Q2 2024 Arcadia Biosciences Inc Earnings Call

August 13, 2024

Speaker Change: Good afternoon and welcome to Arcadia Bioscience's second quarter 2024 financial results and business highlight conference call.

Operator: Financial Results and Business Highlights Conf. 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 ready.

Operator: Financial Assault and Business Highlight Conference Call. At this time, our 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.

Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

Speaker Change: To ask a question during the session, you'll need to press star 11 on your telephone.

Operator: So would you all your question? Please press star 11 again.

Mark Kawakami: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again 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

Operator: Please be advised that today's conference is being recorded.

Operator: To withdraw your question, please press star 11 again. 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: 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 TJ 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.

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'll now turn the call over to TJ. Good afternoon, everyone.

Mark Kawakami: Thank you and good afternoon. Joining me on the call today is TJ Schaefer, Arcadia's President and Chief Executive Officer.

Speaker Change: This call is being webcast and you can refer to the company's press release at ArcadiaBio.com

Mark Kawakami: 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 are most recently filed 10-Q.

Speaker Change: 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.

Speaker Change: 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.

Thomas Schaefer: With that, I'll now turn the call over to TJ. Good afternoon, everyone. 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.

TJ Schaefer: You can review the company's safe harbor language and our most recently filed 10-Q. With that, I'll now turn the call over to TJ.

T.J. Schaefer: 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 intellectual property.

TJ Schaefer: Good afternoon, everyone. Thank you for joining us today to discuss our second quarter financial results for 2024.

TJ Schaefer: 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.

TJ Schaefer: 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.

Thomas Schaefer: 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 resistance starched Durham wheat to a wholly owned subsidiary of Corteva Agroscience 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 resistance-starched Durham wheat trade. Corteva has been steadily advancing this trade toward commercialization, intergrossing it into elite germplasm lines, and this transaction gives them access to markets beyond North America.

TJ Schaefer: 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 WEAT IP.

T.J. Schaefer: 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 Agroscience 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 trade. Corteva has been steadily advancing this trait toward commercialization, intergressing it into elite germplasm lines.

TJ Schaefer: 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.

Speaker Change: 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 trade.

Corteva Agriscience: Corteva has been steadily advancing this trait toward commercialization, intergressing it into elite germplasm lines, and this transaction gives them access to markets beyond North America.

T.J. Schaefer: 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 a 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 In less than two years, we launched the Goodwheat brand into three distinct categories, pasta, pancakes, and mac and cheese, securing over 3,500 points of distribution, an amazing achievement for a company our size.

Thomas Schaefer: For Arcadia, this means earlier monetization of our resistance starched Durham technology, accelerating royalties with the one-time payment of $4 million.

Speaker Change: For Arcadia, this means earlier monetization of our resistant starch Durham technology, accelerating royalties with the one-time payment of $4 million.

Thomas Schaefer: 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 good wheat business to Above Food Corporation. As part of the agreement, Arcadia agreed to transfer good wheat 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 Good Wheat brand into three distinct categories: pasta, pancakes, and mac and cheese, securing over 3,500 points of distribution, an amazing achievement for a company our size.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: In less than two years, we launched the Goodwheat brand into three distinct categories, pasta, pancakes, and mac and cheese.

Speaker Change: securing over 3,500 points of distribution, an amazing achievement for a company our size.

Thomas Schaefer: However, we also recognized the investment required to scale the business nationally and felt that the time was right to monetize the brand.

T.J. Schaefer: 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 the full year 2025.

Speaker Change: However, we also recognize the investment required to scale the business nationally and felt that the time was right to monetize the brand.

Thomas Schaefer: The historical results of the Good Wheat 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 Good Wheat 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 five months early and have generated several hundred thousand dollars through the sale of farm equipment that is no longer needed.

Speaker Change: The historical results of the Goodwheat business are now reflected in our P&L as discontinued operations.

Speaker Change: While these transactions allowed us to monetize part of our WEAT IP, they also set the wheels in motion for additional cost savings.

Speaker Change: 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.

T.J. Schaefer: We were also able to successfully negotiate the exit from our facility in Idaho five 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.

Speaker Change: We were also able to successfully negotiate the exit from our facility in Idaho five months early and have generated several hundred thousand dollars through the sale of farm equipment that is no longer needed.

Thomas Schaefer: 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.

Speaker Change: We estimate the impact of these savings to be approximately $2 million on a full year basis as we exit 2024.

Speaker Change: compared to our normalized operating expense run rate of approximately two million dollars per quarter and we will continue to look for opportunities to reduce our expenses further.

Thomas Schaefer: It's important to note that our SG&A expense in Q2 2024 of approximately $2.7 million includes nearly half a million dollars 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.

T.J. Schaefer: It's important to note that our SG&A expense in Q2 2024 of approximately $2.7 million includes nearly half a million dollars 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 became part of Arcadia in May 2021 as part of the LeafEcho acquisition that also included several body care brands. Celebrating its crisp, clean taste that is slightly sweet, Zola offers natural hydration and is rich in electrolytes.

Speaker Change: It's important to note that our SG&A expense in Q2 2024 of approximately $2.7 million includes nearly half a million dollars in M&A fees related to the two transactions.

Speaker Change: While cost reductions are certainly part of our strategy to achieve profitability, we will not get there through cost-cutting alone.

Thomas Schaefer: 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. 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 good wheat brand. One, Zola's 20-plus year history in the marketplace means it has an established customer base and distribution channels.

Speaker Change: The second part of our strategy revolves around growing our Zola Coconut Water brand, and we are off to a strong start in 2024.

Speaker Change: Founded in 2002, Zola Coconut Water became part of Arcadia in May 2021 as part of the LeafEcho acquisition that also included several body care brands.

Speaker Change: Celebrated for its crisp, clean taste that is slightly sweet, Zola offers natural hydration and is rich in electrolytes.

T.J. Schaefer: It also provides several advantages to Arcadia in contrast to the GoodWeek brand. One, Zola's 20 plus-year history in the marketplace means it has an established customer base and distribution channel. Two, Zola's placement is typically in the produce section of conventional grocery retailers, which provides several benefits. First, it's less competitive.

Speaker Change: It also provides several advantages to Arcadia in contrast to the GoodWeek brand.

Speaker Change: One, Zola's 20-plus year history in the marketplace means it has an established customer base and distribution channels.

Thomas Schaefer: Two, Zola's placement is typically in the produce section of conventional grocery retailers, which provides several benefits. First, it's 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.

T.J. Schaefer: 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 the center. So from a financial perspective, what does this mean for Arcadia? It means more predictable customer reorder patterns and significantly less marketing investments than Goodwill. Let me give you an example to help drive home the point.

Speaker Change: Two, Zola's placement is typically in the produce section of conventional grocery retailers, which provides several benefits.

Speaker Change: First, it's less competitive.

Speaker Change: Second, it aligns the brand with fresh natural products enhancing its appeal to health conscious consumers.

Speaker Change: And third, the produce section does not normally require the slotting investment that is typical in center store.

Thomas Schaefer: So, from a financial perspective, what does this mean for Arcadia? It means more predictable customer reorder patterns and significantly less marketing investments than good. Let me give you an example to help drive home the point. In 2023, our marketing investment in good wheat 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.

Speaker Change: So from a financial perspective, what does this mean for Arcadia? It means more predictable customer reorder patterns and significantly less marketing investments than GoodWeed.

T.J. Schaefer: In 2023, our marketing investment in GoodWeat 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. Let's now shift gears and talk about the progress we have made.

Speaker Change: Let me give you an example to help drive home the point.

Speaker Change: In 2023, our marketing investment in GoodWeat 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.

Speaker Change: 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.

Thomas Schaefer: Let's 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 29th, 2024, coconut. Additionally, in the latest four-week period ending June 29th, 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 I 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.

T.J. Schaefer: 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 percent while Zola sales increased 42 percent. 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.

Speaker Change: Let's now shift gears and talk about the progress we have made.

Speaker Change: The momentum we spoke about previously related to ZOLA continued into Q2.

Speaker Change: According to Nielsen data, in the 13-week period ending June 29, 2024,

Speaker Change: Coconut water category sales increased 16% while Zola sales increased 27%.

Speaker Change: 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 Change: 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.

T.J. Schaefer: 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, which just began shipping in Q2 2024.

Speaker Change: So while the Nielsen data shows a 27% increase in Q2 2024 compared to the same period last year,

Speaker Change: Actual Zola sales increased by 42% during the quarter.

Thomas Schaefer: 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.

Speaker Change: 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.

Speaker Change: 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.

T.J. Schaefer: 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 2020. While we continue to explore strategic alternatives, our immediate focus is on reducing our costs and accelerating the growth of Zola.

Speaker Change: 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.

Thomas Schaefer: And our expectation is that this strong performance will continue in the second half, generating strong revenue growth and growth profit.

Speaker Change: Before I wrap up my prepared remarks, I want to provide some perspective on the rest of 2024.

Speaker Change: While we continue to explore strategic alternatives, our immediate focus is on reducing our costs and accelerating the growth in ZOLA.

T.J. Schaefer: 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 lost sales from Goodwill. 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 10K 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.

Thomas Schaefer: 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 Goodweat. 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 and our 10-K filed in March. 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.

Speaker Change: On our special investor call back in May, we provided a preliminary outlook for 2024, and today we want to reaffirm those metrics.

Speaker Change: More specifically, from a top-line perspective, we expect new distribution gains at Zola to offset the lost sales from GoodWeed.

Speaker Change: 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 10K filed in March.

Speaker Change: 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.

Thomas Schaefer: The result is an expected 50 percent decrease in our use of cash in 2024 compared to the $15 million that we reported in our 10-K for 2023.

T.J. Schaefer: The result is an expected 50% decrease in our use of cash in 2024 compared to the $15 million that we reported in our 10K for 2023. With that, I will now turn the call over to Mark to discuss our Q2 financial results. Thank you, TJ.

Speaker Change: The result is an expected 50% decrease in our use of cash in 2024 compared to the $15 million that we reported in our 10K for 2023.

Mark Kawakami: With that, I will now turn the call over to Mark to discuss our Q2 financial results. 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 Good Wheat 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 percent sequentially, and it was basically flat compared to the same period of last year.

Speaker Change: With that, I will now turn the call over to Mark to discuss our Q2 financial results.

Mark Kawakami: 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.

Speaker Change: Thank you, TJ, and welcome to everyone joining us on the call.

Mark Kawakami: I would like to remind everyone that my discussion of the financial results will refer to the impact of continuing operations only.

Mark Kawakami: Any reference to prior year results will exclude the impact of the discontinued GoodWeed and body care operations.

Mark Kawakami: 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 revenue. Zola sales increased 86% sequentially and 42% versus last year.

Mark Kawakami: With that, I'll begin our discussion of the financial results.

Mark Kawakami: 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.

Mark Kawakami: Total revenues were driven by strong growth in Zola that was partially offset by a decline in GLA oil revenues. Zola sales increased 86 percent sequentially and 42 percent versus last year. This quarter, Zola represented about 90 percent 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. Q2 gross profit was $673,000. This represents an increase of 30 percent compared to last quarter and an increase of 4 percent compared to last year.

Mark Kawakami: Total revenues were driven by strong growth in Zola that was partially offset by a decline in GLA oil revenues.

Speaker Change: Zola sales increased 86% sequentially and 42% versus last year. This quarter, Zola represented about 90% of the total revenues.

Mark Kawakami: This quarter, Zola represented about 90% of the total revenue. As TJ mentioned, Zola is off to a very strong start in 2024, with sales growth outpacing the category. We're optimistic about the outlook going forward as our new product offerings and new distribution begin 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 revenue.

Speaker Change: As TJ mentioned, Zola is off to a very strong start in 2024, with the sales growth outpacing the category.

TJ Schaefer: We're optimistic about the outlook going forward as our new product offerings and new distribution begins to take hold in Q3.

TJ Schaefer: 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.

Mark Kawakami: The resulting gross margin was 52 percent 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 expected 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 the gross profit rates to be a trend toward the low 40s in 2024 and a trend toward the low 30s after that. Research and development costs were $10,000 in Q2.

Mark Kawakami: 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 on gross profit rates to be a trend toward the low 40s in 2024 and a trend toward the low 30s after that.

TJ Schaefer: The resulting gross margin was 52% of total revenues.

TJ Schaefer: 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.

TJ Schaefer: 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.

TJ Schaefer: 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.

Mark Kawakami: 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 flavor. 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 half a million dollars of legal and consulting fees related to the transactions with Corteva and AboFood.

Mark Kawakami: 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 $2.7 million were approximately $600,000 above Q1 of this year and also Q2 of last year. The increase was driven by nearly a half a million dollars 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.

TJ Schaefer: 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.

TJ Schaefer: The decrease was driven by a reduction in development expenses related to the new Zola flavors.

TJ Schaefer: Selling, general, and administrative costs of $2.7 million were approximately $600,000 above Q1 of this year and also Q2 of last year.

TJ Schaefer: The increase was driven by nearly a half a million dollars of legal and consulting fees related to the transactions with Corteva and AboFood.

Mark Kawakami: 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 zero. The loss from discontinued operations was $789,000.

TJ Schaefer: The gain on the sale of intangible assets was $4 million, and it was related to the transaction with Corteva.

Mark Kawakami: 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 zero. The loss from discontinued operations was $789,000. This was a decrease of 47 percent compared to Q1 of this year and a decrease of 61 percent compared to Q2 of last year. As the sale of good we 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.

TJ Schaefer: 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 zero.

Mark Kawakami: 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 Good Week 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 well as the $2 million of cash that Arcadia paid in the transaction with Above Food.

TJ Schaefer: The loss from discontinued operations was $789,000.

TJ Schaefer: 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 Good Week took place midway through Q2 of this year.

TJ Schaefer: We expect these costs to decrease by about 75% in Q3, before ceasing altogether by the end of the year.

TJ Schaefer: Moving to the balance sheet.

TJ Schaefer: We ended Q2 with $8.1 million of cash and short-term investments compared to $8.5 million last quarter.

Mark Kawakami: The change of $400,000 includes the $4 million of cash that Arcadia received in the transaction with Corteva, as well as the $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 at our expectations for strong revenue growth through year end.

Speaker Change: The change of $400,000 includes the $4 million of cash that Arcadia received in the transaction with Corteva, as well as the $2 million of cash that Arcadia paid in the transaction with Above Food.

Speaker Change: The net impact of all of our business activities in the first half of 2024 resulted in a $3.5 million reduction in cash.

Speaker Change: 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.

Mark Kawakami: 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 GoodWeed, 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 have recorded the note at its discounted value of $5.7 million.

Speaker Change: 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.

Mark Kawakami: As a result of the sale of good wheat, we received a promissory note that is to be repaid in three installments over a three-year term with interest occurring at the prime rate. The stated value of the note is $6 million, and we have 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.

Speaker Change: 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.

Speaker Change: The stated value of the note is $6 million, and we have recorded the note at its discounted value of $5.7 million.

Speaker Change: We are scheduled to receive approximately $2.5 million of cash in May of 2025 as the first repayment of principal and interest.

Mark Kawakami: In conclusion, Arcadia has made tremendous progress in Q2 towards our goal of becoming profitable. First, we monetized our wheat IP and sold the brand that required a high-level investment. Second, we significantly increased Zola revenues on both a quarter-over-quarter and a year-over-year basis while maintaining gross margin rates. Finally, we continued to reduce our operating expenses and lower our cash consumption to the lowest levels in our history as a public company.

Mark Kawakami: 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.

Speaker Change: In conclusion, Arcadia has made tremendous progress in Q2 towards our goal of becoming profitable.

Speaker Change: First, we monetized our wheat IP and sold the brands that required a high-level investment.

Speaker Change: Second, we significantly increased ZOLA revenues on both a quarter-over-quarter and year-over-year basis while maintaining gross margin rates.

Mark Kawakami: 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 of the question, and thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker Change: 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.

Operator: I will now turn the call over to the operator for questions. Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. In one moment, for our first question.

Speaker Change: I will now turn the call over to the operator for questions.

Speaker Change: And thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question.

Operator: Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from Raghuram Selvaraju from H.C. Wainwright and Company. Your line is now open.

Operator: And our first question comes from a program that's still for you from H.C. Wainwright and Company. Your line is now open.

Speaker Change: and many more. Thank you. Thank you.

Operator: Financial Assault and Business Highlight Conference Call. At this time, our participants are on 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. So would you all your question? Please press star 11 again.

Speaker Change: [inaudible]

Raghuram Selvaraju: And our first question comes from Raghuram Selvaraju from H.C. Wainwright & Company. Your line is now open.

Benjamin Klieve: Thanks so 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 effectively transacted on everything that could be monetized.

T.J. Schaefer: Thanks so 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? Yeah, hi, Ram.

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.

Operator: Please be advised that today's conference is being recorded.

Mark Kawakami: 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 TJ 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.

Thomas Schaefer: Hi, Ron. Thanks for the question. Yes, we still do have a few traits in our library that we are actively working on monetizing as well.

T.J. Schaefer: Thanks for the question. Yes, we still do have a few traits in our library that we are actively working on monetizing as well. It 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 RS Durham. Okay, and then secondly, I was wondering whether you can provide us with any visibility, any color on the timing of the 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 Change: Yeah, 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.

Thomas Schaefer: 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.

Mark Kawakami: You can review the company's safe harbor language and are most recently filed 10Q.

Speaker Change: 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 R.S. Durham.

Thomas Schaefer: 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. Yeah, 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.

Speaker Change: 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.

T.J. Schaefer: Yeah, so as I stated in my prepared remarks, the pineapple and the lime just started shipping in Q2, so those are very new to 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 year. 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.

Speaker Change: for the foreseeable future.

Speaker Change: 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.

Thomas Schaefer: 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.

Speaker Change: we do have some ideas that

Thomas Schaefer: 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 resistance starched Durham wheat to a wholly owned subsidiary of Corteva Agro science 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 resistance starched Durham wheat trade.

Speaker Change: we could potentially launch in 2025.

Speaker Change: and then we continue to explore innovation longer term. So I think, you know, the short answer is yes, we are looking at an innovation pipeline and potential new product introductions in the coming years.

Thomas Schaefer: 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 is a franchise compete. 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. Yeah, it's a good question. So, you know, I think today, based on kind of the that grocery category that we typically look at, which is a little bit of a subset, you know, we're probably 1% of the market.

Speaker Change: 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.

T.J. Schaefer: 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, roughly? Just so we have a sense of what kind of market share would translate into sustainability for the company. Yeah, it's a good question.

Speaker Change: 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.

Thomas Schaefer: Corteva has been steadily advancing this trade toward commercialization, intergrossing it into elite germplasm lines and this transaction gives them access to markets beyond North America. For Arcadia, this means earlier monetization of our resistance starched Durham technology accelerating royalties with the one-time payment of $4 million.

T.J. Schaefer: So, you know, I think today, based on the grocery category that we typically look at, which is a little bit of a subset. You know, we're probably 1% of the market. And I think, you know... Still, a very low single-digit rate is where we need to get to in order to, You know, those are the kind of that's the kind of scale we're looking at just to reach breakeven. Thank you. Sure. And thank you.

Speaker Change: Yeah, it's a good question. So, you know, I think today, based on kind of that

Speaker Change: grocery category that we typically look at, which is a little bit of a subset, you know, we're probably 1% of the market and I think, you know,

Thomas Schaefer: And I think, you know, still a very low single-digit rate is where we need to get to in order to, you know, those are the kind of that's the kind of scale we're looking at just to reach break even.

Speaker Change: still a very low single-digit rate is where we need to get to in order to

Speaker Change: You know those are the kind of that's the kind of scale we're looking at just to reach breakeven

Thomas Schaefer: Thank you. Sure.

Operator: 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.

Operator: And thank you. And one moment for our next question.

Speaker Change: Thank you.

Speaker Change: Sure. And thank you. And one moment for our next question.

Thomas Schaefer: In less than two years, we launched the Good Wheat brand into three distinct categories, pasta, pancakes, and mac and cheese, securing over 3,500 points of distribution, an amazing achievement for a company our size. However, we also recognized the investment required to scale the business nationally and felt that the time was right to monetize the brand.

Operator: And our next question comes from Ben Cleve from Lake Street Capital Market; should line us now open. All right, thanks for taking my questions.

Speaker Change: And our next question comes from Ben Klieve from Lake Street Capital Markets. Your line is now open.

Ben Klieve: All right, thanks for taking my questions. Yeah, congratulations on a nice quarter and a lot of progress here year-to-date. Question on the quarter itself.

Benjamin Klieve: Yeah, 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 tailwind supporting Zola and 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 one-time revenues that came in and drove this real outperformance on that were a function of, you know, kind of new product placements or anything sizable. That would have given you that out performance versus the category.

Ben Klieve: Alright, thanks for taking my questions. Yeah, 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, 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 one-time revenues that came in and drove this real outperformance that were a function of new product placements or anything sizable that would have given you that outperformance versus the category?

T.J. Schaefer: You talked about all the different kinds of tailwinds supporting Zola, 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 one-time revenues that came in and drove this real outperformance that was a function of new product placements or anything sizable that would have given you that outperformance versus the category? Yeah, that's correct. There were no sort of one-time lumpy revenues.

Thomas Schaefer: Yeah, that's correct.

T.J. Schaefer: And no sort of, you know, no large initial sell-in that would have driven the, Okay, great. Great, that's good for you guys. Another question on the quarter itself and maybe kind of longer-term trends over the last few quarters regarding GLA. You talk about this kind of ratcheting down to, you know, being a zero once you burn through your inventory exiting the year. Can you comment on GLA as a percentage of your revenue base, you know, in the first quarter and second quarter and kind of how you expect that to tail off here into the balance of the Yeah, so second quarter, it was 10% of our revenue. Let me get you.

Thomas Schaefer: There were no sort of one time lumpy revenues and no sort of, you know, no large initial selling that would have drove the performance.

Speaker Change: Yeah, that's correct. There were no sort of one-time lumpy revenues and no sort of, you know, no large initial sell-in that would have drove the performance.

Thomas Schaefer: We were also able to successfully negotiate the exit from our facility in Idaho five 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's important to note that our SGNA expense in Q2 2024 of approximately $2.7 million includes nearly half a million dollars in MNA fees related to the two transactions.

Benjamin Klieve: Okay, great. Great. That's good for you guys.

Thomas Schaefer: Another question on the quarter itself and maybe kind of longer-term trends over the last few quarters regarding GLA. You talk about this kind of ratcheting down to, you know, to be a zero once you burn through your inventory, exiting the year. Can you comment on GLA as a percentage of your revenue based, you know, on the first quarter? In the second quarter and kind of how you expect, you know, that to the tail off here into the balance of this year. Yeah, so second quarter, it was 10% of our revenue. Let me get looks like in the first quarter, it was closer to 30%, and, you know, in terms of the go forward, you're right, we are, we will be selling GLA through the end of 2024, but that will be the end.

Speaker Change: Okay, great.

Speaker Change: Great, that's good for you guys.

Speaker Change: Another question on the quarter itself and just maybe kind of a longer term trends over the last few quarters regarding GLA. You talk about this kind of ratcheting down to you know to be a zero once you burn through your inventory exiting the year. Can you comment on GLA as a percentage of your revenue base you know in the first quarter and second quarter and kind of how you expect?

Speaker Change: That's the tail off here into the balance of this year.

Thomas Schaefer: 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. Celebrated for its crisp clean taste that is slightly sweet, Zola offers natural hydration and is rich in electrolytes.

Speaker Change: Yeah, so second quarter it was ten percent.

Speaker Change: of our of our revenue. Let me get...

T.J. Schaefer: It looks like in the first quarter, it was closer to 30%. Um.., and... You know, in terms of the go forward, you're right. We are, we sell GLA through the end of 2024. But that will be the end. We're 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. Okay, great. Um...

Speaker Change: It looks like in the first quarter it was closer to 30%.

Speaker Change: Thank you.

Speaker Change: and...

Speaker Change: In terms of the go forward, you're right. We will be selling GLA through the end of 2024, but that will be the end. We're selling through all the remaining inventory that we have.

Thomas Schaefer: And we're 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.

Thomas Schaefer: It also provides several advantages to Arcadia in contrast to the good wheat 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's 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.

Speaker Change: and so what you saw in the second quarter is essentially what we would be projecting for quarters three and four.

Benjamin Klieve: Okay, great. Very good.

Ben Klieve: Very good. Let's see. One for me, you guys noted the kind of halving of your cash burn from 15 million last year to this year. I'm wondering if you can talk about the kind of the run rate that you're looking at as you exit 24 and go into 25, you know, either on a quarterly or four-year basis. I would expect your cash burn is going to be the lowest ending the year. And in that, you know, this year it will be seven and a half million.

Speaker Change: Okay, great.

Thomas Schaefer: Let's see, one from you: you guys noted the kind of the halving of your cash burn from 15 million last year to this year. I'm wondering if you can talk about kind of the run rate that you're looking at as you exit 24 and go into 25. You know, either on a quarterly or four-year basis, I would expect your cash burn is going to be the lowest exiting the year. And in that, you know, in this year would be seven and a half million. So I'm kind of curious, you know, how low that cash burn.

Speaker Change: Very good. Let's see. One for me, you guys noted the kind of the halving of your cash burn from 15 million last year to this year.

Speaker Change: I'm wondering if you can talk about kind of the run rate that you're looking at as you exit 24 and go into 25, you know, either on a quarterly or four-year basis. I would expect your cash burn is going to be the lowest.

Thomas Schaefer: So from a financial perspective, what does this mean for Arcadia? It means more predictable customer reorder patterns and significantly less marketing investments than good. Let me give you an example to help drive home the point. In 2023, our marketing investment in good wheat 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.

Ben Klieve: So I'm kind of curious, you know, how low that cash burn you think is going to be exiting 24 and going into 25. Yeah, so, I think the guidance for 24 is that we would cut the burn in half, so you're right, kind of in that seven to seven and a half million range based on the comments we made. Our use of cash was three and a half times higher in the first half, and we said it would be similar in the second half.

Speaker Change: exiting the year, and in that, you know, in this year will be seven and a half million. So I'm kind of curious, you know, how low that cash burn you think is going to be exiting 24 going into 25.

Thomas Schaefer: You think it's going to be exciting 24 going into 25. Yeah, so, you know, I think the guidance for 24 is that we would cut the burn in half. So you're right. Kind of in that seven to seven and a half million range. Based on the comments we made, our use of cash was three and a half in the first half. And we said it would be similar in the second half. And so that's kind of where we're, where we're 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, you know, kind of that $2 million run rate of where we are.

Speaker Change: Yeah, so, you know, I think.

Speaker Change: The guidance for 24 is that we would cut the burn in half, so you're right, kind of in that 7 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.

Mark Kawakami: And so that's kind of where we are, where we're landing for twenty four. The other thing that we identified in my prepared remarks was an additional two million dollars of annual cost savings that I said we expected to be on top of, you know, kind of that two million dollar run rate of where we are. So, we see that coming into play more in twenty five. So, kind of as we exit, so that takes another two million out.

Speaker Change: and so that's kind of where we're where we're landing for 24.

Speaker Change: The other thing that we identified in my prepared remarks was an additional $2 million of annual cost savings.

Thomas Schaefer: Let's 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 29th, 2024, coconut Additionally, in the latest four-week period ending June 29th, 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 I reported sales represent inventory that is sold into the retailer, which means the numbers can be different.

Speaker Change: that I said we expect to be on top of, you know, kind of that $2 million run rate of where we are. So we see that coming into play.

Thomas Schaefer: So we see that coming into play more in 25. So kind of as we exit. So that takes another $2 million out.

Speaker Change: More in 25, so kind of as we exit, so that takes another 2 million out.

Mark Kawakami: And beyond that, you know, 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, you know, what we're looking at is, is kind of trying to reduce this, you know, into the low to mid single digits next year.

Thomas Schaefer: And beyond that, you know, 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, you know, it's what we're looking at is kind of trying to reduce this. You know, 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.

Speaker Change: And beyond that, you know, 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, you know, it's what we're looking at is is kind of trying to reduce this.

Ben Klieve: So we've got a little bit more work to do, but we've already identified 2 million dollars beyond where we are at our current run rate. Got it. Very good. Good for you guys. All right. 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 to you in the second half. Great. Thanks so much. And thank you. And I'm showing no further questions.

Speaker Change: you know, 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 two million dollars beyond where we are at our current run rate today.

Benjamin Klieve: Got it. Very good. Good for you guys. All right.

Benjamin Klieve: Well, I appreciate to pick my questions. Congratulations again. Really a lot of a lot of good moment. I'm coming on to you guys.

Speaker Change: Got it, got it. Very good, good for you guys. All right, 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.

Thomas Schaefer: 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 tetrapack offerings in original, lime, and pineapple flavors that just began shipping in Q2, 2024.

Benjamin Klieve: I'll get back to you. I'm about to walk here in the second half. Great.

Operator: Thanks so much. And thank you.

Operator: And I'm still in no further questions.

Speaker Change: Great, thanks so much. And thank you. And I'm showing no further questions. I would now like to turn the call back to TJ Schaefer for closing remarks.

Thomas Schaefer: I would now like to turn the call back to TJ Safer for closing remarks.

T.J. Schaefer: I would now like to turn the call back to T.J. Schaefer for closing remarks. 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-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.

Thomas 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-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.

TJ Schaefer: In summary, we view the second quarter of 2024 as a significant turning point for Arcadia as we transform the business.

Speaker Change: Over the last two years, we have exited several underperforming brands, right-sized the organization, and streamlined our cost structure in order to extend our runway.

Speaker Change: 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.

Thomas Schaefer: 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 growth profit.

Thomas Schaefer: 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.

T.J. Schaefer: 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 profit. This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker Change: 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. Thank you.

Speaker Change: [inaudible]

Thomas Schaefer: 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 loss sales from Goodweat.

Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.

Thomas Schaefer: 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 and our 10K filed in March. 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 percent decrease in our use of cash in 2024 compared to the $15 million that we reported in our 10K for 2023.

Mark Kawakami: With that, I will now turn the call over to Mark to discuss our Q2 financial results. 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 good wheat and body care operations. With that, I'll begin our discussion of the financial results.

Mark Kawakami: In Q2, total revenues were approximately $1.3 million. This was an increase of 32 percent 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 percent sequentially and 42 percent versus last year. This quarter, Zola represented about 90 percent of the total revenues. As TJ mentioned, Zola is off to a very strong start in 2024 with the sales growth outpacing the category.

Mark Kawakami: We're 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 percent compared to last quarter and an increase of 4 percent compared to last year. The resulting gross margin was 52 percent 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.

Mark Kawakami: As a reminder, we expected 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 the gross profit rates to be a trend toward the low 40s in 2024 and a 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, but it was a decrease of $17,000 compared to Q2 of last year.

Mark Kawakami: 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 a half a million dollars of legal and consulting fees related to the transactions with Corteva and above food. The gain on the sale of intedible assets was $4 million and it was related to the transaction with Corteva.

Mark Kawakami: 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 zero. The loss from discontinued operations was $789,000. This was a decrease of 47 percent compared to Q1 of this year and a decrease of 61 percent compared to Q2 of last year. As the sale of good we took place midway through Q2 of this year.

Mark Kawakami: 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 well as the $2 million of cash that Arcadia paid in the transaction with above food.

Mark Kawakami: 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 at our expectations for strong revenue growth through year end.

Mark Kawakami: As a result of the sale of good wheat, we received a promissory note that is to be repaid in three installments over a three-year term with interest occurring at the prime rate. The stated value of the note is $6 million and we have 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.

Mark Kawakami: In conclusion, Arcadia has made tremendous progress in Q2 towards our goal of becoming profitable. First, we monetized our wheat IP and sold the brand that required a high-level investment. Second, we significantly increased Zola revenues on both a quarter over quarter and a year over year basis while maintaining gross margin rates. Finally, we continued to reduce our operating expenses and lower our cash consumption to the lowest levels in our history as a public company.

Ron: And our first question comes from a program that's still for you from H.C. Wainwright and Company. Your line is now open.

Thomas Schaefer: Thanks so 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 effectively transacted on everything that could be monetized. Hi, Ron. 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 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.

Thomas Schaefer: 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.

Thomas Schaefer: 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 is a franchise compete. 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.

Thomas Schaefer: Yeah, it's a good question. So, you know, I think today, based on kind of the that grocery category that we typically look at, which is a little bit of a subset, you know, we're probably 1% of the market. And I think, you know, still a very low single digit rate is where we need to get to in order to, you know, those are the kind of that's the kind of scale we're looking at just to reach break even. Thank you. Sure. And thank you.

Ben Cleve: And one moment for our next question. And our next question comes from Ben Cleve from Lake Street Capital Market, should line us now open. All right, thanks for taking my questions. Yeah, 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 tailwind supporting Zola and I want to make sure that I really understand the kind of revenue makeup in the second quarter.

Ben Cleve: Can you clarify that there was no kind of lumpy one time revenues that came in and drove this real out performance on that were a function of, you know, kind of new product placements or anything sizable. That would have given you that out performance versus the category. Yeah, that's correct. There were no sort of one time lumpy revenues and no sort of, you know, no large initial selling that would have drove the Performance. Okay, great. Great. That's good for you guys.

Thomas Schaefer: Another question on the quarter itself and maybe kind of longer term trends over the last few quarters regarding GLA. You talk about this kind of ratcheting down to, you know, to be a zero once you burn through your inventory, exiting the year. Can you comment on GLA as a percentage of your revenue based, you know, on the first quarter? In the second quarter and kind of how you expect, you know, that to the tail off here into the balance of this year.

Thomas Schaefer: Yeah, so second quarter, it was 10% of our of our revenue. Let me get looks like in the first quarter, it was closer to 30% and, you know, 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. And we're 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. Okay, great. Very good.

Thomas Schaefer: Let's see, one from you, you guys noted the kind of the halfing of your cash burn from 15 million last year to this year. I'm wondering if you can talk about kind of the run rate that you're looking at as you exit 24 and go into 25. You know, either on a quarterly or four year basis, I would expect your cash burn is going to be the lowest exiting the year. And in that, you know, in this year would be seven and a half million.

Thomas Schaefer: So I'm kind of curious, you know, how low that cash burn. You think it's going to be exiting 24 going into 25. Yeah, so, you know, I think the guidance for for 24 is that we would we would cut the burn in half. So you're right. Kind of in that seven to seven and a half million range based on the comments we made our use of cash was three and a half in the first half.

Thomas Schaefer: And we said it would be similar in the second half. And so that's kind of where we're, where we're 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, you know, 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, you know, I don't want to make any comments at this point with respect to 25.

Thomas Schaefer: We'll have more information in November. But it's, you know, it's what we're looking at is kind of trying to reduce this. You know, 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. Got it. Very good. Good for you guys.

Ben Cleve: All right. Well, I appreciate to pick my questions. Congratulations again. Really a lot of a lot of good moment. I'm coming on to you guys. I'll get back to you. I'm about to walk here in the second half. Great. Thanks so much. And thank you.

Operator: And I'm still in no further questions.

Thomas Schaefer: I would now like to turn the call back to TJ Safer for closing remarks.

Thomas 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.

Operator: You may now disconnect. Thank you.

Q2 2024 Arcadia Biosciences Inc Earnings Call

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