Arcadia Biosciences Inc (RKDA) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to Arcadia Biosciences Second 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 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 2 of this presentation.

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

Thank you, Takeeya, 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 will review the financial results for the second quarter of 2017. At the end of the call, we will, as always, take your questions.

The positive financial results we saw in the first quarter continued in the second quarter as a result of all the changes we made last year. We are really encouraged by this continuing momentum.

Turning to Slide 3. In the second quarter and the first half of 2017, revenues increased, our operating cost decreased and the net loss improved significantly.

Our key products continue to make great progress towards commercialization, as we received important regulatory approvals and completed successful field trials.

Before I update you on the progress of our product pipeline, I would like to talk about some recent very positive developments. This week, we announced an exciting agreement with Dow AgroSciences to jointly develop and commercialize a breakthrough, wheat quality trait focused on improved nutrition. This is an expansion of our wheat portfolio, which will leverage our non-GM TILLING development platform with Dow's enabling technology, high-quality elite germplasm and global commercial channels.

This collaboration will expand our access into the growing market of improved nutrition traits with an established leader in agriculture. And it will accelerate the development and commercial deployment of products to deliver significant value to growers, food manufacturers and consumers.

We also announced this morning that Verdeca, a joint venture with Bioceres, received approval from the FDA for food and feed safety of the HB4 trait. This approval moves us a step closer to full approval of the drought stress-tolerant trait in soybeans in the U.S. In addition, regulators around the world look to the FDA as a reference point for food and feed safety approvals. So this should facilitate approvals in other countries around the world as well.

This is a tremendous achievement, as we continue to advance this trait to commercialization. The HB4 trait holds great promise for bringing better yield stability to agriculture in areas that experience chronic water stress issues. Our combined efforts and to create significant value for soybean growers by increasing the productivity and sustainability of this important protein crop.

We also received an FDA approval for our water use efficiency trait recently, as they completed their early food safety evaluation. This review validates that the protein and the Water Use Efficiency trait is safe for humans and animals.

Like the HB4 approval, this is also a significant step forward in the approval process for our Water Use Efficiency technology. Both of these approvals demonstrate the safety of our technology and the capabilities of our science and regulatory teams to develop safe technologies and advance them through the regulatory systems towards ultimate commercial approvals.

This week, we also announced the addition of Amy Yoder to the Arcadia Board of Directors. Amy is a great addition as she brings a wealth of experience in agriculture. Earlier in June, we announced the addition of Eric Rey and Greg Waller to the Arcadia Board of Directors. With these additions, we now have significant business, financial and ag industry expertise on our board, and they are fully engaged in guiding Arcadia's growth strategy forward. We welcome Amy, Eric and Greg to the board and look forward to their contribution.

Now let's take a closer look at our 2 key business segments: ingredients and ag productivity, beginning on Slide 5. Sales of SONOVA GLA safflower oil are up year-on-year by 25%. The second quarter saw rapid sales growth. As we discussed in our last call, the recent regulatory clearances for use of GLA in dry dog food diet and in medical foods and nutritional beverages should generate growth of our SONOVA GLA safflower oil products during the year.

ARA, or arachidonic acid, is a key ingredient in more than 90% of infant nutrition product with an estimated global market of $160 million. We are in the early phases of development of ARA in safflower. Our expertise in growing safflower for our SONOVA GLA products gives us a clear advantage in development of ARA safflower at a competitive cost.

Greenhouse trials of ARA safflower were completed early in the second quarter and results indicate that we achieved desirable levels of ARA in safflower. Based on these results, we planted trials in the field to demonstrate high levels of ARA in safflower under field conditions. We visited these trials recently, they're going well. And we will update you on progress in the next quarter. Our partners continue to be interested in the future development and commercialization of ARA from safflower.

Our 2 key non-GM wheat products, Resistant Starch Wheat and Wheat Quality, continue to advance in field trials. Results from the RS Wheat trials harvested in the second quarter indicate improved yields. Additional trials were planted in the second quarter to continue to optimize the performance of wheat lines with the Resistant Starch trait. We also completed trials of the non-GM Wheat Quality trait in the second quarter, and samples are now being analyzed for improved flavor profile and stability. Expanded trials have been planted, and we are also growing seed for more testing.

Turning to our ag productivity platform on Slide 6. For the HB4 trait in soybeans, the focus is to progress that trait towards regulatory approval. And on this front, we are making excellent progress. As we announced this morning, Verdeca received the FDA approval from food and feed safety for the HB4 trait in soybean. This is a significant event in the process towards getting approvals in the U.S. and in other countries. Regulatory work needed for submission to Europe and other countries for important approvals continues. The trait is already approved in Argentina, with additional approvals pending in the U.S., China and Uruguay. We continue to be very excited about the potential for this unique trait. Soybeans are the fourth largest global crop grown on 272 million acres worldwide and HB4 fits into a significant portion of the high stress acreage of this market.

Breeding trials were completed by our seed partners in Argentina in the second quarter, and the analysis of the results from the trials are underway. High rainfall and the growing season reduced the drought stress in many areas, but our partners remain enthusiastic and confident about the performance of the trait.

Turning to corn. Field trials of corn yield traits by Dow AgroSciences continue in this season, and we will report progress later in the year when trials are completed.

Non-GM wheat yield trials planted over winter were harvested and the results were positive, as we identified candidates with significant yield increases. New trials were planted in the second quarter to validate the results and identify additional candidates.

So to summarize our results for the second quarter, our financial performance was very good compared to the same quarter in 2016. Our products are advancing well through the pipeline with some key regulatory achievements and advances in the field performance of our traits. And our team is fully engaged and focused on driving these products to commercialization.

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 business milestone achievements, it was also a continuation of our improved financial performance. That is to say revenues were up and expenses and net loss were down from the prior year.

As you can see in Slide 7, total revenues in the second quarter were $991,000, a 37% improvement over the prior year second quarter. And for the first half of the year, revenues totaled $2 million, an improvement of 28% over the same period in 2016.

The primary revenue growth driver in both the quarter and the first half of the year is the increase in contract research revenues from our new Origin Agritech agreement. The second biggest driver of revenue growth is from our SONOVA GLA sales, which increased twofold or $130,000 in the second quarter over the last year second quarter and up 25% as compared to the first half of 2016. These sales have been increasing due to our expansion into the new markets, including pet foods, medical foods and nutritional beverages that Raj referred to earlier.

The 1 area where revenues were down a bit for both the quarter and 6 months as compared to the prior year periods was our license revenue. As you may recall from the prior earnings calls, we are now amortizing our upfront license 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 itself in Q4 of 2017.

Turning now to our expenses on Slide 8. As you can see here, our research and development expenses are down by $547,000 or 25% for the quarter and $926,000 or 21% for the 6 months as compared to the prior year periods. While SG&A was up slightly for the quarter by $184,000, the year-to-date SG&A expenses were down by $200,000 or 3% as compared to the same periods in 2016.

Both expense categories saw decreases driven by lower salaries and benefits resulting from our workforce reductions in 2016. However, increases in consulting and stock-based compensation expense in the second quarter this year drove the net increase in SG&A cost over the prior-year quarter. Therefore, comparing our total operating expenses to the prior year periods, they were down 6% to $4.7 million for the second quarter and down 10% to $9.7 million for the first half of the year.

Putting all this P&L activity together on Slide 9, the bottom line impact is a net loss for the quarter of about $4 million compared to last year, which is an improvement of 12%. And for the first half of the year, our loss decreased to $8.2 million, an improvement of 16% as compared to the same period last year.

As for our liquidity, cash on hand and investments totaled $44.1 million at the quarter's end. And our net cash use for the quarter was $4.3 million, up slightly from the $4 million used in the same quarter last year. There were certain onetime payments made during the quarter that offset the reduction in cash burn from our workforce reductions last year. Cash used during the first 6 months of this year totaled $8.8 million, a slight improvement from the $8.9 million used in the same period last year.

I'd like to highlight an important event that occurred following the end of the second quarter. After careful consideration, management decided to prepay its outstanding loan with Silicon Valley Bank in order to further conserve company cash. Therefore, in July 2017, we repaid the $25 million principal balance and terminated the facility. With that, management estimates a total cash savings in interest expense of $2 million over the remaining term of the original facility.

Now turning for a moment to our financial outlook. We are targeting overall revenue growth in 2017 from the continued growth in our product and license revenues with our contract and research government grant revenues remaining consistent with the prior year levels.

We expect our expenses to continue to hold steady below our prior year run rates, while maintaining healthy investments in the development and commercialization of our pipeline traits. In combination, we believe these trends will result in a meaningful reduction in our overall cash burn, while we continue accelerating the advancement of our key productivity and ingredients traits to market.

With that, I'd like to turn the call now 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 second quarter of 2017. Our positive momentum from the first quarter continued in the second quarter with increased revenue, decreased operating cost and a reduced net loss.

We've made some significant regulatory achievements, and together with our partners, moved our trait and ingredient products forward in the pipeline. Our focus remains on advancing these products to commercialization, and we are confident that we can continue this momentum through the rest of the year.

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

(Operator Instructions) And our first question comes from the line of Tyler Etten with Piper Jaffray.

Congrats on the HB4 approval, that's really a very good milestone for you guys. In terms of the other major approvals, do you have any sense of where we are on some of the more major ones like China and Europe? I believe they've been submitted, but could you just clarify where we're at on this?

Sure. So both China and approval -- China and Europe approvals for import of grain into those world regions are going to be key for allowing farmers to plant in Argentina or anywhere for that matter. So the China submission was made last November. And that is now in the queue or in progress in China. The European approvals -- the European submission, we are targeting to make at the end of this year. So there's a couple of studies we are doing right now to finalize the package that we will submit to Europe by the end of this year. So China approval is the most important, because practically all of the soybeans produced in Argentina go to China.

Got it. Maybe if we could also go on the next steps for the Water Use Efficiency trait, I know it's a bit early but safety evaluation is very important on it. Do you have any idea of what the time line would look like for that trait under FDA approval?

Right. So I think that's still, again, in process. The full approval for Water Use Efficiency is probably still over more than a year away at least. And that's the general approval for the Water Use Efficiency trait. And then, of course, we'll have to -- we'll get -- after we get specific approvals for the crop depending on the country that we are applying for.

Got it. And then, maybe if we could switch over to the Dow partnership. I mean, what would be the partnership look like longer-term? Is this something that they've been interested in something more than the Wheat Quality trait? I know that you guys have worked with Dow in terms of trials, but I guess, do you see this relationship evolving into a more -- intertwined with the other traits?

Yes. So we have an agreement with Dow for corn yield and stress traits. We're now in year 3 of that agreement. So I commented on that, we've got trials in the ground or I should say Dow has trials in the ground that we work with them collaboratively on. But that's a completely separate agreement than the Wheat agreement that we've just signed. And this is supported by the wheat business within Dow. And currently, it's really in early phase research. So this will progress through breeding and testing and then eventually commercialization. But yes, these 2 are separate agreements. At this time, it would be too early to say anything about intertwining these. We've worked with -- we got a good relationship with Dow. And these are really 2 separate crop teams within Dow that we are working with.

Okay, that's helpful. And then, maybe a couple of questions for Matt on the model. Do you guys see this kind of sub-$2 million run rate for -- through the rest of the year for the R&D? And maybe this is an obvious question, but there was a 2 million share count drop. I was just curious on how that happened, any color would be helpful?

Sure. I'll start with the share drop. March 31, we executed a share swap with Limagrain as part of the LCS partnership, whereby we exchanged with one another our ownership in the LCS arrangement that we had. And as a result of that, they exchanged with us 1.8 million shares of Arcadia stock, which we then retired which resulted in that $1.8 million -- or 1.8 million share reduction at that time. With regard to your question about R&D, I think it's fair to assume that for the foreseeable future, the run rate will be relatively consistent with this quarter. We had a lot of anomalies in that number. And when we look at the 4, 5 primary investments we're making in our traits, that's probably going to remain pretty steady for at least the next -- at least the balance of the year.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Raj Ketkar, President and CEO, for closing remarks.

So to close, thank you, everyone, for joining the call, and thank you for your continued interest and support of Arcadia. We look forward to speaking with you again during our Q3 conference call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.