Good afternoon, and welcome to the Arcadia Biosciences Third Quarter 2019 Earnings Conference Call. Today's presenters will be Matt Plavan, President and CEO; Sarah Reiter, Chief Commercial Officer; and Pam Haley, 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 filed 10-K and again on Slide 2 of this presentation. With that, I'll now turn the call over to Matt Plavan, President and CEO.

Thank you, Margeline, and thanks to everyone who is joining us on the call. We are pleased to report Arcadia achieved important progress during the third quarter in both product commercialization and our research and development programs in each of our 3 strategic crop categories: hemp, wheat and soy. I'll spend just a few minutes covering the highlights, and then we'll segue to provide our investors better visibility into the channels we are developing to scale new revenues in 2020 and 2021. In terms of our hemp research progress during the quarter, we established a third research facility. This one in Imperial Valley, California, and tripled our acreage in Hawaii during the quarter to a total of 30 acres. Recently, we also partnered with an Oregon breeder to conduct field research in that key hemp territory. With research operations now in 3 distinct geographies, we are well equipped to test varieties and advance our breeding activities under multiple climate conditions with improved access to more germplasm. With that, our R&D team achieved key milestones in technology demonstration during the quarter, having produced our first unique variety and executed a number of varietal crosses to generate new performance characteristics and identify valuable attributes. We also added new personnel to bolster our genomics capabilities and further accelerated the throughput of our trait development engine. Commercially, we secured a global distribution arrangement with our Arista Cereal Technologies and Bay State Milling for our high-fiber, GoodWheat bread wheat and had a blockbuster reception of both our high-fiber and reduced gluten GoodWheat varieties at the western hemisphere's most comprehensive baking event, the 2019 International Baking Industry Expo in Las Vegas. And importantly, too, we received USDA approval of our HB4 soybean opening another sales territory for our unique drought and herbicide tolerant stacked soybean trait.…

Thanks, Matt, and thanks to those of you listening in for your time. I'm going to provide a peek into our recent commercial activities and our expectations. Matt talked to you a few minutes ago about the progress we've made since the formation of Arcadia Specialty Genomics in February this year, highlighting the 3 operational locations, California, Hawaii and Oregon, where we now research and produce hemp or hemp seed. In order to move as quickly as we can in this evolving market, we are now dual-purposing our hemp sites for both research and production. I'm going to focus on the near-term commercial implications of the progress we've seen and the impressive work our team of scientists and breeders have done in stabilizing the crop. But first, I want to remind those of you joining us here today why we see hemp as such an exciting opportunity. Hemp is experiencing explosive growth with even broader expansion expected now that the USDA has issued its preliminary rules, in line with the 2018 Farm Bill. Those rules and the downstream rules of the state will be enacted in the first half of 2020. If you'll refer to Slide 5, entitled hemp market expansion, you'll see that the industry has seen significant growth in the number of planted acres of hemp in recent years, and we anticipate this growth will continue in 2020 and beyond. We see many drivers creating upside momentum on the number of hemp acres. States will be enacting their local rules for hemp production. Our analysis indicates that for most states, this means hemp production will be enabled. In many states, farmers will likely give hemp a chance at least on small acres, driven by agronomic curiosity or by relatively low prices on some of their other crops. As…

Thank you, Sarah. I'm pleased to be speaking with you today as CFO of Arcadia, after having served in the Controller role here for a number of years. I'm grateful for the opportunity to advance within the company and look forward to working with the team to deliver on our revenue and profitability targets. Getting to the financials on Slide 7. As Matt indicated, revenues from our legacy R&D business model continued its wind-down, and our expectations for initial sales of our wheat and hemp products in the fourth quarter remain on track. As we continue to invest in the added resources and expertise necessary to support a commercial company, our total operating expenses increased by $2.1 million in the third quarter of 2019 compared to the third quarter of 2018 and by $2.6 million for the 9 months ended September 2019 when compared to the same period in 2018. It's important to note that included in the year-over-year increases is the onetime noncash stock compensation expense of $662,000 recognized for the modification of our former CEO stock options in connection with his separation as well as the accelerated vesting of a consultant's performance warrants. Total R&D expense was $597,000 higher for the quarter as compared to the same quarter in 2018 and $863,000 higher year-to-date. The increase was primarily driven by additional soybean precommercial activities, higher employee-related expenses with the expansion of our research team and additional external hemp-related costs. Total SG&A expense was $1.5 million more in the third quarter of 2019 than third quarter of 2018 and $1.9 million more year-to-date. Accounting for a sizable portion of this increase is the onetime non-cash stock compensation expense I just mentioned in addition to higher employee expenses, additional consulting fees and increased public relations and marketing activities. These increases…

Thanks, Pam. In closing, we are energized by the progress we achieved this quarter and how well positioned we are to achieve our growth and profit goals in 2020 and 2021. We hope we’ve provided improved visibility into our execution plans and increased your confidence that we are on track to deliver results. Ultimately, we know that it is results, not plans and good intentions that create true and lasting value. With that, I’ll turn the call over to the operator for your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Ram Selvaraju of H.C. Wainwright. Your line is open.

This is [indiscernible] in for Ram. Thanks for taking my question. So the first one, how do you see Arcadia’s exposure to multiple downstream elements of the flour and bread supply chains evolving over time? Should we think about high-fiber bread wheat business solely in terms of acreage? Or will there be additional metrics taking precedence in the future?

So let me make sure I understand your question. You’re asking, when we talk about this our wheat business in the future, will we be talking will be using metrics such as acreage? Or will we be talking about pounds of flours. Is that your question?

Yeah.

Well, I think we’ll want to share both. I think we’re going to sell we’re certainly going to keep you apprised of the acreage and the growth in our acreage as we expand the wheat business. But there are a number of executions that we see being able to sell our GoodWheat. Some will be flour. Some will be grain. And it really it just kind of depends on the partner we’re working through, but we’ll endeavor to find those metrics and report them out as we grow. But certainly, it will include acreage and likely the bushels, if it’s grain. So those will likely be the captures for reporting out on our growth. And of course, the revenue.

Yeah. Next one, what is the significance of the autoflowering hemp varietal? And how challenging is it to affect year-around growth cycles without such varietal?

Well, the autoflowering, for those who may not know what that is, it’s a variety of hemp that is able to grow and mature to harvest, independent of the amount of light in a given day, it gets. If you don’t have an autoflowing varietal then you want to be growing in areas to optimize the yield of the hemp, you want to be growing in areas where there’s an equal amount of light and dark over a given day. So it stands to reason that without autoflowering varieties, you want to be closer to the equator for optimal growing. So if you’re not, and you want to grow hemp, autoflowering is an important attribute to have.

Okay. Just following, yes. One more.

I was just going to ask Sarah to see if she would add anything to that.

I was just going to add, actually, that yield is impacted by a number of characteristics and effects, autoflowering and the day length is one of them. But we are actively pursuing several others, which include increasing the percentage of the desired essential oil. It could include the architecture of the plant so that you have more plant per acre and mechanical harvesting, for example. And you could even be thinking about short stature or shortened season, so that you can accommodate more plantings in a given year. So there are a lot of shots on goal. Autoflowering is obviously one of them that we are pursuing, and we'll have autoflowering varieties in our catalog. But we will also have other varieties that are destined to show impressive yield gains for other reasons.

Okay. Following up with the autoflowering, is autoflowering also applicable in the cannabis space?

Is it, I'm sorry, I didn't catch the question. Can you say it again?

Is auto flowering also applicable in the cannabis space?

I believe so. We're focused pretty heavily on hemp right now. But I would say that since it's the same plant, the cannabis plant, I would say that whether it's Marijuana or hemp that it would be beneficial.

Okay. And the last one, what is Archipelago hot crop incidence currently? And how could it theoretically be reduced to a negligible level?

Well, we haven't disclosed that specifically. I think we've just been, we have shared that we've fared better than most when it comes to the harvest that we've had in Hawaii, and that's, I think, attributable to how closely we've watched and how much we've learned over the half, probably the dozen varieties that we've planted. The best way to knock out this problem is to bring forth a no-THC variety of hemp. And certainly by combining good agronomics and making sure that you're starting with good seeds, you're going to improve your chances of mitigating the potential for growing hot and certainly, all of those things we're focused on.

Your next question comes from the line of Ben Klieve from National Securities.

First, I have a couple on the cannabis front. Sarah, you talked about your existing acreage being kind of dual-purpose for R&D and production purposes. I think I guess I have a couple of questions here. As you look out over the next year, I mean, do you have kind of a rough target for R&D acreage? Or do you think, do you think, are you pretty comfortable with where you stand right now?

Thanks, Ben. My sense is that we're positioned really well right now in 3 very different latitudes, 3 very different climate zones, and 3 very different days, day length, geographies. So we feel like we have really good coverage that would enable us to develop varieties that can address most of the major producing areas of the world, whether you're talking about South Africa or Zimbabwe, we can emulate that very easily, whether you're talking about Europe and the United States. We have really good coverage there. So basically, we have kind of a Pacific Northwest zone, we have a desert zone, and we have a...

A tropical.

Tropical or hotter-temperature zone. It gives us a really broad ability to design solutions for both -- or for all three environments. If we see an opportunity, obviously, to expand our capabilities through another location, we'll pursue it aggressively.

Got it. Okay. And also with regards to acreage, is there a way to kind of quantify on a percentage basis or overall acreage basis the land that you have dedicated purely to R&D, purely to production or a combination of the two?

I would say that any meaningful expansion from here forward is going to be for the production of CBD hemp. I think that’s the plan at this point.

Got it. Perfect. And then on the, in the market overall, as have you seen as commoditization has kind of become a variable that seed prices have held up where they were a few months ago? Or have you seen seed prices kind of begin to soften a little bit over the last quarter or two?

We actually have not seen seed prices soften, which, honestly, was a little surprising. This past year, growers held permits for about 530,000 acres, only about 230,000 of those acres actually got planted for a variety of reasons, but one of the reasons being seed supply. And of that 230,000 acres, people are estimating maybe 100,000 got harvested. So there’s obviously a huge potential in 2020 for that intended acreage or that actual planted acreage to go up substantially. So we don’t see that price falling dramatically. We still see very strong prices on both the seed and the clone start environment. And we’re pricing appropriately right now as we're heading out into the market.

Got it. Perfect. On the wheat side, the first congratulations on your on the progress on the resistant starch, starch wheat that you noted in the last couple of days. I guess, when you look out into next year, do you have kind of either a rough kind of target for acreage? And then also, have you -- can you share any progress that you have with contracted acreage in advance of any planting next year?

Not sure I can say much beyond every one of the growers that we had this year, will be a grower again next year. We will expand acreage with every one of them. We have gosh, not that much I can say about it at the moment. I would say that we have a number of food and food service announcements that we’re anticipating. And as soon as we can announce, we’ll do so.

Got it. Okay, perfect. Thank you. And one other one on wheat, on the gluten variety, excuse me, the low gluten variety. Can you kind of update us on kind of the expected commercialization there? Is that potentially coming into play later next year? Or is it beyond that? And then what still needs to be done on that front in advance of commercialization in terms of securing farmers for contracted acreage, partners within the supply chain for processing or partners for the eventual commercialization? What all needs to occur before you can actually commercialize?

So the reduced gluten product is actually very close to the market. We're excited that we expect to have a position maybe even before the end of the year. And we are actively bulking seeds. We're actually in the process of bulking seeds now. We grew it last year, we'll grow it next year. We are without a specific milling partner in that space right now. But we have a number of food and food service partners that are evaluating the technology. So it's, it's really interesting, Ben. It took us a long time to get the first GoodWheat variety. As I was talking about, it's a 2 to 3-year cycle. The RG is coming along a little faster probably because we already have some of those relationships in place.

Got you. Congratulations on that speed. I guess, last question for me, just kind of big picture for whoever wants it here. You're sitting on $30 million in cash, you have visibility of revenue ramping. How can we look at the kind of the model, say, between now and, and your estimated breakeven in mid-2021. In terms of R&D spend and CapEx, can we use this quarter as a reasonable benchmark? Or you're going to be investing more heavily on those line items or on the SG&A front here over the next few quarters?

We look at this past quarter and when we take out what are the, what we would say, nonrecurring or unusual charges. We'd probably say it's around $5 million a quarter right now. That's a $20 million run rate. And over the next 2 years, we were talking about this earlier. Between 5% and 10% is probably what operating expenses will grow at. And it will be in R&D and commercialization assets. Those are really the 2 areas that we're investing, but when you look at the trajectory of revenue, it's, operating expenses are going to remain, they're not going to change a lot by comparison. But certainly, they will increase as we're executing. But we don't, we see a lot of leverage in our overall operating infrastructure to bring in pretty substantial revenue increases.

Your next question comes from the line of Brian Marckx from Zacks Investment.

Congrats on the, all the progress. Just kind of, just curious as to the USDA interim final rule relative to hemp cultivation. And was that something that the growers wanted to see? The issuance of that before they could get too excited about potentially being customers? Or was that already anticipated? And it was more of a -- it was just more of a symbolic thing in that context?

So the rules come as mandated by Congress 2018 Farm Bill. And we’ve all been anticipating them. The reason that it’s important that they came out is that it enables the states that didn’t already have a 2014 Farm Bill pilot program running to now stand up the rules under which they’ll operate in the post 2018 era. So under the 2014 Farm Bill, States were enabled, some states were unable to build pilot programs in hemp. And each year, more did. So there’s now, I think, what, 34 states that operate pilot programs. The 2018 Farm Bill actually legalized nationally and requires each of the states to make rules. They can make a rule that says, we’re not going to grow hemp or they’re going to make a rule that says, this is how our growers are going to grow hemp. And so it’s important because it now creates a national clarity, a process by which all the states can issue their own rules, and it will, sometime over the 2020 season, retire the pilot programs. So we think, for example, in our case, in Hawaii, where the pilot program limits the numbers of acres that you can participate on, we think that acreage limitation will also retire. So it’s exciting for a number of reasons for anybody who’s participating as a farmer. It’s exciting for us as seed and traits and attribute growers. It’s also exciting for us as CBD processors and extractors because there’s going to be many more farmers and many more acres for us to access.

Okay. Okay, great. And one more just related to that. I gather that the states how the states specifically regulate this is not a big, it’s not a big question mark, I guess, for the growers, particularly in the states that you’re already in. But just for clarity, if you can address that whether it is or it isn’t? What I’m getting at is are the growers waiting for the state’s rule to come out before they do anything?

In some places, they are. Obviously, you can’t -- if your state doesn’t have rules, then you’re not in a position to grow this crop. So a really good example is the state of Louisiana, whose Governor said, as soon as USDA makes its rules, we anticipate 80,000 acres of hemp will become available to us. That’s because they didn't want to get out in front of the USDA’s rules, so they held off issuing state rules until USDA issued theirs. So you’re going to see a lot of states who’ve been holding off issue their rules in the first quarter of 2020, which is super exciting for us. You already have a number of states who have growers. And as I said to Ben, there was 0.5 million acres permitted last year. So this -- the rules that the states issue can't be different than the rules that the USDA issued. So they can have minor nuances, but they can’t abandon the pattern that the USDA has set, which does require you still to have a permit, so they know who’s growing and does require you not to grow Marijuana. So you’d have to stay under 0.3% THC. It has testing requirements, has a number of different rules and elements that the states must also include in their rules. So it's not different for those of us who've been working in the pilot phase. It feels very, very familiar. But I think it does provide a lot of clarity for folks who had wondered how to go into this space. Farmers can now apply for crop insurance, for example, for this crop. The USDA will be able to stand up programs to, and EPA for that matter, can stand up programs so that we can use registered pesticides in this crop. There's a lot of things that are enabled once this becomes a federal crop, and that's basically what happens when these rules come in effect.

I think just lastly, the primary purpose of the state programs or state rules will be to demonstrate to the Feds how the program in their state is going to comply with the federal requirements. That's the main thing they want to know is if you're going to go ahead and allow hemp to be growing-en legally that you demonstrate how those who are growing it are going to maintain compliance with those federal guidelines. So it should be pretty easy for states to turn their programs. USDA has 60 days to approve once submitted. So we hope it's, we hope the states move quickly to get their plans submitted and approved.

I am showing no further questions at this time. I would now like to turn the conference back to Matt. Matt?

Thank you, everyone, for joining the call and your continued interest and support. We work hard every day to bring consumers new and improved healthy food options while maintaining that single-minded focus, profitable growth. We look forward to reporting our key milestone achievements in the lab, in the field and in commercial markets as we progress towards accomplishing these goals. Thank you very much for listening in.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.