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

Thanks, and good afternoon, everyone. I appreciate all of you spending part of your day with us for Calyxt's Third Quarter 2020 Business Update and Results Conference Call. Joining you as hosts are Jim Blome, our Chief Executive Officer, and Bill Koschak, our Chief Financial Officer. We put out a press release with the results this afternoon at 4:05 p.m. Eastern Time today, and you can find it on the company's website, calyxt.com. Prior to starting the formal presentation, I want to remind everybody that remarks given on this call and webcast — including ones about future financial results, future operational goals, and industry prospects — are forward-looking and could be subject to a number of risks and uncertainties that might cause actual results to differ materially from what gets described on the call. For a list of associated risks, please refer to the company's SEC filings; this presentation also includes a discussion of adjusted gross margin, net loss, net loss per share and EBITDA. Each of those is a non-GAAP financial measure. In Calyxt's press release and its filings with the SEC, both of which are posted on Calyxt's 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. And 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's Chief Executive Officer, Jim Blome. Jim, the floor is yours.

Thank you, Chris. I'm glad all of you could join us for the conference call on Calyxt's results for the third quarter of 2020. A lot has been accomplished since we last spoke, so I'll go right to the key points. First, the biggest development: in the past week, we entered into a commercial deal with S&W Seed Company, an agricultural business with global reach headquartered in Longmont, Colorado. That agreement grants an exclusive license for a higher-quality alfalfa trait throughout the United States and in several other chosen regions. This marks the first time the company has ever signed a commercial trait license agreement, and based on long-term U.S. sales estimates, it could generate more than $10 million in license revenue over the lifespan of the trait's pending patents. Calyxt collaborated with S&W to pinpoint quality-enhancing traits for a more sustainable alfalfa product offering increased bioavailability for livestock. Thanks to the enhanced trait, farmers can grow alfalfa forage for livestock with better digestibility, which could translate into stronger animal performance. The trait is built to reap — to result in a higher value alfalfa, grown on the same acre with the same inputs, placing greater profitability in the farmer's hands. The new alfalfa seed will be sold within the S&W Seed portfolio under the brand IQ Alfalfa. S&W will collaborate with alfalfa researchers on yield and animal performance via proof-of-concept and field trials. Also in 2021, we'll run demonstration trials across important areas to highlight what IQ Alfalfa can do and how it benefits growers. This initial trait licensing deal, along with S&W's forthcoming alfalfa seed release, represents real progress in executing Calyxt's three go-to-market approaches and shows how well we collaborate: picking traits that add value, conducting the necessary research, and helping S&W Seed commercialize cutting-edge plant science. Back in August, we shared a significant plan to shift our soybean offerings toward a seed-focused go-to-market model. Using gene editing technology for food, we were the first to successfully demonstrate a proof-of-concept with our high oleic soybean product. Now that we've reached that proof-of-concept milestone and led the way on the regulatory front, we're moving ahead with a new commercialization program. Our aim is to supply Calyxt's first product as seed to large grain processors, who will partner with growers to produce, process and sell the soybean oil and meal that results. By moving upstream, we can concentrate our resources on creating and capturing more value from innovative plant-based solutions that carry substantial disruption potential. In Q3, we wrapped up a number of key steps tied to the divestment, among them making staff changes in our supply chain and sales teams, getting out of a large number of supply chain agreements, and selling off all of our soybean oil and meal. Beyond that, we're still on schedule to finish the contracted grain purchases along with the related grain sales later in 2021. Those selling efforts pushed third quarter revenue up 77%, to $5.2 million, and that figure includes the sale of almost the entire 2019 grain crop. Our goal of growing seed sales with large processors hasn't changed, and we expect that to generate at least $3 million in revenue for 2021. I'd also like to report some good news: we've been making solid headway on three market-entry approaches designed to bring us to positive cash flow sooner, all of which capitalize on what our TALEN platform can do. We recently welcomed Sarah Reiter aboard in the role of Vice President of Business Development. Sarah has a track record of leading in plant-based technology and agribusiness, and she has zeroed in on forging first-rate alliances and value chains that bring new technologies successfully to market for startups, early stage ventures, and Fortune 500 corporations. She’s going to help shape, sharpen, and carry out the broader commercial plan for Calyxt’s upcoming offerings — that includes deciding which markets, customers, and kinds of products to focus on first. As for our balance sheet, given the recent market swings, a chance came up in October once our soybean products moved to a seed go-to-market approach, letting us bolster our capital base, and we brought in $15 million through an SEC-registered offering. That fresh $15 million doesn’t only stretch how far our cash can take us — it can also be directed toward pushing forward the product development pipeline we have now, so we can continue advancing our TALEN technology and our intellectual property portfolio, all while helping us execute on our streamlined business model. It means a lot to us that Cellectis decided to join this offering — it demonstrates their support for what we're building and their confidence in how we plan to bring our products to market. One more announcement: we've scheduled our Virtual Analyst Day for November 17, 2020, beginning at 4:00 p.m. Eastern Time. We're looking forward to sharing updates with you at that point about our product development work and other topics. With that, I'll hand things over to Bill Koschak, our CFO.

Thanks, Jim. A major pillar supporting Calyxt's success is our soybean lineup. That offering proved the concept and enabled much of what we're currently pursuing. I want to remind everybody that as the 2020 planting season concluded, we were at roughly 72,000 acres—double the amount planted across 2019. All of the 2020 goals related to advancing our soybean products have been achieved, and we're now completing the shutdown of the remaining grain operation. As Jim mentioned, those activities should finish in late 2021, and we remain on track. Executing this shift well ought to reduce the cash our soybean product line uses by $45 million through 2022. Moving ahead, selling seed will be how we take this product to market, and during 2021 we plan to aim seed sales at the big grain processors, which should account for at least $3 million of projected 2021 revenue. Our main routes to market offer distinct paths toward commercialization and could generate cash payments across the development cycle; for a trait product license, our expectation is to bargain for upfront fees and then payments once key milestones are hit by our partner. Partners brought in earlier who shoulder more development cost can be repaid out of that payment. Once our partner commercializes, we might also collect continuing royalties. Under the seed sales route to market, we anticipate that revenue will come from selling seed and will show up right away. With a TALEN license, we anticipate upfront fees and then yearly payments from whichever licensee comes aboard. Upon commercialization by that licensee, continuing royalties would also be expected. Across these 4 routes to market, we're aiming for margins in the high double digits over time, subject to how much ongoing investment Calyxt needs to make. Our development pipeline is strong too. As Jim said before, we signed a commercial deal with S&W Seed Company covering IQ Alfalfa, which is our first trait license agreement. Beyond that, we have 8 projects sitting at Phase I or beyond across alfalfa, hemp, oats, soybeans and wheat. We're additionally looking into better protein and flavor profiles for pulse crops, with multiple possibilities being weighed. Our goal is for no fewer than 5 of those product candidates to enter commercial planting between now and 2024. We're likewise in active talks with prospective partners about particular opportunities where development work won't start until a commercial agreement is reached. And last, product development efforts, or the specific point at which we enter the value chain, differ from crop to crop and hinge on a number of factors. We'll pursue the biggest margins available and the strongest route to positive cash flow. A press release about our Q3 2020 results was issued earlier today, and we also submitted our Form 10-Q. Both are available on our investor site. Now for the numbers: in the third quarter of 2020, revenue came to $5.2 million, which is an increase of $2.3 million, or 77%, compared with the third quarter of 2019. Volume contributed 15 basis points and pricing contributed 64 basis points to that gain, while 2 basis points of negative product mix partially offset both, as meal accounted for a bigger portion of total revenue in 2020 than it had the year before. In 2020, a single customer accounted for most of the oil revenue, purchasing our oil to use as a plant-based replacement for synthetic fluids, and we expect to finish fulfilling their remaining orders during the fourth quarter of 2020. For the third quarter of 2020, gross margin stood at negative $1.8 million, or negative 35%, down $1.2 million, or negative 16%, compared with the same quarter last year. During Q3 2020, our gross margin decline came from reduced costs associated with items sold back in 2019. Specifically, $2.8 million in grain cost had already been recorded as R&D expense, and we saw $1.1 million in commodity derivative losses on hedging contracts that were sold in order to shift our fixed price grain inventories and fixed price Forward Purchase Contracts over to floating prices, which matches how we anticipate selling that grain. On top of that, there was a $0.2 million rise in the net realizable value adjustment for inventory at period end. These increases were partially offset by lower product costs as well as gains from pushing forward the go-to-market strategy for our soybean product line. Adjusted gross margin for Q3 2020 landed at negative $1.3 million, a negative 24%, versus negative $2.5 million, or negative 86%, in Q3 2019. That improved adjusted gross margin resulted from increased slowing prices, reduced product costs, and benefits tied to moving our soybean product line's go-to-market strategy forward. Operating expenses decreased by $2.8 million, reaching $7.3 million, which was fueled by a $2.1 million drop in noncash stock compensation stemming from forfeited unvested stock awards, along with reduced personnel costs, though these were partially offset by greater insurance costs plus restructuring expense for severance and other items related to the August 2020 action we took on our soybean product line. Also, during that same quarter in 2019, we recorded $0.5 million in expenses tied to writing off R&D tax credits that could no longer be realized. For the third quarter of 2020, our net loss reached $9.5 million, which represents a $1.2 million improvement compared with the third quarter of 2019. Adjusted net loss for the third quarter of 2020 was $9.3 million, a $2.6 million improvement over the third quarter of 2019, and that was driven by gains from moving our soybean product line go-to-market strategy forward. Our net loss per share in the third quarter of 2020 was $0.29, a $0.03 per share improvement relative to the third quarter of 2019, which came as a result of the change in net loss. For Q3 2020, our adjusted net loss came to $0.28 per share. That's a $0.08 per-share gain compared with Q3 2019, and it also stems from the shift in adjusted net loss. Adjusted EBITDA loss for Q3 2020 totaled $7.1 million, which beat Q3 2019 by $1.8 million. We cover gross margin as adjusted, adjusted net loss, adjusted net loss per share, and adjusted EBITDA in our press release and Form 10-Q, and we include reconciliations for all of those metrics to the closest GAAP measure. That material sits under the heading Use of Non-GAAP Financial Information in the press release or the Form 10-Q. Turning to a recap of what we delivered operationally in Q3 2020, we felt good about the distance we traveled in transitioning soybean products toward a leaner route to market. Across those three months, we shed the bulk of our freight leases along with other soybean-related expenses. For the grain still on our books, as well as any we purchase later, our plan is to sell at market prices, and to protect the cash margins on such sales, we plan to deploy commodity derivatives so that fixed price exposures become market-based. We believe those hedges will insulate the margins tied to those grain sales. Adjusted gross margin for the quarter landed right where we had anticipated. We sold all of the soybean oil and meal in the quarter and have sold almost all of our 2019 grain inventories; these results show the on-track progress we are making toward finishing the transition of the products on schedule. As of September 30, 2020, cash, cash equivalents, short-term investments and restricted cash came to $29.4 million. In Q3 2020, our net cash used came to $5.8 million, which was a $4.2 million improvement. The main drivers were a $4.6 million net reduction in cash flows used by operating assets and liabilities — largely tied to the timing of payments made to growers and to year-over-year shifts in inventory balances — plus a $0.6 million decrease in spending on land, buildings, and equipment. Meanwhile, our net loss improved by $1.2 million, thanks to a $2.1 million drop in noncash stock compensation expense. Looking ahead to Q4 2020, we anticipate cash used by operating activities will exceed what we saw in the first nine months of the year, because we expect working capital to rise in connection with the grain we need to buy during that period. Once Q3 wrapped up, Calyxt brought in $15 million before expenses through a financing. Among those participating in this SEC-registered direct offering were Cellectis—the company's biggest investor—along with a number of institutional backers joining for the first time. In our view, the backing from both Cellectis and these new investors shows confidence in how we plan to bring our products to market. With that, I'll turn the discussion over to Jim.

Thanks, Bill. To sum up, we think we're in a strong position to make good on what our technology promises and to shake up industries by supplying plant-based inputs to partners in a range of sectors. Our TALEN technology, our scientists, and our intellectual property are solid, and they give us an innovation platform that will propel the company forward. We brought our proof-of-concept soybean to market first and have built a first-mover advantage and a pathway to commercial planting that new innovations can leverage. Moving our soybean products forward into the Seed go-to-market strategy marks a significant milestone for Calyxt; it lengthens our cash runway and moves our first product nearer to the partnership strategy we anticipate. Our differentiated go-to-market strategies create focus and enhance the company's financial model. Calyxt's emphasis on disruptive innovation, using plant-based inputs, has opened new doors in the third quarter, and our ongoing talks with potential partners are going well. Thanks to our streamlined business model with differentiated go-to-market strategies, we're aiming for diverse revenue streams across multiple industries, a high double-digit margin profile, and a faster path to free cash flow. We believe that advancing our soybean products, the cash receipts we expect from our product development work with partners, and new cash infusion extend our anticipated cash runway into the second half of 2022. We're eager to share more of our developing story, covering key projects and our business model, at Calyxt's Virtual Analyst Day on November 17, 2020. With that, I'd like to open the call for any questions. Operator, please go ahead.

Bobby, this could go to Jim, Bill, or the two of them. I'm interested in the question of yield. When we discuss the characteristics you're actually providing to customers, yield isn't necessarily the strongest indicator of value creation. And given the improved performance — for protein output overall — the seed you're providing in this new alfalfa, I believe, simply performs better when it comes to the animal's mass, how it grows, how fast it grows, and so on. How complex is that mix of various forms of value creation? If yield alone can't serve as the metric for what you're pursuing, how many separate performance metrics are you currently examining across these different projects?

Bobby, you've got it right. We measure things in multiple ways besides yield, since we're transitioning away from commodity production toward contracted or value-added production. That supply chain, along with what Calyxt has managed to build and maintain in order to deliver at margins higher than commodity prices, is genuinely central to how our business model works. So whether it's a high oleic soybean oil with better performance or an alfalfa that's more sustainable or far more digestible, these represent the kinds of projects we're pursuing to develop and deliver value at the consumer or end-use market. So it's an entirely different market from what most commodity growers operate in, and Calyxt is genuinely glad to be locating the innovative growers who take an interest in these new models and to be offering them some diversity in how they bring their farm products to market.

Does that give you an edge when it comes to working out your portion of the total added value? In this new territory you're moving into, is it somewhat harder to see clearly, given that there's a chance to be inventive about the way these deals get structured?

Absolutely. When we bring in partners and start mapping out the problems they've been wrestling with and haven't been able to solve, and when we consider identity preserve, where we're able to capture payment in the end markets for value generated beyond commodity levels, that opens up genuinely fascinating conversations with very big players. So I have no doubt this model is compelling. It has a role, and there are lots of what I'd call stumps, correct? A handful of problems have left people stumped. So we've been brought really intriguing challenges; and I believe our intellectual property, our scientists, and our standing in the market form the very best toolkit to assist some of these businesses in locating answers to certain stubborn problems or possibilities.

All right. Before I pass things along, one final item; regarding that S&W license covering alfalfa, could you take us through how that development unfolded? My guess is they needed to put in considerable effort beyond what was already on your plate. What was the timeframe for that? And did this at any point represent a shift away from a different route you'd been pursuing? Was a licensing agreement always the plan here?

Correct. The commercial setup ended up being pretty much what people had in mind back when the research kicked off; so essentially we were asking how to get more of the alfalfa cut in the field to deliver nutritional value for the cow consuming it, or whatever animal is consuming it. That served as the basic idea behind launching the project, and from there we examined which pathways were sensible and applied TALEN's editing to reach that point on a schedule that positions us for market entry during 2021.

And when did the work with S&W actually get underway for you?

That goes back before my time here, though my understanding is the conversations around this initiative in its conceptual stage began either in 2017 or 2016.

So regulatory matters and all of that are part of this? That means it's pretty tight relative to certain other schedules that exist?

Correct. To my mind, that's one benefit we've observed with gene editing compared with several other scientific approaches and regulatory routes. Our voluntary reviews alongside the FDA — along with certain steps we've taken to blaze that trail — have turned it into a faster route to market than several other scientific fields?

Just a few things from me. First, I'm interested in the wheat product. You're roughly 3 months into this new business model, so I'd like to hear you go into more detail about what the outlook really looks like for that wheat product, which is set to launch in a couple of years. From my vantage point, you put substantial time and effort into building a supply chain that significantly overlaps with high oleic soy across the last few years. With this model now shifting, I'm wondering whether the scale of a commercial launch in the first year or 2 might look different under the new model compared with what you had in mind under the old one.