Arcadia Biosciences Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 5 speakers on the call.

Operator

Afternoon, and welcome to Arcadia Biosciences Third 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to T. J.

Operator

Schaeffer, Chief Financial Officer at Arcadia. Please go ahead.

Speaker 1

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 Bio Sciences 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.

Speaker 1

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.

Speaker 2

Good afternoon, everyone. Thank you for joining us today for our 2023 Q3 conference call. I am pleased to report that Arcadia continues to make excellent progress in executing Project Greenfield, our 3 year strategic plan to unlock the company's potential and provide a path to profitability. GoodWheat Pasta and Pancake Mixes and Zola Coconut Water added more than 1,000 stores of distribution in Q3, resulting in revenue growth from continued operations of 20% compared to last quarter. And we are operating with a leaner structure after the exit of our Body Care business as evidenced by our lowest total SG and A since 2019.

Speaker 2

I spoke last quarter about our plans to scale more quickly And today, I want to provide an update on those key initiatives. 1st, GoodWheat Pasta is executing 2 programs that are expected to drive growth in Q4 and throughout 2024. The lower average price is now fully in market across more than 2,000 stores And we expect this more competitive price point to result in higher turns and faster customer reorders. Q4 will also be the rollout of our new marketing messaging that GoodWheat is picky eater approved with a clean plate guarantee, you'll love it or your money back. We began this new messaging in October during National Pasta Month, resulting in over 14,000,000 impressions and multiple social media influencer partnerships.

Speaker 2

The 2nd key scaling initiative was the launch of GoodWheat into the breakfast category with new better for you pancake and waffle mixes as well as Single Serve Quick Cakes. These new products are made with simple ingredients in Arcadia's proprietary non GMO wheat flour, which delivers the same taste and texture of regular pancakes, but sneaks in more fiber and protein than traditional wheat flour. In product testing, consumers prefer the taste of GoodWheat pancake mix 2:one versus the leading better for you pancake mix. And I am pleased to report that retailers are recognizing this innovative proposition and we will be shipping to over 7 50 stores by the end of the year. Not only will GoodWheat pasta and pancake mixes provide a foundation for growth in 2024, I have another GoodWheat initiative to announce today, the launch GoodWheat Mac and Cheese.

Speaker 2

The Mac and Cheese category is over $1,100,000,000 in sales and has long been a household staple for families. Better for you brands make up nearly 20% of the category and are growing faster than traditional brands. Our GoodWheat Mac and Cheese packs in the most fiber of any brand in the category, 4 times more than the leading brand. In fact, one serving of GoodWheat Mac and Cheese Has the same fiber as 2 servings of oatmeal or 2.5 servings of broccoli. And just like our pasta and pancake mixes, GoodWheat Mac and Cheese is higher in protein than the leaving brand with 12 grams of protein per serving.

Speaker 2

Our mac and cheese is sneaky delicious and picky eater approved Made with real cheese and no artificial flavors, dyes or preservatives. There are 3 varieties to choose from, classic cheddar, white cheddar and 3 cheese. We start shipping into retailers this month and will be shipping to over 3 50 stores by the end of the year. And in February, we plan to have all three varieties available online at eatgoodwheat.com. For Zola Coconut Water, innovation has been our focus with the upcoming introduction of 2 new flavors, pineapple and lime to add to our original Extra Pulp and Espresso flavors.

Speaker 2

Pineapple is the number one coconut water flavor and lime is the number one flavor in sparkling water. We believe these new offerings will energize Zillow sales. Both flavors are 100% natural, no sugar added and non GMO. Launching in Q1 2024, these new flavors will be available in 16.9 ounce resealable containers. The last skill initiative to discuss today is the strategic review announced on July 20, which stated that Arcadia would explore a range of strategic options, which could include an asset sale, acquisition, merger, sale or other strategic transaction.

Speaker 2

As we discussed in previous earnings calls, our strategic plan calls for an acquisition that would allow us to bring the GoodWheat value proposition to an existing business in a new wheat based category. We are beginning the due diligence process with potential candidates and are also evaluating asset sale and larger merger opportunities with our banking partner, and we'll keep you updated as material events occur. However, we must point out that there can be no assurance That this exploration of strategic alternatives will result in the company entering or completing any transaction and no timetable has been set for the conclusion of the strategic review. With that, I'll turn the call over to T. J.

Speaker 2

To discuss our Q3 financial results. T. J?

Speaker 1

Thank you, Stan, and good afternoon, everyone. Today, I will walk you through our Q3 financial highlights. In my prepared remarks, we'll focus on our results from continuing operations, which excludes all Body Care related results for the period discussed. So let me spend just a few minutes providing some background as to why these brands are now being presented as discontinued operations. As you recall, we exited the Body Care co packing business in the first half of twenty twenty two And then made the decision to license the Savvy Naturals brand to Radiance Beauty in July of 2022.

Speaker 1

At that time, we also ceased body care manufacturing activities and began using third party manufacturers for Provol and SolSpring in an effort to simplify our business, focus our resources and increase our margins while freeing up cash. We consider GoodWheat, Zola and Provault to be core brands that could offer attractive margins, provide differentiation and give us the ability to scale. However, the CBD category continued to face challenges that included: 1, a lack of distribution opportunities as the majority of U. S. Retailers would not take CBD products, including online retailers such as Amazon.

Speaker 1

2, many retailers that did sell CBD Put the product behind locked glass doors that had a negative impact on sales. 3, CBD products could not be marketed on large mainstream platforms such as Google Search, Facebook and Instagram, limiting our ability to advertise. And 4, many retailers that once sold CBD made the decision to significantly reduce or completely step out of the category. As a result, we began to explore strategic alternatives for ProVault and SolSpring at the beginning of 2023, but were unable to find a buyer. In June of 2023, We notified retailers that we would no longer be producing the product and in September of 2023, we stopped selling both brands.

Speaker 1

Given the strategic shift as well as the meaningful impact that all of these brands had on our prior year financial results, We made the decision to classify these businesses as discontinued operations in accordance with the guidance disclosures. Moving now to our results from continuing operations. Revenues of $1,600,000 increased 2% year over year As higher sales of GoodWheat were largely offset by lost distribution at Zola that occurred at the end of 2022. On a sequential basis, revenues increased 20% in Q3, driven by increased GoodWheat distribution and higher sales of Zola. Gross margins in Q3 2023 were 31% compared to 28% in the prior year, which was in line with our expectations.

Speaker 1

On a year to date basis, our gross margins have increased nearly 1500 basis points compared to the same period last year. Research and development expenses of $305,000 were $50,000 above prior year, but $86,000 below the prior quarter as a result of innovation work in Q2 2023 that resulted in the launch of pancakes and mac and cheese. Selling, general and administrative expenses of $3,400,000 were 18% below prior year and 4% below the prior quarter, primarily driven by lower headcount associated with the body care brands as we discussed last quarter. And as Stan mentioned in his opening remarks, our SG and A expenses are now at the lowest level since 2019. We will continue to evaluate our expense profile in an effort to conserve cash.

Speaker 1

The reduction in expenses led to a 19% year over year improvement in our loss from continuing operations. We recorded $133,000 of interest income as well as a benefit of $608,000 from the change in the fair value of common stock warrant and option liabilities, resulting in a net loss attributable to common stockholders of $2,500,000 Our cash and short term investments at the end of Q3 2023 were $15,700,000 a decline of $2,800,000 compared to the previous quarter. We expect our use of cash to increase in the 4th quarter driven by an estimated payment of $1,000,000 related to the grow out of approximately £6,000,000 of grain that will be used to produce pasta and mac and cheese. Accounts receivable of $304,000 declined by $917,000 compared to the beginning of the year, driven by $1,000,000 in milestone payments from Bioceres. As a reminder, we have now collected all milestone payments related to the Chinese approval of HB4 soy.

Speaker 1

Total inventory of $4,300,000 is approximately $1,200,000 higher than the balance at the beginning of the year with approximately 80% of this inventory attributable to GoodWheat driven by production runs in May September of 2023. We do not anticipate any production runs until Q2 of next year and plan to sell through our finished goods over the next 6 months. In conclusion, we are extremely pleased with the progress we have made so far. We have delivered positive gross profit from continuing operations for 7 consecutive quarters, have reduced our SG and A expenses to the lowest level in 4 years lowered our cash burn to less than $3,000,000 in the latest quarter And we now enter 2024 with the opportunity to scale 3 GoodWheat categories and the potential to add additional categories through acquisition. With that, I will now turn the call back over to the operator for questions.

Operator

Thank you. At this time, we will conduct a question and answer Please standby while we compile the Q and A roster. Our first question comes from the line of Dipesh Patel from H. C. Wainwright and Co.

Operator

Your line is now open.

Speaker 3

Hi Stan, T. J. This is Dipesh standing in for Ram Selvaraju. Is there anything else that you can highlight as you look at strategic alternatives, maybe including timelines? And then also, What progress has been made in capturing additional economics in the value chain for Good REIT?

Speaker 3

So some comments around that would be helpful. Thank you.

Speaker 2

Yes. Thank you, Dipesh, and thanks for calling in today. So for your first question, we don't have a timeline that we're ready to give In terms of closing any transactions, but there are several that are in our pipeline and We are continuing to work diligently to do the right steps. In terms of capturing value through the rest of our supply chain, we do have Several agreements that are in front of some of our partners and we do expect More news on that front in our next earnings call.

Speaker 3

Great. Certainly very helpful. Thanks again for the update today.

Operator

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

Speaker 2

All right.

Speaker 4

Thanks for taking my questions and congratulations guys. Nice little quarter here from top to bottom it seems. I have a handful of questions for you. First of all, on Zola. Stan, it sounds like Some of the momentum that you saw in Zola in the second quarter really continued into the third.

Speaker 4

Excluding the impact of new the new flavors that are coming online, can you comment on Zola's Contributions to the top line and retail distribution today versus the Thai watermark, a few quarters ago before some of the challenges emerged.

Speaker 2

Yes, sure. And thanks for calling in today, Ben. For Zola, yes, the challenges that we had last quarter or In Q4 of 2022, they're still continuing. And so we're going to expect to lap those by Q4 of 2023. We have seen incremental distribution and we have seen velocities also start to improve, but we do expect The innovation to be a catalyst for more distribution in 2024.

Speaker 3

Okay.

Speaker 4

Okay, perfect. Thank you. Curious, with GoodWheat Retail Placements now 15 months old, maybe a little more, I'm wondering if you can talk about kind of the lessons that you took from the initial placements A year ago and how you're driving growth now from new retail stores and maybe a more accelerated manner now. I mean, what challenges did you guys run into a year ago that you're not running into today? Any insights there would be

Speaker 2

helpful. Yes. So if we go back 15 months, it was GoodWheat Pasta that we had launched and we were Successful in gaining distribution in a number of different accounts, different size accounts, different regions of the country. We've had lots of great learning, as we had spoken on earlier conference calls on price points and where we need to be in comparison to Other better for you brands, we've also been learning about shelf placement, number of SKUs on shelves, the promoted pricing programs. So all those factors are going into ways that we can optimize our current distribution footprint.

Speaker 2

So I think that's really the focus for the pasta category is making sure that we're nurturing those accounts and those SKUs that we have distribution. And in some accounts, there's opportunities to expand our lineup to include more of the pasta SKUs. So I think that's really what our key learnings for pasta and we're also applying those learnings as we've launched the pancake category and now more recently the mac and cheese category.

Speaker 4

Okay, great. T. J, a clarifying question. In your prepared remarks, did I hear you call out Costs in the Q3 associated with mac and cheese and pancakes, I believe, or am I making that up?

Speaker 1

Yes. No, so I called out R and D expenses that they were higher in Q2 Related to preparing for the launches of pancakes and mac and cheese.

Speaker 4

Okay. So R and D costs in Q2 were directionally higher For given both of those products. Okay. I thought I missed an explicit number. Okay.

Speaker 4

And Last question for me. I mean, the looks like a lot of momentum has really built through 2023 so far. I mean, as you look Into 2024, can you guys give any kind of high level expectations regarding overall retail doors that you hope to be at ending For any kind of high level metrics that you can really provide to help us get a sense of kind of the scale you're looking at 12 months from now?

Speaker 2

Yes, sure. I think when we add up the 3 categories for GoodWheat, we'll be over 3,000 doors ending 2023. And in 2024, our plan is really to nurture those 3,000 doors. There may be additional accounts that come online in the first half of the year, but really we want to make sure that we're growing where we are And that we become almost indispensably attractive to the larger retailers in the large work in the accounts that we are today. So we're still planning on double digit growth for GoodWheat next year and then I would say the same for Zola.

Speaker 3

Got

Speaker 4

it. Okay, very good. Plenty more to talk about, that's a good place to leave it. Thanks for taking my questions and congratulations again on a really nice quarter here. Thank you.

Operator

I'm showing no further questions at this time. I would now like to turn it back To Stan Jacotte for closing remarks.

Speaker 2

In summary, as we enter 2024, Arcadia is in the best position in its history. Our proprietary weed technology has been commercialized in 3 categories with the potential to add more categories through acquisition. We have exited the low opportunity and high resource body care business and are revitalizing the ZILVA Coconut Water brand with innovation rolling out early next year. This has resulted in stronger top line growth and higher gross margins. And finally, we have rightsized the organization and streamlined our cost structure in order to extend our runway to execute our plan.

Speaker 2

We look forward to updating you in the future.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Arcadia Biosciences Q3 2023
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