Arcadia Biosciences, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Arcadia develops agricultural biotechnology traits for food, feed and fiber crops, licenses traits to partners, conducts contract research and sells SONOVA GLA oil. It reports Verdeca, its jointly owned soybean-development venture, on a consolidated basis.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1.018 million | $0.852 million |
| Operating expenses | $4.981 million | $5.785 million |
| Operating loss | $(3.963) million | $(4.933) million |
| Net loss | $(4.216) million | $(5.190) million |
| Net loss per share, basic and diluted | $(0.10) | $(0.12) |
| Cash used in operating activities | $(4.530) million | $(4.855) million |
- Revenue rose 19%. Contract research and government grants increased 59% to $707,000, primarily due to a new 2017 research contract. Product revenue fell 20% to $205,000, mainly reflecting order timing; license revenue fell 30% to $106,000, primarily because of delayed expected launch dates for licensed yield traits.
- Operating expenses fell 14%, with lower R&D and selling, general and administrative costs, largely reflecting workforce reductions in 2016. Product gross profit was $99,000 on $205,000 of product revenue; the filing does not present an overall operating margin.
- At quarter-end, cash and cash equivalents were $7.559 million and short-term investments were $40.966 million. Current assets were $50.444 million versus current liabilities of $5.171 million. Total assets were $52.648 million.
- Debt was $25.175 million, including $2.083 million classified as current. Interest expense was $339,000. Stockholders’ equity was $18.371 million; accumulated deficit was $155.766 million.
- Investing activities provided $10.060 million, mainly from investment maturities and sales; financing activities provided $16,000. Cash increased by $5.546 million, primarily reflecting investment portfolio activity rather than operating cash generation.
Changes, outlook and risks
- Net loss narrowed 19% year over year as revenue grew and operating expenses declined. Operating cash use also decreased modestly.
- Management said existing cash, cash equivalents and short-term investments should cover anticipated cash requirements for at least 12 months. However, it expects that it will not meet the term-loan liquidity-ratio covenant within the next 12 months unless terms are renegotiated; the loan agreement alternatively requires cash collateral equal to 100% of obligations to the bank. Arcadia reported covenant compliance at March 31, 2017.
- Management reported a $25 million senior secured term loan, bearing interest at 0.90 percentage point above prime. Interest-only payments run through December 2017, followed by 36 monthly principal installments; maturity is December 1, 2020. Substantially all assets other than intellectual property secure the loan.
- Arcadia has never been profitable and expects substantial costs before trait-based seed products generate revenue. Management does not anticipate commercial product sales beyond SONOVA for at least three to five years; products arising from contract research are not expected to generate sales for at least two to four years.
- Regulatory delays pose a material development and commercialization risk. The company cited a pause in Indian approvals of GM-trait field trials and estimated delays of at least two to three years for a license partner’s programs there. Field-trial timing, growing seasons, weather, partner execution and uneven milestone/grant timing can also affect results.
- Management is prioritizing SONOVA market expansion, non-GM wheat quality and yield traits, and partner work on corn and soybean yield traits. No quantified financial forecast or formal earnings guidance is provided.
- A $3.0 million Anawah-related contingent liability remains recorded as a noncurrent liability; payment depends on cash collected from sales of specified products. The company said it considered the liability probable.
- The company expects to adopt the new revenue standard in Q1 2018 using the modified retrospective method and said it may materially affect license revenue; the impact was not yet concluded. Management reported no conditions raising substantial doubt about going concern for the year after the financial statements’ issuance.
Most important facts for investors to verify
- Progress on renegotiating the bank covenant or arranging the required collateral, and the resulting effect on usable liquidity.
- Cash burn, investment maturities and funding needs against the stated 12-month liquidity expectation.
- Timing and regulatory status of key partner programs, particularly GM traits and the cited India delays.
- Whether contract research and grant revenue is repeatable, and the timing of license milestones and commercial launches.
- The eventual effect of the 2018 revenue-recognition standard on license revenue and reported results.
- Developments affecting the $3.0 million contingent liability and the commercialization prospects of the related programs.