Q3 2022 Arcadia Biosciences Inc Earnings Call
Good afternoon, and welcome to the Arcadia Biosciences third quarter, 2000, and trying to earnings conference call.
Today's presenters will be <unk>, President and Chief Executive Officer, and Pam Haley Chief Financial Officer of our caveat.
This call is being webcast and you can refer to the company's press release at the Arcadia.
Bio dotcom.
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.
As 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 star one on your Touchtone phone with that I will now turn the call over to Stan <unk> 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 we've doubled from the previous quarter and to 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 in Q3 does not include any nonrecurring revenues from green sales or the buyout series H before so a milestone that we reported in Q1 and Q2.
This is all part of our business plan and it is working well our Q3 revenues were below Q1, and Q2 or Q3 gross profit dollars were higher than the first two quarters combined.
So I am extremely pleased with the quality of our third quarter revenues our improvement in gross margins and the distribution gains we have made a good week and 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 good wheat.
On our Q1 earnings call in mid May we announced that good wheat pasta has officially launched 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 of 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, good REIT possible, what's available and nearly 500 stores.
<unk> progress for a brand that launched just two months earlier.
We also projected that store count with 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 could be passed and now available nationwide and nearly 1000 retail stores.
This is an amazing accomplishment for the <unk> brand and our kitchen as a whole so I would like to take a minute and thank the team for all 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're committed to supporting our retail customers and driving trial, a good wheat, where we already have placement.
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. Good read is bringing to the past 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 two 4%.
We believe the pasta category, we 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 weeks.
And as we've discussed before pasta is just one of many categories, where we believe our proprietary superior we can add value.
I'll touch more on this later, but let me shift now to our other core brands Zillow coconut water and profile pain relief.
Coconut water category continues to grow primarily driven by price increases in the 13 weeks ended September 24th category sales increased nine 7% while units declined 6%, which was an improvement from the previous quarter when units declined 15%.
<unk> 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 solar to increase distributions as consumers prefer the taste of build out to other leading coconut water brands in a blind unbranded taste test.
As a result, we're refreshing our packaging working on new innovation and are taking our message to retailers in order to gain new shelf space.
Moving to probe halt the Taco pain relief category sales declined three 8% and units fell nine 9% in the 13 weeks ending September 24 at 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 protocols 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 our key has been focused on simplifying our 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.
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.
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 brands and I'm happy to report that those transitions were completed on August one.
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 nearly 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.
Okay.
Our revenues of approximately $9 billion are up $4 3 million or <unk>, 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 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 billion 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 nine months of approximately $13 million improved by $8 7 million or <unk> 40 per <unk>, 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 theres 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.
Stirred 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're in the exploratory phase of evaluating potential acquisition targets that would allow us to bring the goodwill value proposition to an existing brand and 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 REIT 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 establish distribution.
This initiative is a component of project Greenfield, which we laid out in prior quarters. As a reminder, the first strategy and project Greenfield split 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 mainly 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 wheat 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.
Thanks, Dan Good afternoon, everyone as Dan noted, we had anticipated reduced revenue in third quarter as they have turned our focus on a high.
Our higher margin brands.
Total revenues recognized for third quarter, 2022, or $1, one $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 at 28%.
And as mentioned earlier third quarter year to date revenues were $4 3 million higher than third party a year to date 2021 for an increase of 94%.
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 favorability was the good be pass through revenue recognized this quarter.
As previously communicated once that could be passed at the end of second quarter. This year and are very pleased with the progress to date.
This $1 3 million favorability in year to date revenues for 2022 as compared to 2021 was driven by a full nine months of coconut water and body care products 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 with $4 $6 million less than $11 1 million recognized in the third quarter of 2021, and third quarter and year to date total operating expenses was $4 4 million lower than the same period in 2021.
As Dan 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 of $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 leased 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.
Gulf 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.
G&A was $2 $9 million lower driven by the lower employee.
The 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 our second quarter call.
Gain on the sale of vertical and the amount of $1 1 million was recognized in the second quarter of 2022 with a 10 million dollar milestone season by a series triggered by the Chinese approval of HB forcefully.
Net loss attributable to common stockholders of $2 9 million in third quarter of 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 noncash income from the change in fair value accounting, plus warrant and option liability and third quarter of 2021 compared to third quarter of 2022.
Along with the $1 1 million gain on extinguishment of the P. P T loans from third quarter of 2021.
So here at Baxter and measuring the change in fair value of common stock warrant and option liability with the preferred investment options issued in 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 from operations of $8 7 million lower third quarter 2022 year to date versus 2021 year to date.
21 included a $10.2 million gain on the sale by a series shares that was not present in 2020 scale.
This concludes our financial highlights for the third quarter and first nine months of 2022.
He's very much for your time and attention and I'll turn the call over to the operator for Boston.
Operator.
Thank you we will now begin the question and answer session.
You'd like to ask a question. Please press <unk> one on your Touchtone phone.
Thank you for your phone you need to pick up your handset first before pressing any numbers once again, if you'd like to ask a question. Please press zero one on your Touchtone phone.
Our first question comes from Ben <unk> from Lake Street Capital Markets. Your line is now open.
Alright, Thanks for taking my questions. Here. This afternoon first question on gross margins great progress during the quarter.
This is now really streamline business that you have 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 there are kind of relatively in line with each other or individual products that are really driving this number right now.
Yes. Thank you for the question Ben.
We're at this point for our <unk> III 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.
Couple of questions on good wheat, specifically, so first regarding retail distribution I mean, great.
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 timeframe.
In that range.
Yes, so again, we continue to.
Present, good wheat, too many retailers across the nation and depending on shelf reset timeframes, which will last all the way through this time in 2023, we would expect to get to the three to 5000 distribution points by the end of 2023.
Okay perfect perfect. Thank you stand and then.
I hear you loud and clear on the opportunity and the <unk>.
Great good wheat into other other categories potentially via acquisition I'm wondering if you can also elaborate on your kind of expectation on on expanding the addressable market beyond CPG.
That you control.
B to B revenues via the ongoing trial underway with <unk> in South America is there any kind of update you can provide on either of those fronts.
Yes, we still continue to.
Look for partnerships.
We continue to leverage the partnerships. We currently have with companies like bio theories.
But theres nothing really new to report.
For this year.
At this point nothing new in the pipeline that will typically impact our projections.
Okay.
Very good and then.
One.
One last one for me with all the.
Ed.
Moving pieces here recently with west.
Exiting exiting businesses and exiting the year.
Your processing facilities are there any kind of <unk>.
Cash inflows outflows here expected here from Q4 and beyond.
Round this broad initiative.
Streamlining your operations or have those all really been realized.
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 in the asset balances, we have an 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, alright that makes sense.
Alright, well.
I'm in good shape, congratulations again on some some really good progress on several fronts and I'll get back in queue.
Thank you.
Thank you. Our next question comes from <unk> Patel from each the Wainwright. Your line is now open.
Hi, guys. Thanks for the update just standing in for Rob silver onto H C. Wainwright.
And do you plan to reach operating cash flow breakeven.
Yeah. So it was a part of project Greenfields, Yeah, 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 for whatever remaining hemp related inventory you are still holding our next study what might not look like.
With that I'll turn that one over to Pam sure. So you.
You know the CBD market has been pretty challenged lately and we are still looking to do.
To monetize the assets that we have on our books I mean, it's a continuous.
Uhm and depending on how that market outlook truly does look so then for next year.
We'll just have to see but it's 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 feel good wheat product line and what strategies.
Employing in order to drive the uptake.
Yes, so our partners debt.
We've lifted.
We are very satisfied with our performance.
I would say for most of them were very early on in the trial driving period.
As you know once we secure distributions we have to get in queue for.
Promotions and which include feature adds includes display. So we are just now starting to see some of those promotional activities that hit the marketplace and with that we will see the corresponding lift.
And corresponding trial so.
But yes, we are.
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.
All the typical promotion tools and.
And marketing tools to continue to improve our of losses.
Great. Thank you Tim.
Thank you.
And presenters I'm showing no further questions in queue. At this time I will turn the call back to Mr. Jacobs for closing comments.
Thank you.
So in closing we have made meaningful progress this year in transitioning Arcadia to a more lean and focused our 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 our long term plans we have previously shared.
Look forward to sharing with you our full year results. 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.
Okay.
Okay.