Arcadia Biosciences, Inc. (RKDA) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Arcadia Biosciences Q1 2016 Financial Results and Business Highlights Conference Call. [Operator Instructions] I’d now like to turn the conference over to your host, Steve Brandwein, Interim Chief Financial Officer. You may begin.

Thank you very much. Good afternoon, everyone, and welcome to Arcadia Biosciences first quarter earnings conference call. I’m joined this afternoon by Roger Salameh, our Interim President and CEO. We are going to cover two areas in today’s call. First, I’ll review first quarter financial results, and then Roger will provide an update on the business. We, of course, will conclude the call with your questions. This call is being webcast and you can refer to our press release and slides at www.arcadiabio.com. Before we start, if I could ask you to refer to slide 2, I’ll remind you that we’ll 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 our safe harbor language in both our most recently filed 10-Q and again on slide 2 of the presentation. So let’s turn then to our financial results, a summary of which is provided on slide 3. Overall, our 2016 first quarter performance reflects solid progress when compared to the same period last year. Our net loss for the first quarter was $5.2 million compared to a loss for the same period last year of $5.8 million, an improvement of $600,000 or 11%. Net loss attributable to common stakeholders improved by $2.5 million, as last year included certain expenses associated with preferred shares that were redeemed with our IPO in May and warrants reissued when we reincorporated the company prior to the IPO. Net loss per share attributable to common stockholders improved to a loss of $0.12 compared to a loss of $3.71 in quarter one of 2015. Of course, 2015 results were prior to our recapitalization of the company in conjunction with the IPO. So, let’s go a bit more detail on the financials, and on slide 4 we have a breakdown of our revenue categories. Total revenues were up by 5% for the first quarter. Our product sales more than doubled for the quarter compared to last year as SONOVA GLA revenue saw a nice bump from increased demand in the nutritional supplement market. As we mentioned in the past, GLA sales can be somewhat irregular as customer orders are not consistent from quarter to quarter. However, the first quarter showed promising results and as we continue to execute against the base business with existing customers, we’re also pursuing large volume market opportunities that will support significant and sustained growth. License revenue is consistent with last year and represents recognition of deferred revenue from upfront fees that we received when license transactions were executed. Contract research and government grant revenue, however, is down for the quarter from last year by $131,000. Now, as we discussed in our last call, we had government grants that were successfully completed last year and others in which we reduced the scope of activities. Together, this impacted our revenue on a comparative basis. However, additional government grant activity is in process, and we expect to see positive impact from that later this year. On slide 5, you’ll see details for our expense categories. Total operating expenses were up 28% for the quarter compared to the same period last year. Now, the increase in cost of product revenues of $91,000 is actually good news as this was the result of higher SONOVA GLA product sales. Research and development expenses were up for the quarter by $370,000 or 20% from last year as we’ve expanded our efforts in corn trait development. In addition, field trial activity increased and this is heavily associated with an aggressive push on our most promising trait crop combinations. SG&A expenses are higher compared to the same period last year by $798,000 or 30%. The majority of this is related to a one-time expense associated with the departure of our CEO and the remainder is associated with costs of being a public company as in quarter one 2015 was prior to our IPO. Now, while not called out specifically on this slide, I would like to point out that interest expense for the quarter was down by $140,000 as a result of our consolidation and refinancing of debt at much more favorable terms at the end of 2015. We will continue to see a benefit in this area in future quarters as we do comparisons to last year and overall interest savings for the year will exceed $1 million. At the end of the first quarter of this year, we had cash on hand and liquid investments totaling $65.1 million. From a cash burn perspective, I will reiterate that we continue to manage our operating expenses tightly and our ongoing level of expense provides the needed investment in our pipeline and product development and does take into account the additional costs associated with being a public company. So with that, I’ll turn the call over to Roger to elaborate on business progress for the quarter.

Thank you, Steve, and thanks to everyone who’s joining on the call today. Let me begin by providing an update on the status of our senior leadership transition. As you may have seen in the press release issued earlier today, we announced that Raj Ketkar will join the company as President and CEO later this month. Raj has spent more than 30 years of his career in a variety of business operations and strategy roles for Monsanto and has demonstrated success in agricultural trait commercialization around the globe. Most notably, as Managing Director of Mahyco-Monsanto Biotech in India, Raj led the launch of Bt cotton, the country’s first and most successful agricultural biotechnology trait. I will be taking on a new role with Arcadia as Chief Operating Officer reporting to Raj, and with a new CEO in place, we can now turn to getting the permanent CFO search back underway. Speaking for myself and the rest of the management team, we’re extremely excited to welcome Raj to the company. We believe he will be instrumental in helping us grow the business to generate significant value for our customers and our shareholders. So with that, let me turn to some achievements of this past quarter starting with slide 6. We continued to make significant progress with our HB4 stress tolerant soybeans through our Verdeca joint venture. With the successful completion of the regulatory process in Argentina, we submitted for regulatory approval in Uruguay, and we are working on additional submissions in key soybean production and import countries, which I will cover in more detail shortly. We have further expanded our presence in the corn seed trait market. In March, we announced a new collaboration with Beck’s Hybrids, the largest family-owned retail corn seed company in the US, to develop and commercialize traits to enhance corn yield and farmer profitability. At our last update, we announced on the corn collaboration with Dow AgroSciences and the Beck’s agreement continues to build on our investment in corn, giving us access to Beck’s leadership position in key segments of the corn belt. We also reached an important technical milestone with our Salinity Tolerance trait in Q1. In two years of field trials, rice varieties with our Salinity Tolerance trait showed double digit yield increases with no loss of yield under normal conditions. At the same time, our partner Mahyco is advancing lead rice lines in their trait introgression program. With that brief summary, I’d like to turn your attention to slide 7. Some of you are familiar with this diagram, which is a high level view of our business strategy, and how Arcadia plays a catalytic role between basic research and the commercialization of traits. While the strategy continues to underpin who we are as a company, we find that at this stage of our life the real opportunity is weighted to the right side of the target’s face, represented by the blue box. Essentially what that means is that we are now in a position to capitalize on the investments we’ve made over the last decade to begin to deliver on the most advanced and promising products in our pipeline. To do so successfully, we need a different framework for applying the company’s resources against those opportunities. To meet this challenge, we initiated a process in Q4 2015 to expand some projects in our pipeline and to discontinue others. As part of that process, we also realigned some functions within the company and eliminated several positions. These changes will allow us to invest more heavily in activities that drive mid-term revenue growth and to accelerate our product commercialization efforts. As we focus our pipeline against the most important food and feed crops in the world, corn, rice, soybeans and wheat, we believe that the resulting products will deliver significant value to our partners and their customers. So let’s take a look at each one of those major crops and how Arcadia is addressing opportunities within that. Starting with slide 8, our corn strategy is an excellent example of the business model that work. In less than six months, we entered into two strategic relationships with leading corn seed and trait partners, each of whom brings a unique set of capabilities and assets. Dow AgroSciences brings a diverse portfolio of crop protection traits and world class regulatory capabilities and Beck’s brings a sharp focus on the US corn market and a strong desire to develop traits with Arcadia. This approach has delivered two yield traits that are already in phase two of development, with additional candidates further back in the pipeline. This now puts us at least five years ahead of where would otherwise be had we decided to start a corn research program from scratch. With slide 9, I would like to talk about what we’re doing in rice. With our Nitrogen Use Efficiency trait, we are field testing multiple rice lines that have shown yield increases between 20% and 30%. These remarkable results have been replicated in multiple rice types and environments over four years. These are the kinds of numbers that can transform rice production and fundamentally change the lives of millions of farmers and their families. Introgression [into lead lines] is already underway in two rice types that account for more than 80% of rice grown worldwide. Nitrogen Use Efficiency, Salinity Tolerance, Water Use Efficiency are traits that anchor a rice platform that we believe will give growers the most competitive yield stacks in our industry. With slide 10, I would like to turn your attention to HB4 stress tolerance soybeans. As we know, soybeans have the highest trait adoption rates in the industry, with more than 80% of global soybean production using traits to control weeds and insects. And now, working with our Bioceres and Verdeca joint venture partners and our breeding partners, we intend to address the other side of that equation by tackling yield losses attributable to abiotic stresses. Our HB4 stress tolerance soybean trait is already licensed by companies representing more than 35% of South American seed sales and our plan is to marry their introgression work together with the regulatory approvals to achieve what I believe could be one of the fastest product launches for a trait in a major crop. With the Argentina regulatory approval complete and a pending submission in Uruguay, we’re now turning our attention to the largest soybean production and importing countries, next up, our regulatory submissions in the US, Brazil, China and Europe. Between the regulatory submissions and breeding efforts, we believe we have all the pieces in place for a rapid commercial launch. Equally as important, in order for us to support a successful launch for HB4 soybeans in key countries like Argentina and Brazil, we have created the right incentives for our partners to support value capture in these markets. Turning now to slide 11 and to wheat, about eight years ago, we made the decision as a company to invest in wheat trait development at a time when frankly many of our peers were scaling back their commitments in that crop. Fundamentally, our belief then and now is that wheat is largely underserved by technology providers and that we have an opportunity to be a market leader in wheat. NUE wheat, a product demonstrating more than 10% yield increase in multiple field trials over several years, will lead the charge in generating the kind of value that wheat growers need to remain competitive with other crop options. Staying with wheat for a moment, I’d like to turn your attention to slide 12 and our resistant starch wheat, which is the result of our non-GM tilling platform. With this product, we are more than doubling the amount of dietary fiber in whole grain flour. This technical breakthrough enhanced as a nutritional quality of wheat and has the potential to address the growing challenges of diabetes and obesity in a very material way as wheat is found in tens of thousands of food products around the world. This product is now in phase four of development and we are working with our commercial partners to increase production of RS wheat to meet their formulation and launch plans. I parallel, we are working with breeding partners to make the trait available in major wheat types in key markets. These efforts will allow us to introduce the first significant breakthrough in wheat nutrition in decades. Earlier on our call, we discussed the Arcadia business strategy and how it enables innovation through collaboration. That strategy is beginning to yield significant benefits. We are now at a major inflection point as a company as we focus on taking our most promising leads into the pre-commercial phase of development. If you turn to slide 13, you can see how this collaborative framework is propelling our products forward in the four major global crops. Our long-term investments in rice and wheat are beginning to pay off as we advance traits to bring value to our partners and their customers in two most important food crops in the world. In less than six months, we’ve advanced yield and stress traits in corn in multiple location trials with major industry partners. In less than four years, we have our stress tolerant soybeans in multiple regulatory submissions and breeding programs and headed towards commercialization. Prior to becoming a public company one year ago, Arcadia spent more than a decade building a world class portfolio of products. Now, our resources are being narrowly focused on the next stage of growth as a company. In other words, it’s time for us to round the corner and head for the tip. With that, I’d like to turn the call over to you for your questions.

[Operator Instructions] Our first question comes from Brett Wong with Piper Jaffray.

First, I just need to ask you, given the Verdeca partnership and activity you’re doing back in Argentina, can you speak to the recent government rulings around delivery systems there and the expected resolution in the rulings?

I think it’s an important one, it’s one that we’re certainly keeping an eye on, but before I address recent developments, let me just maybe take you back to the concept of how we organized Verdeca and why we did what we did with Bioceres. I think that there’s tremendous value in Bioceres being an Argentine company and a company that’s owned by 300 of the biggest soybean farmers in South America. I think that brings leverage and brings frankly a shared interest for us, for Bioceres, and for those growers. Similarly, how we’ve structured our relationships with our breeding partners and these are the Don Marios and the TMDs of the world is to give them a shared financial interest in terms of developing, being able to capture the value that we create for the grower in Argentina, Brazil, and elsewhere in South America. I think structurally how we’ve done those plays in our favor. So that’s the Arcadia side of the transaction. You know what I’m about to say next is just my personal opinion and probably built upon a couple of conversations. I think there’s a fair bit of arm wrestling right now between someone like Monsanto, who has a very successful product, and growers around not necessarily value-sharing overall, but frankly around the level of what that value share is and at what stage of the crop season that comes or doesn’t come. I think and partly I hope that some of that gets resolved by the time that our products get to market. It’s certainly an important situation, and it’s certainly something we’re keeping an eye on, but I think that it will reach some resolution which I believe will be favorable for a technology company like Arcadia by the time our products get there.

So basically you’re of the opinion that there will be a resolution that supports payment, a royalty payment for technology versus not.

I believe that. I believe that very firmly, Brett. And I think there’s a bit of arm wrestling right now around the scope of that payment, maybe the timing of when that payment gets made. And as best as I can tell, growers want more optionality around when those payments are made and I think an agreement will be reached.

Then maybe you can provide a little more color on this new partnership with Beck’s. It’s definitely an interesting one and any more help you can do to shine some light on the partnership is great.

I mean as you may well know, Beck’s is one of the most respected names in the corn seed business in the United States, and we’ve had a long-going discussion to get to an agreement that I think really epidermises the way we want to approach things as a company, and frankly I think the way Beck’s wanted to approach things as a company, which is Arcadia has probably one of the best pipelines for yield and stress tolerance in the industry and has expertise around regulatory approvals in the US and elsewhere, certainly very heavily in the US. And that Beck’s could leverage that expertise while, honestly, what we could do is leverage their product development, infrastructure, marketing, and commercial sales infrastructure, and co-share to be defined specific set of projects, and then co-sharing the value that those products create with US growers. It’s I think a really nice example of how too nimble and small companies can get to agreement on something fairly quickly and create a win-win for both companies.

And on that same line, just talking a bit more about Beck’s and Dow and how those partnerships kind of work together or are there exclusive rights for each one of them kind of discuss that ...?

Sure. I probably should have guessed that question from the first question. The way it’s structured and we don’t really talk about this, but it’s important to understand, things that we develop with Dow, we can develop with Dow either exclusively and this goes both ways, for Dow and for Arcadia, either exclusively or non-exclusively. The same goes for Beck’s. And each of those, if you think – I think about it from a purely Arcadia perspective, it gives Arcadia optionality around multiple work streams that frankly have their own disadvantages – advantages and disadvantages. For Arcadia, it gives us functionality – it gives us optionality on how we manage some of our trait development. I think for Beck’s, particularly for Beck’s, it gives them access to a pipeline that can be made either exclusive or non-exclusive. There’s no specific governance around exclusivity, same thing for Dow. But honestly and I think this comes as no surprise, they bring different things. Beck’s has a really fascinating intense focus on key states in the corn-belt. Dow has a much more global view. Dow brings a crop protection package, I think, that we could marry up with the yield and stress traits that we’re bringing along. So really each party brings something different. We’re delighted to be in partnership with both companies. We think there’s something positive in each of those and we hope over the next few years we can return the same sort of value to them as we believe they will bring to us.

One just one last one for me, I know I’ve been on here too long already. But can you just talk to your expected test usage in 2016 as now you’re a quarter through or a bit more than that, do you expect a similar burn rate to last year or are there additional opportunities that you see this year that will require additional expense?

I think Steve do you want to...

I think and I’ve talked to this before that we’re sort of at the point now where our sort of overhead structure is what it is, what we expect it to be. And I’m not expecting there is going to be any material increase at all in our spend. So I think you can look at what our overhead structure is and sort of anticipate that we’re sort of where we need to be. There’s going to be the occasional one-off from time to time as there was in the first quarter, but in broad terms we’re not anticipating any material change.

Our next question comes from the line of Chris Parkinson of Credit Suisse.

This is actually Graham Wells on for Chris. First off, congrats on the solid Q. Just a couple of questions for you guys. You kind of started off in the Q&A talking about the whole issue of value capture in Latin America. But I’m interested on the same theme, but in India given issues we’ve seen there over GM traits and then also given the choice of CEO, whether you have any opinions or any color you can give on kind of what your outlook is there for value capture for your traits.

It’s a multi-layered question. Let me just start with the choice of CEO. I think for us and for the Board, for the management team and for the Board, having Raj join the company [I consider had a great coup]. This is someone who has experience in terms of commercial launch and value capture, not only in what has traditionally been sort of easy places to do so, say North America for example, but in more challenging environments like for example India where Raj and the Monsanto Mahyco team had to basically develop very novel value capture strategies from the ground up. So I think it is a great coup for Arcadia to have Raj on board. Super excited about that and ready to learn and execute every day. I think value capture has different flavors in different environments and frankly for different crops. The way we have tackled it at Acadia traditionally is to create an incentive for our breeding partner to participate in the value capture mechanism. In some instances with other trait providers basically there was no value capture for the seed partner; they captured value on having that trait coupled with their lead germplasma and they captured value on the germplasma premium. For us at Arcadia, we’re basically incenting our partners and that’s a model we’ve approached so far. We think it’s as robust enough and flexible enough to apply in different places. We think that that model works. But just stepping away from value capture has a financial construct; I think it all really at the end of the day for me starts with products. If you have products that are delivering real value on the ground and doing it in multiple environments year after year, folks in the distribution chain and the value chain will be incented to be your partner. And what I mean, I mean all the way from the grower, all the way back out to the consolidator at the bin. Everyone would want to participate in a value that’s created. There are some dynamics, some specifics for us to work through over how much value gets distributed in that value chain. But honestly, Graham, I think for me it all starts with making home run products and that’s what we’re focused on. And when we bring those to market, we’ll figure out a way, we’ll create a big enough pod to figure out a way to share value with folks who contribute to our success.

And then coming to the segueing from the idea of kind of creating a product that will deliver value consistently across different types of environments, given the very dry conditions we’ve seen in Southeast Asia, I was wondering if you could kind of provide some commentary on field trials that you have for some of your products out there, particularly anything on Water Use Efficiency or Nitrogen Use Efficiency in the context of the drought and if there’s anything to report there.

I’m not sure I have anything to report now with respect to 2016. But let me just take you back to the rice, NUE rice trials that we’ve done. So we’ve done those trials now in four years, in four – in two different – actually in two different geographies, in South America and in Africa, in two different rice types, in two different rice type environment. There is paddy rice and upland rice. This is why I’m really excited about NUE rice, because we literally put these rice plants in every conceivable environment over four years and multiple locations and the data remain remarkably consistent. This is the most consistent yield data I’ve ever seen in my 20 plus years in the industry. I think the consistency of that phenotype is going to be important for our customers and our customers’ customers, because it will define the value that we will be able to create and it all starts with creating value. If we create it, then we will find a way to capture. I should say part of the reason I say we don’t have data on 2016 is because those trials have not been implemented in Asia yet, planting season is upon us now. So we’ll know more about that with respect to these, for example, NUE or salt tolerant rice later in the year.

And if I can just sneak one last question and this one is kind of more stepping back and thinking about the Arcadia story. And as you kind of reflected over the last year and look ahead in terms of the partnerships you guys have been able to sign, where do you feel you are as opposed relative to what your initial objectives were? Do you think that you’re ahead of schedule or behind schedule? And as you think about partnerships moving forward, is it kind of just more of the same in terms of your strategy on that front or are there any new things that you’ve learned so far that you’d apply going forward?

It’s an excellent question, it’s part of what the exercise that we started late last year really was about. I think I don’t want to oversimplify this next statement. I think what’s really exciting for the company right now is we have multiple products that are in advance stage of development, any one of which frankly can take us to profitability. And the evolution that we started late last year and completed early this year is about migrating us from pipeline development, if you will to more product development and pre-commercialization. I think that if I have to characterize the kinds of relationships that we’ll continue to build on a go forward basis, more of those would be about commercial development and breeding type relationships that can help us accelerate product commercialization versus ones that are about basic research and pipeline development. Generally speaking, I think that’s the flavor that I could sort of put on this.

There are no further questions in the queue. I would now like to turn the call back over to Roger Salameh for closing remarks.