all of us.

Jeff Osborne - Stifel Nicolas

I understand. Thanks for the clarification there.

Operator

Thank you, sir. And that is all the questions we have at this time. I would like to turn the conference back over to management for any additional or closing remarks?

Rick Eno

Good. Well, I would like to thank you all for attending our call today. In numerous ways, we see our technology portfolio very well aligned with the global trends towards sustainability, and the use of renewable materials. We are well positioned to build value in each of our Metabolix platforms. Most immediately, the access to the Mirel product inventory will help us to develop the customer base for a launch of this unique and innovative material. We anticipate tangible progress across each of our business areas in the coming quarters, and look forward to keeping you informed.

Thanks again for joining the call. I hope you all have a nice evening. Thanks.

Operator

Thank you, sir. And that does conclude today’s conference. We thank you for your participation. Have a good day.

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