Arcadia Biosciences, Inc. 10-Q

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 have commercialized 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. It is 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. 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. 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 wheat trait portfolio. Our proprietary intellectual property ("IP") with multiple non-GMO wheat traits have clear functional benefits, which we utilized to launch the GoodWheat brand into multiple categories. We believe our wheat provides a compelling point of difference and we will continue to evaluate ways to extract value from our proprietary technology. • Evaluate M&A opportunities. We intend to evaluate potential asset sales, mergers, acquisitions and other strategic opportunities. We believe there is a significant opportunity to integrate our wheat IP into larger businesses and drive shareholder value. • Scale Zola through retail expansion. 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 continue to invest in trial-driving activities and expand distribution of our Zola coconut water brand through mass market retailers and grocery store chains. Arcadia Wellness, LLC 17 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 Saavy Naturals™, a line of natural body care products, Soul Spring™, a CBD-infused botanical therapy brand in the natural category, and ProVault™, a THC-free CBD sports performance formula made with natural ingredients, providing effective support and recovery for athletes (collectively "body care brands"). Also included in the purchase is Zola, a coconut water sourced exclusively with sustainably grown coconuts from Thailand. On July 8, 2022, the Company entered into an agreement to license Saavy Naturals to Radiance Beauty and Wellness, Inc. ("Radiance Beauty"). In July 2023, management made the decision to exit the remaining body care brands, Soul Spring and ProVault, as a result of continued pressure on the CBD market due to regulatory uncertainty. Body care operations ceased during the third quarter of 2023. Our Product Portfolio Most Americans suffer from a significant fiber deficiency. 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. However, less than 10 percent of women and less than 3 percent of men get enough fiber in their daily diets. Our GoodWheat portfolio of better-for-you products addresses these needs as they are naturally higher in fiber and protein than traditional wheat without sacrificing on taste or texture. GoodWheat™ Pasta 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. GoodWheat™ Pancakes and Waffle Mixes In August 2023, we launched our GoodWheat into the breakfast category with new, better-for-you pancake and waffle mixes as well as single-serve Quikcakes™. Our new mixes are made with simple ingredients and Arcadia’s proprietary wheat grain, which is naturally higher in fiber and protein than traditional wheat. GoodWheat pancake and waffle mixes are sold in resealable, multi-serve pouches, with each serving delivering 8 times the fiber of traditional pancake mix and 5 grams of protein. Our multi-serve mixes are available in 3 classic varieties, including Buttermilk, Chocolate Chocolate Chip and Apple Cinnamon. GoodWheat Quikcakes are an innovative, single-serve instant pancake that is a great option for busy mornings – you simply pour one packet into a bowl, add water and microwave for 90 seconds. Quikcakes have 11 times the fiber of traditional single-serve pancake mixes and contain 7 grams of protein per serving. Quikcakes are available in 3 flavors, including Buttermilk, Chocolate Chocolate Chip and Confetti. GoodWheat™ Mac and Cheese In November 2023, we announced the third GoodWheat category, Mac and Cheese. Our Mac and Cheese is made with real cheese and contains no artificial flavors, dyes or preservatives and are available in three varieties: Classic Cheddar, White Cheddar and Three Cheese. GoodWheat Mac and Cheese packs in the most fiber of any brand in the category, 4 times more than the leading brand. In fact, one serving of GoodWheat Mac and Cheese has the same fiber as two servings of oatmeal, or two and a half servings of broccoli! And, just like our pasta and pancake mixes, GoodWheat Mac and Cheese is higher in protein than the leading brand, with 12 grams of protein per serving. 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. 18 Discontinued Operations As mentioned above, the Company exited the body care brands and ceased its operations during the third quarter of 2023. In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the condensed consolidated balance sheets and the results of the discontinued operations as a separate component of loss on the condensed consolidated statements of operations and comprehensive loss for all periods presented. See Note 1 to the condensed consolidated financial statements for further information on discontinued operations. Components of Our Statements of Operations Data Revenues Product revenues Product revenues consist primarily of sales of GoodWheat, Zola 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. 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 primarily relates to the sale of GoodWheat and Zola 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, the Company is required from time to time to make certain milestone payments in connection with the development of technologies in-licensed from third parties. The Company's research and development expenses may fluctuate from period to period. Loss (Gain) on sale of property and equipment Loss (Gain) on sale of property and equipment includes losses or gains realized from the sale of tangible assets sold below or above their net book value. Impairment of property and equipment Impairment of property and equipment 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. 19 Interest income Interest income consists of interest income on our cash and cash equivalents and investments. Other income, net Other income, net consists of miscellaneous income. 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. Net loss from discontinued operations Net loss from discontinued operations represents results of operations related to the discontinued body care brands. See Note 1 to the condensed consolidated financial statements for further information on discontinued operations. Results of Operations Comparison of the Three Months Ended March 31, 2024 and 2023 Three Months Ended March 31, $ Change % Change 2024 2023 (In thousands except percentage) Revenues: Product $ 1,255 $ 1,232 $ 23 2 % Total revenues 1,255 1,232 23 2 % Operating expenses (income): Cost of revenues 820 688 132 19 % Research and development 272 359 (87 ) (24 )% Loss (Gain) on sale of property and equipment 2 (19 ) 21 (100 )% Impairment of property and equipment 36 — 36 100 % Selling, general and administrative 3,189 4,071 (882 ) (22 )% Total operating expenses 4,319 5,099 (780 ) (15 )% Loss from continuing operations (3,064 ) (3,867 ) 803 21 % Interest income 45 198 (153 ) (77 )% Other income, net 3 32 (29 ) (91 )% Valuation loss on March 2023 PIPE — (6,076 ) 6,076 (100 )% Change in fair value of common stock warrant and option liabilities 593 940 (347 ) (37 )% Issuance and offering costs allocated to liability classified options — (430 ) 430 (100 )% Net loss from continuing operations (2,423 ) (9,203 ) 6,780 (74 )% Net loss from discontinued operations — (181 ) 181 (100 )% Net loss attributable to common stockholders $ (2,423 ) $ (9,384 ) $ 6,961 (74 )% 20 Revenues Product revenues accounted for 100% of total revenues during the three months ended March 31, 2024 and 2023. Product revenues increased $23,000, or 2%, during the three months ended March 31, 2024 compared to the same period in 2023 driven by GoodWheat and Zola sales, partially offset by higher costs related to new distribution. Cost of revenues Cost of revenues increased by $132,000, or 19%, during the three months ended March 31, 2024 compared to the same period in 2023 primarily related to grain sales. Gross profit, calculated as total revenues less cost of revenues, was $435,000 and $544,000 during the three months ended March 31, 2024 and 2023, respectively. The decrease in gross profit is related to higher cost of revenues driven by the grain sale during the three months ended March 31, 2024. Research and development Research and development expenses decreased by $87,000, or 24%, during the three months ended March 31, 2024 compared to the same period in 2023 primarily related to lower consulting fees during the three months ended March 31, 2024. Loss (Gain) on sale of property and equipment During the three months ended March 31, 2024, the Company sold property and equipment for net proceeds below book value by $2,000. During the three months ended March 31, 2023, the Company sold property and equipment for net proceeds exceeding book value by $19,000. Impairment of property and equipment During the three months ended March 31, 2024, the Company recognized impairment of property and equipment held for sale of $36,000. There was no such impairment of property and equipment during the three months ended March 31, 2023. Selling, general, and administrative Selling, general, and administrative expenses decreased by $882,000, or 22%, during the three months ended March 31, 2024 compared to the same period in 2023 primarily driven by decreases in employee compensation and marketing expenses. Interest income During the three months ended March 31, 2024, the Company recognized interest income of $45,000 from investments as compared to $198,000 during the same period in 2023. Other income, net During the three months ended March 31, 2024, the Company recognized other income of $3,000 as compared to $32,000 during the same period in 2023. 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 $593,000 during the three months ended March 31, 2024 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. The change in the estimated fair value of common stock warrant and option liabilities was $940,000 during the three months ended 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 Issuance and offering costs were $430,000 during the three months ended March 31, 2023 related to the March 2023 PIPE financing transaction. 21 Net loss from discontinued operations Net loss from discontinued operations was $181,000 during the three months ended March 31, 2023. See Note 1 to the condensed consolidated financial statements for further information on discontinued operations. 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 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 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, 2024, we had cash and cash equivalents of $3.3 million and short-term investments of $5.2 million. For the three months ended March 31, 2024, the Company had net losses of $2.4 million and net cash used in operations of $3.2 million. For the twelve months ended December 31, 2023, the Company had net losses of $14.0 million and net cash used in operations of $15.3 million. Going Concern We believe that our existing cash and cash equivalents and short-term investments 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): As of March 31, As of December 31, 2024 2023 Current assets $ 11,642 $ 14,972 Current liabilities 2,878 3,590 Working capital surplus $ 8,764 $ 11,382 Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2024 2023 Net cash (used in) provided by: Operating activities $ (3,210 ) $ (3,466 ) Investing activities 4 315 Financing activities 5 5,505 Net (decrease) increase in cash $ (3,201 ) $ 2,354 22 Cash flows from operating activities Cash used in operating activities for the three months ended March 31, 2024, was $3.2 million. With respect to our net loss of $2.4 million, non-cash charges including $51,000 of depreciation, $138,000 of stock-based compensation, $177,000 of lease amortization, and $36,000 of impairment of property and equipment, were offset by the change in fair value of common stock warrant and option liabilities of $593,000, adjustments in our working capital accounts of $329,000, and operating lease payments of $269,000. 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. Cash flows from investing activities Cash provided by investing activities for the three months ended March 31, 2024 consisted of proceeds of $17,000 from the sale of property and equipment offset by $13,000 of purchases of property and equipment. 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 flows from financing activities Cash provided by financing activities for the three months ended March 31, 2024 consisted of proceeds from the purchase of ESPP shares of $5,000. 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. 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. 23 ITEM 3: QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK Not Required.