Q3 2023 Arcadia Biosciences Inc Earnings Call

Good 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 speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one one on your telephone and you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again, please be advised that today's conference is being recorded.

I would now like to hand, the conference over to TJ Schaefer, Chief Financial Officer at Arcadia. Please go ahead.

Yeah.

Thank you and good afternoon, joining me on the call today as Sanjay got Arcadia, as President and Chief Executive Officer.

This call is being webcast and you can refer to the company's 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.

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. Thank you for joining us today for our 2023 third quarter conference call.

I am pleased to report that Arcadia continues to make excellent progress in executing project Greenfield, our three year strategic plan to unlock the company's potential and provide a path to profitability.

Good wheat, pasta and pancake mixes and Zola coconut water add more than 1000 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&A since 2019.

I spoke last quarter about our plans to scale more quickly and so they didn't want to provide an update on our key initiatives.

First could be pasta is executing two programs that are expected to drive growth in Q4 and throughout 2024.

The lower average price is a fully end market across more than 2000 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 good a picky eater approved with a clean slate guarantee you'll love it or your money back.

We began this new messaging in October during national pasta month, resulting in over 14 million impressions and multiple social media Influencer partnerships.

Yeah.

The second key scaling initiative was the launch of good week into the breakfast category with new better for you pancake muffin mixes as well as single serve quick kicks. These.

These new cards familiar with simple ingredients and our Acadian proprietary non GMO wheat flour, which delivers the same case in texture regular pancakes, but sneaks in more fiber and protein that traditional wheat flour.

And product testing consumers prefer the taste that could be pancake mix two to one versus the leading better for Ya pancake mix.

I am pleased to report that retailers are recognizing this innovative proposition and we will be shipping to over 750 stores by the end of the year.

Not only will could be passed and pancake mixes provide a foundation for growth in 2024 I have another good with initiatives to announce today the launch a good wheat Mac and cheese.

The Mac and cheese categories over $1 $1 billion 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 good with Mac and cheese packaging that most fiber of any brand in the category four times more than the leading brand.

In fact, one serving a good bit Mac and cheese has the same fiber as to starting to devote meal or two and a half servings of blockly.

And just like our pasta and pancake mixes could be Mac and cheese is higher in protein and leading brand with 12 grams of protein per serving.

Our Mac and cheese as sneaky delicious and picky eater approved bandwidth real cheese, and no artificial flavors dies or preservatives.

There are three variety to choose from classic Cheddar White Cheddar and three cheese.

We start shipping into retailers this month and will be shipping to over 350 stores by the end of the year.

And in February we plan to have all three varieties available online at <unk> Dot com.

Brazil, our coconut water innovation has been our focus with the upcoming introduction of two new flavors pineapple in line to add to our original extra pulp and espresso flavors.

Pineapple is the number one coconut water flavor in line was the number one flavored sparkling water. So we believe these new offerings will energize the sales or.

Both flavors are 100% natural no sugar added and non GMO.

Largely in Q1 2020 for these new flavors will be available in 69 ounce resealable containers.

The last deal initiative to discuss today is 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 discussed in previous earnings calls our strategic plan calls for an acquisition that would allow us to bring the goodwill value proposition to an existing business and our new wheat based categories.

We are beginning the due diligence process with potential candidates and are also evaluating asset sale and larger emerging opportunities with our banking partner and we will keep you updated as material events occur. However.

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 to discuss our Q3 financial results T J.

Thank you Stan and good afternoon, everyone. Today I will walk you through our third quarter financial highlights in my prepared remarks will focus on our results from continuing operations, which excludes all body care related results for the period discussed so.

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 2022.

And then made the decision to license the savvy natural brand to radiant beauty in July of 2022.

At that time, we also ceased body care manufacturing activities and began using third party manufacturers for pro vault and sole spring in an effort to simplify our business focus our resources and increase our margins, while freeing up cash.

We considered good wheat, zola and protocols 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 one a lack of distribution opportunities as the majority of U S retailers would not take CBD products, including online retailers such as Amazon.

Too many retailers that did sell CBD put the product behind locked glass doors that had a negative impact on sales.

Three CBD products could not be marketed on large mainstream platforms, such as Google search Facebook and Instagram limiting our ability to advertise and.

And for many retailers that one 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 pro vault and saw spring 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 2023, we stopped selling both brands.

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 $6 million increased 2% year over year as higher sales of good wheat 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 good week distribution and higher sales of zoloft.

Gross margins in Q3, 2023, or 31% compared to 28% in the prior year, which was in line with our expectations.

On a year to date basis, our gross margins have increased nearly 500 basis points compared to the same period last year.

Research and development expenses of $305000 or $50000 above prior year, but $86000 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 $4 million were 18% below prior year and 4% below the prior quarter, primarily driven by lower head count associated with the body care brands as we discussed last quarter.

And as Stan mentioned in his opening remarks, our SG&A expenses are now at the lowest level since 2019.

We will continue to evaluate our expense profile in an effort to conserve cash.

The reduction in expenses led to a 19% year over year improvement in our loss from continuing operations, we recorded $133000 of interest income as well as a benefit of $608000 from the change in the fair value of common stock warrant.

Option liabilities, resulting in a net loss attributable to common stockholders of $2 5 million.

Our cash and short term investments at the end of Q3 2023 were $15 7 million a.

A decline of $2 8 million compared to the previous quarter.

We expect our use of cash to increase in the fourth quarter, driven by an estimated payment of $1 million related to the grow out of approximately 6 million pounds of grain that will be used to produce pasta and Mac and cheese.

Accounts receivable of $304000 declined by $917000 compared to the beginning of the year driven by $1 million in milestone payments from bio series.

As a reminder, we have now collected all milestone payments related to the Chinese approval of HP for soy.

Total inventory of $4 $3 million is approximately $1 $2 million higher than the balance at the beginning of the year with approximately 80% of this inventory attributable to good week driven by production runs in May and 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 six 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 seven consecutive quarters.

We've reduced our SG&A expenses to the lowest level in four years lowered.

Lowered our cash burn to less than $3 million in the latest quarter and we now enter 2024 with the opportunity to scale three good wheat 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.

Thank you at this time, we will conduct a question and answer session as.

As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

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

Okay.

Yes.

Yes.

Our first question comes from the line of <unk> Patel from H C. Wainwright. Your line is now open.

Hi, Stan T. J. This is <unk> standing in for Ross Silver Roger.

Is there anything else that you can highlight as you look at strategic alternatives may be including timelines and then also.

What progress has been made in capturing additional economics in the valley shrink for good wheat. So some comments around that would be helpful. Thank you.

Yes, Thank you <unk> and thanks for calling in today so.

For your first question, we don't have a timeline that we are ready to give.

In terms of closing any.

Transactions, but there are several that are in our pipeline and we.

We will continue 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.

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

Thank you one moment for our next question.

Yeah.

Our next question comes from the line of Ben <unk> from Lake Street Capital Markets. Your line is now open.

Alright, Thanks for taking my questions and congratulation guys nice quarter here from top to bottom of teams.

Have have a handful of questions for you.

First of all on Zelle.

It sounds like some of the momentum that you saw in <unk> in the second quarter really continued into the third.

Sure.

Excluding the impact of new.

The new flavors that are coming online can you comment on on Zelle was.

Contribution from the topline of retail distribution today versus the high watermark.

A few quarters ago before before some of the challenges emerge.

Yes, sure and thanks for calling in today, Ben for Zola, Yes the.

The challenges that we had last quarter.

In Q4 of 2022, there is 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 velocity is also start to improve.

But we do expect.

Innovation to be a catalyst for.

More distribution in 2024.

Okay.

Okay perfect. Thank you.

Yeah.

<unk>.

I'm curious with good week retail placements now <unk>.

<unk> 15 months old.

Maybe a little more.

I'm wondering if you can talk about kind of the lessons that you talk from.

The initial placements.

A year ago, and how you're driving growth now from new retail stores, and maybe a more more accelerated manner now.

What challenges you guys wrote them until a year ago that you are not running into today.

Any insight there would be helpful.

Yes so.

If we go back 15 months it was going to be positive 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.

We had spoken in earlier conference calls on price points, and where we need to be in comparison to other better for you brands.

<unk> also been learning about shelf placement number of Skus on shelf the promoted pricing programs.

So all those factors are going into.

Ways that we can optimize our current distribution footprint. So I think thats 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 <unk> Skus.

So I think thats 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 magazines category.

Okay great.

T. J clarifying question in your prepared remarks did I hear you call out costs in the in the third quarter associated with Mac and cheese, and pancakes, I believe or am I, making that up.

Yeah, no so I called out R&D expenses that.

They were higher in Q2 related to.

Preparing for the launches of pancakes, and Mac and cheese.

So R&D cost in Q2 were Directionally higher.

Before given both of those products, Okay, I thought I thought I missed and export the number.

Okay.

Then.

Last question for me I mean the.

It looks like a lot of momentum is really built through.

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 hope to be at.

<unk> 24.

At a high level metrics that you can really provide to help us get a sense of kind of the scale youre looking at 12 months from now.

Yes sure.

I think when we add up the three categories for good wheat will be over 3000 doors.

Ending 2023 and in 2024.

Our plan is really to to nurture those 3000 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 indispensable attractive to the larger retailers.

And largely in the accounts that we are today.

So we're still planning on double digit growth for good week next year, and then what I would say the same facility.

Got 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 Unreal and nice quarter here.

Thank you.

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

In summary, as we enter 2020 for Arcadia is in the best position in its history.

Our proprietary <unk> technology has been commercialized in three categories with the potential to add more categories through acquisition.

We have exited the low opportunity and high resource body care business and our revitalizing the Zelda coconut water brand with innovation Rolling out early next year.

This has resulted in stronger topline growth and higher gross margins and finally, we are we right size the organization and streamlined our cost structure in order to extend our runway to execute our plan.

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

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

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