Arcadia Biosciences, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statement amounts below are in millions of dollars unless otherwise noted. The filing is unaudited; interim results are not necessarily indicative of full-year results.
Business context
Arcadia is an agricultural biotechnology trait company developing crop productivity and product-quality traits with commercial partners. Current revenue comes from Sonova safflower oil sales, licensing, contract research and government grants. The company says it does not expect sales of seeds incorporating its agricultural yield traits for at least three to five years.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $0.852 | $0.815 |
| Product revenue | $0.255 | $0.081 |
| License revenue | $0.152 | $0.158 |
| Contract research and government grants | $0.445 | $0.576 |
| Operating expenses | $5.785 | $4.526 |
| Loss from operations | ($4.933) | ($3.711) |
| Net loss | ($5.190) | ($5.803) |
| Net loss attributable to common stockholders | ($5.190) | ($7.695) |
| Net loss per share, basic and diluted | ($0.12) | ($3.71) |
| Cash used in operating activities | $4.855 | $2.598 |
Revenue rose 5% year over year, while operating expenses increased 28% and operating loss widened 33%. Product revenue grew 215%, driven by higher Sonova sales volume; cost of product revenue rose to $0.147 million, leaving product revenue less stated product cost of $0.108 million. The filing does not provide a consolidated gross margin measure. R&D increased 20% to $2.202 million, and selling, general and administrative expense rose 30% to $3.436 million. Net loss narrowed, but the comparison reflects $1.892 million of preferred-stock accretion and warrant deemed dividends in Q1 2015 that did not recur in 2016, as well as the prior-year derivative fair-value expense.
At March 31, 2016, cash and cash equivalents were $29.540 million, short-term investments $20.654 million and long-term investments $14.907 million, totaling approximately $65.1 million in cash and investments. Total current assets were $52.535 million versus current liabilities of $4.158 million. Total assets were $70.105 million and stockholders’ equity was $35.477 million. Cash increased $5.567 million during the quarter, largely because $10.465 million of investment sales and maturities generated investing cash; operating activities used $4.855 million.
Notes payable were $24.978 million, classified as long-term, under a Silicon Valley Bank facility. Interest-only payments are due through December 2017; principal amortization follows, with maturity on December 1, 2020 and a $0.600 million final payment. The loan is secured by substantially all company assets other than intellectual property. Arcadia reported compliance with the liquidity covenant at quarter-end: a minimum 1.4:1 liquidity ratio or 100% cash collateralization. Interest expense was $0.327 million, down 30% year over year.
Material changes and management commentary
- Product revenue increased, but contract research and grant revenue fell 23%, mainly because two contracts were completed in 2015; license revenue was down 4%.
- Higher R&D reflected increased in-licensing fees, contract research fees and field-trial activity. SG&A growth included severance, public-company accounting and legal costs, outside services and state franchise tax.
- Management states that R&D expense is expected to increase in absolute dollars for the foreseeable future. The company expects continued losses and may need additional financing; no specific numerical revenue or earnings guidance is provided.
- Following a pipeline-prioritization review, seven positions—about 8% of the workforce—were eliminated on April 22, 2016, after quarter-end. Management said resources would be reduced, eliminated or reallocated among development programs.
- Executive leadership had recently changed: the CEO and CFO were interim officers. Management cited risks from leadership transition and public-company costs.
- The company has never been profitable and reported an accumulated deficit of $137.116 million. It cautions that long development and regulatory timelines, field-trial outcomes, weather, partner execution, grant availability, competition and financing needs could affect results.
Other notable items and risks
- A $3.0 million contingent liability remains related to the 2005 Anawah acquisition; payment depends on cash collected from revenue on certain products. The company said the amount remained appropriate as it pursued three development programs.
- Arcadia owns 35% of Limagrain Cereal Seeds, whose investment carrying value was zero after equity-method losses. The joint venture had $20.0 million of debt to its majority owner, due July 15, 2016; Arcadia expected that lender to extend or provide further financing as needed.
- Verdeca, the soybean joint venture with Bioceres, is consolidated as a variable interest entity. Arcadia reported $40,000 of direct expenses and allocated overhead for the quarter.
- The company reported no material litigation and no material changes in contractual obligations. It identified no material changes to critical accounting estimates. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarter-over-quarter change in internal control over financial reporting.
- Arcadia’s investment portfolio is primarily high-credit-quality liquid securities; management said a 1% interest-rate movement would not significantly affect portfolio value. Interest-rate changes could still affect investment values.
Important facts for investors to verify
- Cash burn and the runway implied by cash, investments and ongoing operating losses; assess whether additional capital may be needed.
- Silicon Valley Bank debt terms, covenant headroom, security interests and the transition from interest-only payments to principal repayment.
- Progress and funding needs for the pipeline after the April workforce reductions, including the timing and prospects for regulatory approvals and commercialization.
- Revenue concentration and partner dependence, including the timing of grant awards, contract research work, milestones and any commercialization payments.
- The status of the Limagrain Cereal Seeds debt due in July 2016 and any effect of further financing or dilution on Arcadia’s 35% ownership.
- The $3.0 million Anawah contingent liability and whether the related development programs could lead to payments.