Q2 2023 Arcadia Biosciences Inc Earnings Call
Participants
Stanley E. Jacot; President, CEO & Director; Arcadia Biosciences, Inc.
Thomas J. Schaefer; CFO & Corporate Secretary; Arcadia Biosciences, Inc.
Benjamin David Klieve; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Dipesh A. Patel; Research Analyst; H.C. Wainwright & Co, LLC, Research Division
Presentation
Operator
Good afternoon, and welcome to Arcadia Biosciences Second Quarter 2023 Financial Results and Business Highlights Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. And I would now like to hand the conference over to T.J. Schaefer, Chief Financial Officer at Arcadia. Please go ahead.
Thomas 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 harbor language in our most recently filed 10-Q.
With that, I'll now turn the call over to Stan.
Stanley E. Jacot
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 3-year strategic plan to unlock the company's potential and provide a path to profitability.
Both GoodWheat 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 Project Greenfield milestones.
Let's start with how we plan to scale revenues more quickly. For GoodWheat pasta, there are 2 key programs which are expected to drive growth in the second half of 2023. Last quarter, I discussed that GoodWheat pasta is experiencing higher velocity than 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, and 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 to be offset by higher volumes.
The second program is a shift in our marketing message to highlight the great taste of GoodWheat pasta. Many people do not like the taste of high-fiber foods, and GoodWheat is the only brand that can sneak health into family's favorite foods without changing their taste.
In fact, we are so confident in the taste and texture that we are rolling out a taste 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 2 programs will also unlock new distribution at larger retailers as we have received feedback that they loved our brand and loved our products, but they want to see more impact in market.
The second scale initiative was announced on July 17, where we announced that GoodWheat is launching into the breakfast category with new better-for-you Pancake & Waffle Mixes as well as Single-Serve Quikcakes. Launching just in time for back-to-school, the new pancake mixes are made with simple ingredients and 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 2:1 versus the leading better-for-you pancake mix. GoodWheat Pancake & Waffle Mixes will be sold in resealable, multi-serve pouches with each serving delivering 8x the fiber of traditional pancake mix and 5 grams of protein. They will be available in 3 classic varieties for the whole family, including Buttermilk, Chocolate Chocolate Chip and Apple Cinnamon.
In addition to the Multi-Serve Pancake & Waffle Mixes, GoodWheat is also launching Quikcakes, an innovative single-serve instant pancake. Quikcakes are a great option for busy mornings. Simply pour one packet into a bowl, add water and microwave for 75 seconds for a hot, fresh pancake. No freezer burn, easy cleanup, and the retail price is roughly half of existing single-serve pancake cups.
Quikcakes have 11x the fiber of traditional single-serve pancake cups and contains 7 grams of protein per serving. Quikcakes will be sold with 5 individual 2-ounce packets per carton and will also be available in 3 flavors: Buttermilk, Chocolate Chocolate Chip and Confetti.
We believe that adding another daypart with Pancake & Waffle Mixes is a perfect complement to our existing pasta lineup. Pancakes are a beloved classic in 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 Quikcakes are currently available nationwide after launching August 1 on Amazon. Both Quikcakes and Multi-Serve Pancake & Waffle Mixes began shipping to 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 Zola 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.
Zola grew distribution in Q2, reversing a multi-quarter decline in store count. We've also seen great success in adding racks in the Produce category, driving velocity in high-traffic accounts. And innovation is ramping up on the brand for the first time in years with new launches planned for Q1 2024. Zola continues to be a focus for us, and we expect these programs to grow distribution and velocity in the category.
Finally, I want to address the last scaling initiative, 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. As we have mentioned previously, our strategic plan calls for an acquisition that would allow us to bring the GoodWheat value proposition to an existing brand in a new wheat-based category.
There are many categories in 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 already -- has broad shelf placement and established distribution.
While we have nailed 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 in 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 costs and complexity. We have made the decision to streamline our operations and exit our remaining Body Care brands, ProVault and SoulSpring, in order to focus our resources on our most promising opportunities on GoodWheat and Zola.
We were unable to find an interested buyer, given the severely depressed market for CBD products. As a result, we continue 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 reduce headcount 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 rightsizing our organization. And the combined changes will result in operating expense savings of $2 million in 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.?
Thomas J. Schaefer
Thank you, Stan, and good afternoon, everyone. Our Q2 revenues of $1.4 million were down $119,000 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 & Beverage businesses, we are taking steps to scale our business by lowering prices to be more competitive, implementing a taste guarantee to incentivize trial and launching new categories where we believe GoodWheat 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 $170,000 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 Saavy Naturals businesses that are no longer part of our portfolio; and three, nearly $900,000 in licensing revenue related to the HB4 China milestone. These 3 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 $391,000 in the second quarter were slightly higher than the first quarter as we prepared to launch our GoodWheat pancakes in Q3. R&D expenses on a year-to-date basis are 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 $576,000 or 13% compared to the previous quarter despite a similar level of marketing spend. And they are now at the lowest level in 3 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 20, 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 continue 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 $100,000, 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 headcount. 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 headcount reductions. Starting in Q4, we expect SG&A to decline to a run rate of around $3.5 million to $4 million per quarter depending on the level of marketing spend with modest improvements across 2024.
In the second quarter, we recognized $207,000 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 $823,000 or $0.61 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 GoodWheat and Zola. And that's 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 $300,000 primarily due to the $500,000 HB4 soy milestone payment. We have now received the entire $2 million in cash from Bioceres related to the China milestone.
So in summary, we have made good progress turning low-quality nonrecurring revenues into high-quality ongoing revenue streams, and we have launched additional scaling initiatives. We have also rightsized 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question will come from Ben Klieve of Lake Street Capital Markets.
Benjamin David Klieve
Congratulations. A lot of good results here in the quarter. It sounds like an encouraging second half of the year coming. A couple of questions on distribution. So first, Stan, 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 downwards.
Stanley E. Jacot
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.
Benjamin David Klieve
Okay. Great. And then kind of similar question on GoodWheat. I'm really curious more about your prior expectations of kind of the store count that you're expecting by the end of this year. Do your prior expectations for store count of GoodWheat continue to track as expected 3 months ago? Or has that changed in any material way?
Stanley E. Jacot
Yes. I think we kind of gave a range of around 3,000 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' planograms fall. Some of them have moved out of 2023 into 2024, but we'll keep you updated.
Benjamin David Klieve
Okay. All right. Very good. And on the pricing initiatives within GoodWheat, I appreciate the dynamic that you're working through there. Can you help us understand the -- you talked about volume kind of offsetting lower pricing model. Can you talk about kind of the margin structure you're expecting on those products going forward here?
Stanley E. Jacot
Yes. So we do expect to see our margins erode slightly on GoodWheat. Some of this is because, obviously, the pricing is -- that's a driving factor, but we still expect to see margins in the 20s. So we -- it just is going to be kind of more like mid- to low 20s versus mid- to high 20s.
Benjamin David Klieve
Okay. All right. Very good. 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 that the product lines that you have of Zola and GoodWheat are both decidedly core.
Can you comment on if you expect your organic business to change any more here in the next coming quarters? Or are you pretty comfortable with the business that you have today, given all the changes that have taken place over the last few quarters?
Stanley E. Jacot
Yes. We're confident in our portfolio, and we're only going to add to it from here.
Benjamin David Klieve
Okay. All right. Very good. That's what I thought, and good to hear you feel that way. Very good. There's more to talk about, but I'll get back in line. Congratulations on a good quarter.
Stanley E. Jacot
Thank you, Ben.
Thomas J. Schaefer
Thank you.
Operator
(Operator Instructions) Our next question will come from Dipesh Patel of H.C. Wainwright.
Dipesh A. Patel
This is Dipesh standing in for Ram Selvaraju. Just a couple of questions -- 2 or 3 questions. Are you -- is it possible for you guys to add any color or additional color on the status of exploring strategic opportunities?
Stanley E. Jacot
Yes. So I think at this point, 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.
Dipesh A. Patel
Okay. Great. And then as you look at GoodWheat, are there any like any new additional channels for that product?
Stanley E. Jacot
Yes. So that is something that we are actively exploring beyond grocery, expanding that brand into other channels as well. So more to come when we secure distribution. But yes, that is part of our plan.
Dipesh A. Patel
All right. And then the last question, would you say the current product mix is optimized? Or will there be further pairing or adjusting in the future?
Stanley E. Jacot
Yes. No, I think our product mix -- we're satisfied 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 pairing opportunities.
Operator
And I am seeing no further questions in the queue. I would now like to turn the conference back to Stan Jacot for closing remarks.
Stanley E. Jacot
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.
Operator
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.
