Arcadia Biosciences Inc (RKDA) 2018 Q4 法說會逐字稿

Good afternoon, and welcome to Arcadia Biosciences Fourth Quarter and Full Year 2018 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 recent filing, 10-K, and again on Slide 2 of this presentation. With that, I will now turn the call over to Raj Ketkar, President and CEO. You may begin.

Thank you, Victor, and thanks to everyone who is joining us on the call. I'm joined today by Matt Plavan, CFO of Arcadia, and now additionally, the President of Arcadia Specialty Genomics. We recently announced the formation of this new strategic business unit and look forward to talking about this new venture today. I'll start by summarizing our overall 2018 accomplishments, including in the fourth quarter, before I turn it over to Matt to talk about Arcadia Specialty Genomics and review our financial performance.

Turning to Slide 3. 2018 was a transformative year for Arcadia. We emerged as a health and nutrition ingredients company serving the food industry. It was a year of many accomplishments across our business, and we are now well positioned to complete our transition to a commercially focused company bringing high-value, non-GM wheat ingredients to the health and nutrition food industry. Some of the significant highlights of 2018 include: establishing the GoodWheat brand, achieving key -- technical milestones and amylose levels in our Resistant Starch wheat lines; adding Reduced Gluten wheat to the GoodWheat line of products; building partnerships with key players in the wheat value chain, including wheat growers to grow seed and grain, several food companies who are testing our ingredients in their food products and wheat milling companies, like Ardent Mills.

In the fourth quarter, we announced our collaboration with Ardent Mills for the development of innovative wheat technologies. The first product will be a patented approach to extend shelf life and improve the taste of whole-wheat flour. Ardent Mills is North America's premier milling company with more than 40 milling operations across the U.S., Canada and Puerto Rico. The project with Ardent Mills introduces this trait, design to extend whole wheat shelf life by slowing the enzymatic processes that produce bitterness in whole wheat flour.

As Arcadia and Ardent Mills formed our partnership, we made this project our first focus because despite how much nutritionists and dietitians have come to understand about the health benefits of whole grains, Americans on average consume only 1/3 of the full daily recommended whole grain. Research by the Whole Grains Council shows that taste is the leading barrier to increasing consumption. Together, we aim to improve the taste of whole wheat by reducing the bitterness caused by oxidation in the flour, and we were successful. Arcadia received a U.S. patent for this Extended Shelf Life Wheat, and we are continuing to further strengthen our intellectual property covering this trait.

Seed breeding and commercialization efforts will carry forward from here under the direction of Ardent Mills. Additionally, in the fall harvest, we demonstrated agronomics of our GoodWheat product in production trials in multiple locations. And we completed formulation testing of GoodWheat ingredients in diverse types of food products with a major food lab. We demonstrated that using GoodWheat ingredients results in healthier products we consume daily, such as pasta, crackers, cookies, tortillas and other baked goods.

Moving on to Slide 4. Our other products also made commercial and technical progress. These include HB4 Drought Tolerant soybeans. In 2018, our second year of field trials in commercial soybean varieties coincided with significant drought conditions in Argentina, providing the opportunity for farmers to observe the potential benefits of the trait. The trait preserved yield, whereas the varieties without the trait had a reduction in yield due to drought.

In the fourth quarter, Verdeca, our JV with Bioceres Crop Solutions Corporation received approval from Argentina's regulatory authorities for HB4 Drought Tolerant soybeans stacked with herbicide-tolerant traits. This expands the addressable market for HB4 technology in South America, enabling farmers to control weeds across soybean-growing regions while protecting yields in drought conditions.

And late in the fourth quarter, the third season of breeding trials were planted in Argentina. We will also be testing lines containing HB4 alone and HB4 stacked with herbicide-tolerant traits in Argentina to demonstrate this technology to soybean growers. We expect to launch HB4 soybeans as soon as we have import approval from China, which is expected in late 2019.

Our seed partner in India, Shriram Bioseed, achieved a key milestone, and they are now progressing the Extended Shelf Life tomato seeds to commercialization in 2019. As for GM traits in rice and cotton, in Africa, through our USAID projects, scientists at the African Agricultural Technology Foundation achieved double-digit yield increases in rice using a stack of our 3 traits: nitrogen-use efficiency, water-use efficiency and salinity tolerance, also called NEWEST Rice. Regulatory authorities in Africa have initiated work towards deregulation of these traits.

In India, our partner, Mahyco, received approval for field trials of NUE cotton and rice for the first time in several years and the trials showed good progress. As I said earlier on the call, a few weeks ago, we announced the launch of Arcadia Biosciences new venture, Arcadia Specialty Genomics. Matt Plavan will lead this venture. During the fourth quarter and the early part of the first quarter of 2019, Matt and a team of scientists and strategists at Arcadia have been working hard to analyze the opportunity to take Arcadia's technologies into a new crop and create a business plan for this venture.

With that introduction, I would now like to turn the call over to Matt to discuss Arcadia Specialty Genomics and review the financial results for the quarter.

Thanks, Raj, and good afternoon, everyone. It was just 30 days ago that we announced our decision to turn our considerable and unmatched expertise in plant transformation to a new crop for us, cannabis, focusing exclusively in federal and state legal markets. With the establishment of our strategic business unit, Arcadia Specialty Genomics, we declared our ambition not just to enter the space but to establish early on a leadership position by extending our reputation in traditional agriculture as a leading science-driven company into the burgeoning U.S. cannabis category.

As of today, Arcadia Specialty Genomics is up and running with a research operation, focused on optimizing and standardizing the cannabis plant across a number of critical quality and productivity value targets.

I'm honored and inspired to lead this important new endeavor and very appreciative of Raj and the board's confidence in me to execute our strategy in this promising new frontier. I will also retain my role as CFO with continued emphasis on maximizing shareholder value at Arcadia.

If you'll turn to Slide 6, I'd like to start by telling you why we made the decision to enter the cannabis market, and why now? Starting with why cannabis. Well, in fact, it is because cannabis has been illegal in most of the industrialized world and banned as an agricultural crop until very recently that makes it such a ripe and potentially enormous opportunity for Arcadia. That sounds strange, I know, but having been an illegal crop, the cannabis plant has not benefited from a concerted breeding efforts to improve its agronomic performance in the way all conventional crops has.

As you can see, by the stats on Slide 6, due to 2 major green revolutions over the past 50 years or so, productivity gains and improvements in caloric content experienced in traditional crops has been exponential. The first wave in the '60s brought mechanization and chemistry to ag. And then beginning in the '90s, the biotech brought high science to further enhance crop performance and farmer income.

So as depicted on Slide 7, during that time, the global gains to wheat, corn, soy, rice were on the order of 200% in terms of yield. The critical takeaway here is that cannabis benefited from none of these advances. So as a result, the plant today suffers greatly from suboptimal genetics, its germplasm is highly fragmented and rampant performance inconsistencies plague its scalability.

At the moment, these dynamics are keeping the price high in many geographies as demand outstrips supply, but it's also these genetic deficiencies causing significant waste in cultivation and processing. These challenges, coupled with the lack of plant traceability and surety of consistent quality supply, the scale-up and long-term viability of the industry is at serious risk. Therefore, in cannabis, we see tremendous opportunity and demand for what we can deliver; novel, traceable cannabis varieties that improve productivity for cultivators and farmers.

As highlighted in Slide 8, through the development of traits addressing pest and disease resistant, enhanced robustness for climate resilience and quality traits in genetically consistent strains, we see an ability to affect supply assurance and brand differentiation for consumable ingredients, such as hemp oil, hemp fiber, CBD oil and potentially other valuable cannabinoids.

In fact, we can't think of a bioscience company more qualified to pioneer cannabis' innovations than Arcadia. With 16 years of experience and a track record in agricultural innovation, we have a proven ability to partner with established leaders in agriculture and to effectively navigate the regulatory pathways with agencies like the USDA and the FDA in bringing new and beneficial crops and functional food ingredients to the market.

If you have a look at Slide 9, you'll see the expertise and resources required to span the execution spectrum from seed and trait development through ingredient production, to the delivery of the branded consumer product as we've done in safflower and wheat.

As you can see here, this execution requires a really deep, wide set of capabilities and it's something that no other company in the cannabis space has actually done. Perhaps our success increasing the volume of omega-6 nutrition oil in safflower serves as the best proxy for how we can create value in cannabis.

To our knowledge, our GLA safflower oil product has the highest concentration of GLA omega-6 available in any plant, at 65%. Keep in mind, other omega-6 products -- or plants that produce omega-6 contain 3x to 6x less GLA. With the global retail market for CBD valued at $540 million in 2018 and expected to reach $22 billion by 2022, we like to imagine how big of a market CBD oil will be for Arcadia if we can achieve even a fraction of the increase in oil content in cannabis as we achieved in safflower.

Yet, as we've seen with the recent crackdown on hemp derivatives, as food and beverage ingredients, there is an addressable gap in the marketplace for a company like ours that can introduce standardization and consistency into the U.S. cannabis supply chain. As big as the CBD opportunity is, we see it as only the tip of the iceberg in cannabis.

So turning now to the question. So why now as opposed to a few years ago when cannabis was being legalized in states and beginning to become legalized throughout the world? Simply stated, we are a NASDAQ-listed public company, and as such, a primary listing requirement is that we participate exclusively in state and federally legal business activities. Although for the reasons just described, we have been eager and ready to enter the space, practically speaking, effective legal participation was only recently enabled via the passage of the 2018 Farm Bill in December of 2018, which confirmed the federal legalization of hemp, which is the term given to nonpsychoactive cannabis containing less than 0.3% THC. Therefore, at this time, because our current operations are exclusive to the U.S., our research and business activities will be limited to hemp. And as indicated by the analysts' expectation for growth, hemp represents an enormous opportunity in and of itself.

Lastly, because hemp and marijuana are the same plant, it is possible our innovations in hemp will be equally beneficial and transferable to marijuana strains. However, only where fully, federally and state legal would we consider doing so.

So now that we've established why we waited until now, we are full-steam ahead and quickly moving. As you may have seen, within a week of announcing our entree into cannabis, we released the news that we've been granted an Industrial Hemp Pilot Program license from Hawaii's department of agriculture. This is significant development on several fronts. First, this license allows for the cultivation of industrial hemp in Hawaii for the purposes of agriculture and academic research. Second, hemp and hemp products produced under this program may be sold commercially. And perhaps most importantly, it gives Arcadia the advantage of commencing research and cultivation efforts immediately, while others awaiting the issuance of guidelines other -- under the 2018 Farm Bill, in order to begin research, are in a wait-and-see mode. The USDA has yet to issue their guidelines from which each state must design and submit their plans to demonstrate ongoing compliance, a process that most of us think will take the better part of 2019. Therefore, we are using this head start to our advantage, moving quickly to establish our Hawaii research program cultivation in April and to pursue expansion through licensure in other states.

Lastly, looking back at this launch, we are energized by the initial response we received from the Capital Markets and our industry partners. We were covered in approximately 200 news stories and are experiencing positive trading activity. In what we are -- moreover, inbound interest in what we are bringing to the cannabis space from existing partners and potential new collaborators has been really strong.

Now let's turn briefly to the financial performance highlights. As we've indicated throughout this year, our financial results in 2018 reflect the impact of our transformation from a predominantly research and licensing business model to one of a consumer products health and ingredients model. Revenues from our legacy R&D business model wound down during the year, and our forward expectations for the onset and scale up of new revenues from our nutritional ingredient products over the next 9 to 18 months remains unchanged. We could see the impact of these factors on our overall revenue in the fourth quarter and in the full year turning to Slide 10.

Our legacy revenue sources have wound down prior to the onset of our new revenue sources contributing to a 69% reduction in revenues this quarter over the prior year fourth quarter and a 64% reduction for the full year over annual 2017. Importantly, however, we have compensated for the impact of this revenue shortfall through our continued cost-containment efforts, having kept our annual 2018 operating expenses on par with the 2018 -- sorry, the 2017 spend of $18.3 million.

Operating expenses for the current quarter were $370,000 or 8% higher than in the fourth quarter of 2017, primarily due to fees incurred in support of protecting our intellectual property. Taking a little closer look at the operating expenses, we can see the effect of our transformation here, too. Total R&D expense was $621,000 lower for the quarter and $1.3 million lower year-to-date as compared to 2017. The decrease for both periods was primarily due to the lack of certain in-license and subcontracted research costs in 2018 that were present in 2017 as well as less subcontracting activity in support of government grants in 2018.

Total SG&A expenses were $782,000 higher in the fourth quarter of 2018 than the fourth quarter of 2017 and $953,000 higher year-to-date. The increase for both periods was mostly due to the higher intellectual property legal fees I mentioned earlier as well as increased marketing activities during 2018. The annual unfavorability was partially offset by strategic advisory costs, retention bonuses and severance amounts incurred during 2017 and not in 2018.

Net loss attributable to common stockholders for the fourth quarter of 2018 was $646,000, a $2.3 million improvement over the $3 million loss in the fourth quarter of 2017. Financings completed in the 2 -- the first 2 quarters resulted in recording liabilities was significant noncash charges and noncash income that hit the P&L as the liabilities were remeasured at the end of the applicable quarters. Please refer to footnote 11 in our 10-K for a detailed description of the accounting for these transactions.

With regard to our liquidity and capital resources, cash on hand, cash equivalents and short-term investments totaled $21.8 million. Our net cash used in operating activities for the quarter was $2.4 million and $14 million for all of 2018 consistent with the amount of cash we used for operating activities during all of 2017.

That wraps up our financial highlights for 2018. Thank you for your time and attention today. 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'd like to summarize our results for the fourth quarter and full year 2018, during which we made good progress towards commercialization of key products.

2018 was a transformative year for Arcadia, as we delivered significant regulatory, commercial and scientific advancements in wheat, soy, tomato and safflower. We emerged as a commercially focused health and nutrition ingredients business serving the food and consumer packaged goods industries. We established the GoodWheat brand, achieved key milestones in Resistant Starch wheat and established Reduced Gluten wheat on the commercial track.

We announced our collaboration with Ardent Mills, which is an exciting development towards the commercialization of our wheat technology. We received a U.S. patent for Extended Shelf Life Wheat, which adds to our overall portfolio of intellectual property relating to wheat products. We completed development of recipes of popular foods containing GoodWheat and expanded our list of food companies around the globe testing GoodWheat and their products. We received approval from Argentina regulatory authorities for HB4 stacked with herbicide-tolerant trait, which will expand the market for HB4 soybeans. HB4 showed good performance in severe drought conditions in Argentina, and we are now awaiting import approval in China so that we can commercially launch HB4 soybeans in Argentina. Extended Shelf Life tomatoes developed by our non-GM TILLING technology also reached an important milestone and are moving towards commercialization in India.

We're now well positioned in 2019 to apply our years of expertise to a new crop, cannabis, with the formation of Arcadia Specialty Genomics, dedicated to improving the plant quality, productivity, consistency and climate resilience of cannabis, working initially in hemp.

This is a natural evolution of our business, consistent with Arcadia's focus as a consumer-driven agricultural technology company, developing and commercializing innovative food ingredients, nutritional oils and products that improve crop productivity, nutritional quality and value. We are excited about our new journey in the health and nutrition ingredients business, and we look forward to reporting our continuing positive results next quarter.

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 Ben Klieve from National Securities.

Handful of questions here. First, regarding GoodWheat. I'm curious if you anticipate 100% of your acreage that's in the ground today to convert to revenue this year and next year? Or is there any kind of meaningful percent that you know if going to be converted into seed inventory and won't hit the income statement?

I think what we have in the ground today, Ben, includes some seed bulk-up, it includes some production of grain and it also includes testing of various lines. So we have a lot of different things in the ground that will go in spring. We expect some of it to convert to sales this year. We are pretty confident that we will get first sales of GoodWheat product by the -- before the end of the year 2019, for sure. But right now, it's -- we can't quite predict exactly how much that will be.

Got it. Fair enough. Perfect. And then on the HB4 side, a couple questions. I'd assume, you have seed inventory on the shelves set to deploy when the Chinese approval comes. Is that accurate?

Yes, we've got some small -- it's limited to what we were approved to produce in Argentina as far as seed production goes. So yes, we will have some seed available for sales as soon as we get approvals. As we look at -- they plant in counter-season to the U.S. so commercial plantings happen in the -- around the December time frame. So we're hoping that we get approval by then so that farmers can plant.

And actually you read my mind, Raj. My next question was going to be as the Chinese approval -- is there a kind of a date that we really need to -- is there a date that you're looking for, for that approval to really ensure that you'll be able to sell this -- sell your product here at late this year, early next year as opposed to having it get pushed to the right by a year? I mean, what's kind of the cut-off point that you're really looking at?

By -- I wish I had a crystal ball to give you an exact date. When it comes to regulatory approvals in any country, China or any other, it's really hard to predict a date because those are factors completely out of our control. We submit the data and they take their time to review everything. So we hope that even if we get it by November, we should be able to supply product to farmers so that they can plant in December. If it comes later than that, it will probably slip into the next season or we might have to find some locations in Argentina which are planting late and where it would still be able to plant. But we're really looking for November approval.

Got it. Perfect. On the -- and then transitioning to the cannabis side, a couple of questions here. As I understand the development of cannabis, Matt, you commented that the germplasm is pretty fragmented, but my understanding is that it's also relatively inaccessible. I'm wondering if you can talk a bit about that aspect of the market? And really what you're doing to gain access to germplasm to really enable your development efforts to take off?

It is accessible and increasingly accessible, and certainly through our license programs, we're getting access to a fair variety. So I think that it's a positive because this is an instance where we're going to be able to acquire, innovate, protect and own germplasm and build in a state of our own, which, as you know, would be very, very difficult to do in traditional crops right now. But I think we have early access to some important lines, not only through our Hawaii license and research program but through, as I mentioned on the call, there's been a lot of inbound interest since our announcement from collaborators, potential collaborators, and many of them do have access to germplasm. And so we're seeing actually a pretty good availability to do what we want to do and what we're able to do, and certainly, as part of building that germplasm library or estate, if you will, we'll be bulking up and breeding on our own, therein creating the necessary library and supply for what we want to do.

Okay. Perfect. I guess, one last one for me, and I'll get back in queue here. As you look to OpEx in 2019, Matt, you may have elaborated on this in your comments, and I apologize if I missed it, but do you expect any kind of uptick in either SG&A or R&D here as your efforts towards commercialization pick up or the genomics business takes off or the kind of $4.5 million a quarter run rate for OpEx that you've had here for a while going to be good one for the next year?

I didn't cover that in my comments, so thanks for asking. I think when you look at 2018, we were what, $3.5 million was our average $14 million in total was the burn for the year. I do see an uptick both from our move into cannabis, and we are reinvesting in the business, so to speak. I think the last 2 years, we really wanted to -- as we were kind of reconfiguring things, we wanted to take a hard look at how we were deploying capital and how best to redeploy to the new initiatives and that allowed us to cut our operating expenses pretty significantly, 20% to 30% during '16 and '17. But now we're talking about really ramping up and growing, being commercial and really getting back into the innovation phase. So I think cannabis is going to add maybe 10% to our burn, not a significant number, doesn't significantly change our -- what we need to implement our near-term plan, but it certainly will start to drive OpEx a little bit in the other direction. Not significant, but maybe -- I think the number you used, $4.5 million per quarter would be safe for 2019.

And I'm showing no further questions at this time. I'd like to turn the call back to Raj Ketkar for closing remarks.

Thanks, everyone, for joining the call and your continued interest in Arcadia. We look forward to speaking with you again during our first quarter 2019 conference call.

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