Earnings Call Transcript - RKDA Q4 2024

Operator, Operator

Good afternoon, and welcome to Arcadia Biosciences Fourth Quarter and Full Year 2024 Financial Results and Business Highlights Conference Call. 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, Chief Financial Officer

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-K. With that, I'll now turn the call over to T.J.

T.J. Schaefer, President and Chief Executive Officer

Good afternoon, and thank you for joining us today to discuss our 2024 fourth quarter and full year financial results. The year 2024 represented the culmination of a multiyear plan to put Arcadia on a path to profitability, and I am extremely pleased with the progress we have made. Over the last 2 years, we have exited underperforming Body Care brands in an effort to simplify our business and focus our resources on our most promising brands. In mid-2024, we seized on an opportunity to monetize a portion of our wheat intellectual property portfolio through the sale of a trait as well as the GoodWheat brand of wheat products, which provided non-dilutive capital while significantly reducing our operating expenses. Today, we are a leaner company that is solely focused on growing our Zola coconut water products, and we are delivering what we said we would deliver. In May 2024 on the special investor call following the sale of GoodWheat assets, we provided the following guidance for 2024. We said full year revenue would essentially be in line with the $5.3 million we reported for full year 2023 prior to the sale of GoodWheat that our gross profit dollars would be above $2 million with gross margins in the low 40s and that our R&D and SG&A expenses would have a quarterly run rate of around $2 million in the second half of the year. The results we are reporting today illustrate the successful execution of our strategy with full year revenues of just over $5 million, gross profit of $2.1 million and gross margins of 41.3%. Our reported R&D and SG&A expenses in the second half of 2024 were $4.9 million, which resulted in a higher quarterly run rate than our previous guidance as we incurred approximately $1.2 million of transaction-related fees in the second half that we did not anticipate in May when we provided guidance. But there is an even better story deeper below the surface of the full year numbers, and that is one of momentum. If I were speaking about Arcadia in 2024 using a sports analogy, we would be described as a second half team. In the first half of 2024, Arcadia sales declined 4% year-over-year. But in the second half of 2024, Arcadia sales grew 32% and despite the fact that our GLA business was down 60% in the second half compared to prior year as we sold through the remaining inventory. The significant change in our business was driven by the tremendous amount of momentum with Zola, which grew revenues 16% in the first half of 2024 and 80% in the second half of 2024 as a result of the significant distribution gains in the second half by this hyper-focused team. In fact, in the fourth quarter alone, Zola sales increased 124% compared to the fourth quarter of last year. But the second half story is more than just a revenue story. While our consolidated Arcadia revenues increased more than 30% during the second half, our use of operating cash decreased 30% in the second half compared to the first half of 2024, consistent with our strategy of profitable growth that we have previously discussed. In fact, there were several opportunities for Zola to secure even more distribution during the year, but we walked away from several opportunities that did not meet our profitability targets. For full year 2024, Zola sales increased 46% compared to the previous year, primarily driven by the new distribution I mentioned earlier. In 2024, we added more than 1,600 new stores and grew our retail distribution by 86%, resulting in the best annual performance for Zola since Arcadia acquired the brand in May 2021. From a gross margin standpoint, Zola gross margins in 2024 were 33%, which is consistent with the guidance we provided previously of margins in the low to mid-30s. The success we experienced in 2024 has resulted in Zola growth that is outpacing the coconut water category by more than 2:1 across all measured time periods. And this is a very healthy category where full year growth in '24 was double the growth experienced in 2023 as consumer preferences shift to healthier beverages such as coconut water. Based on Nielsen data for the 4 weeks ending December 28, 2024, the shelf-stable coconut water category in grocery grew 28.7% while Zola increased 73.7%. During the latest 13 weeks, the category rose 29.2% compared to Zola growth of 71.8%. And for the full year, the category grew 18.5%, while Zola increased 38.5%. As a reminder, when we provide Nielsen data, the numbers refer to scan data, which is products sold through to the end customer. As a result, our reported Zola sales growth of 46% differs from the Nielsen number of 38.5% as some product could still be in distribution centers or on store shelves. So in summary, 2024 was a tale of 2 stories. In the first half, the focus was on rightsizing the business and positioning Zola for success. The second half was about executing on our strategy, driving growth in Zola and delivering on the commitments we made earlier in the year. As we begin 2025, we believe that Zola has significant momentum based on the new distribution that was put in place in the back half of 2024 as well as a pipeline of new opportunities to drive additional growth in the future. Before I turn the call over to Mark, I want to provide an update on the pending transaction with Roosevelt Resources. But before I begin, I want to state upfront that the comments I can make today will be limited. For further information and discussion, I would refer you to our Form S-4 registration statement that has been filed with the Securities and Exchange Commission. Having said that, as you are all aware, on December 5, 2024, we announced that we had entered into a definitive securities exchange agreement with Roosevelt Resources, a privately held oil and gas exploration and production company based in Dallas, Texas. As I mentioned previously, we filed a registration statement on Form S-4 with the SEC on February 14, 2025, and related to the proposed share issuance and a stockholder meeting to vote on certain proposals relating to the transaction. As is customary in these types of transactions, the SEC can provide multiple rounds of comments on the matters included in the registration statement. Once we complete the review process and the registration statement has been declared effective by the SEC, we intend to distribute proxy materials to our stockholders to vote on proposals relating to the transaction. Given the timing of the initial filing, as well as various actions required to go through the SEC review process, we currently expect the transaction to be completed towards the end of Q2. With that, I will now turn the call over to Mark to discuss our 2024 Q4 and full year financial results.

Mark Kawakami, Chief Financial Officer

Thank you, T.J., and welcome to everyone joining us on the call. I want to remind everyone that my discussion of the financial results will focus on the impact of continuing operations only. Any mention of prior year results will exclude the effects of discontinued GoodWheat and Body Care operations. Now, I'll begin discussing the financial results. In Q4, total revenues were about $1.2 million, representing a 56% increase compared to the same period last year. This revenue increase occurred even with a significant drop in GLA oil sales as we sold off our remaining inventory. The decline in GLA oil sales was balanced out by a 124% rise in Zola revenues. Despite Q4 typically being on the slower end of our seasonality curve, Zola sales in this quarter exceeded Zola's best quarter of all of 2023. For the full year, total revenues rose by 13% compared to 2023, driven by a 46% increase in Zola sales, which offset a 49% decline in GLA oil sales. The cost of revenues in 2024 was about $3 million, a 36% increase compared to last year, primarily due to the rise in Zola sales, which accounted for 84% of total cost of revenues in 2024 and 93% in 2023. This shift in product sales mix is reflected in our gross margin rate, which fell from 51% in 2023 to 41% in 2024, with a Q4 gross margin rate of 32%. Research and development costs were $53,000 in 2024, down by $11,000 from 2023, as we focused on developing the Zola brand by utilizing existing resources and minimizing new investments. Selling, general, and administrative costs in 2024 totaled $9.6 million, which included $2 million in transaction costs related to the sale of GoodWheat assets and the pending deal with Roosevelt Resources. This is compared to SG&A costs of $8.2 million in 2023. In Q4 this year, SG&A costs were $2.7 million, including $700,000 in transaction-related expenses, while in Q4 last year, SG&A costs were $1.7 million. The loss from discontinued operations for all of 2023 was $2.7 million, mostly due to termination costs and fees for remaining employees and vendors that supported the GoodWheat business. As anticipated, losses from discontinued operations have decreased as the year went on, with losses in Q4 amounting to $23,000. Regarding the balance sheet, we finished 2024 with $4.2 million in cash, down from $11.6 million at the beginning of the year. As T.J. mentioned, we managed to cut our operating cash consumption in the second half of the year, allowing us to keep overall cash consumption stable even with $700,000 in transaction-related costs in Q4. We concluded 2024 with $1.2 million in accounts receivable, compared to $500,000 at the start of the year, reflecting the year-on-year growth in Q4 Zola revenues and accrued interest on the short-term portion of our note receivable from selling GoodWheat assets. Our inventory balance at the end of 2024 was $904,000 compared to $837,000 at the beginning of the year, with inventory growth driven by higher Zola revenues in Q4 and longer lead times from coconut water suppliers. The promissory note received from the sale of GoodWheat assets continues to accumulate interest at the prime rate. We expect to receive about $2.5 million in cash in May 2025 as the first payment of principal and interest. In conclusion, we ended 2024 after successfully restructuring our business and improving nearly all areas of our financial performance. We continue to achieve some of our highest revenue growth rates and outpace the category without needing additional investment. Moreover, we are reducing our cash usage from ongoing operations, enabling us to maintain steady overall cash consumption while progressing with our transaction with Roosevelt Resources.

Operator, Operator

Our first question today will come from Ben Klieve of Lake Street.

Ben Klieve, Analyst

All right. Congratulations on a good end of the year here. First question on Zola distribution, can you elaborate a bit on your expectations for continued distribution growth here in 2025?

T.J. Schaefer, President and Chief Executive Officer

Sure. We have a strong pipeline as we move into 2025. I won't share specific figures, but the pipeline in 2025 is as robust as it was in 2024. Additionally, as we mentioned, much of the new distribution and gains occurred in the latter half of the year, so we will experience a full 12 months of that new distribution in 2025, which will be an advantage compared to 2024.

Ben Klieve, Analyst

Okay. Very helpful. On GLA, can you just help me with some housekeeping here? What was the full year GLA revenue and then also in the fourth quarter? And then can you confirm you guys are 100% sold out of that product as of 12/31/24?

T.J. Schaefer, President and Chief Executive Officer

Yes. So full year GLA revenue was $756,000. Q4 was $55,000. And we are completely out of GLA inventory; there will be no GLA sales in 2025.

Ben Klieve, Analyst

Okay. Perfect. Very good. And then last one for me and I'll get back in the queue is regarding your efforts to monetize the legacy IP from the prior business model. Can you update us on kind of the status of any of those efforts? How advanced in the conversations are and the expectations or any goals, I guess, for future events?

T.J. Schaefer, President and Chief Executive Officer

Sure. So as you are aware, we still do have a portfolio of patents predominantly focused on wheat; it would be our resistant starch reduced gluten and oxidative stability patent portfolio. We are seeking to monetize that entire patent portfolio. I would say it will likely be a series of transactions; there will not be one buyer for the entire portfolio. And part of that is really due to just some of the legal constraints that we have based on licensing deals or the relationships that we have with existing partners. So I think what you'll probably see is potentially one or two even more transactions to kind of unwind that portfolio. In terms of timeline, I think we are in advanced stages in terms of those discussions. So I'm hopeful that we could have something done in the first half of the year that we would be able to announce; that would be kind of my target.

Ben Klieve, Analyst

Got it. Very good. Well, best of luck with all those initiatives and the hopefully final days of the Roosevelt transaction.

Operator, Operator

Thank you. And I would like to go ahead and turn the call back over to T.J. Schaefer for closing remarks. Please go ahead.

T.J. Schaefer, President and Chief Executive Officer

So in closing, we developed a strategy that we believe maximizes the potential of our strongest brand, Zola, and we have executed on that strategy in the second half of 2024 and increasing revenues 80%, while delivering on all of the commitments that we communicated back in May. At the same time, our top line is expanding. We have also maintained tight cost controls. Arcadia has now produced gross margins in excess of 30% for 8 straight quarters, and our 2024 use of cash in operations is at the lowest level since Arcadia went public a decade ago. Zola's distribution expansion, particularly in the second half of 2024 provides tremendous momentum as we enter 2025. This concludes my remarks. Thank you for your interest in Arcadia, and have a great day.

Operator, Operator

Thank you so much for participating in today's conference call. You may now disconnect.