Arcadia Biosciences, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Arcadia develops agricultural biotechnology traits and markets SONOVA GLA oil; most revenue came from research contracts, government grants and licensing. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $0.589 | $1.075 | $2.598 | $2.648 |
| Operating expenses | $4.204 | $5.002 | $13.913 | $15.797 |
| Operating loss | $(3.615) | $(3.927) | $(11.315) | $(13.149) |
| Net loss | $(4.525) | $(4.175) | $(12.747) | $(13.916) |
| Net loss per share | $(0.11) | $(0.09) | $(0.29) | $(0.31) |
| Operating cash used | Not provided by quarter | Not provided by quarter | $(11.282) | $(12.778) |
- Q3 revenue fell 45%, driven by lower contract research and grant revenue (down 52%), lower license revenue (down 34%) and lower product revenue (down 20%). Management attributed the grant/research decline mainly to completion of a four-year grant; license revenue was affected by delayed expected launches of licensed traits.
- Nine-month revenue was down 2%: product revenue rose 14% to $0.482 million, license revenue fell 31% to $0.353 million, and contract research and grant revenue rose 3% to $1.763 million.
- Lower R&D and SG&A expenses improved operating results year over year. Q3 net loss nevertheless widened, principally because of a $0.900 million debt-extinguishment loss; nine-month net loss narrowed.
- Product gross profit was $0.042 million in Q3 and $0.220 million for the nine months, implying product gross margins of approximately 51% and 46%, respectively. These figures cover product sales only, not the company as a whole.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $2.930 million and short-term investments were $12.767 million, totaling $15.697 million. Total assets were $18.978 million; stockholders’ equity was $10.667 million.
- Current liabilities were $2.520 million. Unearned revenue totaled $3.417 million, including $0.626 million current. Other noncurrent liabilities included a $3.000 million contingent liability tied to the Anawah acquisition.
- Arcadia repaid its $25.0 million Silicon Valley Bank term loan in July, plus a $0.500 million prepayment fee and $0.625 million end-of-term fee. Debt was zero at quarter-end; the payoff generated a $0.900 million accounting loss. The company reported covenant compliance at payoff.
- Nine-month investing cash inflow of $38.300 million largely reflected investment maturities and sales; financing cash outflow of $26.101 million primarily reflected loan repayment and extinguishment costs. Cash increased $0.917 million from year-end, while cash plus investments fell from $50.560 million at December 31, 2016.
- Going concern: Management said existing cash and investments were insufficient for anticipated cash requirements over at least the next 12 months. The filing states the balance compared with anticipated operating cash use through November 2018 raises substantial doubt about the company’s ability to continue as a going concern. Management planned to seek financing, asset sales or out-licensing, and partner funding; success was not assured.
Outlook, developments and risks
- Management described regulatory delays for GM traits, including lack of field-trial approvals in India for two years, as delaying partner development and commercialization timelines. Arcadia was reviewing its licensing portfolio and expected to complete the review and any related mutual terminations before year-end 2017; terminated agreements could result in recognition of previously deferred upfront fees.
- Near-term priorities included expanding SONOVA GLA markets, advancing non-GM wheat quality and yield traits, and working with partners on corn and soybean yield traits. Arcadia received FDA approval for SONOVA safflower oil use in dog diets in August 2017 and obtained a research-use license for CRISPR-Cas9 technology.
- Verdeca received a U.S. FDA approval in 2017; regulatory applications were pending in Uruguay, China and with the USDA. An August 2017 wheat-quality collaboration provides for shared research costs and profits, with no guarantee of technical or commercial success.
- Management stated it did not expect seed-trait product sales for at least three to five years; another discussion indicates products arising from contract research may not generate sales for at least two to four years. Commercialization timing therefore remains uncertain.
- Arcadia expected to adopt revenue standard ASC 606 in Q1 2018 using the modified retrospective method. It anticipated a significant accounting impact for upfront license fees, which would generally be recognized at a point in time rather than over the estimated commercialization period; annual and milestone fees would depend on whether consideration was probable not to reverse.
- Nasdaq had granted until February 12, 2018 to regain compliance with the $1 minimum bid-price requirement. Failure could lead to delisting. The filing also reported a separate minimum public-float market-value deficiency. No material litigation was reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Available liquidity, actual cash burn and the timing and terms of any new financing or partnership funding.
- Progress toward Nasdaq bid-price compliance by February 12, 2018 and resolution of the public-float listing deficiency.
- Outcomes of the license-portfolio review, including any terminations and resulting revenue recognition.
- Regulatory milestones, partner diligence and commercialization timelines for GM and non-GM traits.
- The eventual ASC 606 transition adjustment and its effect on reported license revenue and retained earnings.