Arcadia Biosciences Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

There are 4 speakers on the call.

Operator

Hello, and welcome to Arcadia Biosciences First Quarter twenty twenty five Financial Results and Business Highlights Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mark Kawakami, Chief Financial Officer at Arcadia.

Operator

Please go ahead.

Speaker 1

Thank you. Joining me on the call today is TJ Schafer, 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.

Speaker 1

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 CJ.

Speaker 2

Thanks, Mark, and thank you to everyone on the call for joining us today discuss our twenty twenty five first quarter financial results. It has only been seven weeks since we delivered our 2024 year end update, but the momentum from the second half of twenty twenty four has carried into 2025, and I am very pleased with our first quarter results. Zola coconut water continues to thrive and outperform our own internal expectations. In Q1 twenty twenty five, our reported Zola sales increased 90% year over year, primarily driven by new distribution gains, which increased 70% compared to the same period last year. We continue to implement tight cost controls, resulting in strong gross margins and a 16% year over year reduction in operating expenses, inclusive of nearly $500,000 in transaction related fees during quarter.

Speaker 2

In addition to our strong brand performance, we also made significant progress during the quarter monetizing our intellectual property, a goal we have discussed for several years. And finally, the pending business combination with Roosevelt Resources continues to move forward and we believe is on track to be completed towards the end of the summer. Today, I would like to discuss each of these topics in more detail, starting with the performance of Zola. As I just mentioned, our reported sales of Zola increased 90% compared to the same quarter last year, primarily driven by a 70% increase in new distribution. Growing Zola's presence in the marketplace has been a focus of Arcadia, and we believe it represents our best opportunity to significantly increase our share of coconut water industry sales, given our relatively low penetration rate.

Speaker 2

Our sell through or scan data sales increased 76% during the thirteen weeks ended 03/29/2025, based on Nielsen data. This rate of sales growth is more than three times faster than the coconut water category, which grew 24% during the same time period. Coconut water continues to outpace the growth of many other beverage categories, driven by the shift in consumer preferences toward healthy, better for you beverages. With a rich source of key electrolytes such as potassium, magnesium, and calcium, consumers are recognizing that coconut water offers an excellent way to naturally rehydrate and reenergize. With Zola, we believe we have the best tasting coconut water that is packaged directly at the source in Thailand.

Speaker 2

In the past, we have conducted consumer taste tests where Zolo was preferred to its competitors by a two to one margin, and we continue to focus on new products that we believe will bring more consumers into the category. For example, one year ago, we launched two new flavors, lime and pineapple into the marketplace. And I am happy to report that we have already sold more pineapple in the first four months of 2025 than we did all of last year, driven by new placements. Aside from new flavors, we are currently working on a number of new product offerings that will provide a twist on traditional coconut water that we are excited about. In fact, in a category review meeting earlier this year, we brought a sample of our new product to one of our largest customers and they were blown away by the flavor, decisively choosing our new offering over a competitive product.

Speaker 2

While our timeline to launch has been pushed back as a result of the pending business combination with Roosevelt, we expect to have our new innovation on the shelf early next year. In addition to product innovation, Zola also has a healthy pipeline and is currently in discussions with new customers and distributors representing more than 50% of our current customer base. So far in Q2, we have already won new customer accounts and are optimistic about being awarded additional placements based on initial feedback from our category review meetings earlier this year. One positive outcome of these meetings that I would like to highlight is that we were awarded an additional SKU at existing customers representing more than 1,000 stores or nearly one third of our current distribution. This is meaningful not only for the additional revenue that it will bring, but it also highlights the strong performance of the existing Zola SKUs and opens the door to additional placements and offerings in the future.

Speaker 2

From an inventory perspective, Zola is well positioned. We have replenished our inventory ahead of the all important beverage season after it was depleted last year following large new customer wins. The timing of this replenishment was beneficial as it gave us approximately three months of inventory before any of the recently announced tariffs took effect. Therefore, we expect tariffs to have little to no impact on our Q2 financial results. Going forward, we believe the 10% baseline tariff that went into effect in early April is not likely to have a significant impact on our results, as we have identified potential cost savings opportunities that we expect to largely offset the impact.

Speaker 2

As a result, we do not anticipate taking any action at this time in direct response to the baseline tariffs. Having said that, we continue to have conversations with our customers and distributors and have developed mitigation plans should the need occur. Shifting gears, I want to discuss the actions we have taken to exit Arcadia's legacy business and monetize our intellectual property. As disclosed on Form eight ks on April 3, we entered into an agreement with BioSeries effective 03/28/2025. Under the terms of the agreement, all rights related to certain previously licensed soy patents were returned to Arcadia along with 750,000 cash in exchange for Arcadia's granted patents and patent applications for reduced gluten and oxidative stability, as well as the elimination of all future royalties pursuant to a previous agreement between the two companies.

Speaker 2

This transaction represented a meaningful step for Arcadia in our efforts to streamline operations, exit the legacy ag tech business and monetize our intellectual property. So let me provide some context on the significance of this agreement. First, it allowed us to receive $750,000 of cash that was non dilutive to Arcadia shareholders. Second, the soy patent, which was originally acquired in a 02/2005 transaction more than ten years prior to Arcadia going public, resulted in a $1,000,000 contingent liability on our balance sheet. By regaining the rights to this patent, we were permitted to take the next step and notify the patent authorities of our intent to abandon the technology.

Speaker 2

The abandonment of this patent eliminated the possibility of future commercialization, allowing us to release the $1,000,000 liability from our balance sheet. And finally, we are able to avoid any future expenses relating to the maintenance of patents and patent applications for technologies we are no longer pursuing. As a result of this transaction, along with various other agreements that have been previously disclosed, Arcadia no longer expects to receive any license or royalty fees or to incur any significant future expenses related to any of its wheat related intellectual property. Currently, we have one remaining tomato patent that is licensed to a third party and represents a $1,000,000 contingent liability on our balance sheet. While we can make no assurances, we are working on options that could result in the removal of that contingent liability, which would conclude our exit from the legacy AgTech business.

Speaker 2

The last topic I would like to discuss is the pending business combination with Roosevelt Resources. As you are aware, in December 2024, we signed a definitive agreement to combine with Roosevelt Resources pursuant to a securities exchange agreement. While the process has taken longer than originally anticipated, I want to reiterate that the planned transaction continues to move forward as evidenced by our recent Form eight ks filed on May 2 with the SEC. The amendment to the exchange agreement that was filed modified one of conditions allowing a party to terminate the agreement if the transaction was not completed from May 15 to August 15 in order to give both companies adequate time to prepare financials, respond to SEC comments, update our initial Form S-four filing, and host a shareholder meeting to vote on proposals relating to the transaction. In addition, the amendment also provided for a fixed equity share ratio of ninetyten between the Roosevelt Partners and Arcadia stockholders.

Speaker 2

The original exchange agreement included a calculation where the ownership stake could be adjusted upward or downward based on several factors, including the amount of cash and cash equivalents on Arcadia's books at the closing date. By keeping the ratio constant, we believe we are providing Arcadia stockholders with a greater level of ownership certainty post transaction. In terms of next steps, both companies are working to finalize financial results for Q1 twenty twenty five, along with other information, and we anticipate filing an amendment to the initial Form S-four registration statement after this information and other disclosures are updated. Once the registration statement is declared effective, the proxy materials will be mailed out to stockholders of record to be voted on at the shareholder meeting. Although there are many uncertainties that could affect the overall timing of the transaction and no assurances are possible, we are hopeful of being in a position to close the transaction around the August 15 date noted in the First Amendment Agreement with Roosevelt.

Speaker 2

With that, I will now turn the call over to Mark to discuss our twenty twenty five first quarter financial results in more detail. Mark?

Speaker 1

Thank you, TJ, 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'll begin our discussion of the financial results. In Q1, total revenues were approximately $1,200,000 and this represented an increase of 22% compared to the same period of last year.

Speaker 1

However, it's worth noting that Zola revenues increased 90% compared to last year since revenue in Q1 of twenty twenty four included $354,000 of sales related to GLA oil. In 2025, we expect product revenues to be driven entirely by the Zola product line as we no longer carry any inventory of GLA oil. The cost of revenues in Q1 was approximately $680,000 and this represented a 45% increase compared to the same period last year. The gross margin rate was 43% this quarter compared to 52% in Q1 of twenty twenty four And this is the ninth consecutive quarter with gross margins above 30%. Consistent with the last couple of quarters, we continue to expect gross margin rates to trend toward the low 30% range.

Speaker 1

Now that we have transitioned to a single product line. There were no research and development costs this quarter compared to $6,000 of R and D costs in Q1 of last year. This continues to reflect our strategy to develop the Zola brand by leveraging our existing resources and minimizing new investment. As TJ mentioned earlier, we completed a transaction this quarter that allowed us to sell our remaining wheat patents in exchange for cash and the return of a legacy soy patent. The wheat patents did not carry a value on our balance sheet.

Speaker 1

So we recognize the entire $750,000 of consideration as a gain on the sale of intangible assets. We received $500,000 of this in cash prior to the close of Q1 and we received the remaining $250,000 following the end of the quarter. Additionally, regaining control of our legacy soy patent allowed us to eliminate our royalty obligations associated with the technology. This benefit was recognized as a change in fair value and it had the effect of increasing our net income and reducing our non current liabilities by $1,000,000. In Q1, selling, general and administrative costs were $1,700,000 and that included almost a half a million dollars of costs related to the pending transaction with Roosevelt Resources.

Speaker 1

This was a reduction from Q1 of twenty twenty four when costs were $2,100,000 including $200,000 of costs related to M and A activity. There was no loss from discontinued operations this quarter compared to $1,500,000 of costs in Q1 of twenty twenty four. We expect losses from discontinued operations to remain low for the remainder of 2025. Moving to the balance sheet, we ended Q1 with $3,200,000 of cash compared to $4,200,000 at the start of the year. Recall that our cash consumption included ongoing M and A expenses, which we were able to accommodate by reducing our underlying cash spend and by monetizing our legacy business assets.

Speaker 1

For accounts receivable, we ended Q1 with $1,600,000 compared to $1,200,000 at the start of the year. The increase was driven by consideration from the sale of our patent assets, the recovery of some receivables that had previously been reserved for, as well as the addition of interest related to our note receivable. For inventory, we ended Q1 with a balance of $1,300,000 compared to $900,000 at the start of the year. The growth in inventory reflects the growth in Zola revenues, as well as the run up to the spring summer selling season and the effect of longer lead times from our suppliers. The promissory note we received from the sale of GoodWheat assets in May of twenty twenty four continues to accrue interest at the prime rate.

Speaker 1

We are scheduled to receive approximately $2,500,000 of cash as the first repayment of principal and interest. In summary, we've had a strong start to 2025 with continued improvements across almost all areas of our financial performance. First, we continue to achieve revenue growth that outpaced the category, and we have accomplished this without new investment or spending on r and d. Also, we continue to reduce our operating expenses, our underlying cash consumption, and the cost from discontinued operations, all while ramping up for the busy spring summer selling season. And finally, we have continued to strengthen our balance sheet by monetizing legacy business assets and eliminating long standing liabilities.

Speaker 1

Thank you. And I will now turn the call over to the operator for questions.

Operator

Thank you. Our first question comes from Ben Klee with Lake Street. You may proceed.

Speaker 3

All right. Thanks for taking my questions and congratulations. Another good quarter here with the momentum continuing in Zola. First, couple of questions related to Zola. T.

Speaker 3

J, you talked about kind of the momentum continuing and expanding your distribution pipeline. You noted that you had already year to date seen that pipeline expand. Wondering if you can quantify for us any successes that you have to date and then maybe at least directionally talk about the magnitude of the pipeline that you think is still out there for potential expansion later this year.

Speaker 2

Sure. In terms of the let's start with the last. So in terms of the size of the pipeline, it's probably, I mentioned in my prepared remarks, it's about half of our current distribution, which is in the neighborhood of 3,500 stores. So that would be the size of the pipeline. Thus far, yeah, we have added some new accounts, albeit in Q2.

Speaker 2

So we're not reporting those numbers yet. But some new customer accounts as well as some new distributors.

Speaker 3

Okay, very good. And then regarding some new accounts and new distribution, historically there had been kind of a modest lag before those successes really hit the income statement. Do you expect that to the momentum that you have here to be reflected still in the 2025 financials or is that going to be more of a '26 type event?

Speaker 2

Yeah, no. So similar type of trending where we would be awarded the account and then it could be a couple of months before the product actually goes on shelf. But most of those awards that we are looking towards would have an impact on 2025.

Speaker 3

Okay, that's great. Very good. One question regarding the kind of legacy ag biotech business. That one remaining patent that you have, do you guys anticipate that there's any commercial value there? Or is it similar to the patent that you just got back from BioSeries that you simply just want to get it back so you can retire it?

Speaker 2

So there is potentially commercial value, but not for Arcadia. It is licensed to a third party. Our conversations with them have stated that they are probably two years away from commercialization. And so we are working with them to kind of explore options that would allow them to take advantage of that and potentially commercialize their efforts while also alleviating us of any future liabilities.

Speaker 3

Got it. Okay, very helpful. And then last one for me, I'll get back in queue. Mark, you noted $2,500,000 initial payment for the note receivable. I just want to confirm, do you expect to have that in hand here within this within the second quarter?

Speaker 3

Or is that something that could get pushed out into the third?

Speaker 1

Yes, scheduled for receipt in Q2.

Speaker 3

Okay, very good. All right. Well, I appreciate you guys taking my questions. Congratulations again, I'll get back in queue.

Speaker 2

Thank you.

Operator

Thank you. I would now like to turn the call back over to TJ Schafer for any closing remarks.

Speaker 2

Thank you. In summary, we are extremely pleased with our performance to start the year as the momentum from 2024 has continued into 2025. Zola sales increased 90% year over year and we have a strong pipeline of opportunities and new innovation to help drive growth going forward. Our gross margins have now exceeded 30% for nine straight quarters and our operating expenses, inclusive of about $500,000 of transaction fees, are near their lowest level in ten years. We also made significant progress in exiting our legacy business, streamlining operations and eliminating potential liabilities ahead of the pending business combination with Roosevelt later this year.

Speaker 2

This concludes my remarks. Thank you for your interest in Arcadia and have a great day everyone.

Operator

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Zola coconut water sales jumped 90% year-over-year in Q1, driven by 70% growth in distribution and sell-through up 76% versus a 24% category average.
  • Operating efficiency improved with a 16% reduction in operating expenses, nine consecutive quarters of gross margins above 30%, and tight cost controls boosting profitability.
  • Intellectual property monetization progressed as Arcadia sold soy patents for $750,000 non-dilutive cash and eliminated a $1 million contingent liability, exiting legacy ag tech assets.
  • Roosevelt business combination remains on track for completion by mid-August under a fixed 90/10 equity split, with amended terms extending the closing condition to August 15.
  • Tariff mitigation plans are in place after replenishing inventory ahead of recent coconut water tariffs, and identified cost savings are expected to offset any minimal tariff impact.
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Earnings Conference Call
Arcadia Biosciences Q1 2025
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