Q1 2023 Arcadia Biosciences Inc Earnings Call

This along with the <unk> channel expansion will generate the opportunity for exponential revenue and gross profit dollars in year three of the strategy.

The innovation launches and acquisition targets, we'll follow the investment criteria that we've outlined before one is there an opportunity to grow does the existing better for you segments have at least a 20% market share.

Our product <unk>, the leading brand in the category and we 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 as your space for premium pricing can we improve gross margins as we scale.

This disciplined 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 could be launched 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 solar 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% Angola 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 trades, 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 half a million dollars in sales from the body care co packing business and savvy naturals brand, but 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 have 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 $922000 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 $359000 declined $142000 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 $36000 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 three 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 Companys 10-Q filing which is still under review given the complexities of our March financing.

Moving to the balance sheet.

Accounts receivable declined $364000 to $923000.

As we received the Q1 milestone payment of $500000 from bio series.

As a reminder, we have one additional payment of $500000 related to the HP for 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 summer beverage season, as well as the launch of new good week categories that Stan mentioned earlier.

Our cash.

Balance at the end of Q1 was $23 million compared to $26 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 as a reminder to ask a question. Please press star one one on your telephone.

Wait for your name to be announced to withdraw your question. Please press star one one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> <unk> from H C. Wainwright.

Okay.

Hey, Tim T. J, just stand gainful ROM silver Roger with HC Wainwright.

Several questions what is the total number of retail channels through which could wheat products are currently being made available.

Which of these appear to be the most lucrative.

Yes, thank you for calling in so right now grocery, especially conventional grocery is where we are.

Currently selling our products.

We do expect to expand into other channels as well.

For example mass club.

So natural 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.

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 Dan again.

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 our 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 able to expand that that taste into new innovative flavors.

And we think that that will also expand the audience.

People that are interested in our coconut water.

Got it and then you may have touched on this but what are the what are the some of what are the key.

Key drivers of margin improvement and how have you thought you to trend over the coming quarters.

Yes, so I'll answer the first part of that question I'll, let <unk> answer the second so yes for.

For us a lot of this was 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.

And making sure that the businesses that have the best opportunity to grow and to scale into.

<unk> contributed profitably would be the ones that we would grow and that has been the case.

So in terms of outlook.

The outlook for other quarters T J, yeah, I mean, so this quarter.

The gross margin was around 45%.

Again, as Stan mentioned, there were some 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.

I'll, let Peter answer that question.

Yes, so that is the plan.

We can.

Currently only have about $200000 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.

Alright, perfect. Thank you for taking my question 70, Jay.

Youre welcome.

Thank you one moment for our next question.

Our next question comes from the line of Ben <unk> from Lake Street capital markets.

Alright, thanks for taking my questions.

Stan your comments around acquisitions. It sounds like you have a category in mind.

Back to you or.

If you don't have a candidate in mind you at least have it.

A handful of 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 are you expecting to to make a move for a company that already has broad distribution in place or is it going to be with an earlier stage company that is going to be introduced.

And your existing distribution pipeline.

Hi, Ben this is Dan thanks for calling in today.

And to answer your question, Yes, we are looking at.

<unk> an acquisition, we do have a hit we have some categories identified.

What we're looking for is.

In those candidates is as I outlined before they need to have.

A compelling opportunity to grow.

Which includes an existing retail distribution footprint.

<unk>.

I guess would cement the fact that it has consumer acceptance.

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 has to have.

Either a compelling margin story or a path to achieve that so.

So those are really the three criteria that we're looking for in these acquisitions.

Okay.

Very good and then on the on good weight on the on the.

Distribution channels do.

Do you do you see any opportunity within the food service category for this product maybe some some changes that are focused on kind of better for you.

Titan menus or is there something with the value proposition is really going to be entirely focused on retail and e-commerce.

Yes, so for right now our focus is on is on retail and E. Commerce, we do feel like there is opportunity in foodservice, but instead of building an infrastructure to support that we'd rather use a partner that would be able to quickly reach all those foodservice context.

Okay got it.

Thats a sensible approach.

And.

I guess im.

I'm curious about kind of high level expectations on <unk>, you talked you talked about the rebranding.

And expanding.

The <unk>.

Flavor Skus.

Really as you as you kind of fine tune this product over the next few quarters. What do you think this is going to do for for the.

Topline of zoloft.

<unk> 24.

Curious, how how dramatic of a uptick youre expecting here as you kind of refocus this brand.

Yes.

Still do see obviously opportunity for growth.

We do see opportunity, though is only in coconut water as opposed to good REIT, which can expand to multiple categories. So I think that does in some ways.

Have a.

<unk> growth comparison to what we're expecting from good wheat.

But again as we've said on other calls.

Not only has a 4% distribution in grocery channels.

And so.

And it's only in grocery is and no other channels besides that so.

That's one where we do feel like having the right.

Package.

Right.

<unk>.

The right flavor lineup will help expand help us expand to other channels as well.

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

Thank you.

This time I would now like to turn the conference back over to Stan for closing remarks.

So in closing I am pleased with the progress we continue to make we are generating high 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 new categories as well as the innovation, we have planned for <unk> and we look forward to updating you in the future.

You again for joining us and Jose de.

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

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