Good afternoon, and welcome to Arcadia Biosciences' Second 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. And 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 second quarter conference call. I am pleased to report that Arcadia continues to make progress and executing Project Greenfield, our three-year strategic plan to unlock the company's potential and provide a path to profitability. Both GoodWheat and Zola added hundreds of stores of distribution in Q2, and excluding the managed decline of Body Care, top line revenues would've experienced a second consecutive quarter of sequential growth. Importantly, costs are being aggressively managed, as evidenced by our lowest total operating expenses since Q4 of 2020. But we are not satisfied, and I want to spend the time today sharing our plans to scale more quickly while simultaneously reducing expenses and complexity. Together, these initiatives have the potential to accelerate Project Greenfield milestones. Let's start with how we plan to scale revenues more quickly. For GoodWheat pasta, there are two key programs which are expected to drive growth in the second half of 2023. Last quarter, I discussed that GoodWheat pasta is experiencing higher velocities than many competitive better-for-you brands in our newer accounts that have lower everyday pricing. So, we have completed actions to lower prices in all our remaining accounts in order to be more competitive, and these new prices will be showing up at shelf in Q3. This reduction took place through a variety of mechanisms ranging from price cuts to deeper or more frequent promotional activity. In total, we expect the impact of the price reduction to be offset by higher volumes. The second program is a shift in our marketing message to highlight the great taste of GoodWheat pasta. Many people do not like the taste of high fiber foods, and GoodWheat is the only brand that can sneak health into family's favorite foods without…

Thank you, Stan, and good afternoon, everyone. Our Q2 revenues of $1.4 million were down $119,000 or 8% quarter-over-quarter, primarily driven by the wind-down of our Body Care businesses. As Stan mentioned, we notified retail customers in Q2 that we plan to exit these brands, which slowed our orders. Excluding the impact of Body Care, our Q2 revenues would've been up 10% compared to Q1. While we experience sequential growth in our food and beverage businesses, we are taking steps to scale our business by lowering prices to be more competitive, implementing a taste guarantee to incentivize trial, and launching new categories where we believe GoodWheat can provide significant differentiation. One area where we have already demonstrated improvement is our quality of revenue. On a year-to-date basis, we have already generated nearly $1 million more in gross profit this year compared to last year, despite much higher sales in 2022. This includes the impact of a $170,000 write-down of our hemp seed business in Q2. As a reminder, our 2022 first half sales included a number of non-recurring items, including one, nearly $1.8 million in grain that did not meet our quality standards. Two, more than $1.2 million in sales from the Body Care copacking and Savvy Naturals businesses that are no longer part of our portfolio. And three, nearly $900,000 in licensing revenue related to the HB4 China milestone. These three items accounted for more than $4 million in sales, and with the exception of the milestone payment, they all generated losses. Research and development expenses of $391,000 in the second quarter were slightly higher than the first quarter as we prepared to launch our GoodWheat pancakes in Q3. R&D expenses on a year-to-date basis are flat compared to last year, a trend we expect to continue for the…

Thank you. [Operator Instructions] Our first question will come from Ben Klieve of Lake Street Capital Markets. Your line is open.

All right. Thanks for taking my questions and congratulations. A lot of good results here in the quarter. It sounds like an emerging second half of the year coming. A couple questions on distribution. So, first, Stan, you talked about in your prepared remarks the Zola distribution uptick in the second quarter. I'm wondering if you can help frame the scale of that increase, particularly relative to kind of what the high watermark was a few quarters ago before that began to turn downwards.

Yeah. So, we saw about a 10% increase in our distribution, and we're still about 10% below our high watermark. But again, we're encouraged by the results of the racks that we've put in produce and we're starting to see good velocities in some of our newer accounts.

Okay. Great. And then, kind of a similar question on GoodWheat. I'm really curious more about your prior expectations of kind of the store count that you're expecting by the end of this year. Do your prior expectations for store count of GoodWheat continue to track as expected three months ago? Or has that changed in any material way?

Yeah. I think we kind of gave a range of around 3,000 stores and that still is our target for the year. Maybe a little more, maybe a little less depending on where some of the retailers planograms fall, some of them have moved out of 2023 to 2024, but we'll keep you updated.

Okay. All right. Very good. And on the pricing initiatives within GoodWheat, I appreciate that the dynamic that you're working through there. Can you help us understand the -- you talked about volume kind of offsetting lower pricing model. Can you talk about kind of the margin structure you're expecting on this -- on those products going forward here?

Yeah. So, we do expect to see our margins erode slightly on GoodWheat. Some of this is because obviously, the pricing is the driving factor, but we still expect to see margins in the 20s. So, we -- it just is going to be kind of more of like mid to low-20s versus mid to high-20s.

Okay. All right. Very good. And then, one more for me and I'll pass it on. With exiting the Body Care business, it seems like at this point now that the product lines that you have and of Zola and GoodWheat are both decidedly core. Can you comment on if you expect your organic business to change anymore here in the next coming quarters? Or are you pretty comfortable with the business that you have today, given all the changes that have taken place over the last few quarters?

Yeah. We're confident in our portfolio, and we're only going to add to it from here.

Okay. All right. Very good. That's what I thought. And good to hear you feel that way. Very good. Well, thanks for taking my calls again. There's more to talk about, but I'll get back in line. Congratulations on the good quarter.

Thank you, Ben.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Dipesh Patel of H.C. Wainwright. Your line is open.

Hi, Stan. Hi, T.J. This is Dipesh standing in for Ram Selvaraju. Just a couple of questions, two or three questions. Are you -- is it possible for you guys to add any color or additional color on the status as of exploring strategic opportunities?

Yeah. So, I think at this point our press release and our comments kind of speak for themselves. We're early in the process. We don't have a date to end, but there are a myriad of options that we're exploring.

Okay. Great. And then, as you look at GoodWheat, are there any -- like any new additional channels for that product?

Yeah. So that is something that we are actively exploring beyond grocery, expanding that brand into other channels as well. So, more to come when we secure distribution. But yes, that is part of our plan.

All right. And then the last question, would you say the current product is optimized, or will there be further pairing or adjusting in the future?

Yeah. No, I think our product mix -- we're satisfied with the SKUs that we have. We feel like we can still grow SKUs that we have to even better meet consumer needs. But we don't see any more pairing opportunities.

All right. Gentlemen, thank you very much for the update.

Thank you.

Thank you.

Thank you. And I am seeing no further questions in the queue. I would now like to turn the conference back to Stan Jacot for closing remarks. End of Q&A:

So, to summarize, Arcadia is well-positioned for the future. We have made significant progress turning low quality, non-recurring revenues into high-quality ongoing revenue streams. And we are pursuing multiple paths to scale, while actively managing expenses in order to reduce operating losses. These actions have led to a solid cash position and improved runway to execute our plan. We look forward to updating you in the future. Thanks again for joining us and have a great rest of your day.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.