Arcadia Biosciences, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statement amounts are in millions of dollars unless otherwise indicated. The statements are unaudited.
Business context
Arcadia develops agricultural biotechnology traits intended to improve crop yield and product quality, primarily through collaborations and licensing. It reported more than 50 products in development and 13 in advanced development or on the market. Its only material product sales to date were from Sonova safflower oil; management expected seed-trait products to take several years to reach commercialization. Arcadia completed its IPO in May 2015, including the underwriters’ over-allotment sale in June, and converted all outstanding preferred stock into common stock.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.430 | $1.305 | $2.245 | $2.682 |
| Operating expenses | $4.977 | $6.304 | $9.503 | $10.262 |
| Operating loss | $(3.547) | $(4.999) | $(7.258) | $(7.580) |
| Net loss | $(3.677) | $(5.811) | $(9.480) | $(9.287) |
| Net loss attributable to common stockholders | $(4.556) | $(6.329) | $(12.251) | $(9.805) |
| Net loss per share, basic and diluted | $(0.19) | $(3.08) | $(0.94) | $(4.77) |
Revenue mix: Q2 product revenue was $0.179, license revenue $0.401, and contract research and government grants $0.850. For the first half, the respective amounts were $0.260, $0.559, and $1.426. Consolidated gross margin was not separately presented.
Cash flow and liquidity: First-half operating cash use was $6.582, investing cash use $0.023, and financing cash provided $70.037. Cash and cash equivalents rose to $80.003 at June 30, from $16.571 at December 31, 2014. Management said available cash, including IPO and term-loan proceeds, was expected to cover anticipated requirements for at least 12 months.
Debt and balance sheet: Total liabilities were $37.062 and stockholders’ equity was $47.926 at June 30. The company had $19.349 of term-loan debt, $3.456 of current convertible promissory notes, and $2.688 of derivative liabilities related to those notes. It drew $20.0 under a senior secured term loan in April and used proceeds in part to repay prior loans. The new loan bears interest at the greater of 9% or three-month LIBOR plus 8.74%, is secured by substantially all company assets, and has an additional $0.6 end-of-term payment. The company reported compliance with its covenants at quarter-end.
Changes versus the prior comparable period
- Q2 revenue increased 10%; first-half revenue decreased 16%, principally because contract research and grant revenue declined after projects completed in 2014 and because of project timing.
- Q2 operating loss narrowed by $1.452, and net loss narrowed by $2.134. Lower operating expenses—especially SG&A—contributed; Q2 SG&A was down 30%, partly because 2014 included Series D financing fees.
- First-half operating loss improved by $0.322, but net loss increased by $0.193. Higher interest expense and a $0.661 net other expense offset the operating improvement.
- First-half interest expense rose to $1.242, mainly reflecting the new $20.0 term loan and prepayment fees on retired facilities. Other expense included a $1.108 loss from remeasuring convertible-note derivatives, partly offset by a $0.437 gain when IPO-related warrant and derivative liabilities expired.
- Cash increased substantially following the IPO and new borrowing. The IPO issued 8,528,306 shares at $8.00 each and generated approximately $58.3 net proceeds. Preferred-stock conversion and the IPO materially increased shares outstanding; 43,581,695 shares were outstanding at June 30.
Outlook, risks, and unusual items
- Management expected ongoing losses and substantial development costs, with commercial seed-trait revenue several years away. It said R&D expenses and public-company costs could increase; no quantified earnings or revenue guidance was provided.
- Revenue is subject to irregular milestone timing, grant availability, project schedules, customer orders, and agricultural seasonality. Management noted that the business’s seasonality was difficult to assess at this early stage.
- Key risks include long and uncertain development and regulatory timelines; unsuccessful field trials or weather impacts; reliance on collaborators for development and commercialization; customer and government-funding concentration; consumer and regulatory resistance to genetically modified crops; competition; and potential need for additional financing.
- The $20.0 term loan has revenue-or-cash covenants, substantial-asset collateral, prepayment fees, and acceleration remedies upon default. The loan agreement was amended in July 2015 to include certain intellectual property rights.
- Arcadia disclosed a $3.0 contingent liability related to the Anawah acquisition, payable upon specified commercial sales. It also disclosed that a joint-venture partner’s $15.5 debt to LCS had a maturity subsequently extended to October 15, 2015; Arcadia’s investment in LCS was carried at zero.
- The company reported no material litigation, effective disclosure controls at the reasonable-assurance level, and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating cash use and the stated minimum 12-month liquidity outlook remain consistent with the company’s development spending and future financing needs.
- Loan terms, covenant compliance, collateral coverage, and any subsequent amendments or repayment obligations.
- Progress, regulatory status, milestone timing, and commercial prospects for key traits and collaborations, including Verdeca and LCS.
- Revenue concentration and variability, particularly the contribution and renewal prospects of grants, contract research, and major collaborators.
- Potential dilution from outstanding options and warrants, future equity issuance, and shares eligible for sale after IPO lock-up expiration.