Arcadia Biosciences, Inc.

Good afternoon and welcome to the Arcadia Biosciences second quarter 2022 earnings conference call. Today's presenters will be Stan Jaycott, 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 file, 10Q. With that, I will now turn the call over to Stan Jaycott, CEO.

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 BioSeries 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 four 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 Vertica joint venture to BioSeries in 2020. Pam will provide further detail in the financial part of today's presentation. Excluding the impact of the BioSeries 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 Vertica to BioSeries. 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 Good Wheat, two, insights into our other two 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 Good Wheat. We were extremely excited to officially launch our Good Wheat pasta during the second quarter in both the retail channel and online through Amazon. Good wheat pasta contains four times the fiber of regular pasta. With eight 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 good wheat extend beyond fiber. It also has nine 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 one simple ingredient, our USA farm-grown wheat. But the most exciting part is that while good wheat contains all of the nutritional benefits just mentioned, it does not compromise on taste or texture. In recent taste tests, good wheat performed significantly better than a leading veggie pasta and on par with a leading traditional wheat pasta. And the texture is superior, as our pasta is always al dente, never bland or mushy. Our retail customers are recognizing the benefits associated with Good Wheat, and we have received very strong interest early on. Since our launch a little more than two months ago, we have added several new retail customers and are currently shipping our Good Wheat pasta to nearly 500 stores nationwide. I am extremely pleased at the level of interest and retailer commitment we are seeing for this new brand and optimistic that Good Wheat 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 GoodWe 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 are up four times 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 preferred Zola nearly two to one 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 GoodWeek, 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 three 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 two 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 were 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 1st. 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. These two 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 gather our leadership team together at the end of April to begin laying out a long-term roadmap to transform Arcadia into a sustainable, profitable growth company. We are pleased to announce the introduction of Project Greenfield, our company's three-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 four key strategies that I'd like to share with you today. The first strategy is to establish Good Wheat footholds in retail categories representing over $10 billion in annual consumer spending. POS is the first category for Good Wheat, 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 number three 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 BioSeries, which utilized 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 food service and B2B products to expand our wheat presence 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?

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 six months of 2021 for an increase of 217%. Product revenues generated from Zola coconut water sales, one 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 licensed revenue stand discussed briefly at the onset of the call. As you may recall, we sold our half of the Vertica Joint Venture, which was formed to advance and deregulate soybean varieties, in November of 2020 to our partner, BioSeries. In conjunction with the sale, we licensed multiple traits to BioSeries, and the net funds we received at the time of the transaction were allocated between gain on the sale of the transaction and licensed revenue. we've applied that same allocation methodology to the milestone payments totaling $2 million we'll now receive from BioSeries. 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 non-routine transactions affecting second quarter total operating expenses. The $1.1 million gain on the sale of Vertica offset by $460,000 right down to fair market value of the CBD oil inventory that we produced, as well as a $346,000 impairment of fixed assets and a 393,000 inventory write-down associated with the recent outlicense of the Savvy Naturals brand. The inventory write-downs are primarily related to our non-core 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 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 investments. 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 second quarter 2022 year to date compared to 3.2 million 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 BioSeries 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?

Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touchtone phone. And I'm standing by for questions. And our first question comes from Ben Cleavey from Lake Street Capital Markets. Go ahead, Ben.

All right, thanks for taking my questions and 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. In the first quarter, if you back out grain sales, I came to about a $1.9 million revenue number. And in the second quarter, if you back out both grain sales and the bio series revenues, I got about 2.6. Pam, is that about right?

Let me see. Yep, that's right for Q1. Okay. And then you said for Q2, you were backing out the $862,000, right?

Back out, yeah. And then you said 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, $2.6 million in Q2 revenue?

Yes, that sounds about right.

Okay. 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 the products, not including Good Wheat. Is that right? So Good Wheat was a negligible contributor in the quarter?

That's right. Yep.

Okay. Okay, great. And then regarding Good Wheat. 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? You know, what did you start with on day one? Where did you end the quarter? And, you know, where do you kind of anticipate that store count will be, you know, in, I don't know, three to six months, end of the year, some kind of metric like that?

Yeah, well, we were at about 200 stores or so by the end of the quarter. And, you know, 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.

Okay, great, great, great, great. And it sounds like you saw some real, you know, I don't know, given how short this is, I'm not sure what the right way to frame this question is, but, you know, it sounds like you saw some really good kind of sequential improvements from, you know, one week to the next, one month to the next. you know, solid same-store sales improvements in that, you know, in the GoodWeek brand? Is that right so far in this very limited timeframe?

Yeah, it's been limited. And, again, we're very happy with, you know, the retailer commitments that we've seen and, you know, 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 terms.

Got it. Got it. Okay, great. you talked also about a number of kind of moving pieces around divestitures and, you know, exiting businesses, et cetera. Can you talk about kind of the net cash impact that you're, you know, that you're looking for here when the dust settles in terms of both brands and facilities that you're going to be exiting?

Yeah. So, you know, for this year, it's going to be basically a net break even, 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.

Okay, perfect. Yeah, and I heard that on the call. It's good to clarify that you don't have – you're not expecting, you know, some kind of material, you know, lump sum from a divestiture. Okay, perfect. And then one last one from me here, and then I'll get back into Q. I mean, this three-year plan that you're – introducing today. You know, what kind of – what are the kind of benchmarks here that we can look for for the next couple quarters? Three years is a long way away, but, I mean, what are the kind of, you know, the real initiatives here over the next, you know, three to six months, Dan, that we can really look for to show, you know, real improvement in the financials born from this initiative?

Yeah, so the Project Greenfield is really – heavily reliant on good wheat and the expansion into pasta expanding beyond just the 500 stores that we are currently in, as well as expansion into new categories. But we also are going to 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.

Got it. Okay, very good. Well, I'll look forward to further updates on that when the time is right. And, again, congratulations to you and the team on really nice sequential improvement here from the first to the second quarter.

Thank you.

Thanks, Ben.

And our next question comes from Brian Wright from Roth Capital Partners. Go ahead with your question.

Thanks. Good afternoon. I wanted to talk a little bit about the 500-course program You mentioned nationwide. Is it kind of a broad nationwide strategy at this point, or are you kind of testing regionals and then targeting, you know, then figuring out kind of the cadence and how to go about it? I just wanted to think about kind of geographically how that, you know, looks and the strategy there.

Yeah, 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 products properly and to understand the right kind of go-to-market model. You know, everything from promotion to shopper marketing to, you know, other trial driving initiatives. And so those retailers are located, you know, in the east or in the Midwest or some on the west coast. So they are across the nation. But, you know, we are going to be taking those learnings and then expand in 2023 to more retailers.

In that promotional support, does that include in-store marketing and just any kind of color you can provide on what's going on in the stores themselves?

Yeah, we have about, I'd say about 70% of our efforts on Good Wheat right now are would be considered shopper marketing. It's using the retailer's tools. It's using geo-targeting with some of the messaging and digital advertising to support driving those consumers to those retailers. Again, every retailer has their own mix of tools which are successful for them. You know, obviously they will always include, you know, the major ones like, you know, features and display.

Right. Thank you. And last question for me is you had mentioned in the R&D, you know, keeping some product formulation R&D and just was, you know, curious on kind of what efforts are going on in that arena. Yeah.

Yeah, so that's primarily around, again, our Good Wheat brand, and we are already starting formulations in other categories beyond pasta, working with experienced COPAC partners to help develop the correct formulas that will help us break through and win in those categories.

On that, can I just follow up? Would mac and cheese be included in your definition of pasta, or would that be different?

That would be a different category.

Great, great. Okay, thank you so much. Congrats on the quarter and all the progress. Thank you.

I think we have no more questions at this time. I'll turn it back to the speakers for final comments.

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 right-sizing the organization. Our good repost has 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 roadmap that will allow us to significantly grow this business and reach profitability. We feel that 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.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.