Arcadia Biosciences, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Arcadia develops crop traits and commercial products, primarily in hemp, wheat and soybean, monetizing them through product sales, licensing and royalties.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $0.309 | $0.158 |
| Operating expenses | $6.099 | $4.376 |
| Operating loss | $(5.790) | $(4.218) |
| Net income (loss) | $2.423 | $(12.612) |
| Net income (loss) attributable to common stockholders | $2.525 | $(12.612) |
| Cash used in operating activities | $(9.270) | $(3.969) |
- Revenue comprised product sales of $154,000, license revenue of $100,000, royalties of $30,000 and contract research and grants of $25,000. Product revenue was mainly SONOVA orders; license revenue reflected milestone achievement, and royalties included a minimum annual royalty.
- Operating expenses rose 39%: research and development increased 49% to $2.244 million, and selling, general and administrative expense increased 32% to $3.723 million. Management attributed the increases mainly to employee costs, hemp-related research, consulting and consultants’ stock compensation.
- Reported net income chiefly reflects an $8.161 million noncash gain from revaluing warrant liabilities. Excluding this accounting gain, the company had a substantial operating loss; the filing does not present an adjusted earnings measure.
- Cash and cash equivalents were $12.973 million and short-term investments were $3.045 million at March 31, 2020, down from $25.332 million combined at December 31, 2019. Current assets were $23.758 million and current liabilities $5.808 million. Investing activities provided $13.130 million, primarily from investment maturities and sales; financing activities provided $0.696 million, including a $0.689 million contribution from Archipelago’s non-controlling partner.
- Total liabilities were $20.025 million, including $0.161 million of notes payable, $5.838 million of operating lease liabilities and $6.775 million of common-stock warrant liabilities. The company reported an accumulated deficit of $204.646 million.
Material changes and unusual items
- Revenue nearly doubled year over year, but remained small relative to operating costs. Product revenue rose 44%; contract research and grant revenue fell 51% as prior agreements and grants ended. Arcadia said it did not intend to continue pursuing those projects.
- Inventory increased to $6.244 million from $2.158 million at year-end, including a $59,000 wheat inventory write-down. The inventory increase was a significant use of operating cash.
- A Davis office lease amendment and expected renewal added $3.836 million to the right-of-use asset and lease liability; the lease term now extends through April 2025, with a renewal option.
- Warrant-liability fair-value changes are sensitive to share price and valuation assumptions. The company used Level 3 inputs, including weighted-average volatility of 126.9%.
Liquidity, outlook and risks
- Going concern: Management said available cash, cash equivalents and investments were insufficient for anticipated cash requirements for at least the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. The company may seek debt or equity financing or partner arrangements; it warned that financing may not be available on acceptable terms and that spending cuts or program curtailments could be required.
- COVID-19: Management reported slower hemp-seed purchasing decisions amid economic uncertainty and wheat food companies prioritizing production over research and development evaluations. The pandemic could further disrupt business, supply chains, financing access and commercial activity.
- Commercial and regulatory outlook: China’s import approval is required for commercial launch of HB4 soybean. Approval had been expected in late 2020, but the company said the timing was under review because of COVID-19. Hemp sales, field trials and agricultural milestones are exposed to seasonality, weather, regulation and market demand. The filing provides no quantitative revenue or earnings guidance.
- Subsequent event: In April 2020, Arcadia borrowed $1.1 million under the Paycheck Protection Program at 1% interest. Forgiveness is conditional on employee and compensation levels and use of proceeds for qualifying purposes.
- The company reported no material litigation and stated that disclosure controls and procedures were effective. It reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Arcadia secures enough financing to address the stated going-concern uncertainty, and the timing, terms and dilution or repayment implications.
- Cash burn and cash runway, especially given $9.270 million of operating cash use in Q1 and the substantial inventory build.
- How much reported earnings depend on noncash warrant revaluations versus recurring product, license and royalty economics.
- Commercial demand and margin potential for GoodHemp and GoodWheat, and progress on HB4 soybean regulatory approval in China.
- Whether COVID-19, crop-season timing, inventory valuation and the expanded lease or other commitments materially alter liquidity needs.