Yield10 Bioscience Inc (YTEN) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix Incorporated second-quarter 2012 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.

I would now like to turn the conference over to Miss Allison Townsend of ICR. Please go ahead, ma'am.

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 Antibioticos 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 our webcast on the Metabolix website in conjunction with today's call.

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

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

Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including the other risks and uncertainties detailed in the Metabolix filings with the Securities and Exchange Commission including the Company's 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, I would like to turn the call over to Rick Eno, President and CEO of Metabolix. Rick?

Thank you, Allison. I would 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 Antibioticos for the manufacture of biopolymers which is a significant milestone in the launch of the Mirel biopolymers business under Metabolix's 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 bio-based chemicals as drop-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 ordered 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 you that we would launch Mirel biopolymers under the Metabolix nameplate. We said that we would focus on high-value 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. I am 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 let's turn to slide two of the accompanying slides. We selected Antibioticos in Leon, Spain, for commercial production of Mirel biopolymer resin and have signed a letter of intent, or LOI, to initiate the collaboration. Antibioticos is a highly regarded toll manufacturer of fermentation products who has 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 faces of our relationship with Antibioticos. First, in a 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 Antibioticos 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 and commercial operation of Mirel biopolymer resin on site at Antibioticos.

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 Metabolix's 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 a strong outpouring of interest following the exit of ADM from the joint venture. As we narrowed our selection to Antibioticos 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. We have established some very good relationships which we did not have a year ago during our site selection process, and we will maintain active communications with these firms in the future.

Why Antibioticos? There were several factors associated with the selection of Antibioticos as our initial launch point from Mirel biopolymers. But the top four and most important are speed, capabilities, capacity, and location.

First, speed. It is our goal to start making commercial quantities of Mirel as quickly as possible. At Antibioticos, 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 quantities of Mirel biopolymers in early 2013 and launching commercial supply later in 2013.

Second, capabilities. Through our technical due diligence at Antibioticos we are confident that their capabilities, skill set and equipment will be well matched to our technology for both fermentation and polymer recovery. Antibioticos has been producing fermentation-based products for over 50 years and this experience is clearly reflected in their workforce and their approach to business.

I will also mention that we found their management and staff professional, committed to our relationship and a good cultural fit with our team.

Third, capacity. We firmly believe that matching production capacity with market demand will result in commercial success. We expect that Antibioticos equipment will enable commercial spell capacity at our initial target of 10,000 metric tons or 22 million pounds per year. As we described 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 Antibioticos's manufacturing facilities in Leon, Spain, places it within the world's largest market for bioplastic -- Europe. The Antibioticos 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 let's turn to slide three of the accompanying slides. I would like to discuss some of the business metrics associated with 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 we are thinking about it.

On revenue, I touched on this earlier, but our experience with Mirel and new materials euro 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 Antibioticos, the fermenters are already in place as is much of the recovery equipment. As we prepare for the contract manufacturing base, our anticipation is that we will need to secure a limited amount of additional recovery equipment which we believe we can do with short lead time and a relatively low capital cost.

We will be working with Antibioticos 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 of being modest and 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 manufacturing.

On earnings, again, it is much too early to offer any guidance on the earnings potential from the Antibioticos facility, but our analysis and collaborative relationship with Antibioticos should allow this to be a 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 we have told you can be nine to 15 months and the process is often iterative. 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 we have defined a business strategy which should allow us to be profitable at relatively low sales levels and is scalable. Joe will touch on the longer term financial strategy for the firm in his remarks.

The decision on Antibioticos 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 Antibioticos 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 Antibioticos 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 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 could 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's supply through Antibioticos.

Given that our sales now are provided at the 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 Antibioticos 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 uses.

So I will wrap up my review of biopolymers by saying that we have appreciated the strong support we have seen from customers and business partners, especially as we have had to work through the uncertainty of this transition period. We look forward to bringing new supply online in working 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 of 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 exceeds $10 billion.

Our technology is unique in that the same basic 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, we have been in discussions with a number of chemical industry leaders about our technology for making bio-based GBL and BDO. In the second quarter we progress these discussions and continued to advance the technology. We are further validating all aspects of the technology at semi-work scale and providing product to allow prospective customers to test the product and their own large-scale downstream equipment.

In our C3 program, we are also now in a range of discussions with potential feedstock manufacturing and offtake 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 bio-based 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.

I am 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.

I am now turning to slide six. What I would like to do here is outlined to you what the game plan is for going forward. For biopolymers, what we have said is we will secure a new supply chain as a foundation to build the business. We are well on our way to doing this. We have been operating the business since March, have selected Antibioticos 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.

We are working on managing our customer relationships and ultimately transitioning them to ongoing supply. We are focusing our efforts on a limited set of proven market segments, segments we have 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 targeted capacity at Antibioticos and beyond. That is 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. And very interestingly, because we now have full control of biopolymers and chemicals, we can look at integrating them in a way we could never do before. Now we are 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 we are identifying and securing grants. We are not spending a lot of our cash on the crop program. We see this as long term and fortunately there are a lot of people interested in it so a lot of this is being funded by grant money given its long-term yet transformational nature.

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

Thanks, Rick, and welcome, everybody, to this afternoon's call. I will 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 of $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 to reduced headcount.

Through the first six months 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 months of 2012 is primarily attributed to the Company's payment of $3 million to Telles in March of this year for the inventory purchase.

Turning to slide eight, I will now give some additional detail on the Company's 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 consisted primarily of revenue from government grants and product sales.

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

We have been engaged in a 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 costs 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 Company's $6 million DOE grant.

Revenue in the second quarter of 2011 primarily resulted from revenue recognized from royalties under a licensing arrangement with Tepha, a related party in 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.

I'd 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 recognize revenue shortly after delivery of product. During the third quarter we intend to modify our standard sales terms and conditions to provide customers with a 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 defer recognition of product revenue until the period has expired. This will cause a shift by two months between booking sales and recognizing revenue. You'll see this transition occurring in our Q3 results.

Total costs 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 order 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 costs 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 onto the balance sheet. Our balance sheet remains strong. As of June 30, 2012, we had cash and investments 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 are categorized on the balance sheet as 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 usage for the year to be in the range of $28 million to $30 million before any spending on capital expenditures. We anticipate ending the year with cash and investment balances of approximately $40 million to $50 million with year end operating cash run rate of about $24 million. This all excluding any additional partner funding, grant revenue, other sources of income, or capital expenditures. We continue to have no debt.

I would like to now share some thinking on the longer-term financial strategy for the Company given the Antibioticos 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. I would 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 bio-based chemicals, we believe our technology will be highly competitive and are in discussions with numerous partners, all of them have significant financial wherewithal. Partner relationships can take numerous forms ranging from direct investments to offtake agreements.

Third is the timing of our programs. Our intellectual property extends 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 Antibioticos 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 we will open the call to questions.

(Operator Instructions). Larry Alexander, Jefferies.

Good afternoon. I guess the 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 you are getting a value capture above standards technology licensing arrangements?

I don't -- I am not sure I can comment on that right now. I think the point with all of our valuations and with Antibioticos is that we identify them -- a business plan, a set of assets, a business that will be a profit generator for Metabolix and Antibioticos sees the development of the business very similarly the way we do. So I think we have got a very online view on generating good returns from that business but have not yet compared that with the returns with any kind of licensing type arrangement. We didn't consider that.

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

You are talking about the outside of the film grades?

Right.

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. That's clearly a focus for us. There is an agricultural and horticulture segment that we are clearly focused on which takes into account the natural degradation of the PHA materials. There's a marine and aquatic area that we are focused on as well as sustainable packaging.

Mostly film, some sheet products, but that's the area we are focused on. We are not diversifying much from that core.

And then does this agreement -- this agreement doesn't have any constraints on your right of first refusal on any program on C3 or C4?

No, this is completely separate.

Mike Ritzenthaler, Piper Jaffray.

Good afternoon. This is [Enrique] for Mike. Just to say that so we understand that you are still at the preliminary stages of Antibioticos, can you give us some sense for what the CAPEX of the deal at Antibioticos will be and what is that feedstock?

Feedstocks are sugars. But -- and as you know with our Mirel platform can use a range of feedstocks. But the typical feedstock at Antibioticos 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 Antibioticos 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.

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

Right. So we don't provide breakout as to what the different components of the product costs are. But if you look we are holding over $5 million of inventory as was --

(inaudible).

5 million -- sorry, 5 million pounds of inventory. And as we have 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.

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

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 at [Lowe's] and whether the shelf space may be expanded?

No, we can say that the product has been successful. That -- Soil's been a long-standing and good customer of ours and they are pleased with what they're seeing with the product and we maintain a tight relationship with them. If you are looking at -- you probably have to ask them about the specific metrics of where the product is being sold. How many outlets and the performance. But our understanding is they are quite pleased with the product.

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

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

All right. Thanks.

Jinming Liu, Ardour Capital.

Thanks for taking my question. First, I have tried to understand the timing of your collaboration with Antibioticos. So, you currently have signed a letter of intent but the demonstration production will not happen until the first half of 2013. So, why does it take so long?

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

Okay. Then how big will the demonstration scale production be?

To be determined. We don't have a specific target on that. We will be running a series of grades we believed and we will be running sufficient number of fermentation batches so we can identify the reproducibility of the product and make sure we have got very good data to ensure that we have got all of the equipment we need for the commercial scale production.

Okay. Also related to your choice of Europe as the production base. What -- I mean, am I understanding this, most of your current customers are in the States. What do you see opening up the European market? And also can you give us what's the breakout of your current customer pipeline between the US and Europe?

I can't give you specifics on the last, but I think we've said in at least a couple of our previous calls and when we opened the Cologne, Germany office that actually most of our sales activity is in Europe, not the US. 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 Antibioticos 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 the US.

Okay. That sounds good. Also the last thing, related to your cash management, the size of your [G&A] and R&D costs are still very high. Do you have any plan to cut those expenses further?

I think Joe outlined at least 4 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 a number of other activities with a lot of partner interest. And we have got a crop program which is largely funded by grants that we continue to deliver against. But no, we will look at a series of levers as Joe outlined and as we firm up the Antibioticos plan and we will manage our financial resources accordingly. But we have a fair amount of things we can deploy to do so.

Okay. Thanks.

Jeff Osborne, Stifel Nicolaus.

Joe, I was wondering if you could -- or, Rick, give us an update on the food contact. I know it has been a while since we talked about that. Is that still a focus of the Company?

The food contact application has gone well. We have got acceptable product for food contact applications. And it still is part of our portfolio and we continue to sample customers who 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 than non-food contact applications. There is a bit more testing that goes on. There's a series of organoleptic tests that must be done to ensure no flavor issues.

And we are well aware of the steps and we have served in the food contact markets. But at this point it is 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, as you think about the long-term growth of PHA polymers, that is 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 contact.

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

Corn, we believe. But it's a range -- we can use a range of sugars for that facility.

So in terms of cost structure if they are using corn it should be pretty similar to the vague guidance that you had given around the [Quinton] facility?

Yes. Everyone sees what is going on in these markets right now. It is quite dynamic. Having gotten going here with Antibioticos we are going to have quite a substantial effort in looking at those feedstock costs, understanding the levers we have within the EU structure. And it is a somewhat controlled market but we can use oils. We can use a range of sugars.

And the other thing we are going to do with regard to those raw materials is we've got some ways to continue to improve our strains to continue to reduce the dependency on the raw materials which is a good thing from a business perspective and reduce our dependence on sugars.

Makes sense. And just the last one on your partner on the chemical side that you had announced before, development work with CJ. Could you just give us an update on where that stands?

Sure. 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 watching C4 chemicals. It is a nonexclusive relationship, so we are free and we are talking to numerous others. But we maintain an active dialogue with CJ.

The Metabolix role is to move the technology forward, which we are doing, and identifying target customers and markets. And then, we keep in touch with CJ. When that gets burned up, we'll work with CJ to see if a launch strategy makes sense in one of their assets.

So it continues. It's an active dialogue although I wouldn't 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.

Thanks for all of the detail.

(Operator Instructions). [Yu Yu Yen], J.P. Morgan.

Thank you. 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 US to Europe?

Most of the revenue I believe or 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 shipped out of our warehouse there. So we have product both in the US and in Europe. And depending on where the customer is located and the grade, we will deliver that product from inventory.

In the future, we will transition the Antibioticos supply into the supply chain. We will be able to serve global customers from Antibioticos, but with the predominance of our customers in the EU, we will have a quite responsive supply chain for them.

And secondly, so can you remind me how -- maybe it is too early to talk, but how would you buy the raw materials that you need for the demonstration phase and maybe possibly for the commercial phase of the Mirel production? Do you buy it in Europe or you ship it from the US for the corn?

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

And, ladies and gentlemen, that is all the time we have today for questions. I will turn it back over to management for any closing comments.

Thank you very much. I would like to conclude, I would 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. We are well positioned to build value in each of our Metabolix platforms. Most immediately, the LOI with Antibioticos and the new collaboration that will emerge from this work and the access to 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 progress 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.

Once again, that does conclude today's conference call. We thank you for your participation.