Q1 2024 Arcadia Biosciences Inc Earnings Call

Participants

Thomas Schaefer; Chief Financial Officer; Arcadia Biosciences Inc

Stanley Jacot; President, Chief Executive Officer, Director; Arcadia Biosciences Inc

Ben Klieve; Analyst; Lake Street Capital Markets LLC

Presentation

Operator

Thank you for standing by. My name is Priella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Arcadia Biosciences Q1 2024 financial results and business highlights conference call. (Operator Instructions)
I would now like to turn the conference over to TJ Schaefer, Chief Financial Officer, at Arcadia, please go ahead.

Thomas 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-K.
With that, I'll now turn the call over to Stan.

Stanley Jacot

Good afternoon, everyone, and thank you for joining us today to review our first quarter results for 2024. Since we last talked six weeks ago, I am pleased to report that the positive business trends from Q4 2023 have continued in Q1 2024. Revenue continues to grow both sequentially and year over year. Our gross profit margins have been greater than 30% for five consecutive quarters. Operating expenses continue to decline at a double-digit pace versus last year. All of these factors have contributed to Q1 2024 achieving a lowest loss from continuing operations in over six years.
Let's now turn our attention to GoodWheat. The GoodWheat brand continues to expand with Q1, adding a couple of hundred stores of distribution on pancake and waffle mixes. Our focus continues to be nurturing our existing points of distribution and building success stories by category. There are plans in place for each customer addressing everyday pricing, promoted pricing, shelf placement, fuel expansion and account-specific marketing. These plans will require significant expense to execute but are necessary in order to achieve brand scale and defend shelf space from fierce competition.
On our last call, I mentioned several accolades, our GoodWheat brand had received from some significant publications, including Better Homes and Gardens and the website, [Eat This, Not That]. And I want to share another activity that could we have received from a customer. In Q1, we launched GoodWheat mac and cheese nationwide on Amazon and three varieties, Classic Cheddar, White Cheddar and Three Cheese.
At Amazon recently selected GoodWheat, Three Cheese, Mac and Cheese as an Amazon choice new arrival pick. This designation is solely driven by Amazon's criteria, which includes being highly rated well priced and available to ship immediately. This is one more example from an independent source that proves that we already know that our proprietary wheat is commercially viable to create great-tasting products while sneaking in more fiber and protein.
To reiterate our business model includes expanding the use of our technology into food products beyond GoodWheat. There are thousands of products across the grocery store and in foodservice that can offer the same valuable benefits. So we see a long-term path to generate recurring royalty revenue. We have been actively pursuing two key steps to monetizing this technology one partner with a wheat supply chain in order to produce a scalable, cost-effective identity preserved resupply.
We need our wheat technology integrated into all customer preferred wheat varieties and then efficiently move from seed to farm to mills to deliver cloud. We are currently in final discussions with potential partners and hope to update you soon.
In parallel the second step is to work with large food manufacturers to create a demand for our wheat, this can create a long term pull through partnerships to ensure we have enough volume through our supply chain system. Conversations are underway across several categories and will take some time to develop products with their R&D groups.
Now let's move to Zola coconut water. The coconut water categories continued to perform well in Q1 2024, with unit sales and dollar sales both increasing 10% versus a year ago. According to Nielsen data for the 13 weeks ending March 30, 2024. Zillow momentum is continuing in the latest four weeks ending March 30, 2024, so Zola growing 15% in dollar sales and 14% in unit sales.
Zola it is back to growing share in the category and we are optimistic that this double-digit growth will continue in 2024 for a couple of reasons. One, our flavor innovation will begin shipping in Q2, adding more variety to Zola's naturally hydrating lineup, original line in pineapple flavors and then it was 16.9 ounce resealable tetra pack container have been well received by retailers as pineapple is the number one coconut water flavor and lime is the number one flavor in sparkling water.
Two, we have confirmed several new accounts that we will be adding a lot to their single-serve beverage set in the produce section. The store count for this new distribution of nearly 1,300 stores, bringing our total store count facility over 3,300 by the end of Q2. Our focus will be to ensure these new stores can quickly achieve the same velocity and dollar sales as our current retailers enjoy. So we expect that to be a key growth driver for us in the future for both revenue and gross profit, and we will continue to explore the next wave have consumer-preferred innovation.
Last initiative to discuss today is the strategic review announced last year, which stated that Arcadia would explore a range of strategic options, which could include an asset sale acquisition, merger sale or other strategic transaction. Since that time we've allowed our bankers have engaged with a significant number of potential transaction partners to find the best outcome for Arcadia and our shareholders.
And while we operate and provide a detailed update today, we continue to have discussions and performed the due diligence work necessary to accelerate our ability to monetize our IP and deliver cash flow positive results. We will keep you updated as material events occur, and 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.
As discussed on our last call, we anticipated our 2024 net operating loss to be under $10 million for the first time in the company's history. Our Q1 performance and trend has met our expectation in order to deliver that objective, and we plan to grow revenue, optimize margins and reduce operating expenses for the remainder of 2024 in order to achieve this goal.
With that, I'll turn the call over to TJ, to discuss our Q1 financial results. TJ?

Thomas Schaefer

Thank you, Stan, and good afternoon to everyone joining us on the call today. Before I begin, I would like to remind everyone that all comparisons to our prior year results exclude the impact of our body care brands, which were discontinued in September 2023.
With that, let me walk through our results for the first quarter of 2024. Revenues of approximately $1.3 million, increased 7% sequentially and 2% compared to the same period last year. The quarter-over-quarter improvement was attributable to a 28% increase in Zola as Q4 is seasonally the softest quarter for coconut water. Our year-over-year growth was primarily driven by GoodWheat and Zola sales, partially offset by higher costs associated with new distribution.
Gross profit of $435,000 was slightly below the prior quarter and prior year due to product mix, but still resulted in a very healthy gross margin of 35%. And as Stan mentioned earlier, this is our fifth consecutive quarter delivering gross margins in excess of 30%, which is a testament to the progress we have made in delivering high-quality revenue.
Research and development expenses of $272,000 declined 18% quarter over quarter and 24% year over year due to the timing of innovation work following the launch of new GoodWheat categories as well as new Zola flavors.
Selling, general and administrative expenses of approximately $3.2 million decreased 7% versus Q4 2023 and 22% compared to the same period last year as we rightsized the organization and our marketing investments. Total operating expenses of $3.5 million improved 9% sequentially and 21% year over year, resulting in a loss from continuing operations of approximately $3.1 million, which is the lowest level in the past six years.
From a balance sheet perspective, we ended the quarter with $8.5 million in cash and short-term investments, which is $3.1 million below our Q4 2023 ending balance. As we stated on our last earnings call, we believe our use of cash will be in the single digits, and we continue to hold to that guidance. However, our use of cash will be more heavily weighted towards the first half of the year, driven by larger cash payments related to employee bonuses and insurance.
Our inventory balance stood at $5 million at the end of Q1 2024, of which 84% was GoodWheat. We will continue to work down these balances as we focus on driving velocities in existing stores versus new distribution.
In summary, Q1 continued the positive momentum we've achieved over the past few quarters. Our revenue grew quarter over quarter and year over year. We have achieved gross margins in excess of 30% for five straight quarters. At the same time, we have reduced our operating expenses by 21% or nearly $1 million, which has resulted in our loss from continuing operations being at the lowest level in six years, and we estimate our use of cash to be in the single digits for the first time since Arcadia went public in 2015.
So while we still have plenty of work to do in order to achieve positive cash flow results and deliver value to our shareholders, we are very pleased with the progress we made in Q1.
I will now turn the call over to the operator questions.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions)
Ben Klieve, Lake Street.

Ben Klieve

Thanks, for taking my questions. First a couple of questions around the expenses associated with the GoodWheat expansion that you both noted in your prepared remarks. I'm wondering, first, if you can kind of help characterize the magnitude of the associated expenses and impact on gross profit from during the first quarter?

Stanley Jacot

Yeah. Thanks, Ben, for calling in, and I'm actually to turn that over to TJ to answer that question.

Thomas Schaefer

Yeah. Ben, so a lot of the upfront investment is around promotions and slotting, but as we've noted previously, our overall marketing investment will come down significantly relative to prior quarters or prior years, as we focus more on our existing customers and again, driving those velocities versus new distribution into new stores.

Ben Klieve

Okay. That's helpful. I think you've kind of answered my follow-up question, but I will ask it anyway here. Around kind of the trajectory of these costs throughout this year. So it sounds like you're saying you think the costs associated with all these initiatives that you've outlined today are going to be potentially ramping down here into the second, third quarter or they're going to stay at the kind of a consistent run rate from first quarter levels?

Stanley Jacot

Yes, Daniel, it will probably start to ramp down by Q4.

Ben Klieve

Okay. Very good. That's helpful. Thanks, Stan. And then the you talked about your focus on kind of nurturing existing retail relationships. Today, something you've talked about for the past couple of quarters has been a focus throughout 2024. I'm wondering if you could just talk on a high level about kind of the early results thus far in this process. Are you happy with the kind of progression of the relationship that you have with your existing retailers or the things that are going uniquely well, or there challenges that are still in place? There's anything you can elaborate on regarding the strategy would be great.

Stanley Jacot

I'd say the results are mixed Ben. We do have some high spots with some retailers, but there are some retailers were really still struggling to execute the plan that we've laid out. And again, there's a variety of reasons behind it differs by account, sometimes it's a change in the buyers, sometimes it's real resistance to either changing the planogram or adding SKUs other times, it's the difficulty in securing promoted prices. So that it's -- but I would say it's mixed at this point, it is difficult and competitive in these markets.

Ben Klieve

Yeah. That's fair enough, there's no doubt about that. Okay, very good. We'll look forward to updates on that on that in coming quarters. And then on last one for me is on Zola. You guys seem pretty enthusiastic about the opportunity here from it's been your both the SKU count with new flavors and also expansion of single-serve. Can you kind of characterize the your vision for Zola progression here throughout this year and especially into 2025, as all of these initiatives begin to scale. I mean, is this something that's going to be the ultimate I'm trying to understand if Zola is going to be really a revenue driver above and beyond GoodWheat here in coming quarters, given these initiatives.

Stanley Jacot

I think that's a fair characterization that Zola is going to be the majority driver of revenue and in particular, gross profit growth and part of the reason for that is because the growth that we have in Zola, doesn't come with the same kinds of costs. It's a much different category in that protein set in terms of selling dollars required in promoted dollars required.

Ben Klieve

Got it. Okay, very good. Well, best of luck, rolling those initiatives that a dollar. Thanks for taking my questions. And I'll get back to you.

Operator

Thank you. And there are no further questions at this time. I will now turn it back to you Stanley Jacot, for closing remarks.

Stanley Jacot

Thank you. So in conclusion, our Arcadia continuing its positive trajectory. We have transitioned the top line to high-quality revenue, that generates gross profit across multiple sources. We have rightsized the organization and streamlined our cost structure in order to extend our runway. Our GoodWheat is in more than 35 hundred stores in three categories and Zola coconut water is positioned for double digit growth with new flavors and new distribution.
And finally, we remain focused on monetizing our IP and accelerating delivery of cash flow positive results. We look forward to updating you in the future. Thanks again for joining us and have a great rest of your day.

Operator

Ladies and gentlemen, that concludes today's call and thank you all for joining. You may now disconnect.