Arcadia Biosciences, Inc.
Q3 2021 Earnings Call Transcript

Published: 15 Nov 2021

[Operator:]

Good afternoon, and welcome to Arcadia Biosciences Third Quarter 2021 Earnings Conference Call. Today’s presenters will be Matt Plavan, President and CEO; and Pam Haley, Chief Financial Officer of Arcadia. This call is being webcast, and you can refer to the company’s press release at arcadiabio.com. Before we start, 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 involves risks and uncertainties, the company’s actual performance may result – sorry, 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-Q. With that, I’ll now turn the call over to Matt Plavan, President and CEO.

[Matt Plavan:]

Thank you, Delfin. Hello, everyone, and welcome to our third quarter conference call. Thank you for joining us. I’ll begin by saying that the third quarter has been marked by a heightened intensity of focus building on the themes of capacity building, integration and alignment that we discussed back in August. It’s also been marked by strong financial results, a further validation of our successful transformation into a consumer products company. Our third quarter showed continued sequential growth during the year with revenues up six-fold over prior year same quarter, and year-to-date, we are up four-fold over the prior year to date. In addition, revenues are increasing sequentially during the year as well, with revenues up 70% Q2 over Q1 and 69% Q3 over Q2. To help ensure the positive momentum continues, we’ve been persistent with our expanded bench of CPG talent in place in honing our focus, further refining our go-to-market strategies for 2022 and identifying ways to accelerate our path forward. To that end, the company has also made decisions regarding leadership. As we announced in September, I will be stepping down as CEO when a successor is identified. After planning a flag as a CPG company, we’ve made substantial progress in establishing a portfolio of plant-based better-for-you food and wellness products, and we’ve done it in a remarkably short period of time. I’m very pleased with the brand platform that’s now in place and prime to penetrate the market. At this point, having accomplished a lot of the foundational heavy lifting, the timing makes sense to begin the process of transitioning to a new leader, someone with deep experience running successful CPG organizations, who will be able to build on our progress, accelerate speed to market and capitalize on the tremendous growth opportunities ahead. Our Board has launched a national search, and that process remains underway. We are being deliberate in our approach and understand that finding the right person for the position is more important than adhering to a specific time frame, though we are making solid progress and continue to expect process to be completed by the end of the year. In the meantime, our company is keeping pace and moving forward with its plans, and I am concentrating on ensuring that the next leader will be able to hit the ground running when the baton is passed. That includes making critical decisions about where it makes sense to continue to invest resources for the long haul. But first, I’d like to provide updates on our product sales, the launch of our e-commerce business and the multi-channel rollout of GoodWheat. Beginning with our body care products, we significantly expanded our distribution as compared to the prior year third quarter, which we believe bodes well for continued retail growth. We estimate the distribution for our three body care brands expanded by nearly 80%, compared to the prior year, primarily driven by the launch of ProVault in Q1 2021. However, our body care product revenues for the quarter were actually down 42% year-over-year for the following two reasons

[Pam Haley:]

Thank you, Matt. I’d like to take a few moments to share the financial highlights for the recent quarter and year-to-date with you now. As Matt mentioned at the onset of the call, we are pleased with the revenue performance of the brands acquired last quarter of Q2. Total revenues recognized for third quarter 2021 were $2.4 million compared to $314,000 in third quarter 2020 with the majority of the $2.1 million increase driven by the acquisition of the portfolio of body care products and Zola coconut water, in addition to higher GLA sales this quarter. The year-to-date increase in revenues of $3.7 million were mostly attributable to the acquired brands as well as they generated $2.6 million of revenue in addition to GoodHemp seeds, GoodWheat grain and increased GLA sales this year-to-date. Total operating expenses of $11.1 million in Q3 2021 were $3.2 million higher than the $7.9 million recognized in Q3 2020 and total operating expenses of $26.3 million Q3 2021 year-to-date were $5.2 million higher than the $21.1 million recognized Q3 2021 – 2020 year-to-date. Cost of product revenues were $2.5 million in third quarter 2021 versus $1.8 million in third quarter 2020 and $5 million in third quarter 2021 year-to-date versus $3.5 million in third quarter 2020 year-to-date. The $670,000 year-over-year increase for the quarter was primarily driven by the product sales of the portfolio of newly acquired brands, partially offset by lower inventory write-downs this year versus last. Write-downs charged to COGS totaled $449,000 in the third quarter 2021 for the adjustment to fair market value of the commodity hemp seeds in inventory and the destruction of hemp crops due to disease with $1.5 million of write-downs in the third quarter 2020. As for year-to-date, the $1.5 million increase in COGS over the same period in the prior year was driven by the same factors. R&D expenses for the quarter were $1 million in 2021 as compared to $1.8 million in third quarter 2020 and $3.3 million third quarter year-to-date compared to $6 million third quarter 2020 year-to-date. The decrease for both periods was driven primarily by lower employee-related expenses as we restructured our research teams to move from through research and discovery work to the development and commercialization phase of our consumer products. In addition, we no longer have the vertical related expenses in 2021 that were present in 2020 with the sale of our share of the joint venture in November of last year. Partially offsetting the favorability for the quarter and year-to-date in 2021 is an expense of $333,000 recognized for the release of product from inventory that was not commercialized by Arcadia. Our write-down for the impairment of fixed assets in the amount of $1.1 million was recorded in third quarter of 2021 and is associated with the agricultural and extraction equipment within our Archipelago joint venture. As Matt noted, we have successfully harvested over 20,000 pounds of hemp biomass that is in route to be processed into CBD oil. We have produced a sufficient quantity of biomass and are not able to extract CBD oil in Hawaii in the near future due to regulatory restrictions still in place. As a result of these regulatory challenges and of unfavorable hemp CBD market conditions, we have assessed the Archipelago assets for impairment and recorded the write-down. Selling, general and administrative expenses totaled $6.3 million in the third quarter of 2021, a $2 million increase from the $4.3 million recognized in third quarter 2020. Third quarter year-to-date 2021 SG&A expenses totaled $16.8 million, a $5.1 million increase from the $11.7 million recognized third quarter year-to-date for 2020. The increase for both periods is attributed primarily to the additional salaries and benefits associated with the increased headcount. Marketing, advertising and consulting activities increased during 2021 as expected in preparation for product launches. Net loss attributable to common stockholders was $2.2 million in the third quarter of 2021 compared to $6.4 million in third quarter of 2020 and $5.4 million in the first nine months of 2021 compared to $13.6 million in the first nine months of 2020. The operating activity has been addressed, so I’ll give a little more detail on the other components. The third quarter of 2021 included a non-cash credit to expense of $4.8 million for the change in the fair value of warrant liabilities from the end of Q2 to the end of Q3 2021, while Q3 of 2020 included a $1.1 million credit for the change. Specific to this current quarter is a gain recognized on the extinguishment of the $1.1 million Paycheck Protection Program loan that was funded last year as we received notification of forgiveness. Third quarter of 2020 included a $682,000 loss on the extinguishment of warrant liability, while there was no such activity in third quarter of 2021. We recognized a gain of $10.2 million in the second quarter of 2021 on the sale of Bioceres stock. So this concludes our financial highlights for the third quarter and third quarter year-to-date of 2021. Thank you very much, and I’ll turn the call back over to the operator for questions.

[Operator:]

Thank you, Pam. And our first question comes from Ryan Meyers of Lake Street Capital. Please go ahead, sir.

[Ryan Meyers:]

Hi, guys. Thanks for taking my questions. First one for me, I just wanted to get some insight on your hedges level of confidence in launching the GoodWheat five product SKUs in the first quarter, if you think some of the headwinds that delayed the soft e-commerce launch in the fourth quarter here will subside by them?

[Matt Plavan:]

Thanks, Ryan. I would say we have high confidence that as we understand the implications or the impact of the shipping delays on our co-packer that Q1 is reasonable. But I want to be – I’m cautiously – we’re cautiously optimistic simply because this has been difficult to predict, and we want to be careful. But suffice it to say that the date we’re expecting is not at the end of the quarter. So we’ve baked in a little bit of time for additional delays. Don’t expect them, don’t know that they’re happening or don’t have any reason to expect that they’re happening. We think we’ve baked in enough cushion. But at the same time, again, it’s been difficult to predict. So we feel good about Q1 now, and I think I’d say we have high confidence.

[Ryan Meyers:]

Okay. That’s helpful. And then what are you guys hearing so far from some of the retail partners about the GoodWheat products ahead of the launches in 2022?

[Matt Plavan:]

A lot of interest and enthusiasm for the product and its nutritional profile. And it’s really about lining up with the category reviews and the timing of those reviews, and we expect to see good things from some of the larger chains that we’re currently – that we currently have relationships with on our body care products.

[Ryan Meyers:]

Okay. That’s helpful. And then just wondering if there’s any other investments that you guys want to call out that you’re making ahead of both these product launches, whether it’s on the R&D side or the selling and marketing side of things?

[Matt Plavan:]

So I would say that the primary investments are in what we covered, which would be taking the body care products into the online space, which requires a fairly sophisticated website with data analytics that enable you to target – discretely target consumers and evaluate the performance marketing and potentially scale up those digital brands to drive revenue. And our hope is that every dollar towards digital advertising produces reasonable or is a good conversion to revenue dollars. So that’s where I think you’ll see a fair amount of investment here in the early 2022 during the launches over the next 90 days and into early 2022.

[Ryan Meyers:]

Okay. And then last question for me. Do you plan to still do some sort of e-commerce launch on the GoodWheat side? Or are you guys just looking to go straight into the retailers in the first quarter?

[Matt Plavan:]

So let me clarify. Thanks for asking that. The actual full-scale launch we’re referring to is online initially. And what we were thinking we would do previously was start with a single SKU in December to begin collecting data. So the Q1 launch is actually the e-commerce online launch for GoodWheat and shortly thereafter would follow traction in the brick-and-mortar retail space.

[Ryan Meyers:]

Okay. That’s it for me. Thank you.

[Matt Plavan:]

Thanks, Ryan.

[Operator:]

And our next question is from Ram Selvaraju of H.C. Wainwright. Go ahead, sir.

[Unidentified Analyst:]

Hi Matt, This is on for Ram. Thanks for taking our questions. So through your acquisitions of Agrasys, Lief and Zola, you’ve transformed into a vertically integrated food company. Do you plan to integrate your proprietary food innovations into these acquisitions? So for example, GoodWheat in-house breeding technology into the Agrasys products.

[Matt Plavan:]

That’s something that we had originally considered. It would be a strategic opportunity that would make sense or potentially make sense for us. In the spirit of focusing in the near-term, we will simply be focused on launching GoodWheat online and in retail in the U.S. So we’ve really kind of set aside pursuing other potential strategic opportunities until we’ve demonstrated the kind of traction that we think is appropriate and important to leverage into other channels thereafter.

[Unidentified Analyst:]

Okay. Thank you. And then could you please update us on your GoodWheat presence in Europe in the context of the partnership with GoodMills innovation?

[Matt Plavan:]

Yes. So GoodMills continues to develop the ability to produce or breed into local variety so that they can have their own production of GoodWheat to serve their markets. They’ve continued to progress, however, COVID and kind of the economic challenges associated with it have slowed them more than they would like, but their enthusiasm for the product and their commitment to be the largest miller selling GoodWheat is remains intact. And I think they’re looking to 2022 as the year that they demonstrate that first online through their e-commerce strategy. And so we remain committed and together working to bring GoodWheat to Europe through GoodMills.

[Unidentified Analyst:]

That’s very helpful. Thank you. And just finally, you gave us some color on the GoodWheat direct-to-consumer digital marketing efforts. Do you have any indication or can you give us any more color in terms of customers gained quarter-over-quarter or any other metrics?

[Matt Plavan:]

So for the body care products, we are just bringing those sites up. And so we have no sales to report just yet. We expect – since they’re going to all be up by the end of the year, we would have something to report out in Q1. And since GoodWheat is also similarly being launched in Q1, we’ll expect to have initial feedback as of Q1 as well to for the metrics around the sales for those products.

[Unidentified Analyst:]

Okay. Thank you. Congrats, and thanks for taking our questions.

[Matt Plavan:]

Thank you.

[Operator:]

Well, at this point, I’m not showing any further questions. Now I would like to turn the call over to the President and CEO, Mr. Matt Plavan. Please continue.

[Matt Plavan:]

Thank you. To close out the call, we are very pleased with our continued progress and the steps we’ve taken to hone our focus and strategically deploy our resources for maximum impact. The company is well-positioned to execute on its plans with the goal of elevating our brands, further penetrating the consumer health and wellness category and creating shareholder value. Thank you, again, for joining us today, and have a great afternoon.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. And this concludes today’s program. You may now all disconnect. Everyone, have a great day.