Arcadia Biosciences, Inc. (NASDAQ:RKDA) Q4 2021 Results Conference Call March 30, 2022 4:30 PM ET
Company Participants
Stan Jacot – President and CEO
Pam Haley – CFO
Conference Call Participants
Ben Klieve – Lake Street Capital
Operator
Good afternoon, and welcome to Arcadia Biosciences Fourth Quarter Year-end 2021 Earnings Conference Call.
Today’s presenters will be Stan Jacot, President and CEO; and Pam Haley, Chief Financial Officer of Arcadia. This call is being webcast, and you can refer to the Company’s press release at arcadiabio.com.
Before we start, we would like to remind you that Arcadia Biosciences will be making forward-looking statements on this call based on current expectations and currently available information. However, since these statements are based on factors that 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 turn the call over to Stan Jacot, President and CEO.
Stan Jacot
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 a 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 GoodWheat retail launch and winding down some of our existing noncore businesses, such as GoodHemp and Archipelago. We see significant opportunities to grow our business by accelerating the monetization of our GoodWheat 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 3 decades growing CPG brands across dozens of categories. During this time, I’ve had the privilege of leading well-recognized brands and Fortune 100 companies as well as scaling small brands and launching new innovations and start-up environments. In 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%. I’m 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 that 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 has already been made towards becoming a CPG-driven company. A strong leadership team with vast experience across many successful brands have been assembled. New talent across the organization have been added to provide CPG expertise. And there was a portfolio of consumer brands, either already in the marketplace or on the verge of being commercialized, that deliver functional performance that can help solve the consumer problem. So I saw a 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 narrow the 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 3 criteria.
One, what is the opportunity? What is the size of the category or 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 of ingredients or the process to manufacture it?
And three, what is the level of expected profitability? Is our value proposition 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 3 criteria, we have divided our businesses into 2 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, refining our go-to-market strategies and expanding distribution through a variety of channels, including food, drug, mass, club, natural and e-commerce.
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 3 brands that we have identified as core. The first core brand is Zola 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 19, 2022, and Zola outpaced the category growth. In addition, based on a 2018 survey by Epicurious, that included 19 coconut water brands, Zola was rated as the best tasting coconut water brand. Since the vast majority of Zola sales occur in retail brick-and-mortar stores, our goal will be to expand distribution beyond our current 14% ACV and invest in shopper marketing and retail activation activities.
The next brand is ProVault. Provault is an all-natural fast-acting topical pain relief product designed to safely and effectively relieve muscle and joint pain. It contains camphor, menthol, arnica, and CBD that is certified THC-free. Launched in the first quarter of 2021, we view ProVault as a differentiated product with superior benefits that is poised to disrupt $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 are aligning our marketing strategies to incentivize trial in retail stores and on our website at getprovault.com.
And finally, we have GoodWheat. Wheat 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. In our first GoodWheat product, a durum wheat pasta delivers 4x the fiber versus regular wheat pasta, 9 grams of protein and has fewer calories. In fact, one serving of our GoodWheat Pasta provides 32% of 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 increase nutritional values, all the benefits in our pasta come from one simple ingredient, our proprietary USA farm-grown wheat.
We recognize the recent global concerns around wheat 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 pasta at retail first and are thrilled to announce that GoodWheat 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 retail launch, we plan to have GoodWheat available for purchase online in June.
As we look into 2022 and beyond, we are excited about the prospects for GoodWheat. The feedback we have received from retailers about our pasta has been overwhelmingly positive in regard to taste and texture. In a blind consumer in-home taste survey, our pasta significantly outperformed the leading better-for-you competitor and was at parity with the world’s largest pasta brand. And pasta is just the start for GoodWheat. Our leadership team is in the process of developing an executable strategic plan that will expand the GoodWheat 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.
Pam Haley
Thank you, Stan. As Stan mentioned at the onset of the call, we have spent considerable time evaluating our business lines, determining which ones to grow and build and which ones to deemphasize. Acting on some of those decisions has had an impact on our financials, primarily in the fourth quarter, which is reflected in my commentary here.
Total revenues recognized for the year were $6.8 million compared to $8 million during 2020, with the majority of the decrease driven by the license revenue generated from the transactions executed with Bioceres in 2020 that were not present in 2021. Revenue recognized during 2021 was primarily composed of product sales of the wellness brands acquired this May.
Total operating expenses in 2021 were $42.3 million compared to $20.8 million in 2020. The unfavorable variance of $21.5 million was largely due to a gain in the amount of $8.8 million on the sale of our membership interest in Verdeca to Bioceres 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 that had a negative impact on product cost of sales, R&D and SG&A. As a reminder, total operating expenses includes these 3 categories.
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 in the hemp industries regulatory framework triggered a significant write-down of hemp biomass in 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 an impairment of goodwill in the amount 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 unfavorable 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. An 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 were recorded in 2020.
Selling, general and administrative expenses totaled $22.9 million in 2021, a $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 $900,000 of acquisition-related costs, investment banker success fees, legal diligence and transaction costs. We’ve 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. A gain in the amount of $10.2 million was recognized in the second quarter of 2021 with the sale of the shares of Bioceres 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 tight financing transaction in January 2021 and the fluctuation in our stock price at the end of year remeasurement points contributed to the year-end liability values, and thus, the change that flowed through to the results of operations.
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.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Ben Klieve from Lake Street Capital.
Ben Klieve
Welcome aboard, Stan. Looking forward to seeing your strategy here on full and in coming quarters. Good to speak to you here finally. Got a handful of questions. I’ll start with a couple on the quarter itself. No, actually, not on the quarter itself. Let me ask you a couple of questions about kind of the high-level strategy, Stan, that you outlined. It sounds like hemp is pretty decidedly noncore at this point. My question is, are you looking to develop the products that leverage — that integrates CBD, like ProVault, with inputs that are grown by Arcadia developed genetics? Or is the CBD that you’re going to be using for those products, something you’re just going to be buying from other industry sources?
Stan Jacot
Well, what’s nice is that we have the option. So we’ve harvested 22,000 pounds of biomass already due to our relationship with Archipelago. And so we have the capability to use that in our own products. But as always, we’ll be looking for the best opportunities to get the best cost.
Ben Klieve
Okay. And then kind of a 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 looks like you’re clearly trying to monetize via your packaged goods. 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 the shift in strategy that you have?
Stan Jacot
Well, again, as you’ve mentioned, we do have a large portfolio of patents. We have 33 patents related to wheat. So we have a lot of opportunities to do both. But for now, what we’re really focused on is expanding our IP into consumer categories within the store.
Ben Klieve
Got it. Got it. Okay. Perfect. And then another question on the wheat side. I mean you’ve mentioned millions of pounds of GoodWheat are sending in inventory. This is a business that for a while has had a series of inventory write-downs. I guess I’m curious, 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 into inventory, in the finished good inventory here relatively soon and not be exposed to write-downs.
Pam Haley
Ben, it’s Pam. I can take this question. You’re 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 wheat internally, and we are also exploring options with partners on the best use of some of that wheat that we do have in inventory.
Ben Klieve
Okay. Perfect. And then last one for me. Again, kind of a question here on kind of the strategic shift. And the legacy B2B relationships that had been in place with organizations like Bay State Milling and Ardent Mills with the shift that you have, do you see those relationships still ongoing? Or because of the shift, are you guys going to be terminating those relationships?
Stan Jacot
We absolutely see them as valuable partners. And as a matter of fact, the shift in Arcadia towards more of a consumer product organization means there’s less competition. And so we feel that our partnership is only going to get stronger.
Ben Klieve
Got it. Very good. Well, all good stuff. Very interesting. And Stan, best of luck here rolling out what I know is a lot of different initiatives at the same time.
Operator
And I am showing no further questions. I would now like to turn the call back to Stan Jacot for closing remarks.
Stan Jacot
Well, great. Thank you. I’d like to thank everyone for joining us today. It is a very exciting time here at Arcadia. So we’re fast approaching the bid we pass to launch, and there are many other initiatives underway. And so we feel we are really well positioned to execute on these plans we’ve laid out and look forward to reporting our progress to you in May. So thank you again for joining. Have a great afternoon, everyone.
Operator
Thank you. This concludes today’s conference call. You may — thank you for participating. You may now disconnect.
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