Arcadia Biosciences, Inc.

Good afternoon and welcome to the Arcadia Biosciences third quarter 2022 earnings conference call. Today's presenters will be Stan Jaycott, President and Chief 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 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-Q. If you'd like to ask a question during the presentation, please press 01 on your touchtone phone. With that, I will now turn the call over to Stan Jaycott, CEO. Sir, you may begin.

Good afternoon, and thank you for joining us today for our 2022 third quarter conference call. Our third quarter results represent continued progress on our path to profitability that we've discussed on previous earnings calls as part of our long-term strategy called Project Greenfield. As noted in our press release, key highlights include, one, our distribution for good wheat doubled from the previous quarter, and two, our gross margins improved to 28%, validation that we are on the right track. Our Q3 revenues reflect the transformation to a leaner, more focused company. We have divested unprofitable lines of business, And Q3 does not include any non-recurring revenues from grain sales or the bio series HP4 sodium milestone that we reported in Q1 and Q2. This is all part of our business plan and it is working. While our Q3 revenues were below Q1 and Q2, our Q3 gross profit dollars were higher than the first two quarters combined. So I'm extremely pleased with the quality of our third quarter revenues, our improvement in gross margins, and the distribution gains we have made on GoodWeek in a very short period of time, which is a perfect transition to the first topic I wanted to discuss with you today, the success we are having with GoodWeek. On our Q1 earnings call in mid-May, we announced that GoodWeek Pasta had officially launched in the retail channel in May 2022. On our Q2 earnings call in mid-August, we communicated that we added the e-commerce channel with our launch on Amazon, and we discussed that we added more and more retailers at a rapid pace as interest grew around our great-tasting, better-for-you pasta. At that time, GoodWe pasta was available in nearly 500 stores, significant progress for a brand that launched just two months earlier. We also projected that store count would double by the end of the year. Today, I'm excited to report that our distribution has already doubled in the third quarter alone, with GoodWe pasta now available nationwide in nearly 1,000 retail stores. This is an amazing accomplishment for the GoodWeek brand and Arcadia as a whole, so I would like to take a minute and thank the team for all of their hard work and collaboration in making this launch a success. It was truly a cross-functional team effort, and we are extremely proud that the launch is exceeding our own internal expectations. Beyond the launch of new stores, we are committed to supporting our retail customers and driving trial of GoodWeek where we already have placements. There are a variety of programs that we are utilizing to drive awareness and traffic to our partners, including price promotions, coupons, displays, ads, social media, and influencers. Needless to say, I am delighted with the progress we have made and the feedback we have received from our partners regarding the differentiated value proposition Goodreads is bringing to the pasta aisle. I'm also encouraged by how the pasta category has performed. Based on category data from Nielsen for the 13 weeks ending September 24th, which essentially covers our third quarter, pasta category sales grew 25% compared to the same period last year, and units were up 2.4%. We believe the pasta category will continue to be a bright spot in the face of rising food costs and a tough economic environment. So we feel very good about the future prospects for good wheat. And as we've discussed before, pasta is just one of many categories where we believe our proprietary superior wheat can add value. I will touch more on this later, but let me shift now to our other core brands, Zola Coconut Water and ProVault Pain Relief. The Coconut Water category continues to grow, primarily driven by price increases. In the 13 weeks ended September 24th, category sales increased 9.7% while units declined 6%, which was an improvement from the previous quarter when units declined 15%. Zola continues to perform well and is one of only a handful of brands in the category that is growing both dollar sales and unit sales. Dollar sales increased 8% and unit sales grew 4% compared to the same period last year. As we mentioned last quarter, we see opportunity for Zola to increase distribution as consumers prefer the taste of Zola to other leading coconut water brands in a blind, unbranded taste test. As a result, we are refreshing our packaging, working on new innovation, and are taking our message to retailers in order to gain new shelf space. Moving to ProVault, the topical pain relief category sales declined 3.8%, and units fell 9.9% in the 13 weeks ending September 24th. The CBD market has been hit especially hard in the current economic environment as a result of higher price points, and we have seen some retailers step completely out of CBD products. Despite this tougher-than-expected landscape, ProVault distribution increased 6%, and sales grew 51% compared to the same period last year. Now I want to shift gears and provide an update on our exit from certain business lines. As we've previously discussed, Arcadia has been focused on simplifying its operations and placing an intense focus on businesses that, one, have a large opportunity and a differentiated product, two, the ability to easily scale a business without significant capital, and three, meets our profitability goals. In Q1, we announced we would wind down our legacy co-packing business that we inherited as a part of our 2021 acquisition. And in Q2, we reported that this was complete. We also communicated in Q2 that we would divest our manufacturing facility as well as the Savvy Naturals brand. And I'm happy to report that those transitions were completed on August 1st. These changes simplified our business, freed up cash, and allowed us to focus on higher margin SKUs. This focus resulted in higher quality revenue and a nearly 1,800 basis point improvement in gross margins. This level of improvement is significant, so I think it is important to spend a few minutes to talk about the deliberate financial progress made at Arcadia over the first nine months of 2022 compared to the first nine months of 2021. Our revenues of approximately $9 million are up 4.3 million, or 94%, compared to the same period last year. And while 2021 does not include a full nine months of acquisition revenue, If we remove those sales completely from both years, our revenues have still increased 40%. During the same timeframe, our gross profit has increased more than $1 million, leading to a 1,500 basis point improvement in our gross margin through the first nine months. This is a testament to the decisions we have made to unwind underperforming businesses and focus on profitable growth. At the same time, our total operating expenses, including cost of goods sold, of 21.9 million has decreased 4.4 million, or 17%, which validates our ability to grow the business while keeping our costs under control. Our reported loss from operations the first nine months of approximately 13 million improved by 8.7 million, or 40% compared to last year. And finally, our use of cash from operations improved by 7.9 million, or 41%, during the first nine months of 2022 compared to the same period last year. So while there's a lot of work still to do, we have made tremendous progress simplifying our business and focusing on the most profitable brands while doing a better job of managing our cash. And speaking of cash, we ended the third quarter with $22.7 million in cash and cash equivalents, bolstered by the $5 million of gross proceeds from the registered direct offerings in August. We believe this is sufficient to fund our operations through 2023. Currently, we are in the exploratory phase of evaluating potential acquisition targets that would allow us to bring the Good Wheat value proposition to an existing brand in the new wheat-based category outside of pasta. As I briefly mentioned earlier in my comments, pasta is just one of many categories in the grocery aisle where our wheat can provide significant differentiation. We believe there is a tremendous opportunity to scale our business faster by purchasing an existing brand in a different category that already has broad shelf placement and established distribution. This initiative is a component of Project Greenfield, which we laid out in prior quarters. As a reminder, the first strategy in Project Greenfield was to establish good wheat footholds in categories representing over $10 billion in annual consumer spending. Furthermore, we indicated that that strategy could include a mix of product launches as well as potential acquisitions. To execute this initiative, we may access the capital markets earlier than planned in anticipation of using those funds for acquisition purposes and increasing sales and marketing investments for further good weed expansion. We are in the very early stages, so more to come, but I wanted to share with you our current thinking, and I will keep you updated if there is any news to share on this front. This concludes my prepared remarks, so with that, I will now turn the call over to Pam to discuss our 2022 Q3 financial results in more detail. Pam?

Thanks, Dan. Good afternoon, everyone. As Dan noted, we had anticipated reduced revenue in third quarter as we have turned our focus on our higher margin brands. Total revenues recognized for third quarter 2022 were $1.9 million compared to $2.4 million in the third quarter of 2021 for a decrease of 21%, but resulting in a positive growth margin of 28%. And as mentioned earlier, third quarter year-to-date revenues were $4.3 million higher than third quarter year-to-date 2021 for an increase of 94%. The year-to-date gross margin was 8%, impacted by the first half sales of underperforming businesses, which we have since divested. Lower revenues from co-packing and savvy natural product sales accounted for the majority of the decrease for the quarter. Partially upsetting this unfavorability was the good wheat cost of revenue recognized this quarter. And as previously communicated, we launched our Good Wheat Pasta at the end of second quarter this year and are very pleased with the progress to date. The 4.3 million favorability and year-to-date revenues for 2022 as compared to 2021 was driven by a full nine months of coconut water and body care product sales, in addition to the Good Wheat Pasta and grain sales this year. Total operating expenses of 6.5 million in third quarter of 2022 was 4.6 million less than the 11.1 million recognized in the third quarter of 2021, and third quarter year-to-date total operating expenses was 4.4 million lower than the same period in 2021. As Stan mentioned, we have been focused on cost containment, which is reflected in our results here. Cost of product revenues was lower for the quarter, in line with the lower revenues recognized. SG&A expenses were 1.2 million favorable for the quarter, due to the impairment of property and equipment that was recognized in third quarter 2021 with an immaterial amount recognized in third quarter 2022. Also impacting the total operating expense favorability this quarter was the $1.5 million lower SG&A expense recognized in 2022 as compared to 2021, primarily driven by reduced employee, lease, and consulting expenses. Cost of product revenues for the first nine months of 2022 was $8.3 million, or $3.3 million higher than the $5 million in the first nine months of 2021, the result of higher revenues recognized during the same period. The other components of total operating expenses were all lower during the first nine months of 2022. SG&A was $2.9 million lower, driven by the lower employee lease and consulting expenses, along with the absence of acquisition fees recognized in 2021. R&D was $2.3 million lower as the company's focus has turned to commercialization this year. And as discussed on the second quarter call, a gain on the sale of Vertica in the amount of $1.1 million was recognized in the second quarter of 2022 with a $10 million milestone fee from BioSeries triggered by the Chinese approval of HB4 soy. Net loss attributable to common stockholders was $2.9 million in third quarter 2022 versus 2.2 million in third quarter of 2021. Lost from operations was 4.1 million lower, as we just reviewed, and offsetting the favorability was 2.9 million greater non-cash income from the change in fair value of common stock warrant and option liabilities in third quarter 2021 compared to third quarter 2022, along with the 1.1 million gain on extinguishment of the PPP loan in third quarter of 2021. We are back to remeasuring the change in fair value of common stock warrant and option liabilities with the preferred investment options issued in the August registered direct offering. Net loss attributable to common stockholders in the first nine months of 2022 was $11.1 million versus $5.4 million for the same period in 2021, a difference of $5.7 million. Loss in operations was $8.7 million lower third quarter 2022 year-to-date versus 2021 year-to-date, but 2021 included a $10.2 million gain from the sale of BioSeries shares that was not present in 2022. This concludes our financial highlights for the third quarter and first nine months of 2022. Thank you very much for your time and attention, 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'd like to ask a question, please press 01 on your touchtone phone. If you are using a speakerphone, you need to pick up your handset first before pressing any numbers. Once again, if you'd like to ask a question, please press 01 on your touchtone phone. Our first question comes from Ben Cleave from Lake Street Capital Markets. Your line is now open.

Ben Cleave All right. Thanks for taking my questions here this afternoon. First question on gross margins. Great progress there in the quarter. You know, with this now, you know, really streamlined business that you have with, you know, three kind of primary product categories and the first quarter of material gross profit, can you talk about kind of the margin characteristics across each of those three product categories? Because I'm curious if they're kind of relatively in line with each other or individual products that really drive this number right now.

Yeah, thank you for the question, Ben. we're at this point for our three product lines you know all of the different individual skews are a little different but we would say that our line of sight to growth would keep us in the same gross margin range as we experienced in q3 okay um thank you and then um

a couple of questions on good wheat specifically. So, so first we're grabbing retail distribution. I mean, you know, great, great progress there, you know, expanding store account as quickly as you did. You know, I'm wondering now, you know, what comes next? Can you help us kind of frame, you know, realistic expectations for retail count, uh, you know, progressing over the next few quarters, say, you know, through the end of 2023 or some kind of timeframe in that, you know, in that, in that range.

Yeah. So again, we continue to, uh, present good wheat to many retailers across the nation. And depending on shelf reset timeframes, which will last all the way through this time in 2023, you know, we would expect to get to the three to 5,000 distribution points by the end of 2023.

Okay. Perfect. Perfect. Thank you, Stan. And then, um, uh, here's a lot unclear on, on the opportunity to integrate good wheat into, you know, other, other categories potentially via acquisition. I'm wondering if you can also elaborate on your kind of expectation on expanding the addressable market beyond CPG, you know, that you control, you know, via, you know, B2B revenues, via the ongoing trial underway with IOSeries in South America. You know, is there any kind of updates you can provide on either of those fronts?

Yeah, we still continue to, look for partnerships, uh, and continue to leverage the partnerships we currently have with companies like file series. Uh, but there's nothing really new to report, uh, for this year, uh, at this point, nothing new in the pipeline that will significantly impact our projections.

Okay. All right. Very good. Um, and then, uh, you know, one, um, one last one for me, you know, with, with all the, uh, you know, kind of moving pieces here recently with, you know, exiting businesses and exiting the, you know, your processing facilities. Are there any kind of, you know, cash inflows, outflows here expected here from, you know, Q4 and beyond around this broad initiative of streamlining your operations, or have those all really been realized, you know, as of Q3?

Yeah, Ben, I'll turn that over to Pam to answer.

Hi, Ben. I don't think that we don't expect a lot from the cash perspective. I mean, we still will be evaluating, you know, as we do each quarter and especially at the end of the year, the inventory balances and the asset balances we have at the end of the year. And we will be, you know, looking at those to right-size them to fair market value. So there could be, you know, some additional write-downs, but we really don't expect much in the way of cash going out.

Okay. All right. That makes sense. All right. Well, I think I'm in good shape. Congratulations again on some really good progress on several fronts, and I'll get back to you.

Thank you.

Thank you. Our next question comes from Dipesh Patel from HC Wainwright. Your line is now open.

Hi, guys. Thanks for the update. I'm just standing in for Ram Selvaraju at HC Wainwright. When do you plan to reach operating cash flow break-even?

Yeah, so as a part of Project Greenfield, we expect that to happen in early 2025.

Okay. And then with regards to some of your products, do you expect to receive any consideration for whatever remaining hemp-related inventory you are still holding? And if so, what might that look like?

With that, I'll turn it over to Pam.

Sure. So we, you know, the CBD market has been pretty challenged lately, and we are still looking to monetize the hemp assets that we have on our books. I mean, it's a continuous evaluation, and depending on how that market outlook truly does look for next year, we'll just have to see. But it's pretty challenging right now.

Okay. Great. And then last question, how would you characterize the level of commitment among distributors for your GoodWe product line, and what strategies are they employing in order to drive that uptake?

Yeah, so our partners that we've listed, GoodWe are very satisfied with our performance. I would say for most of them, we were very early on in the trial driving period. As you know, once we secure distribution, we have to get in queue for promotions, which include feature ads, include display. So we are just now starting to see some of those promotion activities hit the marketplace. And with that, we see the corresponding lift and corresponding trial. But yes, we're... The acceptance has been strong. The commitment to our brand has been strong. And as we mentioned in the remarks, we're looking at all the typical promotion tools and marketing tools to continue to improve our velocities.

Great. Thank you, Sam and Pam.

Thank you.

And presenters, I show no further questions in queue at this time. I will turn the call back to Mr. Jay Koch for closing comments.

Thank you. So in closing, we have made meaningful progress this year in transitioning Arcadia to a more lean and focused organization. Our financial results continue to improve as evidenced by our significant increase in gross profit in Q3, as well as our ongoing management of expenses. And Goodwill continues to outperform expectations with distribution doubling in the third quarter alone. We believe that our numbers validate our ability to execute on the long-term plans we have previously shared and look forward to sharing with you our full year results on our next call. Thank you again for joining us today. Have a great afternoon, everyone.

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