ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes to those statements included herein. In addition to historical financial information, this report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included in the most recent Annual Report on Form 10-K filed by the Company. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Solely for convenience, the trademarks, service marks and trade names referred to in this report may appear without the ®, TM, or SM symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, or trade names.
Overview
We are a producer and marketer of innovative, plant-based food and beverage products. Our history as a leader in science-based approaches to developing high value crop improvements, primarily in wheat, designed to enhance farm economics by improving the performance of crops in the field, as well as their value as food ingredients, has laid the foundation for our path forward. We have used non-genetically modified advanced breeding techniques to develop these proprietary innovations which we are now commercializing through the sales of seed and grain, food ingredients and products, trait licensing and royalty agreements. The acquisition of the assets of Live Zola, LLC ("Zola") added coconut water to our portfolio of products.
Our commercial strategy is to satisfy consumer nutrition demands with the superior functional benefits our crops deliver directly from the farm, enabling us to share premium economics throughout the ag-food supply chain and to build a world-class estate of high value traits and varieties. The acquisition of the Zola brand allows us to broaden our reach within the beverage sector.
It is also estimated by the U.S. Department of Agriculture (“USDA”), that approximately one-fifth of the FDA recommended calories consumed by people in the US are from wheat. Therefore, the market opportunity for nutritional improvements in wheat are significant not only because the wheat market itself is vast, but also because of the “share of stomach” wheat represents. Considering that most people today are not getting enough fiber or protein in their daily diets, the superior nutrient density of our non-GMO GoodWheat™ (“GoodWheat”) technology can improve the dietary intake of average consumers, by increasing their fiber and protein consumption without changing the way they eat. We believe this proprietary advantage gives GoodWheat the potential to become a global standard in wheat.
Our Growth Strategy
We believe there are significant opportunities to grow our business by executing the following elements of our strategy:
•Accelerate the monetization of our GoodWheat™ wheat trait portfolio. Our proprietary intellectual property ("IP") with multiple non-GMO wheat traits have clear functional benefits, and we will continue to build partnerships across the wheat value chain. This will include launching GoodWheat™ into multiple categories where our wheat can provide a compelling point-of-difference at attractive margins. We will continue to acquire, develop and retain the requisite management and industry experience to fully participate in, and control, the route to market for our high value food ingredients.
•Evaluate acquisitive growth opportunities. We intend to evaluate potential acquisitions that will allow us to bring the GoodWheat value proposition to an existing business. We believe there is a significant opportunity to scale our business faster by purchasing an existing business in a new wheat-based category outside of pasta.
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•Scale Zola through retail expansion. We plan to expand distribution of our Zola coconut water brand through mass market retailers and grocery store chains. Based on our research, consumers prefer the clean, crisp taste of Zola to that of other leading coconut water brands. As a result, we plan to refresh our packaging, launch new innovation and continue to invest in effective brand-building activities.
Arcadia Wellness, LLC
In May 2021, our wholly owned subsidiary Arcadia Wellness, LLC (“Arcadia Wellness” or “AW”), acquired the businesses of Eko, Lief, and Zola. The acquisition included consumer CBD brands like Soul Spring™, a CBD-infused botanical therapy brand in the natural category, Saavy Naturals™, a line of natural body care products and ProVault™, a CBD-infused sports performance formula made with natural ingredients, providing effective support and recovery for athletes. Also included in the purchase is Zola, a coconut water sourced exclusively with sustainably grown coconuts from Thailand. In July 2022, the Company licensed Saavy Naturals™ to Radiance Beauty and Wellness, Inc. ("Radiance Beauty").
Our Product Portfolio
GoodWheat™ Consumer Products
In June 2022, we launched our GoodWheat pasta in five varieties – penne, spaghetti, fettuccine, elbows and rotini – in select retailers nationwide and on Amazon. Our pasta delivers 4 times the fiber of traditional wheat pasta with 9g of protein per serving and no sacrifice on taste. In fact, our research shows that GoodWheat pasta scores at parity on taste with leading wheat pasta competitors and significantly outscores market leading vegetable-based pastas. Made with only our USA farm grown wheat, GoodWheat pasta meets consumers’ preference for clean labels and transparent sourcing. And, in December of 2022, GoodWheat received the American Heart Association’s Heart-Check mark on all of our pasta products. With its high fiber, lower sodium and zero saturated fat, GoodWheat meets the criteria for a heart-healthy pasta and provides consumers with a better-for-you option that delivers superior nutrition with the taste and texture of traditional pasta.
Most Americans suffer from a significant fiber deficiency. Less than 10 percent of women and less than 3 percent of men get enough fiber in their daily diets. The recommended daily value of fiber is 25g for women and children, and 38g for men according to the May 2021 Food and Health Survey by the International Food Information Council. One serving of GoodWheat Pasta gets your fiber closer to your daily need, delivering 8g of fiber, which accounts for 32 percent of the daily value of fiber needs for women and children, and 20 percent for men.
In 2023, we plan to expand the GoodWheat portfolio with the launch of innovative, new wheat-based products in additional categories, offering consumers more options to improve their fiber intake at multiple mealtimes throughout the day.
Zola Coconut Water
Zola is a pure, natural, 100% coconut water with a crisp, clean taste that’s lightly sweet and refreshing. Naturally hydrating and never from concentrate, Zola is Non-GMO Project Verified and only contains 60 calories per serving. In taste tests, Zola beats competitors 2 to 1 and is the best-tasting way to rehydrate, reset and reenergize.
CBD Body Care ProVault Topical Pain Relief
Our portfolio currently consists of two body care brands that both contain CBD. The first brand is ProVault, a muscle and joint pain relief product that is formulated with THC-free CBD isolate along with a proprietary blend of natural ingredients and fast-acting cooling agents. The second brand is SoulSpring, a CBD-infused line of bath and body products that includes nourishing botanicals and minerals.
The market for CBD products has been under pressure primarily due to regulatory uncertainty. Given our strategic focus on food and beverage products, we are currently in the process of exploring strategic alternatives for our body care brands.
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Components of Our Statements of Operations Data
Revenues
We derive our revenues primarily from product sales and royalties.
Product revenues
Our product revenues consist primarily of sales of Arcadia Wellness products, GoodWheat grain and pasta, and GLA products. We recognize revenue from product sales when control of the product is transferred to third-party distributors and manufacturers, collectively “our customers,” which generally occurs upon delivery. Our revenues fluctuate depending on the timing of shipments of product to our customers and are reported net of estimated chargebacks, returns and losses.
Operating Expenses
Cost of revenues
Cost of revenues relates to the sale of Arcadia Wellness, GoodWheat, and GLA products and consists of the cost of raw materials, including internal and third-party services costs related to procuring, processing, formulating, packaging and shipping our products, as well as in-licensing and royalty fees, any adjustments or write-downs to inventory or prepaid production costs.
Research and development expenses ("R&D")
Research and development expenses consist of costs incurred in the development and testing of our products and other products in development incorporating our traits. These expenses currently consist primarily of fees paid to product formulation consultants and are expensed as incurred. Additionally, we are required from time to time to make certain milestone payments in connection with the development of technologies in-licensed from third parties. Our research and development expenses may fluctuate from period to period.
Gain on sale of property and equipment, net
Gain on sale of fixed assets includes gains from the sale of tangible assets sold above their net book value.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of employee costs, professional service fees, broker and sales commission fees, and overhead costs. Our selling, general, and administrative expenses may fluctuate from period to period. In connection with our commercialization activities for our consumer products, we expect to increase our investments in sales and marketing, including additional consulting fees.
Interest income (expense)
Interest income consists interest income on our cash and cash equivalents and investments.
Valuation loss on March 2023 PIPE
Valuation loss on March 2023 PIPE includes the fair value in excess of gross proceeds and the increase in fair value related to the re-pricing of existing warrants.
Change in the estimated fair value of common stock warrant and option liabilities
Change in the estimated fair value of common stock warrant and option liabilities is comprised of the fair value remeasurement of the liabilities associated with our financing transactions.
Issuance and offering costs allocated to liability classified options
Issuance and offering costs generally include placement agent, legal, advisory, accounting and filing fees related to financing transactions.
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Income Tax Provision
Our income tax provision has not been historically significant, as we have incurred losses since our inception. The provision for income taxes consists of state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our U.S. deferred tax assets as of March 31, 2023 and December 31, 2022. We consider all available evidence, both positive and negative, including but not limited to: earnings history, projected future outcomes, industry and market trends, and the nature of each of the deferred tax assets in assessing the extent to which a valuation allowance should be applied against our U.S. deferred tax assets.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
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|
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|
|
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|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
$ Change |
|
|
% Change |
|
|
|
2023 |
|
|
2022 |
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|
|
|
|
|
|
|
|
(In thousands except percentage) |
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Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
1,509 |
|
|
$ |
3,170 |
|
|
$ |
(1,661 |
) |
|
|
(52 |
)% |
Royalty |
|
|
— |
|
|
|
50 |
|
|
|
(50 |
) |
|
|
(100 |
)% |
Total revenues |
|
|
1,509 |
|
|
|
3,220 |
|
|
|
(1,711 |
) |
|
|
(53 |
)% |
Operating expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
825 |
|
|
|
3,458 |
|
|
|
(2,633 |
) |
|
|
(76 |
)% |
Research and development |
|
|
359 |
|
|
|
395 |
|
|
|
(36 |
) |
|
|
(9 |
)% |
Change in fair value of contingent consideration |
|
|
— |
|
|
|
(31 |
) |
|
|
31 |
|
|
|
(100 |
)% |
Gain on sale of property and equipment |
|
|
(19 |
) |
|
|
(328 |
) |
|
|
309 |
|
|
|
(94 |
)% |
Selling, general and administrative |
|
|
4,392 |
|
|
|
4,349 |
|
|
|
43 |
|
|
|
1 |
% |
Total operating expenses |
|
|
5,557 |
|
|
|
7,843 |
|
|
|
(2,286 |
) |
|
|
(29 |
)% |
Loss from operations |
|
|
(4,048 |
) |
|
|
(4,623 |
) |
|
|
575 |
|
|
|
12 |
% |
Interest income (expense) |
|
|
198 |
|
|
|
(1 |
) |
|
|
199 |
|
|
|
(19900 |
)% |
Other income, net |
|
|
32 |
|
|
|
14 |
|
|
|
18 |
|
|
|
129 |
% |
Valuation loss on March 2023 PIPE |
|
|
(6,076 |
) |
|
|
— |
|
|
|
(6,076 |
) |
|
|
100 |
% |
Change in fair value of common stock warrant and option liabilities |
|
|
940 |
|
|
|
— |
|
|
|
940 |
|
|
|
100 |
% |
Issuance and offering costs allocated to liability classified options |
|
|
(430 |
) |
|
|
— |
|
|
|
(430 |
) |
|
|
100 |
% |
Net loss |
|
|
(9,384 |
) |
|
|
(4,610 |
) |
|
|
(4,774 |
) |
|
|
104 |
% |
Net loss attributable to non-controlling interest |
|
|
— |
|
|
|
(122 |
) |
|
|
122 |
|
|
|
(100 |
)% |
Net loss attributable to common stockholders |
|
$ |
(9,384 |
) |
|
$ |
(4,488 |
) |
|
$ |
(4,896 |
) |
|
|
109 |
% |
Revenues
Product revenues accounted for 100% and 98% of total revenues during the three months ended March 31, 2023 and 2022, respectively. Product revenues decreased $1.7 million, or 52%, during the three months ended March 31, 2023 compared to the same period in 2022. Revenues in the first quarter of 2022 included $1.8 million of GoodWheat grain sales and sales of body care products that are no longer part of the Arcadia product portfolio.
Cost of revenues
Cost of revenues decreased by $2.6 million, or 76%, during the three months ended March 31, 2023 compared to the same period in 2022. Cost of revenues in the first quarter of 2022 included GoodWheat grain sold at cost, low-margin body care product sales, and higher inventory write-downs. Gross profit, calculated as total revenues less cost of revenues, was $684,000 during the three months ended March 31, 2023 compared to gross loss of $238,000 during the three months ended March 31, 2022. The increase in the gross profit was driven by the absence of GoodWheat grain sold at cost, the focus on higher-margin products, and lower inventory write-downs during the three months ended March 31, 2023.
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Research and development
Research and development expenses decreased by $36,000, or 9%, during the three months ended March 31, 2023 compared to the same period in 2022 primarily driven by the Company's continued focus on commercialization, which has led to lower employee-related expenses, and related activity costs as we right-sized our research teams.
Gain on sale of property and equipment
During the three months ended March 31, 2023 and 2022, the Company sold property and equipment for net proceeds exceeding book value by $19,000 and $328,000, respectively.
Selling, general, and administrative
Selling, general, and administrative expenses increased by $43,000, or 1%, during the three months ended March 31, 2023 compared to the same period in 2022 despite a 43% increase in marketing expenses in 2023.
Interest income (expense)
During the three months ended March 31, 2023, the Company recognized interest income of $198,000 from investments as compared to interest expense of $1,000 during the same period in 2022.
Other income, net
During the three months ended March 31, 2023, the Company recognized other income of $32,000.
Valuation loss on March 2023 PIPE
During the three months ended March 31, 2023, the Company recognized a $6.1 million valuation loss related to the March 2023 PIPE financing transaction. The valuation loss includes the fair value in excess of gross proceeds and the increase in fair value related to the re-pricing of existing warrants.
Change in the estimated fair value of common stock warrant and option liabilities
The change in the estimated fair value of common stock warrant and option liabilities was $940,000 during the three months ended March 31, 2023 related to the change in the estimated fair value of the liability classified preferred investment options issued in connection with the March 2023 PIPE and August 2022 Registered Direct Offering financing transactions.
Issuance and offering costs allocated to liability classified options
Issuance and offering costs were $430,000 during the three months ended March 31, 2023 and were related to the liability classified options issued in the March 2023 PIPE financing transaction.
Seasonality
We and our commercial partners operate in different geographies around the world and conduct field trials used for data generation, which must be conducted during the appropriate growing seasons for particular crops and markets. Demand for our consumer body care products tends to vary with major holidays and demand for coconut water products is generally higher in the summer months.
The level of seasonality in our business overall is difficult to evaluate at this time due to our relatively limited number of commercialized products, our expansion into new geographical markets and our introduction of new products and traits.
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Liquidity & Capital Resources
We have funded our operations primarily with the net proceeds from our private and public offerings of our equity securities and debt, as well as proceeds from the sale of our products and payments under license agreements. Our principal use of cash is to fund our operations, which are primarily focused on commercializing our products. Our contractual obligations are primarily related to our operating leases for facilities, land and equipment. As of March 31, 2023, we had cash and cash equivalents of $23.0 million. For the three months ended March 31, 2023, the Company had a net loss of $9.4 million and net cash used in operations of $3.5 million. For the twelve months ended December 31, 2022, the Company had net losses of $15.6 million and net cash used in operations of $14.0 million.
Going Concern
We believe that our existing cash and cash equivalents will not be sufficient to meet our anticipated cash requirements for at least the next 12-18 months from the issuance date of these financial statements, and thus raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We may seek to raise additional funds through debt or equity financings, if necessary. We may also consider entering into additional partner arrangements. Any sale of additional equity would result in dilution to our stockholders. Our incurrence of debt would result in debt service obligations, and the instruments governing our debt could provide for additional operating and financing covenants that would restrict our operations. If we require additional funds and are not able to secure adequate additional funding, we may be forced to reduce our spending, extend payment terms with our suppliers, liquidate assets, or suspend or curtail planned product launches. Any of these actions could materially harm our business, results of operations and financial condition.
Liquidity
The following table summarizes total current assets, current liabilities and working capital for the dates indicated (in thousands):
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As of
March 31, |
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As of
December 31, |
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|
2023 |
|
|
2022 |
|
Current assets |
|
$ |
27,205 |
|
|
$ |
25,398 |
|
Current liabilities |
|
|
4,097 |
|
|
|
4,209 |
|
Working capital surplus |
|
$ |
23,108 |
|
|
$ |
21,189 |
|
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
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Three Months Ended March 31, |
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2023 |
|
|
2022 |
|
Net cash (used in) provided by: |
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|
|
|
|
Operating activities |
|
$ |
(3,466 |
) |
|
$ |
(4,885 |
) |
Investing activities |
|
|
315 |
|
|
|
747 |
|
Financing activities |
|
|
5,505 |
|
|
|
4 |
|
Net increase (decrease) in cash |
|
$ |
2,354 |
|
|
$ |
(4,134 |
) |
Cash flows from operating activities
Cash used in operating activities for the three months ended March 31, 2023, was $3.5 million. With respect to our net loss of $9.4 million, non-cash charges including $430,000 of issuance and offering costs, $6.1 million of valuation loss recognized for the March 2023 PIPE, $212,000 of stock-based compensation, $180,000 of lease amortization, $71,000 of depreciation, $23,000 of write-downs of inventory, and adjustments in our working capital accounts of $76,000, were offset by the change in fair value of common stock warrant and option liabilities of $940,000, operating lease payments of $191,000 and a gain on disposal of property and equipment of $19,000.
22
Cash used in operating activities for the three months ended March 31, 2022, was $4.9 million. With respect to our net loss of $4.6 million, non-cash charges including $260,000 of stock-based compensation, $166,000 of lease amortization, $368,000 of write-downs of inventory, and $149,000 of depreciation were offset by adjustments in our working capital accounts of $692,000, $328,000 of gain on disposal of property and equipment, other non-cash income from the change in fair value of contingent consideration of $31,000, and operating lease payments of $180,000.
Cash flows from investing activities
Cash provided by investing activities for the three months ended March 31, 2023 consisted of proceeds of $30,000 from sale of property and equipment as well as proceeds of $285,000 from sale of Verdeca.
Cash provided by investing activities for the three months ended March 31, 2022 consisted of $787,000 of proceeds from sales of property and equipment, partially offset by $40,000 of purchases of property and equipment.
Cash flows from financing activities
Cash provided by financing activities for the three months ended March 31, 2023 consisted of gross proceeds of $6.0 million from the March 2023 PIPE financing transaction and proceeds from the purchase of ESPP shares of $5,000, which were offset by payments of transaction costs related to the March 2023 PIPE financing transaction of $497,000.
Cash provided by financing activities for the three months ended March 31, 2022 consisted of proceeds from the purchase of ESPP shares of $4,000.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities, or variable interest entities other than Verdeca, which was disposed of in November 2020.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We consider our critical accounting policies and estimates to be revenue recognition, determination of the provision for income taxes, and net realizable value of inventory.
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