Arcadia Biosciences, Inc.

Good day, and thank you for standing by, and welcome to the Arcadia Biosciences Q4 2022 Financial Results and Business Highlights Conference Call. At this time, I'll participate on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would not like to hand the conference over to Arcadia Biosciences.

Please go ahead.

Earnings Conference Call. I'm T.J. Schaffer, Chief Financial Officer, and presenting with me today will be Stan Jacob, President and Chief Executive 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 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 our most recently filed 10-K. With that, I'll now turn the call over to Stan.

Good afternoon, and thank you for joining us today. I'm excited to speak with you about our fourth quarter and full year results for 2022. But before we dive into the results, let's take a moment to reflect. It was exactly one year ago today that I spoke to you for the first time, so I wanted to highlight the tremendous progress Arcadia has made over the last 12 months. On that very first earnings call in March 2022, we highlighted the need to reduce complexity, develop robust processes, and nail the priorities in order to focus on activities with the highest likelihood of bringing long-term value to our shareholders. As part of this initiative, we introduced a disciplined approach to evaluating our businesses and identifying priorities based on the size of the opportunity the ease with which we could scale the business, and the level of expected profitability. During our May earnings call, we announced that we had made the decision to exit a body care co-packing business that we had inherited as a part of the 2021 acquisition. While this business generated revenues and increased our capacity utilization, it resulted in significant losses. We estimate that exiting this business will save us $1.5 million to $2 million on an annualized basis. In June, we officially launched our good wheat pasta in both a retail channel and online through Amazon and have experienced significant growth in distribution in the second half of the year, which I will touch on in more detail in a few minutes. On our August earnings call, we introduced Project Greenfield, Arcadia's three-year plan to unlock potential and create shareholder value. As a reminder, the four key strategies are as follows. One, establish good wheat footholds in retail categories representing over $10 billion in annual consumer spending. Two, drive share growth in key brands where there is a large opportunity to scale the business and deliver attractive margins. Three, leverage partnerships and build future licensing royalty streams. And four, build an agile organization and winning culture. In regard to strategy number two, we communicated that we made the decision to divest our manufacturing facility in Los Angeles, as the manufacturing of our body care products was a complex process that included a large number of inputs and tied up cash. At the same time, we reached an agreement to license the Savvy Naturals brand to its original founders, further simplifying our body care business while reducing the number of Arcadia employees by about one-third. These strategic decisions allowed us to focus on the most compelling opportunities and avoid allocating our resources to unprofitable businesses. The benefits were almost immediate, as we reported Q3 gross margins of 28% in November and saw additional improvements in Q4. For the full year, despite the fact that we exited several business lines, resulting in lost revenue, our 2022 revenues increased 47% versus 2021, and our reported gross margins were positive for the first time in Arcadia's history. During the same period, our spending on research and development declined by 61%, and our SG&A spending was 21% lower than prior year. And perhaps the most significant impact was on cash. In 2021, our cash use and operations was $25.9 million compared to $14 million in 2022, a decline of almost 50%. I'm extremely pleased with the progress this team has made over the last 12 months, and while there is still plenty of work to do, I think it's important to celebrate what we've accomplished thus far. So let's turn our attention now to Good Week. Deposit category continued to expand in the last three months of 2022. Based on Nielsen data for the 13 weeks ended December 24th, unit sales increased 3% and dollar sales rose 25% driven by pricing action across the category. Looking at the last 52 weeks, units grew 2% while dollar sales increased 21%, leading to category sales of $2.9 billion. GoodWeek continued its impressive distribution gains in Q4 as store count increased 34% in a quarter not normally associated with significant new shelf placements. From the initial launch in June, we have added more than 1,200 stores in seven months, beating our own internal projections by more than 50%. As we look forward into 2023, our focus will remain on gaining significant new distribution and launching or acquiring new categories. But we will also support our retail customers through a variety of programs that will drive traffic to our brand and increase velocities. One example of a program that I'd like to spend a couple minutes talking about is the HeartCheck certification. In mid-January, we announced that Goodreads Pasta received the American Heart Association's HeartCheck certification on all five varieties. According to the American Heart Association Heart Disease and Stroke Statistics Fact Sheet, heart disease accounted for approximately 13% of deaths in the United States in 2018, and heart disease remains the number one cause of death in the United States. Established in 1995 by the American Heart Association, the heart check mark gives consumers an easy, reliable system for identifying heart-healthy foods. Based on the June 2021 W5 market research among millennials and Gen X, the heart check symbol is far more likely to drive purchase interest than other certifications like Organic, plant-based, or gluten-free. The same study showed that heart health importance ranked number two out of 23 claims, just behind great sorts of protein. Additionally, the 2019 Hartman Group report on health and wellness cited that 78% of consumers look for foods and beverages that are good for my heart. Aside from the outstanding health benefits, The HeartCheck certification also differentiates us from every traditional pasta competitor made with wheat, and to drive awareness and trial as a large number of consumers shop for foods with benefits. And finally, we believe the certification mark makes good wheat less susceptible to distribution losses compared to its peers that lack heart health claims. So, in summary, with its high fiber, lower sodium, zero saturated fat, good wheat meets the criteria for a heart-healthy pasta and provides consumers with a better for you option that delivers superior nutrition with a taste and texture of traditional pasta. Shifting gears now to coconut water. The coconut water category experienced a 4% decline in units, but a 10% increase in dollars for the 13 weeks ending December 24th. As we have seen throughout the year, pricing was the primary driver of category growth in the last quarter of 2022. For the last 52 weeks, units declined 8%, but sales were up 11% to $433 million. In the fourth quarter, Zola sales declined compared to the same period last year, driven by some distribution losses in Q3 as a result of supply chain constraints. For the full year, Zola gained market share, as sales were up 12% from our price increase in the first half of the year to offset higher freight costs. Despite the fact that 2022 was a challenging year from a supply chain perspective, We are optimistic about the prospects for Zola moving forward. We start to see freight costs improve toward the end of 2022, and that progress has continued in the early part of 2023. We are investing in the brand, refreshing our packaging, and plan to launch innovation later in the year. Moving now to body care. As mentioned on prior calls, as well as in my previous comments, We licensed the Saudi Naturals brand in August 2022 and retained the CBD brand, Soul Spring and Pro Vault, due to their higher margins. However, the CBD category has experienced four obstacles that impact the growth opportunity of these brands. One, the vast majority of U.S. retailers will not take CBD products, including online retailers such as Amazon. Two, many retailers that do sell CBD put the product behind locked glass doors, which has had a significantly negative impact on sales. Three, CBD products cannot be marketed on large mainstream platforms such as Google Search, Facebook, and Instagram, limiting the ability to advertise the product. And four, many retailers that once sold CBD have either significantly reduced the set or stepped out of CBD completely. Soul Spring was a victim of loss distribution. There's several retailers that carried Soul Spring opted not to carry CBD products any longer. As a result, Soul Spring lost more than half the distribution it once had, and ProVault has struggled to make meaningful gains, so we have made the decision to explore strategic alternatives for these two brands. As we consider our options, we plan to continue to sell both brands in our current retail footprint, and we'll keep you updated as any new information comes to light. The last two topics I'd like to cover before turning the call over to TJ are the reverse stock split in our March 2023 capital raise. At the end of September 2022, we were notified by NASDAQ that our stock price had closed below $1 for 30 consecutive days and that we had until the end of March to get the stock price back above $1 or we would be at the risk of being delisted. Over the next several months, the stock remained under pressure and continued to trade lower despite positive announcements such as the doubling of good week distribution in November 2022 and the heart check certification from the American Heart Association in January 2023. And while we could have applied for an extension, we felt that the best course of action would be to move forward with the reverse stock split so we could focus on executing Project Greenfield. On February 15th, we held a special shareholder meeting where there was overwhelming approval to initiate the reverse stock split. After the special shareholder meeting, our board approved a 1 for 40 reverse stock split that became effective March 1st. After the reverse stock split went into effect, we were presented with an opportunity to raise additional capital. Access to capital in the current environment is extremely challenging, and we don't know how long that uncertainty will last. As we have previously discussed, we are evaluating potential acquisitions to help scale the business and reach break-even faster than planned, but that will require additional capital. As a result, we decided to take advantage of the opportunity, and on March 2nd, we announced a transaction that would provide us gross proceeds of $6 million. While decisions such as reverse stock splits and capital raises are always difficult, we believe it is the right move to ensure the long-term success of Arcadia. With that, I will turn the call over to TJ to discuss our 2022 financial results.

Thank you, Stan, and good afternoon to everyone joining us on the call today. As Stan mentioned, Arcadia has made tremendous headway that has resulted in significant financial improvement and today I will focus primarily on the progress we made in 2022. But before I discuss the full year results, I do want to spend a few minutes discussing Q4 in order to provide you with some perspective into our operating performance, as well as the drivers of that performance. In Q4, our total revenues of $1 million were $877,000 below the previous quarter. The primary drivers were seasonality in Zola, where Q4 is historically the softest quarter for the entire category, as well as distribution losses in both Zola and Solspring that Stan mentioned earlier. Compared to last year, Q4 revenues were down $1.2 million with about three quarters of the variance due to revenues from brands that were no longer part of our product portfolio. The remaining variance was attributable to loss distribution in Solspring. Our cost of revenues as reported in Q4 was approximately $1.6 million. Included in this number is $941,000 of write downs related to body care inventory, hemp seeds, and CBD oil. These write downs were necessary as the prospects for these products have significantly diminished. We also believe we have minimized the risk of future write downs related to these legacy products as 86% of our inventory at year end is related to either Good Wheat or Zola and the remainder consists of only finished goods that we plan to sell in 2023. So the performance of the underlying business was actually stronger than it's ever been in Q4 as a result of the higher quality of revenue. With that, I will now transition to full year 2022. Our 2022 total revenues of approximately $10 million were 3.2 million or 47% above prior year revenues of $6.8 million. And while 2021 actual results only include about eight months of body care and Zola, even if we assumed we owned these brands from the beginning of the year, Our revenues still would have increased 11%, despite the fact that we exited several business lines in the middle of 2022. Cost of revenues for 2022 was $9.8 million, resulting in Arcadia's first full-year gross profit. Even more encouraging is the fact that our reported cost of revenues includes more than $2.3 million in write-offs. This level of increased profitability validates our strategy of focusing on brands that offer the greatest amount of opportunity, scalability, and profitability. Research and development expenses total $1.5 million in 2022, a reduction of $2.4 million, or 61%, compared to 2021. As discussed on previous calls, our transition to consumer products has resulted in a much smaller organization that is focused on product formulation as opposed to trait development. SG&A expenses of $18 million were $4.9 million or 21% lower than prior year, primarily driven by a reduction in headcount, lower facilities costs, and lower consulting fees as 2021 included body care acquisition costs that were absent in 2022. At the same time, our marketing investment increased 40% year over year to support the launch of GoodWeek. Going forward, we will continue to increase investment in trial and brand building marketing activities, but expect our SG&A to remain relatively flat as we reduce expenses in other parts of the business. Our reported loss from operations of $18.8 million was 16.7 million or 47% lower than prior year. The primary drivers of improvement were one, higher gross profit, which contributed just over $2 million. Two, a little more than $7 million from lower R&D and SG&A expenses. Three, $2 million in benefits from the BioSeries milestone payment. And finally, a $5.5 million favorable variance from lower write-downs in 2022 compared to 2021. The net loss attributable to common stockholders was $716,000 unfavorable to prior year as 2021 included benefits of $10.2 million related to the sale of BioSeries stock, as well as a net favorable variance of $5.7 million from the change in the fair value of warrant and option liabilities. Before I conclude my prepared remarks, I did want to highlight a couple of improvements in our balance sheet. First, while our accounts receivable balance of approximately $1.3 million is essentially flat compared to last year, there are meaningful changes in the composition. At the end of 2022, $1 million of the $1.3 million AR balance is related to the remaining BioSeries milestone payments, which was not on our books at the end of 2021. Offsetting this increase is a significant decline in the body care balances, given the separation from these businesses, as well as the challenges Stan alluded to earlier. Our short-term and long-term inventory declined from $6.9 million at the end of 2021 to $3.3 million at the end of 2022 as a result of the following factors. One, the write-offs associated with the legacy businesses. Two, the separation from business lines and lost distribution in body care. And three, the launch of GoodWeek and corresponding reduction in our grain inventory. Last, we ended 2022 with $20.6 million in cash and cash equivalents as our use of cash declined significantly from a use of $25.9 million in 2021 to a use of $14 million in 2022. As a reminder, we also raised net proceeds of $4.5 million in August of 2022. And subsequent to the end of the year, we raised net proceeds of $5.5 million in March that is not included in the $20.6 million cash balance at the end of 2022. Given our current use of cash, as well as the cash we have on hand, We believe we are well positioned to fund Project Greenfield beyond 2023. With that, I will now turn the call over to the operator for questions.

And thank you. And one moment, please. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by when we compile the Q&A roster. And one moment for our first question. And our first question comes from Ram Selavarju from HC Wainwright.

Hey, everyone. This is Mitchell on for ROM. Thanks for taking the questions. The first one, just wanted to touch upon the Good Wheat retail footprint expansion and just wanted to understand when we'll be able to see the real impact from a sales trajectory standpoint what will be meaningful if you could just provide some context around that uh we we'll expect in the second half of 2023 to see that become meaningful okay great thank you and then what are you planning to do with uh your coconut water and body care product lines uh do you consider these to be core elements of the revenue base, or do you think that they could be potentially spun out, kind of like the savvy naturals?

Yeah, so for Zola, we still see strong growth prospects, and as I mentioned, we are investing in marketing, both from packaging perspective and innovation, in order to continue to grow share in that category. For body care, there are lots of obstacles, so we are exploring all alternatives.

Okay, great. Thank you. And then just wanted to understand a little bit more about the legacy hemp business and the opportunity to potentially monetize this segment of the business, or do you think this is no longer feasible?

I'll turn that over to TJ to answer.

Yeah, so from a legacy business perspective, our archipelago... business we have written down all of the inventory we've written it off so it we're carrying no value on our balance sheet any longer from a hemp seed perspective we did significantly write it down we still have about two hundred thousand dollars in inventory on our balance sheet we will continue to try and sell that we have agreements with distributors in both the us and canada that continue to sell those products. And so our goal would be to sell through the remaining hemp seed inventory in 2023.

Okay, great. Thanks. And the last one for me, if you could just provide any commentary on when you potentially see yourselves reaching profitability.

Yeah, so Project Greenfield had a three-year path of profitability. We are ahead of that plan currently through the end of 2022. You know, all the aspects that TJ had commented on, both gross profit improvements, operating expense reductions, all those have kind of helped us in our trajectory. So, but yeah, we are looking at still that kind of three-year horizon when we launched it in June.

Great. Thank you all so much.

Thank you. And thank you. And one moment for our next question.

And our next question comes from Ben Cleave from Lake Street Capital Markets.

Your line is now open.

All right. Thanks for taking my questions. First one on the fourth quarter performance specifically within GoodWeed. I appreciated your comments on the sequential challenges from Zola and body care businesses. Could you provide a little bit more granularity on the performance of GoodWeed? from the third quarter to the fourth quarter? Did revenue pick up from third quarter to fourth quarter? Did you see similar headwinds in that product specifically on a revenue front?

I'll let TJ answer that one.

Yeah, thanks, Ben. So, from a GoodWeave perspective, we are still in launch phase, having only launched this in June. And so, From a Q4 perspective, there obviously was a slowdown in the new store count growth. And so that does have an impact on good wheat sales in Q4 relative to previous quarters where we've been doubling distribution.

Okay. And so then I guess a follow-up to that in Q4. in you know some of the early adopters for this product that that uh you know have been selling products since june um you know those those uh you know locations see uh increase or decreases in revenue from the third quarter to the fourth quarter that has you know kind of a same store sales type number that you can you know that you can actually observe

Yeah, Ben, this is Stan. What we've seen in the market is that velocities have been steadily improving from when we first launched these products. So that's where the – it takes sometimes a while for the velocity increase to show up in revenue because there's still inventory that's in the market from the launch, the pipeline fill.

Got it. Okay. Yeah. And then turning to the distribution losses in Zola and Fall and Spring, can you kind of elaborate a bit more on these? And, you know, most notably, are these distribution losses that you, you know, still maintain relationships with that you think may come back online in 2023? Or are these kind of permanent losses that you're, you know, seeking to replace particularly on Zola, but do so from a, you know, kind of from square one?

Yeah, so on Zola, that is, you know, there is an opportunity potentially to win those back. Those were supply chain issues, nothing specific to the product or our, you know, go-to-market strategy. On Solspring, not likely to win those back. One was a retailer that, a rather large retailer, that made the decision to get out of all CBD products. The other was another larger retailer that has reduced their CBD set. They decided to keep Provault, but they decided to get out of Solspring.

Okay. And then, Got a follow-up question to what you were just asked about, the path to profitability. So, Stan, you said from the launch of Project Greenfield in June of 22, you had a three-year path to profitability, and you think that you had a schedule on that path. But particularly given what you observed in the fourth quarter of 22, I'm having a hard time reconciling that. So can you you know, elaborate a bit more on how you think the path to profitability has been, you know, really accelerated over the last six months, and then how much of that visibility that you have is going to come from future acquisitions that you may have in the hopper versus organic growth.

Yeah, I'd say what we had been in our model, you know, was – was less cashed in 2022 than what we actually delivered. So it's really about our cash position that was improved through the end of 2022. And yeah, acquisitions, you know, we're always a part of the Project Greenfield model, and we do think that that's going to be, you know, a sizable impact, you know, once we find the right acquisition close. and thank you and i am showing no further questions i would now like to turn the call back over to stan jaycott for closing remarks thank you so in summary arcadia has made tremendous progress over the last 12 months we've streamlined the business by exiting less profitable brands and activities we're focused on the most compelling opportunities that will build long-term value for our shareholders We successfully launched GoodWeek POSTA and have made significant distribution gains. We've increased sales and gross margins while lowering our operating expenses and reducing cash burn. And we have a clear vision for building the future of the company. We look forward to updating you on our progress in the months to come and on our next earnings call. Thank you again for joining us today. Have a great afternoon, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.