Arcadia Biosciences Q4 2023 Earnings Call Transcript

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March 28, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to the Arcadia Biosciences 4th Quarter and Full Year 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 call is being recorded. I would now like to hand the conference over to TJ Schafer, 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.

Speaker 2

Before we start, we would

Speaker 1

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 ks. With that, I'll now turn the call over to Stan.

Speaker 2

Good afternoon, everyone, and thank you for joining us today to review our Q4 and full year results for 2023. I am pleased to report that Arcadia continues to make steady progress in executing Project Greenfield, our 3 year strategic plan to unlock the company's potential and provide a path to profitability. We are halfway through this strategic plan and the results of this focus are unmistakable. Arcadia has significantly improved quality of revenues and has now delivered 2 straight years of gross profit growth for the first time in its history. SG and A expenses have declined for 2 straight years and are at their lowest level since 2019.

Speaker 2

These factors have had a significant impact on cash as our cash used in operations has gone from $25,900,000 in 2021 to $15,300,000 in 2023, a decline of 41%. Let's now turn our attention to GoodWheat. The GoodWheat brand continues to expand and in Q4 added over 1,000 shelves compared to Q3. Since our launch 18 months ago, the brand can now be found in over 3,500 grocery shelves in the pasta, pancake and mac and cheese categories. In addition, we are excited to announce that all 3 GoodWheat product categories are now available nationwide on Amazon.

Speaker 2

As we look forward into 2024, our focus will be on nurturing these points of distribution to grow velocity and dollar sales per store. These success stories by category will be the catalyst for expanded distribution in 2025 and beyond. And GoodWheat has recently received many accolades from some significant publications. And I just want to highlight 2 of them here today. Better Homes and Gardens with 13,000,000 followers across social platforms recognize GoodWheat in the new basics category as the best stealthy healthy pasta with the same flavor as regular pasta, but 4 times the fiber.

Speaker 2

And the Ethis Not That site, which has 7,000,000 unique views per month awarded GoodWheat Quick Cakes recognition in 2 different categories in January. In the 13 best store bought high protein desserts, they highlighted GoodWheat Chocolate Chocolate Chip Quick Cakes as a dessert when wanting something chocolatey and warm. With 7 grams of protein, they're easy to make by cooking them in the microwave for 75 to 90 seconds. And in the 38 best store bought high fiber snacks, they recognize GoodWheat Buttermilk Quick Cakes as a breakfast mix that provides a fluffy pancake that also carries 11 grams of fiber per serving. These accolades from trusted independent testing outlets are proving what we already know that our proprietary wheat is commercially viable to create great tasting products while sneaking in more fiber and protein.

Speaker 2

And we don't plan on stopping with just good wheat products. There are thousands of products across the grocery store that can offer these same valuable benefits. So we see a long term path to generate recurring royalty revenue. There are 2 key steps to monetizing this technology. 1, partner with the wheat supply chain in order to produce a scalable, cost effective, identity preserved wheat supply.

Speaker 2

We need our wheat technology integrated into all customer preferred wheat types and then efficiently move from seed to farm to mill to delivered flour. We are currently in discussion with several potential partners and we realize it will take some time to build and perfect this step. In parallel, the second step is to work with large food manufacturers to create a demand for our wheat. This can create a long term pull through partnership and ensure we have enough volume through our supply chain system. Contact has begun across several categories.

Speaker 2

And again, it will take some time to develop products with their R and D groups. Now over to Xylla Coconut Water. The coconut water category continued to perform well in 2023 with unit sales increasing 6% while dollar sales grew 15% according to Nielsen data for the 52 weeks ending December 30, 2023. As we previously disclosed, Zillow lost distribution at the end of 2022 due to supply chain issues and we felt the impact in 2023 as we experienced double digit declines in both units and dollar sales. However, when we look at 2024 and beyond, we are optimistic that Zola has turned the corner for the following reasons.

Speaker 2

1, Nielsen data for the last 13 weeks shows Zolig unit sales up 2% with dollar sales flat. And the latest 4 week data shows unit sales were up 8% and dollar sales were up 4%. 2, we have new flavor innovation that will be coming to market in Q2 for beverage season. That includes our original, lime and pineapple flavors, all in a new 16.9 ounce re sealable tetra pack container that retailers are excited about. Pineapple is the number one coconut water flavor and lime is the number one flavor in sparkling water.

Speaker 2

So we believe these new offerings will energize Zillow sales. Both flavors are 100 percent natural, no sugar added and non GMO and are a great addition to our original extra pulp and espresso flavors. And 3, we are blind the sight into new retailer wins in the springsummer beverage season that could increase Zillow distribution by as much as 50% this year. So a lot to be excited about for Zola when we look at the next several quarters. The last 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

Over the last 8 months, we along with our bankers have engaged with a significant number of potential transaction partners to try to find the best outcome for Arcadia and our shareholders. And while we aren't ready to provide a detailed update today, we continue to have discussions and perform the due diligence work necessary to scale Arcadia and accelerate our ability to deliver cash flow positive results. We will keep you updated as material events occur and 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. As we look to 2024, the foundation we have laid over the past 2 years provides optimism for even stronger results. GoodWheat is now in 3 categories and garnering national attention, which will also assist our efforts in monetizing our wheat IP through other food manufacturers.

Speaker 2

Zola is leveraging new flavor innovations to expand distribution and is anticipating double digit growth in 2024. And as mentioned in our last call, we continue to evaluate our expense profile in an effort to conserve cash. Due to all of these factors, we anticipate ending 2024 with a net operating loss under $10,000,000 for the first time in the company's history. With that, I will turn the call over to TJ to discuss our Q4 and year end results. T.

Speaker 2

J?

Speaker 1

Thank you, Stan, and good afternoon to everyone joining us on the call today. In my prepared remarks, I will walk through our Q4 and full year 2023 financial results as well as provide insights into 2024. As a reminder, my comments today will focus on our results from continuing operations, excluding the impact of Body Care, which we discontinued in Q3 2023. With that, let me start by discussing our 2023 Q4 financial results. Our Q4 2023 revenues from continuing operations were approximately $1,200,000 compared to revenue of $745,000 in Q4 2022.

Speaker 1

The 57% increase in sales was primarily driven by GoodWheat and the timing of GLA oil sales as Zola remained relatively flat during the quarter. On a year over year basis, GoodWheat distribution increased nearly 300% from approximately 1200 stores at the end of 2022 to more than 3,500 stores at the end of 2023. Over the past 12 months, we also introduced 2 additional GoodWheat categories with our pancake waffle mix launching in August 2023 and mac and cheese in November 2023. Despite higher revenues, our cost of goods sold were actually lower in Q4 2023 compared to the same period last year as our 2022 results included the impact of write downs related to hemp seeds and our Archipelago joint venture, which are all no longer part of our continuing results as we focus on generating profitable revenue. Our research and development expenses of $332,000 were $169,000 or 34 percent favorable to Q4 2022, driven by the timing of innovation work in 2022 in order to launch new GoodWheat and Zola products.

Speaker 1

Our selling, general and administrative expenses of $3,400,000 declined $207,000 or 6 percent compared to the same period last year, primarily driven by headcount reductions that took place in Q3 2023. In summary, our Q4 revenues from continuing operations increased $425,000 and our gross profit increased $655,000 compared to the same period last year. While sales and margins improved, we also reduced our R and D and SG and A expenses by $640,000 leading to a $1,300,000 improvement in our loss from continuing operations. So we are very pleased with the progress we made in Q4 2023. Moving now to full year 2023 results.

Speaker 1

Our total revenues of $5,300,000 declined $2,100,000 compared to the prior year as our 2022 results included more than $2,700,000 in revenues from grain sales as well as a non recurring Despite the lower reported sales, our gross profit increased 54% to just over $2,000,000 as we continue to emphasize profitable growth and higher quality revenue streams. We remain focused on managing our operating expenses and driving costs lower, which I believe is apparent in our results. Our research and development expenses of $1,400,000 declined 8% year over year and our selling, general and administrative expenses of $14,500,000 decreased 4% compared to last year and are now at the lowest level since 2019. And if you look at our R and D and SG and A expenses together, 2023 represents the lowest level of spend since before Arcadia went public in 2015. Our loss from continuing operations of $13,900,000 is relatively unchanged versus prior year as reported.

Speaker 1

However, our 2022 results include a $2,000,000 benefit related to the sale of our Vertica joint venture. Excluding the impact of this gain, our loss from continuing operations would have improved by $2,100,000 or 13%. In 2023, we used approximately $15,000,000 of cash to fund our operations and we also raised $6,000,000 in March 2023, resulting in a year end cash balance of nearly $12,000,000 We believe this cash will fund our operations beyond 2024. So let me provide some context. As Stan mentioned, we are excited about entering 2024 with 3 GoodWheat categories and a tremendous opportunity to meaningfully scale our Zola coconut water business with the new pineapple and lime flavors.

Speaker 1

As a result, we expect to increase sales at a double digit rate in 2024. The increase in sales should lead to higher gross profit dollars, albeit at a lower gross margin rate. We will continue to focus on managing our operating expenses and expect to realize the full year benefit of the cost reductions we have implemented. The impact of these actions will result in an estimated use of cash in the single digits in 2024, which would also be the lowest use of cash since Arcadia went public. With that, I will now turn the call over to the operator for questions.

Operator

Thank you. And our first question comes from the line of Ben Klieve with Lake Street Capital Markets.

Speaker 3

All right. Thanks for taking my questions. First, on the 4th quarter and full year gross profit and gross margin side, without the income statement on the press release, I'm having a hard time putting this together. Can you just lay out what the gross profit and gross margin was in both Q4 and on a full year basis, please?

Speaker 2

Yes, Ben, this is Stan. Thank you for calling in. And I'll turn that over to TJ to answer.

Speaker 1

Yes. So gross profit dollars in Q4 were 499,000 dollars and the gross profit dollars for the full year were 2.03 $1,000,000

Speaker 3

Okay, great. And then okay, I can back that out. Okay, So from when you talk about the outlook for 24 double digit revenue growth, but TJ, you commented that given some of the portfolio shifts, you expect margins to come down a bit. Can you talk about your expectations for gross profit improvement from 2023 to 2024?

Speaker 1

Sure. So again, double digit increase in sales just wouldn't be forecasting. I think our if you look at our full year, we had a 38% gross margin. So that's I think there's some product mix elements to that. And so we're looking more kind of down in the 30% to 35% range.

Speaker 1

It's kind of the numbers that we're looking at.

Speaker 3

Got it. Okay. That's helpful. Thank you. Okay.

Speaker 3

So turning to the comments you made on trying to recognize some royalty revenue and partnering with the weak supply chain and working with the larger food manufacturers. Especially working with the supply chain was something that had been tried a couple of years ago. And not just at Arcadia, but industry wide, this has been a real challenge for these kind of novel enhanced nutrition variety to really find their way into supply chain with these big players. Can you talk about the conversations that you're having today and give us a sense that these large wheat companies are really serious about engaging with technology like you've developed?

Speaker 2

Yes. And so you're right, Ben, that is I think it's been a challenge for any identity preserved crop, but we are actually seeing some manufacturers and some supply chains that are investing in that part of the business because they are realizing better margins on those types of products. So we're kind of seeing the industry start to invest more heavily in that route.

Speaker 3

Okay, great. Very good. On GoodWheat, got a question on GoodWheat, question on Zol and then I'll get back in queue here. In GoodWheat, I know you're 6 months now into the launch of Pancake mix. I'm wondering if you can talk about kind of the performance of these new products today versus the kind of the performance of pasta 6 months in after you launch them?

Speaker 3

Are you realizing revenue synergies now that you've got more products in line? Or is kind of the ramp over the 1st 6 months kind of similar today as it was when you started GoodWheat a couple of years ago

Speaker 2

now? Yes, I would say for pancakes, we're seeing a similar ramp. But I would say that our velocities compared to the average better for you products are higher on pancakes than they were on pasta. It just is a more recognizable segment in that particular category. And so we're kind of part we are benefiting from that.

Speaker 2

Okay. If you

Speaker 1

really can

Speaker 2

tell on anything on mac and cheese, that was since that was just November launch.

Speaker 3

Okay, very good. Thank you. And then one last one for me. In Zoli, you talk about expanding distribution, new SKUs coming online here. You also in your latest investor presentation layout target of expanding this from a 4% ACV in 2022 to 40% in 2025.

Speaker 3

Can you comment on kind of what that number was exiting 2023? And then collectively how all these dynamics will improve that number? How much that number will be improved in 2024?

Speaker 2

Yes. So for 2024 or 2023, we dipped a little bit from that 4% as we have stated earlier. But again, if we get a 50% increase in distribution, that's going to get us close to that 5% to 6% ACV. And so we still have ways to go to reach that 2025 level. But the other thing to note is the distribution that we are getting is basically filling in some of the retailers that are in our stronghold coast regions.

Speaker 2

And we still have a lot of efforts underway to kind of fill in the rest of the country.

Speaker 3

Got it. Got it. Very good. Okay. I appreciate you taking my questions.

Speaker 3

I'll get back in queue.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Dipesh Patel with H. C. Wainwright.

Speaker 4

Hi, Stan. Hi, T. J. This is Dipesh on behalf of Ram Selvaraju at H. C.

Speaker 4

Wainwright. I've got a couple of questions with regards to revenue and then some just one other on the strategic review process. So the first one, what do you consider the most valuable and fastest growing product line from the GoodWheat franchise? Would you say it's mac and cheese, quick cakes or pasta?

Speaker 2

Yes. Hi, Dipesh. This is Stan. Thanks for calling in. Right now, we would probably say pasta, and it's because we're lapping more distribution growth from pasta.

Speaker 2

But again, for both pancakes and mac and cheese, we have gained some distribution that we expect to nurture over the next year. So I think all three of them will be growing this year.

Speaker 4

Got it. And then I guess a follow-up question on the GoodWheat distribution channel, which one would you say appears to be most profitable at this point?

Speaker 2

Well, right now, most of our distribution is in traditional grocery. And those, I think, have equal profitability for those retailers.

Speaker 4

Okay. And then just a couple more. What innovative strategies can the company use to boost revenue growth in the coming quarters?

Speaker 2

Yes. So I think we've kind of laid out some of our key principles. One was distribution growth, which we've highlighted on Zola. The other one is focusing on specific retailers for GoodWheat that we currently have distribution. And looking at the entire mix of tools, whether that's in store and out of store to improve velocity and continue to add SKUs to those stores with our other with our other categories.

Speaker 4

Great. That's helpful. And then last question for me. When does the company plan to complete the strategic review process?

Speaker 2

Well, what we said is, there is no specific timetable to complete the review. So we are continuing to do our due diligence and we'll have more information as material events occur.

Speaker 4

Got it. Thank you for taking my questions.

Operator

Thank you. I'll now hand the call back over to President and CEO, Stan Jacot for any closing remarks.

Speaker 2

So in summary, as we enter 2024, Arcadia is in a great position to continue its positive trajectory. We have transitioned the top line to high quality revenue that generates gross profit across multiple sources. We have right sized the organization and streamlined our cost structure in order to extend our runway. Our GoodWheat is in more than 3,500 stores in 3 categories and Zillow Coconut Water is positioned for double digit growth with new flavors and distribution. And finally, we remain focused on adjacent acquisitions well as monetizing our IP.

Speaker 2

We look forward to updating you in the future. Thanks again for joining us and have a great rest of your day.

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Earnings Conference Call
Arcadia Biosciences Q4 2023
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