Arcadia Biosciences, Inc. (RKDA) Earnings Call Transcript & Summary

Good afternoon, and welcome to Arcadia Biosciences Investor Update. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to T.J. Schaeffer, Chief Financial Officer at Arcadia. Please go ahead.

Thank you, and good afternoon. Joining me on the call today is Stan Jacot, Arcadia's President and Chief Executive Officer. This call is being webcast, and you can refer to the company's press releases at arcadiabio.com as well as our recent 8-K filings. 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 will now turn the call over to Stan.

Good afternoon, everyone, and thank you for joining us on the call today. We scheduled this call to provide more perspective on 2 recent transactions and their significant positive impact to Arcadia and the company's future. But before we dive in, I want to step back and reflect on the progress Arcadia has made in executing Project Greenfield, our 3-year strategic plan to unlock the company's potential and provide a path to profitability, which was initiated less than 2 years ago. Project Greenfield included 4 key objectives, and it's worth taking a moment to review how this focus has reshaped Arcadia and strengthen the position of the company going forward. The first objective was to establish GoodWheat footholds and retail categories representing over $10 billion in annual revenue. In less than 18 months, we launched the GoodWheat brand into 3 distinct categories: Pasta, Pancakes and Mac & Cheese, securing over 3,500 points of distribution, a truly ambitious achievement for a company our size. The products received accolades from many trusted sources including the American Heart Association, Amazon and Better Homes and Gardens. And the brand is now in the hands of a larger company that can scale faster and more efficiently, which I will talk more about later. The second objective for Project Greenfield was to drive share growth in our core brands. I have mentioned in past calls, our relentless focus on generating gross profit, which has been growing top line on our higher-margin businesses while simultaneously reducing the gross profit drains. One of our higher-margin businesses is Zola Coconut Water, which has also been the largest consumer brand in our portfolio. Zola is back to growing share after a tough 2023, and we are optimistic that this double-digit growth will continue in 2024. Our new lime and pineapple flavors will begin shipping in Q2 and add a more variety to Zola's naturally hydrating lineup, and we have added new distribution as we expect to ship to nearly 1,300 new stores in the second quarter of 2024, bringing our total store count to Zola to over 3,300 by the end of June. At the same time, we have sold, divested or exited several businesses that were a drain on our gross profit, including Body Care and hemp. The results from this objective have been significant, with 2 straight years of gross profit dollar growth and 5 straight quarters of gross profit margins above 30%. The third objective in Project Greenfield was to leverage partnerships to build future licensing revenues. We have successfully monetized our IP and resistant starch durum wheat bringing forward future royalties in the deal with our longtime partner, Corteva Agriscience, which I will discuss in more detail later. And we are continuing to pursue 2 key steps to monetize our remaining IP: one, partner with a weak supply chain in order to produce a scalable, cost-effective, identity preserved wheat supply; and two, work with large food manufacturers to build demand for our wheat to create a long-term pull-through partnership. The final Project Greenfield objective was to build an agile organization and winning culture. This has been accomplished by rightsizing the organization as business needs have changed, all while ensuring flawless execution of our key initiatives. We have also tightly managed operating expenses, finding efficiencies and making tough spending choices. The result has been a decline in operating expenses of more than 20% while gross profit dollars have continued to grow, which shows the amazing team and culture that we have at Arcadia. So now let's turn our attention to the first transaction we announced, which was the sale of Arcadia's non-GMO resistant starch durum wheat technology to a wholly owned subsidiary of our longtime partner, Corteva Agriscience. This collaboration started in 2017 when our 2 companies signed an agreement for Corteva to have exclusive North American rights to Arcadia's resistant starch wheat trait. Corteva has been steadily advancing this trait towards commercialization, introgressing it into elite germplasm lines in the pipeline, and this transaction opens up access to markets beyond North America for them. For Arcadia, this means earlier monetization of our resistant starch durum technology accelerating royalties with a onetime payment of $4 million. Importantly, we have retained our remaining non-GMO wheat IP, including RG bread, RG durum and oxidative stability. And we believe this transaction sets a value standard for the rest of this portfolio. Now let's move to the second transaction, the sale of GoodWheat to Above Food. Above Food has a large consumer products and specialty ingredients business, which will allow the GoodWheat products to scale more quickly and Above Foods vertically integrated farm-to-fork supply chain can improve efficiency and margins. GoodWheat fits perfectly into Above Food nutrient-dense plant-based portfolios, and we are excited for the future of the GoodWheat brand new products. Arcadia is receiving a net $4 million over time, which will help extend our cash runway while reducing marketing, promotion and [indiscernible] expenses. This is a win-win for both companies. and we believe there are further commercial opportunities with Above Food. For example, we are exploring the best ways to integrate our remaining wheat IP into Above Foods identity preservation system. We'll keep you updated if any material events occur. As we look forward, Arcadia continues to operate 2 divisions. Arcadia wellness is the consumer business division and is led by Zola Coconut Water. The patent and licensing division is run by the parent company, Arcadia Biosciences and includes the wheat IP that I mentioned earlier. We expect both divisions to generate gross profit in the future, with the majority of gross profit coming from the consumer goods division in the near term. Finally, while we are pleased with the outcome of these 2 transactions, our work is not complete. The strategic review announced last year is still continuing, which stated that Arcadia would explore a range of strategic options, which would include or could include an asset sales, acquisition, merger, sale or other strategic transactions. We continue to explore all options, but we must point out that there can be no assurance as this exploration of strategic alternatives will result in the company entering or completing any transaction, and no timetable has been set for the conclusion of the strategic review. With that, I will turn the call over to T.J. to discuss the financial implications of these transactions. T.J.?

Thank you, Stan, and thanks to everyone on the call for joining us today to discuss 2 transactions related to our wheat IP that we announced over the last 10 days. If you haven't reviewed our 8-K filings related to these transactions, I would encourage you to do so as they contain details outside of what we plan to discuss today. With that, let's review the financial impact of these transactions as well as our outlook going forward, starting with the Corteva agreement. On May 13, 2024, 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 in exchange for $4 million cash. As stated in our Form 8-K filed with the Securities and Exchange Commission on Friday, May 17, the purchased assets have never been recorded on the balance sheet included in Arcadia's periodic filings. As a result, the impact of this transaction from a financial perspective will be a $4 million gain on sale on our P&L and an increase to cash and equity of $4 million on our balance sheet. Moving now to the second transaction with Above Food. On May 14, 2024, 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. 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 3-year term and annual interest that accrues at the prime rate. In addition, as noted in the promissory note that was included as Exhibit 10.2 in our Form 8-K filed on Monday, May 20. At any time between July 1, 2024, and the second anniversary date. Arcadia has the option to receive $2 million in stock if Above Food common stock is publicly traded when we elect this option. For this purpose, Above Food common stock will be valued at 90% of its volume weighted average price for the preceding 20 trading days. If Arcadia were to elect to be paid with stock, the prepayment would be applied to the last installment. This transaction impacts our financial statements in numerous ways, so I would refer you to our unaudited pro forma financial information, which can be found in Exhibit 99.1 of our Form 8-K for further details. Let me now shift gears and talk about the outlook for 2024, but before we jump in, let me remind everyone that the results of our GoodWheat business will be reported as discontinued operations and will not be included in the full year outlook that I will discuss now. Our product portfolio for the remainder of 2024 will consist of Zola Coconut Water as well as our GLA oil. But as Stan mentioned earlier in the call, we expect our Zola brand to be the driver of growth this year with GLA accounting for less than 15% of our total pro forma revenues as we run out the remaining inventory in 2024. From a top line perspective, we expect the new distribution gains at Zola to offset the lost sales from GoodWheat. So on a full year basis, we believe our 2024 revenues will essentially be in line with the $5.3 million of revenue we reported for 2023 in our 10-K filed in March. We expect our gross profit dollars to be above the $2 million we reported in 2023 as both Zola and GLA deliver higher margins than GoodWheat. We expect combined gross margins for Zola and GLA to be in the low 40s in 2024 with some variability from quarter-to-quarter, driven by product mix. Longer term, we expect gross margins to be in the low to mid-30s as we do not expect to sell GLA oil beyond 2024. While we are likely to incur some costs related to this transition in the short term, we currently expect our quarterly run rate for R&D and SG&A expenses to be around $2 million per quarter beginning in the second half of the year. These changes are expected to reduce our operating loss and use of cash by approximately 50% compared to what was reported for 2023 in our 10-K. We believe these reductions, along with the proceeds from the promissory note from Above Food will extend our runway beyond 2025. However, we must point out that our outlook is based on current expectations that could change depending on the outcome of the strategic review, which is still ongoing, as Stan previously mentioned. In summary, we expect our full year 2024 revenues to be in line with the prior year despite the loss of GoodWheat sales. At the same time, our gross margins will be higher and our operating expenses will be lower, resulting in a reduction in the use of cash of approximately 50% compared to what was reported for 2023. That concludes my prepared remarks. I will now turn the call over to the operator for questions.

[Operator Instructions] And our first question comes from Ben Klieve from Lake Street Capital Markets.

Congratulations on all the positive activity here. My first question is with regards to how these transactions will impact the trajectory of Zola going forward? T.J., you laid out kind of your near-term cash -- excuse me, expense expectations. But do you guys anticipate investing more into Zola than you had previous to these transactions? Or is the outlook for Zola really unchanged after recent events?

Ben, this is Stan. Thanks for calling in. And yes, we do expect the trajectory of Zola to change. Our expectation is that the double-digit growth we're experiencing in 2024 will continue in 2025. Again, we've just launched the innovation, which we'll start hitting the markets here in Q2. And there's also more innovation in the pipeline that we're exploring as well as new distribution that we're exploring. So yes, we do expect Zola growth to continue.

Okay. And with regards to wheat, I'm curious, Stan, you talked about working with the supply chain CPG still on wheat initiatives I noted that you retain your reduced gluten and shelf life IP. With the GoodWheat brand now elsewhere, how are these conversations with the supply chain changing since you don't have a -- since you don't have a brand probably leading those conversations. What -- it strikes me that there's probably been a lot of -- it's been a very dynamic conversation over the last few months. I wonder how that's changed now with GoodWheat gone?

Well, the intent was always to have the GoodWheat brand signal that this wheat IP that we owned was commercially accepted. And we feel like that we've done that job, but it was also the intent to expand beyond GoodWheat and to use that as a platform to launch into other categories where GoodWheat wasn't going to launch products. So that still will continue and that -- those conversations are still ongoing.

Okay. Very good. Another question. Historically, you've talked about the potential to integrate acquisitions and I'm wondering how your thought process around future acquisitions has now changed. I mean there's so many different -- the company is fundamentally different today in a lot of good ways than it was a week ago. Does this accelerate your expectations -- around expectations? Does it change the categories that you're looking at? What, if anything, can you give us regarding your thought process there?

Yes. Again, in the strategic review, there's lots of different possibilities that still exist. And at this point we're supporting all of them.

Okay. Fair enough. A couple more for me and then I'll get back in queue. One, on the structure of this note, T.J., the -- you said the interest was at prime. I didn't see in the disclosure. Is this strictly going to be a cash interest payment? Or is there any kind of in-kind interest payments that may be made?

Yes. It will be cash interest on an annual basis.

Okay. Great. And then the last one for me is the reduced gluten wheat IP, I'm wondering if you can talk about kind of the value proposition that you see here versus the value of the -- of higher fiber content. Do you think these are similar? How do you think these could be? Or what differences do you see out of these 2 kind of IP categories?

Yes. So what we see is actually a very similar benefit stream than RS Durum. And again, that's exponential fiber, it's higher protein and it has a lower glycemic load. All 3 of those things are true for RS Durum, and it's the same for RG bread. So that's how we're thinking about it is that we can bring those same benefits to a much wider portion of the wheat food chain than what we can with just durum, which is used in [indiscernible].

Very good. All right. Well, that's all helpful update. Again, congratulations to you both and the whole team on all the positive developments.

I'm showing no further questions. I would now like to turn the call back over to Stan Jacot for closing remarks.

Thank you. So in summary, Arcadia has made tremendous progress over the past 2 years with our Project Greenfield strategy, and these recent transactions with Corteva and Above Food will have a significant positive impact on Arcadia in its future. These efforts will continue as we explore additional opportunities to monetize our IP and create value for our shareholders. We look forward to updating you in the future. Thanks again for joining us, and have a great rest of your day.

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