Yield10 Bioscience Inc (YTEN) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the Metabolix second quarter 2013 conference call. Today's call is being recorded for Internet replay. You may access an archived version of the call on Metabolix website at www.metabolix.com. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference call. I would now like to turn the conference over to Ms. Lynne Brum, Metabolix VP of Marketing and Corporate Communications. Please proceed, Ms. Brum.

Thank you, Shay, and good afternoon, everyone. This is Lynne Brum and welcome to the Metabolix second quarter 2013 conference call. On the call with me today are Rick Eno, President and Chief Executive Officer; Johan van Walsem, our newly appointed Chief Operating Officer; Joe Hill, Chief Financial Officer; and Oli Peoples, Co-Founder and Chief Scientific Officer. If you do not have a copy of the second quarter news release, which was issued earlier this afternoon, one can be found in the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on the Metabolix website on the Events and Presentations page in the IR section.

So I would like to ask you to please turn to slide two. Please note that as part of our discussion today, management will be making 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 that 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 Metabolix's filings with the Securities and Exchange Commission including the Company's most recent 10-K. 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'd like to turn the call over to Rick Eno. Rick?

Thanks, Lynne. Good afternoon and thank you everyone for joining us today. Please turn to slide three. Before we launch into a review of the second quarter, I'd like to describe the key drivers of our business plan and strategy. Our business is based on a family of naturally occurring polymers or PHAs which enable us to target the growing market for advanced materials in high value market segments. In biopolymers, our initial business, we are focused on three segments; film, performance additives, and functional biodegradation. We are building a portfolio of products where our PHA polymers can provide value-added solutions for customers and as a result, command an attractive price in the marketplace. We are building strong customer relationships including those supported by long-term contracts in advance of commercial production to validate market demand and to base load our first plant.

We are working to establish a robust supply chain based on approximately 10,000 tons per year of PHA capacity. This captive capacity will be combined with access to additional biodegradable polymers sourced from third parties, which will allow us to formulate proprietary high performance products in our target segments. We believe our current business plan for this first plant based on PHA production as well as products made from proprietary formulations has the potential to generate approximately $100 million in annual product revenue. Our PHA platform also enables us to produce highly differentiated bio-based chemicals and use crops as a biorefinery system, both offer the means for additional commercial opportunities and value creation. Finally, we are recognized as technology leaders and are creating commercial opportunities in competitive barriers through our extensive intellectual property portfolio.

Now on to the second quarter. Please turn to slide four. During the second quarter, we continued to make good forward progress executing against our plan. Building our product portfolio is an important focus for us. We recognize that given the differences between the key biopolymers, the capability to blend biopolymer products in order to optimize price and performance for customers is critically important. The development of proprietary polymer formulations increases the range of products we can deliver to the marketplace and increases the overall revenue potential of our business model. The expertise we have gained in how the PHA polymer family can be integrated with other biopolymers creates a differentiating position for us. And that like today, we are pleased to announce that we have formalized a collaboration with Samsung Fine Chemicals, a significant industry player based in South Korea. Samsung is pursuing a similar strategy to Metabolix with a complementary product slate and complementary regional positioning. More specifically, Metabolix brings the PHA product family and Samsung brings other biodegradable polymers including PBAT and PBS.

In terms of geographies, Metabolix is focused on US and Europe while Samsung has a strong market presence in Korea and across Asia. Metabolix has been working with Samsung on biodegradable polymers since early 2012. Under this new arrangement, the two companies will work together with the goal of expanding the global market for biodegradable polymers. The products we will develop will be designed to deliver the best performance and value to targeted customer applications. Any products we develop together through this relationship will complement each other's product portfolio. Both companies have substantial skills in product and process development and we are excited to continue our work together in a more formal way to support new product development and market growth in biopolymers.

Now turn to slide five. Now touching an each of our strategic biopolymer segments. We are fortunate in that the biopolymer markets we are serving are exhibiting strong growth with third-party studies showing growth rates of 15% to 20% per year. We are clearly seeing that level of interest in the magnitude of the inbound inquiries we are receiving for product data and samples across our targeted segments of film, performance additives, and functional biodegradation. The film market continues to be a growing part of Metabolix business. Since Q4 2012 when we launched our Mvera B5008 compostable film product, we have seen our quarterly shipment volume for this product line grow steadily. As we are still early in the B5008 product life cycle, we continue to make incremental improvements in the formulation and gather feedback from a select group of customers so as to optimize performance for broader market needs. We have an active pipeline of developmental film products tailored to specific applications.

On last quarter's call, you may remember we announced that we had signed and began delivering on our first annual contract for Mvera B5008. We expect to continue to negotiate other long-term contracts for compostable film products. Sales of certain grades of legacy products have generated revenue for us over the last several quarters. Going forward, revenue from legacy products will be winding down as we sell out of certain inventory and revenue for more strategic products will grow. Joe will summarize the details of the sales numbers in a few minutes.

Our next segment is Performance Additives. This segment represents a key area for product innovation for us based on the unique attributes of PHA, especially for PVC, which is a $70 billion global market. As you may recall, we launched I6001 in late 2012 as an impact modifier for flexible PVC. We are now working with a number of potential customers for a sample of the product and are testing it in a number of high value applications. Early feedback is quite positive. Building on the PHA PVC data we presented last fall, in the July issue of Plastics Technology we published a white paper describing our findings relating to the use of our PHA technology to improve the performance characteristics of PVC including impact modification, UV stability, and resistance to mold. The response to the article has been highly encouraging. The paper is available for you on our website. Our plan is to present additional performance data in PVC based on customer trials at a technical conference in the fall. We will continue to develop close relationships with potential customers in the sizable PVC market and believe this will enable us to establish annual contracts for supply.

Our Functional Biodegradation segment represents a wide range of applications underscoring the diverse potential uses of PHA polymers. We continue to deliver tailored solutions into water treatment applications where PHA is an important mediator in natural denitrification processes. In addition, we have developed an aqueous biodegradable latex product in collaboration with our developmental partners. This is an important development area for us. Latex is a very large market with a wide range of important applications such as paints, coatings, and binders. Demand for sustainable solutions is strong in this market. Performance latex coatings, our initial target, are typically used to modify the underlying substrate or surface of paper and other packaging materials. We have developed a range of PHA latex formulations and are actively sampling customers to optimize product profiles for this area.

Please turn to slide six. Now let's turn to our Chemicals platform where we're using our PHA microbial technology to produce bio-based chemicals for applications that have typically relied on products made from petroleum feedstocks. We continue to advance our technical and commercial milestones for this business. I will mention that we are seeing an increasing interest in our C3 or bioacrylic technology. We believe that industry players are starting to look aggressively at this area because the acrylic market is large, over $8 billion, it's customer-facing with products paints and diapers and where biocontent is a desirable differentiator. Most importantly, we believe we will have a very cost competitive route to serve this market based on our assessment of the relative economics of petroleum and biosourcing.

Regarding our Crops platform, we will continue to work through several active grants for our leading edge crop research. This research targets multi-gene expression and transformation of plants as well as the use of switchgrass as a platform for making industrial chemicals. In June, the MIT Technology Review published an article highlighting our process for making PHB in switchgrass. PHB is a precursor to certain bioplastics and renewable chemicals. This article is also available for you on our website.

Please turn to slide seven. As we said before, our intellectual property is a key differentiator for Metabolix. It helps us open new commercial opportunities while creating competitive barriers. During the second quarter, we were granted or allowed six new patents spanning each of our businesses. In biopolymers, we were granted or allowed four patents for the advanced processing of Mirel biopolymer resin to enhance performance attributes. These patents provide strong evidence of our IP estate around processing and optimizing fundamental properties of PHAs alone and in proprietary formulations with other materials. In chemicals, we were allowed the first patent in a family covering C5 chemicals. And finally in the crops area, we were granted a US patent covering the production of PHB in switchgrass.

And with that, I'll turn the call over to Johan van Walsem, who we recently named to the position of Chief Operating Officer. We announced Johan's promotion earlier this month and he moved into his new role just last week. Johan's new role will enable Metabolix to further integrate the areas of R&D, manufacturing, and business development for maximum commercial impact. His experience with large scale manufacturing will be especially beneficial as we establish commercial scale supply sources for our PHA products. Johan?

Thank you, Rick. I'm excited about this new opportunity. Please turn to slide eight. The key aspects of my role will be building the supply chain and growing revenue through the development of products that deliver value-added solutions to our customers. The establishment of the first plant for captive PHA production will be a key milestone and as a result is a very hard priority for us. Let me explain how we are going about perusing this manufacturing foundation and the current status. After screening a number of potential sites for the ability to enable 10 kiloton per annum of PHA, we are now focused on three sites, all currently in due diligence. First Antiboticos, the legal process for restructuring Antibioticos in Spain is starting to unfold. Recent events in the Spanish courts have provided more clarity on the path forward.

As a result of the involuntary and insolvency process, the prior management has been removed and new ownership for the plant is emerging. We are actively participating in this process working to evaluate the business plan, site economics, and a business model that could potentially work for Metabolix. In addition, we are actively evaluating sites for an alternative US-based manufacturing facility. Rick and I have met with management and assessed three US sites with existing relevant infrastructure and our internal team has modeled operational cost structures and capital investment requirements as well as prepared the high level technical evaluation of each. We have narrowed our focus to two of these US sites and are currently engaged in further due diligence. We believe that the three sites currently in due diligence are potentially viable solutions for PHA manufacturing and are well along the path to a site selection.

Our near-term plan is to utilize PHA biopolymers from this 10 kiloton per annum plant in both neat PHA biopolymer applications as well as proprietary polymer formulations. Our collaboration with Tianjin and now with Samsung are part of this plan. We believe this combined capacity will enable us to create $100 million revenue stream with attractive economics. The model we are aiming to create is capital light and will allow us to expand markets as we continue to reduce costs in the future. Metabolix has a rich history of innovation and we expect to continue to advance our technology to increase the performance of our materials and deploy them in new applications as well as to continually develop technology to lower manufacturing costs.

Now let me turn the call over to Joe for a review of the financial results. Joe?

Thanks, Johan. I'll now focus on the financial results for our second fiscal quarter ended June 30, 2013. As always, we managed our finances with an emphasis on cash flow management. We've maintained this focus and ended the second quarter with $31.7 million in unrestricted cash and investments. We now turn to slide nine. For the second quarter, net cash used in operating activities was $5.8 million as compared to the first quarter 2013 where total cash usage was $8.5 million. This represents a planned decrease in net cash used in operating activities of $2.7 million, which is mainly attributable to the timing of $1.7 million of accrued annual performance bonuses that we typically pay in the first quarter of each year in addition to improvements in working capital for the quarter of $900,000. The cash used in operating activities in the second quarter 2013 was consistent with net cash used of $5.9 million for the comparable quarter in 2012. Through the first six months of 2013 ending June 30, net cash used in operating activities was $14.3 million as compared to net cash used of $18.1 million for the comparable period of 2012. The decrease of $3.8 million was mainly attributable to our one-time purchase of Telles biopolymer Inventory and restructuring expenses incurred in early 2012.

Turning now to slide ten, I will review product orders and associated revenue recognized. Product orders shipped and billed during the second quarter were $400,000, which is consistent with the comparable quarter of 2012. Revenue recognition was deferred for the majority of these shipments in accordance with the Company's policy to defer product revenue for the greater of 60 days and until customer payment. Therefore, product revenue recognized during the second quarter 2013 of $800,000 was primarily from shipments to customers completed during the first quarter of 2013 as compared to $400,000 during the second quarter 2012. We're pleased with the progress we've made with our customers and prospective customers.

As we've discussed before, we expect our sales to increase and have significant inventory that we are using to progress the development of our solutions for our customers. While we see good progress with our prospects, we anticipate that this growth of bookings within our quarterly reporting cycles will not be linear. Through the first six months of 2013 ending June 30, product orders including excess raw material sales shipped and billed were $1.1 million as compared to $400,000 during the first six months of 2012. Product revenue recognized during the first half of 2013 was $1.6 million as compared to $400,000 for the comparable period of 2012.

Now turning to slide 11 for a review of financial results. Total revenue for the second quarter was $1.7 million versus $900,000 in the comparable period of 2012. Second quarter 2013 revenue consisted primarily of product sales, government research grants, and research and development revenue. The year-over-year increase in revenue of $800,000 was primarily related to a $400,000 increase in biopolymer product sales recognized and a $200,000 increase from research and development revenue, the majority of which was earned under a development arrangement with a third-party. Total revenue for the six months ending June 30, 2013 was $3.6 million versus $40.2 million for the year-ago period. The year-over-year decrease was primarily related to $38.9 million in total revenue, which is recognized as a result of determination of the Telles joint venture in early 2012.

Product revenue, grant revenue, and research and development revenue increased by $1.2 million, $500,000, and $600,000 respectively during the first six months of 2013 compared to the first six months of 2012. The cost of product revenue was $1.2 million during the quarter ended June 30, 2013 compared to $400,000 for the comparable period in 2012. The increase of $800,000 was primarily attributed to inventory product costs associated with the product revenue recognized during the quarter plus current period costs for freight, warehousing, and a write-off of excess and obsolete inventory. We currently hold a significant amount of product inventory from material we purchased from Telles last year and from additional purchases of additives we use in various product formulations. We currently warehouse that inventory in the US and in Europe.

Costs associated with management of our entire inventory including warehousing and freight are incurred as cost of sales in each quarter. On a quarterly basis, we review inventory for impairment and as a result during the second quarter, we wrote off $300,000 in excess and obsolete inventory. Cost of product revenue was $1.8 million during the six months ended June 30, 2013 compared to $500,000 for the comparable period of 2012. The $1.3 million increase is attributable to inventory product costs associated with product revenue recognized during the period plus current period costs for freight, warehousing, and write-off of excess and obsolete inventory.

Research and development costs were $4.9 million versus $5 million in the comparable quarter in 2012. Selling, general, and administrative costs were $3.4 million for both the second quarter of 2013 and the second quarter of 2012. Through the first six months of 2013, research and development expenses were $9.8 million compared to $11.1 million for the same period of 2012. The decrease of $1.3 million is primarily the result of decreased employee compensation and benefit expenses of $900,000. Selling, general, and administrative expenses were $6.7 million for the first six months of 2013 as compared to $7.8 million for the comparable six-month period in 2012. The decrease of $1.1 million is primarily the result of decreased employee compensation and benefit expenses of $500,000 and $200,000 reduction in consulting expense.

Net loss for the second quarter was $7.9 million or $0.23 per share, which is consistent with the loss for the comparable quarter in 2012. Net loss for the first half of 2013 was $14.6 million or $0.43 per share compared to a net income of $20.9 million or $0.61 per share in the same period of 2012. Now on to the balance sheet. As of June 30, 2013 we had cash and investments of $31.7 million. This compares with $37.7 million as of March 31, 2013 and $59.9 million at June 30, 2012. We believe that our cash and investments together with expected funds to be received from existing grants and anticipated product sales will be sufficient to meet anticipated cash requirements for our operations for the next 12 months. However, any significant costs that we incur to establish a commercial biopolymer manufacturing facility will shorten this liquidity horizon and require that we seek additional funds in order to continue and advance our operations.

With that, we'll open the call to questions.

Thank you. We'll now be conducting the question-and-answer session. (Operator Instructions) Laurence Alexander, Jefferies.

Good afternoon.

Hi, Laurence.

Good afternoon. I guess couple of questions. First, so for the write-off, can you basically give a little bit more clarity on what it was that made that particular product no longer seem viable and then how you look at how much tonnage of extra products you have left?

Right. So Laurence, if you recall, we purchased a significant amount of inventory from Telles and that was I think we purchased more than 5 million pounds there and we're using that for different product formulations, different products for various customers. We're also evaluating every lot that we have in the warehouses every quarter, checking on any of the degradation, checking on any of its quality, checking on any of matching that with our sales plans and our forecasts and our projections for what we're using that. And if a product is deemed to be out of spec or deemed to be not part of our strategic focus, then deemed as not valuable inventory and we write that off.

Okay. And secondly on the bioacrylic, I guess as you're looking at both the C3 and C5 platforms, what do you see as the main technical milestones you need to hedge in order to be credible or partner worthy without giving up too much in the process economics to potential partners?

I think I'll answer it and pass it over to Johan in a second here, Laurence. If you recall, we've run the C4 platform which we've always have said leads the C3 platform by about a year at a 60,000 liter fermentation scale and we've recovered tonnage quantities of that. Those products for both C4 and C3 have been out in the market and we've got positive customer feedback from both of them, C3 albeit at a smaller scale than C4. So I think the primary kind of focus internally is on the yield of the streams to make sure we continue to move that to the ultimate targets and then in addition to that, we'll be working on the scale up of the recovery process to larger and larger scales. So we pretty much have proof of concept, we have a lot of experience of course in the PHA fermentation platform, and it's just continuing to get the stream to target numbers, which creates a very profitable and viable proposition we see given the numbers we see in front of us. Anyone have anything to add to that?

Laurence, I'll add to that. Obviously, we've been dealing with a number of prospective partners. They're all very sophisticated counterparties and so we typically conduct extensive techno-economic analysis and we understand what technology levels are required to meet the key criteria of capital intensity and cash costs, which ultimately has to be put against the petrochemical cost situation for either new investment or expanded investments. So we translate these economic targets into very specific yield and productivity targets as Rick mentioned.

I think I'll just add to that and move on to your next questions, Lawrence. But one of the benefits we're seeing with the fast process is the ability to make extremely high purity chemicals, which is very interesting and it actually is quite a differentiator versus many of the other biochemical recovery processes. So that gives us a lot of excitement about what we can do with that characteristic.

And then I guess the agreement with Samsung, can you give us a bit of a sense for how this collaboration is going to work. That is, is there already some kind of framework where you get paid based on the amounts of PHA blended into the material or is it a revenue sharing agreement based on the final product sold or is that all still up in the air depending on what is finally developed and commercialized?

Yes, I can explain some of the highlights of that, Laurence. We've had a long standing relationships with Samsung and we work very well with them. We have a very complementary set of products and very complementary regional positioning. There is a steering team to guide the efforts of the collaboration. I'll point out that each party is responsible for its own costs, we're not cost sharing. We just focus, we agree on areas to work on and with our product slate as well as other products that we can buy in, we develop a very robust attractive product for given applications.

With that accomplished, we then discuss with Samsung the appropriate approach to marketing that product in basically the global biopolymer markets. Inherently, I think there's a belief that Metabolix has a stronger regional positioning in marketing channels in the US and Europe and Samsung has stronger positioning in Asia, including Australia and New Zealand. But we will work collaboratively with Samsung to determine the right approach to move those products down those various supply chains based on the specific application. There may be cases also where Samsung will be marketing Metabolix products and Metabolix will be marketing Samsung products.

Okay. I'll hop back in queue. Thanks.

(Operator Instructions) JinMing Liu, Ardour Capital.

Hi. Thanks for taking my questions.

Thank you, JinMing.

First is a follow-up question on the inventory write-off. Can you disclose to us what are the remaining lives for the write-off in the inventory? is there any risk for any future write-off or --?

I'll comment a bit on it, JinMing, and then Joe can pick that up. But some of the write-off has to do with just grades that are obsolete in areas where customers that we're developing are looking for long-term supply and there's certain products that just aren't going to fit into the long-term supply in terms of what we see as the strategy of products going forward in alignment with our commercial strategy. So I think that's a key factor in terms of what we think can effectively use and put our resources against in terms of that inventory.

Okay. My next question is about your current commercialization strategy, I'm kind of confused here. It looks like Metabolix is looking at multiple approaches, but at the same time, we all know you have just limited capital available. What are you guys trying to do here?

Yes, I can explain that and I'll let Johan basically contribute to that as well. Essentially as you well know, JinMing, our core focus and our core product is PHA. But we know a lot about PHAs, we are very comfortable with its properties, we know where it can add value in the market. And what we're increasingly learning and gaining experience in is the ability to formulate our PHA products and we got some very high value grades of PHAs with other biopolymers to improve their performance and to basically tailor the cost performance relationship for specific applications. Our differentiator is our ability and, as Johan pointed out in his prepared remarks, manufacturing ultimately for PHA that gives us control of that key differentiator for biopolymers.

Now with that foundation, what we have found that there are cases that we can sell PHA blended with other products that we can access on the open market either through third-parties including Samsung. So that formulation is done on a toll basis, it's not capital intensive for us, and we are able to get very attractive we believe rates on that formulation step based on our own proprietary formulations. So it's not a capital intensive model. It's basically using the core of the supply chain, which is our PHA polymer, and just supplementing that through that next step of the value chain which is a formulating step or compounding step that we can have others do for us to our specifications to make products that we can bring to customers. Is that clarified a bit?

Yes. But what I'm looking at, you still going to need to put maybe somewhere between $10 million or $20 million into a new facility to set up that 10,000 ton per year production capacity first.

Yes, that's right. And as Joe said in his remarks, as we are looking at alternative financing arrangements to basically get that up and running, we're looking at range of innovative structures to do that, we fully understand that.

Okay, got that. Just partly a related question. I think it's time to talk about your 2014 budgeting. We are looking at your quarterly cash flow and the potential capital investment for your production capacity and on top of that the budget for potential working capital needs to support your growth. Is there anything you can discuss with us today?

Right. JinMIng, what we said and what we are able to discuss is that we have a current quarter cash burn of about $6 million, that we believe we have sufficient cash to meet our operating needs for the next 12 months, and any capital that we require to invest in manufacturing and getting that up and running we are going to need to seek elsewhere. But beyond that, we are not providing any forward-looking guidance.

Okay. Got that. Thanks.

Laurence Alexander, Jefferies.

I guess as you are looking at the evolution of the business, anything about the longer-term opportunities as how do you think about the new chemical platforms compared to the PHA platform? And is there an option as to whether you need to sort of have the full production for the PHA or do you want to shift just your licensing model?

Okay. I'll address that one and open the floor up to my colleagues for any elaboration. It's clear our strategic focus right now, and hope it comes across in terms of the prepared remarks and our communications, it's really biopolymers. That is our strategic product; we've got customers, proven technology, we are well positioned versus global trends and for the earlier question we are working to establish captive manufacturing for the biopolymer portion of our portfolio and that is a growth business. We can see very robust margins in the long-term runway for that given what we know the product can do and what we see from major trends. We are also fortunate in that our same technical foundation of PHAs allows us to produce C3 and C4 chemicals.

I think there we're entertaining a range of different constructs including licensing, I should point out Laurence, and there's no need that we feel nor do we have that we believe the capital at hand to launch all three of these product lines simultaneously; biopolymers, C3 chemicals, and C4 chemicals. But we've got sufficient interest in others that perhaps have existing raw material value chains or positioning in the market against our C3 and C4 that we can look at a range of different structures that we don't have to produce there including possible licensing options as well as other arrangements. But the core is biopolymers and the development of those markets which are differentiated to long-term with a more creative approach we're taking towards the biochemicals portion of the portfolio.

Laurence, in the chemicals, what we are doing with the technology is really enabling a transition of industry to advantaged feedstocks and in some cases a lower capital model. And in biopolymers, as Rick said, we're building this differentiated offering and performance and delivering solutions to customers and for that we need to be captive in PHA which is a key component of that strategy.

And then as you look at your existing customer relationships, where do you see the break point where if you don't have the new capacity up and running to just start shifting to substitute solutions and any further market adoption will basically push back because you have to requalify or win them back so to speak? Is it a volume hurdle or is it a time hurdle?

It's probably more of a volume than time hurdle. The reason being, Laurence, that we've got substantial money inventory. We're trying to be extremely careful and rigorous in terms of how we use that as discussed in some of the earlier questions on our evaluation of that in terms of our strategy going forward. But the fact that we're moving and gaining a lot of expertise and seeing a lot of traction in expanding the volume of that through formulation, that helps lengthen the runway for how we can use that inventory by adding other biopolymers to it in unique applications, it lets that inventory last a lot longer.

In addition, we've got a relationship with Tianjin GreenBio for additional PHA and we continue to work with them this quarter in terms of optimizing the product for the market so that gives us further runway there. We're trying to be as careful as we can in terms of the selection of the manufacturing process. We want to balance speed with rigor and long-term cost position so we're working that deliberately. I think at some point, Laurence, it's a volume thing where between Tianjin and what we have in inventory we can't meet say large market demands perhaps in PVC, which is an extremely large market, that would be a constraint.

Then lastly, you mentioned like the latex blends. Can you tell me about the functionality there because if you're doing things like copper backing or (inaudible), many of those applications like imagine I wouldn't want them to biodegrade quickly and then they end up going into the trash in areas where it doesn't matter if they're biodegradables, they'll be in a landfill. So can you clarify a little bit like are you interested because it's another way to get sort of a bio-based credit with the consumer or are there particular niches where the biodegradability functionality extents to the entire products and that's something that the customer cares about?

So the aqueous latex product is firstly based on some very unique PHA properties that has ability to firm form at room temperature and then solidify a very robust integral form through crystallization over time. So we are exploiting and what we found is that there's a number of classic coating applications like paint on the wall, which is a different type of cost structure and target. We have again here analysis to some of our other strategic imperatives looked at performance coatings and there is a range of these including some barrier or tri-layers. And we're really more focused on the performance enhancing properties of these PHA where they give good bonding to the substrate and to a subsequent coating that need to be applied for preservation of moisture, etcetera. So we are focused on the performance side of these coatings both in barrier and also in inter-layers, tri-layers, et cetera. There are many cases where the biodegradability is a distinct advantage but it's not necessary in some performance coatings.

In cases like with PLA, the type of specialty latex products that Johan is talking about would be an added value not only due to functionality, but the fact that it would maintain its compostable characteristic and that could be important in a number of applications.

Okay. Thank you.

Thank you. At this time we have reached the end of the Q&A session. I would now like to turn the conference back to our speakers for any closing or additional remarks.

Thank you very much. In summary, we made significant progress during the second quarter across our platform. We continue to build and expand the markets for PHA and biodegradable materials, advance our manufacturing and product technology, and explore new opportunities to diversify our supply sources in anticipation of commercial production. Our new relationship with Samsung is an illustration of this providing both product line and regional synergies. We also make several technical achievements which will serve as catalysts for potential future growth in years to come. We're encouraged by the markets' reception to our biopolymer products, the inherent rapid growth in the market, and are excited for the near-term opportunities opening up in our film and performance additive applications for biopolymers. I want to thank you again for joining us today. We appreciate your support and we look forward to speaking with you next quarter. Thank you very much and have a nice evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.