Arcadia Biosciences Inc (NASDAQ:RKDA) Q2 2022 Earnings Conference Call August 11, 2022 4:30 PM ET
Company Participants
Stan Jacot – President and Executive Officer
Pam Haley – Chief Financial Officer
Conference Call Participants
Ben Klieve – Lake Street Capital Markets
Brian Wright – ROTH Capital Partners
Operator
Good afternoon, and welcome to the Arcadia Biosciences Second Quarter 2022 Earnings Conference Call. Today’s presenters will be Stan Jacot, President and Executive Officer; and Pam Haley, Chief Financial Officer of Arcadia. This call is being webcast, and you can refer to the company’s press release at arcadiabio.com.
Before we start, we would like to remind you that Arcadia Biosciences will be making forward-looking statements on this call based on current expectations and current 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 recent filed 10-Q.
With that, I will now turn the call over to Stan Jacot, CEO.
Stan Jacot
Good afternoon, everyone, and thank you for joining us today for our 2022 second quarter conference call. I am excited to share with you the progress we are making in our journey to deliver innovative plant-based health and wellness products to the consumer marketplace.
Our Q2 2022 revenues were up 175% compared to the same quarter last year, part of the increase was driven by the recognition of $862,000 in license revenue from Bioceres related to the Chinese approval of HB4 soy. As we discussed last quarter, the approval would trigger the immediate recognition of the $2 million milestone with 4 cash payments of $500,000 to follow in the coming quarters.
Based on accounting guidance, a portion of the $2 million was recognized as license revenue with the remainder recorded as a gain on sale in relation to the sale of our portion of the Verdeca joint venture to Bioceres in 2020. Pam will provide further detail on the financial part of today’s presentation.
Excluding the impact of the Bioceres milestone revenue, our ongoing revenues were still more than double our revenues in the same period last year and resulted in a record-breaking level of consumer product sales. As a reminder, our Q1 2022 sales of $3.2 million included more than $1 million of business-to-business grain sales as we saw an opportunity to take advantage of rising wheat prices.
In comparison, our Q2 2022 grain sales were approximately 70% less than the previous quarter. While our revenues significantly increased year-over-year, our total operating expenses decreased 16% over the same period. Pam will provide additional insights, but it is important to note that our total operating expenses in Q2 2022 include $1.6 million in write-downs and adjustments, partially offset by a $1.1 million gain on the sale of Verdeca to Bioceres.
In summary, I am pleased with the progress we are making. And today, I wanted to give you some insights into a few of the key topics that we believe will drive revenue growth, improve profitability and enhance shareholder value as we move forward. More specifically, I want to talk to you about, one, the official launch of GoodWheat; two, insights into our other 2 core brands, ProVault and Zola, three, give an update on wind down activities; and four, provide detail on our long-term strategy.
Let’s start with the official launch of GoodWheat. We were extremely excited to officially launch our GoodWheat pasta during the second quarter in both the retail channel and online through Amazon. GoodWheat pasta contains 4x the fiber of regular pasta, with 8 grams of fiber per serving, it can provide significant health benefits to those who are seeking to increase their fiber intake to aid in digestion, weight management, cardiovascular health or to regulate blood sugar.
And the health benefits of GoodWheat extend beyond fiber. It also has 9 grams of protein per serving, which is about 25% higher than most traditional pastas, is Non-GMO Project verified, certified kosher and consists of only 1 simple ingredient, our USA farm-grown wheat. But the most exciting part is that while GoodWheat contains all of the nutritional benefits just mentioned, it does not compromise on taste or texture.
In recent taste tests, GoodWheat performed significantly better than a leading veggie pasta and on par with a leading traditional wheat pasta and the texture is superior as our past is always al dente, never bland or mushy. Our retail customers are recognizing the benefits associated with GoodWheat, and we have received very strong interest early on. Since our launch, a little more than 2 months ago, we have added several new retail customers and are currently shipping our GoodWheat pasta to nearly 500 stores nationwide.
I’m extremely pleased with the level of interest and retailer commitment we are seeing for this new brand and optimistic that GoodWheat will be a game changer for the pasta category. And speaking of the category, sales were up 25% based on the latest 13-week data from Nielsen, while units are up 5%.
We view this data favorably as the category continues to show strong unit growth despite unprecedented price increases by competitors, and we believe higher prices across the industry will only reduce the price gap on GoodWheat compared to traditional pasta.
Shifting now to ProVault and Zola, the topical pain relief category was essentially flat in the second quarter from a dollar perspective compared to Q2 2021. Based on Nielsen data for the latest 13 weeks, category sales were down 1.3% while units declined 7.4%, primarily driven by declines in private label. A bright spot in the category is our brand ProVault. Through the first half of this year, we have added more than 500 points of distribution and our units and sales were up 4x compared to Q2 last year.
It is clear consumers are thrilled with our unique formulation of menthol and camphor that delivers fast acting muscle pain relief with the added benefit of 1,500 milligrams of THC-free CBD, among the highest CBD content of pain relief products in the category. We will continue to drive trial through marketing efforts and focus on distribution in mainstream retail channels.
Moving now to Zola. The coconut water category sales grew 7.6% in the latest 13 weeks, while unit sales declined 15%. Sales are outpacing units as higher costs are being passed along through price increases and Zola is no different. We implemented a price increase across our customer base in Q2, which had a negative impact on volumes due to lower promotional activity.
We view this as temporary and expect promotions and revenues to return to a more normalized level by Q4, but there is a much larger opportunity for Zola and the entire coconut water category than just promotions. We recently learned during an unbranded taste test that consumers prefer Zola nearly 2:1 compared to other leading coconut water brands. Importantly, nearly 40% of consumers said they would buy coconut water more often, which shows how our crisper, cleaner taste with just the right amount of sweetness can lead to incremental sales growth.
We are taking this message directly to retailers to drive distribution beyond our current 4% ACV. So in summary, we have a tremendous opportunity in front of us to significantly grow Arcadia with the launch of GoodWheat, potential placement of ProVault in mainstream channels and increased distribution of Zola.
In order to execute effectively on our plans, we must ensure that we have the right resources in the right place and that our team is focused on the most compelling opportunities. Over the last 12 months, Arcadia has stressed the need to simplify its operations, and we have made decisions to exit businesses such as GoodHemp and Archipelago.
As we discussed previously, we’re evaluating each of our businesses based on 3 criteria: one, the size of the opportunity and ability to differentiate; two, the ease with which we can scale the business; and three, the level of expected profitability. On our May earnings call, we communicated that we had made the decision to wind down a co-packing business that we inherited as part of the body care acquisition, which I’m happy to report is complete.
Today, we are making 2 additional announcements in body care that will enable us to simplify our business, focus our resources and increase our margins. The first decision we made is to move body care production to co-packers, and to divest our manufacturing facility in Los Angeles. The manufacturing of our body care products was a complex process that included a large number of inputs and tied up cash.
By moving our body care production to experienced manufacturing partners we are able to reduce overhead, simplify our supply chain and scale more easily. The second decision that we are announcing today is that the Savvy naturals brand will no longer be a part of the Arcadia portfolio. We recently reached agreement for the original founders to take over the brand effective August 1.
While we are entitled to licensing fees in the future, this move is really about further simplifying our body care business and allowing us to focus on fewer high-margin SKUs. So these 2 body care decisions complete the major wind downs and divestitures that have taken place over the past several quarters.
There will be a slight dip in revenue and a related OpEx charge in Q3 as we work through these transitions, but we expect revenue and margin improvement beginning in Q4. We can now fully focus on the opportunities ahead of us. So let me spend a few minutes giving you a greater level of insight into our new long-term strategy.
As mentioned on our last earnings call, I gathered our leadership team together at the end of April to begin laying out a long-term road map to transform Arcadia into a sustainable, profitable growth company. We are pleased to announce the introduction of Project Greenfield, our company’s 3-year plan to unlock Arcadia’s potential and create a path to profitability.
Project Greenfield provides a framework rooted in solid achievable goals that align our company’s resources around 4 key strategies that I’d like to share with you today. The first strategy is to establish GoodWheat footholds in retail categories representing over $10 billion in annual consumer spending.
Pasta is the first category for GoodWheat but there are a number of other categories where our value proposition is poised to break through and win while also clearly aligning with the investment criteria that I outlined, opportunity, scalability and profitability.
Our approach will be deliberate and executable and may include a mix of product launches as well as potential acquisitions. The second strategy is to drive share growth in our core brands, ProVault topical pain relief and Zola coconut water. These brands have superior product performance in large established categories. So there is compelling upside in improving our small retail footprint.
We can grow significantly faster than the category through expanded distribution, trial driving marketing, and targeted innovation. Strategy #3 is to leverage partnerships to build future licensing revenue in channels such as B2B and food service.
We have already enjoyed the results of successful partnerships like Bioceres, which utilize our expertise to improve the value of commodities. And there are many more opportunities to monetize our proprietary portfolio of Non-GMO wheat traits.
In addition, we are in the process of developing partnerships with manufacturers of upstream foodservice and B2B products to expand our represence into many more product categories, which can generate additional high-margin licensing revenue streams. And the last component to Project Greenfield is to build an agile organization and a winning culture.
This includes developing collaborative processes and quick decision-making, simplifying our business, and ensuring we have the right resources. We kicked off this last strategy by rolling out our company mission and values to all employees and our entire organization is aligned on the behaviors that will allow us to execute our plan efficiently and effectively.
So hopefully, this gives you a sense of how we plan to drive shareholder value going forward, and I will keep you updated as key elements and milestones of Project Greenfield unfold.
With that, I will now turn the call over to Pam to discuss our 2022 Q2 financial results in detail. Pam?
Pam Haley
Thanks, Stan. Good afternoon, everyone. As Stan noted, we realized significant growth in our revenues this quarter. Total revenues recognized for second quarter 2022 were $3.9 million compared to $1.4 million in second quarter 2021 for an increase of 175% and $7.1 million second quarter year-to-date, compared to $2.2 million during the same 6 months of 2021 for an increase of 217%.
Product revenues generated from Zola Coconut Water sales, 1 of the brands acquired in the second quarter of 2021 accounted for the majority of the increase for the quarter and year-to-date, along with increased body care product sales and the license revenue Stan discussed briefly at the onset of the call.
As you may recall, we sold our half of the Verdeca joint venture, which was formed to advance and deregulate soybean varieties in November of 2020 to our partner Bioceres. In conjunction with the sale, we licensed multiple traits to Bioceres and the net funds we received at the time of the transaction were allocated between gain on the sale of the transaction and license revenue.
We’ve applied that same allocation methodology to the milestone payments totaling $2 million will now receive from Bioceres. Also contributing to the year-to-date revenue favorability are the sales of grain transacted, primarily in the first quarter of 2022. Total operating expenses of $7.6 million in the second quarter of 2022 were down $1.5 million from the $9.1 million recognized in the second quarter of 2021 and second quarter year-to-date total operating expenses were up slightly from the same period in 2021.
There are a number of nonroutine transactions affecting second quarter total operating expenses. The $1.1 million gain on the sale of Verdeca offset by $460,000 write-down to fair market value of the CBD oil inventory that we produced as well as $346,000 impairment of fixed assets and a $393,000 inventory write-down associated with the recent out-license of the Savvy Naturals brand.
The inventory write-downs are primarily related to our noncore brands and have been included in the cost of revenues line item within our statement of operations and comprehensive loss. The additional grain and body care and Zola product sales generated additional cost of revenues as well.
Research and development expenses have continued to decrease significantly as planned, $359,000 this quarter versus $1.1 million this quarter last year, and $754,000 second quarter year-to-date versus $2.3 million second quarter year-to-date for 2021. Our R&D expenditures now are predominantly focused on product formulation where our historical R&D expenditures were devoted primarily to trait development.
SG&A expenditures have also decreased $4.6 million in second quarter and $9 million second quarter year-to-date compared to $6.4 million and $10.4 million second quarter 2021 and second quarter year-to-date 2021 for decreases of $1.7 million and $1.4 million, respectively.
Our employee and consulting expenses are lower this year as we’ve simplified operations and are exiting business lines that do not meet our criteria for investment. In addition, second quarter 2021 included acquisition fees that are not present in 2022.
Net loss attributable to common stockholders was $3.8 million in the second quarter of 2022 compared to $5.3 million in the second quarter of 2021, and $8.3 million in second quarter 2022 year-to-date compared to $3.2 million in second quarter 2021 year-to-date.
I’ve addressed the notable variances that bring us to loss from operations and the remeasurement and sale of Bioceres stock in the first and second quarters of 2021, impacted net loss attributable to common stockholders significantly with a gain of $2.8 million and $10.2 million in second quarter and first half of 2021, respectively.
No such gain was recorded in 2022, and as we noted last quarter, we are no longer remeasuring the fair value of common stock warrant liabilities at the end of each quarter per the new accounting standard implemented as of the beginning of this year.
So this concludes our financial highlights for the second quarter and first half of 2022. Thank you very much for your time and attention today. And I’ll turn the call over to the operator for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] First question comes from Ben Klieve from Lake Street Capital Markets.
Ben Klieve
Congratulations on what looks like a pretty darn good quarter here. First, I’d like to just ask kind of a clarifying question regarding the sequential improvement from Q1 to Q2. So when you consider the grain sales in Q1 and Q2, plus the gain from the HB4 revenues in the second quarter. I want to make sure I’ve got the numbers right here.
So in the first quarter, if you back out grain sales, I came to about a $1.9 million revenue number. And then the second quarter, if you back out both grain sales and the Bioceres revenues, I got about 2.6. Pam, is that about right?
Pam Haley
Let me see, yes, that’s right for Q1. And then you said for Q2, you were backing out the $862,000, right?
Ben Klieve
Backout, yes, and then you also had some grain sales in Q2. So if you back out the $862,000 plus the grain sales, I come up with like $2.5 million, $2.6 million in Q2 revenue.
Pam Haley
Yes, that sounds about right.
Ben Klieve
Okay. Great. So some real sequential improvement there. And in your comments, it sounded like really the entirety of that sequential improvement was attributable to your — to the products, not including GoodWheat. Is that right? So GoodWheat was a negligible contributor in the quarter?
Pam Haley
That’s right. Correct. Yes.
Ben Klieve
Okay. Okay. Great. And then regarding GoodWheat. So Stan, I believe you said that you’re in 500 retail locations currently. Can you kind of update us on the cadence of that? What did you start with on day 1? Where did you end the quarter? And where do you kind of anticipate that store count will be in, I don’t know, 3 to 6 months and then in a year, some kind of metric like that?
Stan Jacot
Yes. Well, we were at about 200 stores or so by the end of the quarter. And clearly, in Q3, we’re already shipping to 500 stores and there’s a good — we have good visibility for that number to double again by the end of Q4.
Ben Klieve
Okay. Great. Great. Great. And the — it sounds like you saw some real — I don’t know, given how short this is, I’m not sure what the right way to frame this question is, but it sounds like you saw some really good kind of sequential improvements from 1 week to the next 1 month to the next solid same-store sales improvements in that — in the GoodWheat brand, is that right so far in this very limited time frame?
Stan Jacot
Yes, it’s been limited. And again, we’re very happy with the retailer commitments that we’ve seen and the speed to shelf, to be quite honest. And so right now, we’re just working through the model for promotional support. So those are the things that are also going to impact.
Ben Klieve
Got it. Got it. Okay. Great. And you talked also about a number of kind of moving pieces around divestitures and exiting businesses, et cetera. Can you talk about kind of the net cash impact that you’re looking for here when the dust settles in terms of both brands and facilities that you’re going to be exiting?
Stan Jacot
Yes. So for this year, it’s going to be basically a net breakeven. But where we’re going to see the value is in 2023, where we’re going to see less operating expenses as well as higher margins.
Ben Klieve
Okay. Yes, I heard that, it’s good to clarify that you don’t have — you’re not expecting some kind of material lump sum from the divestiture, okay, perfect. And then one last one for me here, and I’ll let — then I’ll get back in the queue.
I mean, this 3-year plan that you’re introducing today. What kind of — what are the kind of benchmarks here that we can look for, for the next couple of quarters? Three years is a long way away, but I mean, what are the kind of — the real initiatives here over the next 3 to 6 months Stan that we can really look for to show real improvement in the financials born from this initiative.
Stan Jacot
Yes. So the project GoodWheat — sorry, Project Greenfield is really heavily reliant on GoodWheat and the expansion into pasta expanding beyond just the 500 stores that we are currently in as well as expansion in new categories. But we also are going to be — have to be very choiceful about when we enter these categories and how. And so I’d say more guidance will be coming on that as we move forward into future quarters.
Ben Klieve
Got it. Okay. Very good. Well, I look forward to further updates on that when the time is right. And again, congratulations to you and the team on a really nice sequential improvement here from the first to the second quarter.
Operator
And our next question comes from Brian Wright from ROTH Capital Partners.
Brian Wright
I wanted to talk a little bit about the 500 stores? You mentioned nationwide. Is it kind of a broad nationwide strategy at this point? Or are you kind of testing regionals and then targeting, then figuring out kind of the cadence and how to go about it. Just wanted to think about kind of geographically how that looks and the strategy there?
Stan Jacot
Yes. So our strategy is really to align with the mid- to large regional retailers where we have relationships and can develop the support that we need to launch these progs properly and to understand the right kind of go-to-market model, everything from promotion to shopper marketing to other trial driving initiatives.
And so those retailers are located in the East, in the Midwest, some in the West Coast. So they are across the nation. But we are taking — going to be taking those learnings and then expand in 2023 to more retailers.
Brian Wright
And in that promotional support, does that include in-store marketing — and just any kind of color you could provide on what’s going on in the stores themselves.
Stan Jacot
Yes. We have about — I’d say about 70% of our efforts on GoodWheat right now are — would be considered shopper marketing. So it’s using the retailer’s tools, it’s using geotargeting with some of the messaging and digital advertising to support the — driving those consumers to those retailers. And so we’re — and again, every retailer has their own mix of tools which are successful for them. And obviously, they will always include the major ones like features and display.
Brian Wright
Great. And last question for me is, you had mentioned in the R&D keeping some product formulation R&D, and just was curious on kind of what efforts are going on in that arena.
Stan Jacot
Yes. So that’s primarily around, again, our GoodWheat brand, and we are already starting formulations in other categories beyond pasta, working with experienced co-pack partners to help develop the correct formulas that will help us break through and win in those categories.
Brian Wright
On that, can I just follow up, would mac and cheese be included in your definition of pasta or would that be different?
Stan Jacot
That would be a different category.
Operator
We have no more questions at this time. I’ll turn it back to the speakers for final comments.
Stan Jacot
Thank you. So in closing, I’d like to thank everyone for joining us today and our financial results continue to improve as we have made tremendous progress rightsizing the organization. Our GoodWheat pasta is officially launched, and we have made strategic decisions that will enable continued improvement during the second half of the year and beyond.
And we have developed a long-term road map that will allow us to significantly grow this business and reach profitability. We feel we are well positioned to execute on these plans, and we look forward to updating you all on the progress in the future. Thank you again for joining us today. Have a great afternoon, everyone.
Operator
And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.
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