Cibus Inc (CBUS) 2018 Q1 法說會逐字稿

Good day, and welcome to the Calyxt First Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now -- it is now my pleasure to introduce your host, Simon Harnest, Vice President of Corporate Strategy and Finance. Please go ahead, sir.

Thank you, and welcome, everyone, to Calyxt First Quarter 2018 Financial Results Conference Call. Joining me on the call today with prepared remarks are Federico Tripodi, our Chief Executive Officer; Manoj Sahoo, our Chief Commercial Officer; and Bryan Corkal, our Chief Financial Officer.

Yesterday evening, Calyxt issued a press release reporting our financial results for the 3 months ended March 31, 2018. This press release is available on our website at www.calyxt.com.

As a reminder, we will make forward-looking statements regarding financial outlook in addition to regulatory and product development plans. These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. A description of these risks can be found in our most recent Form 10-K on file with the SEC.

I would now like to turn the call over to Federico.

Thank you, Simon. Good morning, everybody, and thanks for joining us today. Welcome to our first quarter investor call.

We have a lot of good news to share today as we successfully continue to execute on our mission to build a better future, one where consumers can trust healthier foods and ingredients are grown in a way that is better for the environment. We are excited, as you will see in our results, that our farmer partners understand and share our vision. We imagine a world where food we love could help us prevent obesity and other diseases and where food allergies -- allergens are eliminated entirely.

Our continued proven performance and results as a newly mintly (sic) [minted] public company gives us a very strong foundation for the path that lies ahead. At Calyxt, we believe it's our responsibility to apply our capabilities to make great-tasting plant-based food ingredients that will give consumers peace of mind, they are good for you and the planet. By applying gene editing, in total alignment with this purpose, we now have the power to mindfully remove the bad and dial up the good in our plant-based foods.

A few unwanted DNA ladders out of billions are lost just like it happens in nature. This is like using a word processor to remove a specific word from 1 page of a book with millions of pages. And we have done this over and over again, and now we have many preparations underway to complete the launch of our first product, high-oleic soybeans. Since 2010, scientists at Calyxt had been -- thoughtfully applied this gene-editing capabilities to tailor crops with the potential to deliver healthier fats, more fiber, reduce sugars and less carcinogens; to require less fungicides in the environment and to reduce food waste.

I would like to take a moment to give you some key metrics of our high-oleic soybean program that show the incredible progress we have made over the past few months, establishing a high-quality grower network in preparation for the commercial launch of our high-oleic soybean product in late 2018. In the first quarter of 2018, we contracted more than 16,000 high-oleic soybean acres with more than 75 farmers in the Upper Midwest, beating our estimate of 12,000 to 15,000 acres and 50 farmers.

As planting approaches, we are confident we will have at least these many acres planted this spring.

Over 90% of our existing farmers signed up to replant Calyxt high-oleic soybeans this year. Furthermore, on average, existing farmers are more than doubling their Calyxt acres year-over-year.

On top of this, we established our premium program in December and did not need to adjust our premiums throughout the season. We believe our premiums this year are competitive with local premiums for non-GMO soybeans from other suppliers and, in some cases, lower. Farmers are excited about the Calyxt story as a small innovative company and the prospects of having choices and being part of the gene-editing movement.

With that, I will pass the call over to Manoj, our Chief Commercial Officer, who will give you more detail on our farmer network and customer progress. Manoj?

Thank you, Federico. To give you a bit more background on our farmer network, our contracting farmers collectively farm over 200,000 acres, with around half the acres devoted to soybeans this year. Approximately, 17% of the anticipated acres to be planted by these farmers consist of Calyxt high-oleic soybean variety.

The average size of these farms we are working with is over 2,500 acres, which is much larger than average size of farms in the regions we operate. The U.S. average farm size is around 430. In Minnesota, it's around 350; in South Dakota, around 1,300 acres. Overall, we are careful in picking our farmers at this stage to select the most progressive growers. This positions us to expand the program in the Upper Midwest region over the coming years.

The success of farmers with the Calyxt model is also our success. Field selection is amongst the most important decisions for us. In order to help farmers select the right fields this year, we are testing soil samples for a disease called soybean cyst nematode. We are very encouraged that, from the testing we have completed so far, around 97% of the fields have come back free of this disease. For the remaining 3%, we encourage these farmers in our program to select a different field or allow them to withdraw from the program. This has helped us build trust with farmers who are our partners through transparency and improves the experience because planting in SCN hot fields can impact yields significantly.

This spring has been wet and cold, which is expected to delay planting dates. Even though we have started planting beans, we expect soybean planting to start in full force in mid-May and be completed by mid-June. In Q2 earnings call, we would provide an update on the final number of acres which are planted.

Farmers are indeed very excited to be part of the Calyxt program. Some of the top reasons we hear from farmers why they sign up for the Calyxt program include: one, they are proud to grow a crop which will be used to produce a healthier food ingredient. They are proud about domestically produced for local markets. Second, growing high-oleic soybeans offers them an opportunity to diversify their portfolio, all while growing the same soybean crop. And lastly, the Calyxt program has attracted high-quality and progressive growers who want to be early adopters of technology and be part of something which will be bigger in the future.

Moving on to new [high-oleic] soybean varieties. We continue to make progress on bringing additional varieties online by doing contra season in South America. Approximately 800 of these lines will be planted in spring in the U.S. this year. We're on track to add 2 to 4 additional high-oleic varieties by 2020, 2021. This would allow us to expand regions in which Calyxt high-oleic soybean can be grown as well as increasing share of Calyxt high-oleic variety in existing growers' portfolio.

Moving on to food company progress. We continue to expand our engagement with food companies. In the last quarter, we added 8 more potential customers, which is 66% more, taking the total number of engagements to 20. The end-use applications of these customers -- these customers are evaluating our high-oleic soybean oil include frying such as chips and French fries, frying meat, both salty and healthy snacks, baking, nut butters and vegan meat products.

To provide some additional perspective on the size of the market opportunity, let us consider the case at our meat substitute market. Vegan meat substitute typically are made out of 1/3 veg protein such as soy, peas or wheat; 1/3 fats and oils; and 1/3 texturizers to put everything together. According to industry estimates, meat substitutes market in the U.S. only is estimated to be $4.63 billion in 2018 and is projected to rise to $6.43 billion by 2023. We estimate the volumes of fats and oils consumed in this category to be between 60 to 80 million pounds. This is a very high growth market, growing at double digits year-on-year, with a segment of consumers preferring plant-based proteins to meat due to health concerns as well as concerns about environmental sustainability and animal welfare.

Another example is baking and frying oils. This segment constitutes approximately 18% of the total demand for fats and oils in the United States, which translates to 7 -- approximately 7 billion pounds annually. There are certain segments especially in baking which are still using hydrogenated oils because of functionality issues. These partially hydrogenated oils, as we all know, will be banned by Food and Drug Administration, FDA, for human consumption in June of this year. We believe Calyxt high-oleic soybean oil can be a strong alternative.

Another example is nut butter. Due to FDA regulations and brand positioning, a lot of nut butter products have had to switch to palm oil, which not only has a very high saturated fat content but also raises concerns about environmental sustainability. The nut butter market is approximately $2.2 billion in U.S., 80% being peanuts and 20% being other nuts, and continues to grow at a healthy pace.

High-oleic soybean can be a viable substitute, which can potentially allow food companies to reduce the saturated fat content, a benefit from a labeling perspective, all while using a domestically sourced ingredient versus imported products. The commercial team is engaged with food companies in each of these target market segments who can be early adaptors in specific end-use applications, thus allowing Calyxt to grow in these segments in later years as we scale up the supply chain.

With that, I would like to turn the call over back to Federico.

Thank you, Manoj. I would like to provide some updates on our product pipeline from R&D, which continues to advance. During Q1, we received confirmation from USDA regarding the nonregulated status of our high-fiber wheat product candidate. Calyxt now has 7 product candidates that have been deemed nonregulated by the USDA across 4 crops, including soybeans, wheat, potatoes and alfalfa.

Last year, we developed our high-fiber wheat and then made flour over the last few months. Data is starting to come in with very positive results. Data on our flour from wheat grown in our greenhouses shows more than threefold increase in dietary fiber content when comparing Calyxt white flour versus commodity white flour. A single serving of Calyxt whole wheat flour may provide up to 100% of the daily recommended requirement.

We believe this product has a tremendous potential to address certain food-related health concerns from consumers. Some everyday foods made with our flour could be eligible to make labeling claims such as good source of fiber, high fiber, may reduce the risk of some types of cancers, may reduce the risk of heart disease. This would include staples like bread, pasta and bakery. These are claims allowed by the FDA as per new guidance on fiber that was released on March 1, 2018.

It is important to note that Calyxt high-fiber wheat flour would provide a clean label option as it would be considered as an intrinsic fiber, thus allowing food companies to reduce their use of synthetic non-digestible carbohydrates or NDCs. Over the coming months, we anticipate that we will plant our high-fiber wheat flour in the field, bulk up quantities for small-scale milling and generate additional data on ingredient functionality. High-fiber wheat may be the next product to market with an anticipated commercialization as early as 2020, 2021.

I am happy to confirm that we have developed and have been making progress with our first product candidate in alfalfa, our improved-quality alfalfa. Through our development partnership with S&W Seeds, we have been able to combine the best-in-class seed varieties with our gene-editing capabilities.

Alfalfa is one of the largest crops in the U.S. and the world. Alfalfa is utilized as a forage by livestock and provide especially high protein content for dairy cows and beef cattle. The U.S. alfalfa hay market is estimated at $11.3 billion. Our partner, S&W Seeds, has an estimated 17% to 20% share of the world production and sourcing market. Hundreds of alfalfa plants have been grown in our greenhouses, and we are now validating our product concept and preparing field plantings later this year.

Changing gears a bit. I will move to our intellectual property front. Calyxt has strong intellectual property in the field of gene editing. We have exclusive worldwide license agreements from Cellectis for the gene-editing technologies in the field of food and agriculture, excluding editing of animals. These patents cover TALEN, which is our preferred set of molecular scissors and also the cell repair processes used in combination with chimeric nuclease-based scissors, which we believe include multiple gene-editing technologies. This last set of patents has already been granted and has survived a challenge process.

Calyxt also has an exclusive license agreement with the University of Minnesota for the use of CRISPR/Cas9 intellectual property. Dr. Dan Voytas at the University of Minnesota was the first to apply CRISPR/Cas9 technology in practice in plants. These patents are still going through the prosecution process.

As we look forward to the rest of 2018, we anticipate we will continue to see progress and strength on the intellectual property portfolio of Calyxt -- that Calyxt has developed and licensed over the last 7 years. We have shown extreme discipline with our cash burn while growing the company at an accelerated pace.

I would like to turn the call over to Bryan Corkal, our CFO, who will walk you through our financials.

Thank you, Federico. I am pleased that we continue to track on plan and on budget. For the first quarter, the cash burn for Calyxt was $6 million and tracking in line with our forecasted cash spend.

The operating cash flow was $6.6 million in the quarter. And the difference between the operating cash flow and the net cash flow was primarily cash inflows from stock option exercises. Our ending cash balance is a healthy $50.7 million.

I'd like to spend some time going into more detail on how we break down our $6 million in cash burn. Our cash spend in the quarter can be characterized by 3 buckets. The first bucket of cash spend is to support the rich pipeline of products and build our industry-leading portfolio of intellectual property. We spend on gene editing, plant transformation, plant development and regulatory activities, all with the goal to make healthier food ingredients.

We continue to make great strides in advancing the pipeline and in the quarter, received our seventh Am I Regulated? letter for high-fiber wheat. A little over 1/3 of the cash spent in the quarter was for growing the product pipeline and is a major investment in Calyxt future growth.

The second bucket of cash used in the quarter was to prepare for the launch of our high-oleic soybeans. Our commercial team has successfully sold over 16,000 acres of high-oleic soybeans, exceeding our goal. This is a huge stride forward for the commercialization of our first gene-edited product.

In the first 3 months of 2018, we spent about 1/4 of the $6 million cash in the quarter to support the high-oleic soybean launch. We spent on seed production and commercial activities, including seed sales, agronomic support and promotional activities with potential high-oleic soybean oil customers.

The remainder of our cash is spent on general and administration for activities including IT systems, hiring talent, public company reporting and maintaining our intellectual property. The team has successfully managed the construction and furnishing of the state-of-the-art facility with its gene-editing laboratory, a food demo kitchen and offices. The new facility is near completion and under budget.

It's hard to believe that, in September, we broke ground on this facility and in a few short weeks, we begin to move in. The new facility will be an inflection point in our development as it will accelerate our R&D productivity and showcase our capabilities to produce healthier food ingredients. We look forward to hosting investors, suppliers and customers in this new facility.

I am pleased that the team continues to execute this strategy with extreme financial discipline. In the first quarter, we had a net operating loss of $4.4 million.

Let me add a comment about noncash stock option expenses. Some of the nonemployee stock option awards are remeasured at the prevailing stock price. For the first quarter, the total noncash stock option expense was a reduction of $68,000.

Before handing it back over to Federico, let me share our forecast for cash burn for the remainder of 2018. Our strategy is to deliver on our key business milestones to continue building a rich pipeline of products and launch high-oleic soybeans. To accomplish these goals, we continue to forecast cash burn of between $2 million and $2.2 million per month for 2018, excluding working capital for grain purchases.

We anticipate spend marginally increasing throughout the year as we hire scientists, operate in our new state-of-the-art facility and build out our commercial footprint. We anticipate we will incur capital expenditures for equipment and furnishings for the new facility, and these have been factored into our full year cash burn guidance.

In addition, we are actively looking at in- licensing IP, additional regulatory activities, supplementing our knowledge of the food industry and understanding our customers' needs. We expect our current cash position to be sufficient to fund operations through a significant portion of 2019.

In closing, our team is focused on building our R&D and commercial expertise in a measured and disciplined approach.

So with that, I'll pass it back to Federico.

Thank you very much, Bryan. We at Calyxt are proud of our tremendous progress since our early beginnings growing plants in a garage at the University of Minnesota a short 7 years ago. Since then, we have received USDA nonregulated status for 7 products and prepared our first product commercialization.

In 2018, we expect to transform the company once again as we transition into a commercial entity with a supercharged R&D engine as we prepare to move to our new state-of-the-art concept-to-fork facility.

We look forward to a remainder of 2018 marked with commercial and supply chain successes while we continue to grow our capability to mindfully disrupt the food system.

Thank you for your time today, and I look back to -- I look forward to seeing you at one of our upcoming conferences that we will be attending.

So with that, I will pass it back to Simon.

Thank you, Federico, and thanks, everyone, for attending our first quarter investor call. I would now like to open the call to questions.

And joining for Q&A will be Federico Tripodi, Bryan Corkal and Manoj Sahoo.

(Operator Instructions) Our first question comes from Ken Zaslow of Bank of Montreal.

It looks like you've been making a lot of progress and glad for the update. Let me just ask you, how are you guys -- can you discuss the progress you're making on your supply chain and how that's working out with the inventory levels and where you are with that? That would be great.

Great. Thanks, Ken. This is Manoj. As you know, we have been making good progress on the supply chain. One, we have sufficient seeds to plant our acres this year, and the planting has just started. With regards to crushers, we are in advanced discussions with multiple crushers. What we are trying to do is find the most optimal contractual arrangement with one or more crush plants, keeping in mind the grand logistics and the logistics of the soybean mill, plus also the high-oleic shipments for these potential customers. And we expect that seed will not be a limiting factor for us to get the acres. We still are seeing some trickling down of the acres being added even at the last moment because it has been a very wet planting season.

And then my second question just is, can you talk about your conversations with your customers? I know you said that you increased them to 20. Where are you on the process with them, from discussions to actually converting them to real customers? And then I'll leave it there.

No, that's great. I think, as you know, we have been expanding the number of customers we have been engaged with while, at the same time, for the customers which we are engaged in the past, we are making progress with them testing our oil and validating some of the properties we confirmed to them. So there's been a lot of samples being exchanged back and forth. And it also involves working with their food application development teams to confirm the functionality they're looking for. Especially, some may need to make certain changes in the way it is applied, and also, some of them may look at beneficial labeling claims on the final products they are looking. So making both in terms of number of customers as also the depth of discussions with each one of them. As we said during the call, there are a couple of segments which we are focusing on so that we can get some early adoption in those market segments.

Have you reached any sort of firm agreements with anybody, with -- getting them to say, "Look, we are comfortable using your product and we're going to be doing it in this time frame" or not yet? And what is the time frame for which you expect to see that?

Some of these customers have already used high-oleic soybean oil in the past, not necessarily the non-transgenic version but others. So they are very comfortable using high-oleic soybeans. I anticipate those will be over the hump very quickly. Right now, as we know, we are not looking at annual contracts. It will be mostly spot purchases, based on their needs. But towards the end of the year, we would be making announcements about specific customers. But obviously, they have confidentiality limitations so we'll have to be thoughtful because, with every customer we engage, we have a CDA. We'll see what we can tell to provide additional color.

Yes. So this is Federico. I expect that, in future calls, we'll give you updates not only on the number of customers and the categories, but we'll give you some color of where we are in different categories and progress without naming specific customers. But we will provide color of categories and additional information to help you understand how things are progressing. Being realistic, this year, we probably will start seeing conversion towards the end of the year once we have the oil coming at commercial scale because it's the first year we're supplying oil to these customers. But I think what Manoj is sharing is the progress has been amazing and the receptivity has been a lot bigger than what we anticipated. And we are talking with customers of every size, like we shared in the last call. And we were a little bit positively surprised that very, very large potential customers are engaging with us given -- even though our scale today is not sufficient to satisfy their needs. So the conversations are extremely positive.

The next question comes from Daniel Jester of Citi.

So I wanted to ask about planting progress. You mentioned this in your prepared remarks, that, in Minnesota in particular, we're really far behind the 5-year average in terms of plantings. Historically, how has your soybean variety performed when it's been planted later in the spring relative to sort of a normal planting time period? And is there any risk to yield should planting be pushed into June relative to May?

Dan, thanks for the question. This is Federico. And given that I'm the agronomist in the room here, I'll take that one. We -- so first, planting here in South Dakota and Minnesota, usually, it comes around mid-May heavily through mid-June. So we expect, this year, it will be delayed because of the conditions we described and you just referred to. We're not officially, officially delayed yet. We're still in the front end of that. We started planting already, so we have farmers planting over the weekend. And some of the farmers, because we were very collaborative with them through the year and they put a decent percentage of their farm to our product, are going to be planting our soybean even before corn, in some cases, which is really, really good. We have seen our performance in terms of oil composition to be consistent regardless of the planting date, so which -- that means that we have seen product quality to be very consistent in early and late plantings, which is good for us as we are after the oil. And like in any soybean variety, there's a sweet spot for timing on the planting. We can tolerate mid-May to mid-June plantings very well. We have been very careful in field selection and farming -- farmer selection. So we're confident that planting here this year is going to progress according to our plan. We also have had additional opportunities with farmers that are either staying with soybeans because of the late planting or that slightly increased their soybean acres throughout the season, moving away from corn and wheat. So that is also helping us making sure that we will stick to that 16,000-acre number that we shared with you today. Traditionally in ag, farmers who can transition from one crop to the other and cancel orders during planting season, we expect that, because of this year and the work we've done, we'll have a high confidence that we will deliver on the number we shared with you today.

Okay. That's really helpful. And then maybe just 2 quick ones for Bryan. I've noticed that you changed a bit about how you're talking about your funding needs to 2019 instead of midyear. It sounds like you're saying for a significant portion of 2019. Is that a change in terms of how you're looking at your funding position through the middle of next year? And then secondly, I noticed your R&D expense on the income statement declined year-over-year, and I'm surprised. For a company at your stage and your life cycle, I thought that would be sort of increasing relatively rapidly. So can you just talk to those 2 things?

Sure. So first, really, there's no change in our amount of cash and our cash burn. We've been talking about $2 million to $2.2 million for quite a long time. I think it's just that we're executing on it, we're disciplined, and just mathematically, I felt comfortable that we could extend it out a little longer than what we had been previously saying. The second one on the R&D spend, well, really, when I talked about the stock option expense and the fact that we have remeasurement, we actually had a credit in R&D for stock option expense in the quarter due to that remeasurement. So when you really look at what we spent, if you were to back out the stock option expense, we are continuing to invest a good portion of our R&D money. So it was really kind of the anomaly of having stock option expense credit in the R&D bucket.

All right. That's very helpful, guys.

And this is Federico again. Just I want to clarify Bryan's comment on runway. We are very comfortable, we can get through mid-2019. So our guidance has not changed. I think we are just showing the strength of our comfort that we can get to the number, but I wanted to reiterate that our guidance remains mid of [2019].

(Operator Instructions)

This is Federico. On behalf of the company, I think we are done with the questions today. We have no more questions on the queue.

I want to thank everyone for dialing in. 2018 has definitely started with strong results and tailwinds for Calyxt. We are looking forward to a full year marked with commercial and supply chain successes while we continue to grow our capabilities to mindfully bring healthier products to consumers.

Thank you again for your time today, and have a great day.

Ladies and gentlemen, that concludes this conference call, and you may now disconnect your lines.