Arcadia Biosciences [RKDA] Conference call transcript for 2022 q1
2022-05-12 18:26:11
Fiscal: 2022 q1
Operator: Good afternoon. And welcome to Arcadia Biosciences First Quarter 2022 Earnings Conference Call. Today’s presenters will be Stan Jacot, President and Chief Executive Officer; 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 will be making forward-looking statements on this call based on current expectations and currently available information. However, these statements are based on factors that include risks and uncertainties, and 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. With that, I'll turn the caller to Stan Jacot, CEO.
Stan Jacot: Good afternoon, everyone. And thank you for joining us today for our 2022 first quarter conference call. Despite the fact that it has only been six weeks since we last spoke to you, Arcadia has made tremendous progress from both a financial and a strategic perspective on its path from a bioscience company to one focused on bringing innovative plant-based health and wellness products to the consumer marketplace. Today, I would like to discuss five important topics that we believe have a meaningful impact on Arcadia today, and will help to better position the company for growth and profitability going forward. These topics include; one, key financial highlights for the quarter; two, a decision we have made to wind down a legacy co-packing business that was part of the Arcadia Wellness acquisition; three, the launch of GoodWheat; four, an update on our long term strategy; and five, how the recent Bioceres announcement regarding HB4 soy will impact Arcadia. So let's start with the financial highlights for the quarter. As many have already seen in the press release, we delivered strong financial results in Q1 that were well ahead of consensus estimates with respect to revenues, gross margins, operating expenses and cash. Our revenues were up nearly 300% year-over-year and were up 48% versus Q4 2021, primarily driven by opportunistic grain sales, expanded distribution in our body care business and continued double digit-growth from Zola coconut water. In Q1, we saw an opportunity to take advantage of rising wheat prices and sold approximately $1 million worth of grain. We view these grain sales as a win for Arcadia as we were able to liquidate older inventory for which we currently have no commercial home while at the same time generating a considerable amount of cash for the company. Going forward, we will continue to monitor the market and will be opportunistic when it makes good sense to do so. In body key in body care, we gained distribution in Q1, adding more than 3,600 points of distribution across our three brands, ProVault, Soul Spring and Savvy Naturals. Savvy Naturals in particular is benefiting from the rebranding work that was completed in late 2021. And on Zola, the coconut water category continued to grow at a double digit rate in Q1 and Zola outpaced the category. According to Nielsen data for the 13 week ending April 4th, Zola unit sales increased 9% and dollar sales grew 17%. From an operating expense perspective, the company has been working hard to right size the business while adequately supporting our CPG initiatives. Our R&D and SG&A expenses were down 11% compared to the same quarter last year, down 30% versus last quarter and are now at the lowest level in three years. While our expenses may vary from quarter to quarter, particularly as it relates to the timing of marketing investments, we are extremely pleased with these results. The combination of higher revenues and lower operating expenses resulted in a lower use of cash during the quarter compared to our run rate last year. We are encouraged by the performance and are striving for gross margin improvement, particularly in the second half of the year. The second topic I'd like to touch on is the key driver to that improvement, which is our decision to wind down a legacy co-packing business that we inherited as a part of the Arcadia Wellness acquisition. As you recall, in May 2021, we acquired a number of brands that we believed had strong potential for growth. In fact, two of these brands, ProVault and Zola, were identified as core brands in our last earnings call. The acquisition also included a co-packing business that had expanded during the COVID pandemic. As we discussed previously, we've analyzed all of our businesses for investment based on the following criteria; one, the size, the opportunity and ability to differentiate; two, the ease with which we can scale the business; and three, the level of expected profitability. The co-pack business was designated as non-core and was not generating cash. So we have made the decision to wind it down, but have agreed to fulfill our existing obligations in an effort to provide an orderly transition. We expect to be out of this business by the end of Q2. Although, it does mean that our gross margin pressure will continue through Q2 as we complete these orders. Having said that, we expect our gross margins to be positive in the second half of the year as the business winds down and GoodWheat ramps up, which is the perfect segue into the next topic, the launch of our GoodWheat pasta. Today, I'm extremely excited to announce that we have already shipped our first order to our first retail customer, and we expect GoodWheat pasta to be on the shelf and retail stores this month. This is a significant milestone in Arcadia’s transformation. And I would like to take a moment to thank all of our employees and partners for helping us achieve this tremendous accomplishment. This was years in the making and we couldn't be happier with the finished product that we are bringing to market. We firmly believe that GoodWheat is poised to disrupt the pasta category by providing a product that is truly unique in the marketplace, a better few pasta with great taste and texture that contains only one simple ingredient. And while we are thrilled about the launch of GoodWheat with our initial customer, we recognize this is only the first step. We continue to engage with a significant number of retailers to expound on the benefits of GoodWheat and look forward to gaining additional distribution and retail stores across the country in the coming months. In addition to the retail success I just mentioned, I'm also very happy to report that our e-commerce launch is on track, and we expect our GoodWheat pasta to be available on Amazon next month. This is another significant milestone for GoodWheat as we embark on a multi-channel approach to make GoodWheat available to customers regardless of whether they wish to purchase the product in store or online. We are optimistic about the prospects for both channels and look forward to the future. And speaking of the future, let me now transition to the fourth item, which is our long term strategy. We have talked about the criteria with which we evaluated our existing brands upon my arrival, and we're using the same criteria to develop a long term plan for Arcadia. While this is still very much a work in progress that we are not ready to share, I did want to provide you with some high level insights. Several weeks ago, I gathered our leadership team together to begin laying out a long term roadmap for Arcadia, in the room were over a 100 years of CPG experience across all functions. And while we aligned on future opportunities for all of our brands, we spent a considerable amount of time focusing on what is next for GoodWheat. Our team partnered with an outside consulting firm to thoroughly analyze and gain insights into more than 15 different categories where our value proposition with GoodWheat is best poised to break through and win. As you know, wheat accounts for 20% of daily calories and is an important ingredient in a multitude of products, so the possibilities are vast. However, our strategy will be deliberate and executable, and mindful of the market trends, competitive dynamics, margin possibilities, patent restrictions and superior product formulations that will allow our GoodWheat technology to establish a strong foothold in market. So we will take a measured approach to do what we believe is in the best interest of Arcadia, our employees, customers and shareholders. More to come on this topic in the coming quarters. But hopefully that gives you some perspective on how we are thinking about future products and product categories in order to build GoodWheat into a dominant brand in the marketplace. Finally, I would like to wrap-up my comments by discussing the recent press release from Bioceres regarding China approval for HB4 soy. As many of you are aware, we were a joint venture partner with Bioceres on the HB4 soy product and sold our interest to them in 2020. In exchange for our membership interest, we received $5 million of cash upon closing, stock in Bioceres that was sold in 2021 for $27 million, $1 million in post closing payments, as well as future milestone and royalty payments. On April 29th, Bioceres announced that China's ministry of agriculture publicly communicated its decision to approve HB4 soy for import and use as food and feed. Once finalized, this approval will trigger four quarterly milestone payments to Arcadia, totaling $2 million. Additionally, Arcadia will receive royalty payments of 6% of Bioceres HB4 soybean net revenue up to a maximum of $10 million. In that same transaction but separate from HB4, we also licensed our wheat technology to Bioceres in Central and South America for which we will receive royalties of 25% of the net wheat technology licensing revenues generated by Bioceres. To date, no such royalties have been earned. With that, I will now turn the call over to Pam to discuss our 2022 Q1 financial results in detail. Pam?
Pam Haley: Thanks Dan. As mentioned at the onset of the call, we are pleased with the financial results achieved this quarter. Total revenues recognized for first quarter of 2022 were $3.2 million compared to $828,000 in first quarter 2021. Product revenues generated from the body care brands acquired in the second quarter of 2021 contributed to the majority of the $2.4 million increase along with the opportunistic grain sales this quarter. Total operating expenses of $7.8 million in the first quarter of 2022 were up $1.7 million from the $6.2 million recognized in the first quarter of 2021. The additional grain and body care product sales generated additional cost of revenues in the first quarter of 2022 compared to the same quarter in 2021, $3.5 million versus $856,000 for an increase of $2.6 million. Research and development expenses have continued to trend downwards, $395,000 this quarter and $1.2 million this quarter last year, for a decrease of $764,000 as we continue our focus on commercialization. This focus is also driving the slight increase in SG&A expenses. We recognized $4.4 million in this first quarter of 2022 compared to $4.1 million in the first quarter of 2021, an increase of $283,000. Net loss attributable to common stockholders was $4.5 million in the first quarter of 2022 compared to net income of $2.1 million in the first quarter of 2021. While the loss from operations of $4.6 million in first quarter 2022 was $700,000 favorable to the $5.3 million recognized in first quarter of 2021, an unrealized noncash gain in the amount of $7.5 million related to the Bioceres stock we held was recorded in the first quarter of 2021. I'd also like to note that we recognize noncash income of $322,000 in the first quarter of 2021 for the change in fair value of common stock warrant liabilities. No such change, income or expense, was recorded in the first quarter of 2022 as we implemented a new accounting standard this quarter, that eliminates the remeasurements of these warrants going forward. Additional detail regarding this change is included in footnotes 2 and 11 of our first quarter Form 10-Q. We also recognized $769,000 of issuance costs associated with the PIPE transaction in January of 2021 with no similar costs incurred or recorded in 2022. This concludes our financial highlights for the first quarter of 2022. Thank you very much for your attention today. And I'll turn the call over to the operator for questions. Operator?
Operator: And we do have Benjamin Klieve from Lake Street Capital Markets.
Benjamin Klieve: I got a few questions for you. First, kind of in the context of the 1x wheat revenue that you realized. Can you guys quantify the amount of tons or bushels of grain you have in inventory now? And then also talk about the level of wheat acreage you are intending to plant this spring to secure inventory here in the fall?
Stan Jacot: We've got about 12 million pounds of inventory in right now and that will be enough to last us for a few years. And so we don't need to immediately grow new grain this year in order to support our needs. And as we stated in the script, the grain that we sold were against wheat that we weren't planning to commercialize.
Benjamin Klieve: And by the way, I apologize if I made you repeat the things you said in the prepared comments. My phone dropped off for a few minutes there, but that's helpful. Next question on the GoodWheat launch. The product looks great. It'll be really excited to hear progress. I have a question on the marketing of it in the -- specifically around the protein content. I mean the protein content is really significantly higher than just about anything else that you'll see, in the pasta aisle outside of brand -- the brand themselves as high protein because of additives. Are you guys able or interested in adding a high protein label to this box, and can you talk about your decision maybe to do so or to not do so?
Stan Jacot: No, that's a smart comment. And it is true, our protein content is significantly higher than other pastas in the category and without additives. We do plan on changing our packaging in order to make that statement on the front panel. So we just weren't in a position to do that from a regulatory perspective prior to launch.
Benjamin Klieve: And then so that brings up in a follow up question. I mean, I know that silly label can not really weird rules around them. I mean, what -- is it just kind of a formality that you'll have to go through to be able to have a high protein label, or is there something that you have to -- anything you have to do to the recipe to do that? What really is required for that?
Stan Jacot: We don't have to add anything to the formula. It will still be one simple ingredient. It's just a matter of the right language that we are able to put on the front panel and location.
Benjamin Klieve: On kind of a modeling front. When you look at this first quarter OpEx, as GoodWheat starting to ramp here, do you think the kind of marketing costs are included in those first quarter numbers? Or do you think you're going to see a step up in OpEx here in the second and third quarter ahead of a revenue ramp?
Stan Jacot: We will see marketing expenses continue to increase. But at the same time, there are other expenses that we're also trying to reduce in our SG&A. So this is a pretty similar pattern that we expect throughout the rest of the year.
Benjamin Klieve: And one other question on the e-commerce initiative. So I think you indicated it's going to be available on Amazon next month. Are you guys -- can you talk about your marketing efforts to get the word out ahead of that e-commerce launch.
Stan Jacot: Well, we actually see the e-commerce launch as a way to ramp up marketing nationally, because as of now we're not able to do that with our current retail distribution. So yes, we are looking at omnichannel approach to getting the word out about our GoodWheat pasta and the benefits, and allowing people to try it for themselves.
Benjamin Klieve: We'll stay tuned for more there. I'll -- that will leave it there, I’ll get back in queue. But thanks for taking my questions and best of luck here next quarter.
Operator: And that concludes our Q&A session. I'll turn the call back over to Stan Jacot for final remarks.
Stan Jacot: Thank you. In closing, I'd like to thank everyone for joining us today. We are excited about the launch of GoodWheat, as well as the momentum we are building in body care and Zola. Our financial results have improved. We have made strategic decisions that will enable continued improvement during the second half of the year. And we feel that we are well positioned to execute on these plans and we look forward to updating you on our progress. Thank you for joining us today and have a great afternoon, everyone.
Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
