Item 2. Management’s Discussion and Analysis
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
Since acquiring the assets of Live Zola, LLC ("Zola") in May 2021, the Company has provided consumers with a great tasting way to rehydrate, reset, and reenergize with Zola coconut water products. The company has leveraged its history as a leader in science-based approaches to develop high value products and drive innovation in the consumer goods industry. Previously, the Company developed products primarily in wheat, which it commercialized through the sales of seed, grain and food ingredients and products, and through trait licensing and royalty agreements.
On May 16, 2024, the Company sold the GoodWheat brand to Above Food Ingredients Corp. ("Above Food") for net consideration of $3.7 million. Refer to Note 6 to the condensed consolidated financial statements for further details of the transaction.
On May 14, 2024, the Company sold its non-GMO Resistant Starch ("RS") durum wheat trait to longtime partner Corteva AgriScience ("Corteva"). Under the terms of the agreement, Arcadia retained certain rights to use the RS durum wheat trait. The Company received $4.0 million in cash payment from Corteva during the nine months ended September 30, 2024 and recorded a gain of the same amount as the trait had no carrying value on the condensed consolidated statement of operations and comprehensive loss related to the transaction. Refer to Note 8 to the condensed consolidated financial statements for further details of the partnership and transaction.
In May 2021, the Company’s wholly owned subsidiary Arcadia Wellness, LLC (“Arcadia Wellness” or “AW”) acquired the businesses of Eko Holdings, LLC, Lief, LLC, 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 was Zola, a coconut water sourced exclusively with sustainably grown coconuts from Thailand. In July 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.
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Our Growth Strategy
We believe there are significant opportunities to grow our business by executing the following elements of our strategy:
• 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.
• 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.
Our Product Portfolio
Zola Coconut Water
Founded in 2002, Zola became part of the Arcadia family of brands in May 2021. Sourced from Thailand, Zola is a pure, natural, 100% coconut water with a crisp, clean taste that’s slightly sweet and refreshing. Naturally hydrating and rich in electrolytes, Zola is Non-GMO Project Verified and only contains 60 calories per serving. In taste tests, Zola beat competitors 2 to 1 and is the best tasting way to rehydrate, reset and reenergize. Zola flavors include original, original with pulp, and espresso, and in May 2024, we added lime and pineapple.
Wheat Traits
RG Wheat
Many consumers are interested in reducing levels of gluten in their diet. Critically, for some, this is due to having Celiac disease ("CD"), an autoimmune disease that impacts many people worldwide with estimates from 1% of the population in Europe to 3.5% in Mexico. Furthermore, non-celiac gluten sensitivity ("NCGS") impacts an estimated additional 6% of the population. Both CD and NCGS are characterized by sensitivity to dietary gluten. The only effective treatment of CD and NCGS requires removal of gluten sources from the diet. Since required adherence to a gluten-free diet is extremely difficult to accomplish for average consumers, efforts to develop alternative approaches are needed.
Our proprietary, non-GMO wheat variety developed using advanced screening and plant breeding techniques have reduced allergenic glutens and increased essential amino acids such as lysine, along with all the other health benefits of high protein wheat. Importantly, this variety also delivers impressively high fiber content at approximately 14 grams per serving compared to 2-3 grams per serving of traditional wheat, providing additional value to health-conscious consumers.
Improved Shelf Life of Whole Grain Flour
The United States Department of Agriculture recommends that “at least one serving of grains per day must be whole grain-rich” due to evidence that a diet containing whole grains provides a multitude of benefits, including lower risk of obesity, cardiovascular disease, and type-2 diabetes. Despite these health benefits, consumption of whole grain products is negatively affected by the bitter and rancid flavors and odors that accumulate in whole wheat flour after milling. Our improved stability and flavor wheat lines greatly reduced the production of rancid and bitter compounds in milled whole grain flour as it progresses through the supply chain.
20
Discontinued Operations
As mentioned above, the Company exited the GoodWheat and body care brands. 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 separate components 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 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.
License revenues
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.
Operating Expenses
Cost of revenues
Cost of revenues primarily relates to the sale of Zola products and consists primarily of product and freight costs. Adjustments or write-downs to inventory are also included in cost of revenues.
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.
Gain on sale of intangible assets
Gain on sale of intangible assets consists of the gain on sale of our RS durum wheat trait to Corteva.
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.
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Interest income
Interest income consists of interest income on our cash and cash equivalents, investments and note receivable.
Other income, net
Other income, net consists of miscellaneous income net of miscellaneous losses.
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 GoodWheat and 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 September 30, 2024 and 2023
Three Months Ended September 30,
$ Change
% Change
2024
2023
(In thousands except percentage)
Revenues:
Product
$
1,537
$
1,298
$
239
18
%
License
—
—
—
0
%
Total revenues
1,537
1,298
239
18
%
Operating expenses:
Cost of revenues
1,032
818
214
26
%
Research and development
24
15
9
60
%
Selling, general and administrative
2,241
1,862
379
20
%
Total operating expenses
3,297
2,695
602
22
%
Loss from continuing operations
(1,760
)
(1,397
)
(363
)
(26
)%
Interest income
233
133
100
75
%
Other income, net
15
17
(2
)
(12
)%
Change in fair value of common stock warrant and option liabilities
330
608
(278
)
(46
)%
Net loss from continuing operations before income taxes
(1,182
)
(639
)
(543
)
85
%
Income tax provision
—
—
—
0
%
Net loss from continuing operations
(1,182
)
(639
)
(543
)
85
%
Net loss from discontinued operations — Body Care
—
(83
)
83
(100
)%
Net loss from discontinued operations — GoodWheat
(430
)
(1,845
)
1,415
(77
)%
Net loss
(1,612
)
(2,567
)
955
(37
)%
Net loss attributable to non-controlling interest
—
—
—
0
%
Net loss attributable to common stockholders
$
(1,612
)
$
(2,567
)
$
955
(37
)%
22
Revenues
Product revenues accounted for 100% of total revenues during the three months ended September 30, 2024. Product revenues increased $239,000, or 18%, during the three months ended September 30, 2024 compared to the same period in 2023 driven by an increase in Zola sales.
Cost of revenues
Cost of revenues increased by $214,000, or 26%, during the three months ended September 30, 2024 compared to the same period in 2023 driven by higher revenues and input costs.
Research and development
Research and development expenses increased by $9,000, or 60%, during the three months ended September 30, 2024 compared to the same period in 2023.
Selling, general, and administrative
Selling, general, and administrative expenses increased by $379,000, or 20%, during the three months ended September 30, 2024 compared to the same period in 2023 primarily driven by employee severance expenses related to the change in management.
Interest income
During the three months ended September 30, 2024, the Company recognized interest income of $233,000, of which $186,000 was related to discount amortization and accrued interest on the promissory note from Above Food. The remaining difference was related to interest from investments. During the three months ended September 30, 2023, the Company recognized interest income of $133,000 from investments.
Other income, net
During the three months ended September 30, 2024 and 2023, the Company recognized other income of $15,000 and $17,000, respectively.
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 resulted in a gain of $330,000 and $608,000 during the three months ended September 30, 2024 and 2023, respectively, 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.
Net loss from discontinued operations
Net loss from discontinued operations for Body Care was $83,000 during the three months ended September 30, 2023. Net loss from discontinued operations for GoodWheat was $430,000 and $1.8 million during the three months ended September 30, 2024 and 2023, respectively. See Note 1 to the condensed consolidated financial statements for further information on discontinued operations.
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Comparison of the Nine Months Ended September 30, 2024 and 2023
Nine Months Ended September 30,
$ Change
% Change
2024
2023
(In thousands except percentage)
Revenues:
Product
$
3,829
$
3,667
$
162
4
%
License
—
10
(10
)
(100
)%
Total revenues
3,829
3,677
152
4
%
Operating expenses:
Cost of revenues
2,136
1,996
140
7
%
Research and development
40
55
(15
)
(27
)%
Gain on sale of intangible assets
(4,000
)
—
(4,000
)
100
%
Impairment of property and equipment
36
—
36
(100
)%
Selling, general and administrative
6,986
6,535
451
7
%
Total operating expenses
5,198
8,586
(3,388
)
(39
)%
Loss from continuing operations
(1,369
)
(4,909
)
3,540
(72
)%
Interest income
428
538
(110
)
(20
)%
Other income, net
168
36
132
367
%
Valuation loss on March 2023 PIPE
—
(6,076
)
6,076
(100
)%
Change in fair value of common stock warrant and option liabilities
493
5,965
(5,472
)
(92
)%
Issuance and offering costs allocated to liability classified options
—
(430
)
430
(100
)%
Net loss from continuing operations before income taxes
(280
)
(4,876
)
4,596
(94
)%
Income tax provision
—
(1
)
1
(100
)%
Net loss from continuing operations
(280
)
(4,877
)
4,597
(94
)%
Net loss from discontinued operations — Body Care
—
(591
)
591
(100
)%
Net loss from discontinued operations — GoodWheat
(2,694
)
(5,665
)
2,971
(52
)%
Net loss
(2,974
)
(11,133
)
8,159
(73
)%
Net loss attributable to non-controlling interest
—
(5
)
5
(100
)%
Net loss attributable to common stockholders
$
(2,974
)
$
(11,128
)
$
8,154
(73
)%
Revenues
Product revenues accounted for 100% of total revenues during the nine months ended September 30, 2024. Product revenues increased $162,000, or 4%, during the nine months ended September 30, 2024 compared to the same period in 2023 driven by an increase in Zola sales.
Cost of revenues
Cost of revenues increased by $140,000, or 7%, during the nine months ended September 30, 2024 compared to the same period in 2023 driven by higher revenues and input costs.
Research and development
Research and development expenses decreased by $15,000, or 27%, during the nine months ended September 30, 2024 compared to the same period in 2023.
Gain on sale of intangible assets
During the nine months ended September 30, 2024, the Company realized a gain of $4.0 million related to the sale of its RS durum wheat trait to Corteva. There was no such gain recorded during the nine months ended September 30, 2023.
Impairment of property and equipment
During the nine months ended September 30, 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 nine months ended September 30, 2023.
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Selling, general, and administrative
Selling, general, and administrative expenses increased by $451,000, or 7%, during the nine months ended September 30, 2024 compared to the same period in 2023 primarily driven by employee severance expenses related to the change in management as well as higher consulting and legal expenses.
Interest income
During the nine months ended September 30, 2024, the Company recognized interest income of $428,000, of which $282,000 was related to discount amortization and accrued interest on the promissory note from Above Food. The remaining difference was related to interest from investments. During the nine months ended September 30, 2023, the Company recognized interest income of $538,000 from investments.
Other income, net
During the nine months ended September 30, 2024, the Company recognized other income of $168,000, of which $117,000 was related to realized gains on investments. During the nine months ended September 30, 2023, the Company recognized other income of $36,000.
Valuation loss on March 2023 PIPE
During the nine months ended September 30, 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. There was no such valuation loss during the nine months ended September 30, 2024.
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 resulted in a gain of $493,000 and $6.0 million during the nine months ended September 30, 2024 and 2023, respectively, 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 nine months ended September 30, 2023 and were related to the liability classified options issued in the March 2023 PIPE financing transaction. There were no such issuance and offering costs during the nine months ended September 30, 2024.
Net loss from discontinued operations
Net loss from discontinued operations for Body Care was $591,000 during the nine months ended September 30, 2023. Net loss from discontinued operations for GoodWheat was $2.7 million and $5.7 million during the nine months ended September 30, 2024 and 2023, respectively. See Note 1 to the condensed consolidated financial statements for further information on discontinued operations.
Seasonality
The coconut water category, similar to other beverages, is seasonal. Generally, sales volumes are highest during our second and third fiscal quarters when the weather is warmer.
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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 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 September 30, 2024, we had cash and cash equivalents of $3.9 million, short-term investments of $2.6 million and current note receivable of $1.8 million. For the nine months ended September 30, 2024, the Company had net losses of $3.0 million and net cash used in operations of $7.4 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, short-term investments and current note receivable 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
September 30,
As of
December 31,
2024
2023
Current assets
$
10,711
$
14,972
Current liabilities
2,328
3,590
Working capital surplus
$
8,383
$
11,382
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Nine Months Ended September 30,
2024
2023
Net cash (used in) provided by:
Operating activities
$
(7,418
)
$
(11,149
)
Investing activities
4,827
(4,396
)
Financing activities
9
5,512
Net decrease in cash
$
(2,582
)
$
(10,033
)
Cash flows from operating activities
Cash used in operating activities for the nine months ended September 30, 2024, was $7.4 million. With respect to our net loss of $3.0 million, non-cash charges including $92,000 of depreciation, $502,000 of lease amortization, $395,000 of stock-based compensation, $154,000 of write-downs of inventory, 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 $493,000, amortization of note receivable discount of $90,000, a gain on disposal of property and equipment of $65,000, gain on sale of RS durum wheat trait of $4.0 million, adjustments in our working capital accounts of $297,000, and operating lease payments of $678,000.
Cash used in operating activities for the nine months ended September 30, 2023, was $11.1 million. With respect to our net loss of $11.1 million, non-cash charges, including $430,000 of issuance and offering costs, $6.1 million of valuation loss recognized for the March 2023 PIPE, $573,000 of stock-based compensation, $535,000 of lease amortization, $227,000 of depreciation and $444,000 of write-downs of inventory, were offset by the change in fair value of common stock warrant and option liabilities of $6.0 million, adjustments in our working capital accounts of $1.7 million, a gain on disposal of property and equipment of $36,000, and operating lease payments of $573,000.
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Cash flows from investing activities
Cash provided by investing activities for the nine months ended September 30, 2024 consisted of proceeds of $342,000 from the sale of property and equipment, proceeds from the sale of investments of $2.5 million, proceeds from the sale of our RS durum wheat trait of $4.0 million, offset by cash paid related to the GoodWheat sale of $2.0 million and $16,000 of purchases of property and equipment.
Cash used in investing activities for the nine months ended September 30, 2023 consisted of proceeds of $42,000 from the sale of property and equipment as well as proceeds of $569,000 from the sale of Verdeca, offset by $5,000 of purchases of property and equipment and $5.0 million of purchases of investments.
Cash flows from financing activities
Cash provided by financing activities for the nine months ended September 30, 2024 consisted of proceeds from the purchase of ESPP shares of $9,000.
Cash provided by financing activities for the nine months ended September 30, 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 $12,000, 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.
27
ITEM 3: QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
Not Required.
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