Arcadia Biosciences, Inc., Q4 2022 Earnings Call, Mar 31, 2023
Biosciences fourth quarter.
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 all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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I would now like to hand, the conference over to Arcadia Biosciences. Please go ahead.
Quarter all year.
Right.
Earnings Conference call.
I am TJ Schaefer, Chief Financial Officer, and presenting with me today will be Stan <unk>, President and Chief Executive Officer.
This call is being webcast and you can refer to the company's press release at Arcadia Bio Dot 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 Companys 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.
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.
And that very first earnings call in March 2022, we highlighted the need to reduce complexity developed robust processes and narrowed our 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.
Identifying priorities based on the size of the opportunity.
He's with which we can scale the business and the level of expected profitability.
During our May earnings call, we announced that we had made a 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 and resulted in significant losses.
We estimate that exiting this business will save us $1 five millions of children on annualized basis.
In June we officially launched our goodwill pasta in both the 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 a few minutes.
On our August earnings call. We introduced project Greenfield RK is three year plan to unlock potential and create shareholder value. As a reminder, the four key strategies are as follows one established goodwill footholds and retail categories representing over $10 billion.
Annual consumer spending.
To drive share growth in key brands, where there is a large opportunity to scale the business and deliver attractive margins.
Three leverage partnerships and of future licensing and royalty streams.
And four dozen agile organization and winning culture.
With 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 our key 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 are almost immediate as we reported Q3 gross margins of 28% in November and.
And so additional improvements in Q4.
For the full year. Despite the fact that we exited several business lines, resulting in lost revenue or 2022 revenues increased 47% versus 2021.
In our reported gross margins were positive for the first time in our Kgs 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.
In 2021, our cash used in operations was $25 9 million compared.
Compared to $14 million in 2022, a decline of almost 50%.
I am 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 to had a 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% in 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.
Good wheat continued its impressive distribution gains in Q4 at store count increased 34% in a quarter not normally associated with significant new shelf placements.
On the initial launch in June we have added more than 200 stores in seven months, beating our own internal projections by more than 50%.
As you look forward into 2023, our focus will.
He will remain on gaining significant new distribution.
And launching or acquiring new categories, but will also support our retail customers through a variety of programs that will drive traffic to our brand and increased velocities.
One example is a program I'd like to spend a couple of minutes talking about is the heart check certification.
In mid January we announced that good news pasta received the American Heart Association Heart check certification on all five varieties.
According to the American Heart Association heart disease, and stroke statistics factsheet.
<unk> accounted for approximately 13% of deaths in United States in 2018, and heart disease Heart disease remains the number one cause of death in the United States.
Establishing 1995 by the American Heart Association Heart check Mark gives consumers an easy reliable system for identifying heart healthy foods.
Based on the June 2021, W. Five market research among millennials and Gen X. The heart check Sybil is far more likely to drive purchase interest that 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 Heartland Group report on health and wellness started at 78% as consumers look for foods and beverages that are good for my heart.
Aside from the outstanding health benefits the heart check verification also differentiates us from every traditional passed a competitor made with wheat.
And to drive awareness and trial as a large number of consumers shop for foods benefits.
And finally, we believe that certification mark mix, it could be 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 goodwill meets the criteria for a heart healthy posture 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 unit, but a 10% increase in dollars for the 13 weeks ending December 24.
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 is always a sales declined compared to the same period last year driven by some distribution losses in Q3 as a result of supply chain constraints.
Despite the fact that 2022 was a challenging year from a supply chain perspective, we are optimistic about the prospects for delivery going forward.
We started to see freight costs improved 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.
Maybe narrow body care as mentioned on prior calls as well as in my previous comments, we licensed the savvy Naturals brand in August 2022, and maintain the CBD brands sole 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.
Too 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 Instagram limiting the ability to advertise the product and for many retailers at one store CBD have either significantly reduce the set or stepped out of CBD completely.
So spring was the victim of loss distribution that several retailers that carried sold spring.
Not to carry a CBD products any longer.
As a result, <unk> lost more than half the distribution that once had and protocols have struggled to make meaningful gains. So we have made the decision to explore strategic alternatives for these two brands as we can.
Consider our options we plan to continue to sell both brands and 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 T J or the reverse stock split in our March 2023 capital raise.
At the end of September 2022 were notified by NASDAQ that our stock price had closed below $1 for 30 consecutive days and then we had until the end of March to get the stock price back above $1, but we will be at the risk of being delisted.
Over the next several months the stock remained under pressure and continue to trade lower despite positive announcements such as the doubling of good redistribution in November 2022, and the heart check certification from the American Heart Association in January 2023.
And while we couldn't apply for an extension we felt that the best course of action will be to move forward with a reverse stock split. So we can focus on executing project Greenfield.
On February 15th we held a special shareholder meeting, where there is overwhelming approval to initiate the reverse stock split.
After the special shareholder meeting our board approved a one for 40 reverse stock split that became effective March one.
After the reverse stock split went into effect, we are 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 reached breakeven faster than planned but that will require additional capital as a result, we decided to take advantage of the opportunity in our March 2nd we announced the 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 is the right move to ensure that the long term success of Arcadia.
With that I will turn the call over to T. J to discuss our 2020 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 $877000 below the previous quarter.
The primary drivers were seasonality Angola, where Q4 is historically the softest quarter for the entire category as well as distribution losses in both Zola and sole spring 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 there.
The remaining variance was attributable to lost distribution and saw spring.
Our cost of revenues as reported in Q4 was approximately $1 $6 million.
Included in this number is $941000 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 has 86% of our inventory at year end is related to either good wheat or XOMA.
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 and 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 own these brands from the beginning of the year, our revenues still would've 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 is for 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 totaled $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 head count 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 a good week.
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 and 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 to a little more than $7 million from lower R&D and SG&A expenses.
Three $2 million and benefits from the bio series 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 $716000 unfavorable to prior year as 2021 included benefits of $10 2 million.
Related to the sale of <unk> 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 <unk>.
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 one $3 million a balance is related to the remaining bio series 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.
Next 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.
To the separation from business lines, and lost distribution and body care and three the launch of good wheat and corresponding reduction in our grain inventory.
Last we ended 2022 with $26 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.
Yeah.
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 $26 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 one on your telephone and wait for your name to be announced soon.
To withdraw your question. Please press star one again, please standby we compile the Q&A roster.
And one moment for our first question.
And our first question comes from ran some overdue.
H C Wainwright.
Hey, everyone. This is mitchell on for Rob Thanks for taking the questions. The first one just wanted to touch upon the good wheat.
Retail footprint expansion just wanted to understand when we will 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.
What are you expecting the second half of 2023 to see that become meaningful.
Okay, great. Thank you and then what are you planning to do with your.
Coconut water and body care product lines do you consider that they used 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.
Yes, so for Zyla, we still see strong growth prospects and as I mentioned, we are investing in.
In marketing both from packaging perspective, and innovation in order to continue.
Continuing 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 this segment of the business or do you think this is no longer feasible.
I'll turn that over to TJ to answer.
Yes so.
From a from a legacy business perspective.
Our archipelago business, we have written down all of the inventory we've written it off so 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 $200000 in inventory on our balance sheet.
We will continue to try and sell that we have agreements with distributors in both the U S 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.
Yes, So project Greenfield has a three year path to profitability.
We are ahead of that plan.
Currently through the end of 2022.
Or are all the aspects that PJM commented on both gross profit.
<unk> operating expense reductions all those have kind of helped us in our trajectory. So.
But yes, 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 our next question.
And our next question comes from Dan <unk> from Lake Street Capital Markets. Your line is now open.
Alright, thanks for taking my questions.
First one on the fourth quarter performance, specifically within good wheat I appreciated your comments on the sequential challenges from zelle.
Zola and body care businesses could you provide a little bit more granularity.
A good wheat from the third quarter to the fourth quarter did revenue pick up from third quarter fourth quarter did you see similar similar headwinds.
And that product specifically on the revenue front.
Okay, I'll, let <unk> answer that one.
Yes, Thanks Ben.
So from a good wheat perspective.
We are still in launch phase, having only launched this in June and so.
From a from a Q4 perspective, there obviously was a.
A slowdown in the new store count growth.
And so that does have an impact on on good wheat sales in Q4 relative to previous quarters, where we have been doubling distribution.
Okay.
And then I guess, a follow up to that and in.
Some of the early adopters for this product.
Yes.
Have been telling me products since June .
Does.
Did those.
Locations see.
Increase or decrease in revenue from the third quarter to the fourth quarter that had kind of a same store sales type number.
As you can.
Yes, Ben this is Dan what we've seen in the market is that velocities have been steadily improving from when we first launched these products right. So that's where the.
It takes sometimes a while for the velocity increase to show up in revenue because there is still inventory that's in the market from the launch the pipeline fill.
Got it okay.
And then turning to the distribution.
Losses in the oil and call sprint can you kind of elaborate a bit more on these.
And most notably our these distribution losses, but you still maintain relationships with that you think may come back online in 2023 or are these kind of permanent losses that you are seeking to replace particularly on solar.
But do so per month.
Kind of from square one.
Hey, Jay you want take that.
Yes, so on that.
That is.
There is an opportunity potentially to win those back those were supply chain issues nothing specific to the to the product.
Or our go to market strategy.
On sole spring.
Not likely to win those back one was a retailer that 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.
<unk> decided to keep protocols.
But they decided to get out of spring.
Okay.
And then.
Got a follow up question too.
To what you were just asked about the path to profitability, So as Dan said.
From the launch of project Greenfield in June 22, we had a three year path to profitability and you think that that.
Youre ahead of schedule on that path.
But particularly given what you know.
What you observed in the.
What we're seeing in the fourth quarter of 'twenty two.
I'm, having a hard time reconciling that so can you.
Elaborate a bit more on how on how you think the path to profitability.
It has been 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 versus organic growth.
Yes, I would say, what we had been in our in.
Our model.
Was.
With less cash than in 2022, and what we actually delivered so it's really about our cash position.
That was improved.
Through the end of 2022.
And yes acquisitions were always a part of the project Greenfield model and we do think that that's going to be.
Sizable.
Impact.
Once we find the right acquisition close.
And in Q.
And I am showing no further questions I would now like to turn the call back over to Stan <unk> 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 could we process 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 then 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.
Okay.
[music].
Okay.
Yes.
Okay.