Arcadia Biosciences, Inc. (NASDAQ:RKDA) Q3 2023 Earnings Call Transcript

Arcadia Biosciences, Inc. (NASDAQ:RKDA) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good afternoon and welcome to Arcadia Biosciences Third Quarter 2023 Financial Results and Business Highlights Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to T.J. Schaefer, Chief Financial Officer at Arcadia. Please go ahead.

T.J. Schaefer: 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 hard language in our most recently filed 10-Q. With that, I will now turn the call over to Stan.

Stan Jacot: 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 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 adds 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&A since 2019. I spoke last quarter about our plans to scale more quickly. And today, I want to provide an update on those key initiatives.

First, GoodWheat Pasta is executing two 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 either approved with a clean plate guarantee, you will 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. The second key scaling initiative was the launch of GoodWheat into the breakfast category with new better-for-you Pancake & Waffle Mixes as well as Single-Serve Quikcakes.

These new products are made with simple ingredients in Arcadia’s proprietary non-GMO wheat flour, which delivers the same case 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 2:1 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 750 stores by the end of the year. Not only will GoodWheat pasta and pancake mixes provide the foundation for growth in 2024, I have another GoodWheat initiative to announce today, the launch of GoodWheat Mac & Cheese. The Mac & Cheese category is 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 GoodWheat Mac & Cheese packs in the most fiber of any brand in the category, 4x more than the leading brand. In fact, one serving a GoodWheat Mac & Cheese has the same fiber as two servings of oatmeal or 2.5 servings of broccoli. And just like our pasta and pancake mixes GoodWheat Mac & Cheese is higher in protein than leading brand with 12 grams of protein per serving. Our Mac & Cheese and Sneaky Delicious and picky-eater approved made with real cheese and no artificial flavors, dyes or preservatives. There are three varieties 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 3 varieties available online at eatgoodwheat.com. For Zola Coconut Water, innovation has been our focus with the introduction of 2 new flavors, pineapple and lime to add to our original extra pulp and espresso flavors. Pineapple is the number one coconut water flavor and lime is the number one flavor in sparkling water. So we believe these new offerings will energize Zola 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 go 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 transactions.

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 our new wheat-based categories. We are beginning the due diligence process with potential candidates and are also evaluating asset sales 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 transactions 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.?

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T.J. Schaefer: Thank you, Stan, and good afternoon, everyone. Today, I will walk you through our third quarter 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 2022 and then made the decision to license the Savvy Naturals brand to Radian’s Beauty in July of 2022. At that time, we also ceased body care manufacturing activities and began using third-party manufacturers for ProVault and SoulSpring in an effort to simplify our business, focus our resources and increase our margins while freeing up cash.

We considered 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 one, a lack of distribution opportunities as the majority of U.S. retailers would not take CBD products, including online retailers, such as Amazon. Two, 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 four, 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 SoulSpring at the beginning of 2023, but we’re 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 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. On a year-to-date basis, our gross margins have increased nearly 1,500 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 & 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 headcount 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 $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 $2.5 million. Our cash and short-term investments at the end of Q3 2023 were $15.7 million 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 & Cheese.

Accounts receivable of $304,000 declined by $917,000 compared to the beginning of the year, driven by $1 million in milestone payments from Bioceres. As a reminder, we have now collected all milestone payments related to the Chinese approval of HB4 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 GoodWheat 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, have reduced our SG&A expenses to the lowest level in 4 years, lowered our cash burn to less than $3 million in the latest quarter.

And we now enter 2024 and with the opportunity to scale three 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.

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