Arcadia Biosciences - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $1.216M (+56% YoY), driven by a 124% YoY surge in Zola coconut water; net loss attributable to common stockholders was $4.064M ($2.98 per share), primarily impacted by warrant/option liability fair value changes.
• Full-year 2024 delivered $5.045M revenue (+13% YoY), gross profit ~$2.1M and gross margin 41.3%, consistent with the May guidance framework; SG&A in H2 ran above plan due to ~$1.2M transaction fees tied to asset sales and the pending Roosevelt deal.
• Zola added >1,600 new stores and expanded retail distribution 86% in 2024; scan data shows category outperformance across 4 weeks (+73.7% vs +28.7%), 13 weeks (+71.8% vs +29.2%), and full year (+38.5% vs +18.5%).
• Management expects healthy 2025 distribution pipeline and completion of the Roosevelt business combination toward end of Q2 2025; ~$2.5M principal/interest payment from the GoodWheat note is scheduled for May 2025, bolstering liquidity.

What Went Well and What Went Wrong

• What Went Well

  • Zola momentum: “Zola sales increased 124% [in Q4]… For full year 2024, Zola sales increased 46%” with >1,600 new stores and 86% distribution growth; gross margin for Zola was 33%.
  • Category outperformance: “Based on Nielsen… grocery grew 28.7% while Zola increased 73.7% [4 weeks]; category +29.2% vs Zola +71.8% [13 weeks]; full year +18.5% vs Zola +38.5%”.
  • Cash discipline: Operating cash use fell 30% in H2 vs H1 despite transaction fees; FY operating cash consumption at lowest level since IPO.

• What Went Wrong

  • Margin compression: Full-year gross margin declined to 41% from 51% in 2023 due to product mix shift; Q4 gross margin was 32% as Zola scaled and cost of revenues rose (+36% YoY to ~$3.0M).
  • Elevated SG&A in H2: SG&A was $4.9M in H2 vs prior quarterly run-rate guidance of ~$2.0M, reflecting ~$1.2M of transaction-related fees ($0.7M in Q4).
  • GLA oil winds down: Full-year GLA revenue was $0.756M; Q4 was $0.055M and the business is now completely sold out—no sales expected in 2025, limiting legacy revenue contribution.

Transcript

Operator (participant)

Good afternoon and welcome to Arcadia Biosciences' fourth quarter and full year 2024 financial results and business highlights conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised t hat 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 (CFO)

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 and our most recently filed 10-K. With that, I'll now turn the call over to T.J.

T.J. Schaefer (President and CEO)

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 multi-year plan to put Arcadia on a path to profitability, and I am extremely pleased with the progress we have made. Over the last two 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. 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. In the second half of 2024, Arcadia sales grew 32%, 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. 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 to 1 across all measured time periods.

This is a very healthy category where full year growth in 2024 was double the growth experienced in 2023 as consumer preferences shift to healthier beverages such as coconut water. Based on Nielsen data for the four 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%. 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 product 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. In summary, 2024 was a tale of two stories.

In the first half, the focus was on right-sizing 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. 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, 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?

Mark Kawakami (CFO)

Thank you, T.J., and welcome to everyone joining us on the call. I would 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 will begin our discussion of the financial results. In Q4, total revenues were approximately $1.2 million, and this represented an increase of 56% compared to the same period of last year. It's worth noting that this increase in revenues occurred despite a sharp decline in sales of GLA oil, as we sold through the last of our remaining inventory. This decline in sales of GLA oil was offset by a 124% increase in Zola revenues.

Despite the fact that Q4 tends to be in the slow end of our seasonality curve, Zola sales in Q4 of this year were higher than Zola's best quarter in all of 2023. For the full year, total revenues increased 13% compared to 2023. This was driven by a 46% increase in Zola sales, overcoming a 49% decline in sales of GLA oil. The cost of revenues in 2024 was approximately $3 million, and this represented a 36% increase compared to last year. The increase in the cost of revenues was driven by the increase in Zola sales, as product costs made up 84% of the total cost of revenues in 2024 and 93% of the total cost of revenues in 2023.

The effect of this shift in the product sales mix can be seen in our gross margin rate, which declined from 51% in 2023 to 41% in 2024. The gross margin rate in Q4 of 2024 was 32%. Research and development costs were $53,000 in 2024. This was a decrease of $11,000 compared to 2023, and it reflects our strategy to develop the Zola brand by leveraging our existing resources and minimizing new investment. Selling, general, and administrative costs in 2024 were $9.6 million, and that included $2 million of transaction costs related to the sale of GoodWheat assets, as well as the pending transaction with Roosevelt Resources. In comparison, SG&A costs in 2023 were $8.2 million. For Q4 of this year, selling, general, and administrative costs were $2.7 million, and that included $700,000 of transaction-related costs. In comparison, SG&A costs in Q4 of last year were $1.7 million.

The loss from discontinued operations was $2.7 million for all of 2024, and the cost was mostly comprised of termination costs and fees for the remaining employees and vendors that supported the GoodWheat business. As expected, losses from discontinued operations have declined as the year progressed, and losses in Q4 were $23,000. Moving to the balance sheet, we ended 2024 with $4.2 million of cash compared to $11.6 million at the start of the year. As T.J. mentioned, we have been able to reduce our operating cash consumption in the second half of the year, and this has allowed for us to keep our overall cash consumption steady despite having $700,000 of transaction-related costs in Q4. We ended 2024 with $1.2 million of accounts receivable compared to $500,000 at the start of the year.

This increase reflects the year-on-year growth in Q4 Zola revenues, as well as the addition of interest related to the short-term portion of our note receivable from the sale of GoodWheat assets. We ended 2024 with an inventory balance of $904,000 compared to $837,000 at the start of the year. The growth in inventory reflects the impact of higher Zola revenues in Q4, as well as the effect of longer lead times from our coconut water suppliers. The promissory note we received from the sale of GoodWheat assets continues to accrue interest at the prime rate. 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, we have ended 2024 having successfully executed the restructuring of our business while making improvements in almost all aspects of our financial performance.

We continue to achieve some of our highest rates of revenue growth and outpace the category without additional investment. Also, we continued to reduce our use of cash from ongoing operations, allowing us to maintain our overall cash consumption while we make progress in our transaction with Roosevelt Resources. I will now turn the call over to the operator for questions.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You'll then hear the automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment, please. Our first question today will come from the line of Ben Klieve of Lake Street. Your line is open.

Ben Klieve (Senior Equity Research Analyst)

All right. Thanks for taking my questions, and congratulations on a good end of the year here. On 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 CEO)

Sure. Yeah, we do have a healthy pipeline as we enter 2025. I do not want to provide any specific numbers, but the pipeline is as healthy in 2025 as it was in 2024. We will also benefit, as we noted, a lot of the new distribution and gains came in the second half of the year. We will benefit from just the full 12 months of all of that new distribution in 2025 compared to 2024.

Ben Klieve (Senior Equity Research 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? Can you confirm you guys are 100% sold out of that product as of 12/31/2024?

T.J. Schaefer (President and CEO)

Yep. Full year GLA revenue was $756,000. Q4 was $55,000. We are completely out of GLA inventory. There will be no GLA sales in 2025.

Ben Klieve (Senior Equity Research Analyst)

Okay. Perfect. Very good. Last one for me, and I'll get back in 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 any conversations are, any expectations, or any goals, I guess, for future events?

T.J. Schaefer (President and CEO)

Sure. 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. 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. 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.

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 (Senior Equity Research Analyst)

Got it. Very good. Well, best of luck with all those initiatives, and best of luck here in the hopefully final days of the Roosevelt transaction. Thanks for taking my questions. I'll get back in queue.

T.J. Schaefer (President and CEO)

Thank you.

Operator (participant)

Thank you. 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 CEO)

In closing, we developed a strategy that we believed maximized the potential of our strongest brand, Zola. We have executed on that strategy in the second half of 2024, 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 eight 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 (participant)

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