Q4 2021 Arcadia Biosciences Inc Earnings Call

Okay.

Good afternoon, and welcome to Arcadia Biosciences fourth quarter year end 2021 earnings conference call.

Today's presenters will be Stan <unk>, President and CEO , and Pam Haley Chief Financial Officer of Acadia.

This call is being webcast and you can refer to the company's press release at Arcadia 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 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 will now.

Now I'll turn the call over to Stan <unk>, President and CEO .

Okay.

Thank you and welcome to our fourth quarter and full year 2021 conference call.

I'm excited to speak with you today about the progress Arcadia has made in recent months as well as the plans we have in place to complete the transition from our Bioscience company to one focused on bringing innovative plant based health and wellness products to the consumer marketplace.

Arcadia had an unprecedented year of transition the acquisitions from 2021 have broadened our reach within the health and wellness sector by entering the coconut water topical pain relief and body care categories.

In addition, we have made tremendous progress in becoming a CPG driven company by adding new talent sharpening our focus on the good week retail launch and winding down some of our existing noncore businesses such as good an archipelago.

We see significant opportunities to grow our business by accelerating the monetization of our goodwill portfolio commercializing and scaling our consumer brands and evaluating future acquisition opportunities.

Later in the call Pam will walk you through the financial results, but I wanted to start by introducing myself as well as providing a background on some of the strategic work that has already taken place since I came on board as CEO in February .

I have spent the last three decades growing CPG brands across dozens of categories. During this time I've had the privilege of leading well recognized brands unfortunate 100 companies as well as scaling small brands and launching new innovations in startup environments.

And my most recent role I led several first to market new products in multibillion dollar categories, resulting in a compound annual growth rate of more than 30%.

Im a hands on operator and my experience has taught me that success requires an agile responsive organization across all functions in order to foster fast decision, making and tight collaboration.

So now it's you know a little about me I want to talk about the important work that is underway in 2022.

When I was evaluating the opportunity to join Arcadia I was impressed with the progress that had already been made towards becoming a CPG driven company.

<unk> leadership team with vast experience across many successful brands had been assembled new talent across the organization had been added to provide CPG expertise and there was a portfolio of consumer brands either already in the marketplace. We're on the verge of being commercialized that deliver functional performance work it.

Help solve a consumer problem, so I saw tremendous opportunity to turn that potential into results.

At the same time, there is still work to be done to reduce complexity develop robust processes and narrowed our priorities in order to focus on activities with the highest likelihood of bringing value to our shareholders.

We took a disciplined approach to identifying the priorities on which to focus and evaluating our businesses using the following three criteria.

One what is the opportunity what is the size of the category, where the premium segment is our product differentiated meaning are we the first to market the only product in the market the best in the market or does it solve a problem.

Two how easy is it to scale.

What amount of time and resources are required how much capital would need to be invested how complex is it to produce the product in terms of the number and for ingredients or the process to manufacture it.

And three what is the level of expected profitability is our value proposition is strong enough to command a price premium in the category are we generating margins that allow us to continue to invest in brand growth.

Using these three criteria, we have divided our businesses into two groups core and noncore.

Our core brands are those we believe can penetrate large and growing categories through high value differentiated products that have that ability to scale and generate attractive margins.

We intend to grow these brands by investing in effective consumer and shopper marketing.

Finding our go to market strategies, and expanding distribution through a variety of channels, including food drug mass club natural and ecommerce.

The role of our noncore business is to extract value that can be reinvested to grow the core business.

So let me spend a few minutes walking through the three brands that we have identified as core.

The first core brand as all our coconut water coconut water is full of natural vitamins and minerals that aid in hydration, while being low in calories and free of fat and cholesterol.

According to Nielsen the coconut water category grew 19% for the 52 weeks ending February 19th 2022, and Zumba outpaced the category growth.

In addition, based on our 2018 survey by Epic curious that included 19 coconut water brands Zillow was rated as the best tasting coconut water brand.

Since the vast majority of <unk> sales occur in retail brick and mortar stores, our goal will be to expand distribution beyond our current 14% ACB and invest in shopper marketing and retail activation activities.

The next brand is Provote pro vault as an all natural fast acting topical pain relief product designed to safely and effectively released muscle and joint pain.

It contains cam for menthol arnica and CBD that is certified THC free.

Launched in the first quarter of 2021, we view pro vault as a differentiated product with superior benefits that is poised to disrupt a $1 billion topical pain relief category that grew 15% in 2021, according to data from Nielsen.

The feedback from customers, who have tried the product has been outstanding. So we're aligning our marketing strategies to incentivize trial and retail stores and on our website at <unk> Dot com.

And finally, we have good wheat.

We'd accounts for approximately 20% of all calories and proteins consumed worldwide.

And our proprietary non GMO, good wheat delivers superior nutrition.

According to a 2021 food and health survey by the International Food information Council less than 10% of women and children and less than 3% of men meet the daily recommended fiber consumption targets and our first good wheat product of durum wheat pasta delivers four times of fiber versus regular wheat pasta.

Nine grams of protein and has fewer calories.

In fact, one serving of our good wheat pasta provides 32% for the daily fiber requirement for women and 20% of the daily fiber required for men.

And while most better for you pasta competitors use additives to increased nutritional values all of the benefits in our pasta come from one simple ingredient our proprietary USA farm grown wheat.

We recognize the recent global concerns around meat supply, but our first production run is complete and we have ample supply of finished goods inventory on hand to meet our needs for the foreseeable future.

We are also carrying millions of pounds of wheat inventory, which allows us to quickly scale back up when needed.

In terms of timing, we have made the decision to launch our posture at retail first and are thrilled to announce that good we will begin shipping to several hundred stores beginning in may with more stores to follow as retailers complete their annual pasta category resets.

And closely following our reach of launch we plan to have good we'd available for purchase online in June .

As you look into 2022 and beyond we are excited about the prospects for good we the feedback we have received from retailers about our pasta has been overwhelmingly positive in regard to taste and texture and.

In a blind consumer in home taste survey, our pasta significantly outperformed a leading better for you competitor and was at parity with the world's largest pasta brand and.

In pasta is just the start for good wheat, our leadership team is in the process of developing an executed both strategic plan that will expand the goodwill brand presence throughout the store and we look forward to updating you on our plans in the future.

With that I will turn the call over to Pam to discuss our 2021 financial results.

Thank you Sam.

As Dan mentioned at the onset of the call. We have spent considerable time evaluating our business mind, determining which ones to grow in belt, and which ones to deemphasize.

Acting on some of those decisions have had an impact on our financials, primarily in the fourth quarter, which is reflected in my commentary here.

Total revenues recognized for the year for $6 8 million compared to $8 million during 2020, but the majority of the decrease driven by the license revenue generated from the transactions executed with bio series in 2020 that were not present in 2021.

Revenue recognized during 2021 that's.

Primarily composed of product sales of the wellness brands acquired business.

Total operating expenses in 2021, or $42 3 million compared to $20 8 million in 2020.

The unfavorable variance of $21 5 million largely due to the gain in the amount of $8 8 million on the sale of our membership interest in vertical Tobias series in 2020, which served as a credit against total operating expenses that year.

In addition, we have recorded write downs and impairment losses in 2021 of $10 4 million and that had a negative impact on product cost of sales.

Andy and SG&A.

As a reminder, total operating expenses includes the three category.

Cost of product revenues were $8 $7 million in 2021, primarily wellness brands product costs.

While 2020 totaled $5 2 million.

Both years included several inventory write downs, resulting from net realizable value and quality adjustments to wheat and hemp.

And changes to enhance industry regulatory framework triggered a significant write down of hemp biomass and 2020.

Research and development expenses were $3 9 million in 2021 as compared to $8 million in 2020, the downward trend in line with our pivot from an R&D driven company to one focused on bringing commercial products to the market.

We recognized an impairment of intangible assets in the amount of $3 2 million and impairment of goodwill of $1 6 million in the fourth quarter of 2021.

The impairment charges were primarily the result of lower margins in our wellness products due to.

Well product mix and higher freight costs that have a significant impact in the near term.

A volatile economic climate and higher than normal inflation were also contributing factors.

And impairment of fixed assets in the amount of $1 4 million was recorded in third and fourth quarters of 2021 and is primarily associated with the agricultural and extraction equipment within our archipelago joint venture.

No asset impairment losses, we recorded in 2020.

Selling general and administrative expenses totaled $22 9 million in 2021, and $6 4 million increase from the $16 5 million in 2020.

Selling and marketing expenses and other general and support costs related to the acquired brands were the primary driver of the increase along with approximately 900000 of acquisition related costs investment banker success fees legal diligence and transaction costs.

We have also increased commercial and marketing personnel and consulting activities in preparation for new product and channel launches.

Net loss attributable to common stockholders for the year was $14 7 million compared to $4 7 million in 2020.

Again in the not the $10 2 million was recognized in the second quarter of 2021 with the sale of the shares of Bio series stock. We held which is included in other income within our financial statements.

The change in the fair value of common stock warrant liabilities was a noncash gain of $8 9 million in 2021, and $6 6 million in 2020.

There are additional warrants issued with the pipe financing transaction in January 2021, and the fluctuation in our stock price at the end of year re measurement points contributed to the year end liability values and thats the change that flowed through to the results of operation.

This concludes our financial highlights for 2021. Thank you very much for your time and attention today and I'll turn the call back over to the operator for questions.

And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster and once again that is star one if you would like to ask a question.

And our first question comes from Ben <unk> from Lake Street Capital. Your line is now open.

Alright, Thanks for taking my questions are welcome aboard Tim looking forward to senior strategies year unfolding in coming quarters.

Good to speak to you here finally.

Thank you.

<unk> got a handful of questions I'll start with a couple on the quarter itself.

No you know what actually are not on the quarter itself. Let me. Let me ask you a couple of questions about kind of the high level strategy stand that you outlined.

It sounds like hemp is pretty decidedly non core at this point. My question is are you looking to develop the products that leverage.

Integrate CBD like pro vault.

With inputs that are grown by Arcadia developed genetics or as the CBD that youre going to be using for those products something youre, just going to be buying from other industry sources.

Well whats nice is that we have the option.

So we've harvested 22000 pounds of biomass already due to our relationship with archipelago.

So we have the capability to use that in our own products.

But as always we'll be looking for the best opportunities to to.

To get the best cost.

Okay.

Then.

Kind of similar question, but on the wheat side the IP that's been developed.

By the company over the last decade in the wheat portfolio is something that it looks like you're clearly trying to monetize via.

Via your packaged goods.

Is is.

How do you view that IP now is that something that's core to retain or do you think there's an opportunity for you guys to kind of monetize that IP.

Given this shift in strategy that you have.

Yeah.

Again.

As you mentioned, we do have a large portfolio of patents, we have 33 patents related to we.

So so we have a lot of opportunities to do both.

But for now what we're really focused on is expanding.

Expanding our IP into consumer categories within the store.

Got it.

Got it got it okay perfect. Thank you and then.

Another question on the weak side, I mean, you've mentioned millions of pounds, a good leader sitting in inventory.

This is a business that for a while and had a series of inventory write downs I guess I'm curious what the.

Status of the wheat, that's on the shelf here, what the shelf life looks like.

And your kind of confidence that this is going to be converted here in the inventory and.

Finished good inventory here relatively soon and not you know not be exposed to to write downs.

<unk>.

Ben It's Pam I can I can take this question.

Youre right, we do have quite a bit of inventory on hand, and we are still working for our projections about the timing of when we can use that.

That we internally and we are also exploring options with partners on the best used up some of that that we that we do have an inventory.

Okay.

Okay, Perfect and then last one from me again kind of a.

Question here on kind of a strategic shift in the legacy <unk> relationships.

That had been in place with organizations like Bay State milling in ardent mills with this shift that you have or do you see those relationships is still ongoing or because of the shift or.

Are you guys gonna be terminating those relationships.

We absolutely see them as valuable partners and as a matter of fact this the shift in in Arcadia towards more of a consumer product organization means there is less competition and so we feel that our partnerships only gets stronger.

Got it got it.

Very good well all good stuff very interesting stand best of luck here rolling out.

I know, there's a lot of different initiatives at the same time. So thanks for taking my questions and I'll jump back in queue.

Thanks, Pat Thank you Ben.

And thank you.

I am showing no further questions I would now like to turn the call back to Steve.

And J Cox for closing remarks.

Well great. Thank you I would like to thank everyone for joining us today. It is a it is a very exciting time here at Arcadia. So we're fast approaching the goodwill parcel launch and there are many other initiatives underway.

So we feel we're really well positioned to execute on these plans, we laid out and look forward to reporting our progress to you in may. So thank you again for joining have a great afternoon everyone.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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