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Edited Transcript of RKDA earnings conference call or presentation 9-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 Arcadia Biosciences Inc Earnings Call

DAVIS May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Arcadia Biosciences Inc earnings conference call or presentation Wednesday, May 9, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew T. Plavan

Arcadia Biosciences, Inc. - CFO & Secretary

* Rajendra Ketkar

Arcadia Biosciences, Inc. - President, CEO & Director

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Conference Call Participants

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* Karthik Sunkesula

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Presentation

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Operator [1]

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Good afternoon, and welcome to Arcadia Biosciences First Quarter 2018 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 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 recently filed 10-K and again on Slide 2 of this presentation.

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

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [2]

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Thank you, Heather, and thanks to everyone, who is joining us on the call today. The purpose of this call is to report on the first quarter 2018 earnings and some exciting developments at Arcadia. I will summarize the first quarter achievements and Matt will discuss our recently completed financing round and the first quarter 2018 financials. At the end of the call, we will, as always, take your questions.

Turning to Slide 3. In the first quarter of 2018, we took some major steps towards making the transition from a trait provider company to a health and nutrition ingredients company. A major accomplishment was the completion of a $10 million private placement financing round, which will meaningfully fortify our cash resources and allow us to better execute our health and nutrition growth strategy in 2018 and beyond.

We also made important progress in developing our non-GM wheat traits portfolio. We announced achievement of 2 major milestones in Resistant Starch wheat, achieving high amylose content and meeting the threshold for high-fiber designation. We also added Reduced Gluten wheat to our portfolio of branded wheat ingredients and expect to have test quantities available by the end of the year for testing by food companies. We launched the GoodWheat consumer ingredient brand and we also appointed Sarah Reiter as the Chief Commercial Officer of the company. We also made good progress in the development of our ag productivity traits. Just yesterday, we announced that rice lines containing triple-stack traits, which includes Nitrogen Use Efficiency, Water Use Efficiency and salt tolerant traits, demonstrated double-digit yield increases over 2 years of trials.

On Slide 4, in 2018, our focus is on commercializing products in a non-GM wheat quality traits portfolio to address the current growth opportunities in the food and agriculture value chain. Consumers are demanding healthier, natural ingredients in their food as evidenced by changing consumption patterns. As food companies respond to these demands, they are looking for distinct innovations in the food ingredient industry. We believe that as innovators of quality traits, we can meet the demand of the food companies by providing ingredients so that food companies can develop healthier product for their customers. What this means for Arcadia is a shift in our business model from being a trait provider to seed companies to an ingredient provider to food companies.

In 2018, we're executing on this shift by building partnerships across the value chain. A key platform of our strategic shift is creating a brand for our wheat ingredient portfolio. In the first quarter, we launched the GoodWheat brand of innovative wheat ingredients, as shown in Slide 5. This is a first major step towards commercialization of our healthy wheat ingredients, and we recently announced Resistant Starch and Reduced Gluten to be the first 2 products under this brand. We believe that branding these ingredients enables consumer food companies to differentiate their products from their competitors and assures consumers that they are getting a healthy ingredient in their products, including flour, bread, pasta, cookies, cereals and other wheat products.

Turning to Slide 6. We recently announced 2 important milestones in the development of high-fiber Resistant Starch wheat, the lead product in this portfolio.

First, we achieved wheat varieties containing 94% amylose we believe to be the highest levels available compared to 25% to 35% in traditional wheat.

Secondly, these varieties can deliver high levels of dietary fiber that meet the FDA's designation of good source of fiber or high in fiber for wheat products packaging. Having the increased fiber intrinsic to the wheat enables food companies to have clean labels and formulations that don't have added fiber in them. Wheat is an important part of our diet. As much as 500 calories per day or almost 25% of the normal intake of 2,000 calories per day in the typical American diet comes from wheat. By delivering healthier wheat varieties to consumers, we can contribute to improved health benefits for our customers.

We initiated the breeding process with our partners to breed our traits into commercial germplasm. We are now planting increased acres of wheat to produce enough wheat for us to supply samples for expanded testing by our processor and food company customers. We recognize that to be successful as an ingredients provider, we need to build relationships across the wheat value chain. We are building these partnerships with seed production, processors, and food companies to bring our wheat products to consumers. And we are providing samples to companies for testing in their product development and market testing process as we prepare for sales.

Our ag productivity traits continue to make good progress in 2018 as shown on Slide 7. HB4, the drought-tolerant soybeans trait being developed by Verdeca, a joint venture between Arcadia and Bioceres, continues to make steady progress. The second season of trials in commercial germplasm was recently completed in Argentina. In this growing season, Argentina is facing drought conditions in many parts of the country. We visited Argentina recently to view the trials and early indications of the performance of the trait are positive. The trials have been harvested and we report the results as soon as the data is available. Meanwhile, regulatory progress continues in the form of studies being conducted for submission of the dossier for import approvals in Europe and other countries.

We recently announced significant yield gains in rice with 3 of our proprietary input states -- traits stacked together. In 2 crop seasons of field trials conducted at the International Center for Tropical Agriculture in Columbia, multiple rice lines carrying Arcadia's Nitrogen Use Efficiency, Water Use Efficiency and Salinity Tolerance traits, outperformed controls by an average of 25% under limiting nitrogen conditions. And these same lines yielded an average of 40% more than controls under the combined stresses of limiting nitrogen and drought conditions in the field. These results confirm that our agriculture productivity traits hold significant promise to help farmers increase yields and improve farm revenue as they deal with the effects of climate change and challenging growing conditions, such as nutrient-deficient soil, drought and salinity.

While we have shifted our near-term focus to our non-GM wheat ingredients portfolio, we see tremendous value in these agricultural productivity traits and we will continue to support our partners in unlocking the commercial potential of these blockbuster traits.

With that, I would now like to turn the call over to Matt for an update on our financial results for the quarter.

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Matthew T. Plavan, Arcadia Biosciences, Inc. - CFO & Secretary [3]

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Thank you, Raj, and good afternoon, everyone. We are very pleased with the completion of our $10 million pipe financing following our special meeting of shareholders on May 2. With this financing complete, we ended the first quarter with a strong balance sheet, having over $20 million in cash and no debt. We are well funded to begin commercialization of our GoodWheat portfolio of nutritional ingredients.

With regard to the financial results for the quarter, I'd like to start with a brief discussion about the impact we expect our evolving business model will have on our near- and mid-term financial performance. As you know, today we derive our revenues from 3 sources: GLA product revenues, licensing revenues from payments associated with the rights to commercialize our GM technologies and revenue from contract research and government grants primarily associated with historical research projects. These revenues are associated with our former business model focused on R&D discovery and out-licensing of traits. Over the next 12 to 36 months, as we introduce our new nutritional ingredient products like GoodWheat to the market and we advance our HB4 soybeans to commercialization, we expect the onset and scale up of revenues, which will most likely be characterized as product revenues or trait fees depending upon the specific arrangement with our end customers. Because of our acute forward focus on GoodWheat and HB4 and other products with near-term scale potential, we do not intend to continue pursuing new contract research in government grant projects at the levels we have historically. These projects are no longer relevant to our forward business strategy and divert critical resources away from essential breeding, production, and other commercialization deliverables essential to successful launch of our high-value health and nutrition products. As such, we expect these revenues to be lower this year as our current contract research agreements and government grant projects conclude and are not replaced.

In addition, we do not anticipate significant new upfront licensing fees under our new business model. And as described more fully in footnote 5 of our Q1 10-Q form filed today and our 10-K filed for 2017, with the implementation of the accounting pronouncement ASC 606, we can no longer amortize such upfront license revenues into revenue over time. As a result, $82,000 and $382,000 of license revenues for Q1 and full year, respectively, which were scheduled to be amortized into revenue was reversed out of deferred revenue and charged to retained deficit effective January 1 of this year. For these reasons, we expect licensing revenues to decline during the year.

Looking at Slide 8 now, we see the impact of these factors on our overall revenue in the first quarter as the legacy revenue sources are beginning to wind down prior to the onset of our new revenue sources, driving a 79% reduction in revenues this quarter over the prior year first quarter. Importantly, however, we have fully compensated for the impact of this revenue shortfall through our continued cost containment efforts, further reducing our operating expenses by 19% to $4 million, which resulted in an overall reduction of our net loss from operations of 3% to $3.8 million.

Now that we've put the macro changes into context, let's take a little closer look at the revenues by type for the quarter on Slide 9. As there were no license agreements executed in the first quarter of 2018 and there was no longer amortization from prior agreements per the ASC 606 change that I just described, we had no license revenue during the first quarter as compared to the $106,000 in the first quarter of 2017.

Now as for our contract research and government grant revenues, several of our contracts and grants were completed in 2017 and others are winding down. In Q1 of 2017, revenues of approximately $200,000 were recorded from NIH, USAID, and other grants as well as $250,000 in research contract revenues from our Origin Agritech agreement, all of which are no longer active in 2018. Therefore, the conclusion of these grants and contracts in 2017 resulted in the total reduction in contract research and government grant revenues of $554,000.

As for our product revenues, they were down 70%. Sales of SONOVA products decreased by $144,000 due to a delay in orders from our dietary supplement customers that occurred in Q1 of last year that we expected to recur in Q1 of this year. We're confident that these orders will occur in Q2 of this year instead. In addition, although we've recorded new sales from our pet food customers, we did underestimate the length of time that they needed to test our recipes and determine the optimal pet food formulations. So in summary, for GLA, we do expect our dietary supplement sales to return to historical levels or better, and to see improving pet food sales throughout the balance of the year.

And now for a quick look at expenses. Turning to Slide 10, you can see here that even though we are shifting our energies more aggressively towards developing our commercial path to market, we've continued to maintain an even keel on overall expenses. Where you can see this most clearly is -- in R&D expenses quarter-over-quarter. These expenses decreased by $427,000 or 23% compared to the same period in the prior year. The decreases were primarily driven by 3 things: the termination of a license and subcontract research agreement at the end of 2017, less subcontracting expense in support of government grants and lower salaries and benefits mainly as a result of the reductions in workforce that occurred in the first quarter of 2017.

Total SG&A costs were also down for the quarter by $431,000 or 14%, also driven by lower salaries and benefits. This decrease was partially offset by higher bonuses and intellectual property legal fees incurred during the first quarter of 2018. Therefore, comparing our total operating expenses to the prior year periods, they were down $928,000 or 19% for the first quarter.

Now just a word about our liquidity and capital resources. Cash on hand and cash equivalents totaled $20.4 million and we had no debt at the end of the quarter. Our net cash used for the quarter was $3.3 million, a significant improvement from the $4.5 million used in the same quarter last year. Also as more fully described in footnote 9 of our 10-Q, during the quarter, in accounting for the pipe transaction, we recorded a couple of one-time charges and a specific liability associated with the transaction. Both the common stock adjustment feature and the common stock warrants were determined under GAAP to be liabilities based upon each instrument's adjustment features and were accounted for at their respective fair values. Because at quarter-end the combined fair values of the liabilities exceeded the $10 million in proceeds, no value was initially assigned to the common stock issued. Therefore, the difference between the $10 million in the proceeds and the $15.9 million market value of the liabilities flows through the P&L as a nonoperating, noncash expense of $5.9 million during the quarter.

Thank you for the opportunity to share not only the financial results for the quarter with you, but more importantly, for the opportunity to provide some insight into how we expect our business transformation to a consumer health and nutrition ingredient provider to positively impact our financial performance over the next 12 to 36 months. With that, I'd like to turn the call back over to Raj for a wrap-up. Raj?

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [4]

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Thanks, Matt. Before we get to your questions, I'd just like to summarize our results for the first quarter of 2018.

The first quarter was a great start to the year as we execute on our strategy of transitioning to a health and nutrition ingredients company. We raised $10 million in capital to fund our growth plan. Our fiscal discipline continued as we lowered our operating costs and reduced our operating losses. We launched our GoodWheat brand and achieved key milestones in Resistant Starch and Reduced Gluten wheat products. And our ag productivity traits continue to make advances through successful trials of our rice lines and completion of drought-tolerant soybean trials.

With that, I'd like to turn the call over to your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ram Selvaraju from H.C. Wainright.

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Karthik Sunkesula, [2]

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This is Karthik on for Ram. I have a question. What is the likelihood that the FDA and the EPA might elect to formulate rules that aren't in congruence with the recent guidance provided by the USDA, indicating that crops produced using techniques like gene editing aren't subject to regulation any different to those applied to crops produced using traditional breeding techniques?

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [3]

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What we know -- we've seen the USDA declaration regarding gene editing and the regulatory processes. So they are essentially -- what USDA has said is that these crops would not be regulated if they are produced by gene editing process. What the EPA and FDA will do we're not sure yet. All the indications are so far that as long as you're not adding a foreign gene or a gene sourced from a foreign organism to the transformed crop, they would not be regulated.

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Karthik Sunkesula, [4]

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Perfect. And then in regards to product candidates. How many different product candidates have been created thus far using TILLING? And what's the current average time from concept to crop cultivation for a candidate originating from this platform?

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [5]

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So from TILLING, today, we have 4 traits in wheat that are in the pipeline. These are Resistant Starch and Reduced Gluten that we've been talking about. We also have an extended shelf life trait that is in development. We also have some yield increase traits, again, from the TILLING platform and wheat. And we're working on some other quality traits that are very early in the pipeline. We are also working on some soy products, in terms of soy quality, to improve soy quality. So currently, I would say we have probably 5 to 6 active candidates in the pipeline. And we have a fairly rich pipeline that we'll deliver and we'll be launching products for several years out of this current pipeline.

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Karthik Sunkesula, [6]

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I see. And when is the food additive petition for use of SONOVA GLA in cat food slated to be approved?

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [7]

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We expect that literally any day now. That has been submitted and we've received indications that it would be approved. But until it actually appears in the federal register, we have to wait for that. So we're currently waiting for that.

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Karthik Sunkesula, [8]

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Okay.

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [9]

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And you asked another question earlier, Karthik, about the timelines. With TILLING, process takes about 5 to 7 years from discovery to commercialization of a TILLING derived trait.

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Karthik Sunkesula, [10]

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All right. And one more question. What is likely to be the timing of RS Wheat flour product rollout in the U.S.?

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [11]

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So the RS product, we expect to see some early sales in the next 12 to 24 months period. And like I said earlier in the call, we're testing it with consumer goods companies -- food companies who have our material and are putting it into formulations. They will be doing the market -- quality testing and then also market testing with consumers before we can start to get some sales. But that's what we are focused on right now is bringing it to market as quickly as possible.

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Operator [12]

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

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Rajendra Ketkar, Arcadia Biosciences, Inc. - President, CEO & Director [13]

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Thanks, everyone, for joining the call, and your continued interest in Arcadia. We look forward to speaking with you again in 2018 during our next quarterly call. Thank you.

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Operator [14]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect. Everyone, have a wonderful day.