Yield10 Bioscience Inc (YTEN) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Metabolix fourth quarter 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 questions. And now I'd like to turn the program over to Ms. Kathleen Heaney. Please go ahead.

Thank you, and good afternoon, everyone. Metabolix's fourth quarter 2006 earnings press release was distributed today shortly after the market close. If you do not have a copy, one may be found on the website at www.metabolix.com in the Investor Relations section. Making presentations today will be Jim Barber, President and Chief Executive Officer, and Tom Auchincloss, Chief Financial Officer.

Before we begin our formal remarks today, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be put upon them. The Company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call.

We refer all of you to the Company's recent SEC filings for a more detailed discussion of the risks that could impact the future operating results and financial condition of the Company. With that, I'd like to turn the call over to Jim Barber, President and CEO of Metabolix. Jim?

Thanks, Kathleen. I'd like to welcome all of you to the fourth quarter 2006 conference call for Metabolix. During this call, I'll update you on the developments and milestones we discussed during our last call in December, and Tom will make a few remarks about our financial results. After we provide this update, we'll open the call to questions, and both Tom Auchincloss, our CFO, and Oliver Peoples, Metabolix's Co-Founder and Chief Scientific Officer, will be available to answer any questions you may have.

Before I discuss the key highlights and milestones of 2006, I want to step back for a minute or two and discuss our overall business and strategy for those who might still be new to the Metabolix story.

Metabolix is a brand-new breed of biotech company and a newly public company, having completed our initial public offering in November 2006. We are innovation driven, and we founded Metabolix in 1992 to use bioscience to provide sustainable, clean solutions to our needs for plastics, fuels and chemicals. We are now commercializing, in a joint venture with Archer Daniels Midland, our first product platform, totally biodegradable Natural Plastic, made through fermentation of renewable resources, such as corn sugar, which is abundant here in the U.S. Dr. [Ollie] Peoples, our Chief Scientific Officer, did the path-breaking work at MIT that provided the basis of Metabolix and underlies the Natural Plastic technology we are commercializing today.

This technology is protected by over 320 issued and pending worldwide patents. The market opportunity for Natural Plastic is very significant. The global plastics market is about 350 billion pounds per year, and each year another 15 billion pounds in new demand is created, virtually all of it made from petroleum. And nearly 10% of the oil consumed in the U.S. is in the production of plastics.

Natural Plastic, on the other hand, can reduce this dependency on petroleum, and since they are totally biodegradable, they can also reduce the environmental problems associated with solid waste and the accumulation of plastics in the environment. So today, when you think of plastic, you think of oil and a growing environmental challenge. But as Natural Plastics find their place in the market, we will think of them as renewable, biodegradable, environmentally friendly materials.

2006 was a momentous year for Metabolix. Besides our IPO, we had numerous significant accomplishments, including, but not limited to, the start of our joint venture with ADM, the establishment of a sales and marketing team, expansion of our base of customer prospects, commissioning of our precommercial manufacturing unit, the achievement of polymer production in switchgrass and, most recently, the initiation of construction of the 110 million pound Natural Plastic plant in Clinton, Iowa.

Looking ahead, we have a lot going on, and we are excited by what we can accomplish in 2007. First, construction of the Clinton plant is underway, and everything remains on track for a startup in the second half of 2008. In fact, piles are being driven and foundations are being poured as we speak, and we have scheduled a groundbreaking ceremony in April.

As you may recall, Clinton is right in the heart of corn country, and this Natural Plastic facility will be adjacent to one of ADM's world-scale corn wet mills. This location provides us with a secure and advantaged source of corn sugar, and given the availability of feedstock from the Clinton wet mill, the natural plastic plant has been designed and is being built with expansion in mind.

In addition to our commercial plant in Iowa, construction efforts are presently underway to increase our precommercial manufacturing capacity from about 17,000 pounds per month to over 50,000 pounds per month. We use this facility to produce material for our market development activities, which include customer sampling, product development and customer testing and qualification.

We have been ramping up precommercial manufacturing and produced near capacity in the fourth quarter of last year and expect to continue to increase production once the expansion is complete, which should be during this second quarter.

We are focusing our efforts not only on the manufacture of Natural Plastics, but also on aggressively marketing them to a sophisticated and environmentally friendly customer base. As you may recall from our IPO, we had at that time a pipeline of about 30 customer prospects evaluating Natural Plastics for about 50 different applications. As of today, that pipeline has grown to about 40 customer prospects for roughly 60 applications.

Of these, about 20 are testing prototypes and qualifying Natural Plastic in specific products. One thing we are particularly excited about is the size and scope of these customer prospects. About one-quarter of the companies doing testing are Fortune 500-size companies. Not all of these prospects will get to the finish line, and some will take time, but we are seeing a lot of interest in Natural Plastic and feel quite confident that the pipeline will continue to expand and customers will continue to move through qualification trials to the point of sale.

Another important milestone for 2007 is the launch of our new brand campaign for Natural Plastic. We are presently finalizing our design and trademark activities and plan to launch the brand, appropriately, around Earth Day, which is April 22nd. We have several activities planned around the country during that week.

While we are particularly excited about the commercial opportunities for Natural Plastic and the potential financial impact it will have, we also vigorously continue our research and development efforts. We have ongoing programs to deliver new and improved production strains and other process improvements to the ADM alliance that can lower the cost of producing Natural Plastic.

We are also continuing to advance our technology platform in other major product areas. Our switchgrass research has been progressing well, and recent strain developments have been showing increased levels of Natural Plastic in their leaves and stems. We plan to expand our efforts in switchgrass with a view toward starting pilot field trials sometime in the next four years.

We are also doing evaluation studies on other chemical intermediates that could be produced economically in a biological system. Depending on how those studies unfold, we may have more to share with you on this later this year.

Before I turn the call over to Tom, I wanted to mention that tomorrow I will be in Washington, DC, testifying before the U.S. Senate Committee on Small Business and Entrepreneurship at a hearing chaired by Senator John Kerry, entitled Small Business Solutions for Combating Climate Change.

Everyone knows about our country's unhealthy addiction to oil and the impact that petroleum use has on climate change, but what everyone doesn't know is that nearly 10% of the oil we consume is used for making plastics and chemicals. Natural Plastic means less oil consumed, less greenhouse gases emitted and less climate change, and we'll continue to spread that message.

With that, I would like now to turn the call over to Tom Auchincloss, CFO.

Tom?

Good afternoon, everyone, and thank you for joining us today. Although this is our second earnings conference call as a public company, the fourth quarter 2006 is the first quarter for which our financial statements reflect the impact of our initial public offering.

As I mentioned during our call this past December, our financial position improved significantly with the IPO, and on December 31, 2006, we had cash and cash equivalents totaling $122 million. This capital should be adequate to build our sales and marketing infrastructure, undertake precommercial manufacturing and make necessary commercial formulation investments and to expand our research and development to build the company.

Now, as most of you can appreciate, since our founding, we have primarily been involved in research and development and have not had significant sales of Natural Plastic and will not have such until the startup of our commercial plant next year. Our financial results reflect this, as well as more recently the initiation of precommercial manufacturing, as well as sales and marketing activities, and all of this is to set the stage for commercialization of our product next year.

We undertook significant growth of our operations in 2006, and our cash expense base for the Company nearly doubled year-over-year. We offset this rise in costs with collaborative partnering arrangements and government grants, which provided financial support.

In fact, the recent trend in net cash used in operating activities showed a decline. It was $3.5 million for the full year 2006, which is down from $4.4 million for the full year 2005. Now, although we are pleased with these results, we are continuing to invest in growing the Company and building our business. As Jim mentioned earlier, we are in the process of expanding our precommercial manufacturing facility for Natural Plastic, and we are expanding our sales and marketing infrastructure.

Although we are extremely excited about the potential in Natural Plastic, we also plan to increase our research and development to improve our production microbes, as well as to advance our switchgrass program. And lastly, we are also putting in place the administrative infrastructure to meet all our growing needs. Consequently, we expect our net cash use in operating activities to increase in the next quarter, as well as for the full year 2007.

Now on a GAAP basis, our reported loss for the three and 12 months ended December 31st was $7.5 million and $16.1 million, respectively. This is considerably greater than our reported net cash used in operating activities, but the primary reason for the difference is that under GAAP the payments we receive from ADM are recorded as deferred revenue and do not appear in our income statement. For the fourth quarter and the full year, these payments totaled $3.6 million and $9.5 million, respectively.

The deferral of recognizing payments from ADM will continue unit commercial sales from the Clinton plant commence, which we expect in the second half of 2008. At that point, the deferred revenue will start being recognized on our income statement. As a reminder, another reason for the difference between our net loss and our net cash use in operating activities is the recognition of stock compensation expense under FAS 123R. For the most recent quarter, and for the full year, this non-cash expenses totaled $2.3 million and $3.5 million, respectively.

Now I'd like to review some details of our fourth quarter 2006 financial result. Our GAAP revenue for the fourth quarter was not significant and for the full year 2006 totaled $4.6 million. As I mentioned earlier, all the payments we receive from ADM are deferred.

Ironically, a significant portion of our reported revenue for 2006 was the recognition of payments that we had received in prior periods for a collaboration that ended early in the year. In the three months and 12 months ended December 31st, as I said earlier, payments from partners totaled $3.6 million and $9.5 million, respectively.

On the expense side, total operating expenses in the fourth quarter were $8.8 million, and for the full year were $22.1 million. Of this $2.3 million and $3.5 million, respectively, related to reconciliation of stock compensation expense. The remaining expense reflects the Company's operations, which have roughly doubled in scale over the last year.

Research and development grew due to increased precommercial manufacturing of Natural Plastic, as well as product development activities and additions to R&D staffing. General and administrative expenses were also up, as we have added sales and marketing and administrative staff. In addition, expenses have risen as a result of operating as a public company.

So the bottom line is that our operating cash use was fairly moderate this year at $3.5 million. It will rise in 2007 as we grow our operations beyond the support payments we are getting from ADM and the government, but to a level that can be readily accommodated by our strong balance sheet.

With that, I would be happy to turn this over for questions and answers. Operator?

[OPERATOR INSTRUCTIONS]

Eric Larson with Piper Jaffray, your line is open. Please go ahead.

Yes, good afternoon, everybody.

Hello, Eric.

The first question is for Tom. Tom, looking forward to 2007, your non-cash stock option expense, what would you expect that to be for the full year? I think there as probably some catch-up for 2006 that the fourth quarter captured. Is that a fair observation?

Yes, so for the fourth quarter, there were a couple of things going on with our stock-based compensation that made it unusually large on a quarterly basis. Roughly half of the charge for the period was associated with stock option grants to our Board of Directors that were made when we became a public company.

Those options were initial grants and they were fully vested at the time of grant, so there was a full charge for the quarter. Going forward, on an ongoing basis, the annual grants will be roughly half the size, and they will have a vesting period of one year. So in future quarters, future grants will have less of an impact.

Okay, good, and then maybe a broader question for Jim. Obviously, you saw some nice advancement in the number of your customers since the last conference call and the number of applications that you're working on. Can you give us just a little bit more feel as to how some of your more advanced customers are progressing in their testing, give us a little flavor of how the pipeline is developing from sort of inception stage to full verification stage?

Sure. There is, of course, as you're indicating, a sequence of activities that a customer prospect goes through in moving from an initial interest to a qualification, through the testing phase, to a full qualification and then a purchase decision. And we have customer prospects at each of those stages through the pipeline.

I would say there is increasing activity, as we indicated, in the testing of these materials for specific product applications, as opposed to a more general assessment of the material for a general use by that customer. So that's a very good sign.

Now, within that pipeline, there's one case, which we have mentioned in the past, where we are already providing material in limited, precommercial amounts for actual precommercial launch, which is the stake for erosion control netting and sod.

We have a number of other types of applications that are moving through that full qualification and toward that completion of testing, as well.

Okay, good. And then just a question on the pilot plant expansion, are you expecting that kind of early in the quarter, or is it too early to tell on that pilot plant expansion?

The construction progress on that expansion is going well. There are some parts that will be delivered at the end of the month, and then as soon as those are installed, which should take a few weeks, the ramp up of production should begin.

So there's no technical hurdle, it's a delivery of equipment hurdle?

Correct.

Okay, then last question and I'll turn it over. Ollie, I'm getting a lot of questions, many more questions today, on switchgrass. In fact, it's been a big item in the last month or so. Can you give us a little feel on what sort of milestones -- obviously you talked today that you might be within the next four years looking at doing some field pilot tests already. Are there any other milestones that we could be looking for that would be significant in the next six to 12 months?

Yes, as regards switchgrass, one of the issues is the grass does grow slowly, but we are making good progress on that program. I think we would expect to have the first publication submitted sometime this year describing the first set of results in the field. I know the scientists are very anxious to get that out there. We have to go through the process at Metabolix before we do so, but we'll begin to make some of that information public sometime later this year.

And, Ollie, what publication would you expect that to come out in?

Well, that's a debate among the scientists at the moment. There's a range of views on that, depending on the particular discipline they come from. But I think it will be in a very nice quality, peer-reviewed applied science journal.

Okay, thank you. I'll turn it over.

Our next question will come from Paul Knight, Thomas Weisel Partners.

Good afternoon. This is Jonathan Palmer, actually, in for Paul Knight. I was wondering if you could perhaps give us a little more flavor in terms of the outlook for signing committed customers to the plant and when you think that might happen? And I guess as a follow-up to that, will you be announcing firm customer orders as they come in?

I can make a few comments on what our policy will be around customer disclosures. At this point in time, what we are planning to disclose in terms of actual customers will be either material -- customer agreements of a material nature, which we would obviously have to file with the SEC. So those would typically involve fairly large commitments, perhaps with exclusive rights associated with them, or if a customer is actually out in the markets selling product, which we consider will be in the public domain anyway.

As far as actually getting customers signed up, we have ongoing discussions with some of the top customers in our pipeline. When those actually get to closure is hard to predict at the moment.

Not a problem. In terms of the next year, next year's guidance, where should we be thinking, I guess, about where the SG&A and R&D expenses go for '07?

Yes, I think what you could do there is -- our advice would be to take the fourth quarter cash expenditures for G&A and assume that they grow quarter-over-quarter for the next four quarters.

Thank you. And then, lastly, in terms of your share count, it looks like the Street might have gotten it a little bit wrong in terms of your full-year 2006 share count. Where did you finish up the year in terms of shares outstanding?

I don't have the exact number off the top of my head, but it was roughly 20 million shares outstanding.

And as we think about that going into '07, is that number roughly in the range of where it's going to be?

It should be. We may see some stock option exercises in the second half of the year from some of our longer-term employees. In addition, we have some warrants outstanding that will expire mid year, and so those would go into the share base as well.

Thank you very much, Tom. I don't have any more questions.

Your next question will come from Pamela Bassett, Cantor Fitzgerald.

Hi, everyone, thanks for taking my call. I think I heard you say that the deferred revenue from ADM is expected to be recognized in the second half of '08. Is that correct?

Pamela, the way it works is that once commercial sales begin out of the plant -- based on discussions with our auditors, that would be the point in time when we would start having satisfied all of our obligations under the contracts. And so for a period of time to be determined at that time, we would begin amortizing the deferred revenue balance into the P&L.

Okay, so that's an approximation, then, second half '08?

Yes.

And will there be -- is any of it tied to -- the recognition of that revenue tied to shipments?

Yes, it would be -- it would probably be tied to production.

So reaching a certain production level.

Well, commercial sales start once we start producing the material, and then we would recognize the revenue based on the production of the period relative to the total expected production over a few years.

So am I correct in thinking that production is still scheduled to start Q1 '08?

No, the plant is expected to complete construction in the second half of 2008, and so it will start operations sometime during that second half, and the operations will progress up to capacity starting then and then over the following quarter or two or three.

Great, thanks for the clarification.

Yes.

Our next question will come from Paul Cheng, ThinkEquity.

Good afternoon, guys. A couple of questions. The first one, last week the Department of Energy announced a $385 million grant for cellulosic ethanol, and my understanding is that you guys have been in the process of applying for grants. Can you give us an update on that process for you guys?

An update on the application for grants?

Yes, yes, exactly and perhaps maybe any takeaways from that announcement that could increase your probability of obtaining grants because that, obviously, would be an [obvious catalyst] for your shares.

Yes, sure. So the DOE has a number of initiatives to stimulate the commercialization of cellulosic-based ethanol in particular and has been providing stimulus to folks building plants to get all that started. Our own view is that the technology for actually converting cellulose to ethanol still needs a lot of improvement to be commercially truly viable. And our own focus is on the co-production of Natural Plastic in a bioenergy crop such as switchgrass -- that's our first target -- where then the Natural Plastic is extracted, provides considerable additional value to the entire system, and then that biomass, that switchgrass biomass, can be used in whatever way people are contemplating the conversion of cellulose to ethanol.

So we have a number of conversations. It would be premature to go into any particulars on them around support, additional support for that effort. I think suffice it to say at this point that we're right in the midst of a very interesting area, bringing a quite distinctive and valuable approach to impacting favorably the economics of biofuels production.

Great. A few more questions. Beyond 2008, as you look to expand, I guess, like, the second and third phases from the plant, how will the capital expenditure be funded? I mean, the first plant is primarily from ADM. Future plants, is that something that you guys have commented on in the past?

There is a fair amount of flexibility under the alliance around the construction of additional plants and how they are financed. The working principle in the agreements is that the parties will do what's in the best interest of the joint venture.

There are two basic scenarios. One is if we were to build a greenfield plant in some other part of the world, that plant would be funded by the joint venture partners in the joint venture itself. Alternatively, if the expansion is an expansion of the Clinton facility, there is an option for ADM to finance that expansion as well, but under somewhat different terms and conditions than the current arrangement.

Okay, and one more question. You talked about launch of a brand associated with Earth Day this year, and I think in the past you guys have mentioned having like a soft and a hard launch. Would that be the hard launch or would that -- I would imagine that would be the hard launch. Is that correct?

Yes, that's correct.

Okay, got it. Thank you.

Sure, thank you.

[OPERATOR INSTRUCTIONS]

We'll go now to Mark Manley with Ardour Capital.

Hi, thanks for taking my call. Just wondering about if you could comment on the BP alliance from the beginning of the year. What was that for, and what happened there?

All right, Mark. We put together an alliance with BP some time ago that was driven out of BP's polymer division, which had -- which was based on funding a program to develop switchgrass that could produce polymer. As we were executing that research and development program, BP underwent a restructuring whereby they had planned to take this polymer division, set it up as a subsidiary, which was to be called Innovene, and then they were going to take that company public and spin it off.

En route to doing that, they sold this Innovene subsidiary to a company in Europe by the name of INEOS, which essentially is a conglomeration of related businesses, but driven primary by cash flow. And INEOS did not have an innovative R&D strategy in mind in the acquisition of Innovene. And so when that acquisition took place, they did not have an interest in funding the alliance, and therefore BP elected to end the research program at that point in time.

Great, thanks. And then just relating back to the research, on your comments with -- regarding cellulosic ethanol, would it be fair to say then the focus is really on developing the plastics, enzymes, processes in the switchgrass cells and really what's remaining is cellulose and let others develop how to deal with cellulose, or are you looking at actual enzymes that make cellulose easier to break down?

Mark, I'll take that one. No, actually, we're primarily focused on putting the plastic into there as a first case. There are a lot of companies out there looking at the enzyme side of it. There's a whole range of them, and we're not focused on that side of things. We have no interest in becoming an enzyme company. The way we view it is existing switchgrass becomes worth $1 based on cellulose technology developed by others, then our PHA plastic-containing switchgrass will be worth probably a couple of dollars on the same basis.

So that's the way we're viewing it. We're essentially carrying that forward as our specific program in that field. We're not trying to become a cellulose ethanol company.

Okay, great. Yes, that's what I thought, good. And lastly, is there any grant revenue that you know that's coming in 2007, R&D grant revenue?

We have a number of proposals that we have made and are making. We will find out about those late in the year as the governmental budget process comes to its conclusion.

Later this year, you'll find out.

That's correct.

Actually, one last thing. In terms of the capacity of the plant in Clinton, the first plant, can you say kind of how much of that has been sort of dedicated to sales at this point?

I would say the answer to that is no. As Jim mentioned earlier, we've got 20 customers in fairly advanced testing at this point, a quarter of whom are very large companies that in and of themselves could consume, and actually do consume in their current products, enormous amounts of polymer.

So the specifics of particular products and the size of those applications will become clearer as we get closer to actual market. But needless to say, in and amongst those 20 customers, there is considerable potential for this plant.

Would you characterize those customers as really plastic customers or end-product consumer packaged goods-type customers?

They tend to be what we would describe as brand owners, OEMs, companies that would be valuing Natural Plastic and the way it's presented to their consumer customers.

Okay, thank you.

And now we'll take a follow-up question from Eric Larson with Piper Jaffray.

Yes, just a quick follow-up, guys, on the shares question. Tom, you said about 20 million shares. That was basically the share count that I was using for basic, but if you put in your -- if you put in particularly the warrants and other things, it's closer to 24 million on a diluted basis. Is that still a -- are those numbers still the accurate way to look at your share count?

The fully diluted shares are closer to 24 million. The primary shares are about 20 million.

Right, okay, good. I just wanted to clarify that. Thank you.

Yes.

And we also have a follow-up from Paul Cheng with ThinkEquity.

Thanks for taking my call a second time, questions a second time. You mentioned that cash use would increase. Can you kind of give us some sort of indication, kind of like a range for the year, the cash burn, if you can?

No, we don't provide formal guidance at this time. I guess what we could say is that one guidepost to cash flow is the size of our operation. We have just shy of 60 people working at Metabolix at the end of this year. That may approach 100 people at the end of 2007.

Fair enough. Thank you.

At this time, we have no further questions standing by. I'd like to turn the program back to Mr. Barber for any closing remarks.

Okay, again, thank you very much for joining us today, and we look forward to updating you at the end of the next quarter. We appreciate your continued interest and support of Metabolix. Thank you.

Thank you, everyone, for your participation in today's conference. You may disconnect at this time.