Q2 2023 Arcadia Biosciences Inc Earnings Call
Good afternoon, and welcome to Arcadia Biosciences second quarter, 2023 financial results and business highlights conference call at.
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I'd like to hand, the conference over to T. J Schaefer Chief Financial Officer at Acadia. Please go ahead.
Thank you and good afternoon, joining me on the call today is Sanjay caught Arcadia, as President and Chief Executive Officer.
This call is being webcast and you can refer to the Companys 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.
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-Q.
With that I'll now turn the call over to Stan.
Good afternoon, everyone and thank you for joining us today for our 2023 second quarter conference call.
I am pleased to report that Arcadia continues to make progress in executing project Greenfield, our three year strategic plan to unlock the company's potential and provide a path to profitability.
Both good wheat, and Zola added hundreds of stores of distribution in Q2.
And excluding the managed decline of body care top line revenues would have 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 projects Greenfield milestones.
Let's start with how we plan to scale revenues more quickly.
For good wheat pasta there are two key programs, which are expected to drive growth in the second half of 2023.
Last quarter I discussed that good wheat pasta is experiencing higher velocities in 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.
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 can be offset by higher volumes.
The second program is a shift in our marketing message to highlight the great taste of good wheat pasta.
Many people do not like the taste of high fiber foods and goodwill is the only brand that can sneak health and their family's favorite foods without changing their taste in.
In fact, we are so confident in the taste and texture that we are rolling out it tastes guarantee you'll love it or your money back.
This message will be delivered across our marketing stack beginning in September including through new social media Influencers that will amplify our reach.
The combination of these two programs will also unlock new distribution at larger retailers as we receive feedback that they loved our brand and loved our product, but they wanted to see more impact in market.
The second scale initiative was announced on July 17, we announced that good weed is launching into the breakfast category with new better for you pancaking them off of mixes as well as single serve quick cakes.
<unk> just in time for back to school, the new pancake mixes are made with simple ingredients and our <unk> 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.
And product testing consumers prefer the taste that could be pancake mix two to one versus the leading better for you pancake mix.
Good we can kick it off of mixes will be sold in resealable multi serve couches with.
With each serving delivering eight times of fiber of traditional pancake mix and five grams of protein.
They will be available on three classic varieties for the whole family, including butter milk chocolate chocolate chip and Apple cinnamon.
In addition to the multi serve pancake and waffle mixes. Good wheat is also launching quick cakes and innovative single serve instant pancake.
Critics are a great option for busy mornings simply poor one pack into a bowl add water and microwave for 75 seconds for our hot fresh pancake no freezer burn easy clean up in the retail price is roughly half of existing single serve pancake cups.
Quick takes over 11 times the fiber of traditional single serve pancake cups and containers seven grams of protein per serving.
Quick hakes will be sold with five individuals two ounce packets per carton and will also be available in three flavors butter milk chocolate chocolate chip and can say.
We believe that adding another day part with pancake and waffle mixes is a perfect complement to our existing pasta lineup pancakes.
Pancakes, our beloved classics every household and mixes represent an $850 million category with better for you nutrition and protein forward options seeing the highest rates of growth.
Our critics are currently available nationwide after launching August 1st one Amazon both cricket and multi serve Pancaking Walter mixes began shipping the customers this month.
And interest has been strong retailers recognize our innovative proposition and we expect to gain distribution in more than 600 stores by the end of Q3.
Shifting now to our third scaling initiative, which is accelerating growth of Zillow coconut water.
Last quarter, we discussed the distribution and velocity headwinds in the coconut water category and I am pleased to report that Q2 marked the beginning of a turnaround.
Dollar grew distribution in Q2, reversing a multi quarter decline in store count.
We are also seeing great success in adding racks in the produce category driving velocity and high traffic accounts and innovation is ramping up on the brand for the first time in years with new launches planned for Q1 2024.
<unk> continues to be a focus for us and we expect these programs to.
To grow distribution and velocity in the category.
Finally, I want to address the last scaling initiative the strategic review announced on July 20th.
Which stated that Arcadia would explore a range of strategic options, which could include an asset sale acquisition merger sale or other strategic transactions.
As we have mentioned previously our strategic plan calls for an acquisition that would allow us to bring the goodwill value proposition to an existing brand and a new wheat based category.
There are many categories of the grocery aisle, where our proprietary wheat can provide significant differentiation and we believe there is a tremendous opportunity to scale our business faster by purchasing an existing brand in a different category that is Ari has broad shelf placement and establish distribution.
While we have narrowed the field of target acquisitions. We have also received several inquiries from parties interested in a larger merger. So we feel that this is the right time to explore the myriad of options with an objective banking partner, especially after closing of the second quarter of 2023, an excellent cash position.
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.
We will keep you updated as material events occur.
Let's transition now to reducing cost and complexity.
We have made the decision to streamline our operations and exit our remaining body care brands Pro vault unsold spring in order to focus our resources on our most promising opportunities on good wheat Angola.
We were unable to find an interested buyer given the sterling.
Severely depressed market for CBD products.
As a result, we continued to sell through our existing inventory during the first half of the year and officially notified retailers in Q2 that we plan to exit the business.
We are running closeout sales on our websites to drive additional purchases and we expect any future write downs to be minimal.
As part of the reduced workload by exiting body care, we made the decision to combine functions and reduced head count by 25%.
These organizational changes were necessary to keep us on the path to achieving our project greenfield milestones and extending our financial runway.
There have been additional cost efficiencies as a result of right sizing our organization and the combined changes will result in operating expense savings of $2 million and the remainder of 2023 and 3 million to $4 million annually.
With that I will turn the call over to T. J to discuss our Q2 financial results as well as provide additional detail around our cost savings initiatives T. J.
Thank you Stan and good afternoon, everyone. Our Q2 revenues of $1 $4 million were down $119000 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 have been up 10% compared to Q1.
While we experienced 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 tastes guarantee to incentivize trial and launching new categories, where we believe good wheat 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 $170000 write down of our hemp seed business in Q2.
As a reminder, our 2022 first half sales included a number of nonrecurring 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 co packing and savvy naturals businesses that are no longer part of our portfolio.
And three nearly $900000 in licensing revenue related to the H before 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 $391000 in the second quarter were slightly higher than the first quarter as we prepared to launch our good wheat pancakes and Q3.
R&D expenses on a year to date basis or flat compared to last year a trend we expect to continue for the remainder of this year.
Selling general and administrative expenses of $3 $8 million declined $576000 or 13% compared to the previous quarter. Despite a similar level of marketing spend and they are now at the lowest level in three years.
Let me spend a few minutes talking about the cost savings that Stan mentioned earlier as well as what we can expect over the next several quarters from an operating expense perspective.
On July 20th we announced our intention to exit the body care brands. While these businesses generated good gross margins. They included a large number of inputs that tied up cash and our ability to scale was limited due to a depressed market for CBD.
In the first half of 2023, we did not produce any new body care products and we continued to sell through our existing inventory. So our expectation is that any potential write downs will be minimal.
We currently estimate our exposure to be less than $100000 and we are hopeful to be out of both body care and hemp by the end of Q3.
In connection with this exit we are also streamlining our operations and expect the total impact to be annualized savings of $3 million to $4 million.
The majority of the cost savings initiatives have already been identified and implemented including a 25% reduction in our head count.
We estimate that these actions along with others already taken will result in $2 million in operating expense savings in the second half of this year with the majority of the savings occurring in Q4.
So as we look at SG&A going forward, we expect higher expenses in Q3 compared to Q2 as a result of higher marketing spend for both pasta and our pancake launch as well as employee separation costs due to head count reductions.
Starting in Q4, we expect SG&A to decline to a run rate of around three $5 million to $4 million per quarter, depending on the level of marketing spend with modest improvements across 2024.
In the second quarter, we recognized $207000 in interest income as a result of the higher interest rate environment as well as a $4 $4 million benefit from the change in fair value of our common stock warrant liabilities.
The end result was net income attributable to common stockholders of $823000 or <unk> 61 per share.
Moving now to the balance sheet.
Cash and short term investments at the end of June were $18 5 million.
A decline of $4 $5 million compared to the end of March.
As we discussed last quarter, we expected our use of cash to increase in Q2, primarily driven by an inventory build for both good wheat, and Zola and Thats exactly what happened with our inventory increasing $1 $3 million compared to Q1, excluding the write off of hemp seed inventory.
Our accounts receivable balance declined $300000, primarily due to the $500000 HP for soy milestone payment.
We have now received the entire $2 million in cash from bio series related to the China milestone.
So in summary, we have made good progress turning low quality non recurring revenues and to high quality ongoing revenue streams, and we have launched additional scaling initiatives.
We have also right sized our expenses in order to protect against any potential shortfalls in order to maintain our cash balance and remain on track with our long term strategy project Greenfield.
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 phone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby as we compile the Q&A roster.
One moment please for our first question.
Yes.
Our first question will come from Ben <unk> of Lake Street Capital markets. Your line is open.
Alright, thanks for taking my questions.
Got it.
Results here in the quarter it sounds like an encouraging second half of the year coming.
A couple of questions on distributions. So first sustained 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 down much.
Yes, 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 similar question on good wheat.
And really curious more about your prior expectations.
The store count that you are expecting by the end of this year do your prior expectations per store count a good wheat continue continue to track as expected three months ago or has that changed in any material way.
Yes, I think we kind of gave a range of around 3000 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 planet grams fall some of them have moved out of $2023 2024.
But we'll keep you updated.
Okay, Alright very good.
And on.
On the.
Okay.
On the pricing initiatives the thing good we'd I appreciate that.
Dynamic.
We're working through there can you help us understand the.
Volume kind of.
Offsetting.
Lower pricing model can you talk about some of the margin structure you are expecting on this on those products going forward here.
Yes, so we do expect to see our margins.
Erodes slightly on good wheat.
Some of this is because obviously the the pricing is the driving factor.
But we still expect to see margins in the Twenty's. So we.
It just is going to be kind of more like mid low twenty's versus mid to high <unk>.
Okay got it.
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.
Product lines that you have and Zola and goodwill are both decidedly core.
Can you.
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 are taking place over the last few quarters.
Yes, we're confident in our portfolio and we're only going to add to it from here.
Okay, Alright very good.
That's what I thought.
Good to hear you feel.
Feel that way.
Good well.
For taking my call again, there's more to talk about but I'll get back in line congratulations on a good quarter.
Thank you. Thank you.
Thank you.
One moment please for our next question.
Yeah.
Our next question will come from <unk> Patel of H C. Wainwright Your line is open.
Hi, Dan Hi, T. J. This is the cash standing in for Rob sales around you.
A couple of questions two or three questions.
Are you is it possible for you guys to add any color additional color on the status of exploring strategic opportunities.
Yes, so I think at this point or.
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 good wheat are there any like any new additional channels for that product.
Yes, so that is something that we are actively exploring beyond grocery expanding that brand into into other channels as well so.
More to come when we secured distribution, but yes that is part of our plan.
Alright, and then the last question.
Would you say the current product mix is.
<unk> will there be further paring or adjusting in the future.
Yes, no I think our product mix.
We're satisfied with with the Skus that we have we feel like we can still grow the amount of skus that we have to.
Even better meet consumer needs.
But.
We don't see any more caring opportunities.
Alright, gentlemen, thank you very much for the update.
Thank you. Thank you.
Thank you.
Yes.
And I am seeing no further questions in the queue.
I would now like to turn the conference back to Dan Stan Jacob for closing remarks.
So to summarize Arcadia is well positioned for the future. We have made significant progress turning low quality nonrecurring 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.
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