Cibus (NASDAQ:CBUS) Q3 2020 Earnings Call

0:00 Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Calyxt Third Quarter 2020 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will open up for questions. This conference is being recorded today, November 5, 2020. At this time, I'd like to turn the conference over to Chris Tyson, Senior Managing Director of MZ North America Calyxt Investor Relations Firm. Please go ahead, sir. Thank you and good afternoon. I would like to thank you all for taking time to join us for Calyxt's third quarter 2020 business update and results conference call. Your hosts today are Jim Bloom, Chief Executive Officer, and Bill Koschak, Chief Financial Officer. A press release detailing these results crossed the wires this afternoon at 4.05 p.m. Eastern Time today and is available on the company's website, calyxt.com. Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks. This presentation also includes a discussion of adjusted gross margin, net loss, net loss per share, and EBITDA. All are non-GAAP financial

1:30 measures. In Calyxt press release and its filings with the SEC, each of which is posted on the Calyxt website at calyxt.com, you will find additional disclosure regarding these non-GAAP measures. Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures and should not be considered a substitute for results that are presented in accordance with GAAP. Finally, this conference call is being webcast. The webcast link is available in the investor relations section of our website at calyxt.com. At this time, I would like to turn the call over to Calyxt Chief Executive Officer Jim Bloom. Jim, the floor is yours. Excuse me, this is the operator. Mr. Bloom, are you present?

2:32 We seem to have lost Mr. Bloom or his line is muted. One minute, please. Mr. Bloom, your line's open. Please go ahead.

3:23 Thank you. Mr. Bloom, we're ready for your presentation. Okay. Thank you, Chris. and thank you for joining us today for CAELIC's third quarter 2020 results conference call. A lot has been accomplished since our last call, so I will dive into the key highlights. First and foremost, last week we executed a commercial agreement with S&W Seed Company, a global agricultural company headquartered in Longmont, Colorado, for the exclusive license of an improved quality alfalfa trade in the U.S. and other select geographies.

4:08 This marks the company's first commercial trait license agreement and, based on U.S. long-term sales projections, could potentially generate more than $10 million of license revenues over the life of the pending patent for the trait. Calyxt worked in collaboration with SW to identify quality-enhancing traits for a more sustainable alfalfa product with increased bioavailability for livestock. The enhanced trait gives farmers the opportunity to produce alfalfa forage for livestock with improved digestibility, which may lead to greater animal performance. The trait is designed to result in a higher-value alfalfa produced on the same acre with the same inputs, putting greater profitability in the hands of the farmer.

4:57 The new alfalfa seed will be sold as part of the S&W Seed Portfolio and branded IQ S&W will work with alfalfa researchers on yield and animal performance through proof of concept and field trials. There will also be demonstration trials in key regions in 2021 to show IQ alfalfa's attributes and value creation for growers. The first trait license agreement and upcoming alfalfa seed launch by S&W represents a milestone in the execution of Calyxt's three go-to-market strategies and is a great demonstration of our ability to work collaboratively, choose traits to enhance value, do the research to make it happen, and support S&W Seed in bringing advanced plant science to market.

5:58 In August, we announced a major initiative to transition our soybean products to a seed go-to-market strategy. With our Ohio Lake soybean product, we were the first company to successfully deliver a proof of concept for food developed with gene editing technology. Having achieved proof of concept and pioneering regulatory success, we are now progressing into a new commercialization program seeking to supply Calyxt's first product to large grain processors as seed. which they will work with growers to produce, process, and sell the resulting soybean oil and meal. Moving upstream enables us to focus our resources on developing and capturing greater value from innovative plant-based solutions with substantial disruption potential.

6:48 During the third quarter, we completed several important actions as part of the advancement, including making staffing adjustments in our supply chain and sales organizations exiting many supply chain contracts and selling all soybean oil and meal. We also remain on track to complete the contracted grain purchases and subsequent sales of grain in late 2021. The impact of these selling activities drove an increase in the third quarter revenue of 77% to $5.2 million, including sale of nearly all of the 2019 grain crops. We are also maintaining our goal to establish seed sales to large processors representing at least $3 million in projected 2021 revenue.

7:38 I am also happy to report that our focus on three go-to-market strategies to accelerate trajectory to free cash flow that optimizes our talent technology is progressing nicely. We recently added Sarah Ryder as Vice President of Business Development. Sarah is a plant-based technology and agribusiness leader who has focused on establishing world-class partnerships and value chains that lead to the successful commercialization of emerging technologies for startup, early-stage, and Fortune 500 companies. She will apply her expertise to develop, refine, and implement the overall commercial strategy for Calyxt future products, including the prioritization of markets, customers, and product types.

8:27 With respect to our balance sheet and given recent market volatility, we had an opportunity in October following the transition of our soybean products to a seed go-to-market strategy to fortify our capital position, and we raised $15 million in an SEC-registered offering. The $15 million in new capital not only contributes to extending our cash runway, but can be used for advancing our current product development pipeline to continue to advance our talent technology and our intellectual property portfolio and also to support the execution of our streamlined business model. We are excited that Selectus decided to participate in this offering as it demonstrates their support of our business and confidence in our go-to-market strategies.

9:21 Finally, we also announced our Virtual Analyst Day scheduled for November 17, 2020 at 4 p.m. Eastern Time. We look forward to providing you with an update on our product development activities and other matters at that time. I would now like to hand the presentation off to our CFO, Bill Koschak. Thank you, Jim. Our soybean product line is important to the success of Calyxte. Its proof of concept enabled much of what we are working on today. A reminder that our final 2020 planted acres were nearly 72,000, representing a doubling of acres from the total planted in 2019. We have completed all 2020 objectives related to the advancement of our soybean products and are in process of completing the wind down of the remaining grain activity.

10:12 As Jim said, we remain on track to complete these activities in late 2021. The effective execution of this transition is projected to decrease the cash used by our soybean product line by $45 million through 2022. Going forward, we will sell seed as our go-to-market strategy for this product, and in 2021, we intend to target seed sales through large grain processors representing at least $3 million in projected 2021 revenues. Our core go-to-market strategies provide differentiated paths to commercialization and have the potential to result in cash payments throughout the development cycle. In the case of a trade or product license, we expect to negotiate for fees up front and then upon the achievement of major milestones from our partner. The earlier a partner is identified, the more of the development expense we can recapture from this payment.

11:03 Upon commercialization by our partner, we may also receive ongoing royalties. When using our seed sales go-to-market strategy, we expect that revenue generation will be driven by the seed sales and will occur immediately. In the case of a town license, we expect to receive fees up front and then annually from any prospective licensee. Upon commercialization by that licensee, we also would expect to receive ongoing royalties. With these core go-to-market strategies, we are targeting high double-digit margins over time, depending upon the level of ongoing investment required by Calyxt. We have a robust development pipeline as well. As Jim mentioned earlier, we executed a commercial agreement with S&W Seed Company on IQ alfalfa, marking our first trade license agreement.

11:51 We also have eight projects at the phase one stage or later in development across alfalfa, hemp, oats, soybeans, and wheat. We're also exploring improved protein and flavor profile in pulse crops, with several options under consideration. We target having at least five of these We are also actively negotiating agreements with potential partners with respect to specific opportunities for which development activity will only commence upon reaching a commercial agreement. And finally, for product development activities, our specific entry point into the value chain may vary by crop, depending upon several factors. We will seek the highest available margins and best path to delivering positive cash flows.

12:43 Today we issued a press release describing our third quarter 2020 results, and we also filed our Form 10-Q. Both documents are available on our investor website. Revenue increased by 2.3 million, or 77%, from the third quarter of 2019 to 5.2 million in the third quarter of 2020. The revenue growth was driven by 15 basis points of volume and 64 basis points of pricing, both partially offset by two basis points of unfavorable product mix as we sold more meal in 2020 as a percentage of total revenue than in the prior period. Most oil revenue in 2020 was from a single customer who purchased our oil to be used as a plant-based alternative to synthetic fluids, and we expect to fulfill their remaining orders in the fourth quarter of 2020.

13:32 Gross margin was a negative 1.8 million or a negative 35% in the third quarter of 2020. a decrease of 1.2 million or negative 16% from the third quarter a year ago. The decline in gross margin in the third quarter of 2020 reflects the impact of lower costs associated with products sold in 2019 because 2.8 million of grain costs were previously expensed as R&D, $1.1 million of commodity derivative losses from hedging contracts sold to convert our fixed-price grain inventories and fixed-price forward purchase contracts from fixed to floating prices consistent with how we expect to sell the grain and a 0.2 million increase in the net realizable value adjustment period and inventory. These increases were partially offset by lower product costs and the benefits resulting from the advancement of our soybean product line go-to-market strategy.

14:23 Gross margin as adjusted was a negative 1.3 million or negative 24% in the third quarter of 2020 as compared to negative 2.5 million or negative 86% in the third quarter of 2019. The improvement in gross margin as adjusted was driven by higher selling prices, lower product costs, and the benefits resulting from the advancement of our soybean product line go-to-market strategy. Our operating expenses decreased by $2.8 million to $7.3 million, driven by a decrease in non-cash stock compensation of $2.1 million from the forfeiture of unvested stock awards and lower personnel costs, partially offset by an increase in insurance costs and restructuring expense incurred for severance and other expenses resulting from the action we took on our soybean product line in August 2020. The same period in 2019 also included half a million dollars of expense to write off R&D tax credits that were no longer realizable.

15:23 Net loss was 9.5 million in the third quarter of 2020, an improvement of 1.2 million from the third quarter of 2019. Adjusted net loss was $9.3 million in the third quarter of 2020, an improvement of $2.6 million from the third quarter of 2019, driven by the benefits resulting from the advancement of our serving product line quarter market strategy. Our net loss per share was $0.29 in the third quarter of 2020, an improvement of $0.03 per share from the third quarter of 2019. Driven by the change in net loss, and then adjusted net loss per share was $0.28 in the third quarter of 2020, an improvement of $0.08 per share from the third quarter of 2019, also driven by the change in adjusted net loss.

16:10 Finally, adjusted EBITDA loss was $7.1 million in the third quarter of 2020, an improvement of $1.8 million from the third quarter of 2019. Our press release in Form 10-Q included discussion of gross margin as adjusted and adjusted net loss adjusted net loss per share, and adjusted EBITDA. They also include reconciliations of each of those measures to the most comparable GAAP measure. That information may be found under the heading Use of Non-GAAP Financial Information in either the press release or the Form 10-Q. To summarize our operating results for the third quarter of 2020, we were pleased with the significant progress we made on transitioning our soybean products to a streamlined go-to-market strategy. We shed most of our freight leases and other soybean-related costs in the period. We expect to sell the remaining grain we own or will purchase at market prices. And to help protect the cash margins of those sales, we've utilized commodity derivatives to convert our fixed price exposures to market prices.

17:12 We expect those hedges will protect our margins from those grain sales. Our adjusted gross margin performance in the quarter was as expected. We sold all of our soybean oil and meal inventory in the quarter and have sold nearly all of our 2019 grain inventories. These results demonstrate the on-track progress we are making toward completing the transition of the products on schedule. Cash, cash equivalents, short-term investments, and restricted cash totaled $29.4 million as of September 30, 2020. Net cash used in the third quarter of 2020 improved by $4.2 million 5.8 million, driven by a 4.6 million net decrease in cash flows used by operating assets and liabilities, primarily the result of the timing of cash payments to growers and changes in inventory balances year over year, and a 0.6 million reduction in purchases of land buildings and equipment, as the improvement in net loss of 1.2 million was driven by a 2.1 million decline in non-cash stock compensation expense. We expect cash used by operating activities in the fourth quarter of 2020 to be higher than in the first nine months of the year, driven by an expected increase in working capital associated with the grain we are required to purchase in the period.

18:32 After the closing of the third quarter, Calyxt completed a capital raise with gross proceeds of $15 million. Investors in the SEC-registered direct capital raise included Selectus, our largest shareholder, and several new institutional investors. We believe the support of Selectus and our new shareholders is a testament to our go-to-market strategy. I would now like to turn the call back to Jim. Thank you, Bill. In summary, we believe we are well positioned to deliver on the promise of our technology and disrupt industries by delivering plant-based inputs to partners across multiple industries. Our talent technology, our scientists, and our intellectual property are strong and provide us with an innovation platform that will drive our company going forward.

19:21 We were the first to market with our proof of concept soybean and have established a first mover advantage and pathway to commercial planting that can be leveraged by new innovations. The advancement of our soybean products to the seed go-to-market strategy is an important milestone for Calyxt. It extends our cash runway, and brings our first product closer to the partnership strategy we expect. Our differentiated go-to-market strategies generates focus and improves the financial model of the company. Calyxt's focus on disruptive innovation utilizing plant-based inputs has opened new doors during the third quarter and our continuing conversations with potential partners are progressing nicely.

20:06 Through our streamlined business model with differentiated go-to-market strategies, We are targeting diverse revenue streams across multiple industries, a high double digit margin profile, and an accelerated path to free cash flow. We believe the advancement of our soybean products, anticipated cash receipts from our product development efforts with partners, and new cash infusion extends our anticipated cash runway into the second half of 2022. We look forward to sharing more on our developing story with respect to key projects and business model during Calyxt Virtual Analyst Day on November 17, 2020. With that, I would like to open the call for any questions.

20:53 Operator, please go ahead. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. First question is from Bobby Burleson, Canaccord. Please go ahead, sir. Bobby Burleson Yeah, good afternoon. Thanks for taking my question. This is either for Jim or Bill or both.

21:38 I'm curious in terms of yield. Yield isn't always the best measure of value creation, I guess, when we're talking about the traits that you guys are delivering to your customers. And with the better performance, I guess, for protein creation and the overall seed that you guys are delivering in this new alfalfa, I guess is just better performance in terms of the mass of the animal in terms of how it grows, how quickly it grows, etc. How complicated is that matrix of different types of value creation? If we can't just look at yield as a measure of what you're going after, how many different types of performance measures are you guys looking at right now on these various projects?

22:33 Thanks, Bobby. You're right. There are different ways of measuring it rather than yield because we're moving out of the commodity stage of production and into contracted or value-added stages. And that supply chain and the things that Calyxt has been able to create and sustain to deliver that at higher margins above commodity prices is really a key to our business model. So whether it's a better performing Ohio Lake soybean oil or a more sustainable or much more digestible alfalfa, these are the types of projects that we're looking at to develop and provide value at the consumer or end-use market.

23:20 So it's a total difference from the market that most commodity growers have. and Calyx is really pleased to be finding the innovative growers who are interested in these new models and giving them some diversity on how they're marketing their products from their farm. Is that an advantage for you in terms of figuring your share of the overall share of that incremental value? Is it kind of more opaque in this new world you're entering into where there's an opportunity to get creative with how you negotiate these agreements? Yeah, as we take partners and kind of whiteboard the issues that they've been dealing with and can't find a solution to, and as we look into identity preserve where we can get paid in the end markets for the value created above commodity levels, These open up really interesting discussions with really large players.

24:24 So I'm confident that this model is interesting and has a place. And there are plenty of what I call stumps, right? People have been stumped by a few problems. And so we've been approached with really interesting challenges. And I think our intellectual property and our scientists and our position in the market are the absolute best toolbox to help Some of these companies find answers to some lingering issues or opportunities. Just one more before I hand it over. In terms of the S&W license for Alfalfa, can you just walk us through that development process? I'm assuming that they had to do a lot of work on top of what you had to do.

25:16 How long did that take? Ever a pivot from some other approach that you were taking? Was this always intended to be a licensing agreement? Yes. The business arrangement was fairly similar to what was envisioned when the research began. And so it really was looking at how to make more of the alfalfa that's harvested from the field have nutritional value to the cow who was eating it or the animal who was eating it. So that was kind of the premise for starting the project and then looking at pathways that made sense and using Talon's editing to get us there in the timeline that will allow us now to be in the marketplace in 2021.

26:04 And how long did you start on this project with S&W? It predates me, but I think it was in 2017 or 2016 when they started talking about this project in conceptual form. And so that includes regulatory and everything. So it's fairly compressed compared to some of the other timetables that are out there? Yeah, I think that's one of the advantages we've seen with gene editing over time. I have a question from Ben Cleave, National Securities Corporation. Please go ahead, sir. All right, thanks for taking my questions.

27:09 Just a couple here. One, I'm curious about the wheat product. You know, now that you're kind of three months into the new business model here, I'm wondering if you can elaborate on kind of how, on really what the outlook is for the wheat product launching here in a couple years. From the perspective of you spent a lot of time and effort building a supply chain that really overlapped with the high oleic, soy, over the last few years. And so now with this model shifting, I'm curious if the kind of scale of a commercial launch in the first year or two is potentially going to be any different now under the new model than you were considering under the old. No, great question, Ben. And we were really looking at overlapping the two and utilizing supply chain efficiencies but now going with larger partners who have that supply chain in a massive scale really allows us to scale even quicker and also allows us to focus our efforts on the different types of wheats in different geographies that can also provide value in the consumer market.

28:24 As you know, the added fiber, if you add fiber to food in the food laws has changed and so Thank you for joining us. I guess you kind of alluded to what my follow-up question on this is going to be in that, you know, when you consider these big processors, a number of them, you know, have a high oleic soybean oil already in their product portfolio, but, you know, high fiber wheat is, you know, effectively a new product.

29:11 And so I'm curious if you are, I'm curious if you can kind of describe the, you know, How these processors are treating these two kind of lead products differently? Is there kind of greater excitement on the fiber side because it is so new or are they maybe less excited about it because it is so new? Maybe I'm reading too much into this. I don't know. Can you just kind of elaborate on that if possible? It's an excellent point, Ben, because a lot of the customers that we are working with on Ohio Lake Soybean Oil also have a wheat need or a flour need and are intrigued by the high-fiber wheat product that we have.

30:00 So we could see it as an early introduction to some of these companies and getting comfortable with some of them as we sell oil. as an entree to prepping and getting ready for the new wheat project. So we're excited about it. I think it really is what the market is looking for, more fiber in their diet. And the second benefit is a cleaner label. So instead of added fiber, this will be fiber from grain, which really seems to have a consumer benefit in this new sophisticated consumer label reading environment. And I think this product is going to fit write very nicely into that demand as it grows. Got it. Very good.

30:46 Appreciate the comments, Jim. I think that does it for me. I'm looking forward to the investor day and I'll get back in queue. Great. Thank you, Ben. Thanks, Ben. We have a question from Adam Samuelson, Goldman Sachs. Please go ahead, sir. Yes, thanks. Good afternoon, everyone. Hi, Adam. Hi. So I guess my first question is on the seed sales next year. So, Bill, you talked about $3 million. So is that, from an acreage perspective, is the expectation and target to be kind of out or above the planted acres this year? Obviously, you're not going to be committing to buying the grain at the calyx level, but the planted acreage would be flat to up versus the 72,000.

31:38 that you delivered or that you achieved this year? Yes, Adam. The expectation would be that the baseline target for next year is equal to what we had contracted for this year, which was slightly more than $100,000. Okay. And just can you help me think about the channel there? And I looked in your development pipeline, and you talked about prospecting for a partnership. Just help me think about how imminent do you think you're going to have that partner lined up? Because if you're not committing to buy the grain to get those acres committed from the growers, and they're making those seed decisions relatively soon, don't they need to know where that's going?

32:28 Is that something we should be expecting in the coming months before we even get to planting? I would expect that's a near-term milestone for us to achieve. We've got to, to your point, the planting begins in the spring, but the contracting has begun or will begin shortly. And so I would think between now and March, you would see something from us on the seed side for 2021. Got it. Okay. Jim, if you'd like to add, if Jim wants to add to that at all. Nope, Bill, you're spot on. Thank you. Okay, and then last one just for me, just you talked about kind of being approached and kind of use the talent technology to kind of solve these kind of thorny problems.

33:14 And I just want to be clear on this that if I look at your development pipeline, I mean, does that include, is that, would the Pulse product be what you've been approached on, something you're going to look at? Or let me think about the opportunities that's beyond kind of what you've, We've laid out our projects, the eight projects that we've been publicly talking about, and some of those came from prior to this conversion or us achieving scale and having bigger discussions. We have chosen to announce those when we have a partner.

34:04 We are in active discussions and projects on that. We'll bring those forward and be talking a bit more about that process at Investor Day. We're excited to take this turn. There are some big issues and some big challenges from the sustainability and the food market out there. We have a toolbox. We're ready to go. So these are pretty exciting. Okay. And then just one more quick one. The cash runaway out to the second half of 2022, does that make any assumptions about kind of initial kind of development, kind of upfront licensing fees or – for new product development in there, or is that based on kind of what is already on the books today and any upfront development fees would be added into that cash runway?

35:04 Bill, I'll let you. The runway, yeah, go ahead. I'll take it. The runway that goes into the second half of 2022 is based on our projections for what our cash burn is and, as Jim said in his remarks, some expectation of development fees as well. So, numbers that obviously we feel comfortable enough to put into our projection to get us to the second half of 2022. Okay. All right. Perfect. Thank you so much. Thank you, Adam. As a reminder, if you wish to ask a question, press star 1 on your telephone keypad. That's star 1. Ladies and gentlemen, there are no further questions.

35:50 I'd like to turn the call back over to Jim Blom for closing remarks. Thanks to everyone for joining us on this call today. And if we're not able to address all of your questions on today's call, please feel free to contact us at our investor relations firm, MZ Group. We'd be happy to answer them. We look forward to providing more updates at our Virtual Analyst Day on November 17, 2020. Operator? This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.