Start Time: 16:30
End Time: 16:53
TerraVia Holdings, Inc. (NASDAQ:TVIA)
Q1 2017 Earnings Conference Call
May 03, 2017, 16:30 PM ET
Apu Mody - CEO
Tyler Painter - CFO and COO
Jeff Majtyka - JM Strategic Communications Group
Good day, ladies and gentlemen, and welcome to the TerraVia Fiscal Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call maybe recorded.
I would now like to introduce your host for today’s conference, Jeff Majtyka. Please go ahead.
Thank you, Charlotte. Good afternoon and thanks everyone for joining us on today’s conference call to discuss TerraVia’s first quarter 2017 results. Leading today’s call are Apu Mody, TerraVia’s Chief Executive Officer; and Tyler Painter, Chief Financial Officer and Chief Operating Officer.
This call is being broadcast live over the web, and we have prepared a slide presentation to accompany the call. The release and presentation can be accessed at the Investor Relations portion of our Web site, www.terravia.com.
Next slide. I’d like to direct you to Slide 2. It says, among other things, that some of the comments made today constitute forward-looking statements that reflect management’s current views and expectations about future events and economic circumstances, industry conditions, company strategy and plans, company events and transactions, product introductions, performance, and financial results.
Statements are based on many assumptions and factors including the ramp-up and optimization of production facilities of new products, the availability and pricing of raw materials, utilities and equipment, operating efficiencies, new product development, market conditions, product sales, access to capital, successful execution of agreements, and financial and strategic initiatives, including with respect to a transaction involving all or a significant portion of the company or equitization of its debt, and actions of government, partners and customers. Any changes in assumptions or factors can produce significantly different results.
To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events. TerraVia has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and encourages you to review these factors.
Also, please note that certain financial measures that we use on this call are expressed on a non-GAAP basis that has been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in today’s press release and presentation.
With that, I will now turn the call to Apu.
Thanks, Jeff. Good afternoon and thanks everyone for joining us. I’m going to start with a review of Q1 and current progress we’re making, then handoff to Tyler for the financial review.
We’re making very good progress in 2017. We are on track against all of our commercial and operational goals for the first quarter and for the full year. We achieved our guidance for year-over-year revenue growth at SB Oils in Q1 and are tracking with our plan for the year.
In particular, we’re excited about the market traction we are seeing with AlgaPrime DHA. I’ll talk more about customer progress in a moment, but DHA is showing early signs of being a blockbuster new product that can become a vital feed ingredient for aquaculture and potentially other nutrition markets.
With DHA, TerraVia has demonstrated for the first time that we can scale, produce and sell a product with strong margin profile and growing global demand. At the same time, we’re continuing to press forward on several financial and strategic initiatives critical to our future.
Foremost among them is restructuring our balance sheet. Today, we filed an 8-K reporting that we have entered into a two-month forbearance agreement with more than 65% of our 2019 convertible debt holders as we continue to work on a plan to restructure our outstanding convertible notes.
Based on the recommendation of our advisors, we have elected to not make the interest coupon payment prior to the end of the grace period and are targeting to reach an agreement with our debt holders by the end of the month.
In parallel with the debt negotiations, the company is actively engaged in a process with a number of strategic and financial parties to sell substantially all or a portion of the company by or before the conclusion [ph] period.
The company is also concurrently in negotiations with the note holders to equitize their debt if the sale process is not ultimately successful within this timeframe. While we cannot provide assurances on the timing or scope of any transactions, we are working diligently toward the best outcome.
I want to be clear that as we pursue this path, our business is operating and we are very focused on delivering on our commitments to customers and partners. As we work through this process, our focus is on realizing the promise of our groundbreaking technology platform and assuring a path forward for our innovative products, which are demonstrating their potential in the marketplace.
Next slide. On our last call, we discussed our focus strategy around a core set of high potential products that we believe create the shortest and best path to profitability for SB Oils and ultimately for TerraVia.
Our priority products all share a few characteristics. Each targets large markets, each has demonstrated customer interest, each offers solutions to significantly challenged and non-sustainable supply chains, and together they create a path to profitability.
Today, our priority products include AlgaPrime DHA, our omega-3 product and AlgaPür, our specialty personal care oil. Our third product targeted for a 2018 launch is our structuring fat which will be branded AlgaWise Algae Butter. Each of these products positions us to capitalize on the significant production assets at SB Oils and leverages large commercial partners to accelerate adoption.
Next slide. AlgaPrime DHA is gaining noticeable traction. As a reminder, AlgaPrime DHA is a traceable, sustainable and high-quality alternative to marine sourced omega-3s initially targeted at the $3 billion plus global aquaculture market.
Developed to answer the growing demand for healthy and sustainable omega-3 oils, this product is designed to reduce the dependency on marine fisheries and enhance the nutritional value of seafood.
AlgaPrime DHA is expected to be a key feed ingredient in the future of aquaculture and we are extremely pleased to partner with BioMar, a global leader in feed for aquaculture. We also see high potential and future applications for DHA in animal feed and eventually human nutrition, and are in productive discussions with potential partners on both fronts.
But keeping the focus on aquaculture for now, we’ve seen growing interest in AlgaPrime directly from fish farmers and retailers who are seeking to grow and sell more sustainable and higher DHA content fish.
We were pleased to see the recently announced adoption of AlgaPrime DHA by two very significant salmon farmers; Lerøy Seafood Group in Norway and Ventisqueros in Chile. Both relationships are the result of our expanded partnership with BioMar.
Lerøy is one of the world’s largest salmon farmers. They are committed to delivering salmon with high levels of omega-3s and BioMar has created sustainable feed solutions for them by leveraging our DHA product.
Chilean salmon farmer Ventisqueros in collaboration with BioMar has announced that it will begin using salmon feed containing AlgaPrime DHA to produce a premium Pacific salmon with unprecedented sustainability benefits.
As previously mentioned, Q1 2017 SB Oils sales, including DHA and sales of our AlgaPür oil to Unilever met our revenue guidance of 2.5 to 3 times growth year-over-year.
In Q2 2017, we expect JV revenue to exceed 3 times growth versus 2016 second quarter, primarily due to expected growth in DHA. We obviously have a ways to go in 2017 but the trajectory for DHA is tracking above our expectations.
Next slide. Our second priority product is our AlgaPür oil designed for Unilever’s use in specialty personal care product. As we talked about last time, we’re closely managing near-term production levels of AlgaPür as we focus on assuring we are prepared to meet the rapidly growth demand for DHA.
We are also seeing growing interest in the prospects for our oils in new specialty personal care applications, both from Unilever and others. We’ve recently signed a new agreement with an undisclosed global industry leader in personal care innovation and ingredients for the development of new unique applications using some of our current portfolio products.
Our third priority product is our structuring fat, which we’ve branded as AlgaWise Algae Butter. We expect to commercially launch this product with our partner Bunge in early 2018. We’ve already successfully scaled the product and have a number of strategic customers working on market applications today.
In the first quarter, we received a GRAS no questions letter from the FDA paving the way for Algae Butter’s commercial release in the U.S. Our Algae Butter is palm oil free, non-hydrogenated solution for the bakery, spreads and confectionary markets.
Collectively, a $2 billion plus market opportunity. We believe our product delivers the same or better performance than other structuring fats including shea stearin and cocoa butter and offer superior nutrition and sustainability attributes.
Next slide. Looking briefly at our ingredients business, we continue to make progress on both the business and regulatory fronts. Our Thrive Culinary Algae Oil is gaining retail sales traction and we expect to be on the shelves of major retailers and new markets around the country in coming months, including in the North East and the South East.
Thrive continues to garner awards and recognition from food industry press including named Best New Product of the Year by BrandSpark, which conducts the leading consumer poll rating CPG products. We are also preparing to launch a spray version of the oil that will feature zero saturated fats per serving.
On the AlgaVia side, we are actively engaged in discussions around potential strategic partnerships and we are seeing broad interest. We also continue to make regulatory progress against our product portfolio.
An independent GRAS expert panel determined that AlgaPrime DHA is generally recognized as safe for use in feed ingredients in the U.S., as well as the FDA no questions approval for AlgaWise Algae Butter as I mentioned earlier. Additionally, Brazilian food safety agency ANVISA has approved our high-oleic algae oil for food use in Brazil.
Next slide. Wrapping up my comments, this is a critical moment for TerraVia. Commercially, we are at one of the most exciting stages in our history. We have two proven high-value products being delivered to major customers today and we’re gaining momentum and strong revenue trajectory with our lead product, AlgaPrime DHA.
And with our soon to come AlgaWise Algae Butter, we have a future third product that has the potential to be a blockbuster. At SB Oils, we’re off to a good start this year following the annual intercrop shutdown and we’re meeting all production demands for our core products.
At the same time, we’re focused on the task of restructuring our capital structure or selling all or a portion of the company to fully execute against this compelling commercial strategy. We now have a timeline in place to bring this process to a conclusion and we’re committed to doing so as soon as practical.
As we talk with various parties about our future opportunities, we believe one thing above all is clear. The value in our platform is real and substantial. We have no doubt the potential of our technology and our products will be realized and we are fully committed to that objective. Thank you.
Now, I’ll turn it over to Tyler.
Thank you, Apu, and thank you everyone for joining the call today. In the first quarter, we continued to build on our operational progress and to aggressively manage our resources by further reducing our expenses and capital commitments.
At the same time, we’ve been busy actively pursuing a number of key strategic initiatives focused on improving our balance sheet to provide the runway needed for our technology to ultimately deliver against the significant commercial potential we see.
I’ll start with a quick review of Q1 results and then turn to an update on 2017 objectives as well as an update on progress we are making with our balance sheet and capital initiatives.
Next slide. TerraVia reported GAAP revenue for the first quarter was in line with our expectations at 4.5 million. Funded R&D revenue was up modestly versus Q1 '16 while product revenue as expected was lower for two reasons.
First, as we are focusing our commercial efforts on the key products produced and sold through our SB Oils joint venture, we continue to expect product revenue to shift into the JV. Second, the year-over-year comparison reflects the absence of industrial sales in 2017, which we were still in the process of ramping down in Q1 of '16.
In addition, we have shifted our focus for AlgaVia away from growing early market entry product volumes to securing the optimal strategic partner to accelerate growth for these valuable ingredients. With the successful confirmation of the arbitration award with Roquette, we have a much clear pathway today to partner that business going forward.
In addition for the quarter, revenues from the JV, excluding our related party product revenues, were 2.9 million versus 1.1 million in the first quarter of 2016, representing an increase of approximately 2.8 times.
These results reflect the increased sales of AlgaPrime DHA and continued managed delivery against our Unilever supply agreement. In total, pro forma revenue, including reported revenue for SB Oils, was 7.5 million in Q1 '17 versus 5.9 million the prior year, up approximately 25%.
On the expense side, Q1 2017 non-GAAP operating expenses, excluding stock compensation expense, were 14 million, down almost 20% versus 17.3 million a year ago. The decrease reflects our continued focus on reducing our operating expense base.
In our GAAP financial results, we also benefitted from the recognition of 2.4 million associated with the confirmation of the Roquette arbitration, which was recorded as an offset to operating expenses.
Next slide. As mentioned on our previous call, our operating performance and business focus in 2017 will be concentrated on our priority products at SB Oils. Production volumes and revenue from the JV in 2017 will be focused primarily on two key products, namely AlgaPrime DHA and the AlgaPür oils for Unilever.
We are reaffirming our expectation for JV revenue to be in a range of 25 million to 30 million for fiscal 2017 representing a 2.5 to 3 times increase versus 2016. Better than expected market momentum for AlgaPrime DHA further supports our expectation for this product line to be the leading driver of revenue growth in the year ahead.
As we are concentrating commercial efforts around SB Oils and exploring strategic partnerships for Thrive and AlgaVia, we continue to expect that our TerraVia reported revenue will be in the range of 10 million to 15 million with the majority coming from funded programs.
On a combined basis, with SB Oils, our non-GAAP revenue guidance remains unchanged and is expected to be in the range of 35 million to 45 million reflecting a 20% to 60% growth year-over-year. We made excellent progress commercially in the first quarter and we remain on track to accomplish the goals that we set out beginning the year.
Now I’ll turn to the balance sheet and our strategic initiatives. Next slide. We ended the quarter with 45 million in cash and cash equivalents. Operating cash burn for the quarter was approximately 13 million. In addition, cash equity contributions to SB Oils totaled 6.6 million for the quarter.
We expect this to be the highest quarterly cash burn of the year as we expect future quarters to benefit from increasing product revenue and the corresponding contribution margins in the JV, reduced operating expenditures both within TerraVia and within SB Oils.
In our 8-K today, we disclosed that we amended the bank guarantee facility we have with Silicon Valley Bank that supports the JV loan facility with the Brazilian Development Bank. This amendment reduces certain covenants and restrictions from the existing facility and we believe enables us to more effectively restructure our convertible notes.
For this amended loan agreement with Silicon Valley Bank, going forward we will begin classifying between 12 million to 13 million of restricted cash on our balance sheet. We expect this restricted cash balance to decline over time as the bank guarantee requirements for the BNDES facility decrease.
We talked on our last call about three priorities to reducing our cash burn. First, reducing our operating cash burn; second, improving the performance and cost structure of the SB Oils JV, thereby reducing our equity contribution requirements; and third, reducing our interest expense through a restructuring of our debt obligations.
We anticipate Q1 non-GAAP operating expenses to be the highest quarter for the year as expense reductions we announced in March are expected to further reduce our non-GAAP operating expenses by $8 million to $10 million annually.
These reductions will focus largely on activities around our ingredients businesses, including a planned suspension of production at our Peoria facility as we seek a commercial partner to accelerate growth for these important new businesses.
With the growing traction of AlgaPrime DHA and our ability to produce at significant volumes today, we are progressing toward our previously stated goal of EBITDA positive performance in the JV in early 2018.
And on the restructuring front, Apu discussed our current initiatives at a high level. The immediate financial implication is that we have elected not to make the first quarter coupon payment on our convertible notes at this time.
The decision to continue withholding our current interest payment and to enter the forbearance agreement announced today does not alter the face of our current P&L nor the ability to continue improving our operations and delivering against our commercial goals.
The forbearance agreement is intended to put a defined timeframe in place that focuses all interested parties we are talking with, both debt holders and potential strategic or financial third-party partners, on bringing our varied discussions to conclusion.
The common thread in all of these discussions we believe is shared agreement on the tremendous potential for our platform and acknowledgement that the company is now demonstrating commercial success.
In summary, we’ve made very good operational and commercial progress in the first quarter and we are on track with our goals for the year. We also have a timeline in place to conclude restructuring and potential transaction activities, which we will update at the appropriate time.
I’d like to thank you for your continued interest in TerraVia and our commitment to delivering valuable and sustainable solutions to food, nutrition and specialty ingredients. This concludes our prepared remarks for the day. Thank you again for participating and have a good evening.
I’ll turn it back to the operator.
Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.
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