Friday, November 22, 2024

Q3 2024 Arcadia Biosciences Inc Earnings Call

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Mark Kawakami; Chief Financial Officer; Arcadia Biosciences Inc

Thomas Schaefer; Chief Financial Officer; Arcadia Biosciences Inc

Benjamin Klieve; Analyst; Lake Street Capital Markets

Operator

Good afternoon, and welcome to Arcadia Biosciences third-quarter 2024 financial results and business highlights conference call. (Operator Instructions) 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

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 beinga 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 T.J.

Thomas Schaefer

Good afternoon, and thank you to everyone on the call for joining us today to discuss our 2024 third-quarter financial results. When we last spoke in August, we characterized the second quarter of 2024 as a turning point for Arcadia as it relates to our business transformation that has taken shape over the last two years. And I believe our third quarter results exemplify the plan we have put in place as well as our ability to execute on it. First, in the third quarter, our total revenues increased 18% year-over-year, driven by a 55% increase in Zola coconut water sales, which I will discuss in more detail later in my prepared remarks.
Second, at the same time, we grew the top line, we maintained our selling, general and administrative expenses. While SG&A expenses increased by $380,000 compared to last year, the entire variance was driven by severance and transition-related fees following the sale of GoodWheat. And finally, our use of cash during the quarter declined to $1.5 million, and that number includes more than $400,000 related to discontinued operations. To put that in perspective, this is the lowest level of cash used in a quarter since Arcadia went public.
So we are extremely pleased with the progress that has been made thus far, but our work is not done. While we continue to evaluate strategic alternatives, we are focused on reducing our cost structure, including both cost of goods sold and operating expenses, monetizing our existing wheat portfolio and growing our Zola coconut water business, which is off to an amazing start. In Q3 2024, Zola revenues increased 55% compared to the same period last year driven by new distribution added during the quarter, strong orders from our existing customers and the new items that started shipping last quarter. The general health of the coconut water industry also contributed to Zola’s growth.
From a distribution perspective, Zola retail store count increased 68% compared to the same period last year, resulting in the largest quarterly rate of distribution gains in our company’s history. But Zola growth was not just driven by winning new customers. In fact, while our revenues, which represent the sell-in to the retailer or distributor, increased 55% year-over-year, our sell-through, as measured by scan data, increased more than 36% compared to prior year, showing strong end customer demand for our products. To drive home that point even further, let me give you an example that illustrates the existing customer demand for Zola.
In July 2024, Zola experienced its highest month of sales since Arcadia acquired the brand in May 2021. This performance was almost entirely driven by strong orders from our existing customer base, as 95% of the new distribution in Q3 did not start shipping until the end of the quarter. Another factor that contributed to Zola’s growth during the quarter was our Q2 launch of new items. As a reminder, the new items included our original, lime and pineapple flavors in a new 16.9-ounce tetra pack, and these SKUs have been incremental to the Zola set as opposed to cannibalizing existing sales.
The last driver of growth for Zola is the health of the category in which it competes. The coconut water industry continues to perform well as consumers look for health benefits, such as hydration and electrolytes from their beverages. A healthy industry landscape is vital for growth. But importantly, according to the Nielsen data ending on September 28, 2024, Zola grew faster than the category across all measured time periods.
More specifically, if we look at the last 52 weeks, the coconut water category grew 15%, while Zola grew 23%. During the latest 13 weeks, essentially representing the quarter, the category rose 20%, while Zola scan data increased by 36%. And finally, in the latest four-week period, which represents the month of September, the coconut water industry grew 28%, while Zola increased 73%, primarily due to the new distribution that began shipping towards the end of the quarter, as I previously mentioned. So from an operating perspective, we are extremely pleased with our performance as well as our ability to lay out a plan and deliver what we said as revenues increased at a double-digit rate, and our cash burn is at historic lows.
Let me now shift gears and talk about what lies ahead for Zola. As we approach the end of the year, we remain optimistic. While Q4 is seasonally the softest quarter of the year for the entire coconut water industry, Zola has strong momentum heading into the end of the year with the significant amount of new distribution we added earlier in the year. In addition, we will begin shipping to 2 new customers in Q4 and we now expect our full year 2024 retail distribution growth to exceed 80%.
We also continue to work on new innovation, which we spoke about briefly on the last earnings call. While we will not be providing any specifics until we are closer to launch, here is what we can share. We have decided on the new concept, the product formulation is done, a mockup of the packaging is complete and the SKUs we intend to launch have been identified. The next step in the process will be to test the concept and product samples with new and existing retailers, to ensure we have interest ahead of our first production run as we will not invest in a new product launch until we understand customer uptake for the product.
And in terms of timing, we expect to have the new product ready for beverage season next year. Before I conclude my prepared remarks, I wanted to let you know that we will not be providing any additional forward-looking guidance on the call today. As I mentioned earlier, we added a tremendous amount of new distribution in Q3. The number of stores added during the quarter alone represents 1/3 of Zola’s total retail distribution and approximately 95% did not start shipping until the end of the quarter.
This makes forecast accuracy extremely challenging as the initial sell-in to a new customer to add inventory to all of their distribution centers can be very different from the ongoing reorder patterns that emerge after the initial order is fulfilled. So it’s really the size of the distribution gains, the percent of total Zola distribution that it accounts for as well as the timing of the initial shipments, that in combination caused us to be reluctant to provide any forward-looking numbers. While we recognize the fact that this does cause some degree of uncertainty, I want to reiterate that these are all very good problems to have, so we appreciate your understanding. With that, I will now turn the call over to Mark to discuss our Q3 and year-to-date financial results. Mark?

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