Arcadia Biosciences, Inc. (RKDA) Q3 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Arcadia Biosciences Third Quarter 2022 Earnings Conference Call. Today's presenters will be Stan Jacot, 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. [Operator Instructions] With that, I will now turn the call over to Stan Jacot, 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 GoodWheat 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 Bioceres HB4 soybean 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 GoodWheat 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 GoodWheat. On our Q1 earnings call in mid-May, we announced that GoodWheat 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, GoodWheat 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 GoodWheat pasta now available nationwide in nearly 1,000 retail stores. This is an amazing accomplishment for the GoodWheat brands 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 and 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 GoodWheat 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 GoodWheat is bringing to the pasta [ph] I'm also encouraged by how the pasta category has performed. Based on category data from Nielsen for the 13 weeks ending September 24, 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 in a tough economic environment. So we feel very good about the future prospects for GoodWheat. 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 24, 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 tests. 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 24. 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 the business without significant capital, and three, meets our profitability goals. In Q1, we announced that 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 1. 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 9 months of 2022 compared to the first 9 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 9 months of acquisition revenue, if we remove those sales completely from both years, our revenues have still increased 40%. During the same time frame, our gross profit has increased more than $1 million, leading to a 1,500 basis point improvement in our gross margin through the first 9 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 for the first 9 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 9 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 offering 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 GoodWheat 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 branded 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 GoodWheat footholds in categories representing over $10 billion in annual consumer spending. Furthermore, we indicated the best 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 GoodWheat 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, Stan. Good afternoon, everyone. As Stan 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, a decrease of 21%, but resulting in a positive gross 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 offsetting this unfavorability was the GoodWheat pasta [ph] revenue recognized this quarter. And as previously communicated, we launched our Goodland pasta end of second quarter of this year and are very pleased with the progress to date. The $4.3 million favorability in year-to-date revenues for 2022 as compared to 2021 was driven by a full 9 months of coconut water and body care product sales in addition to the GoodWheat pasta and grain sales this year. Total operating expenses of $6.5 million in third quarter of 2022 was $4.6 million less and an $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 employees, lease and consulting expenses. Cost of product revenues for the first 9 months of 2022 was $8.3 million or $3.3 million higher than the $5 million in the first 9 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 9 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 Verdeca in the amount of $1.1 million was recognized in the second quarter of 2022 with a $2 million milestone seed [ph] from Bioceres 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. Loss from operations was $4.1 million lower as we just reviewed, and offsetting this favorability was $2.9 million greater non-cash income from the change in fair value of common soft 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 re-measuring 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 9 months of 2022 was $11.1 million versus $5.4 million for the same period in 2021, a difference of $5.7 million. Loss from 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 Bioceres shares that was not present in 2022. This concludes our financial highlights for the third quarter and first 9 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?

Thanks for taking my questions. Good afternoon. First question on gross margins, great progress there in the quarter. With this now really streamlined business that you have with 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, all of the different individual SKUs 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. Thank you. And then a couple of questions on GoodWheat specifically. So first, regarding retail distribution. I mean great progress there, expanding store count as quickly as you did. I'm wondering now what comes next. Can you help us kind of frame realistic expectations for retail count progressing over the next few quarters, say, through the end of 2023 or some kind of time frame in that range?

Yeah. So again, we continue to present GoodWheat to many retailers across the nation. And depending on shelf reset time frames, which will last all the way through this time in 2023, we would expect to get to the 3,000 to 5,000 distribution points by the end of 2023.

Okay. Perfect. Perfect, thank you. Stan, and then I hear you loud and clear on the opportunity to integrate GoodWheat into 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 that you control via B2B revenues via the ongoing trial underway with Bioceres in South America. Is there any kind of updates you can provide on either of those fronts?

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

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

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

Hi, Ben. I don't think that we – we don't expect a lot from a cash perspective. I mean we still will be evaluating 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 looking at those to rightsize them to fair market value. So there could be 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 on queue.

Thank you.

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

Hi, guys. Thanks for the update. Just standing in for Ram Selvaraju at H.C. Bain right. When do you plan to reach operating cash flow breakeven?

Yes. 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 see - to receive any consideration or whatever remaining hemp-related inventory you are still holding? And if so, what might that look like?

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

Sure. So we - 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. And then last question, would you characterize the level of - or sorry, how would you characterize the level of commitment among distributors for your GoodWheat product line? And what strategies are they employing in order to drive that uptake?

Yes. So our partners that we've listed, good we [ph] are very satisfied with our performance. I would say for most of them, we are very early on in the trial driving period. As you know, once we secure distribution, we have to get in [indiscernible] promotions and which include feature adds include display. So we are just now starting to see some of those promotion activities that hit the marketplace. And with that, we see the corresponding lift and corresponding trial. So - but yes, we're - the acceptance has been strong. 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 losses.

Great. Thank you, Stan, Pam.

Thank you.

And presenters, I show no further questions in queue. At this time, I will turn the call back to Mr. Jacot 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 GoodWheat continues to outperform expectations with distribution doubling in the third quarter alone. We believe that our members 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.