Q3 2019 Earnings Call

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Good afternoon, ladies and gentlemen.

Thank you for standing by welcome to Calix third quarter 2019 earnings Conference call.

During today's presentation, all parties will be in listen only mode.

Following the presentation the conference will be open for questions.

If you have a question. Please press the star key followed by the one key on your Touchtone phone.

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This conference is being recorded today November six 2019.

At this time I would like to turn the conference over to Chris Tyson Managing director of MZ, North America, Calix Investor Relations firm.

Please go ahead Sir.

Thank you and good afternoon I'd like to thank you all for taking time to join US for Calix third quarter 29 change does this update I'm results conference call. Your host today, our Jetblue Chief Executive Officer, built <unk>, Chief Financial Officer, Travis freight Chief Technology Officer maneuvers, Sohu, Chief business development and supply.

Gene Officer, and Keith Blanks, the Companys senior Vice President of sales and marketing a press release detailing these results crossed the wires. This afternoon at four or five P.M. eastern today and is available on the company's website <unk> Dot com.

Before we begin the formal presentation I'd like to remind everyone that statements made on the call and web cast, including those regarding future financial results and future operational goals and industry prospects are forward looking and may be subject to a number of risk and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's FCC.

Filings for a list of associated risk. This presentation also includes a discussion of adjusted EBITDA, a non-GAAP financial measure in Calix press release and its filings with the FCC each of which is posted on the Calix website, you will find additional disclosure regarding this non-GAAP measure references non-GAAP financial measure should be considered in addition to GAAP financial measure.

And should not be considered a substitute for results that are presented in accordance with gap. Finally this conference call is being webcast. This webcast link is available in the Investor Relations section of our website at Www Calix Dotcom forward slash investors at this time I'd like to turn the call over to Calix, Chief Executive Officer, Jim Bloom.

Jim the floor is yours.

Thank you, Chris and thank you for joining us today for Calix third quarter 29 team financial results Conference call.

Before we begin I would like to give a brief overview of our company for those of you who might be listening in for the first time today.

Okay looks to the consumer centric food and agriculture focused technology company committed to making the food you love a healthier choices.

We're excited to deliver a healthier food and food ingredients to consumers and I look forward to leveraging our first mover advantage and cutting edge technology to create long term sustainable value for our shareholders.

We mimic the process of nature through science by applying gene editing and other cutting edge plant breeding techniques to develop agricultural and food products that are healthier sustainable and traceable from field to from field to customer.

On the validation front.

In February 29 team Calix completed a consultation with the food and drug administration, the FDA for our heilig soybean.

After reviewing the FDA had no further questions concerning human food ingredients or animal food derived from our higher Lake soybean.

To our knowledge Colina oil is the first gene edited food product to undergo such review and be commercialized in the U.S.

In March we launched our first commercial product Colino, Ohio Lake soybean oil was zero grams of trends fad per serving a reduced saturated fat content and several unique benefits that make it particularly attractive in food manufacturing and foodservice applications.

To power cleaners robust growth trajectory, we have built out a world class supply chain partnering with more than 175 farmers in the upper Midwest to grow our proprietary soybeans.

With that Tegra into Dakotas to assist us with see distribution agronomics support grain storage and transportation services as well as well as with land is in Iowa, which will amplify our geographic footprint for acreage growth and whether risk diversity by adding there see distribution agronomics support.

<unk> grain storage and transportation services for Calix Heilig soybean.

With the addition of lenders to our geographic footprint, we have access to geographies were 40% of the soybean acres grown in the United States are located and we expect to achieve our targeted 100000 acre contracted acres for 2020.

Up from 36000 planted acres in 2019.

We believe the 100000 contracted acres is an important milestone because we believe it enables clay calix.

To be considered a meaningful supplier to some of the largest us food manufacturers.

Going forward, we expect to continue to double our acres annually consistent with our past history.

I'm excited about the innovation, we are developing including how we are continuing to advance our current projects through our pipeline and with the five new varieties of soybeans, we will be launching in 2020.

We're also exploring other projects in canola hemp, oats, peas, peanuts, potatoes, soybeans and wheat.

All of this activity reaffirms our position as an innovation platform and leader in our industry.

Turning to our third quarter 2019 results.

We continued to make solid progress on the commercial fraud I'm happy to report that we achieved our highest quarterly revenue in company history with Q3 higher Lake soybean product revenue of $3 million, primarily driven by our growing customer base and penetration within Cisco's fast food service network.

Bill co shack, our CFO will expand on some other financial metrics later during the call, including our reaffirmed guidance for 2019.

Our commercial growth is gaining momentum and in September we were pleased to expand our leadership team to support commercial opportunities with the appointment of Keith legs to the newly created position of senior Vice President of sales and marketing.

Keith is responsible for driving sales with a focus on building the company's foodservice and food manufacturing customer bases and he will give an update on this front in a moment.

With this addition, menasha, who assumed the role of Chief business development and supply chain officer, focusing his efforts on the development of strategic collaborations across calix platforms of wellness plant based proteins and sustainability.

I will continue to expand our grow our network and supply chain and will elaborate on all of these initiatives later in this call.

With this I'd like to hand, the call over to our Chief Technology Officer, Travis Fry for innovation update.

Drives thank you Jim and good afternoon, everyone.

Hi, joint Calix in May to lead our R&D organization and I was drawn to this opportunity primarily because of our incredible technology clear freedom to operate from IP perspective.

The unmatched talent team that is poised to miss.

The opportunity to work alongside one of a world renowned pioneering gene editing, our Chief Science Officer, Dan VITAS is also very attractive.

Process very attractive is well within my R&D organization I had been the most impressed with the death of scientific talent that exists here at calix.

My team consists of nearly 40 people, including some well respected scientists that have been part of the talent technology from its inception.

This depth of knowledge and passion fuels the innovative engine here at calix that I'm excited about for our future.

We havent exclusive license use talent technology and plants and its power and empowers our innovation platform.

We can selectively brita plant based on its natural genome.

To deliver health benefits valued by consumers in a fraction of the time compared to traditional breeding methods.

As we review ideas for R&D exploration and development, we're focused on ideas that have benefits associated with wellness plant based proteins and sustainability.

In addition to our previously disclosed product candidates. We are also explain ideas across nine crops, including soybeans, we alfalfa Ham piece oats peanuts can olin potatoes.

Today, we have brought several products into our development lifecycle and closing in on commercialization of our second product and improved adjustability alfalfa, which is expected to launch in 2021 through a collaboration with another party, who will bring the seed the market.

We will collect the royalty on the sales sale price of the C monetizing our technology platform.

I'm excited about our pipeline and I'm working to expanded along with others inside and outside organization.

We intend to bring other products to market and similar manner or through our own identity preserve supply chain as we have done with the highlight soybeans.

We also continue to progress our high fiber, we'd product through its field testing hi fiber, we'd is expected to launch as early as 2022.

Within our highly exciting product line, we expect to introduce five new varieties in 2020, which we believe will enable geographic expansion behof beyond our current growing zone, enabling improved diversification of weather risk and moving our growing areas closer to crush plants that we work with.

Finally, I'm very pleased with our robust patent portfolio that covers not just the talent technology.

Our other elements of our R&D and she achievements, we expect to continue to build calix is patent portfolio with new filings and continued pursuit of potential in licensing agreements.

Thank you for your time.

Keep lengths are new senior Vice President of sales and marketing will now discuss product updates and key market opportunities.

Thank you Travis I'm very excited to be here today to talk about colino.

I've been a capex for a little over two months and I've gotten to know the product very well I have a long career in the vegetable space across several roles and join calix to leverage that expertise and knowledge of the marketplace to drive sales of clean across all customer segments.

Plano has far exceeded my expectations as performance and its broad spectrum of potential uses across several markets and multiple channels.

For those of you knew to our historic Colino, our proprietary holic soybean oil is locally grown and traceable, making its suitable to a wide variety of uses ranging from foodservice food manufacturing industrial applications addressing combined 15 billion dollar market opportunity, which is 75% of north American market.

Our how leg soybean oil contains almost 3.5 times as much a lake asset has conventional soybean oil with 20% less saturated fats and zero grams of trans fat per serving.

Clean I'll provide a wide variety of benefits to improve finished product performance and quality, including superior stability and performance for improved taste and shelf life. It also has a clean neutral flavor and less Oliver less oil absorption across applications. It also increases frying life by three type.

James versus conventional oils. This type of performance also leads to less polymerization and clean up.

All these benefits make our clean all very competitive and versatile across multiple segments.

To validate what we saw we also engage third parties to perform testing on our clean all compared to other premium and commodity oils in the marketplace.

These third parties have validated our view of putting those performance compared to those other oils.

We're very confident that when entering the AWS marketplace with a compelling product that will deliver a meaningful value proposition to foodservice food manufacturers and industrial companies looking to achieve higher performance.

I'd now like to provide an update on our customer activity. The first commercial sale of clean out to a Midwest restaurant chain occurred immediately after its launch earlier this year subsequent to that sale Cisco one of the world's largest foodservice distribution companies took interest and now stocks and sales clean out to its customers cisco's customer accounts.

Now above 60, and those short three plus months since our launch with with them.

We're also generating momentum with other foodservice distributors and our testing our oil with other multi unit restaurant chains.

And the food manufacturing market segment, we are working with more than 20 companies to actively explore sample and evaluate colinas performance and a variety of applications and these initial feedback has been that clean now exceeds expectations with equal or better performance and this segment, we remain in testing with large.

Personnel CPG companies for specific applications of our oil, including cereals, granola bars nutritional supplements and more.

Our Cisco growth and the opportunities we see for oil has let us quickly bring on a small agile group of sales and marketing resources to drive sales and foodservice and educate and trial our product with food manufacturers.

For my marketing standpoint, we are leveraging catalinas versatility and have built our value proposition around high performance applications, including longer Fry live and exceptional taste, extending the shelf life of products and reduce cleanup and operations with high polymerization.

In closing I am confident about the high quality of our oil and I'm excited to be leading caintic sales and marketing team.

Ill now hand off to mono Sohu, our business development and supply chain officer to discuss business development and supply chain activities during the quarter.

Thank you Keith.

Once again welcome to the team.

I think you to our team allows me to focus on two major objectives first the build out and optimization of our identity preserve supply chain and second driving collaborations with third parties, thus, bringing in new revenue streams.

And on our additional source of cash.

The third quarter was a fantastic quarter for calix in terms of execution.

During the third quarter, we successfully executed on multiple crosas, including our largest cross steel date, which was over 200000 bushels and were subsequently sold out of the resulting high or lake soybean meal at the end of the quarter.

As it is art Q3 was our best quarter.

Most of our high or lakes soybean meal is being sold to the BDC sector, followed by pork and poultry.

We completed the purchase of all Green from 28 in crop in the quarter I'm not looking to sustain the pace of crushing for the call fourth quarter in order to have product available to meet our 2019 revenue guidance.

We made significant progress in scaling up calix identity preserved supply chain in this quarter.

Especially focused on seed distribution and storage.

We announced an agreement with land as we expand our supply to network and sale feed into I was 10 million acre soybean market, which is around.

11% of the portal U.S. soybean crop.

During the period, we increased the number of our elevator storage locations by 75% on our did another cross plant in our target to growing regions.

Our integrated business model with two of the largest cooperatives in the country covering Steve distribution seed treatment agronomy crop imports elevator storage crush plants and rail logistics is an important part of calix headstart on enables.

Scaling up of our calix identity preserve supply chain model to be at reliable partner to our customers.

The harvest of 29000 acres is progressing well inspite of the windfall Susan.

As of today more than 70% of our growers, who contracted for harvests delivery has completed their deliveries.

The observed use largely inline with expectations.

As Jim stated our 2020 accretive goal remains at 100000 contracted acres as of October 31, we had contracted more than 70000 acres for 2020 and I am happy to report that we have continued the momentum and then as of today we have.

Contracted more than 75000 acres for 2020 .

We have signed up more than 150 growers and an average of nearly 470 acres par grower.

Our retention rate is already close to 70%.

Our average written growers are committing to 41% our diesel acres to our higher Lake program in 2020 versus 2019.

In addition, an algorithmic grew our east committing to approximately 33% off their soybean acres to Calix title League varieties, which is almost double that of last year.

This is a great achievement for Calix and reflects our efforts to on farmers Trust and adoption of our product in such a sorry span of time.

Jim also mention the 100000 acre mark in his opening remarks.

And I want to echoed that this is an important milestone as we believe this inspired confidence in our potential future for service on forward manufacturing customers related to our ability to supply them.

We see strength in the value of our offered to us farmer and intend to capitalize on these relationships underlying our 2019 contracted acres, our supporting distribution channels iron five new hire Lake soybean varieties that we launched next spring we increased penetration we think this.

Sting growers and expand geographically from our current base, we now have growers in five states.

Geographic expansion Diversifies, our grower base aren't supply Tim and thus we believe it makes us a more reliable partner for food companies.

I'd like to now.

Two business development, our strategy is to leverage our technology platform and create new revenue streams, while focusing our innovation efforts around three pillars, as Travis said, well less plant based proteins and sustainability.

These pillars are also rooted in feedback from prospective partners, who are interested in collaborations to develop products by applying calix proprietary talon.

Preseason plant breeding technology to solve specific pinpoints, our unmet needs. In addition to direct customer pool industry trends highlighted the importance of these three pillars as well. Given example, since 2015, 98% of consumer goods for our members have re.

Formulated more than 320000 products to align with new health and wellness initiatives.

Nielsen data suggest that sustainability claims are the fastest growing messaging sold on pack for fast moving consumer goods brands Lastly, at the center of well less than sustainability consumers view, increasing plant based protein consumption as a healthier and more environmentally friendly.

For example, global 14 should estimate that has been more than $17 billion investment in planned best for brands since 2009.

In addition to the Alfalfa collaboration we mentioned frequently I would like to provide another example of a collaboration project. We are actively engaged in well informed industry collaborators have sold strong interest in a healthier and more sustainable alternatives to palm oil.

Turning to you Sds statistics over 4 billion pounds of Palm oil was consumed in U.S. last year for applications like baking confectionery and meat on the logs were palm oil functionality and performance is unique.

Cost effective domestically sourced bomb replacement is highly sought after by food companies, who seek compatible performance and the ability to differentiate that brand with hold it ingredients and sustainability message. We believe we can develop such a solution.

Calix plans to monetize collaboration projects like this example, with an upfront access fees for our talent preseason plan breeding platform, followed up by milestone payments and royalty upon commercialization of the products. This is driven by size of the opportunity on what we are what.

We are in our collaborators each bring to the solution.

Our product innovation cycle is three to five years and gives us.

The ability to solve for the Industrys unmet needs in an accelerated fashion and keep up with the consumer trends consumer driven trends I'll now hand off to our Chief Financial Officer, Bill core Soc, who will give an update on our third quarter financials Bill.

Thank you manage welcome.

Okay.

Thanks, everybody for joining our call before I continue I'd like to pause and thanks, Simon harnessed, our head of financing strategy, who has handled investor relations, so well for both calix and selective.

Shifting back to support select this fall.

Yes.

Morning, both organizations.

Even for side.

Made the decision to engage MZ group represented by Chris Tyson to handle Investor relations for Calix.

This is full contact information is at the end of every press release and is on our IR website.

Please reach out to him directly just as you would have with Simon and he will ensure a prompt response.

Simon impact and presence will be missed and we wish him all the best and is focused role at selected thank you Simon.

The third quarter of 2019 was a good demonstration of our execution of operational milestones our revenue increased to a record $3 million, primarily driven by scaling crushing activity generating sales momentum and oil through foodservice distribution and continued testing with fruit.

Sure.

We were also sold out of meal as of the ended the quarter.

We plan to crush over 300000 bushels of grain in the fourth quarter.

Cost of goods sold increased $3.5 million, reflecting the cost of products sold in the period and adjustment to the net realizable value for inventory that reflects the higher costs were currently experiencing at this early stage of commercialization.

R&D expenses in the third quarter of 2019 were 3.6 million compared to 3.4 million in the third quarter of 2018.

The increase in R&D expenses is primarily due to an increase in noncash stock compensation expense of 567000, a reversal of payroll tax benefits that are no longer realizable 536000.

The addition of personnel.

R&D expenses for the third quarter of 2018 also included $1.1 million of grain costs, we incurred prior to our commercialization.

Earlier, this year, which affects the comparability of R&D expenses year over year.

A few they expenses in the third quarter of 2019 were 6.2 million compared to 3.3 million in third quarter 2018.

The increase was driven by higher non cash stock compensation costs of 1.6 million increased personnel costs of 880000, and an increase in professional fee expenses of 455000.

The increases in personnel cost and professional fees are partially offset by a reduction in the management fees that we have paid to select is as we completed the internalization of newly all services previously provided by select is as of September Thirtyth 2019.

Net cash used in the third quarter 2019 was 10 million substantially in line with previously announced financial guidance of 3 million to $3.25 million per month.

Net loss for the third quarter, 2019 was 10.7 million or 32 cents loss per basic and diluted share compared to a net loss of 7.5 million or 23 cents loss per basic and diluted share in the third quarter 2018.

The increase was driven by a higher non cash expense compensation expense of $2.1 million and costs associated with launching our first products in 2019.

We've also introduced adjusted EBITDA.

non-GAAP measure this quarter, which increased to a loss of 6.9 million for the third quarter from a loss of 6.4 million in the third quarter of 2018.

Driven by increases in personnel costs as the cost of commercialization in 2019 were largely offset by reductions in grain costs expenses R&D in 2018.

This measure was introduced to supplement our unaudited financial results that we prepared in accordance with gap.

This is not a measured as defined by gap.

We define it has net loss excluding interest.

Income tax expense depreciation and amortization and then also make adjustments for noncash stock based compensation.

Payroll tax benefits that are no longer realizable that I mentioned earlier section 16 officer transition expenses and for purchase contracts gains and losses.

Because adjusted EBITDA excludes non cash items and discrete are frequently occurring items, we believe that adjusted EBITDA provides investors with useful supplemental information.

Our operational performance.

And then the business and facilitates comparison of our financial results between periods, where certain items may vary significantly independent of our business performance.

Cash and cash equivalents totaled 66.4 million as of September Thirtyth 2019.

93.8 as of December 30, Onest 2008.

In conclusion, I am pleased with our cash usage trajectory in the third quarter of 2019.

We've largely completed investing in our general and administrative platform required to scale the organization.

In fact, our future investments will be in R&D as we grow our collaboration projects and pipeline and in sales supply chain quality and safety to support growth in our soybean product lines. We are reiterating our prior fiscal year 19 guidance.

Of 7 million to 8 million in revenue and 3 million to 3.25 million in cash usage per month.

Taking into account participated usage going forward I believe our cash position will be sufficient to fund operations into mid 2021.

With that I'd like to turn the call back to Jim.

Thank you Bill.

In summary, the remainder of the year, we'll see us driving increased marketing and customer acceptance of our soybean oil.

We are pleased with the results of the extensive third party testing results of how colino can be applied in food manufacturing in foodservice and in other channels that we believe we are further in the development cycle with potential customers that in any other time in our past.

Across the business, we continue to surpass our operational milestones in our leveraging our lead in industry with our technology and aggressive growth.

We're using our talent technology to create a pipeline of products that we intend to bring to the market either through our commercial organization or alternatively in collaboration with other companies.

The internal foundation has been fortified as we assembled a great leadership team to drive the business and we will continue to add strategic hires.

Weve constructed our supply chain that provides a competitive and first mover advantage, while expanding collaboration with landers leverages their footprint and reach to expedite the launch of our new varieties.

Working with a tegra, we have launched the first full year campaign to contract acres for next year and expect to achieve 100000 contracted acres for 2020.

I look forward to two seizing the opportunities for calix, and creating long term value for our shareholders.

We look forward to sharing more on are developing story at the upcoming Morgan Stanley Global chemicals, and Agriculture Conference on November 13.

The city Agriculture, and chemicals conference on December four.

The Jefferies alternative protein summit on December 10th.

And the LD micro annual main event on December 11th.

With that I'd like to open up the call for any questions. Operator. Please go ahead.

Thank you Sir we will now begin the question and answer session.

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One moment, please while we pull for questions.

Our first question comes from.

Adam Samuelson with Goldman Sachs. Please state your question.

Yes, Hi, this is actually Jordan for Adam.

So I wanted to Eric first ask Hi, I'm wondering if first ask if we can get an update on the realize yields for 2019 that they were lower and its impact if any on crop availability for crash and seed in 2020.

And the second question would be.

If you could provide any color on how you're evaluating financing options for your working capital looking ahead. Thank you.

Bill I'll take the first part on yield and you'll pick apart.

Jordan, we're in the middle of of harvesting, we're gathering that data, but we're we're pleased with where we're at the yields have been as expected in our relative position. So it has been a bright spot for us in our retention in our program, we measured by growing acres and retention of current acres and we see there.

Continuing.

Thanks, Jim.

George I appreciate the question regarding financing options, we've talked about extensively at our current cash need for the crop that's currently being harvested.

I would be financed internally.

And that we have plans that get us out as I said on the call to mid 2021 based on our internal projections.

We're always.

Talking with people about what options are available to us in any financing will be upside to those projections.

All right. Thank you I'll hand, it off.

Thank you.

Our next question comes from Ken Sasol with Bank of Montral. Please state your question.

Hey, good evening everybody.

Jeff again.

Two questions. One is as you expand the number of.

Traits with the soybeans.

Are you actually is the hundred thousand included in that or is there opportunity to extend the geography beyond 100000, how does that all play out what are the basic assumptions within that I know you didn't change anything but it does seem like you're live more comfortable with the.

The varieties.

Yes, Thanks, Ken that was the reason for us jumping up to 100000 acre target. This year there not additional trades there just more varieties and maturity groups that allows us to take the soybean.

In two different types of soil into different geographies. So that will be helpful. For us we're growing the seed.

And of course, we will have seed production that will cover that plus.

Room for re plants and the other other growth as we did last year. So that's a that's kind of the point, we're not adding a new trait, we're adding new varieties.

And then the second part is it sounds like you're adding a new.

New crops like news out more alfalfa, there's more we're talking about him do you have the capital to do that does that change any of the.

Timeline for high fiber, we how does that all play out is innovating new can you just talked about you know the direction of what you're going to go on these new crops.

Well, thanks, Ken I appreciate that question, because it's nothing new for us. It's a restatement of our strategy that will complete our complete identity preserve supply chain for soybeans will utilize that for wheat, as well and we'll market those projects as as calix directly.

These new crops that you're hearing about our the.

Other model, where we take on collaboration partners like we did with SW a lot of alpha.

Where we will be having upfront money and shared expenses in developing that and also.

Taking it to the market through their system in the collaboration so it is in our plan it doesn't change our financials or our burn rate.

And from that standpoint, as were based loaded and ready to go at this time.

Great I appreciate it thank you.

Our next question comes from John Baumgartner with Wells Fargo. Please state your question.

Good afternoon, thanks for the question.

Hi, John .

I wanted to stick with the.

The topic of R&D in the pipeline because I think you know two years ago. The initial emphasis once the H O soybeans were in market. It was emphasis on potatoes, and you know some of the can all varieties and released today noted you know a few others to have the roads the peace and some of the emphasis on plant protein and I'm curious how you how you can't go about.

The vetting process, if he's got 50000 edible plants on the planet.

How does that process has it for seed from here has a process change from starting with maybe an established crop in tweaking it to maybe identifying novel crops that haven't been mainstream yet.

I'm just kind of curious your big picture, how you're thinking about that vetting process in kind of the stage getting going forward.

Sure John I'm going to give a couple of comments from a turn it over to our CTO Dr. Travis Fry.

But you know when I came in a year ago. We did do a lot of of technology and we had a long list of things in the IPO that we were working on we felt it was very important as a public company reporting quarterly that we narrow our focus to soybeans in we complete our supply chain proof of concept nobody done it.

And just make sure that we were successful in doing that.

We're kind of today's celebrating that success by saying now we're ready to move back out and look back at these projects again based on technical feasibility market need another things.

And I'll leave it at that and let the let dr. fried talk talk a bit about how we sort through that.

John Great question, it's actually one of the one of the real drivers for me wanting to be here, we've got a lot of great scientists that we're very very good.

Focusing to get the higher leg soybean right in the right place in the right varieties and get that up and running and they have been thinking in dreaming and innovating that whole time and getting ready to sort of unleashed. This innovative engine that we've created here.

And so we're now allowing them to sort of.

I see that fruition through and so as Jim and.

Bill mentioned it was always in our plan to go this direction. It was just a matter of timing and knowing when the right time wise to ensure we had our first product on the market and could demonstrate our supply chain.

That preserved identity and then now we're getting a lot of interest in these other crops and innovating and bringing some value to the consumer so super exciting to see and I think you're going to be very excited about the new products will come out with in the future.

Great. Thanks for that and just to follow up maybe for Bill commentary about the operational savings that extend that cash runway out to mid 2021 can you elaborate a little bit in term of those cash savings, where they're coming from what sort of buckets, where they're being sourced from thank you.

Thanks, John you bet as you can appreciate it.

Okay go away through our annual.

Budgeting cycle and looking at what we spent this year and so we're able to project forward, what we need now that we got this team is here and knows the business and how we expect to grow and so it's largely through that.

That weve determined where we would set with several months of operating under our belt.

Great. Thank you.

You're welcome.

Thank you.

And just a reminder to ask a question at this time press star one on your telephone keypad.

Sure move yourself from the Q Press star to once again to ask the question at this time press Star one on your telephone keypad.

Our next question comes from Laurence Alexander with Jefferies. Please state your question.

Good afternoon could you give a little bit more granularity on the operational rhythm at your customers that as.

Once they you know how long does it take in terms of trialing for them to.

Significantly put in place a significant order any sense for how fast they scale up.

And I guess more imports on what's the cadence for them to get markets feedback to then change in their minds. So at what point can we look at the order patterns and say this is real and market pull through as opposed to customers experimentation.

Great question, Lawrence I'm going to let Keith.

Talk to that a bit, but youre right Weve always talked about two different trialing periods. One is shorter for our foodservice words, a faster turnover and decision and then a longer pipeline for trial on the food ingredients show, we have somebody on staff now that understands it's been in it in is really creating the dated.

Help us with that and I'll turn it over to Keith to kind of tell you where what his plans are and what you've seen in the brief time that has been here.

Jim is correct foodservice moves at some times faster pace, the food ingredient folks move a little bit slower well. We're seeing is that we're right at the inception of kind of this trend cycle, where were new to the marketplace, but the product is performing at a very high level and so the 10.

Thing phases are moving up so just under nine weeks have been here, we're seeing a lot more testing activity and some positive results through that so I think in some situations that could move faster and then some with large larger more sophisticated customers. Obviously, we'll go through their controls and their measures like like norm.

Yes.

And then I guess, just secondly, just to sort nail this down because I get asked it periodically.

What's the are there any outstanding regulatory hurdles.

That needs to be head. After your customers have started purchasing products that is is there anything that gets triggered once there it's and it's simple it's embedded in a finished products.

Or are you completely out of the regulatory.

Sort of stage.

Hey, Laurence this Travis I'll take that one.

So right now everything that we because we're focused on only the U.S. all of our sales and usage has been in the U.S.

And we we are really just focused on that right now so.

We haven't thought a lot of outgoing.

Any further than you ask we've got a great base and a lot of room to grow here first and.

[noise] right for just to be clear in the U.S. There is no kind of second stage that gets triggered once your embedded customer product is that correct no no. Once once we go on.

Period, which we've already completed.

That's that's all.

Perfect. Thank you.

Thank you just another minor to ask a question press star one on your telephone keypad sort of move your question Press Star too.

Our next question comes from John Baumgartner with Wells Fargo. Please state your question.

Thanks for the follow up.

Bill just wanted to come back to the piano when we think about the R&D, that's been pretty lumpy quarter to quarter and yet you sounds like Q3 had a number of one off factors as well. So how do we think about the run rate R&D I guess.

At least for Q4, then if you've gone that far even thinking about maybe the year on year increase in 2020 to support the business.

Yeah, So you're exactly right John there are a number of factors that drove the comparability.

Called out both in the release in my remarks.

I think that will other than stock comp that should be behind us and I respect the fourth quarter to provide you a cleaner run rate when we get there.

We're looking at R&D expense, obviously in a company like ours, having it be Vicki.

The portion of our growth.

That is very important.

And we would look to try and manage it as a percentage we're not looking to keep it as a percentage of sales it's more percentage of our total funding as we work with Travis on his budget.

Our plans for next year, we would continue to make investments in R&D.

I don't want to comment on a specific number for next year, but who will be an area that you see.

A higher level of growth and you heard us in Sta. This year as we've finished investing in that.

DNA platform.

Expect that to taper off as I that growth is to taper off as I said in my remarks, the last thing that I would say on the comparability.

It is largely behind US however, there is another.

You can.

What do the math on what the number is because I think we said it was three one or three two for the full year, we've got a million six behind us. So there is another million for of grain expense that we push through Q4 last year, then that will affect comparability.

Hi, it's a math for you on the fourth quarter that that's a that's a number that will affect comparability in the quarter.

Next quarter.

Okay. Thank you.

Yep.

Thank you.

At this time this concludes our question and answer session.

I'd now like to turn the call back over to Mr., Jim boom for his closing remarks. Thank you.

Yes. Thank you thanks to everyone for joining us on our call today.

We have dedicated and hardworking people here at Calix, who push themselves to further our mission each day and I want to take us time to give us sincere. Thanks from all of the management to all of you.

We could not do it without you and lastly, if we weren't able to address all of your questions on today's call.

Please feel free to contact us or Investor Relations firm MZ group, who would be happy to answer them. So we look forward to providing more updates on our next call.

Operator.

Thank you. This concludes today's conference. Thank you all for your participation all parties may disconnect.