See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Basis of Presentation
Organization
Arcadia Biosciences, Inc. (the “Company”), was incorporated in Arizona in 2002 and maintains its headquarters in Davis, California, with additional facilities in Phoenix, Arizona, American Falls, Idaho, Molokai, Hawaii, Albany, Oregon, Chesterfield, Missouri, Chatsworth, California, and Barcelona, Spain. The Company was reincorporated in Delaware in March 2015.
The Company is a producer and marketer of innovative, plant-based health and wellness products. Its history as a leader in science-based approaches to developing high-value crop improvements designed to ameliorate farm economics by enhancing the performance of crops in the field, as well as their value as food ingredients and health and wellness products, has laid the foundation for its path forward. The Company used advanced breeding techniques to develop these proprietary innovations which are now being commercialized through the sales of seed and grain, as well as food ingredients and products. The recent acquisition of the assets of Lief Holdings, LLC (“Lief”), EKO Holdings, LLC (“Eko”) and Live Zola, LLC (“Zola”) adds bath and body care products, as well as coconut water, to the Company’s portfolio.
In May 2021, the Company’s wholly owned subsidiary Arcadia Wellness, LLC (“Arcadia Wellness” or “AW”, see Note 7), acquired the businesses of Eko, Lief, and Zola. The acquisition includes leading consumer CBD brands like Soul Spring™, the top selling CBD-infused botanical therapy brand in the natural category, Saavy Naturals™, a leading line of all-natural body care products and Provault™, a CBD-infused sports performance formula made with natural ingredients, providing effective support and recovery for athletes. Also included in the purchase is Zola, a leading coconut water sourced exclusively with sustainably grown coconuts from Thailand. Key personnel have joined Arcadia Wellness.
In April 2021, the Company’s wholly owned subsidiary Arcadia SPA, S.L. (“Arcadia Spain” or “ASPA”), acquired the assets of Agrasys S.A. (“Agrasys”), a food ingredients company based in Barcelona, Spain. The physical and intellectual property assets enable us to commercialize Tritordeum, a proprietary cereal grain that is a combination of durum wheat and wild barley, resulting in a nutritious grain high in fiber, protein and lutein. Tritordeum was developed at the Instituto de Agricultura Sostenible – Consejo Superior de Investigaciones Científicas, (IAS-CSIC) the largest public institution dedicated to agricultural research in Spain, and subsequently licensed exclusively to Agrasys for commercialization. The Company completed the transaction through Arcadia SPA, S.L., a newly formed company based in Spain, and key Agrasys personnel have joined Arcadia Spain to operate the Tritordeum and GoodWheat business in Europe.
On August 9, 2019, the Company entered into a joint venture agreement with Legacy Ventures Hawaii, LLC (“Legacy,” see Note 9) to grow, extract, and sell hemp products. The partnership, Archipelago Ventures Hawaii, LLC (“Archipelago”), combines the Company’s extensive genetic expertise and resources with Legacy’s experience in hemp extraction and sales.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (the “SEC”) in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, Arcadia Wellness, Arcadia Spain, and Archipelago.
The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities ("VIEs"). This approach focuses on determining whether the Company has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and whether the Company has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.
5
For all periods presented, the Company has determined that it is the primary beneficiary of Archipelago, a joint venture, as it has a controlling interest in Archipelago. Accordingly, the Company consolidates Archipelago in the condensed consolidated financial statements after eliminating intercompany transactions. For consolidated joint ventures, the non-controlling partner’s share of the assets, liabilities and operations of the joint venture is included in non-controlling interests as equity of the Company. The non-controlling partner’s interest is generally computed as the joint venture partner’s ownership percentage of Archipelago. Net loss attributable to non-controlling interest of $161,000 and $538,000 is recorded as an adjustment to net loss to arrive at net loss attributable to common stockholders for the three and six months ended June 30, 2021, respectively. The non-controlling partner’s equity interests are presented as non-controlling interests on the condensed consolidated balance sheets as of June 30, 2021.
The functional currency of the foreign subsidiary Arcadia Spain is its local currency (i.e., the Euro). Accordingly, period-end exchange rates are applied to translate its assets and liabilities and average transaction exchange rates to translate its revenues, expenses, gains, and losses into U.S. dollars. Gains and losses arising from the remeasurement of assets and liabilities were $12,000 for the three and six months ended June 30, 2021, and $0 for the three and six months ended June 30, 2020.
The information included in these condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the condensed consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 31, 2021.
Liquidity, Capital Resources, and Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. Since inception, the Company has financed its operations primarily through equity and debt financings. As of June 30, 2021, the Company had an accumulated deficit of $215.0 million, and cash and cash equivalents of $44.0 million. For the six months ended June 30, 2021, the Company had a net loss of $3.7 million and net cash used in operations of $10.9 million. For the twelve months ended December 31, 2020, the Company had net losses of $6.0 million and net cash used in operations of $30.2 million.
With cash and cash equivalents of $44.0 million as of June 30, 2021, the Company believes that its existing cash and cash equivalents will be sufficient to meet its anticipated cash requirements for at least through August 2022.
As is disclosed in Notes 12 and 13, on January 25, 2021, the Company entered into a securities purchase agreement with certain institutional and accredited investors relating to the issuance and sale in a private placement of shares of Company common stock and warrants for an aggregate of $25.1 million, exclusive of any related transaction fees.
The Company sold all of the 1,875,000 shares of Bioceres (“BIOX”) stock acquired in the November 2020 Bioceres transaction. All of the shares of BIOX were sold in June 2021 and generated a one-time impact on liquidity in the amount of $22.2 million of gross proceeds.
The Company may seek to raise additional funds through debt or equity financings. The Company may also consider entering into additional partner arrangements. The sale of additional equity would result in dilution to the Company’s stockholders. The incurrence of debt would result in debt service obligations, and the instruments governing such debt could provide for additional operating and financing covenants that would restrict operations. If the Company does require additional funds and is unable to secure adequate additional funding at terms agreeable to the Company, the Company may be forced to reduce spending, extend payment terms with suppliers, liquidate assets, or suspend or curtail planned development programs. Any of these actions could materially harm the business, results of operations and financial condition.
2. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Additionally, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 in April 2019 and ASU 2019-05, Financial Instruments — Credit Losses (Topic 326) — Targeted Transition Relief in May 2019. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. In November 2019, the FASB issued ASU No. 2019-10, which defers the effective date of ASU No. 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU No. 2016-13 on the consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying other areas of existing guidance. The amendments are effective for all entities for fiscal years beginning after December 15, 2020. The Company adopted ASU No. 2019-12 on January 1, 2021 with an immaterial impact on the Company’s disclosures.
6
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). The Board is issuing this Update to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. The amendments in this Update are effective for public business entities that meet the definition of a smaller reporting company, as defined by the SEC, for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU No. 2020-06 on the consolidated financial statements.
3. Inventory
Inventory costs are tracked on a lot-identified basis and are included as cost of product revenues when sold. Inventories are stated at the lower of cost or net realizable value. The Company makes adjustments to inventory when conditions indicate that the net realizable value may be less than cost due to physical deterioration, obsolescence, changes in price levels, or other factors. Additional adjustments to inventory are made for excess and slow-moving inventory on hand that is not expected to be sold within a reasonable timeframe to reduce the carrying amount to its estimated net realizable value. The write-downs to inventory are included in cost of product revenues and are based upon estimates about future demand from the Company’s customers and distributors and market conditions. The Company recorded write-downs of wheat inventory, and hemp seed inventories of $823,000 and $983,000 during the three and six months ended June 30, 2021, respectively. The Company recorded write-downs of wheat inventory, and hemp seed inventories of $1.4 million for the three and six months ended June 30, 2020. If there are significant changes in demand and market conditions, substantial future write-downs of inventory may be required, which would materially increase the Company’s expenses in the period the write down is taken and materially affect the Company’s operating results.
Inventories, net consist of the following (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Raw materials
|
|
$
|
1,588
|
|
|
$
|
966
|
|
Goods in process
|
|
|
1,531
|
|
|
|
1,921
|
|
Finished goods
|
|
|
4,668
|
|
|
|
4,410
|
|
Inventories
|
|
$
|
7,787
|
|
|
$
|
7,297
|
|
4. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Laboratory equipment
|
|
$
|
3,027
|
|
|
$
|
2,951
|
|
Software and computer equipment
|
|
|
550
|
|
|
|
591
|
|
Machinery and equipment
|
|
|
2,557
|
|
|
|
2,046
|
|
Furniture and fixtures
|
|
|
221
|
|
|
|
181
|
|
Vehicles
|
|
|
428
|
|
|
|
428
|
|
Leasehold improvements
|
|
|
2,271
|
|
|
|
2,229
|
|
Property and equipment, gross
|
|
|
9,054
|
|
|
|
8,426
|
|
Less accumulated depreciation and amortization
|
|
|
(5,314
|
)
|
|
|
(4,887
|
)
|
Property and equipment, net
|
|
$
|
3,740
|
|
|
$
|
3,539
|
|
Depreciation expense was $484,000 and $182,000 for the six months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021, and December 31, 2020, respectively, there was $632,000 and $239,000 of construction in progress included in property and equipment that had not been placed into service and was not subject to depreciation.
During the six months ended June 30, 2021, the State of Hawaii’s Senate decided not to vote on a CBD processing bill in 2021, hence the earliest vote could happen in 2022, and its effectiveness into law will most likely be pushed to 2023. As a result, we assessed Archipelago’s fixed assets related to CBD processing for impairment and recorded a write-down in the amount of $210,000 for the three and six months ended June 30, 2021, calculated through an asset recoverability test. Given the uncertainty in the legislative developments in Hawaii, it is reasonably possible that the entity’s estimate that it will recover the carrying amount of this equipment from future operations will change in the near term.
7
5. Investments and Fair Value Instruments
Investments
The investments are carried at fair value, based on quoted market prices or other readily available market information. Unrealized and realized gains and losses are recognized as other income in the condensed consolidated statements of operations and comprehensive loss.
The Company classified its investments in corporate securities of BIOX as short-term investments. The Company recorded realized gains of $10.2 million for the three and six months ended June 30, 2021, associated with the sale of all corporate securities in other income, net, in the condensed consolidated statements of operations and comprehensive loss.
The following tables summarize the amortized cost and fair value of the investment securities portfolio at June 30, 2021 and December 31, 2020.
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
39,439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,439
|
|
Total Assets at Fair Value
|
|
$
|
39,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,439
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
12,082
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,082
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
10,969
|
|
|
|
656
|
|
|
|
—
|
|
|
|
11,625
|
|
Total Assets at Fair Value
|
|
$
|
23,051
|
|
|
$
|
656
|
|
|
$
|
—
|
|
|
$
|
23,707
|
|
The Company did not have any investment categories that were in a continuous unrealized loss position for more than twelve months as of June 30, 2021.
Fair Value Measurement
The fair value of the investment securities at June 30, 2021 were as follows:
|
|
Fair Value Measurements at June 30, 2021
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
39,439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,439
|
|
Total Assets at Fair Value
|
|
$
|
39,439
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,439
|
|
The fair value of the investment securities at December 31, 2020 were as follows:
|
|
Fair Value Measurements at December 31, 2020
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
12,082
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,082
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
11,625
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,625
|
|
Total Assets at Fair Value
|
|
$
|
23,707
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,707
|
|
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2021 or 2020. The Company’s financial instruments consist primarily of cash and cash equivalents, accounts
8
receivable, accounts payable, accrued liabilities, and notes payable. For accounts receivable, accounts payable, accrued liabilities, and notes payable the carrying amounts of these financial instruments as of June 30, 2021 and December 31, 2020 were considered representative of their fair values due to their short term to maturity or repayment. Cash equivalents are carried at cost, which approximates their fair value.
The Company’s Level 3 liabilities consist of a contingent liability resulting from the Anawah acquisition, as described in Note 17, a contingent liability resulting from the Industrial Seed Innovations acquisition, as described in Note 6, and common stock warrant liabilities related to the March 2018, the June 2019, the September 2019, and the January 2021 Offerings described in Note 13.
The contingent liability related to the Anawah acquisition was measured and recorded on a recurring basis as of June 30, 2021 and December 31, 2020, using unobservable inputs, namely the Company’s ability and intent to pursue certain specific products developed using technology acquired in the purchase. A significant deviation in the Company’s ability and/or intent to pursue the technology acquired in the purchase could result in a significantly lower (higher) fair value measurement. The contingent liability related to the Industrial Seed Innovations (“ISI”) acquisition was measured and recorded on a recurring basis as of June 30, 2021 and December 31, 2020, using unobservable inputs, namely ISI’s forecasted revenue. A significant deviation in ISI’s forecasted revenue could result in a significantly lower (higher) fair value measurement.
The warrant liabilities were measured and recorded on a recurring basis using the Black-Scholes Model with the following assumptions at June 30, 2021 and December 31, 2020:
|
|
January 2021 Warrants
|
|
|
September 2019 Warrants
|
|
|
June 2019 Warrants
|
|
|
March 2018 Warrants
|
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Remaining term (in years)
|
|
|
5.08
|
|
|
|
—
|
|
|
|
3.70
|
|
|
|
4.20
|
|
|
|
3.46
|
|
|
|
3.96
|
|
|
|
1.72
|
|
|
|
2.22
|
|
Expected volatility
|
|
|
125.8
|
%
|
|
|
—
|
|
|
|
137.7
|
%
|
|
|
135.0
|
%
|
|
|
140.4
|
%
|
|
|
135.0
|
%
|
|
|
91.1
|
%
|
|
|
130.0
|
%
|
Risk-free interest rate
|
|
|
0.9
|
%
|
|
|
—
|
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
—
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The significant input used in the fair value measurement of the Company’s Level 3 warrant liabilities is volatility. A significant increase (decrease) in volatility could result in a significantly higher (lower) fair value measurement.
The following table sets forth the establishment of the Company’s Level 3 liabilities, as well as a summary of the changes in the fair value and other adjustments (in thousands):
|
|
(Level 3)
|
|
(Dollars in thousands)
|
|
|
Common Stock
Warrant
Liability -
March
2018
Purchase
Agreement
|
|
|
Common
Stock
Warrant
Liability -
June
2019
Offering
|
|
|
Common
Stock
Warrant
Liability -
September
2019
Offering
|
|
|
Common
Stock
Warrant
Liability -
January 2021
Offering
|
|
|
Contingent
Liabilities
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
|
$
|
662
|
|
|
$
|
832
|
|
|
$
|
1,214
|
|
|
$
|
-
|
|
|
$
|
2,280
|
|
|
$
|
4,987
|
|
Initial recognition
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,631
|
|
|
|
—
|
|
|
$
|
9,631
|
|
Change in fair value and
other adjustments
|
|
|
|
(378
|
)
|
|
|
146
|
|
|
|
192
|
|
|
|
215
|
|
|
|
(140
|
)
|
|
$
|
36
|
|
Balance as of June 30, 2021
|
|
|
$
|
284
|
|
|
$
|
978
|
|
|
$
|
1,406
|
|
|
$
|
9,846
|
|
|
$
|
2,140
|
|
|
$
|
14,654
|
|
6. Industrial Seed Innovations Acquisition
In August 2020, the Company acquired by merger Industrial Seed Innovations (“ISI”), an Oregon-based industrial hemp breeding and seed company. As a result of the acquisition, the Company acquired ISI’s commercial and genetic assets, including seed varieties, germplasm library and intellectual property. ISI’s Rogue and Umpqua seed varieties are now part of Arcadia’s portfolio, alongside the Company’s GoodHemp line of genetically superior hemp seeds, transplants, and extracts. The acquisition has significantly broadened and accelerated commercialization of Arcadia’s hemp-related breeding platform, as well as established a breeding research and development facility in the Pacific Northwest, a key production area in the hemp industry.
9
The acquisition was recorded as a business combination, in accordance with ASC Topic 805. The purchase price consideration for the acquisition totaled an estimated $1,212,000, of which $500,000 in cash and $432,000, in the form of 132,626 shares of the Company’s common stock, was paid during the month of August 2020. The remaining amount of $280,000 will be recognized in two annual installments, each of up to 132,626 shares of the Company’s common stock, subject to the achievement of revenue milestones in 2021 and 2022, and is recorded as a contingent liability at fair value in the condensed consolidated balance sheets as of June 30, 2021. The cash consideration paid for the acquisition was funded by cash on hand.
Acquisition costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. The Company incurred costs related to the ISI acquisition of approximately $67,000 included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations and comprehensive loss for the quarter ended September 30, 2020.
The following table presents the allocation of the purchase price of ISI assets acquired, based on their fair values, which was assessed during the year ended December 31, 2020.
|
|
Purchase Price
Allocation
|
|
Inventory
|
|
$
|
511
|
|
Intangible assets, net
|
|
|
400
|
|
Goodwill
|
|
|
408
|
|
Deferred tax liability
|
|
|
(107
|
)
|
Total consideration allocated
|
|
$
|
1,212
|
|
A deferred tax liability arising from the difference between book purchase price allocation and tax basis has been assessed in the amount of $107,000. Deferred tax liabilities are required to be recorded in purchase accounting independently of whether the acquiror has a valuation allowance on its own net deferred tax assets. As a result, the combined entity now has additional deferred tax liabilities available to reduce the amount of valuation allowance necessary. Future reversals of existing taxable temporary differences are an objective source of future taxable income. Accordingly, the purchase accounting deferred tax liabilities enabled the realization of a portion of the existing deferred tax assets, thus allowing for a reduction in the valuation allowance. The reduction in the valuation allowance is not accounted for as part of the purchase accounting but is recognized in the condensed consolidated statements of operations and comprehensive loss as a discrete tax benefit in the income tax provision.
The former shareholders of ISI remain responsible for ISI’s pre-acquisition liabilities. Pursuant to the definitive acquisition agreement, the Company entered into a lease agreement with ISI for the use of land, equipment, greenhouses and buildings. The lease was effective upon the execution of the definitive acquisition agreement and has a term of 3 years with the option to renew for three additional 3-year terms.
7. Arcadia Wellness Acquisition
On May 17, 2021, the Company’s wholly owned subsidiary Arcadia Wellness, acquired the assets of Eko, Lief, and Zola. The acquisition included consumer CBD brands like Soul Spring™, the CBD-infused botanical therapy brand, Saavy Naturals™, a line of all-natural body care products and Provault™, a CBD-infused sports performance formula. Also included in the purchase was Zola, a coconut water sourced from Thailand. Key personnel have joined Arcadia Wellness.
The acquisition was recorded as a business combination, in accordance with ASC Topic 805. The purchase price consideration for the acquisition totaled an estimated $6.1 million, of which $4.0 million in cash and $2.1 million in the form of 827,401 shares of the Company’s common stock, was paid during the month of May 2021. The cash consideration paid for the acquisition was funded by cash on hand.
Acquisition costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. The Company incurred costs related to the Arcadia Wellness acquisition of approximately $850,000 included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021.
The Company performed a preliminary allocation of purchase price as of the acquisition date based on management's estimates of fair value. The Company believes its estimates and assumptions are reasonable; however, the initial estimated purchase price
10
allocation is subject to change as the Company finalizes its determination relating to the valuation of the assets acquired, finalization of key assumptions, approaches and judgments with respect to intangible assets acquired. Accordingly, future adjustments may impact the initial estimated amount of goodwill and other allocated amounts represented in the table below. The final determination of the fair value of the assets acquired will be completed as soon as the necessary information is available, but no later than one year from the acquisition date.
The following table presents the preliminary allocation of the purchase price of the assets acquired, based on their fair values, which was assessed during the quarter ended June 30, 2021.
|
|
Purchase Price
Allocation
|
|
Inventory
|
|
$
|
840
|
|
Prepaid and other current assets
|
|
|
62
|
|
Fixed assets
|
|
|
308
|
|
Deposits
|
|
|
82
|
|
Customer list
|
|
|
360
|
|
Trade names and trademarks
|
|
|
2,900
|
|
Formulations
|
|
|
260
|
|
Goodwill
|
|
|
1,240
|
|
Total consideration allocated
|
|
$
|
6,052
|
|
The former shareholders of Eko, Lief, and Zola remain responsible for their pre-acquisition liabilities. Following the definitive acquisition agreement, the Company entered into a lease agreement for the use of offices, production equipment acquired, and storage warehouses. The lease was effective on May 17, 2021 and has a term of 3 years.
For the period from May 17 to June 30, 2021, the Company recognized approximately $837,000 of revenue and $144,000 of net loss relating to Arcadia Wellness, which included charges for the amortization of acquired intangible assets.
Acquired intangible assets of $3.5 million include trade names and trademarks of $2.9 million (indefinite useful life), customer list of $360,000 (fifteen-year useful life) and formulations of $260,000 (ten-year useful life).
The total weighted average amortization period for the acquired intangibles is 12.9 years.
The acquisition produced $1.2 million of goodwill. The goodwill is attributable to a combination of Arcadia Wellness’s expectation regarding a more meaningful engagement by the customers due to the scale of the combined Company, and other synergies. Goodwill will be tested for impairment at least annually (more frequently if certain indicators are present). Goodwill arising from the Arcadia Wellness acquisition is not deductible for tax purposes.
11
Pro-Forma Results of Operations
The following unaudited pro-forma condensed consolidated results of operations for the three and six months ended June 30, 2021 and 2020, have been prepared as if the acquisition of Arcadia Wellness had occurred on January 1, 2020 and includes adjustments for amortization of intangibles, and the addition to basic and diluted weighted average number of shares outstanding.
|
|
For the three months ended June 30,
|
|
|
For the six months ended June 30,
|
|
|
|
2021
(Pro forma)
|
|
|
2020
(Pro forma)
|
|
|
2021
(Pro forma)
|
|
|
2020
(Pro forma)
|
|
Total revenues
|
|
$
|
2,203
|
|
|
$
|
2,237
|
|
|
$
|
4,516
|
|
|
$
|
3,862
|
|
Net income (loss)
|
|
|
(5,409
|
)
|
|
|
(9,812
|
)
|
|
|
(5,193
|
)
|
|
|
(8,080
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(5,248
|
)
|
|
$
|
(9,607
|
)
|
|
$
|
(4,655
|
)
|
|
$
|
(7,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Basic and diluted
|
|
|
22,159,103
|
|
|
|
10,154,717
|
|
|
|
21,478,810
|
|
|
|
9,816,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.79
|
)
|
8. Intangible assets, net
The Company’s intangible assets, net as of June 30, 2021, consist of the following:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
$
|
796
|
|
|
$
|
67
|
|
|
$
|
729
|
|
|
$
|
310
|
|
|
$
|
27
|
|
|
$
|
283
|
|
Customer lists
|
|
|
400
|
|
|
|
11
|
|
|
|
389
|
|
|
|
40
|
|
|
|
3
|
|
|
|
37
|
|
Total amortizable intangible assets
|
|
$
|
1,196
|
|
|
$
|
78
|
|
|
$
|
1,118
|
|
|
$
|
350
|
|
|
$
|
30
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands and trademarks
|
|
$
|
2,950
|
|
|
$
|
—
|
|
|
$
|
2,950
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
Total intangible asset, net
|
|
$
|
4,146
|
|
|
$
|
78
|
|
|
$
|
4,068
|
|
|
$
|
400
|
|
|
$
|
30
|
|
|
$
|
370
|
|
Intellectual property and customer lists will be amortized based on their useful lives ranging between 4 and 15 years. As of June 30, 2021, future amortization of intellectual property and customer lists is as follows:
Year Ending December 31,
|
|
|
|
|
2021 (excluding the six months ended June 30, 2021)
|
|
$
|
76
|
|
2022
|
|
|
153
|
|
2023
|
|
|
153
|
|
2024
|
|
|
153
|
|
2025
|
|
|
73
|
|
Thereafter
|
|
|
510
|
|
Total
|
|
$
|
1,118
|
|
12
9. Consolidated Joint Venture
In 2019, the Company and Legacy Ventures Hawaii, LLC, a Nevada limited liability company (“Legacy”), formed Archipelago Ventures Hawaii, LLC, a Delaware limited liability company and entered into a Limited Liability Company Operating Agreement (the “Operating Agreement”). The Company and Legacy formed Archipelago to develop, extract and commercialize hemp-derived products from industrial hemp grown in Hawaii.
Pursuant to the Operating Agreement, a joint operating committee consisting of two individuals appointed by the Company and two individuals appointed by Legacy will manage Archipelago. As of June 30, 2021, the Company and Legacy hold 50.75% and 49.25% interests in Archipelago, respectively, and have made capital contributions to Archipelago of $3,109,000 and $3,017,000, respectively, as determined by the joint operating committee. The Operating Agreement includes indemnification rights, non-competition obligations, and certain rights and obligations in connection with the transfer of membership interests, including rights of first refusal.
The Company consolidates Archipelago in the condensed consolidated financial statements after eliminating intercompany transactions. Net loss attributable to non-controlling interest of $161,000 and $538,000 is recorded as an adjustment to net loss to arrive at net loss attributable to common stockholders for the three and six months ended June 30, 2021, respectively. Legacy’s equity interests are presented as non-controlling interests on the condensed consolidated balance sheets. Refer to Note 1 for basis of presentation.
10. Collaborative Arrangements
In August 2017, the Company entered into a collaborative arrangement for the research, development and commercialization of an improved wheat quality trait in North America. This collaborative arrangement is a contractual agreement with Corteva AgriScience (“Corteva”) and involves a joint operating activity where both Arcadia and Corteva are active participants in the activities of the collaboration. Arcadia and Corteva participate in the research and development, and Arcadia has the primary responsibility for the intellectual property strategy while Corteva will generally lead the marketing and commercialization efforts. Both parties are exposed to significant risks and rewards of the collaboration and the agreement includes both cost sharing and profit sharing. The activities are performed with no guarantee of either technological or commercial success.
The Company accounts for research and development (“R&D”) costs in accordance ASC 730, Research and Development, which states R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred. Third-party R&D costs are expensed when the contracted work has been performed or as milestone results are achieved.
11. Leases
Operating Leases
As of June 30, 2021, the Company leases office space in Davis, CA, Phoenix, AZ, Molokai, HI, Chatsworth, CA, and Chesterfield, MO as well as additional buildings, land and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these short-term leases on a straight-line basis. The Company subleases a portion of the Davis office lease to a third party. During the six months ended June 30, 2021, the Company entered into two leases for office space in Chesterfield, MO and for office space and production in Chatsworth, CA, both with a lease term of 35 months following the commencement date and no renewal option. The leases commenced in April and May of 2021, respectively. There are no other leases that have not yet commenced as of June 30, 2021.
Some leases (the Davis office, warehouse, greenhouses and a copy machine) include one or more options to renew, with renewal terms that can extend the lease term from one to six years. The exercise of lease renewal options is at the Company’s sole discretion.
13
The Company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or material restrictive covenants. Leases consisted of the following (in thousands):
Leases
|
|
Classification
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Right of use asset
|
|
$
|
6,360
|
|
|
$
|
5,826
|
|
Total leased assets
|
|
|
|
$
|
6,360
|
|
|
$
|
5,826
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current - Operating
|
|
Operating lease liability- current
|
|
$
|
962
|
|
|
$
|
717
|
|
Noncurrent - Operating
|
|
Operating lease liability- noncurrent
|
|
|
5,727
|
|
|
|
5,389
|
|
Total leased liabilities
|
|
|
|
$
|
6,689
|
|
|
$
|
6,106
|
|
Lease Cost
|
|
Classification
|
|
For the Three
Months Ended
June 30, 2021
|
|
|
For the Three
Months Ended
June 30, 2020
|
|
|
For the Six
Months Ended
June 30, 2021
|
|
|
For the Six
Months Ended
June 30, 2020
|
|
Operating lease cost
|
|
SG&A and R&D Expenses
|
|
$
|
347
|
|
|
$
|
261
|
|
|
$
|
636
|
|
|
$
|
484
|
|
Short term lease cost (1)
|
|
R&D Expenses
|
|
|
(17
|
)
|
|
|
114
|
|
|
|
30
|
|
|
|
194
|
|
Short term lease cost
|
|
SG&A Expenses
|
|
|
4
|
|
|
|
3
|
|
|
|
15
|
|
|
|
3
|
|
Sublease income (2)
|
|
SG&A and R&D Expenses
|
|
|
(19
|
)
|
|
|
(11
|
)
|
|
|
(33
|
)
|
|
|
(22
|
)
|
Net lease cost
|
|
|
|
$
|
315
|
|
|
$
|
367
|
|
|
$
|
648
|
|
|
$
|
659
|
|
(1)
|
Short term lease cost consists of field trial lease agreements with a lease term of 12 months or less.
|
(2)
|
Sublease income is recorded as a reduction to lease expense.
|
Lease Term
and Discount Rate
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Weighted-average remaining
lease term (years)
|
|
|
4.6
|
|
|
|
5.0
|
|
Weighted-average discount rate
|
|
|
6.5
|
%
|
|
|
6.0
|
%
|
12. Equity Financing
Private Placements
In January 2021, the Company issued in a private placement offering (the “January 2021 Private Placement”) pursuant to a securities purchase agreement (“January 2021 Purchase Agreement”) (i) 7,876,784 shares of its common stock, and (ii) warrants to purchase up to 3,938,392 shares of common stock at an exercise price of $3.13 per share (the “January 2021 Warrants”) and raised total gross proceeds of $25.1 million. The January 2021 Warrants are exercisable at any time at the option of the holder and expire 5.5 years from the date of issuance. In connection with the January 2021 Private Placement, the Company granted to a placement agent warrants to purchase a total of 393,839 shares of Common Stock (the “January 2021 Placement Agent Warrants”) that have an exercise price per share equal to $3.99 and a term of 5.5 years from the date of issuance.
The common stock warrants are classified as a liability within Level 3 due to a contingent cash payment feature. The Company utilized a Black Scholes Merton model on January 28, 2021 with the following assumptions: volatility of 123.8 percent, stock price of $2.88 and risk-free rate of 0.5%. The estimated fair value of the common stock warrant liability was subsequently remeasured at June 30, 2021 with the changes recorded on the Company’s condensed consolidated statements of operations and comprehensive loss. See Note 5.
The January 2021 Placement Agent Warrants were issued for services performed by the placement agent as part of the January 2021 Private Placement and were treated as offering costs. The value of the January 2021 Placement Agent Warrants was determined to be $942,000 using the Black-Scholes Model with input assumptions including the Company’s stock price, expected life of the warrants, stock price volatility determined from the Company’s historical stock prices, and the risk-free interest rate for the term of the warrants. The Company incurred additional offering costs totaling $1.9 million that consist of direct incremental legal, advisory, accounting and filing fees relating to the January 2021 Private Placement. The offering costs, inclusive of the January 2021 Placement Agent Warrants, totaled $2.8 million and allocated to the common stock warrant liability and the common stock using their relative fair values. A total of $769,000 was allocated to the common stock warrant liability and expensed and the remaining $2.0 million was allocated to the common stock and offset to additional paid in capital.
14
In March 2018, the Company issued in a private placement offering (the “March 2018 Private Placement”) pursuant to a securities purchase agreement (“March 2018 Purchase Agreement”) (i) 300,752 shares of its common stock and (ii) warrants to purchase up to 300,752 shares of common stock at an initial exercise price equal to $45.75 (the “March 2018 Warrants”) and raised total gross proceeds of $10.0 million. The March 2018 Warrants are exercisable at any time at the option of the holder and expire five years from the date of issuance. In connection with the March 2018 Private Placement, the Company granted to a placement agent warrants to purchase a total of 15,038 shares of Common Stock (the “March 2018 Placement Agent Warrants”) that have an exercise price per share equal to $41.5625 and a term of five years from the date of issuance.
The number of shares of common stock and the number and exercise price of the March 2018 Warrants issued in the March 2018 Private Placement were subject to adjustments as provided in the March 2018 Purchase Agreement. Following the adjustments as provided in the March 2018 Purchase Agreement, the number of shares issued to the purchasers was 1,201,634, the total number of shares issuable upon exercise of the March 2018 Warrants was 1,282,832 and the per share exercise price of the March 2018 Warrants was $10.7258.
Registered Direct Offerings
On May 11, 2018, the Company filed a shelf Registration Statement on Form S-3 with the SEC which was declared effective on June 8, 2018 (“Shelf Registration Statement”). This shelf registration process allows the Company to sell any combination of common stock, preferred stock, warrants and units consisting of such securities in one or more offerings from time to time having aggregate offering prices of up to $50 million.
In June 2018, the Company entered into a securities purchase agreement (the “June 2018 Purchase Agreement”) pursuant to which it sold (i) 1,392,345 registered shares of its common stock pursuant to the Shelf Registration Statement and (ii) unregistered warrants to purchase 1,392,345 shares of its common stock (the “June 2018 Warrants”) in a private placement, for total gross proceeds of $14.0 million (the “June 2018 Registered Direct Offering”). The June 2018 Registered Direct Offering closed on June 14, 2018. The June 2018 Warrants have an exercise price of $9.94 per share, became exercisable upon issuance and expire 5.5 years after the date of issuance. In connection with the June 2018 Registered Direct Offering, the Company granted to a placement agent warrants to purchase a total of 69,617 shares of common stock (“June 2018 Placement Agent Warrants”) that have an exercise price per share equal to $12.568 and a term of five years.
In June 2019, the Company entered into a securities purchase agreement (the “June 2019 Purchase Agreement”) pursuant to which it sold (i) 1,489,575 registered shares of its common stock pursuant to the Shelf Registration Statement and (ii) unregistered warrants to purchase 1,489,575 shares of its common stock (the “June 2019 Warrants”) in a private placement, for total gross proceeds of $7.5 million (the “June 2019 Registered Direct Offering”). The June 2019 Registered Direct Offering closed on June 14, 2019. The June 2019 Warrants have an exercise price of $5.00 per share, became exercisable upon issuance and expire 5.5 years after the date of issuance. In connection with the June 2019 Registered Direct Offering, the Company granted to a placement agent warrants to purchase a total of 74,479 shares of common stock (“June 2019 Placement Agent Warrants”) that have an exercise price per share equal to $6.2938 and a term of five years.
In September 2019, the Company entered into a securities purchase agreement (the “September 2019 Purchase Agreement”) pursuant to which it sold (i) 1,318,828 registered shares of its common stock pursuant to the Shelf Registration Statement and (ii) unregistered warrants to purchase 659,414 shares of its common stock (the “September 2019 Warrants”) in a private placement, for total gross proceeds of $10.0 million (the “September 2019 Registered Direct Offering”). The September 2019 Registered Direct Offering closed on September 5, 2019. The September 2019 Warrants have an exercise price of $7.52 per share, became exercisable upon issuance and expire 5.5 years after the date of issuance. In connection with the September 2019 Registered Direct Offering, the Company granted to a placement agent warrants to purchase a total of 65,942 shares of common stock (“September 2019 Placement Agent Warrants”) that have an exercise price per share equal to $9.4781 and a term of five years.
In December 2020, the Company entered into a securities purchase agreement (the “December 2020 Purchase Agreement”) pursuant to which it sold (i) 2,618,658 registered shares of its common stock pursuant to the Shelf Registration Statement and (ii) unregistered warrants to purchase 2,618,658 shares of its common stock (the “December 2020 Warrants”) in a private placement, for total gross proceeds of $8.0 million (the “December 2020 Registered Direct Offering”). The December 2020 Registered Direct Offering closed on December 22, 2020. The December 2020 Warrants have an exercise price of $3.00 per share, became exercisable upon issuance and expire 5.5 years after the date of issuance. In connection with the December 2020 Registered Direct Offering, the Company granted to a placement agent warrants to purchase a total of 130,933 shares of common stock (“December 2020 Placement Agent Warrants”) that have an exercise price per share equal to $3.8188 and a term of five years. See Note 13.
15
13. Warrants
Common Stock Warrant transactions
In May 2020, several existing accredited investors exercised the June 2018 Warrants (the “May 2020 Warrant Exercise Transaction”) to purchase up to an aggregate of 1,392,345 shares of the Company’s common stock at a reduced exercise price of $4.90 per share for gross proceeds of $6.8 million. As consideration for the exercise of the June 2018 Warrants, the Company issued new unregistered warrants to purchase up to 1,392,345 shares of common stock (the “May 2020 Warrants”) at an exercise price of $4.775 per share with an exercise period of five years from the date of issuance. The May 2020 Warrants were valued at $4.4 million, which was calculated using the Black-Scholes Model with the following assumptions: volatility of 128 percent, stock price of $3.81, and risk-free rate of 0.38%. In connection with the May 2020 Warrant Exercise Transaction, the Company granted to a placement agent warrants to purchase a total of 69,617 shares of common stock (the “May 2020 Placement Agent Warrants”) that have an exercise price per share equal to $6.125 and a term of five years. The value of the May 2020 Placement Agent Warrants was determined to be $215,000 using the Black-Scholes Model. The Company recognized a gain on extinguishment of warrant liability in the amount of $47,000 associated with this transaction, during the quarter ended June 30, 2020.
In July 2020, an existing accredited investor exercised its March 2018 Warrants (the “July 2020 Warrant Exercise Transaction”) to purchase up to an aggregate of 641,416 shares of the Company’s common stock at a reduced exercise price of $3.975 per share for gross proceeds of $2.6 million. As consideration for the exercise of these March 2018 Warrants, the Company issued new unregistered warrants to purchase up to 641,416 shares of common stock (the “July 2020 Warrants”) at an exercise price of $3.85 per share with an exercise period of 5.5 years from the date of issuance. The July 2020 Warrants were valued at $2.1 million, which was calculated using the Black-Scholes Model with the following assumptions: volatility of 126 percent, stock price of $3.73, and risk-free rate of 0.35%. In connection with the July 2020 Warrant Exercise Transaction, the Company granted to a placement agent warrants to purchase a total of 32,071 shares of common stock (the “July 2020 Placement Agent Warrants”) that have an exercise price per share equal to $4.969 and a term of 5.5 years. The value of the July 2020 Placement Agent Warrants was determined to be $101,000 using the Black-Scholes Model. The Company recognized a loss on extinguishment of warrant liability in the amount of $682,000 associated with this transaction, during the quarter ended September 30, 2020.
Equity Classified Common Stock Warrants
In connection with professional services agreements with non-affiliated third party entities, during the six months ended June 30, 2021 and the year ended December 31, 2020, the Company issued service and performance warrants (“Service and Performance Warrants”).
16
As of June 30, 2021, the Company issued the following warrants to purchase shares of its common stock. These warrants are exercisable any time at the option of the holder until their expiration date.
|
|
Issuance Date
|
|
Term
|
|
Exercise
Price Per
Share
|
|
|
Warrants
Exercised
during the
Year Ended
December 31,
2020
|
|
|
Warrants
Outstanding at
December 31,
2020
|
|
|
Warrants
Exercised
during the
Six
Months Ended
June 30,
2021
|
|
|
Warrants
Outstanding at
June 30,
2021
|
|
January 2021 Placement Agent Warrants
|
|
January 2021
|
|
5.5 years
|
|
$
|
3.99
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
393,839
|
|
January 2021 Service and Performance Warrants
|
|
January 2021
|
|
2 years
|
|
$
|
3.08
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,500
|
|
December 2020 Warrants
|
|
December 2020
|
|
5.5 years
|
|
$
|
3.00
|
|
|
|
—
|
|
|
|
2,618,658
|
|
|
|
—
|
|
|
|
2,618,658
|
|
December 2020 Placement Agent Warrants
|
|
December 2020
|
|
5 years
|
|
$
|
3.82
|
|
|
|
—
|
|
|
|
130,933
|
|
|
|
—
|
|
|
|
130,933
|
|
July 2020 Warrants
|
|
July 2020
|
|
5.5 years
|
|
$
|
3.85
|
|
|
|
—
|
|
|
|
641,416
|
|
|
|
—
|
|
|
|
641,416
|
|
July 2020 Placement Agent Warrants
|
|
July 2020
|
|
5.5 years
|
|
$
|
4.97
|
|
|
|
—
|
|
|
|
32,071
|
|
|
|
—
|
|
|
|
32,071
|
|
May 2020 Warrants
|
|
May 2020
|
|
5 years
|
|
$
|
4.78
|
|
|
|
—
|
|
|
|
1,392,345
|
|
|
|
—
|
|
|
|
1,392,345
|
|
May 2020 Placement Agent Warrants
|
|
May 2020
|
|
5 years
|
|
$
|
6.13
|
|
|
|
—
|
|
|
|
69,617
|
|
|
|
—
|
|
|
|
69,617
|
|
March 2020 Service and Performance Warrants
|
|
March 2020
|
|
3 years
|
|
$
|
2.50
|
|
|
|
—
|
|
|
|
18,350
|
|
|
|
—
|
|
|
|
18,350
|
|
February 12, 2020 Service and Performance Warrants
|
|
February 2020
|
|
2 years
|
|
$
|
4.71
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
150,000
|
|
February 3, 2020 Service and Performance Warrants
|
|
February 2020
|
|
2 years
|
|
$
|
4.91
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
September 2019 Placement Agent Warrants
|
|
September 2019
|
|
5 years
|
|
$
|
9.48
|
|
|
|
—
|
|
|
|
65,942
|
|
|
|
—
|
|
|
|
65,942
|
|
August 2019 Service and Performance Warrants
|
|
August 2019
|
|
2 years
|
|
$
|
1.92
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
—
|
|
|
|
20,000
|
|
July 2019 Service and Performance Warrants
|
|
July 2019
|
|
2 years
|
|
$
|
2.19
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
10,000
|
|
June 2019 Placement Agent Warrants
|
|
June 2019
|
|
5 years
|
|
$
|
6.29
|
|
|
|
—
|
|
|
|
74,479
|
|
|
|
—
|
|
|
|
74,479
|
|
April 2019 Service and Performance Warrants
|
|
April 2019
|
|
5 years
|
|
$
|
6.18
|
|
|
|
—
|
|
|
|
145,154
|
|
|
|
—
|
|
|
|
145,154
|
|
June 2018 Placement Agent Warrants
|
|
June 2018
|
|
5 years
|
|
$
|
12.57
|
|
|
|
—
|
|
|
|
69,617
|
|
|
|
—
|
|
|
|
69,617
|
|
March 2018 Placement Agent Warrants
|
|
March 2018
|
|
5 years
|
|
$
|
41.56
|
|
|
|
—
|
|
|
|
15,038
|
|
|
|
—
|
|
|
|
15,038
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
5,463,620
|
|
|
|
—
|
|
|
|
5,864,959
|
|
17
Liability Classified Common Stock Warrants
Certain warrants contain a contingent cash payment feature and therefore were accounted for as a liability at the date of issuance and are adjusted to fair value at each balance sheet date. The change in fair value of the warrant liability is recorded as change in fair value of common stock warrant liabilities in the condensed consolidated statements of operations and comprehensive loss. The key terms and activity of the liability classified common stock warrants are summarized as follows:
|
|
Issuance Date
|
|
Term
|
|
Exercise
Price Per
Share
|
|
|
Warrants
Exercised
during the
Year Ended
December 31,
2020
|
|
|
Warrants
Outstanding at
December 31,
2020
|
|
|
Warrants
Exercised
during the
Six
Months Ended
June 30,
2021
|
|
|
Warrants
Outstanding at
June 30,
2021
|
|
January 2021 Warrants
|
|
January 2021
|
|
5.5 years
|
|
$
|
3.13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,938,392
|
|
September 2019 Warrants
|
|
September 2019
|
|
5.5 years
|
|
$
|
7.52
|
|
|
|
—
|
|
|
|
659,414
|
|
|
|
—
|
|
|
|
659,414
|
|
June 2019 Warrants
|
|
June 2019
|
|
5.5 years
|
|
$
|
5.00
|
|
|
|
—
|
|
|
|
435,830
|
|
|
|
—
|
|
|
|
435,830
|
|
June 2018 Warrants
|
|
June 2018
|
|
5.5 years
|
|
$
|
9.94
|
|
|
|
1,392,345
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
March 2018 Warrants
|
|
March 2018
|
|
5 years
|
|
$
|
10.73
|
|
|
|
641,416
|
|
|
|
641,416
|
|
|
|
—
|
|
|
|
641,416
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
2,033,761
|
|
|
|
1,736,660
|
|
|
|
—
|
|
|
|
5,675,052
|
|
See Note 5 for the Black-Scholes option-pricing model and weighted-average assumptions used to estimate the fair value of the warrant liabilities.
14. Stock-Based Compensation and Employee Stock Purchase Program
Stock Incentive Plans
The Company has two equity incentive plans: the 2006 Stock Plan (“2006 Plan”) and the 2015 Omnibus Equity Incentive Plan (“2015 Plan”).
In 2006, the Company adopted the 2006 Plan, which provided for the granting of stock options to executives, employees, and other service providers under terms and provisions established by the Board of Directors. The Company granted non-statutory stock options (“NSOs”) under the 2006 Plan until May 2015, when it was terminated as to future awards, although it continues to govern the terms of options that remain outstanding and were issued under the 2006 Plan. The 2015 Plan became effective upon the Company’s IPO in May 2015 and all shares that were reserved, but not issued, under the 2006 Plan were assumed by the 2015 Plan. Upon effectiveness, the 2015 Plan had 154,387 shares of common stock reserved for future issuance, which included 10,637 that were transferred to and assumed by the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant. In addition, shares subject to awards under the 2006 Plan that are forfeited or canceled will be added to the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options (“ISOs”), NSOs, restricted stock awards, stock units, stock appreciation rights, and other forms of equity compensation, all of which may be granted to employees, officers, non-employee directors, and consultants. The ISOs and NSOs will be granted at a price per share not less than the fair value at the date of grant. Options granted generally vest over a four-year period; however, the options granted in the third quarter of 2018 vest over two-year period, vesting monthly on a pro-rated basis. Options granted, once vested, are generally exercisable for up to 10 years, after grant.
In June 2019, the shareholders approved an amendment to the Company’s 2015 Plan for a one-time increase to the number of shares of common stock that may be issued under the 2015 Plan by 120,000 shares. On May 17, 2021, upon completion of the Arcadia Wellness transaction, the Company granted 248,000 inducement stock option pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. On May 28, 2021, the Company filed a registration statement on Form S-8 to register the issuance of shares upon exercise of these inducement stock options. The inducement options grants have been issued outside of the 2015 Plan, but the options are subject to the terms and conditions of the 2015 Plan. As of June 30, 2021, a total of 1,595,068 shares of common stock were reserved for issuance under the 2015 Plan, of which 141,304 shares of common stock are available for future grant. As of June 30, 2021, a total of 9,381 and 1,453,764 options are outstanding under the 2006 and 2015 Plans, respectively. As of December 31, 2020, a total of 19,172 and 870,587 options are outstanding under the 2006 and 2015 Plans, respectively.
18
The following is a summary of stock option information and weighted average exercise prices under the Company’s stock incentive plans (in thousands, except share data and price per share):
|
|
Shares
Subject to
Outstanding
Options
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding — Balance at December 31, 2020
|
|
|
889,759
|
|
|
$
|
14.46
|
|
|
$
|
240
|
|
Options granted
|
|
|
982,042
|
|
|
|
2.88
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
|
(115,720
|
)
|
|
|
3.52
|
|
|
|
|
|
Options expired
|
|
|
(44,936
|
)
|
|
|
128.45
|
|
|
|
|
|
Outstanding — Balance at June 30, 2021
|
|
|
1,711,145
|
|
|
$
|
5.56
|
|
|
$
|
138,915
|
|
Vested and expected to vest — June 30, 2021
|
|
|
1,683,195
|
|
|
$
|
5.58
|
|
|
$
|
138,563
|
|
Exercisable — June 30, 2021
|
|
|
612,570
|
|
|
$
|
9.86
|
|
|
$
|
2,690
|
|
Aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s common stock determined by our Board of Directors for each of the respective periods. The intrinsic value of options exercised was $0 for both quarters ended June 30, 2021 and 2020.
As of June 30, 2021, there was $2.5 million of unrecognized compensation cost related to unvested stock-based compensation grants that will be recognized over the weighted-average remaining recognition period of 3.26 years.
In determining the fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Expected Term—The expected term is the estimated period of time outstanding for stock options granted and was estimated based on a simplified method allowed by the SEC due to insufficient historical data, and defines the term as the average of the contractual term of the options and the weighted-average vesting period for all open employee awards.
Expected Volatility—The historical volatility data was computed using the daily closing prices for the Company’s shares during the equivalent period of the calculated expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free interest rate is based on the interest rate of U.S. Treasuries of comparable maturities on the date the options were granted.
Expected Dividend—The expected dividend yield is based on the Company’s expectation of future dividend payouts to common stockholders.
The fair value of stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumption:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
Expected term (years)
|
|
|
6.84
|
|
|
|
7.69
|
|
|
|
6.37
|
|
|
|
6.57
|
|
Expected volatility
|
|
122%
|
|
|
112%
|
|
|
122%
|
|
|
119%
|
|
Risk-free interest rate
|
|
1.06%
|
|
|
0.54%
|
|
|
0.81%
|
|
|
1.12%
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The Company recognized $0.3 million and $0.6 million of compensation expense for stock options awards for the three months ended June 30, 2021 and 2020, respectively. The Company recognized $0.7 million and $1.4 million of compensation expense for stock options awards for the six months ended June 30, 2021 and 2020, respectively.
19
Employee Stock Purchase Plan
The Company’s 2015 Employee Stock Purchase Plan (“ESPP”) became effective on May 14, 2015. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount of up to 15% of their eligible compensation through payroll deductions, subject to any plan limitations. After the first offering period, which began on May 14, 2015 and ended on February 1, 2016, the ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. As of June 30, 2021, the number of shares of common stock reserved for future issuance under the ESPP is 118,307. The ESPP provides for automatic annual increases in the shares available for purchase beginning on January 1, 2016. As of June 30, 2021, 43,660 shares had been issued under the ESPP. The Company recorded $8,000 and $28,200 of ESPP related compensation expense for the quarters ended June 30, 2021 and 2020, respectively.
15. Debt
Vehicle Loans
The Company entered into notes payable agreements to finance the purchase of company vehicles. The Company has various vehicle loans that mature in 2024 and have interest rates that range from 7.64% to 8.00%. As of June 30, 2021, the outstanding balance of vehicle loans was $122,000.
Paycheck Protection Program Note
On April 16, 2020, the Company borrowed $1.1 million and entered into a promissory note for the same amount (the “PPP Note”) under the Paycheck Protection Program (“PPP”) that was established under the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) of 2020. The PPP Note matures on April 16, 2022, bears an interest rate of 1.00% per year, with interest accruing monthly beginning on November 2, 2020. The Company may prepay the PPP Note at any time prior to maturity with no prepayment penalties. The principal amount of the PPP Note and accrued interest are eligible for forgiveness if the proceeds are used for qualifying expenses, including payroll, rent, and utilities during the eight-week period commencing on April 16, 2020. The Company will be obligated to repay any portion of the principal amount of the PPP Note that is not forgiven, together with accrued interest thereon, until such unforgiven portion is paid in full. The Company has applied for loan forgiveness and expects to complete the process within the required timeframe. No assurance is provided that the Company will obtain forgiveness of the PPP Note in whole or in part. As of June 30, 2021, the outstanding balance of the PPP Note was $1.1 million.
Promissory Note
On June 26, 2020, the Company executed a promissory note (the “Note") in the amount of $2.0 million, payable to MidFirst Bank, a federally chartered savings association (the "Lender"). The Note was issued in accordance with the terms of a Loan Agreement dated as of May 18, 2020 entered into by the Company and the Lender (the “Loan Agreement”) in which the Lender agreed to make advances to the Company from time to time, at any amount up to but not to exceed $2.0 million. Pursuant to the Loan Agreement, the Note accrued interest, adjusted monthly, at a rate equal to the greater of (i) 3.25% and (ii) the sum of (a) the quotient of the LIBOR Index divided by (one minus the reserve requirement set by the Federal Reserve), and (b) 2.50%. The Company was required to make monthly interest payments on the Note to the Lender and pay the full principal amount plus any accrued but unpaid interest outstanding under the Note no later than May 18, 2023. The Company and the Lender also entered into a Pledge and Security Agreement dated as of May 18, 2020 whereby the Company agreed to secure the Note by granting a security interest to the Lender for the Company’s deposit account held with and controlled by the Lender. Due to the lender’s control of the deposit account, the balance of $2.0 million is included in restricted cash on the condensed consolidated balance sheets as of December 31, 2020. As of June 30, 2021, there was no outstanding balance of the Note. On February 26, 2021, the Company repaid the full balance of $2.0 million, and on March 31, 2021, the line of credit was closed.
20
Maturities of current and noncurrent debt as of June 30, 2021, are as follows (in thousands):
Years ending December 31,
|
|
Amounts
|
|
Remainder of 2021
|
|
$
|
1,126
|
|
2022
|
|
|
36
|
|
2023
|
|
|
37
|
|
2024
|
|
|
27
|
|
2025
|
|
|
1
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,227
|
|
16. Income Taxes
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items that are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or as the tax environment changes.
The interim financial statement provision for income taxes is different from the amounts computed by applying the United States federal statutory income tax rate of 21%. The Company’s effective tax rate was -0.01% and -0.09% for the three months ended June 30, 2021 and 2020, respectively. The Company’s effective tax rate was -0.01% and -0.10% for the six months ended June 30, 2021 and 2020, respectively. The difference between the effective tax rate and the federal statutory rate of 21% was primarily due to the full valuation allowance recorded on the Company’s net deferred tax assets and foreign withholding taxes.
The Company experienced an ownership change under IRC Section 382 as a result of the common shares issued in connection with the June 2018 Offering. This ownership change limited the Company’s ability to utilize its net operating loss carryforwards prior to expiration and certain net operating loss carryforwards were written off as a result. The Company is currently conducting additional analysis regarding the valuation of the Company at the time of the ownership change to assess what, if any, portion of the limitation may be reversed. Any adjustment to the amount of limitation will not impact the deferred tax asset balance due to the full valuation allowance. Further, the Company may have experienced an ownership change under IRC Section 382 as a result of the common shares issued in connection with the December 2020 Purchase Agreement or in the January 2021 Purchase Agreement. Such an ownership change could limit the Company’s ability to utilize its NOL carryforwards prior to expiration but would not impact the net deferred tax asset recorded given the full valuation allowance.
During the six months ended June 30, 2021, there were no material changes to the Company’s uncertain tax positions.
17. Commitments and Contingencies
Leases
The Company leases office and laboratory space, greenhouse space, grain storage bins, warehouse space, farmland, and equipment under operating lease agreements having initial lease terms ranging from one to five years, including certain renewal options available to the Company at market rates. The Company also leases land for field trials on a short-term basis. See Note 11.
Legal Matters
From time to time, in the ordinary course of business, the Company may become involved in certain legal proceedings. The Company currently is not a party to any material litigation or other material legal proceedings.
Contingent Liability Related to the Anawah Acquisition
In June 2005, the Company completed its agreement and plan of merger and reorganization with Anawah, Inc. (“Anawah”), to purchase the Anawah’s food and agricultural research company through a non-cash stock purchase. Pursuant to the merger with Anawah, and in accordance with the ASC 805 - Business Combinations, the Company incurred a contingent liability not to exceed $5.0 million. This liability represents amounts to be paid to Anawah’s previous stockholders for cash collected on revenue recognized by the Company upon commercial sale of certain specific products developed using technology acquired in the purchase. As of June 30, 2021, the Company continues to pursue two development programs using this technology and believes that the contingent liability is probable. As a result, $2.0 million remains on the condensed consolidated balance sheets as an other noncurrent liability.
21
Contingent Liability Related to the ISI Acquisition
In August 2020, the Company acquired by merger Industrial Seed Innovations (ISI). A portion of the purchase price consideration for the acquisition in the amount of $280,000 will be recognized in two annual installments, each of up to 132,626 shares of the Company’s common stock, subject to the achievement of revenue milestones in 2021 and 2022. The contingent consideration of $280,000 was measured and recorded at fair value. As of June 30, 2021, the full amount of the contingent consideration is included in other noncurrent liabilities as no installments will become due within 12 months from the condensed consolidated balance sheets date. During the six months ended June 30, 2021 as a result of a remeasurement of the contingent consideration, a $140,000 decrease in the related liability was recorded as a change in fair value of contingent consideration on the condensed consolidated statements of operations and comprehensive loss.
Contracts
The Company has entered into contract research agreements with unrelated parties that require the Company to pay certain funding commitments. The initial terms of these agreements range from one to three years in duration and in certain cases are cancelable.
The Company licenses certain technologies via executed agreements (“In-Licensing Agreements”) that are used to develop and advance the Company’s own technologies. The Company has entered into various In-Licensing Agreements with related and unrelated parties that require the Company to pay certain license fees, royalties, and/or milestone fees. In addition, certain royalty payments ranging from 2% to 15% of net revenue amounts as defined in the In-Licensing Agreements are or will be due.
The Company could be adversely affected by certain actions by the government as it relates to government contract revenue received in prior years. Government agencies, such as the Defense Contract Audit Agency routinely audit and investigate government contractors. These agencies review a contractor’s performance under its agreements; cost structure; and compliance with applicable laws, regulations and standards. The agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. While the Company’s management anticipates no adverse result from an audit, should any costs be found to be improperly allocated to a government agreement, such costs will not be reimbursed, or if already reimbursed, may need to be refunded. If an audit uncovers improper or illegal activities, civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments or fines, and suspension or prohibition from doing business with the government could occur. In addition, serious reputational harm or significant adverse financial effects could occur if allegations of impropriety were made against the Company. There currently are routine audits in process relating to government grant revenues.
18. Net Loss per Share
Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per share attributable to common stockholders is computed giving effect to all potentially dilutive common shares, including common stock issuable upon exercise of stock options and warrants. As the Company had net losses for the three and six months ended June 30, 2021 and 2020, all potentially dilutive common shares were determined to be anti-dilutive.
Securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in shares):
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
Options to purchase common stock
|
|
|
1,711,145
|
|
|
|
996,615
|
|
|
|
1,711,145
|
|
|
|
996,615
|
|
Warrants to purchase common stock
|
|
|
11,540,011
|
|
|
|
4,418,618
|
|
|
|
11,540,011
|
|
|
|
4,418,618
|
|
Total
|
|
|
13,251,156
|
|
|
|
5,415,233
|
|
|
|
13,251,156
|
|
|
|
5,415,233
|
|
22
19. Related-Party Transactions
The Company’s related parties include Moral Compass Corporation (“MCC”) and the John Sperling Foundation (“JSF”). The rights to the intellectual property owned by Blue Horse Labs, Inc. (“BHL”) were assigned to its sole shareholder, the John Sperling Revocable Trust (“JSRT”) due to BHL’s dissolution and then subsequently to JSF. JSF is deemed a related party of the Company because MCC, one of the Company’s largest stockholder, and JSF share common officers and directors.
JSF receives a single digit royalty from the Company when revenue has been collected on product sales or for license payments from third parties that involve certain intellectual property developed under research funding originally from BHL. Royalty fees due to JSF were $33,000 and $80,000 as of June 30, 2021 and December 31, 2020, respectively, and are included in the condensed consolidated balance sheets as amounts due to related parties.
The Company currently leases land on the island of Molokai, Hawaii from an entity owned by Kevin Comcowich, the Chair of the Company’s Board of Directors, and his wife. The Company grows hemp on this land to support the operations of its joint venture Archipelago Ventures Hawaii. The original lease was executed in February 2019, covers 10 acres of land, has a term of two years and provides for rent payments of $1,200 per acre per year. During the quarter ended March 31, 2020, the Company engaged a third-party contractor to construct a fence on the property to adhere to the rules of the hemp pilot program. Out of pocket costs to build this fence were approximately $126,400. Mr. Comcowich supplied materials to the contractor and received payments from the contractor totaling approximately $44,000. In March and April 2020, the Company entered into two lease amendments for two additional 10-acre parcels and two additional 15-acre parcels, at the same lease rate of $1,200 per acre per year, and with a term of two years. The Company made lease payments in the amount of $42,000 and $48,000 for the six months ended June 30, 2021 and 2020, respectively.
20. Subsequent Events
Management has evaluated subsequent events through August 16, 2021, the date that the financial statements were available to be issued.
23