(RKDA)
Q2 2024 Earnings-Transcript
Arcadia Biosciences, Inc. misses on earnings expectations. Reported EPS is $0.78 EPS, expectations were $1.55.
Operator: Good afternoon, and welcome to Arcadia Biosciences Second Quarter 2024 Financial Result 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 session. [Operator Instructions] 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.
Mark Kawakami: Thank you and good afternoon. Joining me on the call today is T.J. Schaefer, 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 T.J.
T.J. Schaefer: Good afternoon everyone. And thank you for joining us today to discuss our second quarter financial results for 2024. The second quarter 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 two years and even more significant progress over the last three months, that I would like to share with you today. But first, let me start by reminding everyone of the two transactions that we completed in the second quarter 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 Durum Wheat, to a wholly-owned subsidiary of Corteva Agriscience, in exchange for $4 million cash.
The collaboration with Corteva started in 2017 with an agreement for Corteva to have exclusive North American rights to Arcadia’s resistant Starch Durum 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 Durum technology, accelerating royalties with the one-time payment of $4 million. 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 million cash in exchange for a $6 million promissory note with a three-year term and annual interest that accrues at the prime rate.
In less than two years, we launched the GoodWheat brand into three distinct categories: Pasta, Pancakes and Mac & Cheese securing over 3,500 points of distribution, an amazing achievement for a company our size. 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&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 hundred thousand dollars through the sale of farm equipment that is no longer needed. We estimate the impact of these savings to be approximately $2 million on a full year basis as we exit 2024. Compared to our normalized operating expense run rate of approximately $2 million per quarter, and we will continue to look for opportunities to reduce our expenses further. It is important to note that our SG&A expense in Q2 2024 of approximately $2.7 million includes nearly $0.5 million in M&A fees related to the two 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] (ph) acquisition, that also included several body care brands, 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. One, Zola’s 20-plus year history in the marketplace means it has an established customer base and distribution channels. Two, Zola’s placement is typically in the produce section of conventional grocery retailers, which provides several benefits. First, it is less competitive.
Second, 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. 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 us now shift gears and talk about the progress we have made. The momentum we spoke about previously related to Zola continued into Q2. According to Nielsen data in the 13-week period ending June 29, 2024, coconut water category sales increased 16%, while Zola sales increased 27%. Additionally, in the latest four-week period ending June 29, 2024, Nielsen data shows that category sales increased 25%, while Zola sales increased 42%. 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 2024, and our expectation is that this strong performance will continue in the second half, generating strong revenue growth and gross profit. 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 perspective, 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 $5.3 million we reported for 2023 in our 10-K filed in March. We continue to expect our gross margins to be in the low 40s, resulting in more than $2 million in gross profit, and we remain comfortable with an operating expense run rate of approximately $2 million per quarter.
The result is an expected 50% decrease in our use of cash in 2024 compared to the $15 million that we reported in our 10-K for 2023. With that, I will now turn the call over to Mark to discuss our Q2 financial results.
Mark Kawakami: Thank you T.J. 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 $1.3 million. This was an increase of 32% sequentially and it was basically flat compared to the same period of last year. 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 T.J. mentioned, Zola is off to a very strong start in 2024, with the sales growth outpacing the category. We are optimistic about the outlook going forward as our new product offerings and new distribution begins to take hold in Q3. 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 to gross profit rates to be a trend towards the low 40s in 2024 and the trend toward the low 30s after that.
Research and development costs were $10,000 in Q2. This was an increase of $4,000 compared to Q1 of this year, where 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 $2.7 million were approximately $600,000 above Q1 of this year and also Q2 of last year. The increase was driven by nearly $0.5 million of legal and consulting fees related to the transactions with Corteva and Above Food. The gain on the sale of intangible assets was $4 million, and 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. 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. We ended Q2 with $8.1 million of cash and short-term investments compared to $8.5 million last quarter. The change of $400,000 includes the $4 million of cash that Arcadia received in the transaction with Corteva, as will be $2 million 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 2024 resulted in a $3.5 million 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 2024. 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. As a result of the sale of GoodWheat. We received a promissory note that is to be repaid in three installments, over a three-year term with interest accruing at the prime rate. The stated value of the note is $6 million, and we recorded the note at its discounted value of $5.7 million. We are scheduled to receive approximately $2.5 million 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. First, we monetized our wheat IP and sold the brands that required a high level of investment. Second, we significantly increased Zola revenues on both a quarter-over-quarter and year-over-year basis, while maintaining gross margin rates. And finally, we continue 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: Thank you. [Operator Instructions] And our first question comes from Raghuram Selvaraju from H.C. Wainwright & Company. Your line is now open.
Raghuram Selvaraju: 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?
T.J. Schaefer: 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 sales similar to what we did with our RS durum.
Raghuram Selvaraju: 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?
T.J. Schaefer: 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. So I think the short answer is yes. We are looking at an innovation pipeline and potential new product introductions in the coming years.
Raghuram Selvaraju: 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?
T.J. Schaefer: Yes. It is a good question. So I think today, based on kind of the — 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 are looking at just to reach breakeven.
Raghuram Selvaraju: Thank you.
Operator: Thank you. And one moment for our next question. And our next question comes from Ben Klieve from Lake Street Capital Markets.
Ben Klieve: All, right. Thanks for taking my questions. Congratulations on a nice quarter and a lot of progress here year-to-date. A 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. Can you clarify that there was no kind of lumpy onetime 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?
T.J. Schaefer: Yes, that’s correct. There were no sort of onetime lumpy revenues and no sort of — no large initial sell-in that would have drove the performance.
Ben Klieve: 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 zero once you burn through your inventory exiting the year. Can you comment on GLA, as a percentage of your revenue base in the first quarter and the second quarter and kind of how you expect that to tail off here into the balance of this year?
T.J. Schaefer: Yes. So second quarter, it was 10% of our revenue. Let me get — it looks like in the first quarter, it was closer to 30%. 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. We are selling through all the remaining inventory that we have. And so what you saw in the second quarter is essentially what we would be projecting for quarters three and four.
Ben Klieve: Okay, great. Very good. Let’s see, one for me, you guys noted the kind of halfing of your cash burn from $15 million last year to this year. Wondering if you can talk about kind of the run rate that you’re looking at as you exit ’24 and go into ’25, either on a quarterly or full year basis. I would expect your cash burn is going to be the lowest exiting the year and that — in this year, it will be $7.5 million. So I’m kind of curious how low that cash burn you think is going to be exiting ’24 going into ’25?
T.J. Schaefer: Yes. So I think the guidance for ’24 is that we would cut the burn in half. So you are right. Kind of in that $7 million to $7.5 million range based on the comments we made. Our use of cash was 3.5% in the first half, and we said it would be similar in the second half. And so that’s kind of where we are landing for ‘24. The other thing that we identified in my prepared remarks was an additional $2 million of annual cost savings that I said we expect to be on top of kind of that $2 million run rate of where we are. So we see that coming into play more in ‘25, so kind of as we exit. So that takes another $2 million 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. So we’ve got a little bit more work to do, but we’ve already identified $2 million beyond where we are at our current run rate today.
Ben Klieve: Got it. Very good. Good for you guys. I appreciate you pick my questions. Congratulations again, really lot of good momentum coming onto you guys. I will get back in queue and best of luck here in the second half.
T.J. Schaefer : Great. Thanks so much.
Operator: Thank you. And I’m showing no further questions. I would now like to turn the call back to T.J. Schaefer for closing remarks.
T.J. Schaefer: In summary, we view the second quarter of 2024 as a significant turning point for Arcadia as we transform the business. Over the last two years, we have exited several underperforming brands right-size 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.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.