Q3 2020 Arcadia Biosciences Inc Earnings Call
Good afternoon, and welcome to Acadia by signs that third quarter tiny tiny <unk> earnings conference call. Today's presenters will be massively then president and CEO, Kevin Hodges VP of commercial operation.
Since and bumpy Li CFO author <unk>. This call is being webcast and you can refer to the Companys press release at Acadia by your Dot Com before we start we would like to remind you that our TDR by science says, we'll be making forward looking statements on this call based on current expectations.
And currently available information.
However, since this the statements are based on factors that involves risks and uncertainties.
The company's actual performance and results may differ materially from those described or implied today, you kind of view the company's safe Harbor.
The language in their most recently filed 10 this K and again on page six after todays press release with that I'll now turn the call over to Matt Plavan precedent and see you soon.
Thank you everyone for joining us and welcome to our third quarter conference call since.
Since our last call.
I'm pleased to report.
Arcadia has achieved a number of fundamental milestones, resulting in a more focused execution strategy and the tangibly strengthened financial ability to achieve our number one goal to drive near term shareholder value by unlocking the full potential of our commercial ready products today.
Im going to highlight these important achievements first as we announced this morning, we have consolidated the forward commercialization of our Hbfour soybeans soybean business with our business partner Bio series in exchange for cash and just under 1.9 million shares and bio series, providing Arcadia with both addition.
Total liquidity for its other business initiatives as well as a meaningful stake in bio series, thereby preserving our share of an upside in the performance of the age before soybean.
Also as part of this transaction bias series acquired the license rights to our good wheat product portfolio, which will extend our global reach into south and central.
Hello, Erica and important we growing region second we completed the acquisition of industrial seat innovations or ISI, and we've successfully integrated breeding activities and their northwestern production operations with our operations in Central California and are now laying the groundwork for sales in 2021.
Leveraging their installed base and strong reputation for quality genetics and grower support.
And third just this week, we formally launched our direct to consumer good wheat products with our partner three farm daughters into both regional grocers in the U.S. and an online E commerce cart made possible only.
And by the hard work.
Over the past 90 days by our employees and our partners putting into place from scratch. So to speak the milling co packing and E Commerce logistics infrastructure required to serve our global markets. The more experience we get in the commercialization of the products of good wheat the hires.
Only confidence that are good we traits will be a blockbuster success unequivocally the feedback from our BTB partners like Baystate milling ardent mills.
As well as our supply chain partners, who work with us to formulate our wheat into food products is that good wheat is.
As our markedly unique because of what we like to think of as the innovation Trifecta, which is one its nutritional content is superior with unparalleled levels of intrinsic fiber to its food formulation performance is exceptional and three it taste delicious, which we know through direct consumer feedback.
Back it's pouring in since our launch the challenge for any food innovator is to improve the nutritional content of a food staple while maintaining formulation performance and taste. This is why I quote one of our large milling partners. When they said to US. Good wheat is the most important wheat innovation in the past 75 years, that's because no one.
As Russ has been able to achieve this trifecta to the degree we feel we have that's why we increasingly believe the global potential for our good we traits is truly vast which Kevin will discuss a bit later in the call. Okay.
Okay I'd like to begin our commercial update with our bio series collaboration as.
As many of you know we have a long and successful history of.
Although development of bio series, we've spent the past six years through our joint venture partnership Vertica developing testing Trialing and deregulating the world's first drought tolerant herbicide resistant soybean trait CHP for soybean. We are proud of this joint development success and consider bias series not only a trusted development partner.
But a very capable commercial.
Company for execution, therefore, now that the development phase is complete and we are squarely in the commercialization phase the management committee of Vertica assembled to determine the optimal forward path for the HP for Soi commercialization as well as other opportunities for.
Our commercial collaboration between our two companies rather quickly to opportunities became very obvious. The first was with regard to the age before soybean business. We concluded that for the highest commercial success of our Hbfour soybeans from this point forward it would be best to consolidate the launch and commercialization authority under one roof.
And in this case it was cleared in Chile to be with five series the reasons being a bias series is well established and South American agriculture, having their headquarters and primary operations in Argentina, one of the largest markets globally for biotech crops and having built a strong reputation as an innovator and operator now marketing.
Agricultural inputs to more than 31 countries and be biased series has built an integrated product platform called eco seed wherein several proprietary technologies, including germplasm, the h. before trait fungicides insecticides polymers and other biologicals are all embedded in a single pellet ecos.
And enjoy a component of the eco seed platform is the specific vehicle through which our age for base before technology will be marketed and sold thus bio series has de facto become the primary operational commercial lead while Arcadia as value contribution.
Has been most recently and certainly would be from this point forward.
Sensibly financial.
And second for all the same reasons bio series is the ideal commercial agent for the H.B. for soybean. We agree. It also makes perfect sense that bias series acquired the rights to our good portfolio of products in South and Central America.
In combination this transaction is highly beneficial for Arcadia and it's.
Shareholders because in exchange for the sale of its membership interest in Vertica and for the rights to our good we technologies in South and Central America Arcadia gets in return won a significant non dilutive infusion of cash.
Following the close Arkady recently received 6 million in cash with two.
Per million and contingent cash to be paid following approval of China.
Regulatory approval or the scale up of HB for acreage.
Arkady also received at close 1.875 million shares.
Bio serious stock two through its acquired stake.
Taken bio series and the follow on trait royalties that will total up to $10 million on H.B. for seed sales Arkady retains a significant share in the upside potential of the HB for soybean overtime, three and very importantly, Arcadia will no longer be responsible for its share of the annual vertical capital.
Total contributions, which are becoming significantly greater entering the commercialization and scale up of the program.
In fact, we estimate our share for 2021 that would have been as much as $9 million is the capital. We would have to have secured which will likely would have been through external sources added.
That we will be able to reduce the dedicated costs related to ongoing management of the germplasm development program as well as the elimination of up to $2 million per year in direct R&D support costs for the development of the age before trait that we have been incurring over the past several years.
And for Arcadia significantly expand.
Expands its geographic reach into South and Central America for its good we portfolio of products between Argentina, and Brazil alone. There are about 22 million acres of wheat grown annually or approximately 33 million metric tons of grain produced we expect our good wheat products will sell at a premium to conventional.
If we were to try and size the market opportunity today, we think that a 15% premium over conventional conventional wheat prices is very reasonable.
Which equates to approximately $27 per ton as conventional we'd today sales at about $180 per ton our royalty percentage is 25%.
Premium derived by bio series or in this case, it would be $6.75 per ton.
And therefore using these events these estimates.
If we assume just a 5% penetration rate into south and Central American markets. It will yield annual royalties to Arcadia of approximately $11 million.
So clearly we will we will be working closely with bio series to two.
To bring this to market and if possible penetrated beyond 5%, but that just gives you some sense for the royalty opportunity for Arcadia through Tobias series license relationship. So in the aggregate we believe the bio series transaction enhances our near term value.
Under the creation potential by providing an immediate infusion of cash eliminating a significant joint venture capital call that was coming due within less than six months.
And would be recurring for the next few years, which significantly de risks our continued participation in the upside of each before and lastly.
The strands.
Its action activates an important new geography for our good we portfolio of products.
So I'd like to turn the call over now to Kevin for an update on our good wheat programs Kevin. Thanks.
Thanks, Matt welcome everyone I'm excited to update all of you on the progress the team at Arcadia has made these last three months on the front of launching our direct to consumer business model goal.
In the us and internationally understanding that this type of product launch and brand introduction takes time the progress that we've made in the third quarter of 2020, excites us even more especially as we set up for success in 2021.
In addition, we are thrilled to now be partnered with bio series on our wheat technology.
We will have forms as they are a leader in the agriculture inputs segment of Argentina, and they are able to bring access and availability of the good we platform of enhanced value attributes to the food industry and eventually consumers in South America and Latin America.
This announcement further enables our BTB market approaches.
Is that we have been updating you on in the last 12 months.
As we are all very aware of the continued help pandemic of the COVID-19 virus history suggest and as do studies published by Mckinsey and company the companies to invest in innovation through a crisis outperform others during.
Such recovery period by as much as 30% that is why we believe our investment in building a direct to consumer good Weve brand will lead to very positive near term revenue opportunities, especially as the nation and world continue to cope with the quarantine restrictions of this ongoing panned.
Danny.
As you will hear us talk about today as a company, we partnered and physician Arcadia by investing in 2021 to enable both near term revenue and sustain long term growth the.
The factors that are leading to continue our investment are powered by the inventions at Arcadia that are a name.
England, the good wheat brand family of enhance nutritional attributes to come to the market.
The good we products are enabling an effort to fill a fiber and nutrition gap in end consumers diets globally studies have found a population wide.
Deficiency in fiber with only 5% of people.
In the US meeting the Institute of Medicines recommended daily target of 25 grams for women and 38 grams per man. This is a stagger city staggering deficiency that makes for a tremendous market opportunity for our good wheat.
As we have tracked through Mckinsey data research there are five fund.
Mental shifts occurring today to the consumers behavior of purchases in our markets stemming from the current health pandemic and this will very likely lead to possibly per permanent changes in purchase patterns well into the future two of the most revealing trends that are more.
One is that over 70% of the consumers have opted for a different purchase store for example online in E. Commerce and second is that it is forecasted that between the range of 20% to 40% net increase of span will incur for online purchases and this will sustain even after that.
Current situation of the COVID-19 resides this.
This leads us to why when we last updated you in August we entered into a joint business partnership with reform daughters, and majority female owned company marketing to families and consumers by providing food products that are wholesome in nutrition we.
Correct on the last call and we are continuing to see this sustained trend of sales of baking stables, such as power banking powder baking soda and east through online direct to consumer and even retail grocery stores throughout the us being at an all time high shelf stable Pat panned.
Pantry categories are still experiencing a plus 19% growth compared to 2019.
As we also announced in our press release on Tuesday of this week. The three farm daughters brand has first launched three different shapes.
Of high fiber excellent taste and texture healthy artist funnel.
Oh pasta noodles in time for the holiday purchase season. This has been accomplished in the direct to consumer channel through their E. Commerce website powered by Shopify, where families can purchase to match their at home volume customized needs with a curbside delivery approach. This.
The specific cost.
Of formulations chosen for this initial launch were based on customers' feedback we received from pre launch studies can tech conducted this past September that feedback was overwhelmingly positive with high remarks on the overall taste texture and al Dente firmness of the pasta new rules that are powered from the guy.
Good we brand of resistant starch durum wheat these.
These points of different station make good we'd a clear consumer choice and give us the potential to be the market leader in this category from a health and nutritional standpoint, all of the pasta noodles are manufactured from resistant starch during we semolina flower with no.
Cost additive and have up to nine grams, more dietary fiber per serving and 30% fewer calories than a traditional pasta and is a very good source of protein.
In addition to the pasta offerings. We're also selling a very exciting add home baking for our product to consumers online.
Another nutrient dense health offering just in time for holiday baking for friends and families.
This 100% wheat flour product is available to consumers in a resealable plastic pouch and is also packed with an impressive nutritional profile contain 30% fewer calories and higher fiber.
And 50% less gluten when compared to all when compared to other all purpose baking flowers being sold in the market today. According to a report in the American Journal of lifestyle medicine for buyers that consume a fiber rich diet like the 100% we flower sold by three farm daughters. This associates.
To an improved health and a reduction in risk of health ailing symptoms.
In addition to the E Commerce launch here in November. We are also excited to talk about a regional launch with a North Dakota, Minnesota grocery retailer Hugo's family marketplace in popular grocery chain chain that provide.
Thats excellent and healthy choices to consumers across the Midwest. This initial launch into the retail market will provide a secondary direct to consumer Avenue to customers desiring great tasting healthy and nutritional food options are key learnings by first partnering with Hugo's will provide real time feedback and enable lard.
Its retail pushes into additional use markets.
As we talked about last quarter, the consumer buying trends in global markets. During this health pandemic are very similar to the United States.
Families internationally are continually seeking healthy clean label and alternative options that bring forward increased health attributes in their diet.
Targets with our partner corner foods and through the E Commerce distribution channels of Tastemade and T Mall, we are poised to create entry and introduction of Arcadia has value enhance platforms to this part of the globe.
We continue to push and are forecasting the launch of three farm daughters brand neutral.
Brand Pos and noodles powered by good wheat. In addition, a legacy product of the Sonova GLA supplemental capsules into the China market through direct to consumer channel in this current fourth quarter as we look to scale production capacity in 2021 to meet the demands and trends.
In international markets like China, we're excited to provide consumers in this geography food products that fit the increased demand to cook and eat at home.
As reported in the second earning second quarter earnings our BBB and the international geography basis is gaining momentum, while all food ingredient companies or fee.
Facing challenges in the current environment of this health pandemic our partner a good mills innovation, an affiliate of good Mills group in Europe, along with Arcadia are continuing to collaborate in pushing ahead with good we brand varieties for use in consumer products in multiple countries of Europe.
In Central America and Morris.
More specifically, Guatemala, our Kt is continuing the marketing and promotion efforts through online website communication and social media engagement.
We are aligning with ingredient and food processors in 2021 to push forward expansion of our good wheat VTB sales.
We invite you to join us on our social media platforms in.
This part of the globe at good we let Tam to continue to see the food innovation and recipes.
That we are creating for consumers and how they are using it in their home cooking of food products that will contain good we'd ingredients.
To further support our continued b to B platform.
With the licensing terms reached with the bias series on good wheat. This only supports that consumers across the globe are seeking and demanding to implement healthier food options at the dinner table. Good wheat in the future years is being introduced and brought to you brought to the south brought to the market in South America by Bioscience.
Yeah.
Enabling the large reach that is occurring for our wheat technology of Arcadia has.
In conclusion, with our direct to consumer and B to C. Push this past quarter and through the through the fourth quarter and beyond we're doubling down on our investment in world class direct to consumer retail and E Commerce.
Channels, who.
Home meal preparation and online food purchases have expanded significantly as a result of the ongoing pandemic and according to an online publication at grocery dive dotcom expectations are that online groceries will account for 21.5% of the total grocery.
Gary sales and will lead to a $250 billion market size in the next five years.
That is why we expect a very busy fourth quarter for good wheat, and Arcadia and look forward to keeping you all informed of our progress.
With that I will turn the call back over to Matt Thanks, Kevin to right.
Round out our commercial update I'd like to give you a brief update on good good him.
To begin with.
An update on the status of archipelago ventures, JV dedicated to cultivating Hawaiian HAMP and the wholesale of premium CBD for the mainland markets. During the quarter. We continued to successfully cultivate our hemp varieties interpret.
EPS repair extraction operations awaiting clarification of the regulatory framework to supersede the October 30, Onest expertise of the Hawaiian industrial pilot program as well, which is what we've been operating under since 2019, which governs which will govern the forward.
Hawaiian commercial up have operations that is the new regulations that were waiting on although the passage of the Bill 18, 19 did lay out a path for the sale of CBD in Hawaii the.
D.A. recently issued an interim rule that some believe represents an existential.
Will threat to the entire hemp industry because it could in theory re re criminalize processing hemp abstract that was made legal through the 2018 Farmville.
Now the ZIOPHARM has been met with vigorous industry opposition during.
During the comment period as well as a number of asserted legal claims against the DTA.
In abundance of caution while the DSS is this public backlash and a clear conflict at this I have far between the current USAA HAMP rules and the rules of the if our itself our Kt will temporarily cease operations of the archipelago ventures at least as the JV.
He is configured today.
And at the same time, we will assess with our joint venture partner legacy Ventures, Hawaii, our best options to remain the first mover in the Hawaiian market amidst these evolving regulations from the FDA in Hawaii Department of Health and Agriculture, we remain very optimistic that this will be.
Be resolved favorably to preserve the legality of hemp cultivation and processing for CBD as was originally envisioned by the U.S. da So I look forward to keeping you updated as we learn more about this matter in the next coming weeks. So for an update on our good help seed sales clearly the most important.
To the good help seed story during the quarter was the completion of our purchase of Oregon based industrial seed innovations with this acquisition Eisai as portfolio of strong performing federally compliant hemp varieties have become part of our Acadias. Good have line of hemp seeds and transplants specializing in organically grown hi.
CBD Feminised hemp season seedlings Eisai is popular Umpqua rogan, San TMC varieties, each bring unique and highly desirable characteristics to further defer differentiate arcadia as good have catalog all three varieties have shown excellent yield and quality when grown in a low.
Density high intensity growing situation and Rogan Encore are also suited for higher density lower intensity planning if thats a desire from a grower to better illustrate the importance of the ISI acquisition to Arcadia I need to dial the lens back for a moment and look at the overall CBD hemp seed market for the first nine.
Months of 2020, the Brightfield group reports that in 2020, the U.S CBD market is projected to reach $4.7 billion in sales with 14% growth from the 2019 sales of $4.1 billion now with Americans facing high unemployment levels, resulting from the pandemic 2020 retail.
Nine sales are not expected to reach the levels anticipated previously economic pressures facing consumers temporary.
Store closures and inaction by the FDA is constraining growth of the U.S. CBD market by 2025, the Brightfield group estimates total us CBD market.
Could reached $16.8 billion. Despite these challenges the base of the us.
CBD consumer is still growing strongly.
Consumers adapted in Q2, 2020, with 47% of CBD consumers purchasing online last quarter.
However, the Brightfield group also notes that the pandemic has.
Been a significant extinction event for hundreds of small brands in the U.S CBD market because the market is seeing both expansion and consolidation in 2020. The top 20 brands have technically lost market share, but still maintain majority piece of now larger pie. So the good news is that the retail CBD Mark.
Market that creates ultimately the pull through demand for Rcs continues to expand remarkably in size. However, the not so good news is the turmoil. Just described has created a temporary dysfunction in the processing and seats segments of the supply chain the lack of visibility for growers into the reliable off.
Agreements results in lower profit in grower losses in early and mid 2020 from unsold biomass that was harvested in 2019 and in fewer acres being planted in 2020 as compared to 2019 as a result to date overall seed sales in 2020 have been well below market.
Expectations as many growers have kind of taken a wait and see approach for those who did plants in 2020 retail retreated to the safety of brands and varieties that they had experience with rather than trying new varieties like good hamper righties. Despite the prospects of better genetics now keep in mind throughout this time, we did not have the ISI.
Hi varieties that I just described.
So as a result, we experienced a disappointing delay in the second and third quarters of the conversion to sales of our good HAMP seed preorder backlog of $3.7 million, which was established in January of this year by more than 50, very enthusiastic and sizable hemp growers before these dime.
Dynamics emerged but I am pleased to report that at this moment industry projections for 2021 reflect a return to growth in seed acres planted over 2020, and we are seeing tangible signs of interest in our ISI seeds for Q4, and the 2021 planting season and not only from our installed base.
Growers, but a number of others, who have performed their own diligence on successful grows around them of ISI seats. In addition to the ISI interest there are several other important factors underlying our optimism for successful good help seed sales. Unlike in 2020, we will enter 2021 with significant seat.
So inventories available for shipment, we expect to enter the year with over 10 million seats available for shipment and to have between 20 and 30 million seeds available for sale. During the 2021 season and have association estimates for the US hemp acres to be 130000 in 2021.
In general.
In our market intelligence indicates growers are comfortable paying between 1500 to $2200 per acre for quality seeds with seed densities per acre ranging between 20, 580 500 seeds for CBD production, depending upon the farmers growth strategy.
To give you an order of magnitude as to the revenue potential of our inventories of seed if we're to assume a high per acre seat density, let's say 5500 seats per acre, we could supply up to 6000 of the 130000 acres estimated to be planted which is less than five.
5% of the projected acres with a total value of more than five and a half million if our average seat price or at the low end of the range I quoted or $1500 an acre.
Furthermore, it remains clear to us that the establishment by the FDA of a regulatory framework for CBD will cause an immediate and catalytic ramping.
CBD.
Market applications, including food ingredients and supplements, which will result in significant pull through and help seed sales in the us therefore, our enthusiasm for the opportunity to help represents for Acadia is undiminished as either a seed seller or CBD producer.
Now with the commercial update complete.
I'd like to take a moment to reflect on our near term outlook before turning the call over Pam for the financial highlights.
In aggregate through the actions taken over last quarter the.
The reductions in spend that I highlighted from the sale of Vertica.
And weve effectively reduced our overhead and recurring operating run rate by 28% for $7 million of.
Of the approximate $25 million in trailing 12 months expense most.
Most of which we expect to re purpose. If you will to properly fund the act the customer acquisition costs to drive high volume sales of our good wheat retail products without increasing our overall operating expenses in 2021 and perhaps reduce.
Do seeing them.
From our 2020 run rate.
With that I'll now turn the call over to Pam.
Thank you Matt.
Touch quickly on the highlights for the third quarter and year to date, our revenues were down 20% quarter over quarter, but increased the year to date by 20% we.
We recognized initial good wheat grain sale.
Some royalty revenue during 2020, along with increased CLA product sales in the pet food market.
Total operating expenses for the third quarter of 2020 with $7.9 million compared to $6.6 million in the third quarter of 2019, and third quarter 2020 year to date operating expenses totaled $21.2 million versus the 16.1 million.
They will be recognized during third quarter year to date 2018 for an increase of $5 million.
Cost of product revenues was the primary driver of the significant operating expense increase was 1.8 million recognized in the third quarter.
Recognizing the third quarter compared to 177000 in the third quarter of 2019 and 3.5.
Billion third quarter 2020 year to date versus 324003rd quarter 2019 year to date.
We recognized a couple of anomalies this year with a $1.3 million write off of archipelago hemp inventory recorded this quarter due to the temporary prohibition to process CBD that Matt discussed earlier.
Second key.
In favor of this year included an inventory write off in the amount of $1.4 million due to seeds produced by contracted grower that did not meet our quality specifications.
Cash on hand, and cash equivalents totaled $10.2 million at the end of the third quarter with an additional $2 million in restricted cash our net cash used in operating active.
Tivity from the cash flow statement for the first nine months of 2020 was $23.5 million with the majority of the $11.3 million increase from the same period in 2019, resulting from the scale up of inventory.
We continue to invest in inventories across all product lines with the majority of the balance at quarter end in good wheat, while positioning.
In us to generate revenues from our good wheat direct to consumer products just launched this week as Kevin discussed.
And as announced earlier today and noted by Matt at the onset of the call our balance sheet got a boost from the 1.875 million shares of bio series stock acquired as part of this strategic transaction Thats executed along with 5 million.
In dollars of cash received at closing and another $1 million coming shortly additional amounts will be earned upon the achievement of strategic milestones by bio series and as royalties on sales they generate using our license technology going forward.
And now I'll turn the call back over to Matt.
Thank you Pat.
Against the backdrop of continued coated related economic delays, we remain in forward motion with successful executions, increasing our asset liquidity building needed direct to consumer capabilities and significantly repurchasing our spend all destined to drive near term revenue opportunities at the same time.
We refined our focus and further simplified our formula for value creation, we look forward to keeping abreast of our continued progress and with that I will turn the call over to our operator for questions.
Thank you, Sir ladies and gentlemen, if you have a question.
Please press star and the number one.
Yeah.
You bet.
And has been paid off.
Mr sales from the Q.
We have a question from the line of sales.
Your line is open you may ask your question Sir.
Okay.
Hi, This is months on for Rob Thanks for taking my questions.
So we wanted to know.
Timing of the mill.
And one of the reason for closing remarks.
So why not.
Thanks.
Oh thanks.
Thank you for the question.
It is an important one.
As far as the time.
Assuming it really does have to do with as I described in my prepared comments that there is a.
Fundamental transition away from a development joint venture to a commercialization activity.
And and bio series has as I mentioned really started to lead that already.
And.
We found that you continuing to try and run this through a joint venture structure really was beginning to slow them down.
And so it was time to turn this over to them completely I think that.
The reason that both cash and stock made sense for US is that it is I mentioned in my prepared remarks, it keeps us.
Yes.
Still able to benefit in the upside of the program, which we have high high regard are high.
Expectations for so we really like the idea of kind of splitting it down the middle if you will.
And thereby giving us some immediate capital.
Few infusion as well as.
Ability to share on the upside and let's not forget that the.
The trailing royalty is not insignificant either so I think we're really pleased with the structure and that would be the reason that we we did it now and the way we did it.
Okay. Thanks for the additional color there.
And I was wondering what factors would you say were most important in determining.
Topline the sequential revenue growth.
Some of it.
I think we achieved.
Im sorry that the audio is a little sketchy could you please repeat.
The question.
I just.
Wondering if you could summarize what factors you would say are most important.
In determining when top line sequential revenue growth can be sustainably achieve.
Okay.
I think 2021 this this.
In particular, the ramp with our good wheat direct to consumer what we really are excited about is it's it's one of those channels, where you see direct results from your efforts. So you will be seeing us begin to to to market to consumers directly through digital media platform.
And as you know you get immediate feedback and I think the plan here is to to develop momentum.
And through.
Through that channel, we expect to see increasing revenue quarter by quarter as a result of gaining new customers, having an installed base and adding to that.
Overtime.
Okay. Thanks.
We were also wondering if the recent legalization of marijuana across mainland Europe has any near term implications for Arcadia as business.
Boy, we surely believe it does and.
A rising tide lifts all boats.
And we can imagine that fleet.
Legalization will of marijuana will certainly enable.
Or motivate I think the further.
Legalization of having in particular have have extraction, which I think is what.
As bottlenecking right now.
Okay very good and then just a final one on.
We will bring about the inventory write off so I'm wondering if you could just provide some more color on why that is.
What's the likelihood that they could be more in the future.
Yes.
I think that.
I'll take a shot at and their families to add anything it's great but.
The majority of this was the result of.
US cultivating producing and preparing our ham harvests.
In Hawaii that ultimately, we weren't able to convert.
Kurt to CBD with without potentially running a foul of this DTA I have far.
And I think that coupled with having this being really our first year of production I would say that the the cost to to cultivate.
Theres some learning costs in there.
And so whether whether we were writing it off or converting it CBD and selling it it probably would have been very low margin, but the reality is that.
It was the lack of regulatory clarity that resulted in that write off we do not expect to see that.
At.
Going forward at all we think we're well positioned to.
Since we have ceased.
Operations, there until we have clarity, we don't see that as a recurring risk Pam would you add anything to that I would just add that you know as a public company. We are very mindful of staying within all of the federal state.
Rule.
And working within that framework, so we're on a little bit of a.
More stringent framework I think and then maybe other most other CBD companies. So were extra careful in that in that regard.
Very very helpful. Thanks for taking my questions.
Thanks for your questions I appreciate it.
Thank you Sir we do have another question from the line Steven.
You May ask your question.
Oh good evening, Thank you for taking my questions.
Sure.
First of all.
These the write off of the.
Archipelago inventory.
That's in the cost of products revenue line.
Correct.
Okay.
And you mentioned that the.
You're going to initiate sales of Sonova, Jill eight capsules to China in the fourth quarter.
Do you expect.
Those revenues to be significant given the size of the market et cetera.
Yeah. Thanks, Thanks for asking about snow, Kevin you want to take that yeah, I think in fourth quarter, we will still be entering the market in ramping up but actually.
That the peak to interest in China for the G.
Go a supplemental capsules is quite high through some initial market research analysis that we've conducted here in both the second quarter and third quarter. So.
So I would be.
Beginning of 2021, either first quarter and second quarter, we should start to see scale and.
Size, so both good profitability and good topline revenues.
All right can you put a a magnitude of any sort on that.
Through.
Through fiscal year 2021, we are projecting 1.8 million.
In dollars just into that China market.
Okay. Thank you and can you give us a progress update on.
Good mills when I was doing my due diligence I was impressed by the amount of grain with 2.9 million tons annually that the process and that.
Very extensive footprint basically in eastern Europe.
I know the announcement was only made last in August.
But do you have anything to add.
Yeah, obviously being partnered with good mills as they come to the market we have to be in lock step in.
Unison, meaning that they are still in their R&D development stages, but as we have seen with our good we products in the U.S.V.
Very high customer feedback sensory panels and stuff like that they are experiencing the same thing in Europe, obviously, the current pandemic situations.
He has been varies across the globe and so that.
That has slowed things down from just speed to market, but overall enthusiasm and desire by good mills to bring these products to the market is still very high just probably slowed down but so same results we're seeing here with.
Hi, Noah.
Nutritional panels.
And very good customer feedback.
Great taste or the same thing so we expect that to come on the only thing is we can't manage right. Now is the current health health situation, but good mills is is very excited for the future.
Yes.
Thank you.
I probably have some questions on the bio series.
Transaction, but first I have to digest all that information.
But on a lighter note.
Monitor the three daughters account and I follow them on Twitter.
And then just placed by first order I'd been monitoring their web site.
And seamless shopping cart come up and I'm looking forward to receiving my order.
Excellent sell all your friends. Please [laughter]. Thank.
Thank you. Thank you very much thank you Stephen.
Thank you.
If you would like.
Yeah.
And then the number one.
Thanks.
We do have another question from the line of Dan.
You May ask your question.
All right. Thanks for taking my questions and.
First of all my phone cut off for a few minutes in the Q and I. So I apologize if I'm asking something that has already been been addressed on so I have a few questions here both.
On have been weak I guess, we'll start with wheat.
Steve in your prepared remarks today did I hear you correctly say that you expect the the wheat business to launch in China in the fourth quarter or was that just for the GL eight products.
No both GL, a and Pos that we have inventory produced and.
Ready ready to launch so yes.
E Commerce chat.
Channels.
This is where we project the launch in fourth quarter.
Got it and then kind of along the same lines of the previous question here I mean can you help us kind of understand kind of overall inventory levels or some kind of metric that.
Help us understand really the scale of the opportunity in the fourth quarter and into 2021.
And then also was this is this a.
Look of private label or is this a three farm daughters product going into into China or something else.
So Ben I'll start with a question about the in.
Laurie and the trajectory into in Q4.
I would say that Q4 will really be kind of that.
Testing ground, if you will of our of our new supply channel that Weve opened up.
We have significant wheat inventories were in the process.
One thing and turning into the products that Kevin just referred to.
And so.
If we if we were able to exit the year with several hundred thousand dollars, we'd be we'd be pretty happy with that on the way to a significantly bigger number in Q1.
But this.
Sales is really an important time for us to to make sure that the channel is appropriately.
Built and that it is built for scale.
That's on the weak side.
Sonova, a little a little easier to fulfill those requests if if the demand ends up.
Spiking.
But.
When we look at 2021, we have.
Good.
I don't know 8 million pounds of.
Wheat available to supply into the chain. So we have no real concern about meeting the demand.
The significant demand at that so.
So did I Miss anything there Kevin.
All right just really getting working with.
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Yes, yes, sorry, and then I guess my my my the second part of that question was what exactly is the product going to be in China is this is this three farms.
There's a private label on development is it something else.
So it is going to be the three farm daughters brand to lead with to get the introduction of these healthy nutritional value products and then obviously as we get through 2021, and we get our key learnings when possible.
If we can expand into white label, but.
But right now would be three from daughters brand on the pasta and then the Sonova brand on the GLP capsules.
Got it got it perfect.
Alright, so turning over to hand.
A lot a lot going on here can you update us on the back.
Numbered that 3.7 million backlog that you've had for the past few quarters.
Have you written that off in any way given the.
Given what's what's happening in Hawaii or is that still on.
Is that still standing firm.
I think it's it's a matter of.
No.
Filling it.
Later in time I think that.
The reality is that as I mentioned in my prepared comments when we looked at the new space coming online. This this last quarter, our expectation was that there would be opportunities for seed sales in those states.
As part of the conversion of that backlog.
Reality is very little hemp was planted.
And.
Men for many different severance for several different reasons.
The certainly the regulatory confusion.
As well as the pandemic.
But I would say that we are.
We're looking at continuing to try to.
Frankly for the ISI customers.
Who are have made up their mind that theyre going to grow in 2021, some of them could make early purchases to secure seed.
Because we may not have enough for all the demand in 2021, but thats probably that what we're looking at in terms of orders in Q4, it would be pre pre order fulfillment for plantings in February March so.
We're we're not.
Mtus.
Sizing the 3.7 as much as we would have.
Three months ago in terms of being able to convert that to revenue in the fourth quarter.
Got it and along along these lines here with ISI.
Did they face the same problem that you have.
On.
Throughout 2020 regarding the kind of uncertainty and hemp industry are on or before before the acquisition were they able to.
Deliver any kind of material revenue.
But before they were acquired on.
Yes, they were and it's.
Speaks to the point that I wanted to make which was in this market where there is a lot of uncertainty.
To to minimize risk growers tended to stick to the varieties that they knew and trusted even.
Even if we were in front of them with new genetics that had.
Performance marks may be better than what they were growing.
With all the other risks in the market right now they tended to stick to what they know so for all of the ISI folks.
Growers they repeat.
They generally they planted fewer acres in 20.
And they did and 19, but when they did they did they did buy from ISI. So they had reasonable meaning reasonable sales and 2020.
Did see a slight decline from 19 as everyone else did but we are entering 2021 with an installed base, whereas we did not have that into.
In 2019.
Got it and then last question from me and I'll get back in queue regarding H. before.
First of all congratulations on the transaction and I'm curious how.
How the resources that were previously allocated to this JV I think you alluded to roughly 7 million.
And 20 year, how really thats going to get reallocated to the wheel on were not that that's a significant.
Amount dedicated to wheat.
Tweak commercialization, what exactly are you going to be dealing with that.
What these resources another available.
Yes, thanks for teasing that out.
Ill speak to that.
The reduction and I'll turn it over to Kevin to talk about what we're going to be spending but just.
$7 million in reductions, which is a combination of what we don't have to spend in R&D on h. before as well as a bit of a re tuning in architect.
And deferring some of the spend.
That we have been allocating to the development of multiple HAMP for sorry, hemp traits. So we have really reduced or focus more specifically on THC knock out in a couple of what we hope to be blockbuster trades in the architect platform.
Platform.
But that allowed us by narrowing and focusing more we were able to really redirect three 3 million ish.
Former R&D to the the new customer acquisition.
Activities that I'll, let Kevin described.
And so as Matt was talking.
Trimmed about obviously, we're coming into the market.
With the new brand and a new product that consumers have not had access to before so theres a traditional approach of going through grocery retail which takes time.
I have to be aligned and a lot of a lot of.
Entry cost there and so again, what we're approaching this through partially because of the current health pandemic and just in general.
At March shift over the last 24 months, even prior to the health pandemic of how consumers buy and so what you're doing is you're placing that as Matt talked about us.
Customer acquisition costs, typically digital media, so Facebook Instagram Google.
Hey to ads to lead consumers to purchasing through either our online cars that we kicked off this week through shopify or and eventually we're looking to obviously enable through Amazon.
So what it allows you to do is at the very beginning of the year activities, which were going to align to right. After the holiday season gets over and consumers get back into more of a traditional food category purchasing pattern. We will we will scale up but it gives us a chance to react reacts.
Cut things worked really well we can go faster if we have key learnings that that things aren't working well, we can try different approaches and so as you go through 2021 first quarter, both revenue from good wheat and spend will be moderate, but then if as we figure out ways to communicate to our.
Our purchased our customers and get them and then we will scale that up and but you will see that followed by a scale up of revenue.
So thats the spend that you teased out is really there in customer acquisition costs with digital digital media.
Got it Thats very helpful. Thanks for the color on <unk> and.
So I think I'm in good shape, all and get back in queue. Thanks for taking my questions. Thank you.
Thank you Sir.
No questions at this time.
Okay.
Matthew.
Sir.
Thank you everyone for joining the call and your patience, we know is a bit of a long call but.
It was a lot to discuss and digest. So we look forward to continuing our real time reporting on our key milestone achievements in the lab in the field and the commercial markets and we wish you all a safe and good health.
And look forward to speaking soon.
Ladies and gentlemen, this concludes.
This conference call you may now disconnect. Thank you for joining us.
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