Calyxt, Inc.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good day and welcome to the Calyxt First Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Simon Harnest, Vice President of Corporate Strategy and Finance. Please go ahead, sir.

[Simon Harnest:]

Thank you, and welcome everyone to Calyxt first quarter 2018 financial results conference call. Joining me on the call today with prepared remarks are Federico Tripodi, our Chief Executive Officer; Manoj Sahoo, our Chief Commercial Officer; and Bryan Corkal, our Chief Financial Officer. Yesterday evening, Calyxt issued a press release reporting our financial results for the three months ended March 31, 2018. This press release is available on our website at www.calyxt.com. As a reminder, we will make forward-looking statements regarding financial outlook in addition to regulatory and product development plans. These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. A description of these risks can be found in our most recent Form 10-K on file with the SEC. I would now like to turn the call over to Federico.

[Federico Tripodi:]

Thank you, Simon. Good morning, everybody and thanks for joining us today. Welcome to our first quarter investor call. We have a lot of good news to share today as we successfully continue to execute on our mission to build a better future, one, where consumers can trust healthier foods and ingredients are grown in a way that is better for the environment. We are excited, as you will see in our results that our farmer partners understand and share our vision. We imagine a world where food we love could help us prevent obesity and other diseases, and where food allergens are eliminated entirely. Our continued proven performance and results as a newly [mintly] public company gives us a very strong foundation for the path that lies ahead. At Calyxt, we believe it's our responsibility to apply our capabilities to make great tasting plant-based food ingredients that will give consumers peace of mind, they are good for you and the planet. By applying gene editing in total alignment with this purpose, we now have the power to mindfully remove the bad and dial up the good in our plant-based foods. A few unwanted DNA ladders out of billions are lost just like it happens in nature. This is like using a word processor to remove a specific word from one page of a book with millions of pages. And we have done this over and over again, and now we have many preparations underway to complete the launch of our first product, high-oleic soybeans. Since 2010, scientists at Calyxt have been thoughtfully applied this gene editing capabilities to tailor crops with the potential to deliver healthier fats, more fiber, reduce sugars, and less carcinogens; to require less fungicides in the environment and to reduce food waste. I would like to take a moment to give you some key metrics of our high-oleic soybean program that show the incredible progress we have made over the past few months, establishing a high quality grower network in preparation for the commercial launch of our high-oleic soybean product in late 2018. In the first quarter of 2018, we contracted more than 16,000 high-oleic soybean acres, with more than 75 farmers in the upper Midwest, beating our estimate of 12,000 to 15,000 acres and 50 farmers. As planting approaches we are confident we will have at least these many acres planted this spring. Over 90% of our existing farmers signed up to replant Calyxt high-oleic soybeans this year. Furthermore on average, existing farmers are more than doubling their Calyxt acres year-over-year. On top of this, we established our premium program in December and did not need to adjust our premiums throughout the season. We believe our premiums this year are competitive with local premiums for non-GMO soybeans from other suppliers and in some cases lower. Farmers are excited about the Calyxt story as a small innovative company and the prospects of having choices and be part of the gene editing movement. With that I will pass the call over to Manoj, our Chief Commercial Officer, who will give you more detail on our farmer network and customer progress. Manoj?

[Manoj Sahoo:]

Thank you, Federico. To give you a bit more background on our farmer network, our contracting farmers farm over 200,000 acres, with around half the acres devoted to soybeans this year. Approximately, 17% of the anticipated acres to be planted by these farmers consist of Calyxt high-oleic soybean variety. The average size of these farms we are working with is over 2,500 acres, which is much larger than average size of farms in the regions we operate. The U.S. average farm size is around 430, in Minnesota it's around 350, in South Dakota around 1,300 acres. Overall, we are careful in picking our farmers at this stage to select the most progressive growers. This positions us to expand the program in the upper Midwest region over the coming years. The success of farmers with the Calyxt models is also our success. Seed selection is among the most important decisions for us. In order to help farmers select the right fields this year we are testing soil samples for a disease called soybeans cyst nematode. We are very encouraged that from the testing we have completed so far around 97%percent of the fields have come back free of this disease, for the remaining 3% we encourage these farmers in our program to select a different field, or allow them to withdraw from the program. This has helped us build trust with farmers who are our partners through transparency and improves their experience because planting in [SPN] hot fields can impact yields significantly. This spring has been wet and cold, which is expected to delay planting dates. Even though we have started planting beans, we expect soybean planting to start in full force in mid-May and be completed by mid-June. In Q2, earnings call we would provide an update on the final number of acres which are planted. Farmers are indeed very excited to be part of the Calyxt program. Some of the top reasons we hear from farmers why they sign up for the Calyxt program include, one, they're proud to grow a crop which will be used to produce a healthier food ingredient; they're proud about domestically produced for local markets. Second, growing high-oleic soybeans offers them an opportunity to diversify their portfolio, all the while growing the same soybean crop. And lastly, the Calyxt program has attracted high quality and progressive growers who want to be early adopters of technology and be part of something which will be bigger in the future. Moving on to new high soybean varieties, we continue to make progress on bringing additional varieties online by doing contra season in South America. Approximately 800 of these lines will be planted in spring in the U.S. this year. We're on track to add two to four additional high-oleic varieties by 2020, 2021. This would allow us to expand regions in which Calyxt high-oleic soybeans can be grown as well as increasing share of Calyxt high-oleic variety in existing growers' portfolio. Moving onto food company progress, we continue to expand our engagement with food companies. In the last quarter, we added eight more potential customers, which is 66% more baking the total number of engagements to 20. The end use applications of these customers are evaluating our high-oleic soybean oil include frying such as chips and French fries, frying, frying meats both pulpy and healthy snacks, baking, not-butters and vegan meat products To provide some additional perspective on the size of the market opportunity, let's consider the case at our meat substitute market. Vegan meat substitute typically are made out of one-third veg protein such as soy, peas or wheat, one-third fats and oils and one-third texturizers to put everything together. According to industry estimates meat substitutes market in the U.S. only is estimated to be 4.63 billion in 2018 and is projected to rise to 6.43 billion by 2023. We estimate the volumes of fats and oils consumed in this category to be between £60 million to £80 million. This is a very high growth market growing at double digits year-on-year, with a segment of consumers preferring plant-based proteins to meat due to health concerns, as well as concerns about environmental sustainability and animal welfare. Another example is baking and frying oils, this segment constitutes approximately 18% of the total demand for fats and oils in the United States, which translates to approximately £7 billion annually. There are certain segments especially in baking, which are still using hydrogenated oils because of functionality issues. These partially hydrogenated oils, as we all know, will be banned by Food and Drug Administration FDA for human consumption in June of this year. We believe Calyxt high-oleic soybean can be a strong alternative. Another example is nut butter. Due to FDA regulations and brand positioning, a lot of nut butter products have had to switch to palm oil, which not only as a very high saturated fat content, but also raises concerns about environmental sustainability. The nut butter market is approximately 2.2 billion in U.S., 80% being peanuts and 20% being other nuts and continues to grow at a healthy pace. High-oleic soybean can be a viable substitute, which can potentially allow food companies to reduce the saturated fat content, a benefit from a labeling perspective, all the while using a domestically sourced ingredient versus imported products. The commercial team is engaged with food companies in each of these target market segments, who can be early adaptors in specific end-use application thus allowing Calyxt to grow in these segments in later years as we scale up the supply chain. With that I would like to turn the call over back to Federico.

[Federico Tripodi:]

Thank you, Manoj. I would like to provide some updates on our product pipeline from R&D, which continues to advance. During Q1, we received confirmation from USDA regarding the non-regulated status of our high fiber wheat product candidate. Calyxt now has seven product candidates that have been deemed non-regulated by the USDA across four crops including soybeans, wheat, potatoes and alfalfa. Last year, we developed our high fiber wheat and then made flour over the last few months. Data is starting to coming in with very positive results. Data on our flour from wheat grown in our greenhouses shows more than threefold increase in dietary fiber content when comparing Calyxt white flour versus commodity white flour. A single serving of Calyxt whole wheat flour may provide up to 100% of the daily recommended requirement. We believe this product has a tremendous potential to address certain food related health concerns from consumers. Some everyday foods made with our flour could be eligible to make labeling claims such as good source of fiber, high fiber may reduce the risk of some types of cancers, may reduce the risk of heart disease. This would include staples like bread, pasta and bakery. These are claims allowed by the FDA as per new guidance on fiber that was released on March 1, 2018. It is important to note that Calyxt high fiber wheat flour would provide a clean label option as it would be considered as an intrinsic fibers, thus allowing food companies to reduce their use of synthetic, non-digestible carbohydrates or NBCs. Over the coming months we anticipate that we will plant our high fiber wheat flour in the field, bulk up quantities for small scale milling and generate additional data on ingredient functionality. High fiber wheat maybe the next product to market with an anticipating commercialization as early as 2020, 2021. I am happy to confirm that we have developed and have been making progress with our first product candidate in alfalfa, our improved quality alfalfa. Through our development partnership with S&W Seeds we have been able to combine the best in class seed varieties with our gene editing capabilities. Alfalfa is one of the largest crops in the U.S. and the world. Alfalfa is utilized as a forage by livestock and provide specially high-protein content for dairy cows and beef cattle. The U.S. alfalfa hay market is estimated at 11.3 billion. Our partner, S&W Seeds, has an estimated 17% to 20% share of the world production and sourcing market. Hundreds of alfalfa plants have been grown in our greenhouses and we're now validating our product concept and preparing field plantings later this year. Changing gears a bit I will move to our intellectual property front. Calyxt has strong intellectual property in the field of gene editing. We have exclusive worldwide license agreements from selectives for the gene editing technologies in the field of food and agriculture excluding editing of animals. These patents cover TALEN, which is our preferred set of molecular scissors and also the cell repair processes used in combination with chimeric nuclease based scissors, which we believe include multiple gene editing technologies. This last set of patents has already been granted and has survived a challenge process. Calyxt also has an exclusive license agreement with the University of Minnesota for the use of CRISPR-Cas9 intellectual property. Dr. Dan Voytas at the University of Minnesota was the first to apply CRISPR-Cas9 technology in practice in plants. These patents are still going through the prosecution process. As we look forward to the rest of 2018, we anticipate we will continue to see progress and strength on the intellectual property portfolio of Calyxt, that Calyxt has developed and licensed over the last seven years. We have shown extreme discipline with our cash burn, while growing the company at an accelerated pace. I would like to turn the call over to Bryan Corkal, our CFO, who will walk you through our financials.

[Bryan Corkal:]

Thank you, Federico. I am pleased that we continue to track on plan and on budget. For the first quarter the cash burn for Calyxt was $6 million and tracking in line with our forecasted cash spent. The operating cash flow was $6.6 million in the quarter and the difference between the operating cash flow and the net cash flow was primarily cash inflows from stock option exercises. Our ending cash balance is a healthy $50.7 million. I'd like to spend some time going into more detail on how we break down our $6 million in cash burn. Our cash spend in the quarter can be characterized by three buckets. The first bucket of cash spend is to support the rich pipeline of products and build our industry leading portfolio of intellectual property. We spend on gene editing, plant transformation, plant development and regulatory activities all with the goal to make healthier food ingredients. We continue to make great strides in advancing the pipeline and in the quarter received our seventh Am I Regulated letter for high fiber wheat. A little over one third of the cash spent in the quarter was for growing the product pipeline and is a major investment in Calyxt future growth. The second bucket of cash used in the quarter was to prepare for the launch of our high-oleic soybeans. Our commercial team has successfully sold over 16,000 acres of high-oleic soybeans exceeding our goal. This is a huge stride forward for the commercialization of our first gene edited product. In the first three months of 2018, we spent about quarter of the $6 million cash in the quarter to support the high-oleic soybean launch. We spent on seed production and commercial activities including seed sales, agronomic support and promotional activities with the potential high-oleic soybean oil customers. The remainder of our cash is spent on general and administration for activities including IT systems, hiring talent, public company reporting and maintaining our intellectual property. The team has successfully managed the construction and furnishing of the state-of-the-art facility with its gene editing laboratory, a food demo kitchen, and offices. The new facility is near completion and under budget. It's hard to believe that in September, we broke ground on this facility and in a few short weeks we begin to move in. The new facility will be an inflection point in our development as it will accelerate our R&D productivity and showcase our capabilities produce healthier food ingredients. We look after to hosing, investors, suppliers and customers in this new facility. I am pleased that the team continues to execute this strategy with extreme financial discipline. In the first quarter, we had net operating loss of $4.4 million. Let me add a comment about non-cash stock option expenses. Some of the non-employee stock option awards are re-measured at the prevailing stock price. For the first quarter, the total non-cash stock option expense was a reduction of 62,000. Before handing it back over to Federico, let me share our forecast for cash burn for the remainder of 2018. Our strategy is to deliver on our key business milestones to continue building a rich pipeline of products and launch high-oleic soybeans. To accomplish these goals we continue to forecast cash burn of between $2 million and $2.2 million per month for 2018 excluding working capital for grain purchases. We anticipate spend marginally increasing throughout the year as we hire scientists operate in our new state-of-the-art facility and build out our commercial footprint. We anticipate we will incur capital expenditures for equipment and furnishings for the new facility and these have been factored into our full-year cash burn guidance. In addition, we are actively looking at in-licensing IP, additional regulatory activities, supplementing our knowledge of the food industry and understanding our customer needs. We expense our current cash position, to be sufficient to fund operation you’re significant portion of 2019. In closing, our team is focused on building our R&D and commercial expertise in a measured and disciplined approach. So with that I'll pass it back to Federico.

[Federico Tripodi:]

Thank you very much, Bryan. We at Calyxt are proud if tremendous progress since our early beginnings growing plants in a garage at the University of Minnesota, a short seven years ago. Since then we have received USDA non-regulated status for seven products and prepared our first product commercialization. In 2018, we expect to transform the company once again, as we transition into a commercial entity with a supercharged R&D engine as we prefer to move to our new state-of-the-art concept-to-fork facility. We look forward to a remainder of 2018 marked with commercial and supply chain successes, while we continue to grow our capability to mindfully disrupt the food system. Thank you for your time today and I look back to – I look forward to seeing you at one of our upcoming conferences that we will be attending. So with that I will pass it back to Simon.

[Simon Harnest:]

Thank you, Federico, and thanks everyone for attending our first quarter investor call. I would now like to open the call to questions. And joining for Q&A will be Federico Tripodi, Bryan Corkal, and Manoj Sahoo.

[Operator:]

Thank you very much sir. [Operator Instructions] Our first question comes from Ken Zaslow of Bank Montreal. Please go ahead.

[Kenneth Zaslow:]

Hey, good morning everyone.

[Federico Tripodi:]

Good morning.

[Kenneth Zaslow:]

Looks like you've been making a lot of progress and glad for the update. Let me ask you, how you guys – can you discuss the progress you're making on your supply chain and how that's working out with the inventory levels and where you are with that? That would great, thank you.

[Manoj Sahoo:]

Great. Thanks Ken. This is Manoj. As you know we have been making good progress on the supply chain; one, we have sufficient seeds to plant our acres this year and the planting has just started. With regards to crushers we are in advance discussions with multiple crushers. What we're trying to do is find the most optimal contractual arrangement with one or more crush plants, keeping in mind the grand logistics and the logistics of the soybean milk, plus also the high-oleic shipments for these potential customers. And we expect that seed will not be a limiting factor for us to get the acres. We still are seeing some trickling down of acres being added even at the last moment because it has been a very wet planting season.

[Kenneth Zaslow:]

And then my second question just is can you talk about your conversations with your customers? I know you said that you increased them to 2020, where are you on the process with them from discussions to actually converting them to real customers? And then I'll leave it there. Thank you.

[Manoj Sahoo:]

No, that's great. I think as you know, we are expanding the number of customers we have been engaged with, while at the same time for the customers which we are engaged in the past, we're making progress with them testing our oil and validating some of the properties we confirmed to them. So there's been a lot of samples being exchanged back and forth. And it also involves working with their food application development teams to confirm the functionality they're looking for, especially some may need to make certain changes in the way it is applied and also some of them may look at beneficial labeling claims on the final products they're looking. So making both in terms of number of customers as also the depth of discussions with each one of them, as we said during the call, there are a couple of segments which we are focusing on so that we can get some early adoption in those market segments.

[Kenneth Zaslow:]

Have you reached any sort of firm agreements with anybody with getting them to say, look we are comfortable using your product and we're going to be doing it in this timeframe or not yet or what is the timeframe for which you expect to see that?

[Manoj Sahoo:]

Some of these customers have already used high-oleic soybean in the past, not necessarily the non-transgenic version but others. So they're very comfortable using high-oleic soybeans. I anticipate those will be over the hump very quickly. Right now, as we know we are not looking at annual contracts, it will be mostly spot purchases based on their needs. But towards the end of the year we would be making announcements about specific customers, but obviously they have confidentiality limitations, so we'll have to be thoughtful because with every customer we engage we have a CDA. We'll see what we can tell to provide additional color.

[Federico Tripodi:]

Yes, so this is Federico. I expect that in future calls we'll give you updates not only on the number of customers and the categories but we'll give you some color of where we are in different categories and progress without naming specific customers but we will provide color of categories and additional information to help you understand how things are progressing. Being realistic, this year we probably will start seeing conversion towards the end of the year once we have the oil coming at commercial scale because it's the first year we're supplying oil to these customers. But I think what Manoj is sharing is the progress has been amazing and the receptivity has been a lot bigger than what we anticipated and we are talking with customers of every size, like we shared in the last call. And we were a little bit positively surprised that very, very large potential customers are engaging with us given, even though our scale today is not sufficient to satisfy their needs. So the conversations are extremely positive.

[Kenneth Zaslow:]

Fantastic. Thank you.

[Operator:]

Thank you very much. The next question comes from Daniel Jester of Citi. Please go ahead.

[Daniel Jester:]

Good morning, everyone. So I wanted to ask about planting progress, you mentioned this in your prepared remarks that in Minnesota in particular we are really far behind the five-year in term so plantings. Historically, how has your soybean variety performed when it's been planted later in the spring relative to a sort of a normal planting time period? And is there any risk to yield should planting be pushed into June or rolled into May?

[Federico Tripodi:]

Hey Dan, thanks for the question this is Federico and given that I'm the agronomist in the room here I'll take that one. So first, planting here in South Dakota and Minnesota usually it comes around mid-May heavily through mid-June, so we expect this year it will be delayed, because of the conditions we described and you just referred to. We're not officially, officially delayed yet, we are still in the front end of that. We started planting already, so we have farmers planting over the weekend and some of the farmers because we were very collaborative with them through the year and they put a decent percentage of their farm to our product, are going to be planting our soybean even before corn in some cases which is really, really good. We have seen our performance in terms of oil composition to be consistent, regardless of the planting date, so which that means that we have seen product quality to be very consistent in early and late plantings, which is good for us as we are after the oil. And like in any soybean variety there's a sweet spot for timing on the planting. We can tolerate mid-May to mid-June plantings very well, we have been very careful in field selection and farmer selection. So we were confident that planting here this year is going to progress according to our plan. We also have had additional opportunities with farmers that are either staying with soybeans because of the late planting, or that slightly increase their soybean acres throughout the season moving away from corn and wheat. So that is also helping us making sure that we will stick to that 16,000 acre number that we shared with you today. Traditionally in ag, farmers who can transition from one crop to the other and cancel orders during planting season. We expect because of this year and where we've done we'll have a high confidence that we will deliver on the number we shared with you.

[Daniel Jester:]

Okay, that’s really helpful. Thank you. And then maybe just two quick ones for Bryan, I’ve noticed that you changed a bit about how you're talking about your funding needs to 2019 and to that midyear, it sounds like you are saying for significant portion of 2019, is that a change in terms of how you're looking at your funding position through the middle of next year. And then secondly, I noticed your R&D expense on the income statement declined year-over-year and I'm surprised for company at your stage and your lifecycle I thought that would be sort of increasing relatively rapidly. So can you just talk to those two things? Thank you.

[Federico Tripodi:]

Sure, first really there's no change in our amount of cash and our cash burn, we've been talking about $2 million to $2.2 million for quite a long time. I think it's just that we're executing on it, we're disciplined and just mathematically I felt comfortable with that. We could extended out a little longer than what we had been previously saying. The second one on the R&D spend, well really when I talked about the stock option expense and the fact that we have remeasurement, we actually had a credit in R&D for stock option expense in the quarter due do that remeasurement. So when you really look at what we spend, if you were to back out the stock option expense we are continuing to invest a good portion of our of our R&D money. So it was really kind of the anomaly of having stock option expense credit in the R&D bucket.

[Daniel Jester:]

All right. That’s very helpful guys. Thank you very much.

[Federico Tripodi:]

And this is Federico again just I want to clarify Bryan's comment on runway. We are very comfortable, we can get through mid-2019, so our guidance has not changed, and I think we are just showing the strength of our comfort that we can get to the number but I wanted to reiterate that our guidance remains mid-2019.

[Daniel Jester:]

Great. Thank you very much. End of Q&A

[Operator:]

Thank you very much. [Operator Instructions] I'll pass it back on to Federico for closing remarks.

[Federico Tripodi:]

Hi, this is Federico on behalf of the company, I think we are done with the questions today; we have no more questions on the queue. I want to thank everyone for dialing in. 2018 has definitely started with strong results and tailwinds for Calyxt. We are looking forward to a full-year marked with commercial and supply chain successes, while we continue to grow our capability to mindfully bring healthier products to consumers. Thank you again for your time today. And have a great day.

[Operator:]

Thank you very much sir. Ladies and gentlemen, that concludes the conference call. And you may now disconnect your lines.