Cibus, Inc. (CBUS) Earnings Call Transcript & Summary

Good morning, and thank you. We appreciate each of you making the time to be with us for the Calyxt First quarter 2020 Business Update and Results Conference Call. Joining you as hosts today are Jim Blome, our Chief Executive Officer; Bill Koschak, our Chief Financial Officer; Keith Blanks, Senior Vice President of Sales and Marketing; and Travis Frey, our Chief Technology Officer. A press release covering these results went out over the wires at 8 o'clock Eastern this morning and can be found on the company's website, calyxt.com. Ahead of the formal presentation, I want to remind everyone that remarks delivered on this call and webcast — among them those concerning future financial results, future operational goals, and industry prospects — are forward looking and could be subject to a variety of risks and uncertainties that might cause actual results to differ materially from what is described here. For a list of associated risks, please refer to the company's SEC filings. Also, this presentation discusses adjusted EBITDA and gross margin as adjusted, and both are non-GAAP financial measures in Calyxt's press release and its filings with the SEC, each of which is posted on the Calyxt website at calyxt.com. Additional disclosure regarding these non-GAAP measures is available there. These non-GAAP financial measures ought to be considered in addition to GAAP financial measures and should not be viewed as a substitute for results presented in accordance with GAAP. And finally, this conference call is being webcast. The webcast link can be found in the Investor Relations section of our website at calyxt.com. At this point, I'd like to hand the call over to Calyxt's Chief Executive Officer, Jim Blome. Jim, the floor is yours.

Thanks, Chris. I appreciate everyone being here for the Calyxt call covering our first quarter 2020 results. Prior to getting into the Q1 review — and how the company is getting through the COVID-19 crisis right now — I want to start with a brief overview of what we do. The groundwork we laid during 2019 has put Calix in a position to succeed this year and afterward. Calyxt operates as a technology business, and what we provide are plant-based solutions that are healthy and unsustainable. No other company anywhere has yet commercialized a gene-edited food product, and our plan is to launch more offerings centered on 2 key pillars. Pillar one is Health and Wellness, and the sorts of product ideas we're developing there involve things that are heart healthy, anti-inflammatory, contain more fiber, taste better, or deliver more protein. Pillar two is sustainability. The products we're commercializing deliver sustainability advantages, such as possibly substituting for imported oils that could be contributing to deforestation and other climate change, swapping fossil fuels for plant-based alternatives, and making it possible to get differentiated output per acre so biodiversity improves. We think this sets us apart from the majority of others in our space. Our accelerated plant breeding technology, known as TALEN, is how we achieve these goals. TALEN was developed in part by Dr. Dan Voytas, who co-founded Calyxt and serves as Chief Science Officer. It's an advanced breeding technology enabling precise targeting of genes that already exist inside a plant's genome. Our scientists will choose for desired traits, speeding up breeding to a fraction of the time traditional approaches take, and it imitates the way plants might evolve in nature. We're able to evaluate whether a trait is viable in under two years, with as few as three additional years required before reaching commercialization. Our development pipeline is robust, with 18 products spread across various development stages, among them several in soybeans and hemp plus projects involving other crops such as wheat, alfalfa, oats, and others. We intend to bring these offerings to market by working with partners through collaborations or joint ventures. In that setup, our contribution is the science, while theirs is commercial know-how, so the product concept can be taken all the way to commercialization. This asset-light approach ought to provide the company with non-dilutive financing, plus a recurring revenue stream with high margins once projects reach the commercialization stage. We also have an integrated business model available for launching products, in which we draw on third-party assets within the agricultural supply chain to process grains and sell the resulting products into the marketplace. That model, however, requires more capital and yields lower margin than the collaboration and joint venture model does. Let's now move on to how we performed in the first quarter of 2020. The worldwide disruption caused by COVID-19 is unlike anything we've seen before. I feel immense pride in how committed and resilient the Calyxt team has been, and I'm equally proud of the actions we've taken in light of the COVID-19 pandemic in order to safeguard both our people and our operations — this has meant that from the earliest days of this crisis, anyone whose job could be done off-site has been working remotely. Most of our laboratory personnel continue to work on-site at our headquarters. Protecting our scientists and the work they perform is critically important for the future, and up to this point we've managed this transition with zero disruptions. I'm truly grateful for what our team has done to keep everyone protected and keep us moving forward; the year opened well for us and we're still carrying out our business plans. In Q1, we started noticing how the COVID-19 pandemic was affecting areas nationwide and weighing on the economy. The pandemic has dealt a serious negative blow to the food sector, particularly food service, and that has cut demand from the food industry for vegetable oils by a substantial amount. Our high oleic soybean oil has seen weaker demand, which tracks with the overall drop in appetite for all vegetable oils. We've also been watching the way COVID-19 is hitting the protein supply chain, and that will likely shape how much high oleic soybean meal we can sell as well as what price we can command for it. With demand continuing to move around, pricing faces pressure, and given the uncertainty our customers and prospective customers are dealing with because of the pandemic, we've adjusted our short-term crush schedule and canceled the crushes that had been planned for late May, June, and July 2020. This change means our product sales effort is going to move to the latter part of 2020, when there may be some recovery in what customers are asking for, contingent on the timing and completeness of their return to standard business activities. As a result of COVID-19, we have suspended our 2020 outlook for revenue and gross margin as adjusted, and we have developed cost-reduction measures for the remainder of the year. During April, we received a $1.5 million loan from the Small Business Administration's paycheck protection program, recognizing that we are a small, early-stage company with a single product that uses up a substantial amount of cash annually; under these unprecedented circumstances, our capacity to obtain capital has suffered. We also face competitors that are far bigger and far better funded, and to safeguard our team, we chose to take the loan proceeds and intend to hold onto them. Down the road we'll decide if we seek forgiveness for any portion of that loan. We're chasing cash through collaboration agreements with high margins and licensing possibilities, and we're examining every other source of cash flow. Thanks to these steps, we revised our 2020 cash usage to a range of 30 to $34 million and pushed our cash runway out to late 2021. We keep assessing further ways to bring our cash usage down even more. We've delivered outstanding service to our world-class customers, who account for a big share of our 2020 oil revenue. Oil shipments to our major industrial customer are still going without interruption. We're still sampling and testing our high oleic soybean oil with big consumer packaged goods companies. Our 2020 contracted acres hit the 100,000-acre goal, and we ran out of seed for the 2020 crops. We're rolling out 5 new seed varieties, and we're also growing in 5 states now. Back in April, we introduced our e-commerce site. We're treating this site as a pilot, and it can be applied quite easily to other products too. It gives us a number of advantages, such as letting customers buy our oil straight from us at any hour and get immediate feedback on the product. It's also an efficient channel for getting samples into the hands of influencers, growers, and investors, and it answers demand from people who are familiar with Calyxt and its track record. We went into this pilot without expecting to build a consumer brand or make a major investment, so we don't anticipate meaningful revenues from the site. We'd love for you to try the oil at calyno.com. On the technology side, we continue to advance and sharpen our suite for gene editing. We obtained a brand new breakthrough out of the University of Minnesota — one developed in the lab of Dr. Dan Voytas, who co-founded Calyxt — and it will allow us to substantially reduce the time needed to develop trades in certain crops. The 4 product candidate advancements achieved in our development process during the quarter make me happy, especially because each one is so unique. What keeps us ahead of competitors and preserves our lead in gene editing is our innovative technology, continual enhancement, and a robust team of scientific experts. Looking ahead a bit, the first hemp offering we bring to market should arrive soon. It will feature enhanced solutions targeting the main challenges hemp cultivators deal with, and it represents the debut of our second product sold commercially. As our lineup of market-ready products grows stronger and spans a number of distinct sectors, we anticipate the pace at which revenue chances come our way will pick up. Turning to what we're doing to land fresh collaboration deals with companies in the industry, our goal is to finalize several such agreements during this year. We look for these collaboration agreements to deliver cash milestone payments, which would give added backing to our liquidity and to our belief that Calyxt functions as an innovation platform company. With that, I'd like to turn things over to our Chief Technology Officer, Dr. Travis Frey, to give us the latest on innovation and what's coming in our product pipeline.

Thanks, Jim. Like Jim said, we keep racking up scientific wins, and the biggest ones are our refreshed R&D pipeline and the deals we've struck to license new tech that makes our gene editing even better. On the R&D side, four projects moved forward in our development process during the first quarter. In hemp, our first product should launch in the second quarter — better plans aimed at the main issues hemp growers deal with — and that marks our second commercial product launch. We got this product to market fast by using our patent-pending production system and analytics strengths to crack the partner's problem. What we learned has also sped us up on the rest of our hemp projects. Each project in our pipeline addresses a significant market opportunity and creates fresh possibilities for our company. One clear illustration is our high-fiber wheat offering, through which we have achieved dietary fiber levels at minimum triple those found in conventional white wheat flour. Our target is to bring this item to market possibly during 2022. By March 31st, 2020, our count of initiatives at the discovery phase or beyond totaled 18, spanning alfalfa, canola, hemp, oats, potatoes, soybeans, and wheat, with soybeans and hemp making up the largest share. Between now and the end of 2024, our plan is to bring a minimum of six product candidates to launch. That group covers the hemp and wheat items I brought up before, plus our alfalfa candidate, which arrives in 2021, and three further candidates that would come either through what we do internally or by partnering with outside parties. There's real excitement here, since we're stepping up work on valuable partnership deals with top-tier companies so our products can reach the market in a way that keeps margins high and capital needs low. Our R&D pipeline has me energized, and I'm putting effort into growing it together with colleagues both within and beyond our company. By moving our technology forward and broadening our IP holdings, we keep stretching the limits of what TALEN lets us achieve, going past what we once assumed was achievable. By doing this, we'll look into fresh crops we can target, new traits, and different pathways, and we'll keep leading the way as innovators in editing plant genes. In the first quarter, we completed two significant technical steps to back up these efforts. The first was licensing technology from the University of Minnesota that boosts how efficiently plants can be gene edited, which lets us remove the requirement for tissue culture across multiple crops; our expectation is that this will let us get the most out of our TALEN core technology, delivering products to market more quickly and steering clear of added R&D spending on those products. The second step: we're growing our IP portfolio further, thanks to recently issued US patents plus applications belonging to new patent families. We have been issued US patents that broaden the core TALEN patent family. These claims are directed toward methods for producing gene-edited plants, along with one more soybean product concept. We also filed new provisional patents. These are intended to expand our portfolio of innovative gene-editing tools and supporting technologies, new product concepts for soybean and wheat, and additional germplasm types arising from our breeding programs. Beyond what we have already disclosed, we will continue to expand our development pipeline so that potentially blockbuster products can make it to market. A few illustrations of things we are pursuing hard include sustainable oil substitutes, in which one oil gets swapped for a different, more sustainable or healthier option derived from plants; non-gluten choices; and within protein and flavor, we're looking into goods and project concepts that make the taste of proteins and plant-based proteins better. We've also got several initiatives going in hemp, among them a number that let us take advantage of our genomics work in plant breeding plus a bit of shared know-how to speed up launches into the market. To wrap up, 2020 has begun strongly for us, which sets things up for a thrilling remainder of the year. At this point, I'll hand things over to Keith Blanks, who serves as our Senior Vice President of Sales and Marketing, so he can share the latest on what our sales and marketing teams are doing with high oleic soybean oil and meal.

Thanks, Travis. Now I'd like to walk through how our soybean products performed in the first quarter. At present, we're aiming our high oleic soybean oil sales at four segments: food service, food manufacturing, animal nutrition, and industrial markets. The bulk of our oil revenue this quarter came from a world-class customer of ours that's active across all four of those premium oil segments. We've got sufficient oil in inventory to fill their outstanding orders from now through early in the fourth quarter; on top of that, we're now providing our high oleic soybean oil to the two biggest food service distributors in the U.S., even though demand in that channel has taken a hit from COVID-19. We keep sampling and testing our high oleic soybean oil with the big consumer packaged goods companies, but at the moment they're concentrating on serving their own customers rather than altering products or rolling out major innovation. When it comes to soybean meal, our customer base has grown, both in terms of geography and into more protein production markets. Beyond that, our average price premiums came in better this past quarter than they did in the third and fourth quarters of 2019. On contracted acres for 2020, we hit our 100,000-acre goal, which works out to 278% growth compared with the 36,000 acres we planted in 2019, beating our stated objective of doubling soybean acreage each year. Seed for the 2020 crop has also sold out, and distribution of that seed is currently in progress. Seed deliveries are proceeding on schedule, and we've kept watching the distribution network. That covers the five new varieties we introduced for 2020. We estimate our share of 2020 high oleic soybean acres at 25%, with the acreage gains coming from expanded distribution into Iowa, Nebraska, and Kansas, which gives us access to the places where 45% of U.S. soybean acres get planted. Now, on the effects of the COVID-19 pandemic: it has dealt a significant adverse blow to the food industry, which has sharply cut food industry demand for vegetable oils. Starting in the final weeks of the first quarter of 2020 and carrying into the second quarter of 2020, we've seen weaker demand for our high oleic soybean oil, tracking the overall drop in demand for vegetable oils as a whole. On top of that, an oversupply of vegetable oil has pushed prices down, and we think our high oleic soybean oil could be especially affected by lower pricing in the premium oil category. Going forward, we anticipate premium oil prices staying low and vegetable oil demand remaining depressed through the second half of 2020 and potentially past that. Right now, we're targeting sales of our high oleic soybean meal at dairy, poultry, and pork producers. COVID-19 has hit protein processing facilities, with a number of them temporarily shutting down or pausing operations, and that's affecting upstream operations across the industry. The COVID-19 effect on protein supply will likely produce a matching effect on demand for our high oleic soybean meal. As we look ahead, we anticipate that soybean meal prices will stay depressed, and based on herd sizes, demand for soybean meal could likewise remain weak through the back half of 2020 and potentially longer. Given shifting demand, pressure on pricing, and the uncertainty the COVID-19 pandemic has created among both our customers and our target customers, we have revised our near-term crush plan and have called off crushes that had been set for late May, June, and July 2020. This move prevents incurring storage costs for oil and should push our product sales efforts into the latter half of 2020, when customer demand might partially bounce back, contingent on when and how fully normal operating activities resume among our customers; we are also speeding up our purchase of the remaining 2019 grain crop, which had initially been slated for purchase prior to August 31, 2020, so that we can capitalize on current soybean grain prices. I'll now turn things over to Bill Koschak, our CFO, who will provide an update on our first quarter financial results.

Thanks, Keith. Earlier today, we put out a press release covering our results for the first quarter of 2020, and we filed our Form 10-Q this morning as well — you can find both documents on our Investor website. Revenue from high oleic soybean oil and meal rose $2.2 million in the first quarter of 2020, reaching $2.4 million. The growth came from 1,440 points of volume and 44 points of favorable product mix, partly offset by 70 points of pricing. In the first quarter of 2020, high oleic soybean meal accounted for 87 percent of revenue, versus 92 percent a year ago. Most of what we earned from oil in the quarter was generated by a world-class client that operates across every one of the four premium oil target market segments, where it serves as a plant-based substitute for synthetic fluids. On gross margin, we reported a drop of $1.6 million, finishing the first quarter of 2020 at negative $1.5 million — a figure that mirrors the elevated costs tied to where we currently stand in commercializing our high oleic soybean products. When measured on a non-GAAP adjusted basis, gross margin reached negative $1.2 million, equal to negative 49%, versus the negative $1.5 million, or negative 63%, recorded under GAAP. In our earnings release, you'll find a discussion of gross margin as adjusted, plus a reconciliation between gross margin — the closest GAAP measure — and gross margin as adjusted. Research and development costs increased by $568,000, reaching $2.8 million during the first quarter of 2020, which came from higher personnel cost, professional fees, and non-cash stock compensation expenses. Since we continue to concentrate on our technology and on commercializing projects created alongside collaborators, we anticipate that R&D expenses will either stay flat or grow. Selling and supply chain expenses climbed 676,000 to $1.6 million in the first quarter of 2020, which came from higher personnel costs and allocated expenses, among them $273,000 tied to Section 16 officer transition expenses, and these were partly offset by $314,000 of reduced non-cash compensation. When you factor in what COVID-19 has done, we're broadly anticipating that selling and supply chain expenses will come down, since sales are lower and we're spending less on marketing. In responding to the pandemic, we've launched broader efforts to cut costs, and sales and supply chain expenses are part of what we're going after — for the rest of 2020, we expect those expenses to be lower than they were in the first quarter of 2020. On the G&A side, first quarter 2020 expenses climbed $558,000, reaching $4.7 million, with professional services expenses and higher depreciation driving that increase. In response to the pandemic, we're looking at G&A as one area within our broader expense-cutting push, and for the rest of 2020 we anticipate those costs coming in lower than what we saw in Q1. During 2020's first quarter, net loss climbed $3.7 million, landing at $11.1 million. For that same quarter, net loss per share came to $0.34 on both a basic and diluted basis, which is $0.11 higher per basic and diluted share than what was reported in the first quarter of 2019. Adjusted EBITDA, on a non-GAAP basis, grew $2.6 million to hit $8.2 million in 2020's first quarter. That came about because of shifts in operating expenses, the negative gross margin increases we described earlier, plus a $570,000 drop in interest expense resulting from lower rates, reduced balances, and unrealized losses on short-term investments. You can find a discussion of adjusted EBITDA, along with a reconciliation to net loss — the closest U.S. GAAP measure — in our earnings release. Net cash used during 2020's first quarter came to $12.6 million, versus $9.6 million in the comparable 2019 period. The driver was a $3.7 million rise in net loss, partly offset by less cash going toward operating liability payments, mainly because supplier and related-party payments were higher during 2019's first quarter. As of March 31st, 2020, cash, cash equivalents, short-term investments, and restricted cash came to $47.4 million. Because of the COVID-19 crisis, we've seen demand shifts throughout the oil markets along with falling exchange-traded prices for oil and meal alike. Consequently, we halted our crushing and refining schedule, and we anticipate product sales work in the second quarter moving into the latter portion of 2020. We're seeking cash sources via high margin collaboration agreements and licensing opportunities, and we're doing more to boost financial flexibility and liquidity — reviewing operating expenses, shifting the timing of grain purchases from the fourth quarter into the next year, and delaying non-essential capital expenditures. During April 2020, we obtained a $1.5 million loan through the Small Business Administration's payroll protection program, created under the CARES Act. Following a thorough management review, we concluded that today's economic uncertainty required this loan to sustain ongoing operations and to keep our team members employed through this unprecedented time. Calyxt put out 2020 financial guidance covering revenue, adjusted gross margin, and cash usage on March 5, 2020, without factoring in COVID-19 pandemic impacts. Because of all the unpredictability the pandemic has introduced, plus the difficulty of pinning down just how far or how long it will affect our operations and financial results, Calyxt is pulling its 2020 guidance as well as its 2020 adjusted gross margin guidance. On top of that, when we factor in the decrease we expect in cash expenditures, Calyxt's current projection for 2020 cash usage is a range of $30 million to $34 million, which is lower than the $34 million to $38 million we had previously guided for 2020 cash usage. Those cuts also extend into 2021. With these moves, we believe our existing cash runway will last into late 2021. We continue to look at additional ways to further use — to further bring down our cash usage. At this point I'd like to hand the call back to Jim.

Thanks, Bill. Though what lies just ahead isn't clear, one thing is certain: Calyxt needs to move wisely and firmly in order to thrive through this period and once it's over. We've taken steps that cut our cash spending for both this year and the next, which lets us stretch our cash runway until late 2021. We keep carrying out our business initiatives around customer advancement and soybean margin optimization. Our agronomy and supply chain teams have put in work so that our 2020 acres can be planted. We've kept up the pace of our meetings with some of the world's best companies regarding product development opportunities. In our labs, we've enhanced our gene-editing platform, grown our patent and IP portfolio, and pushed our R&D programs ahead. I'm extremely proud of our team, and I look forward to sharing more of our developing story at the upcoming BMO global farm-to-market virtual Conference on May 13, and then at a later date, giving more detail about our technology and R&D pipeline. With that, I'd like to open the call for any questions. Operator, please go ahead.

Only a few things from my end; first off, I'm curious whether you could give a little more detail on the timing pattern for those hemp projects you're talking about. You mentioned that this year it sits at the pilot stage alongside other projects, with a launch anticipated in 2023, yet does that mean the crop as a whole will basically stay at pilot stage across the coming couple of years until it truly speeds up in 2023, or do you anticipate a significant rise from one year to the next in the meantime?

Appreciate it, Ben, Jim here. Absolutely, we're thrilled. This initiative emerged and we'll be rolling it out in Q2, though for us it's truly a standardization effort aimed at tackling the usual problems, or helping construct a framework for the usual problems hemp growers face, so our goal is to help turn hemp into a broad-acre crop, and therefore particular steps are required to support automatization plus mechanization and other elements necessary to become a broad-acre crop, and much like our high oleic soybean model, it genuinely delivers a different economic model for a crop, a model for American farmers who truly want that. That's the origin of the concept — one of our soybean growers also grows hemp and has particular product-related difficulties with that crop; and we think our expanding know-how in TALEN tools might be applied to support upcoming concepts, already highlighted and covered in the current market, such as possible wellness benefits and applications, the extremely strong green building materials utilized as halide and utilized as a protein source, and genuinely exploring methods to lower risk or deliver fresh profiles for consumer products amid this major conversation about this nascent crop with abundant white space and searching for a leader; so that's essentially our hemp strategy and we're delighted to be underway with it, and we feel this accumulation and early advantage plus know-how in this crop that's searching for a leader is thrilling for us, and it likewise enables us to capitalize on our soybean work, much of this R&D in the methods has genuinely aided us on both fronts, though we truly believe that's one more reason this will prove a powerful space for us.

Great. Moving on to Calyno, I might have missed the precise figure for acres, but previously you provided quite specific figures for acreage either planted or under contract when you reported. I heard that 100,000 figure mentioned again today — did I overlook the exact acreage you've got contracted for this year, and if I did, what is it? And if you didn't give it, is there some reason you can't share that precise number?

As we told you previously, we got there pretty early, I believe in February — the 100,000 acres where these five new varieties are being ringed — and we've replicated that seed down in South America, brought it back, and it's ready to go in the ground. So we will have — there's always some additional seed inventory available for replants should a weather event occur, but our focus is on that 100,000, and honestly, given the rise from 36,000 a year ago, we feel good about that figure, though we're in the middle of planning it now. So the truth is we've planted under half, yet we're far ahead of where we normally are and where we were a year ago in those areas that maintain this type of data at USDA, so predicting what's ahead isn't possible, but we're genuinely thrilled to get these 100,000 acres into the soil.

Alright, regarding the commercialization side, I mean, I definitely get the difficulties in the present climate with commodity prices and the broader market. But I'm curious if you could discuss a little the — your capacity to — how your capacity to secure a premium for the meal and the oil has changed across the last 12 months, perhaps before COVID-19 actually, actually took hold, were — was your — did you observe pricing power getting better over the last year, were you charging more than — significantly more than commodity prices and commoditized substitutes or were you getting pricing really sort of nearer to that figure and how did that figure change here over the last 12 months or so.

I'll begin, and then I'll have Bill address margin figures, but we are thrilled; it truly appears that this emphasis on high oleic soybean as a substitute for imports in other less local traceable sustainable choices is gaining traction. We witnessed substantial demand entering the year and some spot scarcities of certain competing products that genuinely made us interested and introduced us to many customers. Sadly, now with the closure of the restaurant sector and other factors, that has eased some of those supply problems and so we're back to selling now; so regarding the margin aspect, Keith and Bill, would you like to speak to that.

Absolutely. So Ben, as you're aware, shifts in commodity prices—which make up the foundational piece of the price we capture, particularly in the oil market—dropped quite a bit during the first quarter, and we definitely observed that. However, the premiums that Keith and his team were trying to obtain from a range of prospective buyers fell within what we'd anticipated since the start of the commercialization effort. When it comes to meal, those prices too, as you know, have been extremely volatile—depending on which week in March you looked at, the difference could be $40—and we applied our risk management approaches to safeguard the pricing expectations in our programs, which have turned out to be effective, and we were also seeing favorable pricing relative to the board on the meal side, with a very consistent supply and demand for the product. Keith, is there anything you'd like to add?

No, I believe you've captured it, Bill.

Kevin Estok here, filling in for Laurence, from Jefferies. I've got just a single question. It concerns R&D collaboration, so I suppose I'm curious whether there's anything new on that front, and perhaps how the coronavirus, plus economic uncertainty of course, is affecting the R&D collaboration you do with peers.