Calyxt, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Calix, Inc. First Quarter 2021 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the 1 followed by the 4 on your touch-tone phone. If you would like to withdraw your question, please press the 1 followed by the 3. If you are using speaker equipment, please lift the handset before making your selection. This conference is being recorded today. May 6, 2021. At this time, I would like to turn the conference over to Chris Tyson, Executive Vice President of MD North America, Calix Investor Relations Firm. Please go ahead, sir.

Thank you, and good afternoon. I would like to thank you all for taking time to join us for Calix's first quarter 2021 financial results conference call. Your hosts today are Bill Koschak, Chief Financial Officer, Dr. Eve Rebay, Executive Chair of the Board. A press release detailing these results crossed the wires after market closed today and is available on the company's website, calix.com. Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. please refer to the company's SEC filings for a list of associated risks. This presentation also includes a discussion of adjusted gross margin, net loss, net loss per share, and EBITDA. All are non-GAAP financial measures. In Calix Press Release and its filings with the SEC, each of which is posted on the company's website at calix.com, you will find additional disclosure regarding these non-GAAP measures. Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures and should not be considered a substitute for results that are presented in accordance with GAAP. Finally, this conference call is being webcast. The webcast link is available in the investor relations section of calix.com. At this time, I would like to turn the call over to Calix Chief Financial Officer, Bill Koshek.

Thank you, Chris, and thank you for joining us today for our first quarter conference call. The first four months of 2021 included several accomplishments by our great team of scientists, combined with continued execution of the transition of our soybean product line. I'd like to begin by congratulating Sarah Ryder on her promotion to Chief Business Officer. She has made great contributions since she joined Calix in October 2020. Well done, Sarah, and I look forward to working with you in this expanded role. Initial testing of our next generation premium high oleic, low linoleic soybean oil, TRAIT, has exceeded industry performance targets expected in the premium oil segment. This achievement is a significant improvement from our first soybean product. Preliminary composition analysis indicates that our next generation soybean trait is expected to have among the highest levels of heart-healthy oleic acid and ultra-low levels of linoleic acid of any premium oil, substantially on par with high oleic sunflower oil. We are excited by these results, and expect high performance in terms of desirable fatty acid profile, improved stability, increased shelf life, and reduced polymerization. This trait should be ready for commercial planting as soon as 2023. For commercialization, we are seeking to partner with elite soybean companies to introduce this trait to their premium seeds as a compelling alternative to commodity soybean and other premium oils. Our scientists have transformed the hemp genomes. demonstrating the ability to engineer hemp in a manner that can be used to unlock capabilities in order to selectively breed and deliver improvements in hemp traits. Historically, hemp has been a particularly difficult crop to transform. It is non-domesticated and poorly adapted for broad acre production. The new hemp transformation technology we developed is enabling our team to overcome the technical hurdles presented by hemp. Using our transformation tools, will enable hemp breeders and scientists to select plant characteristics that may contribute to the establishment of hemp as a modern, stable, and valuable broad-acre crop. We expect this accomplishment to accelerate hemp development. By modernizing the hemp crop, we can now deliver traits that benefit both growers and consumers who are increasingly looking for plant-based and sustainable foods, materials, pharmaceuticals, nutraceuticals, and more. First of these traits is expected to be available for commercial planting as soon as 2023. Also, shortly after quarter end, we executed a new seed sale agreement with an affiliate of a grain customer of ours. And as of today, we have sold more than 50% of the 2020 grain crop to ADM, with the remaining grain projectively sold to ADM throughout 2021. And finally, during the first quarter, we also made initial appointments of world-renowned plant biochemistry experts to our scientific advisory board. The SAB reports to our board of directors and is chaired by our co-founder, Dan Voitas. Other appointees include Ann Osborne from the John Innes Center, Elizabeth Statley, an associate professor of chemical engineering at Stanford, and Paul Bernasconi, a former head of molecular biology at BASF. SAV will focus on identification of high-value plant-derived products for development and commercialization using our proprietary innovation SIP platform. We have eight projects in later stage development, including two in Phase 3. We are targeting having at least five product candidates available to begin commercial planting between now and the end of 2024. During the quarter, we stopped development of our improved oil HOLL product. which was being developed with a target of higher HOL oil content. This product was being developed to reduce our cost per pound of oil under our prior go-to-market strategy. We also determined to pursue trade development and licensing arrangements as our baseline go-to-market strategy. While we opportunistically engage in alternative arrangements, our intention is to license all products under development as trade. We intend to move our current Hyalaic soybean product to this go-to-market strategy in 2022, and are currently in discussions with potential licensors. This transition further reduces the capital requirements for these products and is expected to drive high-margin royalty revenue streams when those traits are commercialized by the licensors in future years. Today, we issued a press release describing our first quarter 2021 results, and we also filed our Form 10-Q this evening. Revenue was $4.4 million in the first quarter of 2021, an increase of $2 million or 85% from the first quarter of 2020. Increase was driven by sales of a portion of the 2020 grain crop as compared to the first quarter of 2020 when we were selling soybean oil and meal. As of March 31st, 2021, we had sold over 50% of the 2020 grain crop. Gross margin was a negative 2.3 million or negative 53% in the first quarter of 2021 compared to negative 1.5 million or negative 63% in the first quarter of 2020. Adjusted gross margin, a non-GAAP measure, was negative 1.3 million, or negative 31%, in the first quarter of 2021, compared to negative 1.2 million, or negative 49%, in the first quarter of 2020. The improvement on a percentage basis was driven by benefits resulting from the advancement of our soybean product line go-to-market strategy. Total operating expenses were 7.3 million in the first quarter of 2021, a decrease of $1.8 million, or 20%, from $9.1 million in the first quarter of 2020. The decrease was driven by lower personnel costs as a result of cost reductions following the advancement of a go-to-market strategy for our soybean product line, as well as other reductions in cash expenses from the first quarter of 2020. Net loss was $10 million in the first quarter of 2021, an improvement of $1 million, or 9%, from the first quarter of 2020. Net loss per share was 27 cents in the first quarter of 2021, an improvement of 7 cents per share, or 21%, from the first quarter of 2020. Adjusted net loss was $8.8 million in the first quarter of 2021, an improvement of $2 million, or 18%, from the first quarter of 2020. The improvement in adjusted net loss was driven by the improvement in adjusted gross margin and cost reductions from the advancement of our soybean product line go-to-market strategy, and other reductions in operating expenses. Adjusted net loss per share was 24 cents in the first quarter of 2021, an improvement of 9 cents per share or 27% from the first quarter of 2020. The improvement in adjusted net loss per share was driven by the change in adjusted net loss. Adjusted EBITDA loss was 6.8 million in the first quarter of 2021, an improvement of 1.4 million or 17% from the first quarter of 2020. The change was driven by the improvement in adjusted gross margin and cost reductions from the advancement of our soybean product line go-to-market strategy and other reductions in operating expenses. Our earnings materials, which are posted on our website, provide important context about the non-GAAP measures we report and include reconciliations of these measures to the most comparable GAAP measure. Net cash used in the first quarter of 2021 improved by $50.3 million compared to the first quarter of 2020. The improvement was driven by changes in purchases and sales of short-term investments of $47.3 million and a $2.8 million improvement in net cash used by operating activities, primarily the result of improvements in net loss and working capital. In the first quarter of 2020, we invested cash in cash improvements and short-term investments to diversify our counterparty credit risk. From a cash perspective, the first quarter of 2021 was highlighted by the significant progress we made selling grains, managing grower deliveries to best match demand, and reducing our operating expenses below last year and staying on track to achieve our cash operating expense annual target of $25 million or less. We believe these actions will be enough to fund our operations for at least the next 12 months and into the second half of 2022. Subsequent to the quarter end, we were notified by the Small Business Administration that the full amount of our Paycheck Protection Program loan had been forgiven. We expect to record income in the second quarter of 2021 for the full amount of the loan and the associated accrued interest. I'd now like to turn the call over to Dr. Yves Roubet, our executive chair, for his concluding remarks. Yves?

Thank you, Bill. The first four months of 2021 included several exciting developments in our laboratories. the promotion of Sarah Reiter to Chief Business Officer, and the formation of our Scientific Advisory Board. The SAB provides us with scientific and technical expertise for us to leverage and grow the business in new directions and will explore opportunities in plant-derived ingredients for therapeutic, cosmetic, advanced materials, fragrance, flavoring, colorants, and more. The SAB will seek to identify both near-term opportunities and long-term technological breakthroughs, some of which we may look to realize through partnership. Our R&D team continues to innovate by identifying and unlocking high-value plant-based products and metabolites for the use of Calix proprietary system and advanced analytic platform that builds upon the learning from our first edited product. Our HOLS soybeans receive favorable testing results on its fatty acid profile. I'm especially pleased with our successful transformation of the hemp genome, enabling future advancement like trade delivery, gene editing, and advanced plant breeding. These developments underscore our ability to quickly discover, understand, and harness the potential of complex plant biological pathways to deliver the next generation of plant-based solutions. We look forward to sharing more about these advances later this year. The promotion of Sarah Reiter to Chief Business Officer is in recognition of her strong contribution to the business in her first six months with the organization. In this role, she will be responsible for all business activities of the company, including finding partners for the development and commercialization of our trades and products. And she will also be responsible for communications activities, including corporate communications, public relations, and product marketing. So a big congratulations to Sarah. I would like to close with a few comments on our ongoing CEO search. In our last call, we announced the transition of my role to executive chair. Day to day, I am supported in leading Calix by this dedicated team of executives. Our search committee, which I lead, has been active in screening candidates, and while it is too soon to comment on the ultimate hiring of our new CEO, we are making good progress towards a successful completion.

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There are many exciting developments taking place at Cali. And as I said in our year-end earnings call, we are becoming the source of power that generates plant-based ingredients for innovative products. These products will meet emerging customer needs across a variety of growth sectors, all while improving health, ensuring environmental sustainability, and addressing climate change. This is the dream and the vision of Calix. Operator, that concludes our prepared remarks. Please open the line for questions. Thank you.

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. To submit a written question, please use the chat feature on your webcast console. Our first question comes from the line of Amit Dale with Wainwright. Please proceed with your question.

Thank you. Good afternoon, everyone. Just to begin with, if you could clarify for us, are you stopping seed sales only for HOLL, or does this apply to other products also?

Good afternoon, and good question, Amit. So we are... going to continue selling seed for our HO product in 2021. And then for all products, including HO, as we move forward, we intend to move to a trade go-to-market strategy.

So in terms of, you know, sort of your efforts to just make this all royalty-based, license-based, I know you promoted Sarah to head the BD side of things. What other sort of efforts can we sort of anticipate as you transition towards more of a licensing-based model versus a seed-based model?

I think you'll continue to see us do more of the same. The promotion of Sarah, as you said, is a great recognition of what she's done. We have a tremendous number of licensing opportunities in front of us for all the products that are in our a pipeline that we've disclosed as well as in response to a couple of the press releases that we've made related to the advancements of our technology, especially what we've done in hemp. We've got a lot of inbound interest. The accomplishment that we announced in hemp, our ability to transform it, opens up the opportunity for many people, including us, if you want to work with us, to make advancements in that crop. The transformation ability we've developed is key to editing that crop and performing other advanced breeding techniques. And from our perspective, we believe it unlocks new markets that were previously unavailable, including advanced materials and other complicated or complex plant-based inputs that are more sustainable than the alternatives that are currently in use.

Okay, understood.

And in terms of, you know, your earliest... planting timeline. Is 2023 sort of the targeted timeline for 2023 for the new soybean product? Is that possible earlier than that or is it dependent on certain other factors which is pushing you out to 2023? I think 2023 is a

good benchmark. It's what our target has been for some time in the table that you're referring to. There may be things that could accelerate it, but I think I would stick with 2023 for HOLL coming as a product. HO will continue until it is taken over by HOLL in 2023. Okay.

Understood. In terms of operating costs your cash burn, et cetera. Could you give us any clarity on, you know, how many quarters you have with the current balance sheet?

You bet. So we ended the quarter, as I said, with $20.4 million in cash. We made significant progress in the quarter converting our grain inventory to cash. We expect to continue that through the year. We're managing our growers to best match demand. And we've and very focused on reducing our operating expenses. When you take those elements of what we've been doing and combine that with cash flows that we anticipate from the business development activity associated with the licensing of our technology and trade developments that we'll continue to progress on, we believe that our cash is sufficient to fund our operations for at least the next 12 months and into the second half of 2022. And just one last one for me.

In terms of catalysts, outside of maybe completing the CEO search, are there any near-term milestones we should be looking out for?

From my perspective, and I'll let Yves weigh in on this one as well, as we look forward, certainly completing that search is an important one. From a business perspective, the milestones that we look for would be getting to letters of intent or understanding whatever legal term you want to put on them with partners as we think about bringing these development projects that we've had or products that we've had to a close and getting somebody signed up to be our partner. And in the case of soybeans, one of the things that we expect to go and do is work with some large elite soybean seed companies to get our HOL trait into their germplasm, which could be wonderful for us. And so those are the types of things that I would look for. As we've talked about in the past, those things are still true today.

I would agree with what you said. The first three main important steps are obviously the CEO search and the incoming of the CEO in the company. The second one is to announce some partnerships on some other products that we have presented to you. And I also add to what was said, the SAB coming with eventually new products that we'll be able to disclose as being probably the third area that we could announce relatively quickly.

So thank you for that. That's all I have, guys. Appreciate it. Thank you.

Thank you. Thanks, Annette.

Our next question comes from the line of Bobby Burleson with Canaccord. Please proceed with your question.

Hi. Thanks for taking my questions. So I guess the first one is just if you had to kind of rank your target commercial planting, opportunities for 2023? Is it kind of in the order that you have in the presentation? And is that why wheat is in a different color than soybean and hemp? And I'm talking about just ranked in terms of risk-adjusted, most likely.

Right. Great question, Bobby, and good to talk with you today. From our perspective, they're not listed in terms of priority order. They're on the page based on how we chose to group them from a crop perspective more than anything. The one that we are most confident in from a viability perspective is the soybean, the HOLL soybean, the one we made the announcement about earlier, and then followed closely by the hemp. uh, trait that we expect to have available in 2023 as well. Um, I think wheat is, is first because it's always been, we've always listed things as HO, alfalfa, and then that wheat product from the time of our IPO. That's, it's as simple as that.

Okay, great. Um, and you know, the way that you were presenting these opportunities, you know, a few months ago, um, you know, there was some optionality, I guess, uh, between seed sales and trait licensing. And now you're exclusively looking at the licensing portion going forward. Are there any cost savings when you remove that optionality? Any additional headcount reductions associated with eliminating the seed sale part of the plan?

Great question. And from our perspective, we run a really lean organization. So no, our expectation isn't that we would have any cost savings from a seed handling perspective, right? We still need to do some work to get enough foundational seed over to our trade licensor, right? So with the lean team we have, it's too early to tell, but I don't think at this point we would expect anything. At the same time, the cost avoidance is significant because we know what we would have to incur to scale up that level of personnel if we were to turn this into a really large seed business. Also, bigger than that alleviates a working capital need that the company has, and that's where the real money is. If you think about the cost per acre from a working capital perspective is essentially one times COGS, and we avoid that going forward. So that is the beauty of moving to the trait model. It drives pre-cash flow much, much sooner than we would get to if you think about it on a per acre basis than if we were going down the seed path.

And then if we, last one for me for now, if we look at what you announced in alfalfa with SNW and, you know, what you're anticipating or excited about in soybean with HO, soybean is Are we talking about orders of magnitude, larger type of licensing and royalty opportunity with soybean in terms of what you might announce?

That is our expectation. Order of magnitude of the size of the two crops is obviously very different. That particular small segment of the alfalfa crop that our improved forage quality goes into is, you know, 30%-ish of the alfalfa crop, what the current size of that market is, we'd expect, you know, our HLL soybean, given its high quality performance versus industry expectations from a fatty acid profile perspective, to be something that would capture a far, you know, in terms of dollar value, a much greater dollar value, many times over, like you just described when you compare the two. So it would definitely be much bigger than Alfalfa, if you think about it from that perspective, what the opportunity is.

If I could just sneak one more in here. So as you expand your licensing, obviously this is on the Talons platform website, and you've talked about a technology licensing opportunity as well. Is this kind of a proving ground or an enticement of sorts to maybe get some folks pursuing a technology license to develop their own traits?

One of our strategies has been to be very selective in how we do this, but we're definitely open to it, have been and will be going forward. I think moving in a more to a pure licensing company where we license traits or technology, that makes a lot of sense. It drives our margins to be high, our working capital needs to be low, and our path to profitability as a company this becomes for us much clearer, I think. And so as we think about the licensing of the technology, sure, it could be talent, but we're working all the time and filing patents to expand our footprint and develop things that may push talent to be less important than it is today to the organization. And those types of advancements would be things that somebody else could leverage as well. And so As we think about this, there's a broad array of patents that we have and ones that we filed for that we continue to expand upon. And that's what excites us about the technology and the advancements that we are making in our labs.

And are you, just can you remind us whether or not you're doing anything with epigenetics? Is that an area where you guys are filing patents or pursuing developments of any kind?

On that one, Bobby, my view is no, we're not, but I'll throw it over to Yves, and it's not a term that we've talked about.

We obviously look at it, but, I mean, again, I prefer to leave that to my CTO to be able to respond the next time, but it's a good question indeed.

Okay, great. Thank you. Thank you.

Ladies and gentlemen, as a reminder to register for a question, please press the 1 followed by the 4 on your telephone. Our next question comes from the line of Lawrence Alexander with Jefferies. Please proceed with your question.

Hi, everyone. It's Dan Rizzo on for Lawrence. How are you? Good. Hi, Dan. How are you? Good, good. So how should we think about working capital in the coming quarters and years as this strategy shifts? I mean, I think it was – running roughly six million a quarter last year outfall. I was wondering if that's what we should expect maybe this year and then improve as the licensing takes off or just how we should model it, basically.

Right. Really good question, Dan. I think from our perspective, we've been a user of working capital, right? It's generally been a use of cash as opposed to a source of cash. And I think you'll see that transform as we look forward we'd expect that as we exit this year, knowing that we won't be investing in seed for 2022 planting, that we'd have a tailwind from that activity, the conversion of all of our grain inventory to cash this year. That's all part of the cash projects we talked about. And then looking forward, because we'll be in a licensing model, obviously the two variables that then become relevant are receivables and accrued expenses. And well, it's too soon to predict what the licensing receivables will look like. What we'll work to do, obviously, is to get paid more than annually. If we were to be paid only annually, they would be very seasonal and probably in the first calendar quarter. But if we can work to get the royalties paid more frequently than that, that would be our objective. So too soon to tell. So That's how I would think about the receivable side of the working capital modeling and the liability side of the balance sheet would remain as it is in terms of how it is flowing today. Obviously, stripping out all of the grain-related activity will create some noise in the near term, but it will, I guess, normalize as you get to the first quarter of next year, this time next year.

That's actually very helpful. Maybe it's in the end of the year. I really appreciate that color. And then so with the grain sales this year to ADM, the other 50%, I was wondering how we should think about the cadence with that. Is that something that's going to happen over the next quarter or is it something that's going to be kind of evenly drawn out over the remainder of the year?

Our statements have been to have that flow over the course of the remainder of the year. Okay. We'll see what that looks like in terms of how it falls by quarter, but I think something over the remainder of the year is what you should stick to.

Thank you very much. Thank you.

Ladies and gentlemen, as a final reminder to register for a question, please press the 1 followed by the 4 on your telephone. And Mr. Tyson, I'm showing no further questions on the phone lines.

Thank you. So this concludes our call today.

I'd like to thank everybody for joining. And if we were not able to address your questions on today's call, please feel free to contact us or our investor relations firm, MZ Group, who would be happy to answer them. Operator?

Thank you. That does conclude the conference call for today. We thank you for your participation and ask you please disconnect your lines. Thank you and have a great day.