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METABOLIX, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) (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, 12 -------------------------------------------------------------------------------- Table of Contents statements concerning: future financial performance and position and management's strategy, plans and objectives for research and development, product development, shipment and commercialization of current and future products, including the commercialization of Mirel™ bioplastic ("Mirel") through our alliance with Archer Daniels Midland Company ("ADM"). 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 Telles, LLC ("Telles") joint venture with ADM and our dependence on our collaboration with ADM for the success of Telles, 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, 2010 and our Current Report on Form 8-K filed on May 18, 2011. 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 which is focused on bringing environmentally friendly 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 biotechnology with chemical engineering and industrial production. From these capabilities, we are building a multi-product industrial biotechnology company around our long standing expertise and development of polyhydroxyalkanoate ("PHA") chemistry. We believe that a PHA chemistry platform has the potential to produce both bioplastics, which are attractive end products, and a variety of building blocks used to produce renewable chemicals that can serve large and established markets. Our first platform, which we are commercializing through Telles, a joint venture with Archer Daniels Midland Company, or ADM, is a proprietary, large-scale microbial fermentation system for producing a versatile family of PHA polymers, which we have branded under the name Mirel™. Through Telles, we are selling these bioplastics as biobased and biodegradable, but functionally equivalent, alternatives to petroleum-based plastics. Mirel offers superior biodegradability characteristics and can be used in a wide range of commercial applications, including products used in agriculture and horticulture, compost and organic waste diversion bags, marine and aquatic applications, consumer products, business equipment and durable goods, and general packaging materials. Mirel is now being produced in a commercial scale plant located in Clinton, Iowa (the "Commercial Manufacturing Facility") designed for an annual capacity of 110 million pounds. ADM completed construction of the initial phase of the Commercial Manufacturing Facility in 2009 and the facility began manufacturing Mirel in early 2010. The Commercial Manufacturing Facility produces biobased and biodegradable Mirel plastic using corn sugar, an abundant agriculturally-produced renewable resource. To exploit our first technology platform, we are working closely with ADM to bring the Commercial Manufacturing Facility to the full 110 million pound annual design capacity in advance of customer demand for Mirel. We believe the biodegradable bioplastics that this facility is now producing are superior to other bioplastics in several ways. They are highly versatile and range in properties from hard and stiff to soft and flexible. Mirel can withstand temperatures in excess of 100 °C, i.e., the boiling point of water, an important threshold. Some formulations of Mirel can withstand temperatures up to 130 °C. Mirel can be processed in many types of the existing conventional polymer conversion equipment currently used for petroleum-based plastic. While Mirel will biodegrade in marine and fresh water environments, it is resistant to reacting with cold or hot water over the intended life span of the product. Our current life cycle analysis (LCA) model for Mirel has identified the feasibility of reaching carbon neutrality using renewable energy sources in the manufacturing process. We are working with customers to determine the LCA for specific applications. These properties allow for a wide variety of commercial applications, offering a biobased alternative to petroleum-derived synthetic materials which are not biodegradable. In addition, the use of Mirel will reduce petroleum dependence. Through Telles, we are positioning Mirel as a premium priced specialty material catering to customers who want to match the functionality of petroleum-based plastic with the added dimension of environmental responsibility for their products and brands. 13 -------------------------------------------------------------------------------- Table of Contents With ADM, we have conducted product and business development activities, including production of pre-commercial amounts of Mirel, working with potential customers, and initiating qualification trials of our material for selected customer applications. In addition, we have established commercial supply agreements with several Telles customers. We expect that our products will initially be sold to companies that are: † selling products in which biodegradability is a key functional requirement; † establishing themselves as leaders in responding to consumer demand for environmentally responsible products and services; and/or † addressing current or anticipated regulatory pressure to shift to more sustainable products. We have a pipeline of current and prospective customers that reflect each of these traits. The plastics market is a large and global marketplace consisting of a broad range of polymer resins. As of 2008, the global plastics market was approximately 540 billion pounds annually or about $0.5 trillion in size. For our second platform, Industrial Chemicals, we intend to apply our core capabilities in microbial and process engineering to develop biological routes to other chemicals and chemical intermediates. Our initial focus is on the four-carbon ("C4") and three-carbon ("C3") chemical families, which, together, offer an addressable worldwide market size of over $10 billion. During 2009 we completed all work under our U.S. Department of Commerce National Institute of Standards and Technology grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. C4 chemicals are a large family of chemicals enabling a wide range of end-use applications, including engineering resins, urethanes, solvents, and personal care products. We were able to achieve all of the technical milestones outlined in this grant. In 2010, we scaled up our C4 chemicals technology, producing samples for prospective customers which we began shipping during the first quarter of 2011. We also achieved technical proof of concept for our C3 chemicals products. In 2011, we plan to build upon these technical successes, as well as feedback from our early customers, to further scale the technology and bring our products closer to commercialization. We also anticipate assessing market entry options and potential partnerships. Our third technology platform, Crop-based Businesses, which is at an early stage, is an innovative biorefinery system which uses plant crops to co-produce both bioplastics and bioenergy. For this system, we intend to extract polymer from the engineered plant crop, so that the remaining plant material can be used as a biomass feedstock for the production of bioenergy products including electricity and biofuel. In 2010, we expanded our recovery technology to enable the production of industrial chemicals from this platform. Our crop targets are oilseed crops, specifically camelina, switchgrass and sugarcane. More specifically: † Camelina-We are conducting research to develop an advanced, genetically modified camelina for co-production of bioplastics along with vegetable oil, biodiesel fuel, and oleochemicals. In August 2010, we established a research company in Saskatchewan, Canada to further pursue our research with industrial oilseed crops. Also in 2010, we conducted our first successful field trial of engineered camelina. † Switchgrass-We are engineering switchgrass to produce bioplastics in the leaf and stem of the plant. Switchgrass is a commercially and ecologically attractive, non-food energy crop that is indigenous to North America and is generally considered to be a leading candidate for cellulose-derived production of ethanol and other biofuels. † Sugarcane-We are collaborating with the Australian Research Council to further pursue our research to maximize bioplastic production in the leaf tissue of sugarcane. Sugarcane is an established energy crop that is well suited for tropical regions of the world. We believe that using these crops to co-produce bioplastics or chemicals with bioenergy products can offer superior economic value and productivity as compared to single product systems that produce them individually. Through 2011, we will continue to advance the research and assess alternative commercialization models for our crop programs. We may also seek to establish alliances with partners to commercially exploit this platform. 14 -------------------------------------------------------------------------------- Table of Contents As demonstrated by our technology platforms, we take an integrated systems approach to our technology development. We are focused on developing entire production systems from gene to end product as opposed to developing specific technologies (for example, gene sequencing, shuffling or directed evolution) or singular aspects of a product's production (for example, providing a key enzyme, catalyst or ingredient). We believe this systems approach optimizes manufacturing productivity and, when and if commercialized, will enable us to capture more economic value from any platform that we pursue. We have generated revenues primarily from government grants, research and development payments, license fees, and royalty payments. We have funded our operations primarily through the sale of equity securities, government grants, and payments from our collaborative partners. As of June 30, 2011, we had an accumulated deficit of $226,499 and total stockholders' equity was $56,190. Collaborative Arrangements Our strategy for collaborative arrangements is to retain substantial participation in the future economic value of our technology. We may also receive current cash payments to offset research and development costs and working capital needs. By their nature, these agreements are complex and have multiple elements that cover a variety of present and future activities. In 2004, we entered into the "Technology Alliance and Option Agreement" with ADM Polymer Corporation, or ADM Polymer, a subsidiary of ADM. The goal of the Technology Alliance and Option Agreement was to demonstrate the capabilities of our fermentation and recovery technologies at commercial scale and to prepare a master plan and budget for the construction of a commercial facility with a 110 million pound annual capacity. Upon achievement of such goals, ADM Polymer had the option to enter into a commercial alliance with us through execution of the "Commercial Alliance Agreement," for further research, development, manufacture, use, and sale of bioplastics. In July 2006, ADM Polymer exercised its option under our Technology Alliance and Option Agreement and entered into a Commercial Alliance Agreement with us. Upon entering into the Commercial Alliance Agreement, the Technology Alliance and Option Agreement terminated pursuant to its terms. The Commercial Alliance Agreement called for Telles to pay the Company quarterly support payments of $1,575 each. The last of fourteen quarterly support payments was received as of June 30, 2009. All quarterly support payments received from ADM on behalf of Telles, totaling $22,050, have been recorded as deferred revenue on the Company's balance sheet, and we will continue to defer recognition of these payments received from ADM during the "Construction Phase" of our agreement. We expect to begin recognizing this deferred revenue at the time of the achievement of a milestone referred to in the Commercial Alliance Agreement as the "First Commercial Sale." The deferred revenue will be recognized on a straight line basis over a period of approximately ten years in which our contractual obligations are fulfilled in accordance with the terms of the Commercial Alliance Agreement. Achievement of the First Commercial Sale requires the sale by Telles to third parties of at least one million pounds of Mirel manufactured at the Commercial Manufacturing Facility. Qualifying sales must meet certain criteria, including a minimum order size, product acceptance by the customers in accordance with the terms of their contracts and receipt of payment, in order for such sales to contribute towards the First Commercial Sale milestone. A portion of the deferred revenue representing estimated amounts expected to be recognized within the next twelve months has been classified as short-term in the Company's balance sheet at June 30, 2011. We also expect to receive payments from Telles for the compounding services we provide as well as royalty payments. The compounding payments and royalty payments are due to us as Telles sells product to its customers. These payments will be recognized as revenue during the period in which they are earned. We received the following payments from these arrangements to offset operating cash needs: † upfront payment of $3,000 from ADM in November 2004; † milestone payments of $2,000 from ADM in May 2006; † support payments of $22,050 from ADM, on behalf of Telles, through June 30, 2009; † † cumulative cost sharing payments from ADM for pre-commercial manufacturing plant construction and operations made in accordance with the Technology Alliance and Option Agreement of $1,209; and 15 -------------------------------------------------------------------------------- Table of Contents † cumulative cost sharing payments from ADM for pre-commercial manufacturing plant construction and operations made in accordance with the Commercial Alliance Agreement of $9,857. During the commercial alliance, ADM is responsible for the construction, financing and operation of the Commercial Manufacturing Facility which ADM Polymer owns, through a manufacturing agreement with Telles. We will provide or procure compounding services to convert the output from the Commercial Manufacturing Facility into forms that are suitable for various commercial applications. Although Telles is a separate legal entity owned equally by us and ADM, ADM will disproportionately fund the activities of the joint venture. Specifically, the cost of the Commercial Manufacturing Facility, the working capital requirements of the joint venture and the support payments to us will exceed the investments made by us to establish compounding operations for the joint venture. In order to rebalance the respective investments made by the parties, a preferential distribution of cash flow provides that all profits, after payment of all royalties, reimbursements and fees, from the joint venture will be distributed to ADM until ADM's disproportionate investment in the joint venture, including the costs of constructing the Commercial Manufacturing Facility, have been returned to ADM. Once ADM has recovered these amounts, the profits of the joint venture will be distributed in equal amounts to the parties. In order to track the disproportionate investments ADM has made, a Ledger Account has been established to record the respective investments made by the parties. As of June 30, 2011 the balance of the ADM Ledger Account was $420,783. This balance is expected to increase as the remaining manufacturing equipment and systems are brought online at the Commercial Manufacturing Facility and until Telles achieves positive cash flow from its operations. Government Grants As of June 30, 2011, expected gross proceeds of $6,328 remain to be received under our U.S. 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, 2011 June 30, 2011 Expiration Blow Molded Bioproducts From Renewable Department of Plastics Agriculture $ 349 $ 148 $ 201 August 2011 Advanced Technologies for Canadian Engineering of Ministry of Camilina Agriculture 210 83 127 February 2013 Total $ 559 $ 231 $ 328 In May of 2011 we were awarded a $6,000 grant from the United States Department of Energy. As of June 30, 2011 we had not finalized the contractual agreement and the grant had not yet commenced. 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, 2011 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, 2010. The critical 16 -------------------------------------------------------------------------------- Table of Contents 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, 2011 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 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, 2011 and 2010 Revenue Three Months Ended June 30, 2011 2010 ChangeLicense fee and royalty revenue from related parties $ 92 $ 42 $ 50 Grant revenue 99 5 94 Research and development revenue - 62 (62 ) Total revenue $ 191 $ 109 $ 82 Total revenue was $191 and $109 for the three months ended June 30, 2011 and 2010, respectively. During the three months ended June 30, 2011 we recognized $92 of license fee and royalty revenue from related parties compared to $42 for the respective period in 2010. Grant revenue for the three months ended June 30, 2011 was primarily generated from the Blow Molded Bioproducts from Renewable Plastics grant. There was no research and development revenue during the three months ended June 30, 2011. During the three months ended June 30, 2010 research and development revenue was derived primarily from the delivery of product samples to potential customers. Presently, revenue from Mirel product samples is recognized by Telles. We expect revenue to increase when the First Commercial Sale milestone is reached and we begin recognition of payments received from ADM, a related party, that have been recorded as deferred revenue. We also expect to receive increased payments from Telles for the compounding services we provide as well as royalty payments related to the sale of Mirel. The compounding payments and royalty payments are due to us after Telles has sold the product to the end customer and we expect to recognize these payments in the period they have been earned. In addition, we expect grant revenue to increase due to a grant awarded to Metabolix Oilseeds, Inc., our wholly-owned Canadian subsidiary, during the first quarter of 2011 for the advancement of technologies for engineering of camelina by the Saskatchewan Ministry of Agriculture and due to a recently awarded grant from the U.S. Department of Energy for the development of renewable biofuels. Expenses Three Months Ended June 30, 2011 2010 Change Research and development expenses, including cost of revenue $ 6,000 $ 5,838 $ 162 Selling, general, and administrative expenses 4,196 3,848 348 Total operating expenses $ 10,196 $ 9,686 $ 510 Research and development expenses, including cost of revenue Research and development expenses, including cost of revenue, were $6,000 and $5,838 for the three months ended June 30, 2011 and 2010, respectively. The increase of $162 was primarily due to an increase in employee compensation and related benefit expenses and research and development supplies and services, partially offset by a decrease in material production costs. Employee compensation and related benefit expenses were $3,407 and $3,262 for the three months ended June 30, 2011 and 2010, respectively. The increase of $145 was primarily attributable to annual compensation merit increases and our hiring of employees, including employees for our Canadian subsidiary. Expenses related to research supplies and services increased $73 primarily due to the expansion of our Industrial Chemicals research program. Material production costs decreased $133 primarily due to reduced activity at our pre-commercial manufacturing facility as a result of commencing operations at the Commercial Manufacturing Facility. 17 -------------------------------------------------------------------------------- Table of Contents We expect to incur increased research and development expenses through the remainder of the Construction Phase of the ADM agreement as we continue to undertake technology improvements and product development activities as we develop, test, and refine product to meet the specification requirements of Telles customers. We also expect to incur increased research and development expenses as we expand our efforts across our Industrial Chemicals platform. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to development of Mirel are expected to decrease significantly as these expenses will be transferred to Telles. We estimate that research and development expenses that will transfer to Telles will be approximately $3,300 to $3,900 per quarter once we commence the Commercial Phase. Until then, we will continue to bear these expenses. Selling, general, and administrative expenses Selling, general, and administrative expenses were $4,196 and $3,848 for the three months ended June 30, 2011 and 2010, respectively. The increase of $348 was primarily attributable to an increase in employee compensation and related benefit expenses and increased legal fees, partially offset by a decrease in consulting fees and related expenses. Employee compensation and related benefit expenses were $2,443 and $2,082 for the three months ended June 30, 2011 and 2010, respectively. The increase of $361 is primarily attributable to additional headcount to support business development. Legal fees and expenses, including general and patent related expenses, increased $164 for the three months ended June 30, 2011. Consulting fees decreased $242 primarily as a result of nonrepetitive work performed in 2010 related to market analysis for our Industrial Chemicals platform and support for upgrades and improvements made to some of our financial software applications. We expect to incur increased selling, general, and administrative expenses through the remainder of the Construction Phase of the ADM agreement as we increase our market development activities for Mirel. Upon the commencement of the Commercial Phase of the ADM agreement, selling, general, and administrative expenses are expected to decrease significantly as these Mirel related costs will be transferred to Telles. We estimate that selling, general, and administrative expenses that will transfer to Telles will be approximately $700 to $1,100 per quarter once we commence the Commercial Phase. Until then, we will continue to bear these expenses. Other Income (Net) Three Months Ended June 30, 2011 2010 Change Total other income (net) $ 23 $ 34 $ (11 ) Other income (net) was $23 and $34 for the three months ended June 30, 2011 and 2010, respectively. Other income (net) during both periods consisted of investment income. Comparison of the Six Months Ended June 30, 2011 and 2010 Revenue Six Months Ended June 30, 2011 2010 Change License fee and royalty revenue from related parties $ 393 $ 72 $ 321 Grant revenue 124 5 119 Research and development revenue - 212 (212 ) Total revenue $ 517 $ 289 $ 228 Total revenue was $517 and $289 for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011 we recognized $393 of license fee and royalty revenue from related parties compared to $72 for the respective period in 2010. License fee and royalty revenue from related parties increased primarily as a result of a royalty earned under a licensing agreement with Tepha, Inc. ("Tepha"), a related party. Grant revenue for the six months ended June 30, 2011 was primarily generated from the Blow Molded Bioproducts from Renewable Plastics grant. There was no research and development revenue during the six months ended June 30, 2011. During the six months ended 18 -------------------------------------------------------------------------------- Table of Contents June 30, 2010 research and development revenue was derived primarily from the delivery of product samples to potential customers. Presently, revenue from Mirel product samples is recognized by Telles. We expect revenue to increase when the First Commercial Sale milestone is reached and we begin recognition of payments received from ADM, a related party, that have been recorded as deferred revenue. We also expect to receive increased payments from Telles for the compounding services we provide as well as royalty payments related to the sale of Mirel. The compounding payments and royalty payments are due to us after Telles has sold the product to the end customer and we expect to recognize these payments in the period they have been earned. In addition, we expect grant revenue to increase due to a grant awarded to Metabolix Oilseeds, Inc., our wholly-owned Canadian subsidiary, during the first quarter of 2011 for the advancement of technologies for engineering of camelina by the Saskatchewan Ministry of Agriculture and due to a recently awarded grant from the U.S. Department of Energy for the development of renewable biofuels. Expenses Six Months Ended June 30, 2011 2010 Change Research and development expenses, including cost of revenue $ 12,199 $ 12,006 $ 193 Selling, general, and administrative expenses 7,983 7,717 266 Total operating expenses $ 20,182 $ 19,723 $ 459 Research and development expenses, including cost of revenue Research and development expenses, including cost of revenue, were $12,199 and $12,006 for the six months ended June 30, 2011 and 2010, respectively. The increase of $193 was primarily due to an increase in employee compensation and related benefit expenses, research and development supplies and services and contracted research, partially offset by a decrease in material production costs. Employee compensation and related benefit expenses were $7,103 and $6,542 for the six months ended June 30, 2011 and 2010, respectively. The increase of $561 was primarily attributable to annual compensation merit increases and hiring of new personnel to support our manufacturing process and research programs, including employees for our Canadian subsidiary. Expenses related to research supplies and services increased to $156 primarily as a result of the expansion of our Industrial Chemicals research programs. Expenses for contracted research increased $147. The increase was primarily attributable to outside testing services related to the development of Mirel and industrial chemicals. Material production costs decreased to $901 from $1,595 for the six months ended June 30, 2011 and 2010, respectively. The reduction of $694 was primarily due to reduced activity at our pre-commercial manufacturing facility as a result of commencing operations at the Commercial Manufacturing Facility. We expect to incur increased research and development expenses through the remainder of the Construction Phase of the ADM agreement as we continue to undertake technology improvements and product development activities as we develop, test, and refine product to meet the specification requirements of Telles customers. We also expect to see increasing research and development expenses as we expand our efforts across our Industrial Chemicals platform. Upon commencement of the Commercial Phase of the ADM agreement, expenses relating to development of Mirel are expected to decrease significantly as these expenses will be transferred to Telles. We estimate that research and development expenses that will transfer to Telles will be approximately $3,300 to $3,900 per quarter once we commence the Commercial Phase. Until then, we will continue to bear these expenses. Selling, general, and administrative expenses Selling, general, and administrative expenses were $7,983 and $7,717 for the six months ended June 30, 2011 and 2010, respectively. The increase of $266 was primarily attributable to an increase in employee compensation and related benefit expenses and increased legal fees, partially offset by a decrease in consulting fees and related expenses. Employee compensation and related benefit expenses were $4,799 and $4,590 for the six months ended June 30, 2011 and 2010, respectively. The increase of $209 is primarily attributable to an increase in stock-based compensation expense that resulted from annual employee stock option grants as well as stock options granted to our Board of Directors and newly hired employees. Legal fees and expenses, including general and patent related expenses, increased $161 for the six months ended June 30, 2011. Consulting fees decreased $259 primarily as a result of nonrepetitive work performed in 2010 related to market analysis for our Industrial Chemicals platform and support for upgrades and improvements made to some of our financial software applications. 19 -------------------------------------------------------------------------------- Table of Contents We expect to incur increased selling, general, and administrative expenses through the remainder of the Construction Phase of the ADM agreement as we increase our market development activities for Mirel. Upon the commencement of the Commercial Phase of the ADM agreement, selling, general, and administrative expenses are expected to decrease significantly as these Mirel related costs will be transferred to Telles. We estimate that selling, general, and administrative expenses that will transfer to Telles will be approximately $700 to $1,100 per quarter once we commence the Commercial Phase. Until then, we will continue to bear these expenses. Other Income (Net) Six Months Ended June 30, 2011 2010 Change Total other income (net) $ 43 $ 89 $ (46 ) Other income (net) was $43 and $89 for the six months ended June 30, 2011 and 2010, respectively. Other income (net) during both periods consisted of investment income. Liquidity and Capital Resources Currently, we require cash to fund our working capital needs, to purchase capital assets and to pay our operating lease obligations. The primary sources of our liquidity have been: † equity financing; † our strategic alliance with ADM; † government grants; and † interest earned on cash and investments. We have incurred significant expenses relating to our research and development efforts. As a result, we have incurred net losses since our inception. As of June 30, 2011, we had an accumulated deficit of $226,499. Our total unrestricted cash, cash equivalents and investments as of June 30, 2011 were $95,180 as compared to $61,574 at December 31, 2010. As of June 30, 2011, we had no outstanding debt. Our cash and cash equivalents at June 30, 2011 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. The primary objective of our investment activities is to preserve our capital. As of June 30, 2011 we had restricted cash of $622. Restricted cash consists of $522 held in connection with the lease agreements for our Cambridge, Massachusetts facilities and $100 held in connection with our corporate credit card program. Investments are made in accordance with our corporate investment policy, as approved by our Board of Directors. Investments are limited to high quality corporate debt, U.S. Treasury bills and notes, bank debt obligations, municipal debt obligations and asset-backed securities. The policy establishes maturity limits, concentration limits, and liquidity requirements. As of June 30, 2011, we were in compliance with this policy. We believe that our cash, cash equivalents, investments and interest we earn on these balances will be sufficient to meet our anticipated cash requirements, including cash requirements with respect to the commercial launch of Mirel, for at least the next 24 months. If our available cash, cash equivalents, and investments are insufficient to satisfy our liquidity requirements, or if we develop additional products, we may need to sell additional equity or debt securities or obtain a credit facility. In addition, we may seek to raise additional capital when we believe market conditions are favorable or when we otherwise believe it is prudent. The sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may 20 -------------------------------------------------------------------------------- Table of Contents require additional capital beyond our current forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business. Net cash of $15,299 was used in operating activities during the first six months of 2011 compared to $16,831 used in the respective period in 2010. The cash used during the six months ended June 30, 2011 primarily reflects the net loss for the period partially offset by non-cash expenses, including stock-based compensation expense of $2,442, depreciation expense of $770 and the Company's 401(k) stock matching contribution of $368. After the Commercial Phase of the ADM alliance begins, Telles will reimburse us for the costs of services provided pursuant to the Commercial Alliance Agreement, including research and development, product development and sales and marketing. Until then, we will continue to bear these costs. Net cash of $26,850 was used in investing activities during the first six months of 2011 compared to net cash of $18,035 provided by investing activities for the respective period in 2010. Net cash used in investing activities for the six months ended June 30, 2011 included $78,968 used to purchase investments and $488 used to purchase capital equipment, partially offset by $52,606 provided by the sale and maturity of investments. Net cash of $49,405 was provided by financing activities for the six months ended June 30, 2011, primarily from the net proceeds of $49,357 provided from our common stock offering that was completed in May 2011. Contractual Obligations The following table summarizes our contractual obligations at June 30, 2011 and the effects such obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period Less than 2-3 4-5 More than Total 1 year years years 5 years Purchase obligations $ 100 $ 25 $ 50 $ 25 $ -Operating lease obligations 3,255 1,433 1,822 - - Total $ 3,355 $ 1,458 $ 1,872 $ 25 $ - Off-Balance Sheet Arrangements As of June 30, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission's Regulation S-K. Related Party Transactions We engaged in various transactions with Tepha, a related party, and recorded $92 and $393 of license and royalty revenue during the three and six months ended June 30, 2011, respectively. During the three and six months ended June 30, 2010 we recorded license and royalty revenue from Tepha of $42 and $72, respectively. We had no outstanding receivable balance due from Tepha as of June 30, 2011or December 31, 2010. We had various transactions with our alliance partner ADM, a related party, during the three and six months ended June 30, 2011 and 2010. We had an outstanding receivable balance of $479 and $813 due from ADM at June 30, 2011 and December 31, 2010, respectively. We also had various transactions with Telles. We also had an outstanding receivable balance of $1 and $15 due from Telles as of June 30, 2011 and December 31, 2010, respectively. For more information on our related party transactions, please see Note 8 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless 21 -------------------------------------------------------------------------------- Table of Contents otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, "Comprehensive Income (Topic 220)" (ASU 2011-05). This newly issued accounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011, which for Metabolix will be the fiscal year that begins on January 1, 2012. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact our financial position or results of operations. In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" (ASU 2011-04). This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for Metabolix will be the fiscal year that begins on January 1, 2012. We do not expect that adoption of this standard will have a material impact on our financial position or results of operations. In January 1, 2011, we adopted new authoritative guidance on revenue recognition for multiple-element arrangements. The guidance, which applies to multiple-element arrangements entered into or materially modified on or after January 1, 2011, amends the criteria for separating and allocating consideration in a multiple-element arrangement by modifying the fair value requirements for revenue recognition and eliminating the use of the residual method. The fair value of deliverables under the arrangement may be derived using a "best estimate of selling price" if vendor specific objective evidence, or VSOE, and third-party evidence, or TPE, is not available. Deliverables under the arrangement will be separate units of accounting provided (a) a delivered item has value to the customer on a standalone basis; and (b) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the company. We did not enter into or materially modify any multiple-element arrangements during the six months ended June 30, 2011. |