Q3 2021 Arcadia Biosciences Inc Earnings Call
Good afternoon, and welcome to Arcadia Biosciences third quarter 2021 earnings conference call today's presenters will be Matt Flanagan, President and CEO and bomb Haley Chief Financial Officer of Arcadia. This call is being webcast and you can refer to the company's press release App alright.
Video bio dot 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 involve risks and uncertainties the company's actual performance.
So I'm, sorry, but I promise and we're supposed to be deeper materially from those described or implied today you can review the Companys Safe Harbor language in their most recently filed 10-Q with that I'll now turn the call over to my 11, Brushy That's M C L.
Thank you Delfin Hello.
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.
There'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're up full four 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.
<unk> 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 and 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 planting 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 black the brand platform, that's now in place and trying 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 timeframe, 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 multichannel rollout of good wheat.
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.
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 pro vault in Q1, 2021 however.
However, our body care product revenues for the quarter were actually down 42% year over year for the following two reasons one the global shipping prices resulted in an approximately 300000 and orders that were received but not fulfilled in Q3 and will shift into Q4 and two in.
The prior year as a result of the Covid pandemic 470000, and sanitizer revenues were recognized which were temporary in nature.
Excluding the impact of these two anomalies our body care product orders actually increased 20% year over year third quarter.
Also our Zola coconut water revenue was up 34% and our GLA Synovus have all oil revenue was up 137% over the third quarter of last year. The increase in coconut water sales is due to category growth and strong brand performance and our GLA sales are up due to higher pet.
Food sales due to an expanded U S presence of our Canadian distributor Royal Canin.
Although revenues for these products were generally up.
Our revenue growth and gross margins are definitely being negatively impacted by the global shipping crisis as well as the inflationary pressures affecting the U S economy.
These dynamics have increased our costs in three primary ways, one we've experienced a threefold increase.
And the cost of inbound international shipping, which has increased our product cost for zola by more than 25%.
Two the arrival of our manufacturing automation equipment was delayed by 90 days seriously compromising our planned automation.
Our planned automation efficiencies for the quarter and three we have experienced increased ingredient and material costs for a number of body care products up to 100% in some instances. These three factors have temporarily driven gross margins for our body care products into single digit territory.
However, we have implemented discrete action plans to alleviate these pressures with regard to the impact of inflation, we are evaluating our price elasticity byproduct to determine if there are opportunities to raise our prices without negatively affecting our sell through volumes also where possible we are shifting from.
Suppliers to domestic suppliers, where we have better supply assurance and as of a few weeks ago. We've received all of our automation equipment on site and expect to complete in the implementation of our automation in due course.
We expect these initiatives will have a material impact on improving our margins, but we also recognize that shipping costs and inflation are expected to persist into the foreseeable future and may worsen before they get better. So this will continue to be an area of critical focus shifting.
Shifting for a moment to our operating milestone achievements during the quarter. Let me begin with our e-commerce initiatives. Our primary focus during the quarter has been the build out of our new body care E. Commerce sites to begin driving online sales through a robust performance marketing as I mentioned previously historically are.
Retail product sales are roughly 90% brick and mortar and with little investment to date in promoting our products online. We believe ecommerce sales to be an untapped source of new revenue.
That being the case I am pleased to say that as of October 29, We've launched our new pro vault site at get pro vault Dot Com and we recently began our digital marketing and advertising campaign. We're in the early phase of testing our performance marketing strategies, honing and refining them to maximize traffic to the site and conversion.
A impressions to purchases.
Also we remain on track to have the remaining two product sites launched by the end of the year, including the rebranded savvy ecommerce website savvy naturals dot com with all new product packaging and design and the optimized sole spring Commerce site, which is MISO spring Dot com.
As for a good wheat pasta launch we are tracking for a full scale launch of five.
Pasta Skus in Q1 of 2022.
Including a full scale performance marketing push this is a slight modification to our prior expectation for a soft launch in December and then a full scale launch in January the shipping crisis has also affected the readiness of our contract manufacturer.
To provide packaging and products as of January therefore, we're broadening the estimated launch timing to Q1 to account for these expected delays.
Next I'd like to share a little about our progress to date and preparing our good wheat pasta products for entre into the consumer retail channel.
Our team has invested meaningful resources to ensure we have a consumer preferred package for our good wheat pasta, we tested several variations to identify the most impactful design.
Package, we will launch a strong purchase intent and in fact outscores category norms for purchase intent as well as uniqueness are selected design also breakthrough on shelf and we will translate well across categories as we expand the brand in the future.
A final milestone highlight for the quarter as our successful harvest of over 20000 pounds of Hawaiian hemp biomass. We are currently processing the biomass and expect the resulting out output to be one of the largest suppliers of Hawaiian CBD on the market today in cooperation with our archipelago joint venture partner, we will continue.
To evaluate the optimal monetization strategy for this asset.
Turning now to look forward I'll say, a word about our goals for the balance of 2021 in early 2022 as.
As we reflect on the market interest for our consumer products one thing is clear.
The channels to market and the number of product category opportunities are numerous and collectively they exceed our resource bandwidth to pursue all of them at once therefore forecast focused execution on select opportunities remains critical to our continued success.
Especially over the next 24 months, we are carefully staging our resources to conserve cash while focusing on the following key initiatives that we believe build the foundation for sustained growth first launch and scale up of our body care products online.
Second expand our body care brick and mortar retail business by focusing on innovation within our existing brands to drive organic growth as well as continuing to add new doors.
And third introduce our good wheat pasta online and in retail stores drive sales and earn meaningful brand recognition in 2022, we believe successful execution of these three initiatives will drive encouraging near term revenue growth meaningfully build our brands and position us favorably to enter new channels.
<unk> and product categories in due course.
We're also putting in place measures to reduce our forward operating expense run rate for instance, now that we've produced a sufficient ingredient supply of our Hawaiian CBD, we are winding down our cultivation activities. The same is true for our good hemp seed cultivation, we've wound down production operations since the hemp seed market it's Sachin.
Rated.
With that I'll turn the call over to Pam for an update on our financials Pam.
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 Q2.
Hello revenues recognized for third quarter, 2021, key point $4 million compared to 314000 in third quarter 2020, with the majority of the $2 $1 million increase driven by the acquisition of the portfolio.
Body care products and delicately in Atlanta in addition to higher daily sales this quarter.
The increase in revenues of $3 7 million, primarily attributable to the acquired brands as well as they generated $2 6 million in revenue. In addition to good hemp CBD, good wheat grain and increased deal anything else 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 in Q.
<unk> 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 third quarter 2020.
The $670000 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 down this year versus last.
Write downs charged to conquer totaled 449000 in the third quarter 2021.
Adjustments to fair market value of the commodity hemp seed.
Inventory and the distraction of hemp crop.
With $1 5 million of write downs in the third quarter 2020.
And for year to date, the $1 $5 million increase in con over the same period in the prior year.
Same factors.
R&D expenses for the quarter were $1 million in 2021, as compared to $1 8 million in third quarter of 2023.
$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 <unk> can move through research and discovery work career development and commercialization phase of our consumer products in.
In addition, we no longer have the vertical related expenses through 2021 that were present in 2020.
<unk> 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 333000 recognized for the release of product from inventory that was not commercialized by Arcadia.
A 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.
That noted we have successfully harvested over 20000 tons of hemp biomass is en route to the profit and the CBD Lam.
We have produced a sufficient quantity of biomass and are not able to extract CBD oil and in Hawaii in the near future regulatory restrictions still in place.
As a result of these regulatory challenges and unfavorable hemp CBD market condition, we have assessed the archipelago asset for impairment and recorded the write down.
Selling general and administrative expenses totaled $6 3 million in the third quarter of 2021 and $2 million increase from the $4 3 million recognized in third quarter 2020.
Third quarter year to date 2021, SG&A expenses totaled $16 eight 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 head count.
Marketing advertising and consulting activities increased during 2021 as expected and 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.
Third quarter of 2021 included a noncash credit to expense of $4 8 million for the change in fair value of warrant liability from the end of Q2 at the end of Q3 2021 or Q3 of 2020 included a $1 1 million or credit for the teams.
Specific to this current quarter as 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 $682000 loss on the extinguishment of warrant liability, while there was no such activity in third quarter of 2021.
We recognized the gain of $10 2 million in the second quarter of 2021 on the sale of bio series back.
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.
Thank you Pam thought up participants if you have a question at this time, Please press star and number one on your Touchtone telephone again press Star one.
Question has been answered or you wish to remove yourself from the queue. Please press the pound key.
First question comes from Ryan Meyers of Lake Street Capital. Please go ahead Sir.
Hi, guys. Thanks for taking my questions first one for me I just wanted to get some insight on your guys or the level of confidence in launching the good week five product skus in the first quarter of 2022.
If you think some of the headwinds that delayed the soft e-commerce launch in the fourth quarter here will subside by them.
Mhm Thanks Ryan.
I would say we have.
High confidence.
That.
As we understand them.
The the implications or the impact of the shipping delays on our co Packer.
That Q1 is reasonable.
But I want to be 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 to 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 don't have any reason to expect that theyre 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.
Okay. That's helpful. And then what are you guys hearing so far from some of the retail partners about the good week products ahead of the launches in 2022.
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 when.
And we expect to.
To see good things from some of the some of the larger chains that were currently that we currently have relationships with on our body care products.
Okay.
That's helpful. And then just wondering if there's any other investments that you guys want to call out that you are making ahead of both these product launches, whether it's on the R&D side or the selling and marketing side of things.
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.
Discreetly target consumers.
And evaluate the performance marketing.
And potentially scale up those digital brands to drive revenue and our hope is that.
Every.
Every dollar towards digital advertising produces a reasonable or.
As a good conversion to revenue dollars. So that's where I think youll see a fair amount of investment here in the early <unk>.
'twenty two.
During the launches over the next 90 days and into early 2022.
Okay and then last question for me do you plan to still do some sort of E. Commerce launch on the goodwill side or are you guys. Just looking to go straight into the retailers in the first quarter.
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 will start with a single SKU in December to begin collecting data. So the Q1 launch is actually the E Commerce online launch for good wheat.
And.
Shortly thereafter would follow.
Traction in the brick and mortar retail space.
Okay. That's it for me thank you.
Ron.
And our next question is from Ram <unk> of H C. Wainwright go ahead Sir.
Hi, Dan This is Matt on for Rob Thanks for taking my questions.
Do your acquisitions of Grace's leaf and solar you've transformed into a vertically integrated company.
Do you plan to integrate your proprietary food innovations into these acquisitions. So for example.
Good we in house breathing technology into the across its products.
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.
We will simply be focused on launching good wheat 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.
Okay. Thank you and then could you please update us on your good presence in Europe in the context of the partnership with good Mills innovation, yes.
Yes, so good mills continues to.
Develop the ability to produce or breed into local variety. So that they can have their own production of good wheat to serve their markets. They've continued to progress, however, COVID-19 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 good wheat is remains intact.
And I think Theyre 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 good weight to Europe through through good mills.
That's very helpful. Thank you and just finally, you gave us some color on good wheat direct consumer digital marketing efforts.
Do you have any indication or can you give us any more color in terms of customers' gains quarter over quarter or any other metrics.
So for the body care products were just.
Bringing those sites up and so we have no no sales to report just yet we expect.
Since they are going to all be up by the end of the year, we would have something to report out in Q1.
And.
And since good wheat is also similarly being launched in Q1, we will expect.
To have.
Initial feedback as of Q1 as well to for the metrics around the sales for those products.
Okay. Thank you congrats and thanks for taking my questions. Thank you.
But I've decided I'm not showing any further questions now I would like to turn the call over to the precedent and CEO Mr. Matt 11. Please continue.
Thank you.
To close out the call.
We're 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.
<unk>.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program you may now all disconnect everyone have a great day.
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