Arcadia Biosciences' (RKDA) CEO Raj Ketkar on Q2 2016 Results - Earnings Call Transcript

| About: Arcadia Biosciences (RKDA)

Arcadia Biosciences Inc (NASDAQ:RKDA)

Q2 2016 Results Earnings Conference Call

August 09, 2016, 16:30 pm ET

Executives

Raj Ketkar - President, Chief Executive Officer, Director

Steve Brandwein - Interim Chief Financial Officer

Analysts

Chris Parkinson - Credit Suisse

Operator

Good afternoon and welcome to Arcadia Biosciences second quarter earnings conference call. Today's presenters will be Raj Ketkar, President and CEO and Steve Brandwein, Interim 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 will now turn the call over Raj Ketkar, President and CEO.

Raj Ketkar

Thank you Andrew and thanks to everyone who is joining us on the call today. I would like to start by sharing a bit about myself and my background, since I just recently joined the company. I will then provide an update on business activities for the last quarter and my vision for the future of Arcadia, including near-term priorities and our long-term strategy. Steve will then provide a review of the second quarter financial results and we will conclude the call with your questions.

As many of you know, I joined Arcadia as President and CEO on May 23 of this year. On slide three, you will see some details on my background. I started my professional carrier 35 years ago as a Chemical Engineer in Manufacturing and Technical roles and over the years, transitioned to commercial roles in agricultural chemicals, seed and biotechnology. In my career, I have gained valuable leadership experience in many areas, including P&L responsibility, strategy and operations and international assignments in developing markets.

As Joint Managing Director of Mahyco-Monsato Biotech, I lead the successful launch of Bt cotton in India, the first biotech trade to be commercialized in that country. Today, Bt cotton trades are grown on more than 90% of cotton acres in India or about 20 million acres and are planted by more than five million farmers annually.

I learned many lessons from this experience, including working effectively with seed partners, managing uncertainty in the regulatory process and maximizing value capture in a challenging market. I think there is tremendous opportunity to draw on this commercial experience as we work to maximize value from the Arcadia pipeline.

Turning to slide four. I would like to highlight a few reasons why I joined Arcadia and why I am excited about our future. First, I was impressed with the pipeline that this team has built in a fairly short period of time with modest investments. Arcadia has a robust pipeline of both transgenic and non-transgenic traits, many of them in advance stages of development,

Second, the company has a unique business model of partnering with companies that touch with end-users, capitalizing on their knowledge of these markets to efficiently commercialize our technologies. This collaborative framework accelerates the development of selected trait and allows the company to prudently invest and ultimately share in the commercial value generated by our products,

Third, with numerous licenses already in place, Arcadia has a presence in the major global crops like corn, rice, wheat, soybeans and cotton. The company is ideally situated to benefit from growth in ag traits worldwide and with the number of products in late stages of development, the opportunity for multiple successes with strong financial returns is substantial.

Lastly, the company has a dedicated team of professionals with the expertise to take traits from early stages of development, all the way through to regulatory approval and commercialization. It's clear to me that Arcadia is capable of delivering long-term value and I am excited to help drive our progress forward and bring these innovative products to the market.

As I started my role, I identified three critical near-term priorities, which are listed on slide five. Our first near-term priority is to complete a strategic review of our product pipeline, which is currently underway. This review serves two primary purposes. First, it helps me dive deep into the details of our pipeline and rigorously evaluate the development plans and timelines. Second, the review will help define our strategy going forward and shape the long-term vision for the company.

While we have a rich pipeline of innovative traits, it is essential for us to prioritize the projects that have the greatest probability of generating the highest return of investment in the shortest time. Arcadia began this process last quarter by starting to prioritize and streamline its project pipeline and this review will allow us to drive progress on the most important products for commercial development.

Our second critical priority is to identify opportunities for increasing near-term revenue and improving the efficiency of our current resources. This is imperative for the company until we start generating significant income from commercialized products. While the company has sufficient cash to execute against its current plan, we will continue to further streamline and achieve efficiencies where we can.

Our third priority is to ensure that Arcadia is a performance driven highly motivated organization. We will achieve this by aligning processes across functional areas and ensuring that we have the right talent in the company to advance products to commercialization. After two months on the job, I can tell you that the entire Arcadia team is engaged and focused on addressing these key priorities and I look forward to updating you on our progress in the months ahead.

Now turning to slide six. I would like to update you on our progress in two key crop opportunities before turning to our financial results for the quarter. The first update is on our HB4 stress-tolerant soybeans trait, which is in the regulatory phase of development and is managed through Verdeca, our joint venture with Bioceres. You may recall that we received all necessary regulatory approvals in Argentina last year. And earlier this year, we submitted for regulatory approval in Uruguay.

In May of this year, we continue to advance this product towards commercialization with a regulatory submission in the United States to the FDA. Further submissions are expected over the next 12 to 18 months in Brazil, Paraguay, China and Europe.

Early field data has shown that HB4 performs best in areas with the highest levels of environmental stress, which we believe is between 35 to 50 million acres in South America. As you know, trait integration programs are already underway with several of the largest seed companies representing a significant share of the South American soybean seed market

So once a trait is approved in key countries, we will be able to rapidly commercialize HB4 in South America. Even with a conservative adoption rate, this trait represents a tremendous revenue opportunity for Arcadia through our Verdeca joint venture.

Now let's turn to another major focus for Arcadia that I am very excited about, our non-GM wheat platform. In 2005, Arcadia acquired a company called Anawah, which had been optimizing a trait development platform called tilling. Tilling is an advanced targeted breeding tool used to efficiently detect desirable genetic variations in crop lines. Using this platform, we have developed a wheat library that we have been mining for new product leads on an ongoing basis. And since the resulting products are non-GM, there are fewer regulatory hurdles involved in bringing that to the market.

Slide seven shows some of the leading products being developed using this platform. Our resistant starch wheat has more than twice the dietary fiber as conventional wheat enabling our customers to develop healthier food with a lower glycemic index. This will also help mitigate the impact of obesity and diabetes, both major global health issues. This product is in the pre-commercial phase and we are scaling up production to satisfy our customers' launch plan requirements.

Our grain quality product aims to increase the shelf life and flavor profile of fleet flour, a major ingredient in almost all consumer packaged goods. It also allows our customers to make improvements in supply chain management. This product is currently in the hands of our commercial partners for testing and integration into elite germplasm.

Our herbicide tolerant wheat provides growers with a non-GM effective weed control solution that improves farming efficiency and adds significant value on the farm. We are currently conducting field trials this trait. And our reduced gluten wheat supports the launch of multiple high-value products for consumer packaged goods companies providing an effective low-cost solution for consumers with gluten sensitivity. This product is in the early stages of development.

These are just a few of the products developed with our wheat tilling platform, some of which are in later stages of development. So today, more than a decade later and against the one-time investment in wheat, we have multiple products advancing towards commercial launch. We will continue to update you on these products in future reports.

I would now like to turn the call over to Steve Brandwein for an update on our financial results this quarter.

Steve Brandwein

Thank you Raj and welcome everyone. Overall, our 2016 first half results were in line with our internal expectations and reflect consistent performance compared to the same period last year.

A summary of our financial results is shown on slide eight. Net loss attributable to common stockholders for the second quarter was $4.6 million comparable to the same period last year. For the first half of 2016, net loss attributable to common stockholders was $9.7 million compared to $12.3 million in 2015, an improvement of 20%. Now I would like to point out that last year's loss included certain expenses associated with preferred shares that were redeemed with our IPO in May and warrants reissued when we reincorporated the company prior to the IPO.

Net loss per share attributable to common stockholders for the second quarter was $0.10 compared to a loss of $0.19 in the second quarter of 2015 and net loss per share attributable to common stockholders for the first half of 2016 was $0.22 compared to a loss of $0.94 last year. Note that results for 2015 were prior to our recapitalization of the company in conjunction with the IPO.

Loss from operations for the quarter totaled $4.3 million compared to last year's loss of $3.5 million with the decrease resulting from lower revenues recognized during the period. Loss from operations for the first half of 2016 was $9.2 million compared to $7.3 million in 2015. Again, this is partly due to lower revenues as well as additional costs associated with operating as a public company following our IPO in May of last year.

If you turn to slide nine, I will go into breakdown of the revenue categories. Total revenues were down by $709,000 for the second quarter compared to last year. Our product sales of SONOVA GLA oil were down by $114,000 for the second quarter compared to last year. However, year-to-year product sales remain up for 2016 by $60,000 or 23%. Now as we have mentioned in the past, GLA sales can be somewhat regular as customer orders are not consistent from quarter-to-quarter plus major distributor orders can also be sporadic and that will influence the timing of the revenue.

License revenue, which represents recognition of deferred revenue from upfront fees that we receive when license transactions were executed, decreased for the second quarter compared to last year by $261,000 and for the first half of 2016 by $267,000. This is primarily due to accelerated revenue recognition in the second quarter of 2015, resulting from the discontinuance of certain agreements.

Contract research and government grant revenue decreased for the quarter by $334,000 and for the first half of 2016 by $465,000 compared to last year. Now as we have discussed previously, we had government grants that were successfully completed last year and others in which the scope of activity has been reduced. Together this impacted our revenue on a comparable basis. Timing, of course can be a factor as well and revenue is recognized as work is completed on grants and contracts.

On slide 10, you will see details of our expense categories. Total operating expenses for the second quarter of 2016 of $5 million were comparable to the same period last year. Operating expenses for the first half were up by $1.3 million. Looking at the details, product cost of sales is down by $71,000 for the second quarter, as would be expected due to lower product revenues. For the first half, product cost of sales was up by $20,000, in line with the increase in revenue.

Research and development costs increased by $130,000 compared to the same quarter last year and by $500,000 for the six months of the year, but this is primarily the result of expanded efforts in corn trait development as well expanded push on field trials for our late stage products and we mentioned that last quarter.

SG&A cost of $2.8 million for the quarter are comparable to the same quarter last year and for the first half, SG&A expenses are up by $772,000 and much of this is related to expenses of being a public company as well as certain severance costs booked in the first quarter.

I am happy to report that interest expense for the second quarter of 2016 decreased by $448,000 and by $588,000 for the first half compared to 2015 as a result of our debt refinancing which occurred last year.

At the end of the second quarter of this year, cash on hand and liquid investments totaled $61.1 million. Our net cash use for the quarter was $4 million, down by about $900,000 from the first quarter of this year and that's partly as a result of our headcount reduction which happened earlier. The first quarter also included certain one-time payments, which were not repeated.

So I would like to take the opportunity to also remind everyone and Raj, of course, is pointed this out, that we manage our operating expenses tightly and we will continue to do so as we are going forward.

I will now turn the call back to Raj.

Raj Ketkar

Thanks Steve. Before we get to your questions, let me just say again how excited I am about the many opportunities that lie ahead for Arcadia. We have important work ahead of us. But with multiple products in the late development stages, our robust pipeline of leads, strong partnerships and a dedicated team of experienced professionals, I firmly believe that there is a very promising future for Arcadia. I am confident that we will deliver great value to our customers and shareholders as well as growers and consumers worldwide.

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

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question or comment comes from the line of Chris Parkinson with Credit Suisse. Your line is now open.

Chris Parkinson

Perfect. Thank you very much. Can you just give us some more color on HB4 specifically? Anything else you have on expectations for cultivation import approvals? You mentioned some countries in addition to Argentina, I guess, the U.S. and Paraguay. As well as any new color on the potential for licensing agreements, any new interest? And also, is there any read-through on your business from the latest M&A proposals, especially for potential for import approvals into China? Thank you.

Raj Ketkar

Thanks Chris. So yes, we talked about regulatory approvals. We are developing the packages for submission, like I said earlier, for China and Europe. These are the two main parts of the globe where soybeans from Argentina would be exported. So we need to have the import approvals from these two major regions, China and Europe. So we are applying for those as we develop the packages for them.

And your second question was related to an M&A activity.

Chris Parkinson

Yes. Is there any read-through on your business from the latest M&A proposals, specifically potential for any import approvals or even potential delays out of China given what's going on there?

Raj Ketkar

No. Nothing that we know of there, Chris. I don't think we could speak to that.

Chris Parkinson

Okay. And then just over the next six to 12 months, can you generally run through any additional regional field trials you are looking at across the globe, including any new efficiency metrics you are looking for or yield hurdles you are looking at accomplishing? And then also is any difference in the scale of these field trials that's a big difference on year-on-year basis? Thank you.

Raj Ketkar

So we are continuing to do field trials for all of our or many of our products in the portfolio that we have. This would be around things like nitrogen use efficiency, salinity tolerance, water use in different countries and in different crops. So those are normal development work that we do and we work with our partners to conduct these trials.

Chris Parkinson

Perfect. Thank you very much.

Operator

[Operator Instructions]. And I am showing no further questions or comments at this time. So with that being said, I would like to turn the conference back over to President and CEO, Mr. Raj Ketkar, for closing remarks.

Raj Ketkar

Thank you everyone for joining the call and your continued interest and support for Arcadia. We look forward to speaking with you again during our third quarter conference call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!