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MBLX > SEC Filings for MBLX > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for METABOLIX, INC.


2-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(All dollar amounts are stated in thousands)

Forward Looking Statements

This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In particular, statements contained in the Form 10-Q, including but not limited to, statements regarding our future results of operations and financial position, business strategy and plan prospects, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as "may," "will," "should," "expects," "plans," "anticipate," "intends," "target," "projects," "contemplates," "believe," "estimates," "predicts," "potential," and "continue," or similar words.

Although we believe that our expectations are based on reasonable assumptions within the limits of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees. Our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. These forward looking statements include, but are not limited to, statements concerning: future financial performance and position and management's strategy, plans and objectives for research and development, product development, and commercialization of current and future products, including the commercialization of our biopolymer products. 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, without limitation, risks related to our dependence on establishing collaborations or partnerships for the commercialization of our products, risks related to the development and commercialization of new and uncertain technologies, risks associated with our protection and enforcement of our intellectual property rights, as well as other risks and uncertainties set forth under the caption "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2012.

The forward-looking statements and risk factors presented in this document are made only as of the date hereof and we do not intend to update any of these risk factors or to publicly announce the results of any revisions to any of our forward-looking statements other than as required under the federal securities laws.

Overview

Metabolix is an innovation-driven bioscience company focused on delivering sustainable solutions to the plastics, chemicals and energy industries. We have core capabilities in microbial genetics, fermentation process engineering, chemical engineering, polymer science, plant genetics and botanical science, and we have assembled these capabilities in a way that has allowed us to integrate our biotechnology research with real world chemical engineering and industrial practice. In addition, we have created an extensive intellectual property portfolio to protect our innovations and, together with our technology, to serve as a valuable foundation for future industry collaborations.

The markets for petroleum-based plastics, chemicals and fuels are among the largest in the global economy. Issues associated with the prolonged use of petroleum-based products include plastic waste management and pollution, limited fossil fuel availability and price volatility, and global warming and climate change. We believe that a substantial global market opportunity exists to develop and commercialize our technology to produce sustainable, renewable alternatives to petroleum-based products including advanced biopolymers, biobased industrial chemicals and bioenergy.

Metabolix was formed to leverage the ability of natural systems to produce complex biopolymers from renewable resources. We have focused on a family of biopolymers found in nature called polyhydroxyalkanoates, or ("PHAs"), which occur naturally in living organisms and are chemically similar to polyesters. We have demonstrated the production of PHAs at the industrial scale to produce PHA biopolymers and biobased industrial chemicals, as well as production of polyhydroxybutyrate ("PHB"), a subclass of PHA biopolymer, in agriculturally significant crop plants.


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From 2004 through 2011, we developed and began commercialization of our PHA biopolymers through a technology alliance and subsequent commercial alliance with a wholly-owned subsidiary of Archer Daniels Midland Company ("ADM"), one of the largest agricultural processors in the world. Under the commercial alliance, ADM was responsible for resin manufacturing, and Metabolix was primarily responsible for product development, compounding, marketing and sales. Through this alliance, the companies established a joint venture company, Telles, LLC ("Telles"), to commercialize PHA biopolymer products.

After ADM terminated the Telles joint venture early in 2012, we retained significant rights and assets associated with the PHA biopolymers business which are being used to launch the business using a new commercial model, continuing business operations, marketing biopolymer products, and identifying alternate manufacturing capability. We hold exclusive rights to the Metabolix technology and intellectual property used in the joint venture. We acquired all of Telles's product inventory and compounding raw materials totaling more than five million pounds, all product certifications and all product trademarks including MirelTM and MveraTM, and we retained all co-funded pilot plant equipment in locations outside of the Commercial Manufacturing Facility in Clinton, Iowa. In early 2012, we restructured the biopolymers business retaining a core team in our biopolymers group to provide continuity with technology, manufacturing process, and markets.

During 2012, we established Metabolix GmbH, a subsidiary located in Cologne, Germany, to serve as a focal point for our commercial activities in Europe. This cost effective location is intended to enable us to directly access the European market, which is the largest for bioplastics. We also took steps toward establishing a new commercial model for our PHA biopolymers business. We worked closely with our core customers to supply product from existing inventory as a bridge to new supply. We evaluated the potential applications for our biopolymer products and narrowed our market development focus to three high value market segments: (i) film and bag applications; (ii) performance additives; and
(iii) functional biodegradation. In March 2012, we began directly booking product sales and shipping product from inventory to our customers. During the second half of the year, we developed, sampled and launched two new products:
Mvera B5008, a compostable film grade, and I6001, a polymeric modifier for polyvinyl chloride.

During 2013, we expect to continue to use existing inventory to continue to develop the market and to supply new and existing customers. We continue to explore alternative options to establish a new biopolymer manufacturing and supply chain properly sized to our business.

For our second platform, we are developing C4 and C3 chemicals from biobased sources, not the fossil fuels that are currently used to produce most industrial chemicals today. Our process for creating biobased industrial C4 and C3 chemicals involves engineering metabolic pathways into microbes that, in a fermentation process, produce specific PHA structures that serve as precursors for the chemicals. Through our PHA technology, we are able to control the microbe biology to achieve high concentrations of specific, naturally-occurring PHA that accumulate inside cells as they metabolize sugars. This intracellular accumulation of the biopolymers inside the microbes is a unique and differentiating aspect of our technology. When the fermentation is completed, we use a novel internally developed recovery process known as "FAST" (fast-acting, selective thermolysis) that converts the biopolymer to the target chemical using heat.

In the C4 program, we have produced biobased gamma butyrolactone ("GBL") at industrial scale and demonstrated a chemical profile that meets or exceeds the existing industrial specifications. In 2012, we completed the preliminary design for a commercial scale plant to enable production of biobased GBL and, through an established conversion process, butanediol ("BDO"). This plan, which could be implemented under a potential future collaboration, includes specifications for all of the components of our fermentation and recovery process. In conjunction with our technical progress, we expect to continue discussions with industry leaders with the goal of forming the industry alliances necessary to successfully bring our biobased C4 industrial chemicals, including GBL and BDO, into commercial production.

We believe that developing and commercializing biobased C3 chemicals could represent another attractive market for our technology. In 2011, we undertook a market analysis of the global market for acrylic acid, a C3 chemical, to assess the market participants, renewable technology competition, economics, intellectual property status, and end markets.

In 2012, we continued scale up of fermentation and optimization of microbial strains to produce biobased C3 chemicals. We also successfully scaled up recovery of acrylic acid from dried biomass using the "FAST" process in our Cambridge laboratory. We also provided sample quantities of dried biomass for conversion to biobased acrylic acid for customer evaluation. We believe that strategic alliances will be required to commercialize C3 chemicals, and in 2013, we expect to continue to engage in partnership discussions.

In our third technology platform, we are harnessing the renewable nature of plants to make bioplastics, renewable chemicals and bioenergy from crops. The focal point of our plant technology efforts is around PHB, the simplest member of the broad PHA family of biopolymers. While applications for PHAs have focused mainly on their use as biodegradable bioplastics, these polymers have a


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number of other unique features that will allow their use in other applications, such as the production of chemical intermediates and their use as value-added animal feeds. We are creating proprietary systems to produce PHB in high quantity in the leaves of biomass crops or seeds of oilseed crops for these multiple applications.

Our work in crops highlights our leading edge capabilities and research targeting multi-gene expression and transformation of plants. Researchers at Metabolix have designed novel, multi-gene expression systems to increase production of PHB in plant tissue. The science behind this shift in metabolism is complex since the goal is to significantly increase production of PHB to be viable at industrial scale without impairing the ability of the plant to thrive in its natural environment. In 2011, Metabolix was awarded a $6 million grant by the U.S. Department of Energy ("DOE") to engineer switchgrass producing 10 percent PHB, by weight, in the whole plant and to develop methods to thermally convert the PHB-containing biomass to crotonic acid and a higher density residual biomass fraction for production of bioenergy. Further, in 2012, Metabolix was awarded four new grants for leading-edge crop research targeting multi-gene expression and transformation of plants including important biofuel and food crops. Funding from these four grants is expected to total approximately $1.0 million and will run through 2014.

In 2013, we expect to continue to advance research under our grants, focused on increasing PHB production in switchgrass and developing a thermal conversion process for crotonic acid. We may also seek to establish alliances with partners to commercially exploit this platform. We are in the process of capturing intellectual property gained in our work in crops and will be evaluating the possibilities of monetizing that intellectual property.

As of June 30, 2013, we had an accumulated deficit of $256,660 and total stockholders' equity was $34,597.

Collaborative Arrangements

We are not currently participating in any collaborative arrangements. Our historical strategy for collaborative arrangements has been to retain substantial participation in the future economic value of our technology while receiving current cash payments to offset research and development costs and working capital needs. By their nature, our collaborative agreements have been complex, containing multiple elements covering a variety of present and future activities.

ADM Collaboration

From 2004 through 2011, the Company developed and began commercialization of its PHA biopolymers through a technology alliance and subsequent commercial alliance with ADM Polymer Corporation, a wholly owned subsidiary of ADM. The Commercial Alliance Agreement between Metabolix and ADM Polymer specified the terms and structure of the alliance. The agreement governed the activities and obligations of the parties and included the establishment of a joint venture company, Telles, LLC ("Telles"), to market and sell PHA biopolymers, the construction of a manufacturing facility capable of producing 110 million pounds of material annually, the licensing of technology to Telles and to ADM, and the conducting of various research, development, manufacturing, sales and marketing, compounding and administrative services by the parties.

Under the Commercial Alliance Agreement, ADM was permitted, under limited circumstances, to terminate the alliance if a change in circumstances that was not reasonably within the control of ADM made the anticipated financial return from the project inadequate or too uncertain. The agreement provided that, upon termination by ADM due to a change in circumstances, we would be permitted to continue to produce and sell PHA biopolymers, and ADM would be required to perform manufacturing services for us for a period of time following the termination (subject to certain payment obligations to ADM). On January 9, 2012, ADM notified us that it was terminating the commercial alliance effective February 8, 2012, citing the projected financial returns from the alliance were too uncertain.

Upon termination of the alliance, Metabolix intellectual property licenses to ADM Polymer and Telles ended, with Metabolix retaining all rights to its intellectual property. ADM retained its manufacturing facility located in Clinton, Iowa, previously used to produce PHA biopolymers for Telles. Also upon termination, contractual payments made to us by ADM during the term of the alliance totaling $38,885 and recorded as deferred revenue on the Company's balance sheet were immediately recognized during its fiscal quarter ended March 31, 2012, as the Company had no further performance obligations in connection with the alliance.

After termination of the Commercial Alliance Agreement, the parties entered into a Settlement Agreement in which the parties agreed to specific terms related to the winding up and dissolution of Telles. Under this Settlement Agreement, we purchased certain assets of the joint venture for $2,982, including Telles's entire inventory, exclusive and perpetual rights to all of Telles's trademarks, and all product registrations, certifications and approvals for Telles's PHA biopolymers. Pursuant to the Settlement Agreement, ADM relinquished any claims with respect to certain co-funded equipment previously acquired by Metabolix and situated at locations other than ADM's Clinton, Iowa manufacturing facility, and Metabolix and Telles waived any rights to post-termination manufacturing and fermentation services under the Commercial Alliance Agreement.


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In February 2013, Telles was formally dissolved and ADM notified us that no trade or other obligations remain to be paid. As a result, we do not believe that the Company is contingently liable for any third party obligations stemming from the former ADM collaboration.

Government Grants

As of June 30, 2013, expected gross proceeds of $3,996 remain to be received under our United States and Canadian government grants, which includes amounts for reimbursement to our subcontractors, as well as reimbursement for our employees' time, benefits and other expenses related to future performance.

The status of our United States and Canadian government grants is as follows:

                                                  Total        Total received     Remaining amount
                               Funding          Government        through         available as of     Contract/Grant
Program Title                  Agency             Funds        June 30, 2013       June 30, 2013        Expiration

Renewable Enhanced
Feedstocks For
Advanced Biofuels And    Department of
Bioproducts              Energy                $      6,000   $          2,705   $            3,295   June 2014

Subcontract from
University of
California
(Los Angeles) project
funded by ARPA-E
entitled
"Plants Engineered to
Replace Oil: Energy      Department of
Plant Design"            Energy                         566                152                  414   September 2014

Capacity Building for
Commercial-Scale
PHB Camelina             National Research
Development              Council Canada                 247                123                  124   March 2014

Subcontract from
University of
Massachusetts
(Amherst) project
funded by ARPA-E
entitled "Development
of a Dedicated High      Department of
Value Biofuels Crop"     Energy                         259                213                   46   June 2013

Development of a
Sustainable
Value Added Fish Feed
Using PHB Producing      National Research
Camelina                 Council Canada                  90                 25                   65   March 2014

Screening and
Improvement of
Polyhydroxybuyrate
(PHB) Production         Canadian
Camelina Sativa          Agricultural
Lines for Field          Adaptation Program
Cultivation              (CAAP)                          56                  4                   52   December 2013

Advanced Technologies
For Engineering of       Canadian Ministry
Camelina                 of Agriculture                 194                194                    -   February 2013
Total                                          $      7,412   $          3,416   $            3,996


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Critical Accounting Estimates and Judgments

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2013 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012. The critical accounting policies and the significant judgments and estimates used in the preparation of our consolidated financial statements for the three and six months ended June 30, 2013 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates and Judgments."

Results of Operations



Comparison of the Three Months Ended June 30, 2013 and 2012



Revenue



                                     Three Months Ended
                                          June 30,
                                       2013         2012     Change
Grant revenue                      $        584    $  461   $    123
Product revenue                             822       373        449
Research and development revenue            238         -        238
License fee and royalty revenue              62        89        (27 )
Total revenue                      $      1,706    $  923   $    783

Total revenue was $1,706 and $923 for the three months ended June 30, 2013 and 2012, respectively. During the three months ended June 30, 2013, we recognized $584 of government grant revenue compared to $461 for the same period in 2012. Grant revenue for the three months ended June 30, 2013 and 2012 primarily consisted of $512 and $447, respectively, in revenue earned from the Renewable Enhanced Feedstocks for Advanced Biofuels and Bioproducts ("REFABB") grant awarded by the U.S. Department of Energy in mid-2011. During the three months ended June 30, 2013 and 2012, we recognized $822 and $373, respectively, of product revenue related to the sale of biopolymer. At June 30, 2013, short-term deferred revenue of $529 shown on the Company's balance sheet includes $206 of deferred product revenue, nearly all of which is expected to be recognized during the quarter ended September 30, 2013. The Company's product revenue recognition policy is to defer recognition of product sales until the later of sixty days or receipt of payment from the customer in order to allow discretion in accepting product returns for a period of sixty days after delivery. During the three months ended June 30, 2013 we recognized $238 of research and development revenue, which was attributable to a funded research and development arrangement with a third party.

We expect total revenue to substantially decrease during 2013 compared to 2012, due to the one-time recognition of the deferred revenue associated with the Telles joint venture in 2012. We anticipate that product revenue will increase in 2013 compared to 2012, as we continue to gain market acceptance for our products, although there will be fluctuations from quarter-to-quarter.

Costs and expenses

                                         Three Months Ended
                                              June 30,
                                          2013         2012      Change
Cost of product revenue                $    1,196    $    437   $    759
Research and development                    4,945       5,006        (61 )
Selling, general, and administrative        3,422       3,437        (15 )
Total costs and expenses               $    9,563    $  8,880   $    683


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Cost of Product Revenue

Cost of product revenue was $1,196 and $437 for the three months ended June 30, 2013 and 2012, respectively. These costs primarily include inventory product costs of $705 associated with product revenue recognized during the three months ended June 30, 2013 plus current period freight and warehousing costs of $111 and $96, respectively. Inventory product costs include the cost of sample inventory provided to prospective customers. We also routinely evaluate inventory for impairment. During the three months ended June 30, 2013, we recorded a $271 charge to cost of product revenue for raw material and finished goods inventory that we determined was unlikely to be sold or converted to future sellable product based on customer demand and our current sales forecasts.

Although there will be fluctuations from quarter to quarter, we expect our overall cost of product revenue will continue to increase during 2013 and beyond, commensurate with our increasing product sales, and as our lower cost inventory acquired from Telles is depleted and replaced with new higher cost manufactured inventory, including new product grades that will enter the market during the year. During 2013, we may also incur costs for small scale commercial manufacturing operations either on our own or with third parties for our biopolymer products. Due to the expected high per unit cost of these smaller manufacturing batches, any inventory costs in excess of our expected saleable market price will be immediately expensed as cost of product revenue. We also anticipate that our cost of product revenue as a percentage of product sales will fluctuate during the remainder of 2013 as our mix of biopolymer products sales changes.

Research and Development Expenses

Research and development expenses were $4,945 and $5,006 for the three months ended June 30, 2013 and 2012, respectively. The decrease of $61 was primarily due to a decrease in employee compensation and related benefit expenses. Employee compensation and related benefit expenses were $2,835 and $2,959 for the three months ended June 30, 2013 and 2012, respectively. The decrease of $124 was primarily attributable to a decrease in headcount.

We expect our future research and development expenses will increase due to costs related to our validation of potential biopolymer manufacturing sites.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were consistent at $3,422 and $3,437 for the three months ended June 30, 2013 and 2012, respectively.

We expect that our selling, general and administrative expenses will increase during 2013 as we continue to expand our biopolymer sales and marketing activities, primarily in Europe.

Other Income (Expense), net



                                       Three Months Ended
                                            June 30,
                                       2013           2012       Change
Interest income, net                $       12     $       34   $    (22 )
Other expense, net                         (21 )          (25 )        4
Total other income (expense), net   $       (9 )   $        9   $    (18 )

Other income (expense), net were an expense of $9 and income of $9 for the three months ended June 30, 2013 and 2012, respectively. Other income (expense), net during both periods consisted primarily of income from our investments, offset by investment management and custodial fees.


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Comparison of the Six Months Ended June 30, 2013 and 2012



Revenue



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