Calyxt, Inc. (CLXT) Q1 2019 Earnings Call Transcript

Calyxt, Inc. (CLXT 1.83%)
Q1 2019 Earnings Call
May. 08, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Calyxt first-quarter 2019 earnings call. [Operator instructions] Please note, this conference is being recorded. I'll now turn the conference over to Simon Harnest, vice president of finance. Thank you, you may begin.

Simon Harnest -- Vice President of FInance

Thank you. And welcome everyone for joining us on Calyxt first-quarter 2019 financial results conference call. Joining me on the call today with prepared remarks are Jim Blome, our chief executive officer; Manoj Sahoo, our chief commercial officer; and Bill Koschak, our chief financial officer. Yesterday evening, Calyxt issued a press release reporting our financial results for the three months ended March 31, 2019.

This press release is available on our website at calyxt.com. As a reminder, we will make forward-looking statements regarding financial outlook in addition to regulatory and product development plans. These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. A description of these risks can be found in last year's Form 10-K and Form 10-Qs on file with the SEC.

And with that, I would like to hand the call over to Jim.

Jim Blome -- Chief Executive Officer

Thank you very much, Simon. In the first quarter of 2019, we achieved a monumental milestone for Calyxt in the agricultural industry with the successful commercial launch of Calyno. We are thrilled to see that our high-oleic soybean oil either met or exceeded the performance and quality standards of the commercially available oils for specific qualities, including fry life, trans-fat content, saturated fat content and flavor transfer. We're pleased to see the high quality of our oil confirmed by independent third parties.

We also saw a few surprises. Preliminary results indicate Calyno may require less cleanup after frying and up to a 5% lower oil absorption while frying, which could result in cost savings for the restaurateur and possibly added health benefit to the consumer. We believe this performance in quality will enable us to commercialize Calyno as a premium oil. I'm excited to share that Calyno oil is now available from one of the world's largest broadline foodservice distributors.

This new customer provides a growth platform for the distribution and penetration of our oil into the nationwide foodservice business. With this great start into the foodservice business, we can continue to identify and vet a series of opportunities in the food ingredient market segment. Our strategy is to focus and strongly pursue these opportunities and to translate them into orders of size, as well as multiyear agreements. In our industry, size and relationships matters.

With over 55,000 acres planted in 2019, which is more than three times our 2018 acreage, our goal is to top the 100,000-acre mark next year. We're excited about our acreage trajectory and looking ahead, we believe we are approaching a footprint that enables us to show real supply strength to our customers with the intention to enter larger scale supply contracts in the future. With this, I'd like to hand the call over to Manoj Sahoo, our chief commercial officer who will provide more detail on our grower activity and customer activity. Manoj?

Manoj Sahoo -- Chief Commercial Officer

Thank you, Jim. To echo Jim's words, it is indeed an exciting time for us right now at Calyxt. We are seeing an acceleration of grower interest in contracting for acreage. Today, I am glad to announce that we have effectively sold out of seed for the 2019 growing season.

This means, we have contracted just over 55,000 acres for the 2019 season. With this, we have now more than tripled our 2018 acres. To provide some more detail, we are now working with over 150 farmers, planting on an average 17% of their acres with Calyxt high-oleic soybeans. We're also excited to announce that our grower partners saw an average retention rate of more than 70%.

As we have mentioned before, we're coming into this industry with the tailwinds of the highly favorable macro trend that supports locally produced and addressable agricultural products, which are sold in the local market. We're proud to support the American farmer and provide transparency about where their food comes from to our customers. We begin to ship seed for the 2019 planting season early in the second quarter and expect to complete all deliveries as early as May 31. Our new partner, Agtegra, has been instrumental in bringing us additional acres helping with agronomic support and logistics.

We are excited about this new partnerships, which has already contributed a small portion of our 2019 acreage right out of the gate, and we see tremendous growth opportunity in the coming planting seasons. I would now like to share an important update on our oil customers' side. We are now distributing oil with our own Calyno brand name through one of the largest broadline foodservice distributors. They have positioned our oil in the premium oils category.

This new relationship enables us to supercharge our distribution capability while positioning our labeled product to foodservice operators. At the same time, as we are expanding our product reach in foodservice through strategic relationships such as this, we're also vetting food companies for ingredient opportunities to sell our oil at premium prices. We believe our first growing trend in acres on the contract will position us to execute on these relationships in the future. So far, our foodservice relationships have confirmed and positively surprised us to the upside of the quality of our oil and economic potential due to extended frying life and decreased operating cost for restaurants.

Most of all, providing a non-GMO high-oleic oil that has zero trans-fats per serving is the key selling point for us. As Jim mentioned before, we are getting increased traction based on the quality of our oil and the next step for us is to top the 100,000-acre mark next year, that is 2020, and so supply reliability to our customers. We believe this will enable us to execute on the relationships we are currently nurturing. The first commercial sale proved the viability of our business model, and now it will be all about scale up.

With this, I would like to hand over the call to Bill Koschak, our CFO. Bill?

Bill Koschak -- Chief Financial Officer

Thank you, Manoj. We ended the quarter with cash, cash equivalents and restricted cash of $85.7 million. During the first quarter, we used $9.6 million of cash to fund our activities. This cash burn included over $2.5 million of nonrecurring payments related to hiring activity and the cost of being a public company.

Our operating cash burn in the first quarter was less than $3 million per month, driven by spending less than our plans called for in the quarter. Based on the acreage contracted, we expect to receive consideration for seed transactions with farmers of $1.8 million in the second quarter. Taking into consideration our current spending levels, the consideration we will receive from seed that I just mentioned and the increase in acreage for 2019's growing season, we continue to expect our cash burn to remain near $3 million per month through the remainder of the year. Our cash runway provides funding through early 2021.

Our plans for 2019 project a revenue between $7 million and $8 million based on our 18,000 acres planted in 2018 and harvested to date. We expect our revenue to ramp up through the remainder of the year with most of the revenue occurring in the third and fourth quarters. With the commercialization we talked about in the quarter, I would also like to highlight two matters that impact our reporting. First, we do not record seed transactions as revenue because of the commitment we have to purchase the grain crop from the farmer.

As a result, the consideration we receive for seed transactions, net of cost to produce the seed, are deferred in inventory and will be recognized as a reduction of cost of goods sold upon the sale of our finished goods. Second, before our commercial launch late in the first quarter of 2019, we recorded all grain purchased as R&D expense. We now capitalize grain and other costs to process it into oil and meal, into inventory. As a result of our prior accounting methodology, our initial margins will not be indicative of what we expect them to be on a normalized basis.

With that, I would like to pass it back to Jim for his closing remarks.

Jim Blome -- Chief Executive Officer

Thank you, Bill, for that summary. This first quarter of 2019 is very important to us as our first commercial sale together with our regulatory clearance is the proof of concept for our business model. For the remainder of 2019, we will focus on scaling up and building strong commercial relationships. We are strategically hiring to enable our commercial team to grow and drive customer demand.

Looking into the future, 2019 will be a key year to build the foundation of our early commercial relationships. We have decided to move forward with focus and selectivity to build solid agricultural and food partnerships that keenly position us for sustainable growth. To further this concept of sustainability, our pipeline has undergone a thorough analysis to accelerate those programs with the highest commercial value and near-term opportunity. Our progress in high-fiber wheat, where we are planning a commercial launch as early as 2022, is a strategic expansion of our market position.

The key selling point for this product is the fact that our high-fiber wheat contains more than three times the dietary fiber when compared to standard white flour. We are creating an excited synergy and incentive for our current soybean growers as they would have the opportunity to rotate their Calyxt soybean acres with Calyxt wheat acres. We are also moving forward with an improved quality alfalfa, which could potentially reduce the irrigation water needed to grow forage, the livestock's required food intake and the resulting CO2 output of livestock, which can significantly and measurably improve the sustainability of our customers. We are pursuing select partnerships with our improved quality potato and canola projects.

These product candidates will follow our licensing model rather than downstream integration, therefore, providing an attractive revenue opportunity while maintaining our lean business model. We couldn't be more excited about what is to come for Calyxt this year and to establish Calyxt as a trusted partner for farmers and food customers. With that, I'd like to open up the call for any questions. Operator, please go ahead.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Adam Samuelson with Goldman Sachs.

Adam Samuelson -- Goldman Sachs -- Analyst

So I guess, my first question just on the 2019 commercialization and just how this plays out over the balance of the year. Is it a situation where all the meal and the oil -- I mean, you're still expecting to sell out of everything produced coming out of the 2018 crop. And I'm just trying to, especially on the meal side, I guess, we would have thought that there would be more realized revenues in the first quarter as you should be selling that pretty close to when it's crushed. But just help frame kind of how the revenue progresses over the balance of the year as you do have for sales?

Jim Blome -- Chief Executive Officer

Sure, Manoj?

Manoj Sahoo -- Chief Commercial Officer

Yes. So Adam, I think the 2018 crop we expect to be sold out in 2019 definitely. And meal has a lower shelf life, so you have to sell it almost within four to eight weeks of production. And currently, we have actually sold out all the meal, which we have produced in the first quarter.

And we are engaging in crushing for the next future batches to serve our existing customer portfolios needs.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. So that will be kind of 2Q revenue recognition, just to be clear on that one?

Jim Blome -- Chief Executive Officer

Yes, you're right.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. And then as we think about kind of the added foodservice distribution and the way you frame the comments around food companies, is it a situation where the food companies wanted to see the scale on the acreage and the production capability before committing to using Calyno as a food ingredient? It just seems like we shifted a little bit more toward the foodservice and the fry life -- frying oil as opposed to being an active ingredient in the -- for a food company? And just how those discussions were fanned versus previous calls, and just any additional color there on the prioritization?

Jim Blome -- Chief Executive Officer

Good point there, Adam. And as you know, the qualification period and trial period for an ingredient switch over and recipe change is longer than the qualifications for the foodservice distribution. So in our early commercialization stages, it just made sense to start both, but one would start before the other. And you're absolutely right.

As people integrate our products into their products, our scale and our proven reliability is an important part of that and will allow us to continue through '19 with very good discussions with larger players.

Adam Samuelson -- Goldman Sachs -- Analyst

But I shouldn't read that as, hey, you're in advanced negotiations and people step back? It's more just they wanted -- maybe they are looking at the 2019 acreage and the 2020 oil capabilities, is a better point to start incorporating those? Just wanted to be clear on that point.

Manoj Sahoo -- Chief Commercial Officer

Yes, Adam. It's sometimes that you need to be large enough to be able to supply for them, to switch one of the current oils to our oil. The other aspect I would like to highlight is that foodservice is willing to pay a significantly higher premium versus ingredient customers on an average, there are always exceptions, which made sense for us because when we have a lower scale selling it into the markets which are willing to put the highest value was part of our stated strategy, and that's what we are executing on along with the qualification time. So it kind of perfectly fits to create a portfolio of customers, both in foodservice, as well as food ingredient.

Simon Harnest -- Vice President of FInance

And Adam, it's Simon. Maybe just to sum it up, what we're saying basically is we're doing a lot of the heavy lifting now with the negotiations because that is what pays off in the long term. We are having very good conversations right now and if it was up to our food customers, we would be sold out immediately. But you know that a lot of this effort is well spent at the beginning to basically build the platform for our business model.

And we are so surprised by the quality of our oil that it seems to be literally one of the best oils out there that it's worth it to have these negotiations now, and then we will have a very solid commercial launch.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. And then just finally for me, just on the 2019 acreage, it's good to see kind of the comments on being sold out for this year. Any thoughts or is it just too soon to tell, just weather risk in the Dakotas or in South Dakota area just in terms of planting? It's been a very slow start to planting. It's early on beans especially up there, but the wet weather, is that causing you any concern about actually getting acres into the ground or potentially even has created opportunities as people maybe push away from corn just given the timing?

Jim Blome -- Chief Executive Officer

Adam, it's a great point. And as we reported our statistics, these are contracted acres, so these are planned to be planted and will be done in May. And it's different for corn than it is for soybean. So there may be some people that miss planning dates for earlier crops that may switch to soybeans that may increase acreage in U.S.

as a whole. And so we'll have to wait and see how the weather plays out in the next few weeks on how that impacts our actual planted acreage.

Operator

Our next question is from Daniel Jester with Citi.

Daniel Jester -- Citi -- Analyst

So first on the 2018 harvest. Can you just give us an update how much of the oil has been committed and sold out? And how much more you need to commit over the next couple of months?

Manoj Sahoo -- Chief Commercial Officer

Yes. So if you recall, Dan, the 2018 acres was close to 17,000 acres, slightly above that. If you take a standard yield of somewhere around 40, 45 bushels an acre, you're looking at somewhere between 5 million to 6 million pounds. With the major customers we just signed up, they buy oil in hundred of millions of pounds, so I'm not too worried about the amount of oil to be sold out because one customer can take it all.

But what we are intentionally doing is creating that portfolio of customers, and some of these food ingredient companies, even though they will not be signing annual contracts, just to do qualification can take a couple of million pounds. That's why we're reserving some of that oil for the qualification with these customers. And I think we're very hopeful of being sold out of our 2018 supply of volumes. We have not intentionally signed contracts with one customer to take it all because that would not leave us with enough volumes to qualify with some of the major food ingredient companies we're talking to.

Jim Blome -- Chief Executive Officer

I think that's consistent with your plan, right? That we're being selective and we're making sure that we're getting qualified by as many customers as we can during the summer of 2019. And we've put our third and fourth-quarter sales on the table today.

Daniel Jester -- Citi -- Analyst

So just to follow up on that. Should -- of the 50,000 -- 55,000 acres that are planted in 2019 for oil sale later this year and in 2020, are you going to actually sell all of that oil? Or will you need to continue to reserve a meaningful portion for qualification trials?

Jim Blome -- Chief Executive Officer

I think it really depends on the portfolio of customers that we finally select on it. We want to spread our risk, we want to have a strong portfolio of customers. And right now, we couldn't tell you what that magic number is, but that's what we will be doing in this qualification period.

Daniel Jester -- Citi -- Analyst

Gotcha. And then just on the ramp up of new varieties, can you give us an update on how you see that progressing. I know it's a year out from now, but just wondering how that is progressing?

Manoj Sahoo -- Chief Commercial Officer

No. That's an excellent question, Dan. We have one variety and I think we have done -- my team has done excellent job getting to three times acres with just one variety, phenomenal. At the same time to grow two times from here where we said we're going to at least target 100,000 acres, it's important for us to launch new varieties.

I'm happy to announce that we had a very successful bulking of our seed in North America -- in South America. We have successfully shipped the product to North America and new varieties are getting planted as we speak. So we remain on track to launch two to four new varieties in the growing regions we currently plant or operate in and also allows us to expand our footprint to adjoining or contiguous states to where we are growing. So --

Jim Blome -- Chief Executive Officer

That's an excellent point, Manoj. And just to clarify, we bulked up seed in South America. The seeds being planted in North America in this month will be for seed production, not for oil production. So just a clarification there that these acres will be for bulking up seed to be harvested this fall for planting next year.

Daniel Jester -- Citi -- Analyst

Gotcha. And then just one last one for me. The 30% or so of your growers that chose not to renew with Calyxt. Was there any, sort of, feedback that you got that was consistent across those farmers that you may be using to modify your go-to-market program in the years ahead?

Jim Blome -- Chief Executive Officer

Yes. I think you -- I think it's -- I don't know what the industry trend is, but you always have turnover. But remember, we just have one variety, and we selectively spot that on the right acres right now. And you don't always do that right.

So part of it is that growers don't always grow soybeans every year. So part of the fallout is just the growers switching to other economics and other crops and other things coming into that. So in the end, I think if you're looking from the outside of this industry, I think you would say that 70% retention year on year is fantastic.

Operator

Our next question is from Ben Klieve with National Securities.

Ben Klieve -- National Securities -- Analyst

First a quick follow-up question regarding the challenges for this year's soybean crop. In addition to poor field condition that you guys noted, there are some reports on some early weak germination rates. Wondering if you have any indication thus far about the performance of your seed from this aspect? Maybe too early for you to comment on that at all, but just curious if you have any thoughts on that?

Jim Blome -- Chief Executive Officer

We don't have any concerns with our germination tests and the spring is the spring, right? So we've certified our seed, and we're going forward with it.

Ben Klieve -- National Securities -- Analyst

OK. And then a question regarding next year's acres. I'm curious if you can elaborate a bit on what the limiting factors are going to be. I mean, demand seems really strong from the grower perspective, especially, if you're adding another variety or two, that 100,000 acres hurdle seems to be pretty attainable.

So what's going to be the variable next year that really caps acreage?

Jim Blome -- Chief Executive Officer

That's a great point. Of course, it will be seed production. We only have so much seed produced this year. So that will be an obvious mathematical limitation.

But with these new varieties, we will have to penetrate and introduce. So we will be in introductory mode in some more different geographies and adjacent geographies and lining up additional logistics and infrastructure, and we're excited about that project and look forward to it. But those are the things that we are managing logistics to the identity preserved, elevators, the crushing and everything that goes around selectively expanding from our current base.

Operator

Our next question is from Jon Hickman with Ladenburg Thalmann.

Jon Hickman -- Ladenburg Thalmann -- Analyst

Just one clarification. When you distribute oil for qualification, are your potential customers paying for that? Would you call that R&D?

Manoj Sahoo -- Chief Commercial Officer

We start with gallon or sometimes jibs and sometimes we have given barrels or toads. After that if they want a bulk tanker load, they need to pay for it, that's the stand we have taken. At the same time, we are open. If it's a very significantly large global CPG company, we understand it's a relationship.

It's about building trust. So we generally remain open on that, but most of them don't mind paying for it.

Bill Koschak -- Chief Financial Officer

Jon, this is Bill. Just to build on what Manoj talked about. Historically, those costs would have gone through R&D consistent with where all the other precommercial costs went. Going forward, the cost of those samples to us to the extent we don't charge for them will be in our cost of goods sold.

Jon Hickman -- Ladenburg Thalmann -- Analyst

OK. Then one more clarification. So this $7 million to $8 million that you said -- or that you noted in your prepared remarks, that is for 2018 product harvest that will be recognized over the next few months here in 2019. It doesn't include anything you might sell late in the year from the 2019 harvest?

Bill Koschak -- Chief Financial Officer

It's our annual projection, and I think it's going to include all of '18 and perhaps some of '19.

Manoj Sahoo -- Chief Commercial Officer

But very little. Because harvest takes in November, and there's not much time to crush it, plus you generally do not want to crush beans which come straight out of the ground. We generally like to store it and then crush it. So almost all of the 2019 production will be crushed and sold in 2020.

Jon Hickman -- Ladenburg Thalmann -- Analyst

And then that trend goes forward like what you harvest next year will -- and what you harvest in 2020 will be sold basically in 2021, right?

Jim Blome -- Chief Executive Officer

Yes. This established seasonality will then carry on year to year, correct.

Operator

Our next question is from Adam Samuelson with Goldman Sachs.

Adam Samuelson -- Goldman Sachs -- Analyst

Just one quick follow-up and just given some of the volatility in the underlying soy and soy meal markets, I mean, have you guys done any hedging or forward sales in terms of locking in flat price? Just trying to get a sense of -- or as you think about adopting more structured risk management programs moving forward, just how you're approaching that?

Bill Koschak -- Chief Financial Officer

Great question, Adam. And as we talked about in March, we were working through getting our accounts open policy set up. We have not yet done any hedging, but we expect to over the next couple of weeks as we get our accounts opened and move forward with our risk management activity.

Adam Samuelson -- Goldman Sachs -- Analyst

OK. So just to be clear, just on soy meal values, in terms of revenue recognition this year, you're going to be -- as prices have come off, I mean, that is a bit of missed revenue opportunity for you guys because there wasn't any hedging in place? Or you haven't sold yet?

Manoj Sahoo -- Chief Commercial Officer

But Adam, at the same time, we continue to sell our oil at fixed flat prices, which are not linked to anywhere to the commodity prices. So as the soybean prices have gone down, that has improved our margins on the paper. So that's the positive side also.

Operator

We have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Simon Harnest -- Vice President of FInance

Thank you very much. And always we appreciate you following Calyxt. It's a very exciting year for us. And we're available at anytime for follow-up questions and calls, just contact us, any one of our team, but feel free to email me, [email protected].

Thank you.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Simon Harnest -- Vice President of FInance

Jim Blome -- Chief Executive Officer

Manoj Sahoo -- Chief Commercial Officer

Bill Koschak -- Chief Financial Officer

Adam Samuelson -- Goldman Sachs -- Analyst

Daniel Jester -- Citi -- Analyst

Ben Klieve -- National Securities -- Analyst

Jon Hickman -- Ladenburg Thalmann -- Analyst

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