Arcadia Biosciences, Inc. (RKDA) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Arcadia Biosciences' Second Quarter 2023 Financial Results and Business Highlights Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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.

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.

Good afternoon, everyone, and thank you for joining us for our 2023 second quarter conference call. I am pleased to report that Arcadia continues to make progress and executing Project Greenfield, our three-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've 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 two key programs which are expected to drive growth in the second half of 2023. Last quarter, I discussed that GoodWheat pasta is experiencing higher velocities 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 two programs will also unlock new distribution at larger retailers, as we have received feedback that they loved our brand and loved our product, but they want to see more impact in market. The second scale initiative was announced on July 17th where we announced that GoodWheat is launching into the breakfast category with new better-for-you pancake and 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 two to one versus the leading better-for-you pancake mix. GoodWheat pancake and waffle mixes will be sold and resealable multi-serve pouches with each serving delivering eight times the fiber of traditional pancake mix and five grams of protein. They'll be available in three classic varieties for the whole family, including buttermilk, chocolate, chocolate chip, and apple cinnamon. In addition to the multi-serve pancake and 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 prices roughly half of existing single-serve pancake cups. Quikcakes have 11 times the fiber of traditional single-serve pancake cups and contain seven grams of protein per serving. Quikcakes will be sold with five individual two ounce packets per carton and will also be available in three flavors; buttermilk, chocolate, chocolate chip, and confetti. We believe that adding another day part with pancake and waffle mixes is a perfect compliment 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 seem the highest rates of growth. Our Quikcakes are currently available nationwide after launching August 1st on Amazon, both Quikcakes and Multi-Serve Pancake and 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'm 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 have 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 20th, 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 had 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 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 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 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 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 right sizing 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.?

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've been up 10% compared to Q1. While we experience 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 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 non-recurring 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 copacking and Savvy 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 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 $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 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 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, non-recurring revenues into 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. [Operator Instructions] Our first question will come from Ben Klieve of Lake Street Capital Markets. Your line is open.

All right. Thanks for taking my questions and congratulations. A lot of good results here in the quarter. It sounds like an emerging second half of the year coming. A couple 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.

Yeah. 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 a 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 three months ago? Or has that changed in any material way?

Yeah. 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 to 2024, but we'll keep you updated.

Okay. All right. Very good. And on the pricing initiatives within GoodWheat, I appreciate that 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 this -- on those products going forward here?

Yeah. So, we do expect to see our margins erode slightly on GoodWheat. Some of this is because obviously, the pricing is the driving factor, but we still expect to see margins in the 20s. So, we -- it just is going to be kind of more of like mid to low-20s versus mid to high-20s.

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 and of Zola and GoodWheat are both decidedly core. 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 have taken place over the last few quarters?

Yeah. We're confident in our portfolio, and we're only going to add to it from here.

Okay. All right. Very good. That's what I thought. And good to hear you feel that way. Very good. Well, thanks for taking my calls again. There's more to talk about, but I'll get back in line. Congratulations on the good quarter.

Thank you, Ben.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Dipesh Patel of H.C. Wainwright. Your line is open.

Hi, Stan. Hi, T.J. This is Dipesh standing in for Ram Selvaraju. Just a couple of questions, two or three questions. Are you -- is it possible for you guys to add any color or additional color on the status as of exploring strategic opportunities?

Yeah. 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.

Okay. Great. And then, as you look at GoodWheat, are there any -- like any new additional channels for that product?

Yeah. 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.

All right. And then the last question, would you say the current product is optimized, or will there be further pairing or adjusting in the future?

Yeah. No, I think our product mix -- we're satisfied with the SKUs that we have. We feel like we can still grow SKUs that we have to even better meet consumer needs. But we don't see any more pairing opportunities.

All right. Gentlemen, thank you very much for the update.

Thank you.

Thank you.

Thank you. 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. End of Q&A:

So, to summarize, Arcadia is well-positioned for the future. We have made significant progress turning low quality, non-recurring 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.