Arcadia Biosciences Inc (RKDA) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the Arcadia Bioscience (sic) [Arcadia Biosciences] First Quarter 2019 Earnings Conference Call. Today's presenters will be Raj Ketkar, President and CEO; and Matt Plavan, CFO and President of Arcadia Special Genomics (sic) [Arcadia Specialty Genomics].

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

Before we start, if you refer to Slide 2, we'd like to remind you that Arcadia Biosciences will be making forward-looking statements on the call based on current expectations and current available information. However, since these statements are based on facts and involve risk and uncertainties, the company's actual performance and results may differ manually from the -- those discussed and implied today. If you review the company's safe harbor language in those most certain filed 10-K and again, on Slide 2 of the presentation.

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

Thank you, Darwinda, and thanks to everyone who is joining us on the call. I'll start by summarizing our overall first quarter 2019 accomplishments before turning it over to Matt to talk about Arcadia Specialty Genomics and review our financial performance.

Turning to Slide 3. In the first quarter, we completed the production scale-up of GoodWheat in the winter counter season, which is being harvested now. We continue to be encouraged by the progress of new lines with improved performance and improved yields in the field. Preparations for planting, for seed production and field trials in the summer season in key wheat-growing states are underway. This will help us build supply for the commercial launch and first sales of GoodWheat in 2019. Meanwhile, testing of GoodWheat products and commercial discussions with food companies and milling companies continued in the first quarter to support the commercialization of GoodWheat this year.

Turning now to Slide 4. Verdeca, a joint venture with Bioceres Crop Solutions, introduced HB4 drought and herbicide tolerant soybeans to farmers at Expoagro, the largest farm expo in Argentina. Verdeca welcomed over 1,200 farmers to the pavilion to view drought and herbicide tolerant soybeans and learn more about this technology. The Bio-Innovator program signed up many farmers interested in priority access to test the HB4 technology in their fields. Verdeca also completed the third year of breeding trials to test drug tolerance and herbicide tolerance, and these trials are being harvested now. In addition to breeding trials, we are bulking up seed production in preparation for commercial launch in the fourth quarter of 2019, pending approval from China regulatory authorities.

Early in the second quarter, we hired Dr. Randy Shultz as head of R&D for Arcadia based in Davis, California. Randy is well known as a science leader, particularly in the field of gene editing and new plant-breeding technologies. We are excited to have him join the team to lead our important R&D function.

With that brief update on wheat and soybeans, 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 5 weeks ago we announced the formation of Arcadia Specialty Genomics and declared our ambition to establish early on a leadership position as a leading science-driven crop improvement company in hemp in the same way we have done in traditional agriculture. I'm very pleased with the progress our team has made since our announcement. For one, we established research operations in 2 states and hired dedicated field staff and experienced R&D leadership. We've also begun acquiring and testing multiple strains of hemp germplasm for our libraries, and we've been field testing multiple strains of hemp, evaluating their performance and are preparing it for several more plantings.

With regard to our broader hemp genomic strategy, we defined our primary targets of interest for gene editing and TILLING, which will better guide our research activities for the rest of the year.

In addition to our progress in the field, we have been actively involved in the space, which has continued to be highly dynamic and continues to evolve rapidly. Investment inflows remain strong, industry players continue engaging in meaningful M&A and vertical integration activities while new cannabis product offerings and new retail outlets are proliferating at an astonishing rate. Since our announcement, we've been swiftly pulled into this activity as the market players recognize not only the need for quality genetics but also product and supply assurance. Interestingly, each of our traditional crop partners have engaged us about our plans in hemp and the potential to collaborate. In addition, several established players in the cannabis space have done the same. With the universal belief in the nutritional and medicinal qualities of this crop, each is evaluating how to best leverage their market positions and scale a business in hemp amidst the sub-optimal state of cannabis genetics and the pervasive lack of quality standards from cultivation to product formulation and labeling. Moreover, we see more and more the news about the product mislabeling, including unsubstantiated health claims and ingredient content and the serious need for regulations to standardize and qualify cannabis consumer products. An increasing appreciation by the key industry players for the critical business risks of this Wild West attitude towards quality and consistency is fueling an immediate demand for third-party quality assurance and materials qualification in the supply chain. Our expertise and experience in managing quality production and working effectively within regulatory frameworks positions us uniquely not only to provide quality validation and assurance but to become more involved in the process of high-value hemp derivatives, like cannabinoid's oils. As such, we're actively evaluating collaboration, supply and services opportunities with several industry key partners.

We expect these activities to result in announceable collaborations beginning as early as Q2 of this year.

With that said, let's take a moment for a brief update on our Hawaii Industrial Hemp Pilot Program. As you can see from the pictures on Slide 7, our initial plantings from April 1 are flourishing. Our primary goal in this grow is to test local Hawaiian strains, evaluating their performance and quality attributes against climate and geographic conditions.

In addition, it's our opportunity to demonstrate to the Department of Hawaii Agriculture that we can produce hemp compliant with their regulatory requirements. Towards that end, as you can see, the 6 strains we planted are maturing nicely. As expected, each strain is expressing distinctive characteristics, and we expect we'll be ready for harvested analysis of this crop by mid-summer. Our next steps are to stagger additional plantings throughout the remainder of the year, producing multiple harvests with various strains under different growing conditions, which will serve to accelerate our research learnings. Also important to note, we've recently hired dedicated staff at our research facility in Hawaii to oversee these important growth and research operations.

At a macro level, our research goals for 2019 include progress in 3 fundamental areas that we've shown here on Slide 8. First is gaining experience with hemp germplasm. We're acquiring a sample collection of U.S. hemp strains, representing the geographic and phenotypical diversity among the most productive and highest-quality strains available in the U.S. The second is in hemp breeding. Leveraging our research programs in Hawaii and California, we will execute a significant number of crosses, targeting improved agronomic performance. And certainly, any success in these crosses will be opportunities to seek IP protection, which is an essential part of our growth strategy.

The third is trait development. Based upon the early results of our market and customer diligence, we have confirmed our primary targets of interest for gene editing and TILLING, and we're developing our initial hemp TILLING libraries with the intent of having one or more genetically diverse libraries in early 2020.

So these are our primary research strategies for the balance of the year. Again, I am exceptionally pleased with the team's progress in such a short amount of time, and I have high confidence that our collective enthusiasm and drive will result in exciting progress to report to you in Q2 and beyond.

With that, I'd like to move briefly or quickly to an overview of our financial results for the quarter.

As was the case throughout 2018, our financial results in 2019 will 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 continue to swipe -- wind down during the year, and our forward expectations for the onset of our GoodWheat product's revenue by late 2019 remains unchanged. Therefore, we can see the impact of these factors on our overall revenue in the first quarter of 2019 on Slide 9, with a 26% reduction in revenues this quarter over the prior year first quarter. As we execute our commercial strategies, we're making investments in the added resources and expertise necessary for success, generating slight lift in our overall operating expenses in Q1 2019, up 8% or $323,000 over the first quarter of 2018.

More specifically, R&D expense was $109,000 higher for the quarter as compared to 2018. The increase was primarily driven by the timing of expenses related to our joint venture with Verdeca, which was partially offset by lower employee-related expenses and field trial activities.

Total SG&A expense was $191,000 higher in the first quarter of 2019 than the first quarter of 2018. This increase was driven by higher employee expenses due to the growth of the commercial development team as well as additional public relations and marketing expenses in support of our transition to a commercial company.

Net loss for the first quarter of 2019 was $12.6 million, which is a $2 million increase from the $10.6 million loss in the first quarter of 2018. This increase was predominantly the result of the noncash remeasurement of the liabilities associated with the financing that we competed in the first 2 quarters of 2018. Please refer to footnote 8 in our 10-Q 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 $17.8 million at the end of the first quarter. And our net use -- net cash used in operating activities for the quarter was $4 million, $300,000 more than the amount of cash used in operating activities during the first quarter of 2018.

So that wraps up our financial highlights for 2019. Thank you for your time and attention today. And with that, I'd like to turn the call back over to Raj. Raj?

Thanks, Matt. Now before we get to your questions, I would like to summarize our results for the first quarter of 2019. GoodWheat production scale-up in the counter season neared completion at the end of the first quarter and is now being harvested. Preparations are underway for planting in the summer season in the key wheat-growing states to build supply for commercial launch in late 2019. And we continue testing GoodWheat products with food companies and milling companies. We completed the third year of breeding trials in Argentina for HB4 drought tolerant soybeans, and we introduced pre-commercial soybean varieties with both the HB4 drought tolerant and herbicide tolerant traits to growers at Expoagro in Argentina, the country's largest farm show. We launched our new strategic business unit, Arcadia Specialty Genomics, to deliver novel crop innovations in cannabis working initially in hemp. And we received a license for Hawaii's Industrial Hemp Pilot Program, which allowed us to begin planting right away.

Our focus in 2019 will be on applying our years of expertise to developing and commercializing innovative food ingredients, nutritional oils and products that improve crop productivity, nutritional quality and value. 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) First question comes from Ben Klieve from National Securities.

Couple of questions regarding GoodWheat. So first of all, Raj, you sound pretty comfortable about your ability to commercialize this product this year. I guess I'm wondering, first, do you have the supply chain kind of secure from top to bottom? There's still some loose ends you need to tie up in advance of commercialization? Where do you stand with the supply chain?

I think our supply chain is in pretty good shape. We have been working with key farmers across a few different wheat-growing states to grow our wheat. And like I reported earlier, we just completed some feed scale-up in our counter-season production, and we're getting ready to plant. So I think once we get the plantings done here in the next few weeks, we should be able to harvest in the fall. And then as far as identity -- preserving it because that's key, we will -- we are setting up systems with the farmers that we're working with to ensure that GoodWheat is kept separate from commodity wheat, and then we can supply that to our customers. And as far as working with customers, like I said, we are in discussions for agreements with the customers, and we are also testing our wheat with these customers.

So I -- we feel pretty good that we can supply quantities before the end of the calendar year. It will be in the fourth quarter. We would harvest in the fall and then supply that.

Got it. And then that kind of leads into my next question here. Wondering if you can provide a bit of an update regarding kind of the level of discussion you've been having with those potential customers. I mean what, at this point, is standing in the way of them signing on the dotted line? What still needs to happen between now and then -- between now and you being able to make an announcement that you have that first buyer secure?

Yes. I think it will -- it depends on several things, Ben. It's going to be what end product they're going to put this wheat into, what the price is going to be, how much volume are they able to commit for the first year. So a lot of those things are happening -- or those discussions are going on. And like I said, the testing is going on. So those agreements have to come together over the next few months.

Okay. Got it. And one last question on wheat. Regarding -- excuse me, I'm wondering if you could provide a bit of a update on the collaboration with Ardent Mills. I know we're still ways away from any meaningful update there, but I mean, can you give us any update regarding the status of breeding efforts, field trials, any testing that you are aware of that's being done with consumer goods companies? Anything that can help us understand the progress there would be helpful.

Yes. I think Ardent Mills, that is -- as far as the commercialization strategy of the extended shelf-life product, that is really in Ardent Mills' responsibility in terms of our agreement. And so we've developed the trait. It's been tested. I think they are working on their own -- so today, we have it in one variety, but there is breeding going on into commercial varieties as well and testing that they are doing with their customers to bring the product to market.

Okay. Perfect. On -- regarding the cannabis initiative. Now that you're really a few months in -- and you talked about kind of filling out your team there. Wondering if you can comment on really who you brought in to build your capabilities. And kind of what core competencies you're still lacking there. And what, if anything, has been the challenge in -- challenged you in building out that team? What have you needed that you're just unable to get at this point?

Well, I think the first thing I would call out is Randy's arrival that Raj has mentioned. He is incredibly capable in ag in general but had a personal interest in cannabis beginning several years ago. So I was surprised and thrilled to learn that he's quite steeped in the space. And so his leadership is going to be really important in helping us to really define and understand the very question that you just asked. And I think I was pleased in my initial conversations with him, having -- following his arrival here and getting his own feel for the team, that we're really, really well equipped as it is, especially -- or certainly on the genomic side. And as I intimated in my prepared comments, I think there are adjacent opportunities, where our experience is going to be very, very relevant. I think whether it's qualification products coming into the supply chain or getting more directly involved in the production of cannabinoid oils, those would be areas that we would want to enhance our expertise a little more than what we have now. So we've got a pretty good beat on where we would find those folks. And I think, as I also indicated in my prepared comments, we have been in discussions with a number of partners who we think could really extend -- quickly extend our capabilities into those areas. So I feel really good about the team we have, the relationships that we're developing and growing. And so I really think, for us, low risk there in terms of execution, in terms of any skills that we don't have directly in-house.

And just to add to that, Ben, we hired field managers for the Hawaii operation to run our growth there. We've -- also looking at bringing in talent just at the research bench scale level to expand our overall capabilities. As far as the TILLING itself, we have a strong team in-house that developed our TILLING libraries and many other crops, and they're going to be involved in developing the libraries for cannabis or hemp as well. So I think on the talent side and in terms of technical capability, that we don't see that as a problem in terms of bringing on the right talent that we will need.

Our next question comes from Robert Smith from Center of Performance (sic) [Center for Performance].

Can you give me an idea as to the burn rate in the current quarter and your projected cash position at that time at the end of the quarter?

Sure, sure. Yes, we burned $4 million during the quarter. I would think that, that would be a good number to expect in this coming year. People have asked about, "[What] you got in the cannabis? What's -- How's that going to impact your burn?" I think it's maybe no more than a 10% uptick in our burn as is. So yes, it will add a few folks and capabilities, but it's not something that's going to materially change our cash runway.

And some of the intimation of some kind of a relationship developing in the hemp space? How close do you feel that might be?

Second quarter. I'd say by the next time we talk to you, we'll be talking about the results of those activities.

Ann what are you looking for in such a [collaboration]?

Well, that's what I look forward to telling you in Q2. It's the right question, and we're -- suffice it to say that the primary long-term value creation is clearly genomics. In the near term, there's a lot of additional help that is needed in this space that I think we could materially impact. And so we have to be opportunistic as the company that we are. And I think we can stay the course on bringing the best genetics, while at the same time, branching out a little bit and helping in other areas as well.

And I assume you'll be cognizant of the possible financial support as well?

Oh, yes. Right. No, there's -- a number of these players are of the size that they can become strategic financial partners as well.

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

Okay. If there's no other questions, we just want to thank everyone for joining the call and your continued interest in Arcadia and your support. We look forward to speaking with you again during our second quarter 2019 conference call. Thank you all.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect, and have a wonderful day.