Arcadia Biosciences Inc (RKDA) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to Arcadia Biosciences Third 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 the 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-Q, 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, Nova, and thanks to everyone, who is joining us on the call today.

I'd like to begin an update on our achievements during the quarter and our emerging product strategy. And then, Matt will review the financial results for the third quarter of 2017. At the end of the call, we will, as always, take your questions.

Turning to Slide 3, the positive momentum we established in the first half of the year continued in the third quarter. A significant achievement this quarter was the signing of a licensing agreement with the Broad Institute of MIT and Harvard for research use of the CRISPR-Cas9 Genome editing technology in agriculture.

We now have access to the best gene editing technology available, which can accelerate product development by up to 2 years compared to our TILLING technology.

At the beginning of this year, we announced that Arcadia would focus on fewer products in our portfolio. In 2017, we've made great progress in the acceleration of our non-GM wheat quality traits portfolio, derived from the TILLING technology. We added a new product, reduced gluten wheat to our pipeline, as we identified the phenotype that produces a significant reduction in gluten content in wheat. We advanced high-fiber wheat and extended shelf life wheat towards commercialization. And we've enhanced near-term opportunities for our high-fiber wheat by targeting the animal feed market.

In this quarter, we've also signed an agreement with Dow AgroSciences for the development of wheat quality traits in Dow germplasm.

Turning to our abiotic stress mitigation traits, our key products are making great progress towards commercialization. In the third quarter, Mahyco received approval for planting of trials for the Nitrogen Use Efficiency and Water Use Efficiency traits in rice and cotton. This is significant because the Indian Regulatory Authorities had not granted any approvals for trials for the past 3 years. We also achieved important regulatory clearances for our drought tolerance traits this quarter. We received FDA's safety clearance for HB4 soybeans for use in food and feed. The FDA also completed the early food safety evaluation review of the protein in our Water Use Efficiency trait and concluded that it is safe for humans and animals. These approvals pave the way for further approvals in the U.S. and other countries for HB4 and Water Use Efficiency traits.

Finally, this quarter, we added a new member to our Board of Directors. Amy Yoder, is an ag industry veteran and adds valuable industry expertise and insight to the Board. Amy is currently President and CEO of Anuvia Plant Nutrients and is the former President and CEO of Arysta LifeSciences.

I will discuss some of these highlights in more detail later in the call.

Turning to Slide 4, Arcadia is increasing its focus on the health and nutrition ingredients portfolio to drive near-term revenue. The addition of CRISPR to our technology platforms, gives us a leading edge in the drive to develop new products by speeding up the development cycle by as much as 2 years. This graphic shows the relative time lines for developing a product from discovery to product launch. While transgenic or GM products can take 9 to 12 years to bring to market, the TILLING technology speeds up this process to 5 to 7 years and CRISPR could further accelerate this process to 3 to 5 years.

Arcadia has invested over $100 million over the last decade to develop the abiotic stress mitigation traits like Nitrogen Use Efficiency, Water Use Efficiency and Salinity Tolerance in rice, wheat, cotton and other crops. Further development of the abiotic stress mitigation traits will be done by our partners, and we will get royalties from these traits as they come to market.

Going forward, the vast majority of our future investment, will be in products using TILLING and CRISPR technology. Products from TILLING are already acknowledged and recognized as nonregulated products, and therefore, the regulatory steps are not necessary in TILLING-based products, thereby shortening the time line. We have a rich pipeline of products from our Wheat TILLING Library that we are bringing to consumers. Some of these products are already in the precommercial stages of development. Our strong IP, coupled with our demonstrated capabilities to develop products, will enable us to launch these products earlier than other companies. Products derived from CRISPR-Cas9 are also expected to have nonregulated status. We can apply this technology directly to commercial germplasm, and therefore, shorten the launch time lines to 3 to 5 years.

Let's turn to Slide 5, to see how we're accelerating product development of our non-GM wheat products. As you can see on Slide 5, our investments in developing wheat quality traits are beginning to pay off, as we accelerate the commercialization path for these products. Quality traits in wheat, targeted at consumers, could add value to the wheat value chain. Our customers see a strong demand for traits, such as high-fiber, extended shelf life and reduced gluten. And these traits represent a large opportunity in wheat.

High-fiber wheat is rapidly progressing towards commercialization for animal feed and bread and pasta applications. We have identified wheat lines that will significantly reduce yield penalty due to this trait and breeding into commercial germplasm is well underway. We believe the remaining steps to commercialization are significantly shorter than others, who are developing this trait.

The extended shelf life trait also reached important development milestones this quarter. Case studies have shown positive results in whole wheat with this trait compared to whole wheat without the trait. Breeding into commercial germplasm in underway.

We have added a new trait to our commercial track, reduced gluten wheat. We believe this trait will bring a lot of benefit to consumers who are susceptible to gluten sensitivity. Having identified this allele for the reduced gluten trait, we are now also using CRISPR to develop the trait in commercial germplasm. This is a parallel effort to the TILLING effort, so that we can accelerate the product to launch.

To summarize, our non-GM wheat quality traits represent a significant opportunity and now with these dual non-GM technology platforms, we are well positioned to accelerate these valuable traits to the market.

Turning to Slide 6. I would like to provide some more detail on our wheat quality product, high-fiber wheat - what we formally referred to as resistant starch wheat. This trait confers high-fiber to wheat, so consumers can get the benefit of high-fiber in wheat bread and many other wheat products, like pasta, noodles, cookies et cetera. High-fiber is well documented as a key component of a healthy diet and this product fits well into this demand. In addition to benefiting human health, this trait can also benefit animal health and the grain can be used in animal feed. We are now in the precommercial phase of development, including the integration of the trait into commercial germplasm. We harvested large scale trials in this quarter and are providing the wheat to key customers for testing. Ardent Mills, one of the largest flour milling companies in the U.S. is an important partner in the development of high-fiber and extended shelf life traits. We have also developed our capabilities for an integrated supply chain that can produce wheat, identity preserve it and supply it to our customers. This capability assures our customers of quality and reliable supply of the wheat with these high-value quality traits.

Turning to Slide 7. I would now like to update you on the status of our key ag productivity traits. The HB4 drought-tolerant soybeans being developed by Verdeca, our joint venture with Bioceres, completed the first year of field trials in commercial germplasm in 2017. Leading wheat companies like Don Mario, TMG and Bioceres are continuing to integrate the trait into the leading germplasm for the drought stress region of Argentina. And the second year of trials would be planted in the fourth quarter of this year. We remain focused on progressing the trait towards regulatory approval, and we are making excellent progress.

In the third quarter, Verdeca received the FDA approval for food and wheat safety for the HB4 trait and soybeans. This is a significant event in the process, towards getting approval in the U.S. and in other countries. Regulatory work, needed for submission to Europe and other countries for import approvals, continues. The trait is also approved in Argentina, with additional approvals pending in the U.S., China and Uruguay.

As highlighted before, our seed partner in India, Mahyco received approval for field trials, for event selection and field efficacy for Nitrogen Use Efficiency and Water Use Efficiency traits in rice and cotton. These field trials have been planted and we expect results in the first and second quarter of 2018. This is a significant development because the Indian regulatory authorities had not granted any approvals for traits for the past 3 years. We expect that these trials will advance these traits towards commercialization and also result in some milestone payments in 2018.

To summarize our results for the third quarter, our financial performance year-to-date is better than for the same period of last year. We have identified non-GM wheat quality traits as the products we will accelerate to launch in the health and nutrition ingredients space. We obtained a license for CRISPR-Cas9, which adds a new technology platform to our capabilities and will accelerate products for commercialization. And our transgenic traits also advanced, including trials being planted in India for the first time in 3 years.

With that, I would 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. With regards to our financial performance, as you can see in Slide 8, our total revenues were a bit off the mark for the third quarter. However, total revenues are even with the first 9 months of last year, and we continue to expect total revenues for the full year of 2017 to be greater than those in 2016.

In comparing Q3 of this year to last year, you can see each of our revenue categories were lower. Product revenues were down 20% due to the timing of GLA orders expected from new pet food sales, which we now believe will occur in early 2018.

Our primary distributor for dry dog food ingredients, requires time to adjust their ingredient formulations, establish proper labeling and prepare their channels, a process that could not be started until the pet food approval was formally published in the Federal Register. The approval was not published until the third quarter, which was 4 months following the actual approval and much later than we had anticipated. Therefore, we are now more cautious about predicting higher revenues in this category for 2017 over 2016.

As for our license revenues, as we've reported all year, we are now amortizing our up-front licensing fees into revenue over a longer period of time, resulting in less revenue recognized per quarter. This causes the quarter and 9 months revenues to be lower as compared to the prior year periods. However, on a positive note, we expect a significant one-time increase on our license revenue in the fourth quarter of this year.

As discussed in more detail on our third quarter 10-Q, in conjunction with our primary licensee partner Mahyco, we're looking at the return to Arcadia of certain licensed geographies, in favor of jointly pursuing new in-country licensees, that we believe are better able to continue the deregulation and commercialization of our traits from this point forward. We expect to complete this review prior to the end of the year, with a number of licenses being terminated, and in such cases, the remaining balance of any up-front license fees, previously deferred for such agreements, would be released and recognized as revenue. As such, we expect a one-time increase in these revenues between $500,000 and $1.5 million in Q4 of this year.

Lastly, having completed a 4-year research contract in the second quarter of this year, has resulted in a decrease of revenue in contract research revenues for the quarter, down 52% to $363,000. However, we do remain up slightly year-to-date as compared to the prior year.

As you know, contract research and government grant revenues can vary significantly from quarter-to-quarter, depending upon the timing of contract awards, eligible R&D expenses and project completions.

Turning now to our expenses on Slide 9. As you can see, our research and development expenses are down over the prior year by $506,000 or 22% for the quarter and $1.4 million or 21% for the 9 months. SG&A too was down for the quarter by $272,000 and for the 9 months $472,000 or 10% and 5%, respectively, as compared to the same periods in 2016.

Both expense categories saw decreases driven by lower sales and benefits, resulting from the workforce reductions in 2016. Therefore, comparing our total operating expenses to the prior-year period, they were down 16% for the third quarter and down 12% through the first 9 months of the year.

Putting all this P&L activity together on Slide 10, we saw a significant decrease in our operating loss for the quarter and year-to-date over the prior-year periods, 8% and 14% respectively, as highlighted in the green boxes.

Now just a word about our liquidity and capital resources. Cash-on-hand and investments totaled $15.7 million at the quarter's end. And our cash used for the quarter, net of our debt pay off of $26.1 million, was $2.4 million, a significant improvement from the $4 million used in the same quarter last year.

In closing, as for our near-term financial outlook, we continue to target overall revenue growth in 2017 over the prior year, due to the expected one-time increase in our license revenue, with our contract research and government grant revenues remaining relatively consistent over the prior year. As I mentioned earlier, we now expect the uptick in GLA revenues from new sales into the pet food market to begin in 2018, resulting in product revenues at or below the prior year levels for 2017. We expect our expenses to continue to hold steadily below our prior year run rates, while maintaining healthy investments in the development and commercialization of our pipeline traits. In combination, these trends, will result in meaningful reductions in our overall cash burn over the prior year, while we continue advancing our key productivity and ingredient traits to market.

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

Thanks, Matt. Before we get to your questions, I would like to summarize our results for the third quarter of 2017. As you've heard today, Arcadia's financial performance this year is tracking better than last year, and we expect that trend to continue to the end of the year. Our team has remained focused on the 2 key determinants of future success: Current financial performance and accelerating our paths to profitability. Our license for CRISPR-Cas9 enables us to utilize the best gene editing technology available for developing new products. Non-GM wheat traits are advancing to commercialization. The HB4 drought-tolerant soybeans in Argentina completed important regulatory advancements and field trials. And our partner Mahyco, in India received permits and planted field trials for the first time in 3 years. These tangible financial, operational and market accomplishments reflect the fundamental advances we've made in our growth strategy for building long-term shareholder value.

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

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

Matt, I wasn't able to catch that last comment you had about the cash used. I was just wondering, with this lower use of cash in the quarter. Is that a rate that we can expect going forward? I mean, it's a pretty significant let down from the $4 million to $5 million that we've seen in the past out of the used from operating activities. So any color there would be helpful?

Yes. I think it -- as we look at 2018, we would expect our quarterly cash burn to be closer to what it was this past quarter versus the year-ago quarter. I think that's a fair expectation.

Okay. Yes. That's exactly what I needed to know. And then for HB4 trials, could you just remind us the -- the standards for these trials. Is it a 3-year minimum of trials to get through some of these regulatory authorities? I know the second year trials are about to begin. Just -- if you could just walk through, how you see the regulatory process unfolding for HB4? That would be helpful.

Right. So our main target for regulatory approvals or I should say that main target for commercialization, is first, for us to commercialize in Argentina. And for us to be able to do that, we have to submit for import approvals in China and Europe, which are the key import continents for grain coming out of Argentina. As you know, we've already received approvals in Argentina for planting. So we're now awaiting approvals from China. So we submitted to the Chinese regulatory authorities about a year ago, it was November of last year. And we will be submitting to Europe in the next quarter, we expect. So the few trials for regulatory purposes that are going on in Argentina are more for other South American countries, but they are not crucial for approvals in Argentina or China or Europe. So they're really trying to get approvals in Paraguay, Uruguay and so forth. So those are what the trials -- regulatory parts of the trials. We're also conducting, I would say, commercial demos, which are large stripped trials, more for showing to farmers, the efficacy of the trait. And continuing to do -- to fine tune the trait performance in different germplasm. And so those are the other set of trials that are going on, and we will be in the second year of that in this coming season.

Got it. And then on the CRISPR licensing, specifically, on the non-GM wheats. I was wondering, if you could explain, I know most of us have plans this year, but just on a more detailed level, how this technology will help on the existing product development? I know that you guys already had some of the traits discovered, just on how this technology will help accelerate the traits that have already been worked on for some time?

So the traits that are already well advanced as we showed in the slide, which had high-fiber wheat and extended shelf-life wheat, well into the line selection or breeding and integration stages of development. Those specific lines will not be impacted by CRISPR, but we would start working on the next generation, if you will, of RS wheat or high-fiber wheat in new line, as new lines of wheat become commercial. Because the advantage of CRISPR is, you don't have to go through a lengthy integration and breeding process, you could actually do the editing in the germplasm -- targeted germplasm itself. So we could do it in the commercial line. And which is what we are doing in parallel for the reduced gluten wheat, which is still early in the development cycle, even from our TILLING process, and we're starting work in parallel with that in reduced gluten, which is what we tried to demonstrate on the slide. But that's our first target. It's a great tool, a research tool, but we are just starting with it. So there's a learning curve there as well for us. But we're quickly getting up to speed, we've got our corps of scientists, who are really good at this stuff. And we're already applying that to different wheat lines.

And our next question comes from the line of Bill Peters of CAS3 Investments.

I have a quick question. So based on the cash burn now, would you say that you have enough cash to get you through the year. I know in the past 10-Q there was a going concern in reference to that, but since the cash burn has been decreased so much and the current cash-on-hand seems to be about $16 million, what is your opinion on that?

Yes Bill, that's a good question. I think just, kind of, teeing off of the answer to Tyler's question. I think, if we were to continue our burn at the level of this quarter, we ought to be able to get through a year from now, maybe, all the way to 2018, obviously, that depends on, how much more revenue we could bring in next year? But we will certainly -- can remain very focused on cash conservation. And using every dollar as wisely as we can. And I think that is going to extend our run way through 2018.

Okay. And one more question in reference to the company's NOLs. Is that $100 million, that the company has invested?

Yes, the company has raised approximately $170 million since inception. Yes, so that's what you're seeing in that retained deficit.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to your President and CEO, Raj Ketkar for closing remarks.

Thanks, everyone for joining the call, and your continued interest and support for Arcadia. We look forward to speaking with you again in 2018, during our year-end Conference Call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone, have a wonderful day.