Arcadia Biosciences, Inc. Q3 FY2024 Earnings Call

Good afternoon, and welcome to Arcadia Biosciences Third Quarter 2024 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. 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.

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'll now turn the call over to T.J.

Good afternoon, and thank you to everyone on the call for joining us today to discuss our 2024 third quarter financial results. When we last spoke in August, we characterized the second quarter of 2024 as a turning point for Arcadia in relation to our business transformation that has taken shape over the last two years. Our third quarter results exemplify the plan we have put in place as well as our ability to execute on it. First, in the third quarter, our total revenues increased 18% year-over-year, driven by a 55% increase in Zola Coconut Water sales, which I will discuss in more detail later in my prepared remarks. At the same time, we grew the top line while maintaining our selling, general and administrative expenses. While SG&A expenses increased by $380,000 compared to last year, the entire variance was due to severance and transition-related fees following the sale of GoodWheat. Importantly, our use of cash during the quarter declined to $1.5 million, including more than $400,000 related to discontinued operations. This is the lowest level of cash used in a quarter since Arcadia went public. We are extremely pleased with the progress made thus far, although our work is not done. We continue to evaluate strategic alternatives, focusing on reducing our cost structure, monetizing our existing Wheat portfolio, and growing our Zola Coconut Water business, which is off to an amazing start. In Q3 2024, Zola revenues increased 55% compared to the same period last year, driven by new distribution added in the quarter, strong orders from our existing customers, and the new items that began shipping last quarter. The coconut water industry's overall health also contributed to Zola's growth. From a distribution perspective, our retail store count for Zola increased 68% year-over-year, marking the largest quarterly distribution gains in our company's history. Notably, while our revenues increased 55% year-over-year, our sell-through, as measured by scan data, increased more than 36% compared to the prior year, demonstrating strong end customer demand for our products. In July 2024, Zola experienced its highest month of sales since Arcadia acquired the brand in May 2021. Importantly, 95% of the new distribution in Q3 did not start shipping until the end of the quarter. Another key contributor to Zola's growth was the Q2 launch of new items, including original, lime, and pineapple flavors in a new 16.9-ounce tetra pack—all of which have added incrementally to Zola’s sales. The health of the category is vital for growth; the coconut water industry continues to perform well as consumers seek hydration and electrolytes from their beverages. According to Nielsen data ending September 28, 2024, Zola grew faster than the category across all measured time periods. In the last 52 weeks, the coconut water category grew 15%, while Zola grew 23%. In the latest 13 weeks, the category rose 20%, while Zola's scan data increased by 36%. Lastly, in the latest four-week period, the coconut water industry grew 28%, while Zola increased 73%. We are pleased with our performance and ability to deliver on our plan, as revenues have increased at a double-digit rate and our cash burn is at historic lows. Looking ahead, while Q4 is typically the softest quarter for the coconut water industry, we are optimistic heading into the end of the year with a significant amount of new distribution added earlier this year. We will begin shipping to two new customers in Q4 and now expect our full-year 2024 retail distribution growth to exceed 80%. We are also working on new innovations, and while we won't provide specifics until closer to launch, we have decided on the new concept, completed the product formulation, and finalized a mockup of the packaging. We will test the concept and product samples with new and existing retailers to gauge interest before any new product launch. We expect the new product to be ready for the beverage season next year. We will not be providing additional forward-looking guidance today. While we added a tremendous amount of new distribution in Q3, the number of stores added during the quarter represents one-third of Zola's total retail distribution, and approximately 95% did not start shipping until the end of the quarter, making forecast accuracy challenging. We appreciate your understanding regarding this uncertainty. With that, I will turn the call over to Mark to discuss our Q3 and year-to-date financial results.

Thank you, T.J. and welcome to everyone joining us on the call. 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. In Q3, total revenues were approximately $1.5 million, representing an increase of 18% compared to last year, driven by strong performance for Zola, which increased 55%. This quarter, Zola accounted for about 86% of total revenues. Sales of GLA oil continued to decline as we sell through the last remaining inventory, with sales this quarter about half of what they were in Q3 last year. Zola has concluded a busy summer season with a strong finish, benefiting from new distribution secured in Q2 and growth from our existing customers. The cost of revenues in Q3 was approximately $1 million, which included a write-down of just over $150,000 related to hemp and GoodWheat seed. Including this write-down, total cost of revenues increased by about $200,000 or 26% compared to last year. Research and development costs were $24,000 in Q3, an increase of $9,000 compared to last year but a decrease of $15,000 year-to-date. Selling, general and administrative costs in Q3 were approximately $2.2 million, which included about $380,000 of transition costs related to the sale of GoodWheat assets. These costs made up the entire variance compared to Q3 last year, representing a 20% increase in costs. The loss from discontinued operations was approximately $430,000, primarily consisting of termination costs and fees for remaining employees and vendors supporting the GoodWheat business. Overall, losses from discontinued operations decreased by 77% compared to the same period last year, and Q3 makes up about 16% of the total year-to-date loss. Regarding the balance sheet, we ended Q3 with $6.6 million in cash and short-term investments, down from $8.1 million at the end of Q2. This $1.5 million change includes $430,000 of expenses related to discontinued operations. Additionally, this change aligns with our overall cash consumption of $3.5 million in the first half of the year. Our inventory balance stood at $835,000, down 15% from the end of Q2, reflecting the end of the peak selling season for Zola. The promissory note received from the sale of GoodWheat continues to accrue interest at the prime rate, and we are expecting approximately $2.5 million in cash in May of 2025 as the first repayment of principal and interest. In conclusion, we have made substantial progress in all aspects of our financial performance this quarter. We achieved revenue growth both from our existing portfolio and from the new distribution secured in Q2, allowing us to outpace the category and achieve our highest sales since acquiring the Zola business in 2021. We also managed this revenue growth while maintaining ongoing expenses, and effective inventory and working capital management has significantly reduced our cash usage from ongoing operations to some of the lowest levels in our history as a public company. I will now turn the call over to the operator for questions.

Thank you. Our first question comes from Ben Klieve of Lake Street Capital Markets. Your line is open.

Hi. Thanks for taking my questions and congratulations on your nice momentum from Q2 to Q3. First, a clarifying question, Mark, in your prepared comments, you noted a $150,000 write-down. Did you say that was entirely within this quarter and associated with the legacy business? Did I hear that correctly?

Yes. It was entirely in this quarter and related to both Hemp and GoodWheat seed.

Okay. Perfect. Thank you. Looking at gross margins, if you back out that $150,000 write-down and strip out the GLA business that will be coming off the books, can you help give us guideposts regarding your expectations on margins on a go-forward basis?

If you back out those two items, I think you're going to land right around 33%. Historically, our long-term outlook for Zola margins is in the low to mid-30s, and we’re right in the middle of that range.

Okay. Perfect. And regarding the onetime items within OpEx that you flagged, do you expect any more of those residual items to come through in the fourth quarter?

For the most part, I think we have moved past the severance and those types of issues, so we would expect any related costs in the fourth quarter to be minimal.

Okay, great. Regarding the growth pace you have in Zola with new distributors, can you talk about your confidence in Arcadia's infrastructure to support this growth?

We feel comfortable about our infrastructure. Zola is manufactured in Thailand, and we manage it as a very asset-light business model. However, we are managing our inventory carefully due to longer lead times. The large orders shipped at the quarter's end ate into our safety stock, but we are balancing that and will rebuild our safety stock as we enter the softer season.

Okay, very good. Congratulations again on a really good quarter here. Thanks for taking my questions.

Thank you.

Thank you. I’m showing no further questions at this time. I'd like to turn it back to T.J. Schaefer for closing remarks.

In our view, our third quarter 2024 results represent the progress we have made in transforming Arcadia's business and our ability to execute on the plan laid out. Our total revenues increased 18% year-over-year, driven by very strong growth in Zola revenues of 55%. From a distribution perspective, Zola's retail store count increased 68% year-over-year, and Zola is outpacing the coconut water category across all measured time periods, resulting in market share gains. Finally, we have significantly reduced our use of operating cash to the lowest levels in Arcadia's history as a public company. We are extremely pleased with our performance and sincerely thank you for your continued interest in Arcadia.

This concludes today's conference call. Thank you for participating, and you may now disconnect.