Arcadia Biosciences Inc (RKDA) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Arcadia Biosciences second-quarter earnings call. (Operator Instructions) Please note today's program is being recorded.

I would like to introduce your host, Mr. Tom O'Neil, Chief Financial Officer. Sir, please begin.

Thank you, Roland. Good afternoon and welcome to Arcadia's second-quarter earnings conference call. I'm joined this afternoon by Eric Rey, our CEO.

We'll cover two areas in today's call: one our second-quarter and first-half financial results, which I will review; and, two, a strategic overview, which Eric will provide, focusing on the progress we have made with our operations and our technologies so far this year. We will conclude the call with your questions.

This call is being webcast and you can refer to our press release and slides at ArcadiaBio.com.

Before we start if I could refer you to slide 2, I would like to remind you that we will be making forward-looking statements on this call based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, the Company's actual performance and results may differ materially from those described or implied today. You can review our Safe Harbor language in both our most recently filed 10-Q and again on slide 2 of this presentation.

Let's turn then to our financial results, a summary of which is provided on slide 3. As CFO, I focus on our operating performance, because I believe it best reflects our progress in the near-term.

Operating performance year-to-date is in line with our expectations. There are some modest shifts in revenue against which we continue to exercise tight cost controls while still adequately funding our robust product pipeline. As a result, our loss from operations was smaller for both the quarter and the half.

Let's go a little deeper into the numbers, starting with second quarter. Total revenues were $1.4 million, up 10%. Total operating expenses were $5 million, a decrease of 21%. This resulted in a loss from operations of $3.5 million in the second quarter of 2015, a 29% improvement over the same period in 2014.

For the first half of 2015, total revenues declined by 16% to $2.2 million. Total operating expenses declined 7% to $9.5 million in the first six months of 2015. The resulting first-half operating loss was smaller at $7.3 million, or a 4% improvement.

Given the importance of revenue and operating expenses to us, I would like to spend a little more time on these line items. The revenue line is illustrated further on slide 4.

Our simplest revenue category from an accounting standpoint is our product revenue, which reflects sales from our GLA oil product. We have seen a small, but nice, increase in the sales both for the quarter and for the half. A key customer is experiencing better sales of the encapsulated form of this product so far this year.

Let's skip along in the chart for a moment to revenue from contract research and government grants. Just as background, contract and grant revenues tend to vary for one of two reasons.

First, as new agreements come online or, second, as the scope of the work changes or is completed. In 2014 we successfully completed work for two customers and in 2015 the scope of one ongoing project changed. The net result to date was lower revenues. That said, deferred or additional contracts or grants may come online later this year.

If we now turn to the license and milestone revenue line, a little background here is helpful as well. There are three sources of revenue right now: one, annual license fees; two, upfront license fees; and three, milestone payments. In the future, revenue from value sharing will also be recognized here.

For the first half, ongoing annual license fees were a very small percentage of the total, which would be expected as they tend to be weighted toward the year-end. Upfront license fees made up the majority of the revenue for this line item. Upfront license fees are booked using an amortization schedule to recognize those revenues over the expected period of development for a project or product. We review those schedules every quarter and true-up any variances.

So far this year more than half of our upfront license revenues came from ongoing projects. The remainder reflected the conclusion of several license agreements for projects outside our core strategic focus, which resulted in a truing-up of the contractual obligations. This is reflected in the increase in license revenues, both for the quarter and the half.

As expected, we did not have any milestone payments in the first half of this year. The timing of milestone payments in any given fiscal year tends to be weighted more heavily to the end of the year, and because the timing is backend loaded, a milestone payment can sometimes spill over into the next fiscal year.

If you would now turn to slide 5, I would like to focus on the operating expenses. As you know, we have a culture of tight expense control here at Arcadia. Operating expenses improved by 21% in the second quarter and 7% in the first half, even as we incurred added expenses associated with becoming a public company. SG&A expenses were down 30% in the second quarter and 8% in the first half.

Both the second quarter and first half of 2014 included $2.1 million of one-time expenses associated with our Series D financing. This year we have had about $600,000 in one-time expenses associated with preparing to become a public company. These will not carry forward into fiscal year 2016.

R&D expenses are down 8% for both periods and reflect the completion of the grant and contract projects I mentioned previously. The modest uptick in cost of product revenues is simply a function of the somewhat higher GLA product sales.

As I have noted before, I am really focused on operating performance. That said, there are a number of cash and non-cash adjustments between operating loss and net loss attributable to common stockholders that deserves some explanation.

Our net loss and comprehensive loss in the second quarter and first half of 2015 includes the effect of higher interest expense and a higher income tax provision. It also includes non-cash adjustments to the value of financing-related derivatives and a loss in 2014 generated by our Limagrain joint venture. Net loss attributable to common stockholders for the same period includes non-cash adjustments associated with our Series D financing redemption rights and deemed dividends to one of our warrant holders.

I want to emphasize that several of these line items affecting net loss were concluded at the time of the IPO. They will continue to be included in the income statement for historical comparisons, but they won't have a continuing ongoing effect on our operating performance.

So in summary, let me go back to our operational performance. First half of the year has shaped up well. Revenues were slightly up for the second quarter and slightly down for the half, but well within expectations. Operating expenses are well in check, even as we take on the added expenses associated with becoming a public company. Historically, our first-half revenue is smaller than revenue in our second half and we expect that trend to continue as we complete this fiscal year.

So at this point I would like to turn the call over to Eric for his commentary on our strategy.

Okay. Thanks, Tom, and thanks to everyone else who has joined the call today. Given where we stand in the evolution of the Company and looking at the acceleration of our pipeline over the next few years, the numbers that Tom reviewed paint part of the picture, but I think there's also a much bigger picture of Arcadia. And so the part of the picture that I would like to address is about the products in our pipeline, how they are progressing, and how the other elements of the business are coming together to support and confirm that progress.

Please have a look at slide 6. At the time of our IPO we pointed to 13 products that are in Phase 3 or later in the pipeline. It's the progress with these products that gives us a clear path to profitability and it's important to note that it just takes commercialization of a small subset of these 13 products to achieve that goal. That said, we can't be as successful as we want if we are just caretakers of what is an already rich pipeline. That would be inherently risky for any technology business and even more so for us given the nature of agriculture.

So as we near the end of our first 100 days as a public company, we remain focused on two things: one, carrying out the blocking and tackling that is necessary to accelerate what we have in hand and, two, increasing the flow of new opportunities. I would like to talk a little bit about each of these.

From the blocking and tackling perspective, since the IPO we have had a number of major announcements, all of which are significant indicators of progress in our pipeline. These have included key regulatory approvals and important commercial advancements, as shown on slide 7.

When Tom referred earlier to milestones, he was talking about those milestones that trigger payments. I think about these as what I call the big M milestones and they are obviously extremely important to us. But the type of milestones that are on slide 7, which I think of as small M milestones, are equally critical to track. These are the early indicators of the continual flow of progress being made on the research, development, regulatory, and commercial fronts.

Simply put, these are the signals that we are nearing the point of putting major yield advances in the hands of farmers. I watch these signs of more traits going into the dirt and getting closer to the farm with intense scrutiny. These advancements carry significant weight on the runway to the big M milestone payments and commercialization. The pace and density of both of these will accelerate the closer we move towards the farmers' field.

Let me dive into some specifics starting with three substantial regulatory approvals. The first was the approval in Argentina of the HB4 stress-tolerant soybeans as safe for the environment. This was done under our Verdeca joint venture. Completed in less than one year, this approval was a notable achievement for our team and is the world's first regulatory approval for a stress tolerance trait in soybeans.

The second was the completion of the US FDA's early food safety evaluation for our Nitrogen Use Efficiency trait. The FDA reviewed the safety data and their conclusion on safety applies to the presence of the trait in any crop. This was a critical achievement because the data established the foundation for future regulatory approvals of this trait in all crops globally.

The third was yet another FDA approval, this for the use of the meal from our GLA safflower oil in animal feed. Taken together, these three approvals in the first half of 2015 underscore our significant global regulatory capabilities. We continue to leverage these capabilities with our partners to advance our traits quickly and effectively, capturing increased value for Arcadia in the process.

On the commercial side, through Verdeca, we completed a new collaboration with TMG, one of the leading soybean seed companies in Brazil. Our HB4 stress-tolerance trait is now in the hands of TMG breeders and is being incorporated into their impressive array of soybean varieties for South America.

The TMG deal came on the heels of our April announcement of a Verdeca collaboration with Dow AgroSciences. This relationship builds the pathway for our abiotic yield traits to be combined with Dow's biotic stress management traits to create highly-competitive, next-generation trait stacks for soybeans.

These recent announcements in soybeans build on the foundation of what is an active breeding approach in South America. Companies representing some 35% of soybean seed sales in South America now have access to our HB4 trait. In many instances, this breeding work has been going on for two or more years under earlier research agreements. This means that breeders and growers in South America, which I think you know is the world's largest soybean growing area, are getting an early and important look at the power of this trait.

And, finally, our soybean initiative also expanded recently under our partnership with Phytola to develop soybean varieties with increased oil content and greater value.

This acceleration of accomplishments has led us back to the future, so to speak. We are re-examining our pipeline of 50 product candidates, scrutinizing each and every trait by crop and geography with speed to market and overall value potential in mind. Based on this, we are reallocating resources as necessary.

For example, we have identified, in cooperation with our partners, where we can expand product field testing as we prepare for the 2016 growing season, leveraging our existing spend and maximizing our speed to market. Frankly, for me it's pretty easy to make the decision to push hard on a trait like Nitrogen Use Efficiency, given the potential value it brings to major global crops, including rice and wheat for example.

If you would prefer to slide 8, you will see an update on our NUE trait in rice. The data from the most recent independent field tests are still being statistically validated, but the early look at the fourth-year results is stunning even to us and we are, frankly, pretty used to seeing big yield gains.

For this fourth year of testing of NUE in rice, we are seeing yield improvements that are at least as good as the prior three-year average increase of 27%. In fact, the preliminary cut of the data from the fourth-year would indicate that the yield increases are potentially even larger. These are really impressive results, even more so because they have been replicated in the field over multiple years in multiple environments.

So with these kinds of yields to offer growers we have to like our business model, which is shown on slide 9. Fundamentally our model is based on the power of focus. At Arcadia, we are highly adept at leveraging trait research costs effectively, either in conjunction with upstream partners or under our own contract-funded programs. We then develop and validate these traits for downstream commercial partners, reducing our risk, minimizing our invested capital, and maximizing our share of the ultimate commercial value.

This model has resulted in a pipeline of 50 potential products backed up by a portfolio of more than 170 patents. While I think any ag company would be proud of this, we're certainly not resting there. Our team has spent a significant about of time over the last 100 days investigating opportunities that would increase our bandwidth and overall opportunity. These opportunities are fueling both the left- and right-hand sides of the chart.

In a world of ag consolidation, we are fervent believers in an open architecture that gives us the greatest access to new technologies and the greatest possible market penetration. We are open to any partner who believes, as we do, that there is an unmet and pressing need to deliver greater yields to growers. In short, our current portfolio of some 50 traits by crop combinations is the foundation for additional bold moves that will put our groundbreaking yield traits in the hands of farmers faster and in a bigger way.

So for a small company new to the public market, I think that in many ways we're punching above our weight class and we intend to keep that up. I know I speak for everyone at Arcadia when I say that we are more committed and motivated than we ever have been in the business.

I do want to mention that, like many companies, we have a stock option program that employees and directors participate in. Options under our first set of grants have a 10-year life that expires at the end of 2015. Based on this, beginning in the third quarter we may see some option exercises and limited selling, primarily under previously established 10b5-1 plans, for the purpose of covering tax obligations before year-end.

So in summary, we are comfortable with our relatively stable level of revenue and expenses in this near-term period as our products cross regulatory, field trial, and commercial milestones. We're not comfortable, however, assuming that what we have in hand today, as robust as the pipeline is, will be all that we will ever need. We have created a differentiated model for bringing major yield enhancements to growers globally and we are highly focused on accelerating and expanding that potential.

So with that, what we would like to do is turn the call over to you for your questions.

(Operator Instructions) Chris Parkinson, Credit Suisse.

Just a question for Eric. What two announcements in the last quarter were you the most excited about and why? Whether it was timings, the size of the agreement, etc. And are there any additional announcements in the near to intermediate term which we should expect to augment the materiality of them?

Thanks, Chris. So for me the two announcements I am probably the most excited about, one of them would be the regulatory approval for the HB4 soy in Argentina. So that -- as I said in my comments before, that is an approval that we turned around in less than a year from the time that the application was put in. I don't know if that's a record approval turnaround time in Argentina, but it's certainly at the fast end of the spectrum.

And so I'm excited about that for lots of different reasons. One is there is an obvious implication on keeping that moving towards the market. The other, which maybe isn't quite so obvious, is that in my mind it's a real validation of one aspect of our model, which is around working with people that have got deep focus and expertise locally.

So this was obviously an approval in Argentina. We worked very closely with our joint venture partner, Bioceres, and I think that how that all came out was in no small part due to this approach of ours of really working with local folks who know how things work. It relied also on a lot of Arcadia's expertise around regulatory, but the two of those came together very well.

The second announcement I think that I am really excited about is the one that I reiterated about the license agreement with TMG. TMG, as I said, they are one of the major players in Brazil. We, within Verdeca, are super impressed with what TMG has going on.

We've looked carefully at their programs, looked carefully at their market presence, and we are just super excited about having that in place. They are great folks to work with and I think it portends well for what's going to happen with commercialization.

Perfect. And just a quick follow up, just for the longer term. Over the next, let's say two years or so, can you just briefly comment on your expectations for further announcements unrelated to what was recently announced and whether you feel better, worse, or neutral about your pipeline versus the beginning of the year, if that's a fair question? Then also, do you feel that additional announcements during that time will be more weighted to the regulatory side or more on the commercial side going forward, or is it too early to tell? Thank you.

Thanks, Chris. Look, I think that we're going to have a continual flow of announcements both in the near term and the longer term based on looking ahead a little bit. And of course, some of this is not baked in yet, but looking ahead a little bit, I expect to see announcements that fall into multiple categories. One of those categories will be trait performance in various crops and so I think we will have plenty of those going forward. I think some of those announcements will certainly be around further licenses of our technologies to partners in various crops, and then I think that there will also be some announcements which follow on what we've talked about already around passing regulatory milestones.

And I think that -- I think many of those, if not most of those, will be every bit as exciting as what we have announced so far in the last six months or so. And I think that they all basically point to part of what I was talking about earlier with the small M milestones. These are the granular steps along the way that really indicate that things are moving along. And so in that sense I think that they all speak very well to where the portfolio is.

And maybe finally, I will say one part of your question was I think was how do I feel about the pipeline today, and I actually feel very good about the pipeline today.

Perfect, thank you very much.

Brett Wong, Piper Jaffray.

Thank you for taking my questions. I appreciate it. As you talked about the timeline to get regulatory approval for HB4, as you move into other markets -- and granted you mentioned the help of your partnership in Argentina was beneficial there. As you look at other markets, what kind of timelines are you expecting there, and that pursuit in regulatory approval can we expect?

Thanks, Brett. The way that we are approaching this is one of the things that we need to do is really complete a series of approvals in the Americas first before going too aggressively after other markets. And so we've described before that the approval in Argentina was the first approval and there are other approvals necessary.

What we believe is that later on this year or in the early part of next year we will begin to pursue regulatory approvals in other geographies. One of those geographies will certainly be the United States and then also oversees geographies. Similar to the way that we approached it in Argentina where Bioceres is our partner, we are working on partnerships in other geographies that will help facilitate that activity.

But all of that, and I mean all of those activities, regulatory activities, will be based on the core dossier, the safety dossier that we put together for the Argentinean market. It's not exactly like running the duplicating machine, but there is a core data set that comes into play in every market that we go into. But, again, the principle of having strong and connected local partners is one of our -- it's an element of our strategy.

Excellent. That's great color, thanks. Just talking to the milestone on the FDA early food safety evaluation for NUE, can you just talk about how that fits into the plan for the development of that trait across crops and really the ultimate launch of that trait? Can you walk us through the next steps and what we should be looking for as milestones?

Yes, sure. So the EFSA -- again what that is is that the FDA reviewed all of the safety data that we have and so what they do is they do an evaluation of that and they make a determination around whether or not they would have a concern about the presence of that gene in any crop. And the answer to that, as we have said, is that they don't. So it's a first step along the way. It's the first regulatory agency to actually look at safety data and scrutinize it thoroughly.

Where that ties in then and the reason that's important is that then becomes a starting point for safety evaluations that will happen in all other geographies and in all other crops. So, effectively, this is taking a modular approach where you look at the NUE gene, you reach a conclusion that there are no safety concerns.

And then, for each individual crop that comes along with NUE, an incremental determination needs to be made, but it's a determination about that particular crop, not about the safety of the gene, per se. So what it really does is it basically develops the pathway to move more quickly into additional approvals in different crops in different countries.

What happens then is that that comes together with the development program for NUE in various other crops. And so I mentioned on the call today that we are just looking at the fourth year of yield results in rice where the numbers are really amazing. Those results correspond to other independent results in different types of rice.

We say right now that rice is in Phase 3 of development, and so when something is in Phase 3 of development, then there's a fairly well-known timeline associated with getting that to the market. And, generally, what we would say is the experience has been that that would be sort of in the range of as early as three years and maybe as late as five years.

To bring it back -- and I'm sorry if the explanation is a long one, but there's several pieces of the picture. So to bring it back then, NUE is moving along in rice and other crops. As that moves along these safety data and the approval from the FDA feed in and we now are beginning -- in the early stages of beginning the process to put together safety data and regulatory packages for these crop-specific applications.

That is excellent, very elaborate. Thank you. Looking -- it was great color. That's exactly what I was looking for.

On the expense side, Tom, you've obviously done well in trying to control your operating expenses. I'm just wondering what you are kind of expecting moving forward, if we can talk to just expectations of the cash burn for the year. And then how are you controlling your costs and what do you expect as you potentially take more regulatory in-house, how that will impact the burn?

What I will do is I will make a couple of high-level comments first and I'll leave the elaborate explanation to Tom. But at a high level, culturally we always have been very tight on cost control and everybody across the Company understands the need to do that, and so I think we've got a very good track record on that.

Now, obviously, I think that operating costs will go up to some degree as a function of being a public company, because there's obviously additional infrastructure that doesn't come for free. My view is that that's not really -- it's not insignificant, but it's not hugely significant either.

Then I think what I would say, and you touched on it a little bit in the question, is as we go forward we're looking at some of these opportunities where we can, I think in a cautious and judicial way, we can perhaps invest incrementally in some of the regulatory processes for some of the products. For example, NUE in certain crops. And so those might be areas where we would ratchet up somewhat.

But I don't think that there are any of these that are what I would put in the category of sort of astounding increases in operating expenses. I think they are all judicious, relatively moderate steps. So that's not the elaborate explanation. Tom can talk further.

I don't know how much more there is to add on that, but I will just say that we do expect moderate increases, as I think Eric just said. Moderate increases in expenses related to becoming a public company. And that is higher accounting related and D&O insurance, for example.

But really, in our core operating expenses we don't anticipate significant increases, really just moderate increases. And that's in the area of additional headcount, compensation, R&D expenses, as well as just general operations. We don't anticipate significant capital expenditures in the near future.

And I think, as Eric did say, we might choose to pursue incremental opportunities on the regulatory front or in further developing the pipeline. But along with that, in terms of our core operating expenses, we do expect to continue the same thoughtful and conservative approach as we followed so far to get to this point.

Okay, great. Can you provide any expectations for the burn that you are expecting this year?

Well, we used about $6.6 million in cash from ops in investing. And I think, consistent with my previous message, that we really don't anticipate anything more than moderate increases in our spending. And our burn, our cash burn tracks pretty closely with our operating expenses at this point.

Again, if we do make the decision to invest, then that would potentially be an area where we would have incremental increases. What I will also point out though is, I think as we have said before, we do expect our revenue to be higher in the second half of the year. That has just been our historical pattern and that's -- when we get from the field, we get field results and input from our collaborators. So as we expect higher revenue in the second half of the year, we think that that will translate into a benefit for our cash burn for the year in total.

Okay, great. Then one last one from me. Just wondering, Eric, if you can talk a little bit more on what you have done so far in working with Dow and the Verdeca collaboration in stacking HB4. I'm sure you can't provide a lot of details, but I'm just wondering what you can talk to in terms of what you've done so far, expectations for timelines. Anything you can provide is helpful, thanks.

Thanks, Brett. The Dow collaboration is still fairly new. What I can say is that there are physical activities underway already under that collaboration. So people -- what I mean is that scientists here and scientists at Bioceres in Argentina, they've got their hands on biomaterials and so there's actual work underway.

Again, the vision of this is that Verdeca -- through abiotic stress traits that are coming from both Arcadia and Bioceres, Verdeca will basically contribute the abiotic stress side of what will become trait stacks that also incorporate Dow's test management traits essentially. And so I think all I can really say at this point beyond that is that work is underway. We're excited about it. The contact patch between all the companies is big and very productive, and we are very happy with how it's moving along so far.

Very good. Thank you for all the color.

Jeff Zekauskas, JPMorgan.

Thanks very much. Tom, I don't think I fully understood your answer to last question. Is the burn rate in the second half larger than in the first half or smaller or the same or you can't tell?

I'm sorry; we would expect it to be lower. Just because if we maintain our core operating expenses with only a modest increase from where we are now, but then expect an increase in our revenue in the second half of the year, that that would -- the net effect would be a benefit to the cash burn in the second half of the year.

Is GLA oil all of product revenues right now?

Yes.

And the growth rate of GLA was pretty great in the first half. Is that representative of what it might do for the year or was the first half unusually strong for one reason or another?

Jeff, this is Eric. I will take that one and Tom might add some other color.

GLA is still a relatively new product and part of what we are finding to some degree is that as people launch new products based on it and take an inventory, we get a little bit of a spiky, so to speak, order volume from them. And so there are some new products that have been launched, some of the products, as Tom touched on, have done well for one customer in particular. We actually have a number of regulatory approvals that have impacted positively on GLA.

And so I think we're working hard on it and I think we will see where we go, but again I would say that there's a little bit of spikiness in it just because it's a new ingredient still in the market.

Is there a way of talking about its growth exclusive of the spikiness?

We could probably go look at that. One of the tough parts about it, Jeff, is that this is not something where there are 150 different customers. There's a fairly limited customer set. We have made it known that GNC is one of the large customers and GNC has a number of products. And so I don't think we actually have enough data yet to be able to smooth out what's spikiness, what's baseline growth, and so on.

Okay, great. Thank you so much.

I'm showing no further questions at this time. I would like to hand the program back over to Mr. Eric Ray for any additional remarks.

Okay, thanks very much. Well, once again, I want to thank everybody for joining us on the call today. We appreciate your participation. We appreciate the various questions that came up.

And I just want to say that -- further say that so far it has been a remarkable year for us on several different levels, and I hope that what comes through in the comments and also some of the responses to the question is how excited we are about the yield enhancements that are coming in plants due to our traits. We talked quite a bit about Nitrogen Use Efficiency in rice and I think that those results are stunning. And so, if the early look that we have on the fourth year of NUE in rice is any kind of an indication, we think that we should be looking forward to a really good year this year.

Once again, thanks, everybody, very much again and we look forward to speaking with you again soon.

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.