Arcadia Biosciences, Inc.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Good afternoon and welcome to Arcadia Biosciences' First Quarter 2021 Earnings Conference Call. Today's presenters will be Matt Plavan, President and CEO; and Pam Haley, CFO of Arcadia. This call is being webcast, and you can refer to the company's press release at arcadiabio.com. Before we start, if you turn to Slide 2, we would like to remind you that Arcadia Biosciences will be making forward-looking statements on this call based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, the company's actual performance and results may differ materially from those described or implied today. You can review the company's safe harbor language in their most recently filed 10-K and, again, on Slide 2 of this presentation.

[Matt Plavan:]

Thank you, operator. Good afternoon all. Welcome to our first quarter conference call and thank you for joining us. Normally, I begin our calls with highlights of our accomplishments for the quarter. However, today I would like to begin our call with specific coverage of an exciting and strategically pivotal event for the company. Just after the market closed today, we announced that we acquired Lief Brands, a portfolio of leading CBD and wellness products featuring Soul Spring, the number one selling CBD-infused botanical therapy brand in the U.S. in the natural category. In summary, this transaction is strategically transformative for Arcadia, as it substantially broadens our product offering and direct access to consumers. With this acquisition, we gained, one, best-in-class CBD and wellness brands with an immediate and significant impact on our top line revenues with potential for strong, organic and synergistic growth. Two, a customer base of over 5,000 U.S. retail stores through an established network of national retail distributors and large independent grocers through which we believe our GoodWheat, GoodHemp CBD and GLA consumer products can be sold. Three, compelling cost synergy opportunities and four, experienced FMCG management or fast-moving consumer goods management. Referring now to Slide 3 of our presentation, this acquisition is in line with our stated strategy to maximize the value capture from our proprietary innovations in good-for-you foods and wellness products by the vertical integration of our supply chain. We believe with greater control over the manufacturing and placement of our products, we can better participate in the product quality and brand equity we create. We acquired these assets from the parent company, which made its public market debut on the NEO Exchange in January of this year, with an initial market capitalization in excess of $1 billion. It is the largest cannabis company in California by revenue, footprint and brand portfolio. If you'll flip to Slide 4, I'd like to tell you more about this important transaction. Lief Brands comprises four brands with approximately 80 SKUs, spanning 17 product categories in the health and wellness marketplace. Three of these brands, Soul Spring, Saavy Naturals and Zola generated $6 million of revenue in 2020. The fourth and newest brand, Provault was launched in March of this year. And therefore, did not contribute to revenue in 2020.

[Pam Haley:]

Thank you, Matt. Okay, I'd like to take a few moments to share the financial highlights for the quarter with you now. As Matt mentioned at the onset of the call, we are very pleased of made the asset acquisition of Lief Brands and Zola coconut water, and we look forward to reporting revenue from product sales starting in second quarter. Turning to Slide number 10. Total revenues recognized for the first quarter of 2021 were $828,000 compared to $309,000 in the first quarter of 2020, with the majority of the $519,000 increase driven by GoodWheat grain sales this quarter, along with additional GLA product sales. Total operating expenses of $6.2 million in 2021 were up slightly from the $6.1 million recognized in 2020, although the composition deferred. Cost of product revenues of $856,000 increased by $724,000 from the first quarter of 2022 to the first quarter of 2021, due primarily to hire GoodWheat grain and GLA product sales along with the destruction of some non-viable seed in Hawaii. R&D expenses for the quarter were $1.2 million in 2021 as compared to $2.2 million in 2020, the $1.1 million decrease was driven primarily by lower employee-related expenses as we shifted our focus away from true research and development and towards the development of commercial products during the latter portion of 2020. Selling, general and administrative expenses totaled $4.1 million in the first quarter of 2021, a $346,000 increase from the $3.7 million recognized in the first quarter of 2020. Increased employee expenses along with higher marketing and advertising activities were partially offset by lower consulting-related stock compensation expense in the first quarter of 2021, as compared to the first quarter of 2020. Net income to common stockholders was $2.1 million in the first quarter of 2021 compared to $2.5 million in the first quarter of 2020. And I'll give a little more detail on that other income and expense line on the slide that totaled $7.4 million for the first quarter of 2021 and $8.3 million for the first quarter of 2020. So the first quarter of 2021 included an unrealized gain and the amount of $7.5 million related to the 1.875 million shares of bio series stock that we hold as the stock price increased significantly from December 31, 2020 to March 31, 2021. And we recognized $769,000 of issuance costs associated with the PIPE transaction in January of this year, that brought in $25.1 million of gross proceeds. In addition to a non-cash gain of $322,000 for the change in the fair value of warrant liabilities from the end of quarter four to the end of quarter one. And the first quarter of 2020 did not include any issuance or offering costs that we did recognize a non-cash gain and the amount of $8.2 million for the change in the fair value of common stock warrant liabilities. The number of warrants outstanding that are associated with these liabilities increased significantly with the January PIPE transaction. And the balance of cash and cash equivalents totaled $32.8 million at the end of first quarter of 2021. Short-term investments at the end of the quarter was $19.1 million, comprised of the fair value of the bio series stock held and up from the $11.6 million fair market value balance at the end of December, 2020. So this concludes our financial highlights for the first quarter of 2021. Thank you very much for your attention today, and I'll turn the call over now to the operator for questions, Leah?

[Operator:]

Your first question comes from the line of Ben Klieve from Lake Street Capital. Your line is open.

[Ben Klieve:]

All right, thanks for taking my questions here. Congratulations on a good quarter and it sounds like a lot going on over there. First question is, in the context of the quarter itself just a clarification around the grain sale classification that you have for GoodWheat grain, is that revenue to Three Farm Daughters? I mean, does that – has that termed or as GoodWheat grain sales in the quarters, is that something else?

[Pam Haley:]

Hi Ben. I can take that question. That is not sales to Three Farm Daughters, that was sales to other customers.

[Ben Klieve:]

Okay. All right, interesting. Okay, and next question I have, you talked about the $6 million recurring revenue from the acquisition. And Matt, it sounds like that $6 million number was the revenue from those brands in 2020. Is that correct, that's not a forward-looking estimate, that's an actual 2020 number?

[Matt Plavan:]

Yes. Thanks for clarifying or asking for clarification. That is correct. That was the revenue generated by three of the four brands in 2020. Provault was launched in March of this year, so anything that generates will be additive to that recurring number.

[Ben Klieve:]

Got it. Okay.

[Matt Plavan:]

As well as those existing brands.

[Ben Klieve:]

Got it, okay. And then you talked about integrating your Hawaiian operations into the supply chain of this acquisition. It sounded like what you were referring to was that, there was going to be new labels to the brands that are – that have a Hawaiian – like a Hawaiian brand element to it. Is that correct? That these are going to be new brands in this portfolio and you're not necessarily going to be replacing the existing supply chain with your own internal capabilities, is that right?

[Matt Plavan:]

Yes, that's correct. These will be additive to the existing skews that they have. They don't currently sell a Hawaiian CBD, so this will be an ad.

[Ben Klieve:]

Okay, got it. And then on the two other – I guess two other really quick questions. One you talked about the expectations later this year of launching new GoodWheat brands, consumer product one, two and three is how it was phrased on here. Is it fair to assume that you are focused now exclusively on building your own brands internally and that the partnership model is not something – maybe you'll entertain that down the road, but the internal brand development is what you're focused on for GoodWheat.

[Matt Plavan:]

Correct. Right. We think that's the best way to create value for our shareholders. And we've learned a lot about the value of the GoodWheat brand itself and we believe that it will – we have – it will resonate directly with consumers, so that is our strategy going forward. And look, I think Three Farm Daughters will continue to be successful as well. I think that it is their desire to add other products and do things with their brand that are of interest to them. And we want them to be free to do that while we pursue what makes the most sense for us and our shareholders as well.

[Ben Klieve:]

Got it. And then last question, and this is something that I asked in the last call, but given your comments about the trade portfolio today, I'm going to re-ask it. I mean at this point, given how much has changed in your – in the strategy even over the last six weeks? Can you talk about really what is in your trait discovery pipeline today and really what's left of those kind of legacy ag biotech capabilities in terms of headcount today versus a year ago, what remaining strategic objectives there are, anything around that would be helpful?

[Matt Plavan:]

Sure. So when we look at wheat in particular there is a fairly broad set of traits that we have, that we've added to by having acquired the Agrasys assets that we believe will – or applicable to just about any wheat formulation – any food formulated with wheat to improve its nutritional content. So we think that either – whether it's high fiber, reduced gluten, extending the shelf life of the wheat all of those capabilities are within the portfolio of traits that we have. So that right there we think is enabler to become a gold standard in wheat, which is a very large opportunity for us. And so the way to do that at this point is to develop new formulations and focus on food science in order to ensure that we're bringing those products to market in the right consistency and taste which is a slightly different skillset than the traditional biotech. So that's the reason for the evolution and that's an example of the breadth of the traits that we have available to us in our portfolio for wheat, for example. For hemp, we've developed strong varieties for our GoodHemp and we have continued to kind of evaluate genetic opportunities. But I think for the time being, given that what we've learned is that the germplasm market for hemp in the near-term and foreseeable future is not likely to be a very large market. We think for the near-term, our dollars are better spent in iterating on those varieties and germplasm advantages that we've – or attributes that we've created to date. So discovery of new traits, we've really decreased that investment to zero for the near-term and are investing in exploiting those discovered traits to date. And that would be a significant reduction in our R&D both headcount and spend. That's why you see such a significant improvement or reduction in that expense over the prior year quarter.

[Ben Klieve:]

Got it. That's all helpful context. Very good. Well, I appreciate you both answering my questions and I'll get back in queue.

[Matt Plavan:]

Okay. Thanks, Ben.

[Operator:]

And your next question comes from the line of Steven Ralston from Zacks. Your line is open.

[Steven Ralston:]

Hello. Can you hear me?

[Matt Plavan:]

Yes. Hi, Steven, how are you?

[Steven Ralston:]

Hi, congratulations on this Lief acquisition, it's quite transformative. It seems like you may go a leaf from being an ag-tech company to a consumer brand named company.

[Matt Plavan:]

Thank you, Steven.

[Steven Ralston:]

You're welcome. I'm curious about a couple of things. One is I'm looking at the, now you have multiple product lines and I'm trying to look through these layers of revenues that you're going to be generating going forward. Lief has about $6 million a year. It seems like the relationship with Tritordeum is going to be almost $1 million, your GoodWheat and GLA is, well, you did at least 800,000 in the first quarter. So we'll call it about $4 million run rate on a yearly basis, because both are growing. And then you have this additive layer of the Hawaiian CBD product line that will probably come online. I mean, conservatively, it seems like you’d be generating at least $2 million a quarter, how off is that?

[Matt Plavan:]

Well, I mean, I think it's pretty mature for us to give specific guidance. But I think you kind of laid out all of the shots on goal that we're looking at that will contribute to revenue, the timing of which we're doing our best to assess. And whether, like you said, I think the recurring revenue, if you looked at what these products produced in 2020 is around $7 million, including Tritordeum. And then as we push these products on e-commerce, hard to predict how quickly and how much revenue, but when you look at how well some of these CBD topical brands do online, it's encouraging. So we're going to refrain from commenting, give giving guidance or commenting on it, but I think you're putting the pieces together and connecting the dots to appropriately to recognize that, we really are well positioned right now to bring these products to market and have a significant revenue generation during the year and into the future.

[Steven Ralston:]

Thank you. Last question, but it's a broad general one, could you go into any further details of how you expect to get the synergies through – while multiple distribution channels that you now have access to?

[Matt Plavan:]

Yes, so I think if you go back to the comments, I went through, there's a very broad, independent grocery chain that Lief is selling into that where they've done very well with their products and have a good relationship whether it's Safeway, Albertsons, and others, we think those are premiere outlets and great opportunities for all the products we took you through on Slide, I think 8. And so leveraging those relationships and introducing through those relationships, these new products we think is a tremendous synergy. And similarly, with the Hawaiian CBD going into where Soul Spring is today and over a couple thousand stores. In addition, we can see significant synergies, the other direction, the experience that we've had with the digital infrastructure for selling our Three Farm Daughters pasta. There were some significant learnings there and we think we're pretty well positioned to use those learnings, to begin targeting consumer demands for those Lief brands that have yet to really be invested in from an e-commerce standpoint. So that would be synergies going the other direction. Also, we really see some significant low-hanging fruit with regard to improving efficiencies around manufacturing. Some minimal investment in automation should bring a fair amount of improvement in margin, CBD frankly has come down as an ingredient cost over the last year, very, very significantly. So people were paying $11,000 for a kilogram of just 16 months ago, today it's maybe $1,000. So when we look at the prior margins where they were and where they're going to be in 2021, taking into account those automation and formulation, sourcing improvements. We think that there are significant opportunities for synergies there on the cost side. So between revenues and costs, we're pretty excited about growing this business and growing it more profitably than it was in 2020. And when I look at how it did against COVID and all the other challenges last year, we feel like we've got a tiger by the tail. So we're pretty excited about this deal and how we're going to do here for the rest of the year.

[Steven Ralston:]

Thank you for answering my questions.

[Matt Plavan:]

Sure. Thanks, Steven.

[Operator:]

I'm showing no further question at this time. I would now like to turn the conference back to Matt Plavan. Please go ahead, sir.

[Matt Plavan:]

Thank you everyone for joining us and your continued interest and support. We are looking forward to real-time reporting on our key milestones and achievements in the field and commercial markets, and we wish you all safety and good health. Have a good afternoon.

[Operator:]

This concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.