Arcadia Biosciences Inc (RKDA) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to Arcadia Biosciences First Quarter 2017 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 2, 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 risk 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 and their most recently filed 10-K and again on Slide 2 of this presentation.

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

Thank you, Aiyalah, and thanks to everyone who is joining us on the call today. I would like to begin with an update on the business and then Matt Plavan, our CFO, will review the financial results for the first quarter of 2017. At the end of the call, we will, as always, take your questions.

As we discussed in our last earnings call, 2016 was a year of transition for Arcadia, as we evolved from a largely R&D-focused company to a company focused on product development and commercialization. We implemented several changes in the company that included focusing on a select set of products to deliver positive financial results, consolidating our facilities and reorganizing the company. I am pleased to report that these efforts are starting to deliver the results we expected.

Turning to Slide 3. In the first quarter of 2017, we increased revenue and reduced costs compared to the first quarter of 2016. As a result, our net loss from operations decreased nearly $1 million in the first quarter down 20% compared to first quarter of 2016. We are encouraged that the hard work of the last 2 quarters is starting to show positive results. The team at Arcadia is now focused on continuing on the path of increasing revenue and investing in a high-priority product, while reducing operating expenses. Matt will present more details of our financial results in his portion of today's call.

Meanwhile, let's look closer at our 2 key business segments: ingredients and ag productivity, beginning on Slide 4. We outlined in our last call that our ingredients portfolio is comprised of SONOVA GLA safflower oil, ARA safflower oil, non-GM Resistant Starch Wheat and Wheat Quality.

In this quarter, we saw positive progress for GLA and continued progress of the pipeline products towards commercialization. SONOVA GLA safflower oil is on track for growth in 2017. While sales in the first quarter were slightly lower than for the first quarter of last year, we believe this is more of a timing issue as we see sales already increasing in the second quarter. Going forward into the year, we expect to see growth into new market areas as a result of 2 recent regulatory achievements: the generally recognized as safe or GRAS notification for use in medical foods and nutritional beverages and the FDA approval for use in dry adult dog food.

Using our expertise in safflower and driven by interest from potential commercial partners, we are also developing safflower lines with high levels of arachidonic acid or ARA. Greenhouse trials are nearing completion now. Results from these trials combined with our experience in producing and managing the supply chain for safflower, will put us in a unique position to develop, supply and commercialize ARA. ARA is a key ingredient in more than 90% of infant nutrition products with an estimated global market of $160 million.

Our ingredients portfolio also contains 2 non-GM wheat products: Resistant Starch Wheat and Wheat Quality. We see continued interest from potential customers in our Resistant Starch Wheat trait. The Resistant Starch trait produces high-fiber, low glycemic index wheat, which results in healthier bread, pasta and other wheat products. As you know, demand for high-fiber foods is growing and this is a large market. Trials planted in the fourth quarter of 2016 are now being harvested and new trials of spring wheat are being planted in the second quarter of this year. These trials will give us insight into the yield and efficacy performance of this trait.

Our wheat quality trait that provides extended shelf life and improved flavor in whole wheat, also shows promising early results from testing for stability and flavor. Field trials planted in the fourth quarter of 2016 are being harvested now and new trials will be planted in the second quarter of this year.

Turning to our ag productivity platform on Slide 5. In the first quarter, our team and I had the opportunity to visit field trials of HB4 Stress Tolerant Soybeans in Argentina. This is the first year of trials of the HB4 trait in commercial germplasm. Our JV partner, Bioceres, and our seed partners in Argentina continue to be excited about the prospect of this trait to provide value to growers in the high-stress regions of Argentina. We are now awaiting the results of the trials after they are harvested. Verdeca, a joint venture with Bioceres, is continuing their regulatory work needed to submit to Europe and other countries for import approvals. The trait is already approved in Argentina with additional approvals pending in the U.S., China and Uruguay. Soybeans are the fourth largest global crop grown on 270 million acres worldwide and HB4 fits into a significant portion of the high-stress acreage of this market.

For our corn yield and stress traits, we've completed the analysis of our 2016 field trials with our partner, Dow AgroSciences, and they're preparing to plant the 2017 field trials. As you may know, corn plantings, in general, have been delayed due to weather in the Midwest, but we expect that the trial plantings will be completed soon.

For our non-GM wheat yield traits, field trials planted in the fourth quarter of last year are being harvested now, and we will be planting 2017 trials soon.

Turning to Slide 6. A key contributor to our revenues is grants and contract research. Arcadia's scientific capabilities are recognized across the industry, and as a result, we do some very specific and interesting work for our clients. We have 3 projects ongoing with USAID. First, the Nitrogen Use Efficiency, or NUE, trait in NERICA rice continues to show interesting results. 10 trials in 4 countries have shown excellent performance with double-digit yield increases. In February, a study published in the Plant Biotechnology Journal showed substantial yield increases under different nitrogen application rates, with the leading NUE rice line showing a 34% increase in yield over controls.

Second, we have developed stacks of our key abiotic stress traits: Nitrogen Use Efficiency; water use efficiency; and salinity tolerance. The first trials utilizing stack traits in rice are now underway in Columbia.

Third, trials of our heat-tolerant wheat are also underway in California, Mexico and India. Abiotic stresses reduce yields of crops around the world impacting smallholder farmers in many countries. These USAID-sponsored trials are an important validation of Arcadia technology, which can be used for improving agriculture in Africa and other parts of the world to help smallholder farmers increase their yields and mitigate the effects of environment stress.

Our collaboration with Origin Agritech to deregulate insect resistance and herbicide tolerance traits in corn, has made great progress. We were able to successfully produce corn from Origin's lines under quarantine conditions in our greenhouse facilities and provide vital information to Origin to assist them in developing regulatory data for submission to authorities in the U.S. and China.

In summary, we had a very good first quarter of the year, both financially and in the advancement of our key products. Our revenue was higher, and our operating expenses were lower compared to first quarter of last year. At the same time, we are continuing to invest in our high-priority products to drive them towards commercialization. We expect to build on this positive momentum during the rest of the year.

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

Thank you, Raj, and good afternoon, everyone. As Raj just indicated, this was not only a good quarter for us in terms of business milestone performance, it was also a strong quarter financially. We're pleased with our positive and steady progress over the prior-year quarter with revenues up and expenses and net loss down.

As you can see in Slide 7, total revenues in the first quarter of 2017 were $1 million as compared to $852,000 in the prior year quarter, a 19% improvement. The primary driver to our revenue growth in the quarter was a $262,000 increase in contract research revenues due to the Origin Agritech agreement executed earlier this year.

As for our product sales this quarter, we saw a $50,000 decrease in our SONOVA GLA sales as compared to the prior year quarter due mostly to the timing of customer orders. License revenues were also down a bit by $46,000 compared to the prior year quarter due to a change in accounting treatment. As you may recall from our last earnings call, we are now amortizing our upfront licensing fees into revenue over a longer period of time, resulting in less revenue recognized per quarter. The effect of this quarter-over-quarter comparison anomaly will resolve in Q4 of 2017.

Turning now to our expenses on Slide 8. As you can see, both our research and development and SG&A expenses are down nicely over the prior year quarter. R&D is down $379,000 or 17%, and SG&A is down $384,000 or 11%. These decreases are driven by lower salaries and benefits resulting from the workforce reductions in 2016.

When these reductions are combined with the reductions in our cost of product revenues, our overall operating expenses of $5 million for the first quarter were down a total of $804,000 or 14% compared to the same period last year.

Putting all this P&L activity together on Slide 9, the bottom-line impact is a loss from operations for the quarter of about $4 million compared to last year's loss of $4.9 million for an improvement of 20% or $970,000. As for our liquidity, cash on hand and investments totaled $48.5 million at the quarter's end and our net cash used for the quarter was $4.5 million, down from the $4.9 million used in the same quarter last year.

One more transaction occurring during the quarter that I'd like to point out is the share swap with our development partner, Limagrain. Because we believe there is a better collaboration structure to pursue our joint development of wheat yield traits, we agreed Arcadia would exit our existing joint venture: Limagrain Cereal Seeds, effective March 31. To effect this exit, we exchanged our entire 35% ownership interest for the 1.8 million shares of Arcadia common stock held by Limagrain. Upon receipt of these shares, we retired all 1.8 million of them, thereby reducing our common stock outstanding from 44.5 million to 42.7 million at March 31.

Okay. Having covered the finance performance highlights, I'll briefly review our current financial outlook. As for revenues, we expect overall growth in 2017 over 2016 driven by product revenues from our SONOVA GLA oil and license revenues totaling between $1 million and $2 million. As for contract, research and government grant revenues, we think they'll remain relatively consistent with our 2016 numbers. With regard to our expenses, we expect to see the benefits in 2017 of our 2016 organizational changes through reduced overall operating expenses. However, we will keep a steady spend on our key development and commercialization projects in HB4, wheat yield and corn traits, which will partially, but not totally, offset these cost reductions.

So in summary, we expect the combination of higher revenues with lower overall operating expenses to result in a lower cash burn for the year, while at the same time, meaningfully advancing our key high-value traits towards commercialization and the onset of our much-anticipated value share revenue streams.

With that, I'd like to turn the call back over to Raj for a wrap-up.

Thanks, Matt. Before we get to your questions, I would like to summarize our results for the first quarter. We believe that the actions we took in the fourth quarter of 2016 are now starting to pay off. Our financials for this quarter were greatly improved from the first quarter of last year, as the net loss from operations decreased by 20%.

Focusing on our key products is showing results, as we have achieved key regulatory milestones for GLA and great progress for our other products like HB4 soybeans, RS Wheat and Wheat Quality. We believe we are on the right path and confident we can continue this momentum for the rest of the year.

With that, I'd like to turn the call over to your questions now.

(Operator Instructions) Our first question is from Tyler Etten with Piper Jaffray.

I was wondering if we could maybe do a full layout of the HB4 commercialization time line? I know we have approval in Argentina, just where -- which countries are pending approval, which ones are you still planning on getting approval and the expected time line of each of those?

Sure. So the key countries or key regions of the world, I would say, are -- #1 is China and then the EU. So we have applied -- we submitted our registration documents to China back in November of 2016, and we plan to submit for the EU, probably by the end of this year. We're -- the work is being done as we speak to generate the information and the data necessary for those submissions. There will be other countries that we would also need to apply to like Japan, Korea and so forth. But we -- but China and EU are the 2 main areas where pretty much most of the soybeans produced in Argentina go to. So we feel pretty confident that once we have the approvals from China and the EU, we would be able to -- or the seed companies would start selling the seed in Argentina for planting.

Got it. And could you maybe just expand on what goes into the process of submitting to the EU? What kind of things need to be done before an official submission can happen?

Yes. Mainly, we have to submit the results of field trials that we have conducted in Argentina, plus results from various environment impact-type studies, toxicity studies and so forth, that mostly have all been done and completed. There are still a couple of studies we have to do this year from a -- feeding studies for toxicity. And we should be able to submit by the end of this year or early next year.

And is there any sort of risk that's -- could set back that submission by the end of the year?

We don't see that risk, Tyler. Things are going well in terms of getting ready to do the trials. We have to have certain materials ready to put into the feed for the test animals and so forth. All that is happening as we speak. And we should be able to do the trials this year and submit by the end of the year.

Okay. Got it. Maybe shifting gears a little bit. I was curious how you anticipate the contract revenue side of the business evolving over the next couple of years? Do you think they would be more stable? That's some of this research that you are doing for other companies? Or do you anticipate that's part of the business growing more?

Yes, Tyler, this is Matt. It's a good question. I think, as Raj pointed out in his prepared comments, we have a pretty strong reputation in terms of assisting companies and advancing their regulatory requirements and developing and innovating. So with these revenues right now around the $2 million mark between the grants and just the contract work that we do, I think there is an opportunity for us to grow that a little bit in the near-term. And I think we will endeavor to do that. And any opportunity we have to dovetail that work with projects that are strategically relevant to our broader business, those are instances, I think, that we will pursue more aggressively, and so it's kind of a double win when that happens. So it is certainly an area that we'll continue to pursue growing.

Yes, and to add to what Matt said, we're not planning to turn ourselves into a contract research company. So we're not going to be out there looking to do contract research and that is not our competence. Our competence is in certain areas in advancing products through the Phase 1 and Phase 2 process of proof-of-concept, lab studies, growth chamber, greenhouse, field trials, those kinds of things. And where we see opportunities for us to work with a client to be able to do those, we'll do that, given excess capacity. But it's not a -- it's not going to be a core business for us, but certainly, we have the capabilities. We are respected for the scientific work that we do that our team does. So I think we will continue to do that.

I'll just say 1 other thing. With regard to the questions you had about HB4 and some of these other traits that really do represent blockbuster opportunities, to the extent that they may be a few years out, this revenue is really important to us in the near-term. But I think it's fair to say, it's not strategically relevant to the broader picture. Maybe that's another way to kind of characterize how we view this type of revenue.

And I'm showing no further questions. I will now like to turn the call back to Raj Ketkar for any further remarks.

No. I think we're good, Aiyalah.

Ladies and gentlemen, I thank you for participating in today's conference. You may all disconnect. Have a good day.