Arcadia Biosciences Q2 2024 Earnings Call Transcript

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August 13, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to Arcadia Bioscience Second Quarter 2024 Financial Results and Business Highlight Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Kawakami, Chief Financial Officer at Arcadia. Please go ahead.

Speaker 1

Thank you, and good afternoon. Joining me on the call today is TJ Schaeffer, Arcadia's President and Chief Executive Officer. This call is being webcast, 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.

Speaker 1

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 TJ.

Speaker 2

Good afternoon, everyone, and thank you for joining us today to discuss our Q2 financial results for 2024. The Q2 of 2024 was a significant turning point for Arcadia as we transform the business and chart our path to becoming cash flow positive. We have made great strides over the last 2 years and even more significant progress over the last 3 months that I would like to share with you today. But first, let me start by reminding everyone of the 2 transactions that we completed in the Q2 of 2024 that allowed us to monetize part of our Wheat IP. In May, Arcadia entered into an asset purchase agreement to sell certain patent and related rights associated with our resistant starch Durham wheat to a wholly owned subsidiary of Corteva Agriscience in exchange for $4,000,000 cash.

Speaker 2

The collaboration with Corteva started in 2017 with an agreement for Corteva to have exclusive North American rights to Arcadia's resistant starch Durham wheat trait. Corteva has been steadily advancing this trait toward commercialization, introgressing it into elite germplasm lines and this transaction gives them access to markets beyond North America. For Arcadia, this means earlier monetization of our resistant starch Durham technology accelerating royalties with the one time payment of $4,000,000 The second transaction also occurred in May when Arcadia and its wholly owned subsidiary Arcadia Wellness entered into an asset purchase agreement to sell certain assets relating to our GoodWheat business to Above Food Corporation. As part of the agreement, Arcadia agreed to transfer GoodWheat Grain and Finished Goods inventory, trademarks and $2,000,000 cash in exchange for a $6,000,000 promissory note with a 3 year term and annual interest that accrues at the prime rate. In less than 2 years, we launched the GoodWheat brand into 3 distinct categories pasta, pancakes and mac and cheese, securing over 3,500 points of distribution, an amazing achievement for a company our size.

Speaker 2

However, we also recognize the investment required to scale the business nationally and felt that the time was right to monetize the brand. The historical results of the GoodWheat business are now reflected in our P and L as discontinued operations. While these transactions allowed us to monetize part of our Wheat IP, they also set the wheels in motion for additional cost savings. For example, the GoodWheat exit has resulted in headcount reductions that will cut our salaries and benefits by 50% compared to the beginning of 2024 with an even greater impact on full year 2025. We were also able to successfully negotiate the exit from our facility in Idaho 5 months early and have generated several $100,000 through the sale of farm equipment that is no longer needed.

Speaker 2

We estimate the impact of these savings to be approximately $2,000,000 on a full year basis as we exit 2024, compared to our normalized operating expense run rate of approximately $2,000,000 per quarter and we will continue to look for opportunities to reduce our expenses further. It's important to note that our SG and A expense in Q2, twenty twenty four of approximately $2,700,000 includes nearly $500,000 in M and A fees related to the 2 transactions. While cost reductions are certainly part of our strategy to achieve profitability, we will not get there through cost cutting alone. The second part of our strategy revolves around growing our Zola Coconut Water brand and we are off to a strong start in 2024. Founded in 2002, Zola Coconut Water became part of Arcadia in May 2021 as part of the Leaf Echo acquisition that also included several body care brands.

Speaker 2

Celebrated for its crisp clean taste that is slightly sweet, Zola offers natural hydration and is rich in electrolytes. It also provides several advantages to Arcadia in contrast to the GoodWheat brand. 1, Zola's 20 plus year history in the marketplace means it has an established customer base and distribution channels. 2, Zola's placement is typically in the produce section of conventional grocery retailers, which provides several benefits. 1st, it's less competitive.

Speaker 2

2nd, it aligns the brand with fresh natural products enhancing its appeal to health conscious consumers. And third, the produce section does not normally require the slotting investment that is typical in Center Store. So from a financial perspective, what does this mean for Arcadia? It means more predictable customer reorder patterns and significantly less marketing investments than GoodWheat. Let me give you an example to help drive home the point.

Speaker 2

In 2023, our marketing investment in GoodWheat nearly matched our gross sales dollar for dollar as we felt the need to invest heavily in brand awareness to help drive trial for a new brand. In contrast, because of the advantages I just outlined relative to Zola, we expect our marketing investment to be around 5% of net sales on a go forward basis. Let's now shift gears and talk about the progress we have made. The momentum we spoke about coconut water category sales increased 16% while Zola sales increased 27%. Additionally, in the latest 4 week period ending June 29, 2024 Nielsen data shows that category sales increased 25%, while Zola sales increased 42%.

Speaker 2

As a reminder, Nielsen represents point of sale data or inventory that is sold through to the end customer, while our reported sales represent inventory that is sold into the retailer, which means the numbers can be different. So while the Nielsen data shows a 27% increase in Q2, 2024 compared to the same period last year, actual Zola sales increased by 42% during the quarter. And we are optimistic that we will continue to outpace the category as about 75% of the new distribution that we have won and previously called out will ship in Q3 and is not reflected in the numbers I just highlighted. Aside from the new distribution gains, we are also excited about the momentum we are seeing with our 16.9 ounce Tetra Pak offerings in original, lime and pineapple flavors that just began shipping in Q2, 2024. So we have a lot to be optimistic about in terms of the growth we experienced in Zola in the first half of twenty twenty four and our expectation is that this strong performance will continue in the second half generating strong revenue growth and gross profit.

Speaker 2

Before I wrap up my prepared remarks, I want to provide some perspective on the rest of 2024. While we continue to explore strategic alternatives, our immediate focus is on reducing our costs and accelerating the growth in Zola. On our special investor call back in May, we provided a preliminary outlook for 2024 and today we want to reaffirm those metrics. More specifically from a top line we expect new distribution gains at Zola to offset the lost sales from GoodWheat. So on a full year basis, we believe our 2024 revenues will essentially be in line with the $5,300,000 we reported for 2023 in our 10 ks filed in March.

Speaker 2

We continue to expect our gross margins to be in the low 40s, resulting in more than $2,000,000 in gross profit and we remain comfortable with an operating expense run rate of approximately $2,000,000 per quarter. The result is an expected 50% decrease in our use of cash in 2024 compared to the $15,000,000 that we reported in our 10 ks for 2023. With that, I will now turn the call over to Mark to discuss our Q2 financial results.

Speaker 1

Thank you, TJ, and welcome to everyone joining us on the call. I'd like to remind everyone that my discussion of the financial results will refer to the impact of continuing operations only. Any reference to prior year results will exclude the impact of the discontinued GoodWheat and Body Care operations. With that, I'll begin our discussion of the financial results. In Q2, total revenues were approximately $1,300,000 This was an increase of 32% sequentially and it was basically flat compared to the same period of last year.

Speaker 1

Total revenues were driven by strong growth in Zola that was partially offset by a decline in GLA oil revenues. Zola sales increased 86% sequentially and 42% versus last year. This quarter, Zola represented about 90% of the total revenues. As TJ mentioned, Zola is off to a very strong start in 2024 with the sales growth outpacing the category. We're optimistic about the outlook going forward as our new product offerings and new distribution begins to take hold in Q3.

Speaker 1

Q2 gross profit was $673,000 This represents an increase of 30% compared to last quarter and an increase of 4% compared to last year. The resulting gross margin was 52% of total revenues. The improvement in gross profit dollars was driven by revenue growth as the gross margin percentage from continuing operations has remained consistently around the low 50s. As a reminder, we expect GLA oil to decline as a percentage of total sales as we sell through the remaining inventory over the second half of the year. We expect the impact of gross profit rates to be a trend toward the low 40s in 2024 and a trend toward the low 30s after that.

Speaker 1

Research and development costs were $10,000 in Q2. This was an increase of $4,000 compared to Q1 of this year, but it was a decrease of $17,000 compared to Q2 of last year. The decrease was driven by a reduction in development expenses related to the new Zola flavors. Selling, general and administrative costs of $2,700,000 were approximately $600,000 above Q1 of this year and also Q2 of last year. The increase was driven by nearly $500,000 of legal and consulting fees related to the transactions with Corteva and Above Food.

Speaker 1

The gain on the sale of intangible assets was $4,000,000 it was related to the transaction with Corteva. Note that the gain on the sale is equal to the cash proceeds from the sale as the asset was internally developed and had a cost basis of 0. The loss from discontinued operations was $789,000 This was a decrease of 47% compared to Q1 of this year and a decrease of 61% compared to Q2 of last year as the sale of GoodWheat took place midway through Q2 of this year. We expect these costs to decrease by about 75% in Q3 before ceasing altogether by the end of the year. Moving to the balance sheet.

Speaker 1

We ended Q2 with $8,100,000 of cash and short term investments compared to $8,500,000 last quarter. The change of $400,000 includes the $4,000,000 of cash that Arcadia received in the transaction with Corteva as well as the $2,000,000 of cash that Arcadia paid in the transaction with Above Food. The net impact of all of our business activities in the first half of twenty twenty four resulted in a $3,500,000 reduction in cash. Given the positive growth in Zola revenues and the impact of our cost reduction initiatives, we expect our net cash consumption to be similar in the second half of twenty twenty four. We ended Q2 with an inventory balance of $978,000 This was an increase of 17% compared to the end of 2023, reflecting the start of the peak selling season for Zola and our expectations for strong revenue growth through year end.

Speaker 1

As a result of the sale of GoodWheat, we received a promissory note that is to be repaid in 3 installments over a 3 year term with interest accruing at the prime rate. The stated value of the note is $6,000,000 and we have recorded the note at its discounted value of $5,700,000 We are scheduled to receive approximately $2,500,000 of cash in May of 2025 as the first repayment of principal and interest. In conclusion, Arcadia has made tremendous progress in Q2 towards our goal of becoming profitable. 1st, we monetized our wheat IP and sold the brands that required a high level of investment. 2nd, we significantly increased Zola revenues on both a quarter over quarter and year over year basis, while maintaining gross margin rates.

Speaker 1

And finally, we continued to reduce our operating expenses and lower our cash consumption to the lowest levels in our history as a public company. I will now turn the call over to the operator for questions.

Operator

And thank you. And our first question comes from Bhagavam Selvaraju from H. C. Wainwright and Company. Your line is now open.

Speaker 3

Thanks very much for taking my questions and congratulations on all this important progress. Firstly, I wanted to ask if there are any remaining crop trait assets that the company still owns that could be monetized in the future or if you feel that at this juncture you've effectively transacted on everything that could be monetized?

Speaker 2

Yes. Hi, Ram. Thanks for the question. Yes, we still do have a few traits in our library that we are actively working on monetizing as well. Still there still remains to be seen whether that will be in the form of licensing agreements or potentially even an asset sale similar to what we did with our RS Durham.

Speaker 3

Okay. And then secondly, I was wondering whether you can provide us with any visibility, any color on the timing of introduction of any additional Zola flavors or if you expect pineapple and lime to be the sole new flavor introductions that you make for the foreseeable future?

Speaker 2

Yes. So as I stated in my prepared remarks, the pineapple and the lime just started shipping in Q2. So those are very new into the marketplace. We do have some ideas that we could potentially launch in 2025. And then we continue to explore innovation longer term.

Speaker 2

So I think the short answer is yes, we are looking at an innovation pipeline and potential new product introductions in the coming years.

Speaker 3

And then the last question was with respect to what you see currently in terms of market research, broader market size assumptions for the segment in which Zola Coconut Water as a franchise competes, what percentage of that market would you need to effectively penetrate in order to achieve the goal of sustainable profitability according to your internal model approximately? Just so we have a sense of what kind of market share would translate into sustainability for the company.

Speaker 2

Yes. It's a good question. So I think today, based on kind of that grocery category that we typically look at, which is a little bit of a subset, We're probably 1% of the market. And I think still a very low single digit rate is where we need to get to in order to those are the kind of that's the kind of scale we're looking at just to reach breakeven. Thank you.

Speaker 2

Sure.

Operator

And thank you. And one moment for our next question. And our next question comes from Ben Klieve from Lake Street Capital Markets. Your line is now open.

Speaker 4

Hi. Thanks for taking my questions. Yes, congratulations on a nice quarter and a lot of progress here year to date. Question on the quarter itself, you talked about all the different kind of tailwinds supporting Zola. And but I want to make sure that I really understand the kind of revenue makeup in the second quarter.

Speaker 4

Can you clarify that there was no kind of lumpy one time revenues that came in and drove this real outperformance that were a function of kind of new product placements or anything sizable that would have given you that outperformance versus the category?

Speaker 2

Yes, that's correct. There were no sort of one time lumpy revenues and no sort of no large initial sell in that would have drove the performance.

Speaker 4

Okay, great. Great. That's good for you guys. Another question on the quarter itself and just maybe kind of longer term trends over the last few quarters regarding GLA. You talked about this kind of ratcheting down to be a 0 once you burn through your inventory exiting the year.

Speaker 4

Can you comment on GLA as a percentage of your revenue base in the Q1 and the Q2 and kind of how you expect that to tail off here into the balance of this year?

Speaker 2

Yes. So, 2nd quarter, it was 10% of our revenue. Let me get it looks like in the Q1, it was closer to 30%. And in terms of the go forward, you're right. We are we sell we will be selling GLA through the end of 2024, but that will be the end.

Speaker 2

We're selling through all the remaining inventory that we have. And so what you saw in the Q2 is essentially what we would be projecting for quarters 34.

Speaker 4

Okay, great. Very good. Let's see, one for me. You guys noted the kind of the halfing of your cash burn from $15,000,000 last year to this year. Wondering if

Speaker 1

you can talk about kind

Speaker 4

of the run rate that you're looking at as you exit 'twenty four and go into 'twenty five either on a quarterly or full year basis? I would expect your cash burn is going to be the lowest exiting the year and in that in this year, it would be $7,500,000 So I'm kind of curious, how low that cash burn you think is going to be exiting 2024 going into 2025?

Speaker 2

Yes. So I think the guidance for 2024 is that we would cut the burn in half. So you're right, kind of in that $7,000,000 to $7,500,000 range based on the comments we made. Our use of cash was $3,500,000 in the first half and we said it would be similar in the second half. And so that's kind of where we're landing for 24.

Speaker 2

The other thing that we identified in my prepared remarks was an additional $2,000,000 of annual cost savings that I said we expect to be on top of kind of that $2,000,000 run rate of where we are. So we see that coming into play more in 2025, so kind of as we exit. So that takes another $2,000,000 out. And beyond that, I don't want to make any comments at this point with respect to 25. We'll have more information in November, but it's what we're looking at is kind of trying to reduce this into that low to mid single digits next year.

Speaker 2

So we've got a little bit more work to do, but we've already identified $2,000,000 beyond where we are at our current run rate today.

Speaker 4

Got it. Got it. Very good. Good for you guys. All right.

Speaker 4

Well, I appreciate you picking my questions. Congratulations again. Really a lot of good momentum coming out of you guys. I'll get back in queue and best of luck here in the second half.

Speaker 2

Great. Thanks so much.

Operator

And thank you. And I'm showing no further questions. I would now like to turn the call back to TJ Schafer for closing remarks.

Speaker 2

In summary, we view the Q2 of 2024 as a significant turning point for Arcadia as we transform the business. Over the last 2 years, we have exited several underperforming brands, right sized the organization and streamlined our cost structure in order to extend our runway. We have introduced new products and secured significant new distribution wins for Zola Coconut Water and we are positioned to grow faster than the category and gain market share. We thank you for your continued interest in Arcadia and look forward to updating you on our progress as we continue on our path to profitability.

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Earnings Conference Call
Arcadia Biosciences Q2 2024
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