Arcadia Biosciences, Inc. (RKDA) Q1 2023 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Arcadia Biosciences' First Quarter 2023 Financial Results and Business Highlights Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to T.J. Schaefer, Chief Financial Officer at Arcadia. Please go ahead.

Thank you, and good afternoon. Joining me on the call today is Stan Jacot, Arcadia's 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-Q. With that, I'll now turn the call over to Stan.

Good afternoon, everyone, and thank you for joining us for our 2023 first quarter conference call. Today, I want to focus our remarks on three primary areas: one, the progress we made in the first quarter of 2023; two, an update on GoodWheat pasta and Zola coconut water; and three, insights into Project Greenfield and our path to profitability. First, let's start with our Q1 progress. As we have discussed on prior calls, Arcadia is focused on generating revenues that are profitable as opposed to revenues at any cost. We are intensely focused on finding ways to grow high-quality revenues and minimize our costs without negatively impacting consumers or our customers. We will not chase empty top-line or value-destroying revenue. This is a core principle behind Project Greenfield and ensures that we are maximizing our resources and improving the return on our scaling investment. The impact of this focus is clearly seen in our Q1 results as well as the results of recent quarters. And while the high-quality revenues in Q1 2023 are substantially less than the low-quality revenues in Q1 last year, the result is a more than $900,000 improvement in gross profit dollars. These gross profit dollars were the main contributor to a $575,000 improvement in the loss from operations. And we continue to invest in trial-driving and brand-building activities, which are up 43% compared to Q1 last year. This investment is primarily supporting the expansion of GoodWheat pasta to new consumers and customers while we prepare to launch in the new categories during the second half of 2023, which leads to the next topic, an update on GoodWheat pasta. The pasta category continued to expand in the first quarter of 2023. Based on Nielsen data for the 13 weeks ending April 1, unit sales were down 1%, while dollar sales rose 12%, 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 $3 billion. GoodWheat has consistently added distribution in hundreds of stores every quarter, and Q1 2023 was no exception. Retailer acceptance of GoodWheat continues to grow, and we are targeting many large 1,000 store-plus retail chains as they plan their annual shelf resets in Q3 and Q4. Importantly, we also have seen an increase in consumer pull during Q1 2023. Our newer retail accounts with lower everyday pricing have seen GoodWheat's velocity surpass many competitive better-for-you brands, and display programs have been a key lever in driving trial. Execution is underway to convert all current retailers to this model, and we expect newly added retailers will follow the same playbook as they come on board in the second half of 2023. And our GoodWheat pasta continues to collect accolades from trusted sources. In addition to being the only traditional pasta with the American Heart Association Heart-Check certification, GoodWheat pasta has now received the Best New Product Award by the Retail Dietitians Business Alliance, which is a network of registered dietitians serving over 1,000 retailer-employed dietitians throughout the U.S. and Canada. Our GoodWheat pasta beat out submissions from multibillion-dollar food companies such as Hershey's, General Mills and Mars Wrigley. No other new product came close through our combination of great taste and nutrition. And according to an International Food Information Council survey from May 2022, consumers report that a conversation with a registered dietitian nutritionist is the most trusted source of information on foods to eat or avoid. So with expanding store count, improving velocity and award-winning product performance, we feel that we have just started scratching the surface of GoodWheat's potential. Moving now to Zola coconut water. The coconut water category was flat in units and a 16% increase in dollars for the 13 weeks ended March 25th, with pricing continuing to be the primary driver of category growth. For the last 52 weeks, units declined 8%, but sales were up 10% to $443 million. In the first quarter, Zola continues to be impacted by the distribution losses I referenced in the last call. We expect these distribution and velocity headwinds in grocery to continue for the next couple of quarters while we presented new grocery retailers for their annual shelf resets in Q3 and Q4. We also plan to launch product and packaging innovation during the second half of this year to drive expansion into new channels beyond grocery, and we will share more details with you as we move closer to launch. Despite the distribution headwinds, we have seen an improvement in gross profit margins for Zola due to the 2022 price increase and supply chain cost savings. In fact, despite Zola's revenues in Q1 2023 declining 6% compared to a year ago, Zola's gross profit dollars this year are 3x higher than last year, further reinforcing our focus on revenue quality. I have mentioned innovation on both brands, and I wanted to finish my remarks by linking the importance of innovation to Project Greenfield. As you might recall, Project Greenfield is our three-year plan to unlock the company’s potential and create a path to profitability. Project Greenfield aligns the company’s resources around solid, achievable goals to drive shareholder value, including one, GoodWheat retail expansion through both innovation and acquisition. Two, driving growth of our core brands and partnerships, and three, maintaining an agile organization to cultivate next generation wellness products that make everybody feel good inside and out. We are just starting year two of the three-year path to profitability, and this is the year that category and channel expansion are planned. Over the next year, Project Greenfield calls for the launch of two incremental categories with our proprietary wheat technology as well as entering an additional wheat-based category through acquisition. This along with Zola’s channel expansion, we will generate the opportunity for exponential revenue and gross profit dollars in year three of the strategy. The innovation launches and acquisition targets will follow the investment criteria that we have outlined before. One, is there an opportunity to grow? Does the existing better-for-you segment have at least a 20% market share? Can our product match the leading brand in the category and be preferred to the better-for-you brand? Two, can we scale without adding significant capital? Have we identified co-packing partners that have capacity and the highest quality standards? Three, can we be profitable? Is there space for premium pricing? Can we improve gross margins as we scale? This discipline approach ensures the entire team is focused on creating and acquiring businesses that can win in the marketplace and profitably grow share of the $10 billion of total annual consumer spend in these categories. For competitive reasons, we will wait to share the next GoodWheat launch category until our next call. With that, I will turn the call over to T.J. to discuss our Q1 financial results. T.J.?

Thank you, Stan, and good afternoon to everyone joining us today. Our 2023 first quarter financial results represent our continued focus on generating profitable sales and preserving the cash required to fund and grow our business. In Q1, our net sales of $1.5 million increased 51% quarter-over-quarter driven by higher sales across all of our brands. As mentioned last quarter, Q4 is seasonally the softest quarter for Zola as well as the entire coconut water category. And while Q1 is the second softest quarter, we did see an uptick of more than 40% in Zola sales sequentially, despite the distribution losses that Stan mentioned earlier. On a year-over-year basis, our net sales were down 53% driven by two factors. First in early 2022, we identified a grain issue as part of our quality testing process and made the decision to sell this grain for non-human consumption in late March following the spike in commodity wheat prices. As a result, we recorded a one-time sale of $1.3 million in the quarter with associated costs of $1.4 million, but had no such grain sales in Q1 2023. I also want to point out that more than three quarters of the grain sold was related to traits where we currently have no commercial products. So the poor grain quality had a minimal impact on our grain supply for pasta or future product category launches. The second significant driver of sales in Q1 2022 was more than $0.5 million in sales from the body care co-packing business and Saavy Naturals brand that are no longer part of Arcadia. As a reminder, we wound down the co-packing business due to its unprofitable revenue streams and divested Savvy Naturals and the manufacturing plant in August, 2022 in order to reduce expenses and focus on higher margin brands. Excluding the one-time sale of grain as well as the body care businesses that are no longer part of Arcadia, our sales would’ve increased 10% compared to the same quarter last year. But what is even more significant is that while our reported sales in Q1 2023 were $1.7 million below Q1 2022. Our gross profit was $922,000 higher, which is a testament to the progress we are making towards focusing on profitable growth. Turning now to R&D and SG&A. Research and development expenses of $359,000, declined $142,000 or 28% quarter-over-quarter, driven by the timing of innovation work at the end of 2022 as we prepare to launch additional products in 2023. The decline year-over-year was a more modest $36,000 or about 9%. Selling, general and administrative costs were $4.4 million in the first quarter of 2023, which is a slight increase of about 3.5% sequentially driven by higher payroll related fees in Q1. Our SG&A expenses were essentially flat compared to last year, despite the fact that we invested 43% more in sales generating marketing activities. The net loss attributable to common shareholders will be released with the company’s 10-Q filing, which is still under review given the complexities of our March financing. Moving to the balance sheet. Accounts receivable declined $364,000 to $923,000 as we receive the Q1 milestone payment of $500,000 from bio series. As a reminder, we have one additional payment of $500,000 related to the HB4 milestone which we expect to receive in Q2 2023. All other working capital accounts such as inventory and accounts payable remain relatively unchanged compared to the end of 2022. We do expect our inventory balances to increase as we prepare for Zola’s summer beverage season, as well as the launch of new GoodWheat categories that Stan mentioned earlier. Our cash balance at the end of Q1 was $23 million compared to $20.6 million at the end of 2022, primarily driven by the proceeds from the March financing. We believe our cash is sufficient to fund our operations into 2024, but may access the capital markets in anticipation of a potential acquisition. With that, I will now turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes in the line of Dipesh Patel from H.C. Wainwright.

Hi, Stan, T.J. Just standing in for Ram Selvaraju at H.C. Wainwright. Several questions. What is the total number of retail channels through which GoodWheat products are currently being made available? And which of these appear to be the most lucrative?

Yes. Thank you, Dipesh, for calling in. So right now, grocery, especially conventional grocery, is where we are currently selling our products. And we do expect to expand into other channels as well. For example, mass, club, there's also naturals, which is an opportunity for us. And we expect all of those channels to be relatively similar in terms of their gross profit contribution.

Got it. And then kind of just touching base on the coconut water product, how are you planning to differentiate that product versus competitors in that market?

Yes. Thank you. This is Stan again. Well, we have a couple of things that we are doing. One is the change in packaging for us. Really, it will help us highlight the key differentiator for us, which is taste. We actually are preferred two to one versus our nearest competitor in the category. And we have that combination of really crisp, clean taste. And so marketing that taste preference will be a key to the future moving forward. We're also, though, able to expand that taste into new innovative flavors. And we think that, that will also expand the audience of people that are interested in our coconut water.

Got it. And then you may have touched on this, but what are the some – or what are the key drivers of margin improvement? And how are these likely to trend over the coming quarters?

Yes. So I'll answer the first part of that question, and I'll let T.J. answer the second. So yes, for us, a lot of this was product mix. And I think T.J. talked a lot about it in his remarks, where there were a number of businesses that were dragging down the margin. And so for us, it was a shift in the resources and making sure that the businesses that have the best opportunity to grow and to scale and to contribute profitably would be the ones that we would grow, and that has been the case. So in terms of the outlook for other quarters, T.J.?

Yes. I mean, so this quarter, the gross margin was around 45%. Again, as Stan mentioned, there were some product mix issues. And so the expectation, going forward, would be for the gross margin to be in line with kind of the more recent quarters, maybe Q3, Q4. So we expect that mix to kind of level out as we move forward.

Got it. Thanks for that color. And then my last question, does the company expect to be able to monetize any of its hemp inventory near term?

But I'll let T.J. answer that question.

Yes. So that is the plan. We currently only have about $200,000 on the books related to hemp. So it's not as significant as it once was, but we are actively trying to monetize those assets as we speak.

All right. Perfect. Thank you for taking my questions, Stan and T.J.

You’re welcome.

Thank you. One moment for our next question. Our next question comes in the line of Ben Klieve from Lake Street Capital Markets.

All right. Thanks for taking my questions. First Stan, your comments around acquisitions, it sounds like you have a category in mind. I suspect your, if you don’t have a candidate in mind, you at least have a – down to a handful of potential candidates within that category. I’m wondering if you can elaborate a bit on kind of the maturity that you are seeking for an acquisition candidate. Most notably, are you expecting to make a move for a company that already has broad distribution in place? Or is this going to be with an earlier stage company that is going to be introducing your existing distribution pipeline?

Hi Ben. This is Stan. Thanks for calling in today. And for to answer your question, yes, we are looking at an acquisition. We do have some categories identified. What we are looking for is in those candidates is, as I had outlined before, they need to have a compelling opportunity to grow which includes an existing retail distribution footprint, which I guess would cement the fact that it has consumer acceptance. It has to have that scalability in order for us to be able to grow it quickly. And then the third piece is on the profitability side, it has to have either a compelling margin story or a path to achieve that. So those are really the three criteria that we’re looking for in these acquisitions.

Got it. Very good. And then on GoodWheat on the distribution channels, do you see any opportunity within the food service category for this product, with maybe some chains that are focused on kind of better-for-you type menus? Or is this something where the value proposition is really going to be entirely focused on retail and e-commerce?

Yes, so for right now our focus is on retail and e-commerce. We do feel like there is opportunity in food service, but instead of building an infrastructure to support that, we’d rather use a partner that would be able to quickly reach all those food service contacts.

Okay, got it. No, that’s a sensible approach. And the – I guess the – curious about kind of high level expectations on Zola, you talked about the rebranding of the – and expanding the flavor skews. Really as you kind of fine tune this product over the next few quarters, what do you think this is going to do for the top line of Zola, say 2024? I’m just curious how dramatic of a uptick you’re expecting here as you kind of refocus this brand?

Yes, no, we still do see obviously opportunity for growth. We do see Zola’s opportunity though, is only in coconut water as opposed to GoodWheat, which can expand to multiple categories. So I think that does in some ways have a lower growth comparison to what we’re expecting from GoodWheat. But again, as we’ve said on other calls, Zola only has a 4% distribution in grocery channels. And so and it’s only in grocery. It is in no other channels besides that. So that’s one where we feel like having the right package, the right size and the right flavor lineup will help expand – help us expand other channels as well.

Okay. Very good. We’ll look forward for more updates on that. I think that does it for me. Thanks for taking my questions and I’ll get back in line.

Thank you. At this time, I would not like to turn the conference back over to Stan Jacot for closing remarks.

So in closing, I am pleased with the progress we continue to make. We are generating higher quality revenue as evidenced by our improved gross profit. We have increased our investment in trial, driving marketing activities while reducing expenses in other areas in order to keep SG&A expenses flat. And we have managed working capital that has resulted in a higher than expected cash balance. Going forward, we are excited about the launch of [indiscernible] categories as well as the innovation we have planned for Zola, and we look forward to updating you in the future. Thank you again for joining us and have a great day.

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