Q3 2023 Arcadia Biosciences Inc Earnings Call
Participants
T.J. Schaefer; CFO; Arcadia Biosciences, Inc.
Stan Jacot; President & CEO; Arcadia Biosciences, Inc.
Dipesh Patel; Analyst; H.C. Wainwright & Co.
Ben Klieve; Analyst; Lake Street Capital Markets LLC
Presentation
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 Harbor 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 three year strategic plan to unlock the company's potential and provide a path to profitability.
GoodWheat pasta and pancake mixes and zola coconut water add 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 could be 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 2000 stores. And we expect this more competitive price point result in higher turns and faster customer reorders.
Q4 will also be the rollout of our new marketing messaging that GoodWheat is picking either approved with a clean plate 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.
The second key scaling initiative was the launch of GoodWheat in the breakfast category with new better-for-you pancake and waffle mixes as well as single serve quick cakes. These new products are made with simple ingredients are Acadian'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 two to one 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 good initiative to announce today, the launch of GoodWheat mac and cheese, the mac and 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 and cheese packs in the most fiber of any brand in the category four times more than the leading brand. In fact, one serving a GoodWheat mac and cheese has the same fiber as 2 servings of oatmeal or 2.5 servings of broccoli.
And just like our pasta and pancake mixes, GoodWheat mac and cheese is higher in protein than leading brand with 12 grams of protein per serving. Our mac and cheese is sneaky delicious and Picky Eater approved made with real cheese and no artificial flavors, dyes or preservatives. There are three varieties to cheese 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 eatgoodweat.com.
For zola coconut water innovation has been our focus with the upcoming introduction of two 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 was the number one flavored sparkling water. So we believe these new offerings will energize zola sales. Both flavors are 100% natural, no sugar added and non-GMO. Launching Q1 2024 these new flavors will be available in 16.9 ounce resealable containers.
The last field 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 a new wheat based category.
We are beginning the due diligence process with potential candidates and are also evaluating asset sale 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 transaction and no timetable has been set for the conclusion of the strategic review.
With that, I'll turn the call over to TJ to discuss our Q3 financial results. TJ.
T.J. Schaefer
Thank you, Stan, and good afternoon everyone. Today, I will walk you through our third-quarter financial highlights. And my prepared remarks will 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 Radiance Beauty in July of 2022. At that time, we also ceased body care manufacturing activities and began using third party manufacturers for ProVault and Soul Spring. In an effort to simplify our business, focus our resources and increase our margins while freeing up cash.
We consider 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 US 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 Soul 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 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 pound of grain that will be used to produce pasta and mac and 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 bio series.
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 four years, lowered our cash burn to less than $3 million in the latest quarter, and we now enter 2024 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.
Question and Answer Session
Operator
Thank you. At this time we will conduct a question and answer session. (Operator Instructions)
Dipesh Patel, H.C. Wainwright & Co.
Dipesh Patel
Hi, Stan and TJ. This is Dipesh standing in for Ram Selvaraju. Is there anything else that you can highlight as you look at strategic alternatives, maybe including time lines? And then also what progress has been made in capturing additional economics in the value chain for GoodWheat. So some comments around that would be helpful. Thank you.
Stan Jacot
Thank you, Dipesh, and thanks for calling in today. So for your first question, we don't have a time line that we're ready to give in terms of closing any transactions. But there are several that are in our pipeline and we are 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 the more news on that front in our next earnings call.
Dipesh Patel
Great, certainly very helpful. Thanks again for the update today.
Operator
Ben Kliev, Lake Street Capital Markets.
Ben Klieve
Thanks for taking my questions, and congratulations guys. Nice little quarter here from top to bottom it seems. Have a handful of questions for you. First of all, on zola, -- it sounds like some of the momentum that you saw in zola in second quarter really continued into the third, excluding the impact of new on the new flavors that are coming online. Can you comment on zola's contributions to the top line and retail distribution today versus the high-water mark. Few quarters ago, before some of the challenges emerged?
Stan Jacot
Yes, sure. And thanks for calling in today Ben. For zola, yes, the challenges that we had last quarter or in Q4 of 2022, there is still continuing. And so we're going to expect to lot those by Q4 of 2023, we have seen incremental distribution, and we have seen velocities also start to improve, but we do expect the innovation to be a catalyst for more distribution in 2024.
Ben Klieve
Okay, perfect. Thank you. The curious, GoodWheat retail placements now 15 month old, maybe a little more on, I'm wondering if you can talk about kind of the lessons that you took from the initial placements, a year ago and how you're driving growth now from new retail stores and maybe a more accelerated manner now. I mean, what challenges did you guys roll on into a year ago that you're not running into today? Any insight there would be helpful?
Stan Jacot
So, if we go back 15 months, it was GoodWheat pasta that we had launched and we were successful in gaining distribution, a number of different accounts, different size accounts, different regions of the country. We've had lots of great learning, as we had spoken in earlier conference calls on price points and where we need to be in comparison to other better-for-you brands.
We've also been learning about shelf placement, number of skews on shelf that promoted pricing programs. To up sell all those factors are going into ways that we can optimize our current distribution footprint. So I think that's really the focus for the pasta category is making sure that we're nurturing those accounts and those skews that we have distribution.
And in some accounts, there's opportunities to expand our lineup to include more of the pasta skews. So I think that's 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 mac and cheese category.
Ben Klieve
Okay, great. TJ, clarifying question on your prepared remarks. Did I hear you call out costs in the third-quarter associated with mac and cheese, and pancakes? I believe or am I making that up?
T.J. Schaefer
Yes. 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.
Ben Klieve
Okay. So R&D costs in Q2 were directionally higher before given both of those products. I thought I missed an explicit number on.
Okay. Then last question for me. I mean, the looks like a lot of momentum has really built through 2023 so far. I mean, as you look into 2024, can you guys give any kind of high-level expectations regarding our overall retail doors that you hope to be at ending '24. Any kind of high-level metrics that you can really provide to help us get a sense of kind of scale, you're looking at 12 months from now?
Stan Jacot
Yes, sure. I think when we add up, the three categories for GoodWheat will be over 3,000 doors and in 2023. And in 2024, our plan is really to nurture those 3,000 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 we become almost indispensable attractive to the larger retailers in the larger, in the accounts that we are today. So we're still planning on double digit growth of GoodWheat next year and then I would say the same for Zola.
Ben Klieve
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 a really nice quarter.
Stan Jacot
Thank you.
Operator
I'm showing no further questions at this time. I would now like to turn it back to Stan Jacot for closing remarks.
Stan Jacot
In summary, as we enter 20204 Arcadia is in the best position in its history. Our proprietary wheat technology has been commercialized in three categories with the potential to add more category through acquisition. We have exited the low opportunity and high resource body care business and revitalizing the zola coconut water brand with innovation rolling out early next year.
This has resulted in stronger top line growth and higher gross margins. And finally, we have we right-sized the organization and streamlined our cost structure in order to extend our runway to execute our plan. Look forward to updating you in the future. Thanks again for joining us and have a great rest of your day
Operator
Thank you for your participation in today's conference. This does conclude the program, you may now disconnect.
