Arcadia Biosciences Inc (RKDA) 2016 Q4 法說會逐字稿

Good afternoon. Welcome to Arcadia Biosciences' fourth quarter and year end 2016 earnings conference call. Today's presenters will be Raj Ketkar, president and CEO, and Matt Plavan, CFO.

This call is being webcast and you can refer to the Company's press release and slides at arcadiabio.com.

Before we start, if you refer to slide two, we would like to remind you that Arcadia Biosciences 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 the Company's Safe Harbor language in their most recently filed 10-K and, again, on slide two of this presentation.

With that, I'll turn the call over to Raj Ketkar, president and CEO.

Thanks to everyone who is joining us on the call today.

I'd like to begin with an update on the business and Matt Plavan, our CFO, will review the financial results of the fourth quarter and full-year 2016. At the end of the call we will, as always, take your questions.

As many of you might have observed over the year, 2016 was the year of transition for Arcadia. There were management changes early in the year, followed by a new CEO and CFO who started in the second and third quarter of the year. The team at Arcadia is now focused on commercialization of our products.

In the third quarter we initiated a strategic review of Arcadia business to identify opportunities in light of the changes occurring in the Ag industry and reported our early findings in our last earnings call.

In the fourth quarter we completed the strategic review and began to take actions to reposition the company for the future. A key outcome of the review was that Arcadia needed to evolve from a R&D focused company to a company focused on development and commercialization of near-term products.

As we reported in the last quarter, regulatory processes in some countries have delayed the launch time lines for many of our high value blockbuster traits. Therefore, in the short term it becomes increasingly important for us to better manage our cash resources. We decided to focus on projects that have a higher probability of success and or a shorter time to market, such as our non-transgenic TILLING based products in wheat and transgenic products in corn and soybean for North and South America, where the regulatory systems are more predictable.

We also reduced the size of our organization and consolidated our facilities to reduce operating expenses. Slide four shows how we're positioning Arcadia's product portfolio as we go into the future. Our products address customer needs in two sectors of the agricultural supply chain; ingredients and productivity.

The consumer product area of food and nutrition quality is an exciting space which is getting larger amounts of investment. As an ingredient supplier to the food processing industry our products serve the needs of consumers demanding more nutritious and healthier food. Our ingredients portfolio of product includes the commercial product GLA safflower oil and new product candidates, such as ARA oil and wheat quality products; including resistant starch wheat which is in late stage development.

In the Ag productivity area, we provide traits that enhance yield in major crops. Improving yields and combating abiotic stresses on the farm are ongoing needs for growers all over the world. We are uniquely positioned to deliver these trades based on our many years of development activities in this field. Our huge portfolio includes TILLING based wheat yield traits in early stages of development; Soybean traits, including HB4 being jointly developed by Verdeca, our JV with Bioceres; and corn yield traits being co-developed with Dow AgroSciences.

Slide five further shows the rich pipeline of abiotic stress mitigation and quality traits licensed to partners that we believe will deliver strong returns to our investors in the future. We believe these traits will add significant value for farmers around the world once launched. We continue to support our partners, for example Mahyco in India, to bring these traits to market. In a recent visit to India, I met with Mahyco management and was encouraged that they're working with regulatory authorities to move these projects forward.

A great example of the progress of these high value traits were the recent publication of a study in Plant Biotechnology Journal on our nitrogen use efficiency trait in rice lines for Africa. The study demonstrated that over three years of trial in lowlands and upland rice, the leading rice line containing Arcadia NUE traits showed a 34% increase in yield. Such examples continue to give us confidence in the value of these traits.

We will also continue our efforts to execute short-term revenue generating projects from government grant and contract research. Recently we signed an agreement with Origin Agritech Limited under which Arcadia will assist Origin in developing information for submission to regulatory authority in the U.S., China and other countries for the approval of their traits in corn. This project leverages our capabilities in research and regulatory sciences to provide expert services to our customers.

Our strategic review revealed that going forward it is imperative to optimize our organization and operations to conserve cash. To accomplish this, we restructured the organization to support the high priority projects, while retaining a critical mass of science talent. In 2017, we are a leaner organization focused to make Arcadia successful in the future.

We also decided to consolidate the Seattle and Davis facilities. We began the closure of the Seattle lab in the fourth quarter of 2016 and completed it in the first quarter of 2017. Equipment and materials will move to Davis and scientists will train to preserve the capabilities of our Seattle lab. We have also closely examined all external resource services and made efforts to reduce costs across the board.

I would now like to talk about the progress on our key high priority project starting on slide six. Our first commercial product, SONOVA GLA Safflower Oil, is experiencing growth as our customers introduce GLA into new products. Early this year, we receive GRAS notification from the FDA acknowledging that our product is generally recognized as safe. This allows us to expand our markets into medical food and nutritional beverages. We're also awaiting approval for the use of GLA in pet foods this year that will further increase the market for GLA. Our success in GLA underscores our ability to produce crops that can be identity preserved, processed into an end product and successfully moved through regulatory approval. This capability becomes really significant as we move closer to commercializing products like Resistant Starch wheat.

Our non-GM wheat quality traits are moving along nicely toward commercialization, in particular Resistant Starch wheat. We see a growing interest from millers and processing companies and we have supplied test materials to several companies for evaluation.

Product and consumer testing of Resistant Starch wheat continued in the fourth quarter along with production and field trials to test for Agronomic performance.

Turning to slide seven, our joint venture Verdeca with Bioceres made the submission to regulatory authorities in China for import approval in the fourth quarter of 2016. Work continues on developing information for the submission to regulatory agencies and the E.U.

In the fourth quarter, the first trials of the HB4 trait in commercial varieties of soybeans were planted by our seed company licensees. Data from these trials will be available by the end of the second quarter in 2017, providing important information on the efficacy of HB4 [in] commercial varieties and soybeans in Argentina. Regarding yield traits in corn, our partner Dow AgroSciences completed another season of field trials, with several gene candidates and events. We conducted a joint analysis of the data and are advancing certain lines to the next stage of field trials in 2017.

As I stated at the outset, 2016 was a year of transition for Arcadia. We now have a strong team with commercial experience and focus and we have a robust pipeline of products for an exciting future. I'm confident that the progress we've made in Q4, including the organizational changes and cost reduction and expected growth in revenue, positions us well for overall business growth in 2017.

I look forward to reporting our progress in 2017.

With that, I would now like to turn the call over to Matt, for an update on our financial results for the quarter.

Good afternoon, everyone.

As Raj just explained, in this past year we've evolved our organization and our near term growth strategy to adapt to the shifts in our industry and better position the company to grow in spite of the unpredictability of regulatory approval timelines. However, these industry shifts certainly affected our ability to grow the company in 2016, most notably with regard to our license, milestone and contract research revenues.

As you can see in the revenue comparison chart in slide eight our revenues in 2016 were down meaningfully from 2015, in total by $2.2 million or 41%. Delays in granting field trial permits and other inaction by regulatory authorities delayed our expected revenue growth in three primary areas.

First, our partners were unable to conduct their field trial milestones which meant we did not receive the associated milestone payments, thereby resulting in less than expected license revenues for the year.

Second, these regulatory delays also shifted the projected launch dates for certain traits further into the future, on average about three years. Which reduced the amount of license revenue recognized from upfront fees during the year while increasing the number of years over which the total revenue amounts are to be recognized. The net effect of this change, in estimate, is that we booked a $900,000 reversal of license revenues during the fourth quarter resulting in negative revenue at $365,000 for the quarter and only $144,000 for the entire year. Had we not had this change in estimate, our license revenues would have been consistent with the prior number of $1.2 million.

The third area impacting our revenues in 2016 is with our contract services revenues. Certain of our partners, deferred their plans to outsource GM trait development projects to Arcadia until they have a better visibility on the timing and the regulatory progress for their key crops. Without those expected new contract to replace those winding down in 2015, revenues were down for the quarter 20% or $162,000 and for a full year 2016 down 36% or $1.4 million.

On a more positive note, our product sales of SONOVA GLA safflower oil were up by $203,000 for an increase of 44% over the prior year. And up $164,000 for the quarter versus the same quarter last year. The increase was driven by the launch of new customer GLA products as well as an increase in distributor volumes. All in, total revenues for the quarter and year were $806,000 and $2.2 million respectively.

Turning now to our expenses on slide nine; research and development expenses for the quarter were up by $121,000 or 6% as compared to the same period last year. This was due to an increase in subcontract services in connection with our corn trait development program initiated in early 2016. As for the year, R&D was down by $303,000 or 3%; primarily due to reduced subcontract services for HB4 program. However, we expect these costs will pick back up in 2017 in connection with our regulatory filing work for the HB4 project.

SG&A costs for the quarter were up $490,000 or 17% as compared to the prior year quarter, and up $1.1 million for the full year or by 10%. Much of this increase is related to severance costs in connection with our reductions enforced during the year. Thus altogether, our operating expenses for the quarter were $6 million, an increase of $595,000 compared to Q4 last year. Operating expenses for 2016 were 4% higher than in 2015, totaling $21.8 million.

You may remember from our Q3 call we estimated our streamlining efforts to result in a reduction in our annual operating expenses between 15% and 20%. As of today, having reduced our head count by 29% since the beginning of 2016, coupled with a reduction in overhead costs we estimate we have achieved a run rate reduction of just over 20% in our head count overhead costs, as compared to our prior year operating expenses. However, we do expect to increase our development and commercialization investment in HB4 soybeans, wheat yield and our corn traits, previously discussed by Raj, during the year which will partially offset the estimated reductions we have achieved in our other operating expenses.

Turning now to slide 10 and putting all this activity together, loss from operations for the quarter was $5.5 million compared to last year's loss of $4 million. As for the year, loss from operations for 2016 increased $3 million to $18.6 million compared to $15.6 million in 2015 due primarily to those lower revenues.

While not on the chart, I'd like to point out that interest expense of the fourth quarter of 2016 decreased by $434,000 and by $1.5 million compared 2015 as a result of our debt refinancing which occurred in December of last year. As for our liquidity, at the end of 2016 cash-on-hand and investments totaled $53.1 million and our net cash used for the quarter was $4.4 million.

That wraps up our financial performance highlights. But before turning the call back over To Raj, I'd like to say a few words about our 2017 outlook. Simply stated, overall we expect revenues to grow and our expenses in cash burn to decrease as compared to last year. More specifically, we anticipate growth in product revenues for GLA primarily from our anticipated pet food approval and we expect license revenues to be somewhere between $1 million and $2 million for the year. And as for contract research and government grant revenues, we expect them to remain relatively consistent with our 2016 numbers. As I just mentioned, although we expect overall expenses to be lower this year, we're excited to continue making important advancement in the development and commercialization of our high value traits. And the onset of our much anticipated value share revenue streams.

So with that said, I'd like to turn the call back over to Raj, for a wrap up.

Before we get to your questions let me just say that I'm really pleased with the progress that Arcadia's made since I joined the company about nine months ago. In the last quarter, the team at Arcadia has made some bold changes to reposition the company for success in the future. We are confident that these changes will result in greater and positive returns to our investors. I believe we have an exciting future and we are committed to make Arcadia successful. I look forward to reporting on our progress in 2017.

And with that I'd like to turn the call over to your questions now.

(Operator Instructions) Tyler Etten from Piper Jaffray.

First, could you talk about maybe where nutrition fits into 2017 and 2018 with attempting to roll out some new products? Just how you see that business evolving over the next one to two years.

I think the main growth that we'll see in 2017 is on GLA. Like I mentioned, we've gotten the GRAS notifications from FDA that allows us to go into some newer markets in nutritional beverage and medical foods. And then we've got indication from FDA, they're processing our submission of application for approval for pet foods. So we are hoping that once we get that that that would also improve and increase our market size for GLA and get some revenue growth in GLA that way.

The next product would be, I believe, Resistant Starch wheat. We're getting closer, it's kind of hard to say exactly when we would launch. But it will largely depend on our partners also that we're working with, the processors and food companies, that are putting the Resistant Starch wheat put into their formulation, for example and bread and pasta and other products They're doing consumer testing and so once that is done, we will see that product start to commercialize, so we don't have a specific date on the launch for that yet.

Just clarify on the pet foot process, where that process are you are you with the approvals and what steps need to be taken after the current approval is passed?

Once we get the approval, we would obviously be notifying our prospective customers in the pet food business. And they would be able to then potentially start ordering right away or very soon and then putting it into formulations and starting to sell that product. So there's no other work that needed in terms of development activity beyond what's already been done.

And then do you have any kind of rough idea of what you would be looking out for a cash burn in 2017? I know you spend directionally down, but any sort of ratings would be helpful.

At this point Tyler, I think the guidance that it's going to be down is about as much as we're comfortable with. To the extent that we're able to exceed our plan in revenue I think we've got a pretty good handle on our operating expenses. So our goal is going to be to drive as much revenue as we can, keep the belt as tight as we can and certainly burn less than we did last year.

I am not showing any further questions and would like to turn the call back over to Raj Ketkar for any closing remarks.

We appreciate everybody calling in today and we look forward to continuing to work with you all.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.