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

Thanks, and hello everyone. I appreciate each of you spending part of your day with us for Calyxt's Second Quarter 2020 Business Update and Results Conference Call. Joining us as hosts are Jim Blome, our Chief Executive Officer; Bill Koschak, our Chief Financial Officer; and Travis Frey, our Chief Technology Officer. We issued a press release with the full results after trading ended yesterday, and you can find it on the company's site, calyxt.com. Ahead of the formal presentation, please let me note that anything said during this call and webcast — including remarks about future financial results, future operational goals, and industry prospects — constitutes forward-looking statements and could be affected by various risks and uncertainties that might make actual results differ materially from what is described here. A list of associated risks appears in the company's SEC filings; today's presentation also covers adjusted EBITDA and gross margin as adjusted. Those are both 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. You will find additional disclosure regarding these non-GAAP measures. These non-GAAP financial measures ought to be viewed alongside GAAP financial measures, not as a replacement for results presented in accordance with GAAP. Lastly, we are webcasting this conference call. The webcast link sits in the Investor Relations section of our website at calyxt.com. At this point, I'll hand things over to Calyxt's Chief Executive Officer, Jim Blome. Jim, the floor is yours.

Chris, thank you — and thanks to everyone for being here on this call covering Calyxt's results for the second quarter of 2020. Before I get into that quarter and the thrilling step forward for our soybean offerings as we move toward a leaner operating model, I want to start by recognizing how we've responded to the COVID-19 pandemic. Our team is committed and tough, and they kept every one of our important projects moving forward through its development cycle during the second quarter even as the pandemic weighed on us. We've put a number of measures in place so that our employees stay safe and our business stays protected, and I'm grateful for all that our people are doing to keep everyone healthy and keep our projects on schedule. Calyxt came into being with a mission of bringing disruptive, plant-based innovations to the world, beginning with a focus on food and agriculture; through our high oleic soybean product, we became the first business to successfully show a proof-of-concept for a food made using gene editing technology. What we accomplished with that product has been incredible and marks a major milestone for all of us at Calyxt. We ramped up quickly, and within 15 months of our early 2019 launch, we're now supplying some of the biggest companies in the world within their respective industries. Now that we've reached proof-of-concept and led the way on the regulatory front, we're taking our go-to-market strategy for these products forward into a new commercialization program aimed at supplying Calyxt's first product to large grain processors for their own soybean processing operations. The initial move in this new program is a sale of 300,000 bushels of soybeans to one of the largest processors in the world. Under this sale, the processor bought our grain, and it will handle marketing the oil while we handle marketing the meal. By moving upstream in this business, we can capture more value from our soybean product line sooner, since our plan is to partner with processors on selling seed and on launching future soybean product candidates. Last, this transition lets my management team concentrate on developing and capturing greater value from high-value innovations and plant-based solutions that carry substantial disruption potential. Our soybean product line matters a great deal to Calyxt's success. It made possible much of what we're working on today, which Travis will speak to later. Here's a brief recap of where the soybean product line stands. Final planted acres for 2020 came to nearly 72,000 acres, which is double the total planted in 2019. We've doubled acres 3 years running, which shows there's demand for products made from our soybeans. In 2021, we plan to aim seed sales at large grain processors, representing at least $3 million to $4 million in expected revenue, because seed transactions will generate revenue under the new go-to-market strategy. A processor that ranks among the biggest in the world bought 300,000 bushels of Calyxt soybeans — a sizeable chunk of what was on hand as of June 30, 2020. That processor keeps the right to process and sell the soybean oil that comes out of it, and Calyxt will buy and market the soybean meal that results. In the same way, we intend to move the rest of our grain inventories, plus grain we've contracted to buy from the 2020 crop year, to large processors. On top of that, the TALEN mix needs reworking for the coming phase of our business, and roles tied to soybean processing and product sales are being cut. I want to express my thanks to the Calyxt employees whose last day was yesterday. Every one of them played a part in building something unlike anything else in the United States. What they contributed matters to us, and I wish each of them success going forward. We anticipate upfront aggregate cash charges of roughly $0.6 million tied to severance and other related payments, and we expect to book a $0.9 million recapture of noncash stock compensation expense stemming from forfeitures of unvested awards; beyond that, we anticipate $0.5 million in additional cash charges across the next 12 months as we exit processing and transportation contracts. The bulk of transition expenses will hit the books in the third and fourth quarters of 2020. Executing our go-to-market soybean strategy effectively lowers cash consumed by our soybean product line by more than $45 million through 2022 and pushes our cash runway out into 2022. Starting from our original focus on food and agriculture, our innovations today have uses spanning a wide range of industries. To create value from our TALEN technology platform, our strategic focus centers on traits offering higher-margin downstream benefits to end users, which sets us apart from those pursuing traits designed to deliver distinct advantages to the farmer; even so, I do expect the Scientific Advisory Board announced today to surface ideas that could help growers and consumers down the road. We'll assess those alongside other potential projects and give priority to whichever offer the most attractive returns. Our commercial proof of concept, our robust intellectual property portfolio, and our standing as a leader in gene editing have brought us into extensive talks with top companies spanning several industries, among them food, pharmaceutical, energy and agriculture. Our plan is to develop projects with partners that draw on our strength in trait development and gene editing along with our partners' expertise in commercializing products. Conversations with potential partners have centered on our work developing plant-based solutions for specific downstream issues, among them consumer preferences, sustainability, cost, quality and regulatory compliance. By drawing on our partners' commercialization capabilities, this model will shrink our cash needs and allow efficient market penetration of Calyxt traits; we are well positioned to set up licensing arrangements built on our TALEN technology, our trait development expertise, and our leading know-how in the gene editing field. Strategic licensing arrangements open the door to broad market penetration of our technology, while we can earn milestone or royalty payments via our licensees' commercialization efforts. When it comes to the work we do on products, the exact spot where we plug into the value chain can differ from one crop to another. Based on a number of considerations for crops such as soybeans and wheat, we anticipate that selling seed to processors or to other participants in the supply chain will deliver the largest margins available and the strongest route to generating positive cash flow. For some traits, we anticipate that licensing deals will offer an efficient route to non-dilutive financing and the chance to bring in revenue. With that said, I'd like to turn the call over to our Chief Technology Officer, Travis Frey, who will give an update on our commercial pipeline.

Thanks, Jim. I share your enthusiasm regarding the advancement we announced today, and about what TALEN could do to shake up sectors past just food and agriculture. As you're aware, TALEN sits at the foundation of our technology platform. It's a sophisticated breeding method that permits precise targeting of genes already present inside a plant's genome. Carrying it out is fairly uncomplicated. When our scientists work with it, TALEN can be created rapidly. The work involves 4 stages: pinpointing the DNA target, bringing the TALEN into contact with the DNA so the edit gets made, watching the DNA mend on its own, and afterward verifying that the result matched what we wanted. We inspect thoroughly at every point in development to guarantee purity and to confirm that selected plants carry no foreign DNA. Compared with other editing platforms, TALEN offers several significant advantages, and we think that's what makes it the leading editing platform. TALEN can be engineered so that it binds to any DNA sequence at any location in the genome, no matter how complex, which yields a high level of precision. TALEN also demonstrates great specificity in the way it pairs up to locate a target, and you can boost that specificity just by adding additional TAL domains; in our view, our IP portfolio offers an unambiguous route to gene-edited products that reach the market. Our lean business model consists of 3 go-to-market strategies. First, licensing TALEN technology to third parties so they can use it in developing their own specific traits, in exchange for negotiated upfront annual fees plus possible royalties on commercialized products. Second, trait and product licensing arrangements, through which we'll aim to license traits or products developed by Calyxt to downstream partners who possess commercialization know-how, in return for negotiated upfront and milestone payments plus possible royalties on commercialized products. Third, seed sales, through which we'll aim to negotiate agreements to sell seed to agricultural processors, among them millers and crushers or other participants in the applicable crop supply chain, and those sales should generate revenue for Calyxt. When conditions are right, licensing our TALEN can be appealing for multiple reasons, such as letting others push the technology forward, or enabling product ideas we lack the time or resources to chase ourselves. We plan to be strategic regarding how we license this technology and who receives it; for every product candidate, we'll assess which go-to-market strategies deliver the most value creation and the most efficient route for getting the product to market. Our core go-to-market strategies give us a differentiated path to commercialization and could produce cash payments across the development cycle. While we're pursuing one of our licensing go-to-market strategies, we have 2 comparable financial models. With a TALEN license, we anticipate collecting fees upfront and then yearly from whichever licensee we sign. Once the partner commercializes, we anticipate collecting continuing royalties. With a trait or product license, we anticipate collecting fees upfront and then once our partner hits major milestones. If we spot a partner sooner, we can recover more of the development cost through those payments. Once our partner takes the product to market, we anticipate collecting continuing royalties. Because of how the accounting guidelines for these kinds of deals work, revenue and cash might not match for annual upfront milestone payments. Even so, we anticipate that royalty revenue and cash flow will arrive at an equivalent pace. Under our seed sale go-to-market approach, we anticipate that seed sales will power revenue generation, though we might also collect upfront fees tied to how big the opportunity is; through these main go-to-market approaches, our goal over time is margins in the high double digits, subject to how much ongoing investment Calyxt needs to make. In assessing every opportunity, we look at the different go-to-market approaches and how each one influences our capacity to produce free cash flow. After that, we work to launch the idea using the approach we prefer, and we always bring potential partners in as early as we can so that value creation is maximized. As we move ahead, you'll notice the pipeline change from proof-of-concept projects into newer, more disruptive projects involving these same crops plus a number of additional ones. A few pipeline highlights: in the second quarter, Calyxt's high oleic, low linoleic, or HOLL, soybean was judged a non-regulated article through the Am I Regulated? process run by the biotechnology regulatory services of the Biotechnology Regulatory Services of the Animal and Plant Health Inspection Service, also called APHIS, a branch of the United States Department of Agriculture, or USDA. This next-generation soybean product should provide formulation benefits, such as better stability, which helps widen the applications it can serve. We plan to launch this product through a seed sale go-to-market approach. Calyxt's HOLL soybean is in development right now and brings the total to 8 Calyxt products judged non-regulated articles by the USDA under 7 CFR 340. Near the end of the second quarter, we launched our non-edited hemp germplasm, selling plants straight to a grower and generating several thousand dollars in revenue; that swift commercial win is an initial move toward making our hemp projects partner ready, allows us to gather useful insights and data, and should act as the base germplasm as our hemp projects are expected to kick off starting in 2023; we anticipate these projects will target the challenges the crops face now, such as yield and THC levels. We plan to launch these products through either a seed sale or a trait license go-to-market approach; we're also enthusiastic about fresh areas of focus for us that might yield high returns given how large the opportunities are. On this list, there are efforts aimed at alternatives without gluten, plus work on protein and flavor — for instance, making plant-based proteins taste better, along with our soybean initiative involving high saturated fat. That initiative consists of multiple products sharing one underlying chassis, and it uses oil profiles to substitute for the less sustainable oils that go into food and energy. Tied to moving forward with a more streamlined business model, we took a look at our development funnel and cut down how many projects sit in development, so we can concentrate on the ones offering the strongest chance of successful commercialization alongside a partner. Following that review, as of today we hold 8 projects sitting at the discovery stage or further along, spanning alfalfa, hemp, oats, soybeans and wheat. Beyond that, we're investigating better protein profile and flavor in pulse crops, and multiple options are being weighed. Our present soybean product also appears in the table on this slide; we put it there since we're seeking a seed partner or partners to assist with delivery. We're additionally in active talks over agreements with prospective partners regarding particular opportunities where development work would kick off only once a commercial agreement is reached. Alongside our high oleic soybean offerings, we anticipate no fewer than 5 product candidates entering commercial planting from now through 2024, among them our alfalfa product candidate in 2021, our high-fiber wheat product candidate as early as 2022, and 3 further product candidates, each involving third parties. That's especially thrilling given that we keep speeding up our push toward deals with industry-leading companies, so our products reach the market in a high margin, capital-light way. During the second quarter, we additionally licensed a fresh method from the University of Minnesota intended to boost efficiency in product development. That method could shorten the time required to edit plants from roughly 1 year down to several months. We keep growing our intellectual property portfolio, with new U.S. patents granted and applications filed for new patent families on a daily basis. The granted U.S. patents address broadening the core TALEN patent family, with claims aimed at methods of generating gene-edited plants, as well as an additional soybean product concept. We submitted several new provisional patent applications centered on widening Calyxt's gene editing technology portfolio, progress in hemp, soybean, and wheat, and extra germplasm produced by our breeding pipeline. A patent was also granted to us in Australia, covering the use of CRISPR gene editing in plants. That intellectual property originated in Dr. Dan Voytas Lab at the University of Minnesota and is exclusively licensed to Calyxt. Although TALEN gene editing technology stays the main tool for Calyxt' cutting-edge R&D, our CRISPR intellectual property opens the door to further monetizing our IP portfolio by making this CRISPR IP available for licensing. I'll now pass things over to our CFO, Bill Koschak, who will provide an update on our second quarter financial results.

Thanks, Travis. I feel a lot of enthusiasm too about what Calyxt can achieve. We put out a press release yesterday covering our results for the second quarter of 2020. Our Form 10-Q was submitted as well. You can find both of those documents on the investor website. Revenue went up $1.9 million, which works out to 465%, moving from the second quarter of 2019 to $2.3 million in the second quarter of 2020. That top-line improvement came from 487 basis points related to volume plus 16 basis points from a favorable product mix, since oil represented a bigger share of total revenue in 2020 than it did in 2019, with both of those partly offset by 37 basis points from pricing, mostly because meal prices came in below the prior period. High oleic soybean meal accounted for 79% of revenue during the period versus 89% a year earlier. The bulk of oil revenue in 2020 came from one customer, who buys our oil for use as plant-based alternatives to synthetic fluids, and we anticipate completing their outstanding orders within the next 3 months. Gross margin, as reported, came in at negative $3 million, or negative 131%, for the second quarter of 2020, which is a drop of $3.1 million versus the second quarter of 2019. That decline in gross margin for the second quarter of 2020 reflects the elevated costs we've seen throughout the high oleic soybean products proof-of-concept period. The main factors behind gross margin, as reported, were net realizable value adjustments to inventory tied to expected selling prices, grain processing costs, and a substantial quantity of excess seed that was produced for 2020 plantings. Gross margin as adjusted was negative $0.8 million, or negative 34%, in the second quarter of 2020, compared with negative $0.3 million, or 69%, in the second quarter of 2019. For a discussion of gross margin as adjusted and a reconciliation to the most comparable GAAP measure, please see the section of this deck about the use of non-GAAP financial information. Operating expenses totaled $8 million in the second quarter of 2020, down $1.6 million from the second quarter of 2019, primarily due to a $0.5 million reduction in Section 16 officer transition expenses, $0.4 million of lower management fee expenses, and $0.4 million less in noncash stock compensation expenses. Net loss reached $10.9 million in the second quarter of 2020, which is $1.5 million more than the second quarter of 2019, driven by the larger negative gross margins and partly offset by the operating expense changes I mentioned earlier. Net loss per share was negative $0.33 per basic and diluted share in the second quarter of 2020, an increase of $0.04 per basic and diluted share compared with the second quarter of 2019. Adjusted EBITDA loss was $6.5 million in the second quarter of 2020, a decrease of $0.1 million from the second quarter of 2019. Also, you ought to check the deck's section covering non-GAAP financial information, where adjusted EBITDA is discussed alongside a reconciliation to the closest GAAP metric. During 2020's first 6 months, net cash used came to $24.8 million, versus $17.3 million across the same stretch of 2019, a change attributable to a $5.2 million rise in net loss plus reduced cash flows from operating assets and liabilities, largely stemming from bigger cash payments made to growers and crush activity being stopped in early May. Viewed by activity, soybean products absorbed $10.1 million of cash across those first 6 months. Employees accounted for $7.4 million, which included paying 2019 incentives. R&D suppliers along with professional services firms made up most of supplier expenses, while management fees, rent and utilities comprised the bulk of other expenses. Calyxt anticipates its cash usage will get better during 2020's second half once it sells grain, and its burn rate will shrink thanks to the head count reductions. Going forward, annually, we anticipate our burn rate dropping by roughly $5 million per year once combined with other cost savings measures already put in place. As of June 30, 2020, cash, cash equivalents, short-term investments, and restricted cash came to $35.3 million. On May 7, 2020, Calyxt released 2020 financial guidance revisions and paused guidance for revenue and adjusted gross margin, reflecting COVID-19 pandemic impacts. Taking into account our reported second quarter results, the advancement of our soybean product line, and counting the sale of an expected percentage of grain we are contracted to purchase during the fourth quarter, our base case 2020 revenue expectation sits between $17 million and $19 million. Cash usage for 2020 should land somewhere between $43 million and $45 million, which factors in a year-end investment in accounts receivable and inventory of between $15 million and $17 million. Our goal is turning that year-end 2020 investment in inventory and accounts receivable of between $15 million and $17 million into cash within 2021's first 60 days. Under this grain purchase plan, our 2021 grain revenue should come in between $22 million and $24 million, with seed revenue on top of that figure. Were we to finish selling every grain we are contracted to purchase in 2020's fourth quarter, our revenue would climb to between $23 million and $25 million, alongside a matching drop in 2021 grain revenue, and were we to collect every related receivable, our anticipated 2020 cash usage would fall in the range of between $32 million and $34 million. Shifting our soybean offerings toward a simpler operation centered on selling seed to processors puts Calyxt in an upstream market-entry position that, as time passes, meaningfully cuts the large amount of working capital Calyxt puts in, lessens our vulnerability to commodity price swings, and trims complexity from how we do business. Financially speaking, making that shift successfully lets Calyxt lower how much cash it burns and reach better gross margins more quickly, and it will push our cash runway out to 2022. On top of that, moving upstream in our soybean operations alongside major processors speeds up our path toward generating positive cash flow from operations, since that cash flow should come from products reaching the market by 2023, and all of our distinctive market-entry approaches are anticipated to add to gross margins and cash flow generation. Through this stretch, and because the timeline across numerous contracts is so complicated, Calyxt cannot offer guidance regarding gross margin; even so, management remains concentrated on cash consumption and on building new partnership structures, making the most of our simpler operating model paired with distinctive market-entry approaches. At this point I'd like to hand the call back over to Jim.

Thanks, Bill. We demonstrated that the gene-edited food product was capable of being created, brought to market successfully, and we have now identified a better approach to generating value from it through a business model that suits our company nicely. Going forward, our R&D and business development resources will be directed toward delivering to shareholders the advantages of a model marked by low complexity and strong accretion, defined by reduced non-R&D funding requirements and, as time passes, a recurring revenue stream with higher margins that likewise demands no substantial capital outlay to run. We expect that how future agreements are structured, along with the quantity and schedule of cash flows, will differ based on multiple factors, among them development cost, the magnitude of the opportunity, and the point at which a partner or licensee joins the development process. Achievement in this area will spur later projects and will further hone our gene editing expertise while extending our proven track record and swiftly expanding intellectual property portfolio; in short, Calyxt's dedication to disruptive innovation, making use of plant-based inputs, has galvanized our whole team. Via streamlined business models featuring differentiated go-to-market strategies, we are pursuing varied revenue streams spanning numerous industries, a margin profile in the high double digits, and a quicker route to free cash flow; we believe that progress on our soybean products and expected cash receipts from our product development work with partners pushes our anticipated cash runway out to 2022. I take immense pride in our team for everything they have constructed and the position Calyxt now occupies; we are eager to reveal more of this evolving story at the forthcoming 40th Annual Canaccord Growth Conference from August 11 through 13; the Intellisight 2020 Virtual Conference on August 12; the LD Micro Virtual Conference from September 1 through 3; and the 22nd Annual HC Wainwright Virtual Global Investment Conference from September 14 through 16. Additional specifics regarding the key projects and business model will be shared during Calyxt's Virtual Analyst Day, to be announced shortly, in the fall of 2020. Having said that, I would like to invite questions from the call. Operator, please go ahead.

Just a few things I'd like to ask. First, could you give us a way to think about each of the products in terms of how large the opportunity is — some kind of framework we could apply product by product to gauge how big these could become, whether measured by revenue produced or by the licensing deal, and how would you rank them by order of magnitude?

Ken, I appreciate the question. The way we look at it, our focus is on how fast we can reach positive cash flow, and as Travis said, that cash flow may originate from a number of sources. When we consider how large the opportunities are, every one sitting in front of us is significant. If you took an acreage projection for our HO soybeans, which you've likely considered previously, that would serve as an excellent illustration of how to approach this. And from our standpoint, everything comes down to locating a partner to plant commercially when it's a seed product. That specific opportunity — or when it's a trait, collaborating with someone to settle on a concept and then work through the way we build it out. Our germplasm, their germplasm, we'll figure out what that ends up looking like.

At what point do you expect to turn cash flow positive in that regard? When is that milestone going to be reached?

We haven't given a specific year, though the timeline has moved up compared with what it was under the earlier go-to-market approach for our soybean product.

Then here's my final question. Regarding soybeans, you're not selling your soybean oil product anymore, correct? But what's the reason for holding onto the soybean meal? And what portion of the product has already been pre-sold via grain processes? You mentioned 300,000 to 1. But what about the remaining product? How are you thinking about lead time there?

For the initial one of these sales we're doing, the contract laid out that they purchased the grain, sold the oil, and we sell the meal. A large share of that meal is already sold, and we anticipate selling all of it quite soon after the crush, which is happening right now. We don't think that will be the situation moving forward. We anticipate upcoming sales will simply be direct grain sales, and there's nothing we need to market..

To start, I want to ask about this year's operations, specifically how planted acreage compares with what was under contract. What caused planted acres to fall to 72,000 when you had 100,000 acres contracted?

Thanks, Ben. That's a good question. We aimed for and secured contracts on more than 100,000 acres. And just like you observed last year, and again this year within the area we target, we were unable to plant the full amount we'd contracted because of late weather and some weather-related problems; but on top of that, when we looked ahead at some of our oil markets, we made moves to cut contracted acres relative to planted acres given the harsh weather, the later planting dates, expected yields, and reduced oil demand stemming from COVID.

Let's shift to the coming 12, 24 months, as your company moves away from the old way of doing things toward this new approach. For next year, you're aiming at seed revenue between $3 million and $4 million. Could you clarify a few points about that? First, regarding the 300,000 bushels, is the processor you're partnering with right now the same one that, in your estimation, will buy seed? Second, how do you see that $3 million to $4 million figure changing across the year or 2 that follow next year?

Yes. Thanks, Ben. We're in discussions with multiple processors that offer agronomy services and integrated processing arrangements; so we'll wrap up those agreements with that set of parties, and all of them are quite large processors. Regarding next year's $3 million to $4 million in seed, that's going to be revenue under this kind of agreement rather than how we currently operate; it will be recognized revenue; we'll also follow the lead of our processor partners to determine what the return on oil demand appears to be. And we'll be able to provide seed past that amount if we receive signals that oil — that the oil markets have recovered and our customers will need that from us.

A few things I'd like to ask, mostly around how consumers are receiving this. Your company is known for being the first to bring gene-edited food to market, or at least to show genuine proof-of-concept. Could you share your perspective on where consumer acceptance is heading? Clearly, GMO has drawn plenty of resistance. Over time, do you believe the line between GMO and gene-edited will let certain gene-edited items enter the non-GMO grain market?

Yeah, that's a solid question. Regarding how consumers respond, our initial commercial product has gotten an excellent reaction. You're aware that we were the first to complete that regulatory pathway; unlike GMO, it's a separate pathway, since no foreign DNA remains in the final product. That point is simple to communicate. It has contributed to growing our consumer acceptance. Our oil is being sold through the 2 biggest foodservice businesses in the United States, and it's going well. We're also observing soybean oil take the place of a number of imported oils as well as certain GMO oils. That's something we view as a bright spot. We keep backing the United Soybean Board's efforts to expand use of soybeans, U.S. grown soybeans, as a substitute for certain imported oils. So we'll keep advocating for that. Non-GMO plays a role in this, yet the assistance, the trans-fat and the other advantages have benefited this product, and local versus imported has mattered a great deal too. So my sense is that as more products arrive under gene editing, and as we keep educating people about how the 2 differ and building comfort with this, it will help. Emphasizing consumer health benefits has supported this story and the differentiation.

You brought up the distinction between what's produced nearby and what's brought in from elsewhere. At present, it appears the non-GMO grain comes from abroad. Honestly, we lack the systems needed to transport grain between regions and keep it separated at this location. As these other categories develop, do you expect that kind of system to emerge, so that more non-GMO grain grown locally can be used, which would genuinely help with moving that grain and keeping it apart?