Evolva Holding S.A.

Hello. And welcome, everybody.

Thank you for participating in today's call. During this call, we'll make forward-looking statements about the event and circumstances that have not yet occurred, including projections of Evolva's operating activities, our strategic plans, and the anticipated financial impact on our business and financial results in 2021 and beyond.

Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may be materially different from any future results, performance or achievements expressed or implied by such statements. In today's call, Oliver Walker and Carsten Däweritz will elaborate on the progress achieved in the first half of 2021 and will then be available for a Q&A session.

Before we begin, I'd like to note that the press release, the presentation and the consolidated financial statements are already available on the Evolva website. A podcast will also be available after this call has ended.

And with that, I'll hand over to Oliver.

Thank you, Barbara. Good morning and a warm welcome also from my side.

On our last call, I mentioned in my introductory notes that we are living and operating in a challenging environment around the globe. Vaccination programs have started to pave the way out of the worst.

However, there are remaining challenges due to lockdowns in selected countries, business partners still on their way back to a normal ordinary course of business, and customers still insecure about the end use demand consequently continuing to be carefully operating, which includes to prioritize many times cash over, as an example, inventory safety levels. In this challenging environment around the globe, we continued to deliver a resilient performance.

Let us jump to the slide deck and have a first look at slide 5 and 6. Significant investments in manufacturing, the starting up of key products at new CMOs, which have sufficient capacity to support sales growth over the mid-term and the introduction of optimized and more robust manufacturing processes, have heavily influenced our financial results, namely profit and cash flow.

However, these investments were necessary to be able to realize positive gross profit, which we will generate from Q4 of this year. After having brought annual OpEx down from close to CHF 50 million five years ago to CHF 15 million last year, we have further reduced costs to current cash base level of around CHF 7 million per half year.

This helps to save cash, but as well to lower the minimum revenue required to breakeven EBITDA. But besides optimizing costs just mentioned, steady delivery volumes of our key products, resveratrol, have enabled us to consistently serve the strong demand for resveratrol, thus bringing revenue growth back to an accelerated growth path.

For the first half of the year, revenue grew 60% over past year. This growth rate, we have achieved despite the number of customers having deferred launch activities of new products as a result of the supply challenges we were facing last year.

Let's move on to slide 8. With view to progress on realizing our corporate strategy, we have continued to work on innovation and profitable growth, but emphasis laid on measures to increase productivity.

Despite respective work has not yet been fully completed, as slide 11 shows, we have made major progress paving a path to a positive growth to gross profit across all products from Q4 of this year. I will come back to this with a later slide.

Let's move to the achievements realized in manufacturing shown on slide 9. Most important achievement was that we were able to resume the steady supply of our existing as well as existing as well as new resveratrol customers and have created a line of sight towards realizing with resveratrol, not only a positive gross profit, but by 2023, the targeted gross profit margin.

I will come back also on this with slide 13. Slide 10, an update of the slides already included in the full-year 2020 presentation, provides you an overview of the progress of the manufacturing-related projects.

After we have heavily worked on creating more stable and optimized processes, the work remaining yet to be completed has become more predictable. We continue with slide 11.

Further progress in market share for our products have become visible if one compares this bubble chart with its status half a year ago. Especially worthwhile to mention is that, A, the market for resveratrol is already larger than we expected, providing us the bigger market share gain potential; and B, that we have become the driving force in growing the resveratrol market.

Last few slides, we're talking about the progress achieved in the first half of this year. Let's now look ahead to 2023, the year in which we target to breakeven EBITDA.

First to slides 12, composition of sales until 2023. The purpose of this slide is to create a line of sight towards 2023 sales.

Based on what we know as of now, level of sales to breakeven EBITDA ranges broadly around CHF 35 million to CHF 40 million. 2023 sales will be generated, A, with product already today on the market and for which we can influence development of sales and, B, sales generated with products for which we can either not influence level of sales, like EverSweet or Vanillin, or have to wait regulatory approval, like for end user products or pest control applications.

With the accelerated revenue growth of 60% in the first half of this year, we ran above average growth required over the coming two years. And based on the forecasts that we have received from our business partners on every EverSweet and Vanillin, as well as the outlook for pest control sales from 2022, we are positive to achieve the level of sales shown in the graph on this slide, as well as for the incremental business.

Let's move now to slide 13, the development of the gross profit per product. To turn EBITDA positive as a company overall, we expect gross profit margin having to reach at the minimum broadly around 40%.

At this point, let me make some observations regarding the development of the gross profit margin per product. The company gross profit loss has been caused by only one product, Product E.

Due to the size and the dynamics, one can guess that it was resveratrol. From Q4 of this year, also resveratrol will be in gross profit positive territory.

And we know how to achieve for resveratrol the targeted gross profit margin in 2023. A better start than resveratrol, but a similar development as product D.

Finally, for products A to C, the minimum improvement required until 2023 is comparably limited to breakeven EBITDA and we have plans how to get there. Slide 14, I had shown already at the full-year results 2020 presentation half a year ago.

There is one critical element that we had to add to complete the transformation in full. This was the integration of manufacturing expertise into the overall set of capabilities of Evolva.

With this additional element, we can genuinely say that we can take an idea from a blank sheet of paper to an established commercial product. And Evolva is one of not too many companies being able to do this from A to Z.

Now let's move to the business update and the first slide here, to slide 16. In the first half of this year, we have made further progress in developing our commercial businesses.

As the three businesses address different types of customers and structure of respective markets differ, we deploy different go-to-market approaches. Needless to say that we have created value propositions for the different commercial businesses that clearly differentiate from competition.

As you can see from slide 17, we have, in the meantime, six products with each family of products in the market. These products predominantly cover markets showing above-average growth rates and allow us, indeed, as mentioned, to clearly differentiate from competition.

Considering Flavors and Fragrances, commented on slide 18, sales momentum gained in Q2 of the first half year have raised hope of a market recovery from the pandemic. At this point, it remains to be seen how the market segments we address within F&F develop as customers and end users remain cautious.

Still, our new product, L-Arabinose and new variants of Valencene and Nootkatone, support further growth of our F&F business. Finally, the joint activities with IFF to further develop and expand commercialization of Vanillin made good progress, with scale up of manufacturing moving forward as planned and Vanillin product samples receiving a very positive response.

Let's move to slide 19. We experienced ongoing strong momentum for our Health Ingredients.

To address the needs of the different segments within health ingredients better, we have further differentiated our go-to-market approach and began to sharpen focus of our clinical studies towards specific applications. We successfully continued the growth path in the first six months of 2021 despite manufacturing bottlenecks limiting growth in the second half of last year and the number of customers, as I already mentioned, having deferred activities to develop or launch new products.

The increasing interest is also a result of high quality clinical studies initialized by the company, which boosted the already strong commercial interest for the ingredient among global healthcare companies and FMCGs. The strategy of supporting customers in developing new products and providing scientific support based on high quality clinical studies contributed to strengthen the relationship with existing customers and acquire new ones.

Overall, due to its large spectrum of applications, resveratrol has become a key ingredient for manufacturers and formulators alike. Veri-te resveratrol is now increasingly used in a wide range of market segments, including dietary supplements, functional beverages, cosmetics, and API for human and animal health.

So, more information on our new product, L-Arabinose, you find on slide 24. For L-Arabinose, we deploy the same strategic approach as for resveratrol.

It is fundamentally what I already mentioned, the supporting of customers in developing new products and providing scientific support based on high quality clinical studies. On this slide, you'll find the major application areas for L-Arabinose.

In the first phase, we will prioritize on applications for which L-Arabinose is of high perceived benefit. Let's move on to our Health Protection business.

Slide 21 summarizes the actual status. We continue to expect first sales to take place in the second half of 2022.

After pandemic-related delays of both regulatory application processes and formulation work at both customers and ourselves, work streams progress again in a steady manner. Next slide, 22, provides an overview of the most important application areas for Nootkatone.

On one side, we will provide the active ingredient Nootkatone to customers that will include it in their formulations. On the other side, we are developing own application formulation and plan to provide the formulated substance, typically a liquid, to customers to bottle it into their respective delivery systems.

As an example, a pump spray. The purpose of developing own formulated substances is to expedite market entry for smaller, but innovative customers and to capture a higher share of the value chain.

Before I hand over to Carsten to present the financial performance of this first half year, let me mention that we have experienced the royalty income for stevia, respectively EverSweet, to basically grow month after month. With this, I hand over to Carsten for the financials.

Carsten, please.

Thank you, Oliver. Ladies and gentlemen, I'm pleased to welcome you to the financial section of our first half year results presentation.

Turning to slide number 25, I would like to comment on our financial performance. Total revenue increased by 60% from CHF 4 million to CHF 6.4 million.

Product-related revenue increased from CHF 3.8 million to CHF 6 million, in line with our expectations. Main driver for this growth was the ongoing strong momentum in Health Ingredients.

This was made possible by the continued progress made in optimizing supply and scaling up production. Additionally, increased sales in Flavors and Fragrances are signaling first signs of market recovery.

R&D revenue has doubled from CHF 0.2 million to CHF 0.4 million as part of the expanded development of an existing compound. As a result of higher manufacturing costs, mainly for enlarging the supplier base and scaling up manufacturing, the gross profit decreased from minus CHF 0.2 million to minus CHF 6.3 million in the first half of this year.

CHF 4.8 million of these higher manufacturing costs are in line with, and part of, the full-year guidance given during the 2020 year-end results call where we projected CHF 6.1 million higher manufacturing costs for 2021. Total operating expenses increased by 67% from CHF 12.4 million to CHF 20.7 million.

This deviation is due to a non-recurring expense of CHF 9.6 million for the impairment of intellectual property and patents. The majority of the discontinued IP rights relates to one product candidate in a similar application field as other developed candidates in Evolva's product pipeline.

Excluding this non-recurring impairment expense, the operating expenses have decreased by 10.5%, which was driven by reduced commercial and R&D expense. As a result, the operating loss came in at minus CHF 27 million and EBITDA at minus CHF 13 million.

EBITDA adjusted by extraordinary costs of CHF 1 million, which are related to failed startup batches and a non-recurring increase of a provision, amounted to minus CHF 12 million. The operating cash flow of minus CHF 17 million, compared to prior year, reflects additional investments in equipment at our CMO partners and higher net working capital due to the higher product sales.

Evolva's cash position stands at CHF 13.1 million, which is compared to the end of 2020 a reduction by CHF 17 million from operating activities, partly compensated by a cash inflow from Nice & Green, with two additional tranches drawn during the first half of this year. I'm moving now to slide number 26.

In order to compare the underlying performance of the first half this year to the first half last year, we first exclude the extraordinary costs of about CHF 1 million in both years. In addition, if we exclude the costs related to enlarging the supplier base and scaling up manufacturing, we see a similar performance of around minus CHF 7 million first half this year compared to first half last year.

Slightly lower gross profits due to the different product mix was offset by realized OpEx improvements. I would like to explain the additional CHF 4.8 million manufacturing costs that I mentioned on the next slide, slide number 27.

Production costs have been decreasing steadily over the past six months. As you can see from the graph, we have already more than two-thirds of the startup costs behind us, which were overall anticipated for the full year of 2021 to amount to around CHF 6.1 million.

As we continue to optimize production costs will further decrease in 2022 and beyond. This cost development combined with our sales growth gives us strong confidence to reach positive gross profit from Q4 onwards.

Finally, on slide 28, some more detail on our cash flow and period-end cash position. In addition to the cash flow from operating activities in the amount of minus CHF 13.5 million, we invested CHF 3.7 million in capitalized development expenses at our CMO partners and a loan of CHF 1.9 million for manufacturing equipment at one of our CMOs.

The positive cash flow of CHF 10.6 million results from two tranches drawn from Nice & Green during the first half of this year. This leaves us with a cash position of CHF 3.1 million at the end of June.

With this, I conclude the financial section of our first half results presentation and hand over again to Oliver to comment on the outlook for 2021.

Thanks, Carsten. I think that the outlook on slide 30 is probably rather self-speaking.

There is also not too much change or update to our full-year guidance that we issued at the beginning of the year. So, with this, we conclude our presentations and we can start with the Q&A part of our call.

For this, I hand back to Barbara, respectively, to the operator to start the Q&A.

My first would be on the extent of operating cost inflation that is sustained here. What exactly is it that has changed from the start of the year?

And is the increase in operating costs relative to initial expectations effectively, call it, CHF 10 million to CHF 15 million incremental financing need that is now being guided for? My second question is on the CHF 10 million or so of impairments that have been recorded?

Do any of these relate to products that are currently on the market? And if not, what do they refer to?

I will take the first one and perhaps, Carsten, you can take actually the second on impairment. So, first, let's differentiate total operating expenses, which is manufacturing costs, the function, operating expenses, plus impairment, et cetera, versus the function costs which include of R&D, CG&A, so commercial and G&A.

So, the OpEx function costs, R&D, CG&A, they have slightly come down, as I have mentioned earlier and I think as also Carsten has mentioned. So, the total operating increase is driven actually entirely, one, by a non-cash item, which is this impairment that Carsten will go into in a second.

And second, actually, the cost of sales, which are driven by the CHF 6.5 million for the full year, more, let's say, non-recurring elements and extraordinary elements. Plus, then let's say the step-by-step lowering of manufacturing costs as we are introducing new processes.

And I think that's probably clear. Otherwise, please come up then with follow-up question.

I'm happy actually to get into. And now, the financing that you have actually – question that you have put thereafter is certainly the right one because, indeed, the additional financing was mostly vastly driven by the fact that we had more cash out on the manufacturing front.

So, to introduce these processes, but first actually to switch on new CMOs to get them up to speed, to introduce all these new processes, to do the piloting of the product and to scale up of the product. And again, I would like to remind everyone that the reason for new CMOs is one that we have now CMOs that have sufficient capacity that will get us, how to say – or will support the growth for the next years to come.

And second, we have also, for some key products, actually diversified the CMO network, meaning that we have more than one supplier source available, which is a very important element to have, as we are progressing with large FMCGs, large healthcare companies in their product development and 2022. We expect actually first sales to these large – in the second half, first sales actually to these large global healthcare companies.

And with this, we have to actually prepare for that period, both by having more volume available, but second also by having a little bit de-risked supply chain, meaning more than one source available. Carsten, if you perhaps want to get into impairment?

Regarding the impairment of CHF 9.6 million, this relates to a non-recurring expense. As we have strategically reviewed the intellectual property and patent portfolio this year, we have concluded that the IP rights – the specific IP rights that relates to the CHF 9.6 million impairment are no longer strategically relevant because they relate mainly to one product candidate in a similar application field as other developed candidates, which are already in our pipeline and are on the market or close to market.

So, we basically focus on this existing candidate as opposed to having a similar application candidate, and therefore decided that this amount is not longer needed.

As you asked, actually, Sebastian, this impairment has nothing to do with impairing an existing product being already on the market. So, it is one of these many, let's say, IP rights that we have in our portfolio and that we said, yeah, as Carsten explained, is no more needed.

It just costs for no reason.

If I may follow-up just on the own product sales for resveratrol and Nootkatone, could you give an idea of the market share Evolva currently has in both areas? And what is most of your resveratrol going into?

Is it being sold as a food supplement? Or is it going into end markets more as a functional ingredient in terms of functional foods and so on?

Resveratrol is more – or was starting to be used in dietary supplements. In the meantime, as I explained, it is being used more wildly.

I think what it is being just now taken up is in functional beverages as an example, so that there is actually quite often application area. Functional foods eventually as well.

APIs, as I said. Cosmetics there actually are interesting application areas.

So, it is really pretty widespread, but it all started with dietary supplements. But market share wise, Nootkatone, we have indicated on the bubble chart, we are probably close to – I don't know, between 40% and 50%.

The question is, actually, how good always the market data are. There is not really good market research out.

But it is solid market share that we are further expanding. And as we have commented, we have actually been able now to sample large FMCGs also that are considering to take up Nootkatone into their products.

This is to be seen in the context, this whole trend towards more natural ingredients, more sustainable, more renewable sort of sources actually to have. So, we expect the future years, the market share not only to go up, but actually that we become – they're also one of the driving forces of actually expanding that market significantly.

This is already the case with resveratrol as we are the only, let's say, non-plant and non-chemistry, how to say, manufacturer of resveratrol. We have a unique position.

And these large accounts that I have mentioned, they have certainly consciously decided to pursue projects with us because we have this, how to say, sustainable renewable characteristics in the way we manufacture our products. And today's market share probably still to be further expanded.

Probably, it's sort of like a quarter – not even a quarter yet of the market. We are also detecting actually new sort of market volumes as we have gone into the pet segment actually.

We have found additional sort of volumes, you can say. That was the comment I made actually earlier.

So, the market is already bigger than we thought, leaving us more market share gain potential. So, this is also actually a game both of growing market share, but then actually expanding the market as well.

New products are largely undertaken – or are largely established these days. Not anymore with a chemical source or a plant-derived source, but actually with our fermented resveratrol.

So, I hope that this comprehensive set of information helps.

Okay, good. So then, we would like to thank you actually for your attendance, your participation, and we wish you all the best.

I have two questions maybe. On the additional need for funding, I understand you have this available facility of CHF 22 million and then you expect up to CHF 10 million to CHF 15 million on top.

And I guess, this is to cover all your needs until you reach breakeven in 2023. So, please, can you remind us a little bit what are the key drivers and elements contained in that guides?

Does it also include any more payments due to BARDA? What is the net working capital requirements?

So, a little bit more details here would be appreciated.

The thing is, actually, if you go back a few years, the amounts have been bigger. Certainly, we had to add, also because of the pandemic, some additional financing amounts.

But the amounts start to become actually also smaller. So, we are closing in, let's say, step by step towards this cash breakeven time.

The funding actually serves the purpose and there we have needed more money actually to be spent than originally thought on manufacturing. That was clearly – is one of the uses or, how to say, the sources to use or the targets to use the money.

The other one was actually a little bit pandemic related to this. We have had mid-single-digit amount probably that it has cost us, all the delays that we had on various fronts.

And then, I think it is indeed working capital needs that are also playing a role. Plus, we are still, how to say, sort of expanding capacity.

Vanillin, we are in the piloting. We are very much on track.

Actually, scale up will start or has started. We are very much on track.

That looks all good. But to really, how to say, then enlarge the volumes that we see that IFF sees on the demand front, we need perhaps there a little bit of investment.

And as I mentioned, the working capital. I think OpEx-wise, we are pretty fine in terms of our needs, so functional OpEx.

But that's a different discussion on the R&D front. If we would, all of a sudden undertake, again, to a larger extent, some projects, but which is not included in this guidance.

So, this guidance actually is sort of assuming that we have consistent development on the R&D front. So, you can conclude actually out of my comments that, looking backwards, we were having – had actually more spending on manufacturing front and the pandemic, perhaps also some delays on EPA.

And looking forward, it is on – still some investments on the manufacturing front, plus actually working capital needs to sustain the top line growth that are the major sources, and certainly, we will do our very best. And, Carsten, I think, is very committed as well to be as, how to say, cost conscious, as cash flow conscious as possible.

But we want to just flag early enough that maybe there is this additional amount being required. So, it's not for sure.

And it is sort of an indication, forward-looking and we will update you as we go forward.

Just as a follow-up, is it already covering also some potential requirements for the sum DTRA payment or is this now off the table?

No, no. That is all included.

We have reached a settlement in that regard and are currently renegotiating a payment plan. So, this is all included in the cash flow forecast.

Good. Thanks a lot again.

Then I would like, again, on behalf also of my colleagues, thank you for your participation. A few questions which is extraordinary.

Usually, we had actually many more, but that's good if we assume everything is clear. If there are still some questions arising, you know how to get in contact with us.

Don't hesitate any time actually to do this. And in the meantime, we wish you actually all the best, good time and have a good day.

Thanks. Bye bye.