Earnings Call Transcript - EVGN Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Evogene's Third Quarter 2023 Results Conference Call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded November 15, 2023. Before we begin, I would like to caution that certain statements made during this earnings conference call by Evogene's management will constitute forward-looking statements that relate to future events, risks and uncertainties regarding business strategy, operations and future performance and results of Evogene. I encourage you to review Evogene's filings with the U.S. Securities and Exchange Commission and read the note regarding forward-looking statements in today's earnings release, which states the statements made in the earnings release and, in a similar way, on this earnings conference call that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For example, Evogene is using forward-looking statements in this call when it discusses the additional orders for Casterra's castor seeds and new collaborations to generate cash flow for the group, Biomica enhancing in preparing for our pre-IND meeting for BMC128 expected tests of LAV312 in field trials by several multinational companies and Casterra's ability to mitigate production risks and to retain additional seed production subcontractors. All forward-looking statements made herein speak only as of the date of the announcement of results. Many of the factors that impact whether forward-looking statements will come through or beyond the control of Evogene and may cause actual results to differ materially from anticipated results. Evogene is under no obligation to update publicly or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as otherwise required by law, we expressly disclaim any obligation to do so. More detailed information about the risk factors potentially adversely impacting our performance can be found in our reports filed with the U.S. Securities and Exchange Commission. Starting the call today is the President and CEO of Evogene, Ofer Haviv, joined by Evogene's CFO, Yaron Eldad. That said, I would now like to turn the call over to Ofer Haviv, President and CEO of Evogene. Mr. Haviv, please go ahead.

Ofer Haviv, President and CEO

Thank you, and good day, everyone. Today, I will review Evogene's activities, our financial stability and recent achievements. I will also provide an update on Evogene's potential catalysts expected in the near future. I will discuss some of our subsidiaries' recent accomplishments and their positive impact on Evogene. Bear in mind that our subsidiaries leverage evidence technology as their main competitive advantage and their accomplishments demonstrate the power and the value of our AI-driven tech engines underlying their product development process. But first, I would like to start with a personal note about the war with Hamas. The recent events in Israel, starting October 7, 2023 have brought significant changes to our nation. We find ourselves at a time of profound reflection. Our hearts go out to all those directly and indirectly impacted by those evil acts. We pause to remember and honor the memory of a cherished member of the Evogene Group and his wife, who tragically lost their lives during this brutal attack on Israel. May their souls rest in peace and may their memory serve as a reminder of our people's enduring strength and resilience. I want to emphasize that the deep loss only deepens our resolve to succeed and thrive and carry our business forward. Getting back to Evogene's ongoing operations status amidst those challenges. Together with our subsidiaries, we stand strong in our commitment to innovation and progress. Our strategic focus remains strong and our dedicated team continues to work tirelessly to achieve our objectives for 2023 and set the course for 2024. I would now like to review Evogene's positive financial status, beginning with our cash balance across Evogene and its subsidiaries and our new terms financing strategy. As of the end of the third quarter, Evogene had a cash balance of $37.2 million. This included Lavie Bio with $7.1 million, Biomica with $14.6 million, and Evogene together with AgPlenus, Casterra and Canonic with $15.5 million. It is worth highlighting that Evogene's cash balance does not yet reflect the current and expected revenue from Casterra, while on the other hand our cash balance at the end of the quarter is influenced by the significant upfront costs included in producing Casterra seeds in Brazil and Africa. Additionally, it's important to mention that Lavie Bio's cash balance does not yet include an additional $2.5 million expected in January 2024 as part of the pending commercial agreement with Corteva as was announced by the company in July. Furthermore, we anticipate additional orders for Casterra castor seeds and new collaborations to generate cash flow for the group throughout 2024 and beyond, further enhancing our financial stability. Our revenues for the current quarter, which totaled $3.8 million, demonstrate the successful execution of Evogene's business model, joining cash and value from the activity of our subsidiaries. Notably, these revenues include approximately $0.9 million from Casterra's sales of castor seeds and $2.5 million generated by Lavie Bio as a licensing fee in the framework of its collaboration with Corteva. These collaborations not only added value to Lavie Bio for the benefit of its shareholders but also funds its ongoing operations, reducing the need for additional funding from Lavie Bio's shareholders. Concerning Evogene's ongoing activity in the past quarter, we continued improving our three AI tech engines, adding new applications and upgrading existing features. We intend to make our AI tech engines as accessible and user-friendly as possible, and based on feedback from our partners, we continuously improve the user interface. As emphasized in previous calls, Evogene's strategy for capturing value from our AI tech engine revolves around utilizing or licensing this engine as enablers for product development. Evogene employs two main business structures to execute this strategy in order to generate revenue and value. The first is collaboration with leading companies. Evogene collaborates with industry leaders to develop defined products by utilizing Evogene's AI tech engine. Typically, our partners take the lead in later stage development and product commercialization. Using this structure, Evgene can benefit from the following revenue streams: add-on payments, R&D fees, milestone payments and, most importantly, royalties from our partners' sales of the end products. The second business structure is establishing independent subsidiaries, each dedicated to a specific commercial field within the life science market. The subsidiaries hold licenses to use Evogene's unique AI tech engines for product development. Using this structure, Evogene can benefit from the following revenue streams: license fees for the use of our AI tech engines, dividends to Evogene and the shareholders, and most importantly, when an exit event occurs, as long as Evogene remains a major shareholder, a significant one-time payment is expected. In past years, our efforts focused mainly on establishing and supporting the activities of our subsidiaries. They proudly reported their delivery of impressive results, of which I will dive into shortly. As stated in previous calls, during this year, we invested in establishing collaborations directly between Evogene and industry leaders, aiming to leverage our AI tech engine for product development.

GeneRator, Business Update

Now I would like to review the main achievements of our subsidiaries in the last few months, who as part of their competitive advantage are all using Evogene's tech engines under exclusive license for their product development. I would like to start with the two subsidiaries using MicroBoost AI to accelerate and direct their product development: Lavie Bio and Biomica. Lavie Bio is at the forefront of next-generation ag-biological products with Evogene as its majority shareholder. It's worth noting that Lavie Bio has two additional significant shareholders: Corteva, a multinational Ag-tech leader, and ICL, a global mineral and Ag-tech company. Behind their equity investments, both Corteva and ICL are actively engaged in collaborative efforts with Lavie Bio to innovate and develop novel agricultural biological solutions. In July, Lavie Bio announced that it entered another licensing agreement with Corteva. The agreement grants Corteva exclusive rights to develop further and commercialize two of Lavie Bio's lead bio-fungicide product candidates, LAV311 and LAV312, targeting fruit rots. The agreement follows three years of independent field validation trials conducted by both companies. Under this agreement, Lavie Bio was set to receive an initial payment of approximately $5 million in two installments. The first payment of $2.5 million was already received in September 2023, and the second payment is expected in the first quarter of 2024. Lavie Bio will also be eligible for additional future milestone payments and royalties from Corteva's sales of these future products. This collaboration with Corteva not only strengthens Lavie Bio's financial position, but also significantly enhances its overall perception in the Ag market. Furthermore, the revenue generated from this collaboration mitigates the need for external financing, further solidifying Lavie Bio's financial stability and ability to continue advancing its cutting-edge ag-biological products. Last week, Lavie Bio announced significant progress in its bio-fungicide program with LAV321, designed to combat downy mildew and late blight diseases. Field trials conducted in 2023 across Europe and the United States have yielded impressive results. I would like to share that next year LAV321 will be tested in field trials by several multinational companies, for some of which it will be the second year of validation. Biomica, which develops microbiome-based therapeutics for Live Bacterial Product, is the second subsidiary using Evogene's MicroBoost AI tech engine to discover and optimize microbiome-based therapeutic potential. It is worth noting that in addition to Evogene's majority holder, Biomica has another major shareholder, Shanghai Healthcare Capital, one of the largest venture capital groups focusing on healthcare located in China. Biomica's leading product candidates BMC128, for treating cancer patients, is now in Phase 1 clinical trial. The trial conducted in Israel at the Rambam Health Care Campus aimed to evaluate BMC128's safety and tolerability alongside Bristol Myers Squibb’s Opdivo immunotherapy for preparatory patients with NSCLC melanoma or RCC. In August, Biomica opened a second site in Israel at The Davidoff Cancer Center to allow the recruitment of additional patients to the clinical trial. The trial is planned to include 10 to 12 patients; currently, 7 have enrolled. The company is now focused on preparing all the required materials for a pre-IND meeting for BMC128 in its immuno-oncology program expected to take place in the first quarter of 2024. I would like to continue with the two subsidiaries using GeneRator AI to accelerate and direct product development: Casterra and Canonic. Casterra focuses on developing an integrated solution to enable large scale commercial cultivation of castor beans through its unique elite seed varieties. Casterra aims to address the global demand for stable castor oil supply, mainly for the biodiesel industry. The past year was pivotal for Casterra. Our vision of becoming a significant player in the biodiesel industry progresses with a seed order from a world leading energy and gas company totaling $11.3 million for castor cultivation in Africa to support the growing demand for biodiesel. In the last quarter, Casterra successfully delivered its first shipment of high yield, high oil castor seeds from Brazil and Zambia to an African region valued at approximately $0.9 million. Casterra is planning to supply the rest of the ordered seed at the beginning of 2024. In recent months, Casterra has made substantial steps in expanding its overseas seed production capabilities through subcontractors. Based on Casterra's observations of this move, company management has learned that its complexity is high and requires additional resources and extensive physical presence of Casterra's professionals in the overseas production sites. Casterra is currently investing efforts in expanding its workforce to support the subcontractors it's engaged with and in parallel looks for additional seed production subcontractors to manage risk. These efforts aim to ensure a long-term, reliable and sustainable seed production infrastructure that will allow the supply of high quality castor seeds for existing orders by the second quarter of 2024 and provide a stable and scalable platform for future growth. Moving on to Canonic, which focuses on developing best-in-class medical cannabis products. Canonic's main targets for the near-term are to grow its cannabis sales in Israel, benefiting from its elite unique strain while significantly reducing expenses. Economic growth to market strategy includes out-licensing to subcontractors the commercial growth of the cannabis strains towards the final product, which is crucial to select subcontractors with the right skills and expertise to maximize the genetic value of Canonic strains meeting the premium market criteria. Capturing the patient's attention is challenging, leading to price dropping even for premium products. To address this challenge, Canonic is focusing its marketing efforts on the frequent launching of new products in limited batches. During the third quarter, Canonic launched two new products, Tango and Two Aces, and this week an additional product SouthSide was launched.

Yaron Eldad, CFO

Thank you, Ofer. As of September 30, 2023, Evogene had consolidated cash, cash equivalents and short-term bank deposits of approximately $37.2 million. Biomica accounted for $14.6 million of the sum and Lavie Bio holds $7.1 million. Evogene, together with Casterra, Canonic and AgPlenus, possessed an aggregate of $15.5 million in cash. The injections of funds from the last round of investment in July strengthen Evogene's financial position and provide us with the resources needed to execute our future plans effectively. As Ofer already stated, the $15.5 million reflected in the cash balance of Evogene together with Casterra, Canonic and AgPlenus do not include any amount due to the purchase orders received by Casterra in the last few months, which were partially supplied during the third quarter of 2023, and that the $7.1 million reflected in the cash balance of Lavie Bio does not include the $2.5 million which represents the second half of the upfront payment from the licensing agreement with Corteva that is expected to be received at the beginning of 2024. During the third quarter, the consolidated cash usage was approximately $4.8 million or approximately $3.2 million excluding Lavie Bio, which provided positive net cash of $1.1 million due to a $2.5 million upfront payment from the licensing agreement with Corteva, Biomica and $1.2 million of advanced payments to Casterra's subcontractors for castor seed production. I will now review the P&L main items. Revenues for the third quarter of 2023 were approximately $3.8 million compared to approximately $0.5 million in the same period the previous year. The revenue increase was primarily due to revenues recognized by Lavie Bio that the licensing agreement with Corteva and due to revenues recognized by Casterra for the supply of castor seeds during the third quarter of 2023. R&D expenses for the third quarter of 2023, which are reported net of nonrefundable grants received were approximately $5.1 million and remained stable as compared to approximately $5 million in the same period in the previous year. Sales and marketing expenses were approximately $850,000 for the third quarter of 2023 and slightly decreased as compared to approximately $895,000 in the same period of the previous year. The main contributor to this expense decrease was a reduction in personnel expenses at Canonic. General and administrative expenses were approximately $1.5 million in the third quarter of 2023 and remained stable compared to approximately $1.6 million in the same period in the previous year. Operating loss for the third quarter of 2023 was approximately $4.2 million compared to an operating loss of approximately $7.1 million in the same period in the previous year. The decrease in operating loss is mainly due to the increased revenues mentioned above. Financing income net for the third quarter of 2023 was approximately $320,000 compared to the financing expenses net of approximately $61,000 in the same period in the previous year. This difference was mainly due to an increase in interest income during the third quarter of 2023 as compared to the same period in the previous year. Net loss for the third quarter of 2023 was approximately $3.9 million compared to a net loss of approximately $7.2 million in the same period in the previous year. The decrease in the net loss is mainly due to the increased revenues recognized in the third quarter of 2023.

Operator, Operator

With that, Ofer and I would like to open the call for any questions you may have.

Ryan Mayer, Analyst

Hey, guys, thanks for taking my questions. First one from me. So, for the initial $11 million Casterra order, you obviously had initial shipments here in Q3, but the rest expected in Q4 and Q1 of next year. Is this the type of seasonality that you would expect from future Casterra orders going forward?

Ofer Haviv, President and CEO

Can you repeat the last sentence of your question?

Ryan Mayer, Analyst

Yes, just wondering if this is the kind of seasonality that you would expect going forward.

Ofer Haviv, President and CEO

So I will address this question, and maybe Eyal can add a little bit more. Based on our discussions with our existing partners, they are expecting to see growth in their needs for additional Casterra grain to feed their crushing factory because they are planning to increase and expand biodiesel production. Assuming this plan will take place, I believe that we should expect to see an increase in demand for Casterra seeds that Casterra is developing and providing to the market. I would recommend people who are listening to this call to maybe look for a nice article that was published about E&I as an example for a company in the field of energy based on vegetable crops and their future plans, which I think is an example of how the market can look in the future. It's public information that was published by E&I and this is just one example of what might happen in this field. We will be more than happy to take part in this trend and to see Casterra progress in the future.

Ryan Mayer, Analyst

Got it. And then can you just talk about the level of capacity that your energy partner has to take more volume of cash receipt from you guys?

Ofer Haviv, President and CEO

We cannot disclose much about our partner's capacity, but I think that there is still room that we can grow and increase our revenue before we reach the limitations of what they have now. Please remember that they can always decide to build more factories that can crush castor grain to oil in order to produce biodiesel.

Brian Wright, Analyst

Thanks. Good morning. Let me just start out with, I guess you made a comment about the remaining part of the purchase order being delivered in the first quarter. I just wondered if any of that goes into the fourth quarter just given some of the logistical issues you've talked about in Africa and working with additional partners.

Ofer Haviv, President and CEO

So I'm not sure that I hear correctly what you said, but I believe that your question was referring to timing and when we can supply the purchase order that we received. What we believe is that we will be able to deliver the majority, if not all, of the seed that was ordered through the purchase order that we already received by the first half of 2024, while the majority of it will be during the first or mid-after the end of the first quarter. This is mainly due to climate change and the irrigation system that we need to put in place. There is no question if you can deliver the quantity. It's now more of a timing issue. We are investing many efforts these days in strengthening our infrastructure with respect to seed production, in more than one location and on more than one continent, in order to be able to not just deliver grain in the quantity needed, but also at the planned time. We should all remember that this revolution that the castor seed crop is undergoing is really something that took place only in the last nine months and it's really the beginning, and there are some struggles. But I am excited to see how we are addressing all of these challenges. We are expanding the number of employees working for Casterra, and we are recruiting also people in the target locations where we grow the seed to oversee the activity over there on a daily basis. But we're still in the process of building all of these infrastructures. I think that starting from the second half of 2024, we will start to see the impact of all of these things in the way that we are expecting.

Brian Wright, Analyst

Okay. It really sounds like, based on what I just heard, and I just want to make sure I'm interpreting this correctly, just general weather conditions, typical issues with lack of rain probably was a major issue, and that's just part of the business. Is that a fair interpretation of what you said?

Ofer Haviv, President and CEO

Yes. Again, I don't think that the question is not if we will deliver. The question is really more timing and solving problems such as climate issues that you cannot control, etc. But I think that we are now in a spot where we know what we need to do, and our subcontractors are getting better and understanding what they need to do. I think almost every business in the first year or two, you always struggle with scaling up production, and we are exactly going through this process. But I'm quite confident that we will be able to deliver the quantity that we promised. I hope that addresses your questions.

Brian Wright, Analyst

Great, great. Thank you. Can I just do a quick follow-up? I understand gross margins were really good in the quarter, and I think some of that has to do with Corteva payment and how that's recognized. But it still looked pretty good in the quarter. Am I reading too much into it? You probably, your Casterra margin was probably, even with everything that's happened, was probably a pretty good gross margin for Casterra in the quarter as well.

Ofer Haviv, President and CEO

I can disclose the gross margin of our business. We prefer to keep this information internally. But I think that if you review the margins of other companies in the field of seed sales, usually the margins are pretty high, but it makes sense because don't forget the time that you need to invest in order to develop the seed for seed companies—the R&D costs are quite heavy. The good news from Casterra is that we reached this variety that we are offering now to our partners. We have been investing in this activity for the last 10 years and we have invested around $20 million through the years. Now we are starting to see the benefits from this investment. This is also what puts us ahead of any other company that would like to move into this field. So the margins in the seed business are pretty high because they are supposed to cover the expense and the risks that companies are putting into the development of the elite variety, exactly like Evogene did and like Casterra did in the past 10 years.

Benjamin Haynor, Analyst

Good day gentlemen, thanks for taking the questions. First off, for me just on AgPlenus' APTH1 target, how quickly do you anticipate a collaboration or partnership could materialize there? What are you doing or what can you presently do to advance development of the target?

Ofer Haviv, President and CEO

Nir, would you like to take this question or do you prefer me to address it?

Nir Arbel, CPO

If you want, you can go ahead. If not, I’ll…

Ofer Haviv, President and CEO

So I will try to address it. And Nir, if you want, you can add. I think that usually when working with big corporations, it usually takes a while before you engage in an agreement. It includes the validation period and negotiations. But I think that usually when a company feels comfortable to emphasize that there is interest in one of its programs, at least the way that Evogene works, it means that we have some confidence that we are not far away from the point where we might announce such a collaboration. Again, you never know if it will happen—this is the nature of the business—but we feel comfortable that we are in the stage that there is some probability that we will engage in such collaboration. I think that AgPlenus is an amazing example of what Evogene, the technology company can develop and offer to our partners. AgPlenus is using ChemPass AI tech engine and the progress this engine made in the last year has been remarkable. We announced TargetSelector, we announced some other applications that we developed. What attracts the attention of our potential partners is not just the results that you can see in what we have achieved until now, but they also get excited about our ability to improve efficacy and increase the probability of success by using Evogene's technology. So what I’d like to express about the future collaboration for AgPlenus is not just maybe a nice upfront payment but also ongoing collaboration with R&D fees, etc. There are high expectations for what AgPlenus can do. Yes, it's still in early stage. Yes, we still need to demonstrate more and more the power of our technology, but the company is definitely in the right direction in achieving this target.

Benjamin Haynor, Analyst

Okay, very helpful, thank you for that. And then you kind of segue into my next question. With the advancements that you've made in ChemPass AI and particularly TargetSelector, it sounds like that's attracted interest, but can you share any more on potential positive developments that have come with the new application or new functionality like TargetSelector that have occurred here recently?

Amit Noam, CEO of Lavie Bio

So I think TargetSelector in particular attracts a lot of attention. I think that this really addresses unmet need within the space, the way we operate. This past period has been very crucial for AgPlenus as we are not only developing these tools but having a proper validation process. We see within that interest the need to see how we validate. As we progress, we see more and more interest and better validation, confirming that the tools are good and that work as we expect. Therefore, our confidence is very high in the platform itself and what the future focus on.

Benjamin Haynor, Analyst

Okay, sounds so raises the confidence in the platform. Lastly for me on the Crustacean Gene Editing collaboration, does that have the potential to lead to another subsidiary? Is that part of what you alluded to on your last call regarding some of the more food tech oriented things you had going on? Just a little bit more on the Crustacean gene would be helpful.

Ofer Haviv, President and CEO

So at first, yes, I remember that in the previous call I was talking about potential activity of Evogene in the area of food tech. But honestly I didn't think about the Crustacean project when I was talking about it. There are some other activities that hopefully will materialize into an agreement and we will share it with our investors, hopefully maybe in the next quarter or so, but so there is more under the hood than what we disclose in this call. With respect to the Crustacean project, I don't see it developing into a new entity. You never know how big it could be, but at least at this point in time we don't see it. Actually through this collaboration we are covering 100% of our costs, so we see even a little bit of revenue from this activity. I think this is part of Evogene's capabilities in the field of gene editing. In the past, we were leading the biggest consortium here in Israel in the field of gene editing. Evogene has some unique capabilities in this field that we can use to help other companies improve different traits in different organisms. But at least for now, we don't see it evolving into a separate entity. Thank you.

Amit Noam, CEO of Lavie Bio

Thank you.

Operator, Operator

This concludes the question-and-answer session. Before I ask Mr. Ofer Haviv to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference in the U.S., please call 1-888-326-9310, in Israel, please call 03-9255-901 Internationally please call 9723-9255-901. Mr. Haviv, would you like to make your concluding statement?

Ofer Haviv, President and CEO

Yes. Thank you all for joining the call today. We look forward to updating you with our progress on our next call. Thank you once again.

Operator, Operator

Thank you. This concludes Evogene's third quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.