Arcadia Biosciences, Inc.
Q3 2016 Earnings Call Transcript

Published: 10 Nov 2016

[Operator:]

Good afternoon and welcome to Arcadia Biosciences Third Quarter Earnings Conference Call. Today’s presenters will be Raj Ketkar, President and CEO; and Matt Plavan, CFO. This call is being webcast and you can refer to the Company’s press release and slides at arcadiabio.com. Before we start, if you refer to slide two, 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 recently filed 10-Q and again on slide two of this presentation. With that, I’ll turn the call over to Raj Ketkar, President and CEO.

[Raj Ketkar:]

Thank you, Jonathan. And thanks to everyone who is joining us on the call today. I’d like to start with some announcements concerning our executive staff and our Board of Directors. First, turning to slide three, I’d like to Matt Plavan, our new CFO who joined us in mid-September. Matt has nearly 30 years experience in the biotech, healthcare and technology sectors. He’s a CPA and brings us a strong skill set in strategic planning and business development. Matt has extensive experience in both the public and private markets and brings exactly the background that’s appropriate for Arcadia today. You’ll be hearing from Matt later in the call. I’m also pleased to announce that Kevin Comcowich joined our Board of Directors on October 30th. Kevin is a proven business and financial leader with extensive experience in investment management and global capital market strategies. He most recently served as a CEO and portfolio manager of HTX Energy Fund in Houston, Texas. Kevin is now Chairman of our Audit Committee, replacing George Gosbee in that capacity and replacing Uday Garg, as a member of the Committee. The Audit Committee is now in full compliance with NASDAQ requirement. In addition, we received word this morning from Darby Shupp that she has completed her service to Arcadia Biosciences and has tendered her resignation as Chairman and Board Member, effective immediately. George Gosby will be serving as interim Chair while the Board considers internal and external candidates for the permanent position of Chairman of the Board. I’m pleased to welcome both, Matt and Kevin to the Arcadia team, and I believe they each bring valuable skills and expertise that will help drive the Company’s growth strategy. I also want to thank Darby for her long tenure and leadership with the Company. With respect to today’s agenda, I’ll begin with an update on the business and then Matt will review the financial results for the third quarter. At the end of the call today, we will of course take your questions. On our last call, we said we had initiated a full review of our project portfolio and we outlined three key areas we would focus on, as shown on slide four

[Matt Plavan:]

Thank you, Raj and good afternoon to everyone. I’m excited to be here today and for the opportunity to serve as CFO of Arcadia Biosciences. There are number of reasons to be excited about joining Arcadia but for me there are two major reasons. One, I firmly believe we are well-positioned to create significant shareholder value; and two, I believe we are on the most direct path to do so today. And to that end, I look forward to working closely with Raj and sharing our progress to plan going forward. As for our financial report, I’d like to provide a brief primer on our revenue streams today and also speak how we expect them to evolve over time. I think it sets the stage for the review of our financial highlights for this quarter as well as some insights I’ll share about our forward-looking expectations. Okay. As for today, there are three primary areas from which we derive revenues and where we expect to drive near-term revenue growth. First, product revenues. These are revenues generated from the sale of products Arcadia has developed and commercialized. Currently that’s our SONOVA GLA safflower oil. Second, license revenues. Today, these revenues primarily represent amortization of upfront and annual license payment by our partners for the rights to further develop and commercialize our traits. And third, granting contract research revenues. These are revenues we earn from performing contract research services for our partners, government agencies and other third parties. We continue to target additional contract research opportunities that not only provide new revenue opportunities but will represent project that are highly aligned with our strategic focus. Now, as we have discussed at length, we have a robust pipeline of GM and non-GM traits at various stages of development towards commercialization, which upon launch and scale up, represent significant revenue potential for our partners and in turn for Arcadia, as we receive our share of those high-margin revenue streams. However, today, based upon where these traits reside in the development process, we do not expect significant revenues over the next few years from the launch and commercialization of these traits. Alright, with that as the backdrop, if you can now please turn to slide 10, we can review our revenue highlights. Starting from the top. Our product sales of SONOVA GLA oil were down by $21,000 for the quarter. However, year-to-date, product sales are up by $39,000. So, overall, pretty consistent performance. And this is where we are targeting and counting on U.S. pet [ph] approval to provide greater lifts in these revenues moving forward. License revenues for the third quarter was consistent with last year. For the first three quarters, however, license revenue of $510,000 is down from last year by $263,000. This is primarily due to the acceleration of revenues from certain contracts in 2015 that was due to the shortening of a customer’s license period. Our contract research and government revenues for the third quarter were $755,000 as compared to $1.5 million last year, a reduction of 49%. Year-to-date, these revenues were down $1.2 million from the prior year. This is the result of fewer government grants and contract research agreements this year over the last year. However, in connection with the interest we are seeing from nutrition food industry players that Raj spoke to earlier, we do expect to add new contracts in the coming quarters as we work to bring partnerships on line to further develop our trait candidates. All-in, this changes resulted in a decrease in total revenues for the quarter and year of $748,000 and $1.4 million, respectively. Turning now to our expenses on slide 11. Research and development expenses for the quarter are down by $924,000 or 29% compared to the same period last year and down by $424,000 or 6% for the first nine months of the year. This is primarily due to less utilization of subcontracted services in support of our government grants and our research contracts in the current year. SG&A costs of $2.7 million for the quarter are comparable to the same quarter last year. For the first three quarters, SG&A expenses are up by $641,000, much of which is related to expenses of being a public company in addition to certain severance costs booked earlier in the year. Thus, altogether, our total operating expenses for the third quarter of 2016 at $5 million were an improvement of $1 million from the same period last year. Operating expenses for the first three quarters of $15.8 million were up slightly by $236,000 or 1.2% from last year. While it’s not on the chart, I’d like to point out that interest expense for the third quarter of 2016 decreased by $435,000 and year-to-date by more than $1 million compared to 2015, as a result of our debt refinancing which occurred in December of last year. As for our liquidity, at the end of the third quarter of this year, cash on hand and liquid investments totaled a solid $57.4 million. Our net cash used for the quarter was $3.7 million. Putting all this activity together, loss from operations improved for the quarter to $3.9 million compared to last year’s loss of $4.2 million as reductions in operating expenses more than offset lower revenues for the period. As for the year-to-date, loss from operations for the first three quarters of 2016 increased $1.6 million to $13.1 million compared to $11.5 million in 2015 due to lower revenues on essentially the same level of operating expenses as in the prior year. And having covered the highlight, here is a little perspective on our near-term financial outlook. For 2016, we expect to finish the year with revenues between $4 million and $4.5 million and to keep our operating expenses in line with the prior year, even though this is our first full year having the infrastructure of a public company. In 2017, we expect to achieve increases in each of our revenue categories that would be product license and grants and contract research. And as we progress through the fourth quarter of this year and early part of 2017, we expect to gain better visibility into these new revenue opportunities and a better feel for the impact of our cost optimization efforts. We look forward to updating you as we progress through this and update you on upcoming calls. I very much enjoy the opportunity to speak with you today and I thank you for your time. So now, let me turn the call back over to you, Raj?

[Raj Ketkar:]

Thank, Matt. Before we get to your questions, let me say that in the last three months, the team at Arcadia has been involved in a bold initiative to evaluate a strategic direction and develop new pathways for the future of the Company. We have a clear focus for the priorities ahead and we have already started to take steps in the new directions we discussed today. I believe we have an exciting future and we are committed to make it happen. With that, I would like to turn the call over to your questions now.

[Operator:]

[Operator Instructions] And our first question or comment comes from the line of Chris Parkinson from Credit Suisse. Your question please?

[Graham Wells:]

Good afternoon, guys. This is Graham Wells on for Chris. How are you guys doing?

[Raj Ketkar:]

Hi. Good.

[Graham Wells:]

So, I just had a quick question. Raj, you had mentioned earlier that you’ve seen kind of a slowdown in approval processes globally and you highlighted India in particular. We were just curious what are the regions in particular could you point to where you kind of seeing the slowdown in approval processes and what do you think is really driving that?

[Raj Ketkar:]

Yes. I think the two major regions where I would point to for any kind of slowdown or continued slowdown is Europe and China, really. I mean, in Europe, as you know, essentially no significant approvals have been given for quite some time and the regulatory processes take quite long to get through all of it to get to an approval. They do -- they have been giving import approvals but even so, the requirements are getting tougher there. China is also sort of in a similar situation in terms of timing. I think what we’re seeing is that they are trying to bring their regulatory frameworks harmonize them more with global frameworks to make them more consistent. And right now, it’s a bit unpredictable in terms of timeline. I don’t think we can specifically say, is it slowdown by a year or two or whatever. But I think we are hopeful that that’ll continue to increase. But I think those two are the main areas. South America is actually quite favorable.

[Graham Wells:]

And then, I just had another question kind of around, just in ballpark sense just trying to get a feel for what you guys see in terms of the size of the opportunity to explore the move into pet foods within the SONOVA product line?

[Raj Ketkar:]

We see it as an attractive market. I mean, the entire pet food market is a large market. And there’s many ingredient players within that and different ingredients. So, we need to sort of figure out the specifics in terms of the size of the market. We are talking to companies that formulate pet foods and how are our ingredient would fit in. So, I think we’re in the early stages of that and we’ll be happy to report on that in the future.

[Graham Wells:]

And then, just the last one from before I let you guys go. I know, Matt, you kind of mentioned that you guys will be able to give more color on this moving forward. But, we were actually just curious on where could we see potentially the greatest benefits from the cost optimization kind of planning that you guys have gone through. And even if you don’t quite have totally clear idea yet of where things will settle out, where do you kind of see the greatest opportunities to kind of streamline things?

[Matt Plavan:]

We’re looking -- from a macro standpoint, we’re targeting between say 15% and 20% of our overall operating expenses from a run rate standpoint. And I think in terms of where within the organization that that’ll come from, we’ll be able to give you a better sense going forward. But I think in terms of just broad macro guide, that’s really the size, the optimization as we see it today.

[Operator:]

Thank you. Our next question comes from the line of Brett Wong of Piper Jaffray. Your question please.

[Brett Wong:]

I wanted to dig back in on the regulatory timing going off of questioning before. Are you seeing longer timing for import approval in Europe? And is there risk to getting that import approval for HB4 soybeans?

[Raj Ketkar:]

No, we’ve not seen anything specific to HB4 yet, Brett. The general concern is just given the overall sort of macro situation with GM crops in general, given some of the consumer acceptance issues and public acceptance issues which are -- which tend to sort of find their way into the regulatory process and with -- which results many times in demand for more studies and that sort of thing, more documentation which causes a slowdown. So, it’s hard to say what the magnitude of the slowdown is or what part of the regulatory, which step would get slower. But I think what we’re seeing is there is a general slowing down in different areas.

[Brett Wong:]

Okay. I mean, in regulatory or non-regulatory, seeing any time line impact to expected commercialization, not only this one or any other products outside of the GM yield rice, wheat and cotton?

[Raj Ketkar:]

No, I think everything else is very much on track, Brett.

[Brett Wong:]

Okay. And, can you talk to some of the field trial stuff, how are corn yields and expectation this year and field trials and maybe talk about HB4 also?

[Raj Ketkar:]

Yes. So, the field trial results from this current season haven’t yet come in. I mean, harvesting happened just recently and we’re working with our partners at Dow AgroSciences to sort of collate that data and really hone down on what yield increases we saw for which different traits and so on, and which line. So, we’ll have more on that. And like I alluded to in my presentation, I think early part of next year when we do our end of year reporting, I think that would be the time when we would be able to specifically talk about the performance of our products, product candidates. And same with HB4; in HB4, I think we are -- our breeding partners in South America are planting as we speak, right now. So that will be available really in second quarter next year.

[Brett Wong:]

I thought you did some trials this last season.

[Raj Ketkar:]

Yes. So, those are early trials and obviously it’s a selection process where we’re testing a lot of stuff. And based on that we advanced certain lines and certain traits into the trial program for this year, which has just been completed. So, I’ll have to go back and look at what the specifics of, were that came out at the end of last season, which we might have reported at the early part of this year. But you know we…

[Brett Wong:]

Okay, fair enough. I was just wondering the initial -- on the corn side any initial issues or concerns that you’re having; it doesn’t seem like that’s the case.

[Raj Ketkar:]

No, no concerns. I think the story there is really good. We’ve got some really good candidates with Dow and we’re moving forward. We just completed the season and we’ll have the data for you in the first quarter next year, end of year report.

[Brett Wong:]

Great. And then, in terms of the delay in India, does that affect your agreement with Mahyco at all and do you have any ideas of additional costs related to that?

[Raj Ketkar:]

I think the issue there is really delays of -- the cost really is in terms of timing of not commercializing according to our original schedule because the regulatory system even for field trials is proving to be challenging there where Mahyco needs to get approval from not just the central authorities but from every state that you want to do trials. And then, it’s just a time-consuming process, not just time-consuming process but the approvals have come very late, so they could not plant any trials this year. We hope that in the spring, by that time, the process gets a little better. They’ve indicated -- the regulatory authorities have indicated change in their systems. And so, we’re hoping that that will change for the better in the spring up next year.

[Brett Wong:]

Okay, and then last one. Raj, just wondering, given your time so far here as the CEO and all these near term priorities that you’ve laid out, just have you seen any issues, unforeseen issues, is there anything going kind to plan smoothly as you expected? Any initial fix would be great.

[Raj Ketkar:]

It’s been a few months now and it’s just been very exciting to go through this really rich pipeline of products that Arcadia has and go through this whole process that we’ve gone through. It’s really been a grounds up process with a lot of key people involved to look at every product and look at the market and really focusing on which projects make more sense going forward. And that’s where we are right now and kind of what I outlined today. So, I think it’s going well, going great. And I’m happy to be here. And now we’ve got a great team.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today’s program. I would like to hand the program back to Raj Ketkar for any further remarks.

[Raj Ketkar:]

Thanks, Jonathan. So thanks everyone for joining the call today and your continued interest and support. We look forward to speaking with you again during our yearend conference call.

[Operator:]

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.