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Metabolix, Inc. (NASDAQ:MBLX)

Q2 2012 Earnings Call

July 26, 2012 04:30 p.m. ET

Executives

Rick Eno, President & CEO

Joe Hill – CFO

Analysts

Laurence Alexander – Jefferies

Mike Ritzenthaler -- Piper Jaffray

JinMing Liu -- Ardour Capital

Jeff Osborne -- Stifel Nicolaus

Uu Yang – JPMorgan

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Metabolix Incorporated Second Quarter 2012 Earnings Conference Call. Todays 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 Ms. Allison Townsend of ICR. Please go ahead maam.

Allison Townsend

Thank you, and good afternoon, everyone. After the market closed today, Metabolix issued two press releases, the second quarter 2012 financial results press release and the announcement of a letter of intent with Antibióticos to manufacture Mirel Biopolymers. If you have not received a copy of these press releases copies may be found on the website at www.metabolix.com in the Investor Relations section.

In addition, today we have provided several slides to accompany the presentation. These slides are available via webcast on the Metabolix website in conjunction with todays 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, a 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 other risks and uncertainties detailed in the Metabolix filings with the Securities and Exchange Commission including the companys 10-K filed on March 12, 2012. 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 the conference call.

With that, Id like to turn the call now over to Rick Eno, President and CEO of Metabolix. Rick?

Rick Eno

Thank you, Allison. Id like to welcome all of you to the second quarter 2012 earnings conference call for Metabolix. Today, as part of my update on our three platform areas I will provide additional detail and perspective on the announcement today of the signing of an LOI with Antibióticos for the manufacture of biopolymers which is a significant milestone in the launch of the Mirel biopolymer business under Metabolixs control.

I will also provide you with an update on our chemicals program which is advancing rapidly with both the achievement of technical milestones and with the engagement of potential customers. After my remarks Joe will then take you through the financials. With so much to cover today I will not provide an overview, but I will remind you that at Metabolix we are focused on three business platforms, first Mirel, a family of biobased and biodegradable polymers. Second, industrial chemicals initially focused on C4 and C3 biobased chemicals as dropped in replacements for conventional chemicals. And third, crop-based activities which include our programs in switchgrass, oilseeds and sugarcane. All of these efforts are enabled by our PHA or polyhydroxyalkanoates technology around which we have over 700 patents either awarded or pending.

In our review of the business I will begin with Mirel biopolymers. After the ADM termination of the Telles joint venture in January, I outlined our plan forward for you. I told that you that we would launch Mirel biopolymers under the metabolics nameplate. We said that we would focus on high valued segments, initially target a 10,000 ton per year plant, maintain the ability to engage multiple partners, deploy our most recent technology and retain the potential to create an integrated value chain. Im pleased to announce today that we are well on our way to delivering upon all of these objectives with the announcement of a manufacturing partnership.

So lets turn to slide two of the accompanying slides. We selected Antibióticos in León, Spain for commercial production of Mirel biopolymer resin and have signed a letter of intent or LOI to initiate the collaboration. Antibióticos is a highly regarded toll manufacturer of fermentation products who has and been in business for over 50 years. They have manufacturing equipment very well suited to the production of Mirel resin and as such are an ideal selection for our initial production site.

We anticipate two phases of our relationship with Antibióticos. First, in demonstration phase which will begin immediately we will work together to integrate our technology and run the entire process of PHA fermentation and recovery on commercial scale equipment, the vast majority of which is already at their facility. The purpose of this phase is to initiate technology transfer to Antibióticos and to identify the specifics of any equipment needed to ultimately operate the facility at our targeted 10,000 ton per year scale.

Given that all fermentation assets are in place and much of the recovery equipment we are aiming to produce demonstration quantities of Mirel in this demonstration phase by early 2013. In addition, during this phase the companies will complete additional economic and engineering feasibility studies related to the establishment in commercial operation of Mirel biopolymer resin onsite in Antibióticos.

With the completion of the demonstration phase, we expect to enter into the second phase, a definitive contract manufacturing agreement for supply of Mirel biopolymers to serve Metabolixs customers worldwide. This phase will consist of the installation of any needed equipment as identified in the demonstration phase, commissioning and integration of production into our supply chain for Mirel biopolymer resins. We aim to have this completed later in 2013.

I will remind you that in the first half of 2012, we engaged in extensive discussions with more than 10 perspective manufacturing and commercialization partners for biopolymers, based on the strong outpouring of interest following the exit of ADM from the joint venture. As we narrowed our selection to Antibióticos for this initial production, we also engaged in a review of manufacturing options around the world that could be utilized for industrial scale production of PHA materials.

Given the freedom we now have with regards to technology deployment and the dialogue we have established with a number of highly capable parties, we can see some of these sites factoring into our longer term corporate growth. Weve established some very good relationships, which we did not have a year ago during our site selection process and well maintain active communications with these firms in the future.

Why, Antibióticos? There were several factors associated with the selection of Antibióticos as our initial launch point for Mirel biopolymers. But, the top four and most important, our speed, capabilities, capacity and location. First speed, it is our goal to start making commercial quantities of Mirel as quickly as possible. At Antibióticos the fermentation capacity and key pieces of equipment relevant to our polymer recovery operation are available to us immediately and validation runs are being planned as we speak. We aim to be making demonstration quantifies or Mirel biopolymers in early 2013 and launching commercial supply later in 2013.

Second capabilities, through our technical due diligence at Antibióticos we are confident that their capabilities, skill set and equipment will be well matched to our technology for both fermentation and polymer recovery. Antibióticos has been producing fermentation based products for over 50 years and this experience is clearly reflective in their workforce and their approach to business. I will also mention that we found their management and staff professional committed to our relationship in a good cultural fit with out team.

Third capacity, we firmly believe that matching production capacity with market demand will result in commercial success. We expect that Antibióticos equipment to enable commercial scale capacity at our initial target of 10,000 metric tons or ₤22 million per year. As we described to you in January, we believe this is the proper scale to develop the initial market for Mirel and develop a solid platform for growth. We also anticipate being able to implement our latest technology with improved strains and recovery technology versus the 2006 vintage technology deployed with ADM.

And fourth location, the location of Antibióticos manufacturing facilities in León, Spain places it within the worlds largest market for bioplastic Europe. The Antibióticos site is within 24 hours driving time of many of our EU customers, our warehouse as well as from our local offices in Cologne, Germany. This proximity will allow us to be very responsive to our European customers and shorten their supply chain. Of course we will also supply customers worldwide from this site and its location near the Coast of Spain is well suited for this purpose.

So lets turn to slide three, the accompanying slides. Id like to discuss some of the business metrics associated with this initial production plan. While it is too early to give any specifics, as that is the purpose of the demonstration phase I can let you know how were thinking about it. On revenue, I touched on this earlier but our experience with Mirel, a new material suggest that 10,000 tons or 22 million pounds annually is a good starting point for polymer commercialization.

Using our historical pricing guidance we estimate that this initial site has the potential to generate approximately 50 million to 60 million in annual revenue for Metabolix. Through product and process technology we are already developing ways to enhance this, again we see this as a platform for future growth. A capital intensity our choice to select a contract manufacturing option as opposed to buying a facility or building a facility is to execute commercial scale production acquiring a limited capital investment.

At Antibióticos, the fermenters are already in place as is much of the recovery equipment. As we prepare for the contract manufacturing phase our anticipation is that we will need to secure a limited amount of additional recovery equipment which we believe we can do at short lead time and a relatively low capital cost. We will be working with Antibióticos to finalize the details of the contract manufacturing arrangement and to map out the details of the required capital investment as we work together under the demonstration phase of the LOI in the coming months.

While we anticipate the capital cost being modest and manageable for Metabolix we can now choose to open conversations if we wish with a number of customers who had expressed an interest in investing with us in PHA manufacturing.

On earnings, again it is much too early to offer any guidance on the earnings potential from on the Antibióticos facility, but our analysis and collaborative relationship with Antibióticos should allow this to be cash generator for Metabolix once the business is ramped up. While it should be clear to you that we are enthused about the potential of the Mirel launch we are well aware of the many challenges in front of us and are working aggressively to overcome them.

These include first, as you know Mirel is a higher cost material than some other biopolymers. Here we have defined a focused market strategy targeting applications where Mirel is differentiated and adds substantial value for our customers. Second, the launch of a new polymer is challenging, qualification times as weve told you can be 9 to 15 months and the process is often irritative. To address this challenge we have a core group of customers where our product has already been qualified and we aim to translate these successes to other very similar customers. We know our current and many of the potential customers quite well.

And third, Metabolix at its current scale cannot create a ledger balance nor underwrite product sales. Here weve defined a business strategy which should allow us to be profitable at relatively loss sales levels and scalable. Joe will touch on the longer term financial strategy for the firm in his remarks. The decision on Antibióticos was made taking into account all of the above challenges and in our view represents the best next step in the drive to make Metabolix a highly successful, high revenue growth company.

To conclude working with Antibióticos enables Metabolix to collaborate with a highly capable partner and maintain control of all aspects of our technology and process. It allows us to stay flexible, to work with multiple partners, to deploy new technology when we see fit and to integrate biopolymers and chemical manufacturing in the future.

We will enter the market quickly, at a reasonable scale and economics, free from the over $400 million ledger balance that existed under the Telles relationship. So the signing of the LOI with Antibióticos is a first step, but a very important step in our overall plan to set up our supply chain to serve biopolymer customers worldwide and bring our PHA technology to market.

Now, I would like to provide an overview of the market and second quarter revenues for biopolymers. First of all, there was nothing we have seen over the last year that diminishes our enthusiasm for Mirel and bioplastics in general. The markets continue to grow rapidly and the Mirel product is highly differentiated and it offers unique benefits. As we have mentioned in previous calls, the smaller production scale that we are initially pursuing allows us to focus on higher valued segments and applications and we can see substantial growth beyond this first facility.

In the second quarter we recorded $373,000 in product revenue, this represents a significant increase from the $14,000 reported in Q1, which only reflected three weeks of activity. During this quarter, we supplied several of our historic customers and also began to supply new customers. One key area where we saw activity in the second quarter was the compostable bag market in Europe. As you know, we have been working with European customers to develop and market compostable bags based on our Mvera film. And we are pleased to say we have continued productive conversations with customers serving this market and customers have been placing orders.

We have also been serving customers in the horticulture, anaerobic digestion and marine degradable segments. We expect our pipeline to broaden significantly as we discuss with customers the establishment of Mirel supply through Antibióticos. Given their sales now we have provided out of inventory I would like to reiterate that we are not trying to sell the inventory as fast as we can but rather to deploy it strategically with core customers to help meet their needs prior to our manufacturing launch.

Now with the Antibióticos relationship being firmed up we are very confident we can use the existing inventory to continue to serve our current customers, cultivate new customers through sampling and developed high value added applications. We have more than 5 million pounds of product inventory available for these users.

So I will wrap up my review of biopolymers by saying that we have appreciated the strong support weve seen from customers and business partners especially as weve had to work through the uncertainty of this transition period. We look forward to bringing new supply on line in working with customers to understand their product needs. We remain very enthused about the vast potential of the market and the unique role that high quality differentiated PHA polymers can play within it.

Now I am on slide four to begin the update our chemicals platform. In industrial chemicals we are leveraging our PHA microbial technology to enable chemicals that are currently being produced from fossil fuels to be produced from renewable raw materials. We have selected the C4 family followed by the C3 family of chemicals as our entry strategy into this space. Together the addressable market for these products exceed $10 billion. Our technology is unique in that the same basis process can produce both families of products with only relatively minor tailored purification modifications based on the specific molecule being produced.

Over the last year or so weve been in discussions with a number of chemical industry leaders about our technology for making bio based GBL and BDO. In the second quarter weve progressed these discussions and continued to advance the technology. We are further validating all aspects of the technology at semi-works scale and providing product to allow perspective customers to test the product in their own large scale downstream equipment.

In our C3 program we are also now in a range of discussions with potential feedstock manufacturing and off-take partners for our renewable C3 chemicals technology. In the first quarter, we produced densified biomass for acrylic acid, a key C3 chemical and have shipped the product to the market. In the second quarter we produced biobased acrylic acid in scaled up equipment in our Cambridge laboratories.

With the global market estimated at over $8 billion this is a very attractive market for our technology. In addition to our technology and customer progress we also have worked to further our intellectual property around this field. We believe that this will offer us a long runway for the technology and a range of options for commercialization.

Im now on slide five. Our third Metabolix platform is our crop based activity including our programs in oilseeds, switchgrass, and sugarcane. Long term, this is an exciting opportunity and historically we have leveraged government grants and academic research collaborations to move this work ahead.

In the first half of 2012, we continued to make progress in our work on the $6 million Department of Energy grant for the development of our biomass program. This funding will allow us to work on increasing the PHB levels expressed in switchgrass and conduct pilot testing at the production of chemical intermediates via our FAST process. In addition to the DOE grant we continue to identify opportunities for additional grants and collaborations to fund this work.

Im now turning to slide six, what Id like to do here is outline for you what the game plan is for going forward. For biopolymers what we have said is were securing new supply chain as a foundation to build the business. We are well on our way to doing this. Weve been operating the business since March and selecting Antibióticos as our manufacturing partner and maintained a core group of customers and reported sales out of inventory. We are planning to deploy the latest generation fermentation and recovery technology.

Were working on managing our customer relationships in ultimately transitioning them to ongoing supply. Were focusing our efforts on a limited set of proven market segments, segments weve already sold into. We know the critical quality criteria we know the markets and we know the pricing levels. We see the potential to fill out the target capacity at Antibióticos and beyond thats our focus on the commercial side of biopolymers.

In industrial chemicals the plan forward is hitting our internal technical milestones in enabling industrial scale production. Very interestingly, because we now have full control of biopolymers and chemicals we can now look at integrating them in a way we could never do before. Now were looking very carefully at the synergies which could result in higher acid loading, better capital efficiency and the ability to have a diversified PHA based product slate from a single asset.

In crops, were identifying and securing grants. Were not spending a lot of our cash on the crop program. We see this as long-term and fortunately there are a lot people interested in it so a lot of this has been funded by grant money given its long-term yet transformational nature.

This wraps up the business review, and Ill now turn the call over to Joe for a review of our financial results for the second quarter.

Joe Hill

Thanks, Rick, and welcome everybody to this afternoons call. Ill now focus on the financial results for our second fiscal quarter ended June 30, 2012. As always, we managed our finances with an emphasis on strict cash flow management. We have maintained this focus and ended the second quarter with $59.9 million in cash and investments.

Turning to slide seven for the second quarter, net cash used in operating activities was $5.9 million which represents a decrease in cash usage from $12.3 million used during the first quarter of 2012 and remains consistent with the net cash used $5.9 million for the comparable quarter in 2011. The $6.4 million decrease in net cash usage in the second quarter 2012 compared to the first quarter 2012 was primarily attributable to the purchase of more than 5 million pounds of PHA biopolymer inventory from Telles for approximately $3 million during the first quarter.

The decreased usage also reflected restructuring expenses of $900,000 and annual bonus payments of $1.6 million paid in Q1, partially offset by lower expenses related reduced head count. For the first six month of 2012 ending June 30, net cash used in operating activities was $18.1 million as compared to net cash used of $15.3 million for the comparable period of 2011. The year-over-year increase in cash usage for the first six month of 2012 is primarily attributed to the companys payment of $3 million to Telles on March of this year for the inventory purchase.

Turning to slide eight, Ill now give some additional detail on the companys financial results for the second quarter of 2012 ended June 30. Total revenue was $900,000 and $200,000 for the three months ended June 30, 2012 and 2011 respectively. The second quarter revenue consists of primarily of revenue from government grants and product sales.

Metabolix also recorded revenue related to the sales of PHA inventory and the amount of $400,000 and related cost of product revenue of $400,000. The cost of product revenue includes the cost of product shipped to customers, warehousing and freight cost. I want to highlight that the cost of product revenue includes significant ongoing and one-time warehouse costs for the over 5 million pounds of inventory we have on hand.

We have been engaged in the process to consolidate our inventory into fewer and less expensive warehouses. We expect to complete the consolidation in the third quarter. As inventory is sold we expect overall warehousing cost to decrease and to have a positive product contribution as the sales volumes increase. The quarter-over-quarter increase in revenue also reflects an increase in government research grant revenue which increased $400,000 over the same quarter of 2011 primarily as a result of work performed on the companys $6 million DOE grant.

Revenue in the second quarter of 2011 primarily resulted from revenue recognized from royalties under licensing arrangement with Tepha a related party and government grant revenue. Total revenue for the six months ending June 30, 2012 was $40.2 million versus $500,000 for the year ago period. The year-over-year increase was primarily related to $38.9 million in deferred revenue which was recognized as a result of the termination of the Telles joint venture.

If you recall from the description I provided in Q1 this $38.9 million in deferred revenue recognition had no cash impact. Increases in grant and product revenues during the first six months of 2012 compared to the first six months of 2011 of $700,000 and $400,000 respectively were partially offset by a $300,000 decrease in licensing royalty fees received from Tepha.

Id like to provide you with an update on our revenue recognition policy. This will be important to you, this will be important as you review reported Metabolix product revenues in the future. Currently, we recognized revenue shortly after delivery of product. During the third quarter we intend to modify our standard sales terms and conditions to provide customers with the limited right of return for a period of 60 days after product delivery. As a result of the implementation of this new product return policy we will differ recognition of product revenue until the period has expired. This will cause a shift by two months between booking sales and recognizing revenue. You will see this transition occurring in our Q3 results.

Total cost and expenses in the second quarter of 2012 were $8 million versus $10 million in the comparable quarter in 2011. Selling, general and administrative costs in the second quarter of 2012 were $3.4 million versus $4.2 million in the second quarter last year. Research and development costs were $5 million versus $6 million in the comparable quarter 2011. The reduction of cost and expenses reflects the restructuring conducted after the ADM termination.

For the six months ended June 30, 2012 total costs and expenses were $19.4 million as compared to $20.2 million for the respective period in 2011. Research and development expenses were $11.1 million as compared to $12.2 million for the comparable six months in 2011. The decrease of $1.1 million was due to a decrease in employee compensation and related benefits expense net of one-time restructuring expenses of $500,000 and the reduction in contract research expense of $600,000 less frequent biopolymer product trials and a reduction in outside product testing.

Selling, general and administrative costs in the first six months of 2012 were $7.8 million as compared to $8 million for the comparable six months in 2011. The decrease of $200,000 is primarily the result of a decrease in employee compensation and related benefits expense of $300,000 net of one-time restructuring expenses of $400,000.

Net loss for the second quarter was $7.9 million as compared to a net loss of $10 million for the second quarter 2011. Our net loss per share in the quarter was $0.23 per share compared to a net loss per share of $0.33 per share in the year ago period.

Net income for the first half of 2012 was $20.9 million or $0.61 per share compared to a net loss of $19.6 million or $0.69 per share in the same period of 2011. This increase in net income is mostly driven by recognition of deferred revenue.

Now on to the balance sheet, our balance sheet remained strong. As of June 30, 2012, we had cash and investment of $59.9 million. This compares to $66 million as of March 31, 2012 and $95 million at June 30, 2011. Please note that our cash and investments that categorized on the balance sheet is both short term and long term. All of our investments both short term and long term are in government backed securities.

Turning to slide nine, this slide summarizes the key points just discussed and highlights our current expectations for cash usage in 2012. We estimate operating cash uses for the year to be in the range of $28 million to $30 million before spending on capital expenditures. We anticipate and in the year with cash and investments balances of approximately $48 million to $50 million with the year end operating cash run rate of about $24 million this all excluding any additional partner funding, grant revenue, other sources of income for capital expenditures. We continue to have no debts.

Id like to now, share some thinking on the longer term financial strategy for the company given the Antibióticos announcement. Note, that we are well aware of the need to manage our cash balances and believe that we have a number of levers in the business to do so. Id like to highlight four of these levers.

First, is operational effectiveness. In biopolymers we are pursuing a capital efficient approach to launch Mirel. We do not intend to subsidize products in the marketplace. We need to produce it cost effectively and sell it profitably. Given our understanding of the product and the markets, we believe we have an approach to operate this business profitably at a much smaller initial sales level than possible in a large scale facility.

Second is partners, while we anticipate the Mirel biopolymers launch economics being manageable for Metabolix, we can now choose to open conversations if we wish, with a number of customers who have expressed an interest in investing with us in PHA biopolymers manufacturing. In biobased chemicals we believe our technology will be highly competitive and are in discussions with numerous partners, all of whom have significant financial wherewithal. Partner relationships can take numerous forms ranging from direct investments to off-take agreements.

Third is the timing of our programs. Our intellectual properties extents in some cases for nearly 20 years. We therefore have the ability to adjust our resourcing and timing of our non-Mirel programs commensurate with our financial resources. And fourth, alternative financing vehicles. We have a number of additional alternatives such as grants and loans, which will be evaluated and pursued, if required. As the Antibióticos launch plan is firmed up in the coming months, we will optimize our approach to manage our resources. What should be clear, is that our primary objective is to launch the Mirel business rapidly and profitably. Establish a platform for long term growth and we plan to manage our financial resources in order to do so.

With that, well open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And well go to our first caller from Larry Alexander with Jefferies. Please go ahead.

Laurence Alexander – Jefferies

Good afternoon.

Joe Hill

Hi Laurence.

Laurence Alexander – Jefferies

I guess first question is just on the new partnership and I think just broadly speaking, I appreciate that the economics is still, highly speculative but can you give a sense for whether in your discussions with this partner or with other partners youre getting a value capture above standards technology licensing arrangements?

Joe Hill

Laurence I dont, Im not sure I can comment in that right now. I think that the point with all of our valuations with Antibióticos is that we identify them, a business plan a set of assets, a business that will be a profit generator Metabolix and Antibióticos sees the development of the business very similarly then we do. So I think we got a very aligned view on for generating good returns from that business but does not yet compare that with the returns with any kind of licensing type arrangement we didnt consider that.

Laurence Alexander – Jefferies

And I guess in terms of other applications for PHA outside the film grade, are you still spending money on youre developing and improving that or is that one hold at this point?

Joe Hill

And youre talking about the outside of the film grades?

Laurence Alexander – Jefferies

Right.

Joe Hill

Yes just in terms of the marketing strategy for Mirel there is a film platform we have, which has a variety of different grades depending on the application, thats clearly a focus for us. There is an Agricultural and Horticulture segment that were clearly focused on, which takes into account the natural degradation of the PHA materials. There is a marine and aquatic area that were focused on, as well as the sustainable packaging. Mostly film some sheet products, but thats the area were focused on. Were not diversifying much from that core.

Laurence Alexander – Jefferies

And then this agreement doesnt have any constraints on your right of first refusal on any program on C3 or C4?

Joe Hill

No, its completely separate Laurence.

Laurence Alexander – Jefferies

Okay, thank you.

Joe Hill

Thank you.

Operator

Well take the next question from Mike Ritzenthaler with Piper Jaffray.

Mike Ritzenthaler -- Piper Jaffray

Good afternoon. This is Henrike for Mike. So we understand that you saw the preliminary stages of Antibióticos, can you give some sense for what the CapEx for the DOE test Antibióticos will be and what is the feedstock?

Joe Hill

Feedstock is sugars, but as you know with our Mirel platform can use a range of feedstock, but the typical feedstock at Antibióticos is sugars. We are not in a position yet to talk about the specific capital number. What is true and what we have said is that the nice thing about Antibióticos is that all the fermentation is in place, the supporting utilities are in place and the vast majority of the recovery equipment is in place. So we expect capital to be quite modest.

Mike Ritzenthaler -- Piper Jaffray

Okay. In terms of cost of goods, there was higher than expected, can you give us some color on the warehousing costs and when we might see them fall?

Joe Hill

Right. So we dont provide a breakout as to what the different components of the product costs are, but if you look in our Holding over $5 million of inventories as...

Mike Ritzenthaler -- Piper Jaffray

Pounds?

Joe Hill

Sorry 5 million pounds of inventory and as weve been consolidating that just as we sell more product the warehousing costs will come down and as we increase our revenues of course that will be increasing our margins.

Rick Eno

And there were some one-time costs as Joe had mentioned of getting the inventory into locations suitable for us that have basically ended or will end very shortly.

Mike Ritzenthaler -- Piper Jaffray

Okay. Thanks for that. In terms of the sales from SoilWrap at the retail level I believe it was launched in three states. So any initial read on the sales of those and what are the chances peak may be expanded?

Rick Eno

No. We can say that the product has been successful. That boxed in a longstanding and good customer of ours and theyre pleased with what theyre seeing with the product and we maintain a tight relationship with them. If youre looking at you probably have to ask them about the specific metrics where the product is being sold, how many outlets and the performance, but our understanding is theyre quite pleased with the product.

Mike Ritzenthaler -- Piper Jaffray

Got it very good. And lastly any good visibility on licensing revenue from the PHA, PLA technology from the PPP NatureWorks?

Rick Eno

No, I think the point there was we have a lot of intellectual property here at Metabolix. It was something that could help nature works expand the market for biopolymers which is good for all of us. And its in their control in terms of how, that the basic which they utilize that, the technology embedded in that license and were not engaged deeply with how they actually are deploying it, but were just pleased that they are able to expand the market for biopolymers.

Mike Ritzenthaler -- Piper Jaffray

All right, thanks guys.

Rick Eno

Yup.

Operator

Well hear next from JinMing Liu with Ardour Capital.

JinMing Liu -- Ardour Capital

Thanks for taking my question.

Rick Eno

Hey, Jin.

JinMing Liu -- Ardour Capital

Hi, first, Ive been trying to understand the timing of your collaboration with Antibióticos. So, you currently have signed the Letter of Intent, but the demonstration production you will not have until the first half of 2013. Why does it take so long?

Rick Eno

I think the demonstration phase is beginning and were working on that now, just started that. And the demonstration phase is essentially a technology transfer phase and a testing of all their equipment to determine exactly what is needed to produce this at scale. So, embedded within that JinMing, are things such as, theyll be in our facilities here, in our pilot facility to help operate the technology. We will be looking and doing the safety checks in all their equipment to make sure the facility will operate safely and effectively. There maybe some minor re-piping and things to do in order to move a step of our process from unit operation A to unit operation B. And well move ahead as quickly as possible on that and the intent is to have that demonstration product produced by early 2013.

JinMing Liu -- Ardour Capital

Okay, then how big will the demonstrations scale production be?

Rick Eno

Yet to be determined, you know we dont have the specific target on that. We will be running a series of grades we believe and well be running sufficient number of fermentation batches so we can identify the reproducibility of the product and make sure weve got very good date to ensure that we got all the equipment we need for the commercial scale production.

JinMing Liu -- Ardour Capital

Okay. Also related to the toys of Europe has the production base, I mean a man spending these most of your current customers are in the states, what will see opening up the European market and also can you could give us whats breakout of your current customer pipeline between U.S. and Europe?

Rick Eno

Cant give you the specifics on the last, but I think weve said in at least a couple of our previous calls and when we opened Cologne, Germany office had actually most of our sales activities in Europe not the U.S., Europe is the largest bioplastics market in the world. It continues to grow quite substantially even with all the turmoil there and this choice of Antibióticos allows us to have a very tight supply chain with the customers in Europe. But the vast majority of our sales were actually in Europe and not in U.S.

JinMing Liu -- Ardour Capital

Okay, that sounds good. Also will that lastly relate to your cash management, the size of your G&A and R&D cost is still very high, do you have any plan to cut those expense further?

Rick Eno

I think Joe outlined at least four levers we have as we look at the overall financial strategy for the firm. Our primary objective is to get the Mirel biopolymers launched successfully, quickly and profitably and we are going to focus our resources to make sure that happens. That being said we have number of other activities with the lot of partner interest and weve got a crop program which is largely funded by grants that we continue to deliver against. But we look at a series of levers as Joe outlined and as we firm up the Antibióticos plan and, well manage our financial resources accordingly but we have a fair amount of things we can deploy to do so.

JinMing Liu -- Ardour Capital

Okay thanks.

Rick Eno

Thank you.

Operator

Our next question comes from Jeff Osborne with Stifel Nicolaus.

Jeff Osborne -- Stifel Nicolaus

Great thank you. Joe I was wondering if you could or Rick give us an update on the food contact. I know its been a while since we talked about that is that a still focus of the company?

Joe Hill

I think that Jeff good to hear from you, the food contact application has gone well. Weve got acceptable product for food contact applications and its still is part of our portfolio and we continue to sample customers well have food contact applications in mind. However, our objective is to get this facility loaded as quickly as possible and start generating cash as quickly as possible. The inherent issue with food contact applications is that they tend to be a longer development cycle in non-food contact applications. There is a bit more testing that goes on. There is a series of organoleptic tests that must be done to ensure no flavor issues. And were well aware of the steps and we have served into food contact markets. But at this point its there, but in terms of getting this facility ramped up it is not the core part of the focus, just largely due to the timelines needed to get a single application from conception to commercialization. However, if you think about the long term growth, the PHA polymers thats clearly there in the end, I think food contact applications particularly single use food contact applications for anaerobic digestion or composting will be a very substantial portion of the portfolio. But in an effort to get things going quickly the dynamics of those applications are just a bit slower than the non-food content.

Jeff Osborne -- Stifel Nicolaus

Okay, that makes a lot of sense. Just two other quick ones here on the sugar side, following on prior question. My guess is in Spain, are they using sugar beets and molasses as the feedstock to get the sugar?

Joe Hill

Corn we believe, but its – we can use a range of sugars for that facility.

Jeff Osborne -- Stifel Nicolaus

Okay. So in terms of cost structure if they are using corn to be pretty similar to the Reg guidance that you had given around the Quentin facility?

Joe Hill

Yeah, I mean, everyone sees what s going on in these markets right now, its quite dynamic. Having that and going here with Antibióticos were going to have quite a substantial effort in looking at those feedstock costs or understanding the levers we have within the EU structure and it is somewhat controlled market, but we can use oils, we can use a range of sugars. And the other thing were going to do with regard to those raw materials is weve got some ways to continue to improve our strange to continue to reduce the dependency on the raw material which is a good thing from business perspective and reduce our dependence on shippers.

Jeff Osborne -- Stifel Nicolaus

Okay, that makes sense. And just a last one on – your partner on the chemical side that you had announced before, development work with CJ. Could you just give U.S. an update on where that stands?

Joe Hill

Sure yes CJ for those of you who are not familiar, we announced about a year ago, they are a Korean manufacturer of bioproducts, continue to develop alternative concepts with them about launching C4 chemicals and its a non-exclusive relationship. So were free and were talking to numerous others, but we maintain an active dialogue with CJ. The Metabolix rule is to move the technology forward, which were doing and identifying target customers in markets and then, we keep in touch with CJ when that gets burned up, we will work with CJ to see if our launch strategy makes sense in one of their assets. So it continues, its an active dialogue although I wouldnt say day to day dialogue, but we have our roles and we continue to move ahead with that and they are a potential future partner of ours.

Jeff Osborne -- Stifel Nicolaus

Great, thanks for all the detail.

Joe Hill

Thank you.

Operator

(Operator Instructions). Well take our next question from Uu Yang with JPMorgan.

Uu Yang – JPMorgan

Thank you for taking my questions. Some of my questions have been answered, but earlier you commented that now the customer focus would be in Europe. Does it mean that the product revenue you recognized this quarter, most of that is from European customers that you shipped the product from U.S. to Europe?

Joe Hill

Most of the revenue I believe, a good portion was from European customers and we have a warehouse in product already in our inventory in the EU. So, some of that was most likely shift out of our warehouse there. So, we have product both in the U.S and in Europe and depending on where the customers located and the grade well deliver that product from inventory. In the future well transition the Antibióticos supply into the supply chain. We will be able to serve global customers from Antibióticos but with the predominance of our customers in the EU will have quite responsive supply chain for them.

Uu Yang – JPMorgan

And secondly, so can you remind me how may be too its early to talk but how would you buy the raw materials that you need for the demonstration phase and may be possibly for the commercial phase of the Mirel production? Do you buy it in Europe or youre shipping from the U.S for the corn?

Joe Hill

It would be European supply. Keep in mind that Antibióticos has been in business for over 50 years and weve buying sugars for over 50 years. They know the markets well. We work with them on that. so, the supply chains early established and what we do as Metabolix given the importance of raw material and improving and getting profitability as high as possible. Well be engaged within to look at different feedstock we can run and how we can optimize the raw materials. But to get started, they have supply chains and supply sources already in place.

Uu Yang – JPMorgan

Okay, thank you.

Operator

And ladies and gentlemen thats all the time we have today for questions. Ill turn it back over to management for any closing comments.

Rick Eno

Good, thank you very much. Id like to – to conclude Id like to thank all of you for attending our call today. In numerous ways our technology portfolio is well aligned with the global trends towards sustainability and the use of renewable materials. Were well positioned to build value in each of our Metabolix platforms. Most immediately the LOI with Antibióticos and the new collaboration that will emerge from this work can be access through the Mirel product inventory will help us develop the customer base and growth foundation for the commercialization of this unique and innovative material. The attractive cost position for our C4 chemicals business is being increasingly validated by interest demonstrated by prospective customers and we continue to advance the technology. The production of bio-acrylic acid allows us further credibility as we develop technology to serve this attractive market. We anticipate tangible product across each of our business areas in the coming quarters and we look forward to keeping you informed. Thanks once again for joining the call and I hope you all have a nice evening. Thank you.

Operator

Once again that does conclude todays conference call. We thank you for your participation.

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