Yield10 Bioscience Inc (YTEN) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix, Incorporated Fourth Quarter 2009 Earnings Conference Call. Today's call is being recorded. And 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 to queue up for questions. I would now like to turn the conference over to Mr. James Palczynski. Please go ahead, sir.

Thank you, operator. And good afternoon to everybody. Metabolix released fourth quarter and year-end 2009 financial results after the market close today. If you do not have a copy of the press release, one may be found on the website at www.metabolix.com in the Investor Relations section. 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 the Company's Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everybody 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. 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 our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. With that, I'd like to turn the call over to Rick Eno, President and Chief Executive Officer of Metabolix. Rick?

Thank you, James. I'd like to welcome all of you to the fourth quarter and year-end 2009 earnings conference call for Metabolix. Today I will provide you with a review of the Metabolix vision, a broad update of our ongoing activities. Joe will then take you through the financials. We continue to make good progress on our commercialization and development activities and have maintained strong financial position.

For those of you new to these calls, Metabolix is an innovation-driven bioscience Company, which is focused on bringing environmentally-friendly 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 C02 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.

Over the years, Metabolix has received numerous awards for its groundbreaking technology. Most recently in December of 2009, we received recognition by the World Economic Forum with their selection of Metabolix as a technology pioneer, and received this award at the annual meeting in Davos, Switzerland. We are honored by our selection by this influential group and are proud to add this to the list of awards that the Company has garnered.

We currently have three business platforms. First, Mirel, a bio-based, biodegradable plastic currently being commercialized with our partner Archer Daniels Midland through a joint venture called Telles. Secondly, industrial chemicals, initially focused on C4 chemicals. And third, crop-based activities, which include our programs in switchgrass, oil seeds, and sugar cane.

I'd like to begin with the Telles business, our joint venture for commercializing Mirel. We've made some very substantial progress since our last call. I'll provide you with an update on the Clinton Plant, the food contact notification process with the FDA, our pipeline, and a broad description of our expectations for the coming year.

The Clinton Plant is the production source for our first commercial product, Mirel. Consistent with what we outlined in our last call, the construction for the initial phase of the plant was completed in the fourth quarter of 2009. And the plant was fully handed over to ADM operations staff. I'm very pleased to say that all primary areas of the plant have been commissioned, and that the plant is now in production. Initial inventories are being built up. And the product has been shipped to Telles for evaluation. We expect product to be shipped to our core customers within the next month.

Successful start-up of this plant is a major milestone for Metabolix and the Telles business. We will now have an operating world-scale source of supply and can begin to satisfy the significant market demand for the product. I am pleased to note that the start-up process has gone very well. The transition from construction to operations was executed very safely. And there was a high degree of coordination between the ADM Polymer Manufacturing Team, Metabolix technology specialists, and ADM technical support throughout the process. The integrated team rapidly worked through a few minor mechanical and scale-up issues as this large, complex facility was brought online.

Over the next year, the ADM Clinton Plant Team, with support from Metabolix and ADM Technology, will continue to optimize the product and improve operational efficiency at the site. There are also numerous future technology improvements, which we already have in late-stage development, including next-generation microbial strains, recovery technologies, and product enhancements. We will now move to aggressively implement these at the Clinton Plant in order to drive down operating costs, improve capital efficiency, and extend the market potential for Mirel.

We are currently maintaining our guidance for the capital cost of the Clinton Plant as north of $300 million. And it is important to think of this capital investment in the context of growing the Mirel business, including a potential expansion of the plant. Consistent with most process facilities of this type, about two-thirds of the Clinton 1 capital investment will be in the actual processing equipment. And in our case, that is fermentation and recovery. About one-third of the capital will be in supporting infrastructure and utilities, including electrical and cooling water services, control rooms, maintenance facilities, and basic site development.

As we have mentioned before, Clinton was selected and laid out with the vision of a 4x expansion. As such, a good portion of the supporting infrastructure investment to support future expansion is being made with Clinton 1. We expect that the economics of expansion beyond 110 million pounds per year will reap substantial benefits from this Clinton infrastructure. We should also benefit from a more normal environment for the cost of construction materials and labor than what was experienced while ADM was proceeding with the construction for the majority of the plant in 2007 and 2008, as well as the application of next-generation technology that I mentioned, which will enhance capital efficiency.

I'd now like to provide an update on the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier, known as a Food Contact Notification or FCN, which is made up of the results of a number of extraction studies conducted under specific guidelines, as well as a thorough review of a range of polymer characteristics. In addition, there are usually formal requests for additional or clarifying information. Once the clarifying information is submitted, the FDA has up to 120 days to reject the FCN, or it will become active.

In early October, we submitted our dossier to the FDA for food contact notification. Our dossier addressed applications for all food types except alcohol in conditions ranging from frozen up to contact with boiling water. As you can imagine, this was a very large and extensive FCN due to the novelty of this manufacturing process and polymer. Since October, we have submitted additional information to the FDA responding to their questions. Based on the progress of this FCN, we are planning to bring injection molding products to food contact markets in Q2. This will enable us to sell into applications such as cutlery and injection-molded food storage containers. We expect to bring thermoforming and film products to food contact markets in the second half of this year. This will enable us to service applications such as coffee lids, yogurt cups, and film for use in storage bags. We also expect to submit additional notifications to the FDA as new Mirel grades are developed and the technology continues to advance.

Given the progress on the FDA submittal, we are currently in the active development stage with potential food contact customers for injection molding, film, and thermoforming products, producing prototypes for their internal testing requirements. Some of our potential customers are already conducting taste and organoleptic testing with early encouraging results. But keep in mind, as stated in previous calls, our entry strategy for Clinton is not designed around food contact applications and does not depend on it, as we do not have control over many of the factors that impact the overall timing of the FDA process.

Now, an update on our sales and marketing activities. With Clinton product becoming available, we can begin to step up our market development activities. Mirel is a superb product offering superior biodegradability, bio-based sourcing, and performance levels exceeding that of other available bioplastics. Our market development activities remain focused on six specific segments where the combination of Mirel's properties result in a particularly compelling and unique offering. As a reminder, these segments are packaging, compostable bags, consumer products focused on cosmetics, gift cards, and other products you would commonly find on the retail shelves, business equipment, agriculture and horticulture, and marine and aquatic applications. We believe that these six segments represent over 2 billion pounds of initial addressable demand.

The market remains extremely robust for Mirel. We have over 3,000 leads for various applications, of which we have selected a pipeline of about 100 prospects that are in various stages of product development with Mirel. For well over a year, the magnitude of our pipeline has remained relatively constant with the takeaway message being that we see more than enough non-food contact demand for Mirel to sell out Clinton 1. This continues to be the case. Progress on the FDA process will further increase the demand by opening the food contact markets to us, and thereby adding to the potential, addressable applications.

Now, with the Clinton Plant starting production we will be able to move forward with the commercialization of our pipeline, focusing on the ramp-up of sales and driving towards a plant expansion. This will be the result of choosing the right customers and converting this demand into sales contracts and our ability to manage a development time for new applications, which is typically nine to 15 months. We will be gaining a few quarters of operating and market experience with Mirel at world scale, and then regularly provide guidance to you on the plant sales ramp-up and expansions prospects.

In terms of product pricing guidance, we are maintaining our $2.25 to $2.75 per pound guidance. All of our contracts fall within this range. Fundamentally, Mirel's unique combination of biodegradability, bio-based sourcing, and performance properties allow premium pricing relative to most petroleum-based plastics.

In our targeted consumer applications the cost of plastic is small relative to the value that it brings to the brand. In our targeted industrial applications, the economics of a bio-based, biodegradable plastic adds value to that created by incumbent plastics. In both consumer and industrial applications, Mirel enables the creation of product and product lines that were not possible with legacy products. Mirel is a premium product.

The last update on recent progress with Mirel has to do with brand development. Over the last three years, we have described our co-branding strategy. And if you watched the recent Winter Olympics, you might have seen the television advertisement for the Paper Mate green pen and pencil set. This is a product with bio-based, biodegradable parts enabled by Mirel. You can view this view directly on the Paper Mate website. This is a great example of how our strategy to build Mirel into a globally recognized industrial brand is being realized.

Looking forward, you should think about 2010 as a transition year as the Telles business goes commercial, and 2011 as a year when a significant number of customer efforts will materialize as new contracts. More specifically, over the course of 2010 we plan to do the following. First, continue the validation with ADM of the Clinton manufacturing technology at scale and begin the process of continuous improvement. This will take the form of improving day-to-day operating efficiencies and the implementation of new technology that will improve operating costs, capital efficiency, and extend the market application patent for Mirel.

The second will advance the developmental cycle for the large number of potential customers that we have maintained in our pipeline for the last three years, and start to satisfy the strong market demand for Mirel. Third, we'll gain greater clarity on the FDA food contact process. With optimism, we will be selling into a range of food contact markets this year. And, finally, with our experiences in both technology assessment and the market we will be developing with ADM a view on the Clinton expansion program.

It will be an exciting year for Telles and the Mirel brand. And we look forward to keeping you up to date on our progress. Let me now move on to the other Metabolix platforms. These are our industrial chemicals and crop programs. These represent meaningful value creation opportunities for us beyond the Telles venture. We've been quite pleased with the progress we have been making in these other platforms. As such, in November we raised a net of approximately $29 million to help us accelerate these commercialization efforts.

First, industrial chemicals; in C4 chemicals, we continued our work on optimizing the fermentation process and have made significant strides in the development of a very efficient recovery process. As outlined in our previous call, our initial focus is on the C4 specialty market, including the pyrrolidones. And we continue exploratory partner discussions. In 2010, we will be broadening our development work outside of this initial opportunity as we flush out our industrial chemicals platform to also include C3 and C5 alternatives to other chemical families.

Our third Metabolix platform is our crop-based activity, including our programs in oil seeds, switchgrass, and sugar cane. All in all, we are excited about the 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, plastic, and fuels in a very sustainable manner.

In 2010, we expect continued gains in PHA yields expressed in crops, and to gain field trial experience for our industrial crop targets. We also expect to make significant gains in the testing of technologies for the recovery of PHA material from crops.

In terms of overall timing for the commercialization of our crop programs, we are comfortable with our previous estimates of having commercially viable crops in field trials within about two years. We are pleased with our technical progress on our crop programs. And we will communicate important milestones to you when reached.

In summary, we continued to make excellent progress this quarter against our milestones. The start-up of the Clinton facility initiates the next phase of the Metabolix growth story. And we look forward to providing regular updates of our progress to you. We are very enthused about the potential for Mirel, as well as our longer-term platforms. I'll now turn the call over to Joe for a review of our financial results for the quarter.

Thanks, Rick. And thank you all for joining us today. As Rick mentioned, we're very excited about the year ahead. We have our sights set on a number of important goals. And we're very pleased to be able to move forward with customer development and to focus on the ramp-up of sales.

Development and commercialization of Mirel has been a goal which we've been working towards for many years. And it's very rewarding to reach such an important milestone. At the same time, it's exciting to know that while Mirel is our first commercial initiative, as Rick mentioned, our crop and industrial chemicals platforms also each have a powerful market opportunity. We are continuing to make steady progress in both fields. And we believe it will ultimately enable us to develop new businesses, attract additional partners, and to significantly diversify our customer and product mix. This diversification will be an important part of our drive to generate substantial and enduring revenue in profit streams from our many initiatives in the years ahead.

I'll now focus on the financial results for our fourth quarter ended December 31, 2009. As always, we manage our finances with an emphasis on cash flow management. We have maintained this focus and ended the fiscal year with $92.2 million in cash and short-term investments. This reflects the completion of our equity offering that priced on November 11, 2009, which had net proceeds of $29.1 million to the Company.

For the fourth quarter, net cash used in operating activities was $5.9 million, which represents a planned decrease in cash usage from $7.3 million used during the third quarter of 2009. But it has increased over the $3.7 million used during the comparable period of 2008. 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 in the fourth quarter 2009 compared to the fourth quarter 2008 is primarily due to a decrease in cash receipts. The fourth quarter 2008 included two quarterly support payments totaling $3.2 million received from Archer Daniels Midland, the Company's Telles joint venture partner. No further quarterly payments were expected or received from ADM after June 2009. The decrease in cash usage in the fourth quarter 2009 from the third quarter is primarily due to an increase in cash receipts from ADM for pre-commercial cost sharing.

For the full year, net cash used in operating activities during 2009 was $25.8 million compared to $18.4 million for 2008. The increase in net cash usage relates primarily to a decrease in cash receipts in 2009 as compared to 2008, including a decrease of approximately $4.9 million in pre-commercial cost sharing and quarterly support payments from ADM, and a decrease of approximately $2.1 million in funds received from investment income.

I'll now give some additional detail on the Company's financial results for the fourth quarter of 2009 ended December 31. Total revenue was $205,000 versus $399,000 for the three months ended December 31, 2009 and 2008 respectively. Revenue in both quarterly periods resulted from revenue recognized from a delivery of Mirel sample product, license fees and royalties, and government research grants. The year-over-year decrease was attributable to lower revenue recognized from delivery of Mirel sample product and a decline in government research grant revenues, primarily related to the completion of the Company's strategic environmental research development program grant which ended in 2009.

For the full year, revenue decreased approximately $200,000 from $1.6 million to $1.4 million, also due to lower Mirel sample product revenue and a net decrease in grant revenue from our government research programs. Total operating expenses for the fourth quarter of 2009 were $10 million, an increase of $300,000 relative to the comparable quarter in 2008. This year-over-year increase is primarily attributed to higher SG&A costs associated with the hiring of additional personnel needed to support the commercialization of Mirel Bioplastics, but partially offset by slightly lower research and development costs.

Selling, general, and administrative costs in the fourth quarter of 2009 were $4.1 million versus $3.6 million in the fourth quarter last year. Research and development costs were $6 million versus $6.2 million in the fourth quarter of last year.

Net loss for the fourth quarter was $9.8 million, as compared to a net loss of $8.9 million for the fourth quarter of 2008. For the full year, total operating expenses were $40.2 million compared to the 2008 level of $40.4 million. Our net loss for the full year ended December 31, 2009 was $38 million compared to $36 million in 2008. As in previous quarters, the fourth quarter loss is greater than the cash used in operating activities as a result of non-cash expenses including depreciation and stock-based compensation expense. Additional, as we've discussed before, all of the payments we received from ADM are recorded as deferred revenue for GAAP purposes, and therefore do not yet appear on our income statement.

Our net loss per share in the quarter was $0.39 compared to a net loss per share of $0.40 in the year-ago period. For the full year of 2009, the net loss per share $1.62 compared to $1.58 in fiscal 2008. Now, a few words about our balance sheet, which has grown stronger. As of December 31, 2009, we had cash and short-term investments of $92.2 million. This compares to $70.1 million as of September 30, 2009 and $91.1 million at year-end last year. The equity offering we completed in the fourth quarter of 2009 provided net cash to the Company of $29.1 million.

We continue to have no debt. We continue to believe we have adequate capital to build ourselves a marketing infrastructure and to expand our research and development to build the Company. We continue to work with a roster of successful companies with whom we can partner so they can create alternative solutions and change the way they bring their products to the marketplace. We are very pleased with the progress we've made during the fourth quarter and over the course of 2009. With that, we'll open the call to questions.

(Operator Instructions)

Your first question will come from Michael Cox of Piper Jaffray.

Good afternoon, guys. And congratulations on the start-up of the facility.

Thanks, Michael.

My first question is on the ledger balance for the construction costs. I know you said you're still saying north of $300 million. Is it fair to say that it is south of $400 million?

So, the ledger balance, remember the ledger balance that we report in the K, is comprised of a few things. It is the construction cost of the manufacturing facility. It is the support payments that ADM has made to us. And it will be any working capital funding that Telles will need that ADM is going to be providing to Telles. So, as of the -- at the end of Q3, the ledger balance was $369 million. And at the end of Q4, it's $385 million.

Okay. That's very helpful. As you've described before, the sales and marketing expenses associated with the development of Mirel will transfer to the Telles JV. But I'm assuming you'll step up R&D spend for your next plant science programs. Just from a modeling perspective, could you shed some light on what that offset might look like? Should we expect the increased spend in the other programs to offset fully the shift in sales and marketing expense? Or will it be at a lower rate?

I'll provide a view, Michael, and Joe can add to the implications on our financials. Yes, we will be ramping up the other programs. But it is not going to be anywhere near as material as what those reimbursements will be for the Telles operations. That's a business that's entering commercialization right now. And we're still in the development programs for the crop activities. So I can see those moving up, but rather slightly compared to the overall effort on Telles and what it will mean from that cost structure that gets reimbursed to us.

Did that -- so, as we'd said before in previous calls, there's about $5 million per quarter of expense that we're spending on sales and marketing development and product development for Telles that will shift over to the Telles joint venture after we reach the first commercial sale. And we will not be backfilling that full amount with increased R&D spend for Metabolix.

It'll be gradual, but it will be small compared to the magnitude of that Telles spend that Joe outlined.

Okay. That's great. And my last question is on the food contact product. You had mentioned in previous calls that Clinton 1 would be sold out without food contact product. And in this call you're saying that you will be selling food contact product. Is that merely food contact product for tests or sampling for prospective customers? Or do you anticipate allocating some capacity to food contact this year?

Good question. I'll clarify. What we've said historically, and we continue to say, is that we have sufficient non-food contact demand, we believe, to sell out Clinton 1. Now that we're feeling comfortable and are optimistic on the food contact process, there then becomes a process of optimizing how much non-food contact and how much food contact customers and applications will fill out Clinton 1. We are now starting to aggressively move forward with food contact customers in certain areas.

And so I could expect that Clinton 1 will consist of both non-food contact and food contact applications in some mix, which will be determined. But I think the statement you're referring to, Michael, is that we've just felt consistently and still do that because of the uncertainties with the FDA process we have designed a primary entry strategy around non-food contact. But as that process gets resolved, we will integrate food contact applications into the sales mix for Clinton 1.

Very good. Thanks for the responses. I appreciate it.

Thank you.

From Jefferies, we'll hear from Laurence Alexander.

Hi. This is Amanda Sigouin for Laurence. Another question regarding the FDA food contact application progress. Could you help quantify the relative market opportunity for food contact?

Yes. I guess just at a high level there are about 540 billion pound of plastic a year, and about a third of that is food contact, meaning that the world market for food contact is about 180 billion pounds of plastic applications. So, it's an absolute huge number. And much of that is single-serve, which is ideally suited to a biodegradable product like Mirel. We have not got to the point yet of determining at our $2.50 selling point exactly what each application means in terms of addressable market. We know it's huge. And we see trends moving in our favor that are helping us in terms of bans on disposable items and the implementation of composting infrastructure and anaerobic digestion, all which helps us.

But, no, Amanda, we've not got to the point that we've said we can absolutely quantify the specific amount of food contact applications in an addressable market way because it's a very regionalized evolving situation. But we're just excited that it is such a huge market. And at 110 million pounds, we just have to tap a small piece of it and we'll be more than happy.

Okay. And just to follow up, are these different grades of material than you sign with your industrial customers? And, I guess, as far as margins with food contact product products, should we expect these to be similar to margins with your other customers?

We're not providing margin guidance at this point. But the base resin is going to be basically the same. It's coming from the same major technology. And there may be a few minor things that are done initially. But in the end, we'll migrate towards very similar identical grades, actually, for food contact and non-food contact.

Thank you.

The next question comes from Scott Reynolds with Thomas Weisel Partners.

Hi, guys. Thanks for taking my question. I was wondering, typically in the past you had provided a demand pipeline number. I don't know if you were thinking about giving that going forward or if you can give that on this call.

Okay. This is the end of the year call. And we looked at the message and the feedback we've been getting on that metric. And it's been basically a constant number. And it was somewhat confusing to people about what that means. What we intend to do now -- and the message is still the same. There's more than enough non-food contact volume to sell this plant out, Clinton 1 out.

What we want to do now is get a couple of quarters of operating and marketing experience under our belt, and begin to provide a more useful metric as requested by many people who follow us around the ramp-up rate of the plant and the anticipation of an expansion. That earlier metric just talked about what is actually in the pipeline without really an indication of the yield on that. And we intend to provide more color on that as we get experience. But the basic message has always been the same, and it has been for well over the last year that we have more than enough non-food contact demand in our pipeline to more than sell out Clinton 1.

All right. Very good. And would it be fair to say that sometime in the summer or second half of the year we should see full ramp of the facility up to 110 million pounds per year?

I wouldn't say that. I mean, we'll provide you with, once we get some experience under our belt, with a view on the ramp-up rate. But I think we try to describe 2010 as a transition year for this business. We have such a rich pipeline. And for the last, really, two to three years we've been hampered on product availability. That will be resolved for us. And we're now able to move a number of things forward.

Typically, we've described a nine to 15-month development cycle for a variety of -- for typical applications in this industry. And of the 100 chosen potential customers we're working with, they're all at various stages of that developmental pipeline, able to be advanced with the material coming from Clinton. So, I would see 2010 as being a year where lots of activity occurs, including signing up new customers and increasing sales out of Clinton. But 2011 is when a lot of things will convert because we will be in the middle of that nine to 15-month development cycle.

Okay, and on that, you have several non-food contact customers already announced, such as the pen that you said on the commercial. Are those customers fully qualified and they can start receiving material as soon as it starts coming out of the plant? And if that's the case, are there enough customers that are fully qualified that they can take all the material that's going to be coming out of the ADM plant if it is able to ramp fairly fast?

We're not -- I guess the first point is that, yes, those customers are fully qualified on the material. And, as I described in the call, we've got some early material coming out of the plant. We're looking at it. We're assessing it. There's a process of fine-tuning and optimization going on at the Clinton site because there's numerous specifications that a product coming from the plant must meet. And the plant is tuning to meet all those specifications. When we're happy that all are met, that product will go to the customer, and they're fully qualified. With regards to ramp-up, we've not talked much about that other than just saying that we have a significant pent-up demand for the product. And as soon as we can get product in the hands of potential customers, we can get a lot of things moving simultaneously.

Okay. And just a housekeeping question, you did your deal in the fourth quarter. So I was just wondering if we could get some -- a share count guidance for the first quarter.

Share count guidance? You mean outstanding shares?

Yes, if there is anything -- yes, what the first quarter shares would be.

So, you'll see in the 10-K that's being filed, and actually it's in the press release as of now, that we have about 23 million shares, basic shares, 23.4 million basic shares on a weighted average basis. And on an absolute basis, it's about 26 million shares.

Okay. Thank you.

Your next question will come from JinMing Liu with Ardour Capital.

Hi, Rick and Joe.

Hi, JinMing.

Hi. First, I want to clarify one thing here. It's about shipping that $5 million per quarter to the Clinton -- to the JV. Your last conference call you guys mentioned that shift will happen once the facility meets certain production level and meets certain product needs and meets certain specifications. And a few minutes ago, you mentioned that the shift will happen once the first commercial sale happens. So, which one is the right -- ?

So, the first commercial sale is a definition of what you just described, that there's a minimum quantity that needs to be shipped to a customer and paid for by the customer in order to be considered first commercial sale.

You can think -- it's a definitional thing because you're describing exactly the same thing. The first commercial sale is a contractual term. And we're looking at the period between the initial start-up of the plant and that first commercial sale as the optimization period for the business as it gets started. But in the 10-K we outlined the various characteristics and criteria that define what that term first commercial sale means.

Can you give out any guidance on that? When should we expect that shift will happen? And currently it looks like from the language you used in your news release it sounded like it will not happen this year.

No. Currently, we're anticipating that to occur in the second half of this year.

Second half? Sometime in the second half?

Yes.

Okay. In terms of the start-up process, my understanding is that in the expense-related way to start up and the future potential losses with the facility will also go to the ledger balance and the JV will have to repay that part of the expense, as well. Am I correct on that?

Yes. You are.

Okay. So, potentially we're looking at a total capital cost. Basically, the ledger balance is going to be over $400 million once the full commercial sales happens.

So, we haven't given any more guidance other than it will be north of $300 million. We know what the ledger balance is as of the end of the year, which is $384 million. And then there would be some modeling to take into account, the final cost of the completion of Clinton 1 and any of the operating losses that Telles will have.

And from a Management perspective, we're cognizant of that and continuing to manage the start-up process of this business in a very careful way. And I think ADM shares that approach, also. And I've seen it over the last couple of months as the plant was brought up to line, a very methodical, cost-focused way to bring this business to commercial. So, you've got the mechanics correct. But we're cognizant of it, and we're watching it carefully.

Right. So, when you're looking at your models, it is careful -- it is important to note that this ledger balance, which includes the construction cost of the Clinton 1 facility, also includes significant infrastructure for an expansion of the Clinton 1 facility. So, your model, while you're building in the full expense of the ledger balance should also be including expansion of the Clinton facility in order to understand the utilization of what that cost is and what the real return on that expense is going to be.

And, not to mention, I'll add to what Joe said, which is exactly right, is we mentioned in the call we've got a series of late-generation technology development that is aimed at capital efficiency. And one of the things we'll be working on with ADM is how much production can we actually get out of a plant that's designed for 110 million pounds with no additional capital? And that'll be one thing we'll work on very aggressively this year.

Okay. My next question relates to the price of your PHA. I remember that Metabolix is responsible for compounding PHA for various applications. How much Company cost is included in that $2.25 to $2.75 per pounds price?

That's a good question, JinMing. But of -- so, that's getting into what are some of the components of the gross margin. And we just have not been disclosing any of what the net gross margin or components of that gross margin will be. And I think you could understand that a lot for competitive reasons.

But we are using compounders that are out in the market today. And we're using full commercial compounding lines that are there today. And there's a cost structure associated with those that you could investigate. But we're not providing guidance on that.

Yes. I did check that. And that cost varies. It could be $0.30. It could be much higher than that. So, that's why I'm asking to try to get the clear picture on the net price of your PHA.

It could be less, also.

Yes. I understand that. But I averaged. That's the price I got. The [loss] price related to your FDA process, can you give us any idea when was the last comment FDA sent to you? And when did you respond to that?

We won't provide a specific date. But it was very early this year.

Very early this year? Okay.

Yes. We had two iterations with the FDA since October. We responded to both of them; a lot of information transferring hands to them, and waiting to hear back from them. But it was early this year.

And your Clinton facility is still using the generation one recovery technology, right? It still comes from water-based process?

We're not talking about the specific type of technology. But we're saying that based on what we're using to start up Clinton 1, we have advanced the technology substantially over the last three and a half years. And we're looking at continued improvement, like any process operating plant. And we're doing some tests on new and improved ways that would improve capital efficiency, lower cost, and improve product application. But we're not getting into the details of the specifics of our recovery technology.

Okay. Thanks a lot.

Thank you.

(Operator Instructions)

From Rafferty Capital Markets we'll hear from Ian Horowitz.

Hi. Good afternoon, guys.

Hi, Ian.

Just to continue on JinMing's line of questions, with the comments from the FDA it doesn't change the comment period at all, does it? I mean, we're still looking mathematically towards the end of this month to finalize this food contact dossier. Is that correct?

Well, I think the FDA can -- we submitted in October. And I guess if you took 120 days from October that would put you mid-February, something like that. Over the course, we responded within the time frame requested by the FDA. But they have, given the volume of information required, they have the prerogative if they choose to reset that clock. So, we're saying that for injection molding products we expect to have the ability to sell into food contact markets in Q2, and for film and thermoforming in the second half of this year.

Great. So, that -- I mean, that doesn't give us -- I mean, Q2 can be -- selling in Q2, that's a pretty wide spectrum for something so close. And I understand it comes to the second half for the rest of the things. But you're not -- can we get a little bit more clarity on whether this expectation is going to be a Q2 event, a full three months or near full three months? Or is this something that these comments have pushed this dossier back?

No. Again, it's hard to predict from the FDA. But in dealing with our customers and our own internal estimates, we're just saying Q2. But we're planning on injection molding, and in the second half of the year film and thermoforming.

Okay. And then from a modeling standpoint, the volumes that are going through pre this commercial sale, how are we -- is this not going to come through the income statement at all? This isn't going to be recognized revenue? Or do we look at first quarter and second quarter as just very low volumes at that $2.25 to $2.75 a pound range?

Right. So, remember the revenue flows through Telles, not Metabolix, right? So, this is all --

Right. I understand. But when I talk about the whole effort, will we see it in the Telles numbers as revenue? Or is this still just transfer of cost less volumes?

So, any product being sold that's coming out of the Clinton facility flows through the Telles financial statements.

Right.

Whether it's the first pound or the millionth pound or the ten millionth pound.

Okay. So, fully recognized as revenue at the JV, correct?

At the JV.

Okay. Great. Thanks a lot.

Thank you.

And your next question will come from Pamela Bassett with Cantor Fitzgerald.

Hi, everybody. Thanks for taking my questions. Congratulations.

Thank you.

Thank you, Pamela.

I just want to confirm the injection molding plastic grade. In the summer, you announced a second-generation Mirel for injection molding, P1003. And is the same grade that will be used for the initial food contact shipments?

It's going to be very similar.

So, it's a slightly different formulation.

Yes. And this is the thing, Pamela, you have to recognize. This is such rapidly-moving technology that everything is moving. And we continue to improve things. But the P1003 grade is an excellent injection molding resin which has real broad applications. And there are some slight variations to that that have occurred since that announcement. But basically it's very, very close to the same resin.

Okay. So, we can expect to see a continual migration of both improved grades or optimized grades, as well as optimized production out of the facility both going on concurrently?

Absolutely. I mean, every single product grade we're working on from injection molding to thermoforming to foam to non-wovens, it's all moving and improving quite nicely. And then with the plant up and running, exactly as you point out, there'll be optimization of that and then the next-generation technology. So, it's clearly a lot of things moving in a positive way.

And is it fair to characterize these optimizations as in the plant optimizing primarily for yield, whereas in the grades optimizing (inaudible - microphone inaccessible) rather than the strains and the outputs, optimizing the formulations for functional characteristics?

It's a little bit of both. But primarily the typical, as in most processing facilities, the plant modifications at this stage of the technology development aimed, as you point out, at yield, at cost reduction, as well as capital efficiency to try to see how much capacity can a given asset produce? And that's very plant-oriented. In addition, there's some effect by those changes on the breadth and application pattern of the product. But there's another effort going on with regards to the processing of the products from the Clinton plant that's also moving to expand the application pattern and continue to increase the performance parameters of the product. So, both those things are happening now.

With respect to the optimization of the plant, when you say changes in (inaudible - microphone inaccessible) that's more upstream in the fermentation and having to do with the changes in strains or on the downstream extraction processes?

Both.

Both? Really? Okay. Interesting. And is the pilot plant still running? And are you using that to (inaudible - microphone inaccessible)?

Yes. The pilot plant is running. And just to give you some color on that, one of the first things done during the start-up process is material from [fermentate] or recovery pilot plant, as many of you know, some of the fermented material from the Clinton Plant went through recovery. And we used that to help tune the recovery conditions at the plant. So, it was very helpful to have that facility in the start-up process for Clinton. And now we're using that plant, or we will be using that plant in the very near future, to test some of the recovery technologies that we have on the drawing board.

And how is the C4 program coming along? Can you talk a little bit about timelines and commercialization plans for C4s?

Sure. It's a fermentation process to produce a series of C4 chemicals with the initial focus being what we're calling the specialty C4 market called the pyrrolidones. And that's where the primary commercialization efforts reside right now. What's happening this year is we're continuing to improve the strains that are being used to make that product. And we've got a recovery technology that we like quite a bit that we're starting to do some small scale further optimization work around. We're starting to have exploratory discussions with partners. And we're hoping later on this year we can test the technology at something larger than pilot type scale. I think the other thing I'd mention, too, is that, as I'd mentioned in that call, also this year in industrial chemicals we're beginning to explore things outside of the C4 area, including C3 and C5 opportunities that our Microbial Team is working on right now.

And that would also use a fermentation process?

Exactly. That's right.

Okay. And should we be looking at partnerships separately around those three opportunity types or maybe one large partnership?

Hard to determine right now. We're having exploratory discussions. And we'll do whatever makes the most sense for Metabolix.

Great. Thanks very much. Congratulations on the quarter.

Thank you, Pamela.

Ladies and gentlemen, that does conclude today's presentation. At this time, I would like to turn the conference over the Management for any additional or closing remarks.

Thank you very much. I'd like to thank all of you for attending our call today. As you can tell, we're very pleased with our progress. And we have a lot of enthusiasm about the long-term potential for each of our Metabolix platforms. It is a huge milestone for us and for the Company as Telles moves into full operations. And we anticipate a lot of progress across each of these business platforms over the coming quarters. And we look forward to keeping you informed. Thanks again for joining the call, and thanks again for your interest in Metabolix. Have a good evening.

And, ladies and gentlemen, that does conclude today's presentation. We do thank everyone for their participation. Have a wonderful day.