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 health and wellness 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, health and wellness products, and their viability for industrial applications, has laid the foundation for our path forward. We have used non-genetically modified (“non-GMO”) advanced breeding techniques to develop these proprietary innovations which we are now commercializing through the sales of seed and grain, food ingredients and products, hemp extracts, trait licensing and royalty agreements. The acquisition of the assets of Lief Holdings, LLC (“Lief”), EKO Holdings, LLC (“EKO”) and Live Zola, LLC (“Zola”) added bath and body care products, CBD consumer products, as well as coconut water, to our portfolio of products.
Our commercial strategy is to satisfy consumer nutrition, health and wellness 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 Lief, EKO and Zola brands allows us to broaden our reach within the health and wellness 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 IP with multiple non-GMO wheat traits have clear functional benefits, and we will continue to build partnerships across the wheat value chain. We will continue to invest in acquisition, development and retention of the requisite management and industry experience and production and logistics capacity to fully participate in, and control, the route to market for our high value food ingredients.
•Commercialize and Scale our Arcadia Wellness consumer brands through retail and e-commerce expansion. We plan to expand distribution of our consumer brands through mass market retailers, grocery store chains, and other specialty nutrition stores, as well as through e-commerce. These brands can penetrate large and growing categories through high-value, differentiated benefits, with the ability to scale and generate attractive margins. We will continue to build our commercialization and scaling expertise, refine go-to-market strategies and invest in effective brand-building.
22
•Evaluate acquisitive growth opportunities. We intend to evaluate potential acquisitions representing vertical integration opportunities with multiple benefits to Arcadia’s growth plans. These could include integrating further into our supply chains to enhance margin capture, as well as speed to market new product innovations and food formulations.
Arcadia Wellness, LLC
In May 2021, our wholly-owned subsidiary Arcadia Wellness, LLC, acquired the assets of Eko, Lief, and Zola. We intend for Arcadia Wellness, LLC, to house all of Arcadia Biosciences consumer goods businesses, including GoodWheat, Zola Coconut Water and ProVault Topical Pain Relief, as well as SoulSpring Body Care.
Our Product Portfolio
GoodWheat™ Consumer Products
The GoodWheat brand is a portfolio of non-GMO wheat-based consumer products that simplifies food ingredient formulations for consumers that are demanding “clean labeling” in their foods, and that are willing to pay a higher retail price for products made with ingredients they recognize. Because GoodWheat increases the nutrient density directly in the primary grains and oils, it provides the mechanism for food formulation simplification naturally and cost effectively to meet evolving consumer demands.
The brand launch is a key element of the company’s go-to-market strategy to achieve greater value for its innovations by participating in downstream consumer revenue opportunities. We designed the brand to make an immediate connection with consumers that products made with GoodWheat meet their demands for healthier wheat options that also taste great.
In June 2022, we launched our GoodWheat pasta available in five varieties including penne, spaghetti, fettuccine, elbows and rotini, in select retailers nationwide. Our pasta products utilizes our GoodWheat grain as the sole ingredient, providing 4X the fiber of traditional pasta and 9g protein per serving without sacrificing taste. In fact, our research shows taste parity to leading pasta brands, which is unique in the growing better-for-you pasta segment. In addition, GoodWheat is the only better-for-you pasta brand made from one simple ingredient, matching consumers’ preference for cleaner labels. Additional categories of products are slated for launch in 2023.
Zola Coconut Water
We believe that natural hydration and the power of plant-based ingredients are the keys to unlock your inspiration from within, and we are proud to make delicious plant-powered beverages that provide the energy and focus you need to crush your day. From the coconut groves of Thailand, we bring you great tasting coconut water and are proud of our long-lasting relationships with partners around the world who are essential to the quality of our products.
ProVault Topical Pain Relief
ProVault’s proprietary THC-Free, CBD-infused blend of natural ingredients and fast-acting cooling agents are designed to safely and effectively relieve muscle and joint pain and soothe your skin. Our products are third-party tested for potency and purity from pesticides, fungicides, microbials and heavy metals. Our topical pain relievers are formulated to address performance concerns from everyday pain to skin protection. So whether you’re a true competitor, a weekend warrior or simply maintaining an active lifestyle, you can count on ProVault to help keep you in the game. We believe what you put on your body is just as important as what you put in your body.
SoulSpring Body Care
Inspired by nature’s ancient remedies and crafted with care, our SoulSpring products strive to help rejuvenate and renew your mind, body, and soul. Our CBD-infused blends of natural ingredients provide a more thoughtful, holistic approach to internal balance and overall well-being. SoulSpring premium, broad spectrum CBD is extracted from naturally-grown hemp and blended with nourishing botanicals and minerals. Our CBD is purity-tested, non-pshychoactive and non-intoxicating. Our passion for wellness means thoughtfully choosing honest, natural ingredients - inspired by ancient remedies and carefully selected for their healing properties. We then mindfully blend these ingredients to retain their inner essence and natural properties.
23
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.
Royalty revenues
Our royalty revenues consist of amounts earned from the sale of commercial products that incorporate our traits by third parties. Our royalty revenues consist of a minimum annual royalty, offset by amounts earned from the sale of products. We recognize the minimum annual royalty on a straight-line basis over the year, and we recognize royalty revenue resulting from the sale of products when the third parties transfer control of the product to their customers, which generally occurs upon shipment. Our royalty revenues can fluctuate depending on the timing of shipments of product by the third parties to their customers.
License revenues
Our license revenues consist of up-front, nonrefundable license fees, annual license fees, and subsequent milestone payments that we receive under our license agreements. Revenue generated from up-front license fees are recognized upon execution of the agreement. We recognize annual license fees when it is probable that a material reversal will not occur.
Milestone fees are variable consideration that is initially constrained and recognized only when it is probable that such amounts would not be reversed. The Company assesses when achievement of milestones are probable in order to determine the timing of revenue recognition for milestone fees. Milestones typically represent significant stages of development for our traits in a potential commercial product, such as achievement of specific technological targets, completion of field trials, filing with regulatory agencies, completion of the regulatory process, and commercial launch of a product containing our traits. Given the seasonality of agriculture and time required to progress from one milestone to the next, achievement of milestones is inherently uneven, and our license revenues are likely to fluctuate significantly from period to period.
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.
24
Gain on sale of Verdeca
The gain on sale of Verdeca is the gain recognized for the sale our membership interests in the Verdeca joint venture to our partner Bioceres in November 2020.
Impairment of intangible assets
Impairments of intangible assets are recorded when the fair value of intangible assets drops below its carrying amount. See Note 7 to the Condensed Consolidated Financial Statements.
Change in fair value of contingent consideration
Change in the fair value of contingent consideration is comprised of the fair value remeasurement of the liabilities associated with our contingent consideration. See Note 15 to the Condensed Consolidated Financial Statements.
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.
Impairment of property and equipment, net
Impairment of property and equipment, net includes losses from tangible assets due to impairment or recoverability test charges to write down fixed assets to their fair value or recoverability 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.
Other income, net
Other income, net, consists of realized gains on corporate securities, and interest income on our cash and cash equivalents and investments.
Issuance and offering costs
Issuance and offering costs generally include placement agent, legal, advisory, accounting and filing fees related to financing transactions.
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.
25
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 September 30, 2022 and December 31, 2021. 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 September 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
$ Change |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
(In thousands except percentage) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
1,851 |
|
|
$ |
2,324 |
|
|
$ |
(473 |
) |
|
|
(20 |
)% |
Royalty |
|
|
17 |
|
|
|
35 |
|
|
|
(18 |
) |
|
|
(51 |
)% |
License |
|
|
10 |
|
|
|
17 |
|
|
|
(7 |
) |
|
|
(41 |
)% |
Total revenues |
|
|
1,878 |
|
|
|
2,376 |
|
|
|
(498 |
) |
|
|
(21 |
)% |
Operating expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
1,344 |
|
|
|
2,511 |
|
|
|
(1,167 |
) |
|
|
(46 |
)% |
Research and development |
|
|
255 |
|
|
|
1,038 |
|
|
|
(783 |
) |
|
|
(75 |
)% |
Impairment of intangible assets |
|
|
— |
|
|
|
120 |
|
|
|
(120 |
) |
|
|
(100 |
)% |
Impairment of property and equipment |
|
|
24 |
|
|
|
1,108 |
|
|
|
(1,084 |
) |
|
|
(98 |
)% |
Selling, general and administrative |
|
|
4,835 |
|
|
|
6,312 |
|
|
|
(1,477 |
) |
|
|
(23 |
)% |
Total operating expenses |
|
|
6,458 |
|
|
|
11,089 |
|
|
|
(4,631 |
) |
|
|
(42 |
)% |
Loss from operations |
|
|
(4,580 |
) |
|
|
(8,713 |
) |
|
|
4,133 |
|
|
|
47 |
% |
Interest income (expense) |
|
|
95 |
|
|
|
(15 |
) |
|
|
110 |
|
|
|
(733 |
)% |
Other income (expense), net |
|
|
43 |
|
|
|
(7 |
) |
|
|
50 |
|
|
|
(714 |
)% |
Change in fair value of common stock warrant and option liabilities |
|
|
1,880 |
|
|
|
4,777 |
|
|
|
(2,897 |
) |
|
|
(61 |
)% |
Gain on extinguishment of PPP loan |
|
|
— |
|
|
|
1,123 |
|
|
|
(1,123 |
) |
|
|
(100 |
)% |
Issuance and offering costs |
|
|
(314 |
) |
|
|
— |
|
|
|
(314 |
) |
|
|
100 |
% |
Net loss before income taxes |
|
|
(2,876 |
) |
|
|
(2,835 |
) |
|
|
(41 |
) |
|
|
1 |
% |
Income tax provision |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
0 |
% |
Net loss |
|
|
(2,877 |
) |
|
|
(2,836 |
) |
|
|
(41 |
) |
|
|
1 |
% |
Net loss attributable to non-controlling interest |
|
|
(10 |
) |
|
|
(661 |
) |
|
|
651 |
|
|
|
(98 |
)% |
Net loss attributable to common stockholders |
|
$ |
(2,867 |
) |
|
$ |
(2,175 |
) |
|
$ |
(692 |
) |
|
|
32 |
% |
Revenues
Product revenues accounted for 99% and 98% of total revenues during the three months ended September 30, 2022 and 2021, respectively. The $473,000, or 20%, decrease in product revenues for the three months ended September 30, 2022 compared to the same period in 2021 was driven by a decrease in sales of body care products primarily due to the focus on higher-margin products, and the licensing agreement with Radiance Beauty and Wellness, Inc ("Radiance Beauty") executed in July 2022, in addition to the timing of GLA orders. See Note 6 to the Condensed Consolidated Financial Statements for details of the licensing agreement.
Royalty revenues accounted for 1% of total revenues during each of the three months ended September 30, 2022 and 2021. The $17,000 of royalty revenues for the three months ended September 30, 2022 represents the proportionate share of contracted minimum annual royalty fees.
Cost of revenues
Cost of revenues decreased by $1.2 million, or 46%, during the three months ended September 30, 2022 compared to the same period in 2021 primarily due to lower revenues and lower inventory write-downs in 2022. Gross profit, calculated as total revenues less cost of revenues, was $534,000 during the three months ended September 30, 2022 compared to gross loss of $135,000 during the three months ended September 30, 2021. The increase in the gross profit was primarily due to lower inventory write-downs during the three months ended September 30, 2022.
26
Research and development
Research and development expenses decreased by $783,000, or 75%, during the three months ended September 30, 2022 compared to the same period in 2021 primarily driven by the Company's recent focus on commercialization, which has led to lower employee-related expenses, and related activity costs as we right-sized our research teams.
Impairment of property and equipment
During the three months ended September 30, 2022, we recognized $24,000 of impairments of property and equipment related to Arcadia Wellness. During the three months ended September 30, 2021, we recognized $1.1 million of impairments of Archipelago property and equipment related to CBD processing.
Selling, general, and administrative
Selling, general, and administrative expenses decreased by $1.5 million, or 23%, during the three months ended September 30, 2022, compared to the same period in 2021. The decrease was primarily driven by lower salaries, lease expense and consulting fees.
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 decreased by $2.9 million during the three months ended September 30, 2022 compared to the same period in 2021. The decrease was driven by the adoption of ASU 2020-06 in January 2022, which resulted in the reclassification of common stock warrants from liability to equity, partially offset by the change in the estimated fair value of the liability classified preferred investment options issued in connection with the August 2022 Registered Direct Offering ("RDO") financing transaction.
27
Issuance and offering costs
Issuance and offering costs increased by $314,000 during the three months ended September 30, 2022 compared to the same period in 2021 due to the August 2022 RDO financing transaction.
Comparison of the Nine Months Ended September 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
$ Change |
|
|
% Change |
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
(In thousands except percentage) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
7,967 |
|
|
$ |
4,506 |
|
|
$ |
3,461 |
|
|
|
77 |
% |
Royalty |
|
|
117 |
|
|
|
86 |
|
|
|
31 |
|
|
|
36 |
% |
License |
|
|
872 |
|
|
|
17 |
|
|
|
855 |
|
|
|
5029 |
% |
Total revenues |
|
|
8,956 |
|
|
|
4,609 |
|
|
|
4,347 |
|
|
|
94 |
% |
Operating expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
8,250 |
|
|
|
4,954 |
|
|
|
3,296 |
|
|
|
67 |
% |
Research and development |
|
|
1,009 |
|
|
|
3,328 |
|
|
|
(2,319 |
) |
|
|
(70 |
)% |
Gain on sale of Verdeca |
|
|
(1,138 |
) |
|
|
— |
|
|
|
(1,138 |
) |
|
|
(100 |
)% |
Impairment of intangible assets |
|
|
72 |
|
|
|
120 |
|
|
|
(48 |
) |
|
|
(40 |
)% |
Change in fair value of contingent consideration |
|
|
(70 |
) |
|
|
(140 |
) |
|
|
70 |
|
|
|
(50 |
)% |
Impairment of property and equipment |
|
|
370 |
|
|
|
1,319 |
|
|
|
(949 |
) |
|
|
(72 |
)% |
(Gain) loss on sale of property and equipment |
|
|
(386 |
) |
|
|
17 |
|
|
|
(403 |
) |
|
|
(2371 |
)% |
Selling, general and administrative |
|
|
13,834 |
|
|
|
16,733 |
|
|
|
(2,899 |
) |
|
|
(17 |
)% |
Total operating expenses |
|
|
21,941 |
|
|
|
26,331 |
|
|
|
(4,390 |
) |
|
|
(17 |
)% |
Loss from operations |
|
|
(12,985 |
) |
|
|
(21,722 |
) |
|
|
8,737 |
|
|
|
(40 |
)% |
Interest income (expense) |
|
|
123 |
|
|
|
(23 |
) |
|
|
146 |
|
|
|
(635 |
)% |
Other income (expense), net |
|
|
13 |
|
|
|
10,214 |
|
|
|
(10,201 |
) |
|
|
(100 |
)% |
Change in fair value of common stock warrant and option liabilities |
|
|
1,880 |
|
|
|
4,601 |
|
|
|
(2,721 |
) |
|
|
(59 |
)% |
Gain on extinguishment of PPP loan |
|
|
— |
|
|
|
1,123 |
|
|
|
(1,123 |
) |
|
|
(100 |
)% |
Issuance and offering costs |
|
|
(314 |
) |
|
|
(769 |
) |
|
|
455 |
|
|
|
(59 |
)% |
Net loss before income taxes |
|
|
(11,283 |
) |
|
|
(6,576 |
) |
|
|
(4,707 |
) |
|
|
72 |
% |
Income tax provision |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
0 |
% |
Net loss |
|
|
(11,284 |
) |
|
|
(6,577 |
) |
|
|
(4,707 |
) |
|
|
72 |
% |
Net loss attributable to non-controlling interest |
|
|
(152 |
) |
|
|
(1,199 |
) |
|
|
1,047 |
|
|
|
(87 |
)% |
Net loss attributable to common stockholders |
|
$ |
(11,132 |
) |
|
$ |
(5,378 |
) |
|
$ |
(5,754 |
) |
|
|
107 |
% |
Revenues
Product revenues accounted for 89% and 98% of total revenues during the nine months ended September 30, 2022 and 2021, respectively. The $3.5 million, or 77%, increase in product revenues during the nine months ended September 30, 2022 compared to the same period in 2021 was primarily driven by higher sales of the Zola coconut water and body care products, the brands acquired in May 2021, along with $2.1 million of GoodWheat grain and pasta sales this year that weren't present in 2021.
Royalty revenues accounted for 1% and 2% of total revenues during the nine months ended September 30, 2022 and 2021, respectively. The $117,000 of royalty revenues for the nine months ended September 30, 2022 represents the proportionate share of contracted minimum annual royalty fees.
License revenue accounted for 10% of total revenue during the nine months ended September 30, 2022 and is related to the Verdeca-Bioceres licensing agreement discussed below.
Cost of revenues
Cost of revenues increased by $3.3 million, or 67%, during the nine months ended September 30, 2022 compared to the same period in 2021. The increase in cost of revenues is the result of the increase in revenues. Gross profit, calculated as total revenues less cost of revenues, was $706,000 during the nine months ended September 30, 2022 compared to gross loss of $345,000 during the nine months
28
ended September 30, 2021. The increase in the gross profit was primarily driven by the increase in license revenue related to the Verdeca-Bioceres licensing agreement during the nine months ended September 30, 2022.
Research and development
Research and development expenses decreased by $2.3 million, or 70%, during the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily driven by the Company's recent 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 Verdeca
In February 2012, we partnered with Bioceres to form Verdeca, which we equally owned. Verdeca was formed to develop and deregulate soybean varieties using both partners’ agricultural technologies. In November 2020, Arcadia sold its membership interest in Verdeca to Bioceres in a transaction in which Arcadia received cash, shares of Bioceres stock and a royalty stream of up to $10.0 million on sales of Haab 4 ("HB4") soybean. An additional $2.0 million in cash is to be paid upon achievement by Verdeca reaching commercial plantings of at least 200,000 hectares of HB4 or China approving the HB4 soybean trait for “food and feed”. During the nine months ended September 30, 2022, we recognized a gain on sale of Verdeca of $1.1 million related to the regulatory approval of the HB4 soybeans.
Impairment of intangible assets
During the nine months ended September 30, 2022, we recognized $72,000 of impairments of intangible assets related to the Radiance Beauty licensing agreement. During the nine months ended September 30, 2021, we recognized an impairment of intangible assets in the amount of $120,000 primarily as a result of a decline in the hemp seed market forecasted sales.
Change in fair value of contingent consideration
The Industrial Seed Innovations contingent consideration remeasurement resulted in a decrease of the liability in the amount of $70,000 and $140,000 during the nine months ended September 30, 2022 and 2021, respectively. See Note 15 to the Condensed Consolidated Financial Statements.
Impairment of property and equipment
During the nine months ended September 30, 2022, we recognized $370,000 of impairments of property and equipment, of which $320,000 is related to the Radiance Beauty licensing agreement. During the nine months ended September 30, 2021, we recognized $1.3 million of impairments of Archipelago property and equipment related to CBD processing.
Gain on sale of property and equipment
During the nine months ended September 30, 2022, we sold some property and equipment related to the Davis laboratory and Archipelago for net proceeds exceeding book value by $386,000. During the nine months ended September 30, 2021, we sold equipment for book value exceeding net proceeds by $17,000.
Selling, general, and administrative
Selling, general, and administrative expenses decreased by $2.9 million, or 17%, during the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was primarily driven by lower salaries, lease expense and consulting fees.
Other income, net
Other income, net decreased by $10.2 million during the nine months ended September 30, 2022 compared to the same period in 2021 due to the realized gain resulting from the sale of the shares of BIOX in 2021.
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 decreased by $2.7 million during the nine months ended September 30, 2022 compared to the same period in 2021. The decrease was driven by the adoption of ASU 2020-06 in January 2022, which resulted in the reclassification of common stock warrants from liability to equity, partially offset by the change in the
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estimated fair value of the liability classified preferred investment options issued in connection with the August 2022 RDO financing transaction.
Gain on extinguishment of Paycheck Protection Program ("PPP") loan
During the nine months ended September 30, 2021, we were notified by the lender that the Small Business Administration had forgiven the original PPP loan amount in full, and this resulted in a $1.1 million gain for nine months ended September 30, 2021.
Issuance and offering costs
During the nine months ended September 30, 2022, we recognized $314,000 in issuance and offering costs related to the August 2022 RDO financing transaction. During the nine months ended September 30, 2021, we recognized $769,000 in issuance and offering costs related to the January 2021 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.
Liquidity, Capital Resources, and Going Concern
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, contract research agreements and government grants. Our principal use of cash is to fund our operations, which are primarily focused on commercializing our products. As of September 30, 2022, we had cash and cash equivalents of $22.7 million. For the nine months ended September 30, 2022, the Company had a net loss of $11.3 million and net cash used in operations of $11.6 million. For the twelve months ended December 31, 2021, the Company had net losses of $16.1 million and net cash used in operations of $25.9 million.
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 months from the issuance date of our condensed consolidated financial statements, and thus raises substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated 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 do 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 development programs. Any of these actions could materially harm our business, results of operations and financial condition.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
Net cash (used in) provided by: |
|
|
|
|
|
|
Operating activities |
|
$ |
(11,621 |
) |
|
$ |
(19,208 |
) |
Investing activities |
|
|
1,136 |
|
|
|
16,678 |
|
Financing activities |
|
|
4,519 |
|
|
|
22,014 |
|
Net (decrease) increase in cash |
|
$ |
(5,966 |
) |
|
$ |
19,483 |
|
Cash flows from operating activities
Cash used in operating activities for the nine months ended September 30, 2022, was $11.6 million. With respect to our net loss of $11.3 million, non-cash charges including $897,000 of stock-based compensation, $686,000 of lease amortization, $1.5 million of
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write-downs of inventories, $370,000 of write-downs of property and equipment, $72,000 of write-downs of intangible assets, $314,000 of issuance and offering costs, and $354,000 of depreciation, were offset by adjustments in our working capital accounts of $439,000, the change in fair value of common stock warrant and option liabilities of $1.9 million, gain on sale of Verdeca of $1.1 million, $386,000 of gain on disposal of property and equipment, other non-cash income from the change in fair value of contingent consideration of $70,000, and operating lease payments of $718,000.
Cash used in operating activities for the nine months ended September 30, 2021, was $19.2 million. With respect to our net loss of $6.6 million, non-cash charges including $1.0 million of stock-based compensation, $914,000 of lease amortization, $1.8 million of write-downs of inventory, $1.3 million of write-down of fixed assets, $769,000 of issuance and offering costs, and $737,000 of depreciation were offset by adjustments in our working capital accounts of $2.4 million, $10.2 million of realized gain on corporate securities, the change in fair value of common stock warrant and option liabilities of $4.6 million, other non-cash income from the change in fair value of contingent consideration of $140,000, and operating lease payments of $984,000.
Cash flows from investing activities
Cash provided by investing activities for the nine months ended September 30, 2022 consisted of $897,000 of proceeds from sales of property and equipment, $285,000 proceeds from sale of Verdeca, partially offset by $46,000 of purchases of property and equipment.
Cash provided by investing activities for the nine months ended September 30, 2021 consisted of $21.8 million of proceeds from sales of investments, partially offset by $4.3 million of acquisitions, and $919,000 in purchases of property and equipment.
Cash flows from financing activities
Cash provided by financing activities for the nine months ended September 30, 2022 consisted of proceeds from the issuance of common stock relating to the August 2022 RDO financing transaction of $5.0 million gross proceeds and proceeds from the purchase of ESPP shares of $7,000, which were offset by payments of transaction costs related to the August 2022 RDO financing transaction of $488,000.
Cash provided by financing activities for the nine months ended September 30, 2021 consisted of proceeds from the issuance of common stock relating to the January 2021 PIPE financing transaction of $25.1 million gross proceeds, capital contributions from the non-controlling interest in our joint venture of $750,000, and proceeds from the purchase of ESPP shares of $39,000, which were offset by payments of transaction costs related to the January 2021 PIPE of $1.9 million and principal payments on debt of $2.0 million.
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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