Arcadia Biosciences Inc (RKDA) 2020 Q1 法說會逐字稿

Good afternoon, and welcome to the Arcadia Biosciences First Quarter 2020 Earnings Conference Call. Today's presenters will be Matt Plavan, President and CEO; Sarah Reiter; Chief Commercial Officer; and Pam Haley, Chief Financial Officer. 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 the 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. Please review the company's safe harbor language in their most recent filed 10-K and on Page 5 of today's press release.

With that, I will now turn the call over to Matt Plavan, President and CEO.

Thank you, Victor. Good afternoon, everyone, and welcome. With me today at safe distances are Pam Haley, our Chief Financial Officer; and Sarah Reiter, our Chief Commercial Officer.

I want to open by saying that I hope all of you listening in today, your families and your loved ones are staying safe and healthy. This is an extraordinary moment and time for all of us. The coronavirus has affected every business in the world. Together, we are navigating a global health crisis that is bigger and more widespread than anything we have witnessed in our lifetime.

Now before getting into the results, I'll provide some perspective on what we have been seeing since the pandemic hit, the current dynamics in our business and the actions we have been taking to not only manage through, but to adapt quickly and to make sure we are well positioned to emerge stronger.

Our priorities throughout this challenging time remaining the same, to maintain the health and safety of our people, to act as a responsible corporate citizen following local, governmental regulations and guidelines, while maintaining our field operations under the essential worker exception granted to agriculture, and to maintain business continuity and advance our business objectives without interruption. I'm happy to say that we have been successful in accomplishing these goals.

Beginning in March, we preemptively deployed plans for shelter-in-place mandates in the regions where we operate, which we were able to put into effect rather seamlessly. I've been impressed again and again by the dedication, creativity and nimbleness of our employees that they've shown in order to adapt to changing circumstances and to keep our operations running smoothly. I'd also like to acknowledge the growers, farm workers and food industry professionals who keep our food supply chain running smoothly. It's never been more clear that the work we are doing at Arcadia in enhancing the quality and nutritional value of crops and food ingredients is truly essential. Although we find ourselves among the fortunate at this time, the COVID-19 pandemic disruption to our global economy has certainly had some impact on our business.

We saw a number of hemp growers poised to purchase our GoodHemp seeds last month simply stand down for a time while they gathered their bearings and waited for better visibility into the reopening of our economy. However, May has historically been one of the most active months in hemp seed sales in the production areas in the Western U.S. and we are experiencing significantly greater interest and activity in the past 10 days than we did in the prior 6 weeks combined, which is when we've been forecasting the majority of seed shipments to begin occurring. As expected, we're beginning now to see a marked increase in deal flow, as we are reengaging in discussions with a number of growers who have decided they are moving forward with their spring plantings.

Our harvest schedules and planned processing activities in Hawaii were impacted by the shipping delays and island quarantine restrictions, resulting in several weeks of delay in harvesting, processing and beginning initial shipments of our new Archipelago Ventures CBD line through our partner, Vivion Specialties. The trade implications of ports closed around the world disrupted grain shipments, sales and consumption, which had minimal delays in the expected sales of our wheat that we were looking to close in the early part of the quarter. Although we did expect to report an increase in our hemp backlog over the prior reported amount of $3.7 million, the aforementioned pause in commitments during April resulted in no change as of today. However, since growers are now ready to take shipment of seed upon order, our orders from here forward will no longer run through backlog, rather, this number will begin declining as we fulfill these orders.

We're also very encouraged by the steady progress of our HB4 soybean project, having secured regulatory approval on more than 80% of global soybean acres produced. And how that portends for the beginning of our Verdeca HB4 soybean sales in 2021, should China food and feed approval be granted.

So with that said, if the COVID-19 pandemic remains on a recovery trajectory, we believe the worst is behind us and that we are positioned to recover those delayed sales in the coming months and to ultimately regain alignment with our growth targets. With good near-term visibility into our GoodHemp seed sales, our Hawaiian CBD sales coming online in the third quarter and our wheat sales expected to commence in late Q2, early Q3, we reiterate our guidance for total revenue of more than $10 million in 2020. I would be remiss not to call out the unusually high cash burn during our first quarter of $9.3 million, which was double our recent average quarterly burn of about $4.5 million. The additional cash flow was due to inventory builds for wheat and hemp as well as certain capital expenditures for our Archipelago operations to support our 2020 sales targets. We expect our cash burn to be closer to the prior levels or less going forward. Our burn will be progressively reduced by expected incoming CBD and wheat sales and the corresponding flow-through of those inventories as discussed.

Out of an abundance of caution and given the uncertainty in the markets, we have reduced all nonessential spend to ensure we retain sufficient cash resources to execute our plan. Also important to our forward strategy, in addition to our organic growth strategy, we are now poised to accelerate shareholder value creation through acquisitive and strategic growth opportunities in the processing, manufacturing and brand segments of the hemp value chain to create a leading, vertically-integrated platform focused on the best technology, the highest quality and transparency in hemp-derived products.

To help us navigate this emerging market, Arcadia has reached into the sector and is working with strategic advisers, including Corner Capital Group, who has been an early investor in hemp technology and health care industries, including TILT Holdings and Mile High Labs. We see a number of strategic opportunities and are evaluating those, we believe, are accretive and synergistic to our existing portfolio. We see the hemp supply chain, the full supply chain from field to retail is ripe for consolidation, and we expect to play an active role in those opportunities. We look forward to providing more information on these activities in the near future.

For now, I'll turn the call over to Sarah for a commercial update. Sarah?

Thanks, Matt. We had a robust first quarter in terms of strategic partnerships in GoodHemp and Archipelago Ventures businesses. We announced agency agreements with Grow West and Buttonwillow Warehouse Company, 2 of the nation's largest independent crop input retailers. Together, their teams of crop advisers add more than 100 agronomic specialists to our team of GoodHemp argonomists serving California. Their engagement is in line with our strategy to further the best practices from industrial agriculture as the hemp supply chain matures. GoodHemp seeds shipped during second quarter, so you'll begin to see significant hemp seed revenue when we next report. As Matt described previously, we will migrate from talking about backlog to speaking about sales in our second quarter earnings report.

Archipelago Ventures, our joint venture dedicated to year-round production of sun grown hemp in Hawaii announced in the first quarter an exclusive distribution agreement with Vivion Specialties, Inc. VSI. VSI is the distributor of quality ingredients for nutritional, pharmaceutical, food and beverage, cosmetics, personal care, agricultural and industrial markets. Under this agreement, VSI will exclusively distribute our Hawaiian-grown THC-free distillate and CBD isolate in North America. Tested for more than 950 pesticides and containments like heavy metals and microbial organisms, the products will offer an industry-leading purity and quality standard, known as VivAssure. Archipelago Ventures will maintain the rights to market our own ingredients in Hawaii as well as in international markets. Archipelago Ventures also expanded Hawaiian land under production in the first quarter by partnering with local Hawaiian participants in the state's industrial pilot program, now producing on 30 acres with another 20 under development. In the second quarter, we expect to open the extraction facility after COVID-related delays due to travel and shipping restrictions.

Looking forward through the remainder of 2020, we anticipate additional announcements about our strategy in Hawaii. Hawaii, an economy heavily focused on tourism continues to suffer painful employment losses in the after effects of the pandemic. Unemployment rates have reached 34%, among the highest in the nation, and as the state plans for economic recovery continue to evolve, we hope to be a voice of support and assistance. Today, Archipelago Ventures employs more than 20 people in roles from field laborers to extract scientists. We're committed to acting as a responsible corporate neighbor, keeping our team and the communities in which they work and live, safe and vibrant. We will continue to communicate more in the future regarding our Hawaiian operations as we come to better understand the Hawaiian Department of AG's new rules under USDA's Federal Hemp Program and the state's recovery plan.

Turning to soybeans. We are pleased to report strong harvest results in Argentina, where our nearly 7,000 acres of soybean fields continue to demonstrate strong yield protection in drought conditions. The HB4 soybeans, which combine drought and stress resistance with herbicide tolerance have already cleared regulatory hurdles in more than 80% of global soybean producing areas, including Brazil, Argentina and here in the United States.

Verdeca, our joint venture with Bioceres Crop Solutions, advances commercial plans as it awaits deregulation in China, a requirement for commercial launch of soybean traits in Argentina. In light of the global impact of COVID-19, we continue to monitor the regulatory status in China.

In first quarter, the product was highlighted at Expoagro 2020, the premier agricultural trade show in Argentina, which was attended by more than 100,000 growers from throughout South America. The trade fair was used as an opportunity to register growers for the next cycle of seed multiplication and interest exceeded by nearly tenfold, the maximum acreage potential available.

Looking forward through 2020, we expect to share updates on the regulatory status of HB4 throughout the world, and we will progress in our commercial efforts with HB4 soybeans.

Today, we captured 3 routes to market as a technology licensed to seed companies, as varieties licensed to seed distributors and through the proprietary ecoseed program of our joint venture partners, which combines germplasm, traits, biologicals, ag tech and implementation as a package to approach growers. Verdeca has previously announced licenses for varieties with Bioceres Semillas and GYT in Argentina, Kilafen and Semillas ADP in Uruguay as well as technology licenses with Bioceres Semillas in Argentina, TMG in Brazil and Grupo Don Mario in several countries in South America.

And now to wheat. In our first quarter, we advanced our commercial adoption of GoodWheat seeds, traits, grain and ingredients in both international and U.S. markets, where early in the quarter, our ingredients were featured in pasta taste panels. Our recent press release announced expanded U.S. patent coverage. And in fact, we've secured 8 additional patents covering our GoodWheat portfolio in the U.S. and in key foreign markets in recent months.

We've continued to progress our exclusive distribution relationship of our resistant starch high-fiber bread wheat in North America through Bay State Milling company, who continues their introduction of HealthSense flour products. In the second quarter, you should expect to see initial revenue from European shipments and we'll compete -- complete, excuse me, our spring seed sales. We will also reveal plans to expand our retail flour line, which reduces by more than 60% the allergenic components of gluten.

In terms of outlook for the remainder of the year, we will carefully monitor the impacts of the pandemic on sales of basic ingredients. As food companies focus on activities that ensure grocery store shelves are replenished, some have shifted away from innovation initiatives. But on the other hand, we see an increase in sales volumes of retail flours. So beyond the delay Matt mentioned earlier, we see the impacts of COVID-19 on our wheat business as limited and manageable.

With that, I'd like to turn the call over to Pam, who will review the financial results in more detail. Pam?

Thank you, Sarah. Revenue in the first quarter of 2020 was $151,000 higher than in the first quarter of 2019, driven primarily by a licensee's milestone achievements.

Our GLA product revenues were favorable as well, and royalty revenue was recognized this quarter as part of the contracted annual minimum. Total operating expenses for the first quarter was $6.1 million compared to $4.4 million in the first quarter of last year, for an increase of $1.7 million or 39%.

R&D expense was $739,000 higher for the quarter as compared to 2019. And the increase was primarily due to higher employee expenses and hemp-related costs, as we've launched Arcadia's GoodHemp product line and established a joint venture, Archipelago.

SG&A expense was $911,000 higher in the first quarter than in the first quarter of 2019. This increase was mostly due to additional consulting activities and consultant stock compensation expense, along with higher employee-related expenses.

Net income attributable to common stockholders for the first quarter of 2020 was $2.5 million compared to a net loss of $12.6 million recognized in the first quarter of 2019. The fair value remeasurement of the common stock warrant liabilities at the end of each quarter resulted in a noncash income of $8.2 million for the first quarter of 2020 versus a noncash expense of $8.5 million for the first quarter of 2019. The common stock warrant liabilities are associated with the registered direct offering transactions in 2018 and 2019. And you can refer to footnote 9 in our 10-Q for a detailed description of the accounting for these transactions.

Regarding our liquidity and capital resources, cash on hand, cash equivalents and short-term investments totaled $16 million at the end of the first quarter versus $25.3 million at year-end, for a change of $9.3 million. The net cash used in operating activities for the quarter was $9.3 million, of which $4.2 million was attributed to a change in the inventory balance. And as Matt alluded to and as we expected, we invested significantly in inventory buildup for hemp, both GoodHemp and Archipelago and wheat this quarter, along with property, plant and equipment purchases, primarily supporting our Archipelago operations in Hawaii.

Following the quarter-end, Arcadia secured a $1.1 million loan under the Paycheck Protection Program contained within the Coronavirus Aid, Relief and Economic Security Act that was signed into law on March 27, 2020.

And that wraps up our financial highlights for the first quarter of 2020. Thank you for your time and attention today.

And with that, I'd like to turn the call back over to Matt.

Thanks, Pam. Together, we're working hard to position our business for strong and sustained growth. We believe this year, we entered with a position of strength, and we're on track to achieve our revenue guidance. We're confident that our R&D initiatives, proprietary commercial products and accelerated verticality in the hemp space will continue to give us the edge to successfully establish leadership in hemp just as we have in other crops.

With that, I'd like to turn the call over for questions to the operator. Victor?

(Operator Instructions) And our first question will come from the line of Ben Klieve from National Securities.

First question is, Matt, regarding the acquisition discussion that you had within hemp, can you talk a bit about how you're looking at expanding vertically, kind of up and down the supply chain rather than horizontal expansion to kind of grow your footprint of seed production or breeding capabilities? What do you really see as the more substantial value proposition to vertical expansion rather than growing horizontally here?

Yes, Ben, thank you for the question. I wouldn't want to rule out horizontal opportunities. We do see some interesting genetics out there, and I would actually include them in the bucket of opportunities that could be accretive to the company and extend our capabilities. When we think vertically this comes back to -- at the moment, there is a lot of risk in the supply chain around quality. And I think that that's because hemp is in dire need of improvement to reach its full potential. And there's a general awakening to that throughout the supply chain, whether it's processing, manufacturing brands, whatnot, we all understand there's a great risk at trying to grow to the full potential of all the industrial applications having the right genetics. And so that puts us in a privileged position to evaluate a number of opportunities that would allow us to capture greater share of the value in the supply chain. And that by bringing together strong genetics with a processor, for example, and being able to make that stronger connection between the growers, the processors and all the way through the supply chain. We find ourselves well positioned to make it a more profitable and efficient supply chain that perhaps anyone else in that plays in the space. So we're thinking that there's more value to be captured vertically at the moment than there is horizontally because our expertise is in genetics. But I wouldn't want to rule it out because candidly, there are a number of genetic companies we are talking to that could extend our capabilities and accelerate our ability to create value.

Got it. That's helpful. And I guess as a follow-up, can you talk about the kind of the quality of the supply chain in Hawaii versus on the mainland? And then -- and I know it's early, but are you -- can you kind of discuss if you're initially targeting this acquisition strategy on Hawaii or on the mainland?

Well, we're faring pretty well in Hawaii, and we kind of are the supply chain for Archipelago Ventures. We have the genetics. We have the mobile processing unit, as you know. So it's not like we aren't in processing at all at this time. And with the recent announcement of Vivion Specialties, we've also got the channel into -- we have the sales channel into the retail space. So right there, I would say we're pretty well equipped to scale and lead the market in Hawaii, which means that the mainland is likely to be where we're going to -- you're going to see our first moves with regard to verticality. I don't know, Sarah, would you add anything to that? No, we're good. Okay.

Okay, perfect. Turning over to the inventory build. Can you break down the -- that build either by crop or maybe by finished goods that are bagged and ready to go versus inventory that's still in the field in process?

I think Pam can kind of walk you through. We did file the Q. And Pam, did we provide visibility into -- the degree of visibility that he's asking about in the Q?

We do. We've got it in our footnote. We've got a breakdown between raw materials, inventory and process and finished goods, and we do include some crop information. And quite a bit of it was GoodHemp, and most of that is ready to go, but we've got some GoodHemp -- or I'm sorry, some hemp in Hawaii in Archipelago that is still in process. We've got some wheat that's in process. So it's a good mix, but it's -- and we've got some -- we're starting with soybean inventory also.

Got it. Okay. I'll wait for the Q to post, but I appreciate that comment. Last one for me, and I'll get back in queue after this, but could you kind of provide a bit of color regarding your kind of outlook for seasonality, the balance of the quarter? I mean, I know you talked about an acceleration here in recent weeks that you're expecting nice sequential improvement from Q1 to Q2 on the revenue side. But do you have any better visibility regarding kind of how the next 3 quarters are going to look from a percentage of revenue breakdown over your full year total?

Yes. Sarah does.

Yes. So thanks, Ben. The majority of our hemp business will flow out in May, June and July. Though we also have production areas in the Far Southern United States, which we'll be planting in the fall. Hawaii and Florida offer us year-round opportunities. So those are compelling businesses year round. Our wheat sales will not be visible until third or fourth quarter for -- in large part, yes, starting in late third quarter. We have some wheat business that we'll start seeing in second in our European stuff that's actually already in transit but hasn't landed. And so you'll see small amounts in second, deeper in third and fourth from the wheat business. And I wish I could say that there's soya revenue, but we'll have to hold off until next year or '22.

Yes. Understood. Very good. That's really helpful. I think that does it for me. Congrats to all of you on all the progress. And I'll get back in line now.

And our next question will come from the line of Ram Selvaraju from H.C. Wainwright.

It's (inaudible) speaking on behalf of Ram Selvaraju, H.C. Wainwright. Congrats on the progress despite current climate. Just one question from me. So how can Arcadia and its partners on the wheat-based consumer products front, capitalized on the recent trend towards home baking, thought about the resupply, the recent pandemic and the stay-at-home restrictions. Do you see this as an important development going forward or just a transient kind of thing?

No, we absolutely see this as a strong indication that wheat is an important part of home baking and the home experience. We've always talked about wheat as a comfort food, and I think we're actually seeing it consumed that way. We will be announcing in second quarter, our retail flour partnership. And so we would encourage everyone to come back and hear what we have to say in next quarter because we believe that the reduced allergenicity product will definitely have a fit among retail shoppers, where specialty flours have flown off the shelves at the same or increased pace compared to regular flour, which we all have heard about being in short supply these days. So we're very excited about the opportunity to enter that market later this year.

And our next question will come from the line of Steven Ralston from Zacks.

Could you expand on your hemp hub model that you mentioned in the press release, at what stage are you of the 6 locations? I assume you're more advanced in Hawaii and California.

Sure. Sarah?

Sure. Happy to. So our model for rolling out our hemp business, which is brand new to us this year was to ensure that our farmers can be successful growing hemp in a regulated environment. So we put agronomists on the ground to serve our farmers through very frequent contact and ensure that they're successfully farming hemp. So we have established our footprint in the Pacific Northwest, headquartered out of the Portland area. We have a footprint in California, both at our Davis headquarters here and then further south in the Central Valley of California. We also have established a foothold in Florida, which is new to the hemp industry, but is growing rapidly. And we continue to build out our capabilities in the Mountain West and in the desert -- Greater Desert area, anywhere from Imperial through Yuma, Arizona down into West Texas. Obviously, Hawaii is a point of strength for us. We have not only agronomists who can service farmers, but also agronomists to service our own acreage there. So real on the ground experience happening every single day. We are continuing to look for the right place to position our Midwest locations. I hope that answered your question.

Yes, yes. With the -- just talking about the number of acres that you have in test fields, it sounds like you have about 30 now in Hawaii, and you said you're developing another 20. When will they come online?

They're coming online as we speak.

In Hawaii. We also have a research field station in Far Southern California in Imperial County.

Yes. That was my next question, how many acres are there?

10.

10. Moving over to soy. Could you give some color on the Expoagro? Last year, in the press release, it said there were about 1,200 attendees that came actually to your pavilion, even though we know well over a 100,000 attend overall. Could you give some color of how many people came to your pavilion this year? And what was their attitude? And what was the strength of the growers that wanted to register?

Sure. Let me get you the exact number of folks who participated. I don't want to give you wrong information. I can give you some color off the top of my head about the tenor of the discussion. So Argentina last year suffered through a pretty significant drought, which served to really highlight the strength of HB4 soybeans in both the smaller test plots that we had at Expoagro and also in farmers' fields where we were running demonstration trials. So we came into Expoagro with already a good sense that growers perceive this as a highly valued trait, additionally as herbicide tolerance. So we focused on the strength of this trait in our demonstrations at Expoagro against resistant weeds, and so we had a really successful show. In fact, we have about 10x more growers sign up to produce seeds for us in the coming fall season, which would begin starting in August or September than we actually may need. So we have the lucky situation where we're going to have the ability to pick our partners. It's really a lucky situation. The desire for the growers in Argentina is to have new innovations. And they continue to support our development, and we today have -- I'm digging through to get you a number as quickly as possible. I'll have to come back to you with a number, I apologize.

That's okay. We can talk off-line later. When you said 10x more growers versus the acreage, would it be comparable 10x as much acreage?

I misspoke, it's 10x more acreage, not 10x growers.

Okay. And moving to the corporate level, your guidance is for $10 million in revenues this year. And well, you're a third of the way there already with the GoodHemp. But also, you said that your legacy product, GLA is strong. I'm just looking through my model. And it looks like you'll have over $1 million in revenues there this year. Am I off?

No, that's a fair estimate.

Okay. And lastly, concerning this Paycheck Protection Program you applied and received over $1 million there. Do you plan to apply for forgiveness? And if so, do you expect to be -- the loan to be forgivable?

Pam, you want to take that one?

Sure. I would say that, yes, we do plan to apply for forgiveness, and we believe that we will qualify, we'll have the qualifiable expenses to get that forgiveness.

And our next question will come from the line of Robert Smith from Center for Performance Investing.

I hope you guys are doing well. And Matt, can you just reference the possible headwinds down in Argentina due to their financial difficulties and also the -- they're entering, I guess, their winter with the virus.

So is your question, are we concerned about that?

Yes.

No. We have a very formidable partner in Bioceres, who is on the ground, well entrenched. And as Sarah just laid out, we continue to progress the introduction and the testing of the soybeans with farmers. So at the moment, we don't see any reason for unnecessary alarm or concern that we won't be able to move forward with our plans. So I would say provided nothing deteriorates meaningfully, we remain confident in executing on our plan.

Okay. I assume that the longer-term growth targets remain -- the company remaining in looking beyond this year that you stated?

Sorry, Robert, can you say that one more time?

The longer-range targets that you've stated beyond 2020 are still intact. I mean, they haven't been disturbed at all?

Well, we think it's prudent at this point to provide visibility on 2020. I have no reason to believe if we're successful executing 2020 as we've projected that the years thereafter, won't be in line with the significant growth that we've outlined before. But I do think that we want to be a bit more careful and not go beyond 2020 at this point. It would be probably -- it's prudent to just stick with the guidance that we have in the earnings release today.

So you stated the figure beforehand. Are you kind of withdrawing that?

No, I'm not withdrawing it. I'm just reinforcing...

So no, you're not emphasizing it. I got it.

That's right. Exactly.

Okay. And yes, I can't think of -- several of my other questions have already been answered. So I wish you the best of luck and look forward to hearing further progress.

And I'm actually not showing any further questions at this time. I'd like to turn the call back over to Matt for any closing remarks.

Great. Well, thank you, everyone for tuning in. We hope you stay safe and healthy, and we look forward to continuing to report our progress. Have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.