Arcadia Biosciences, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with Q1 2014; balance-sheet figures compare March 31, 2015 with December 31, 2014. Arcadia develops and licenses agricultural biotechnology traits, relying on commercial partners for much of product development and commercialization. It reported more than 50 products in development and 13 in advanced development or on the market. Sonova safflower oil was its principal commercial product; management said it did not expect meaningful seed-trait product sales for at least three to five years.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q1 2015 | Q1 2014 / prior balance-sheet date |
|---|---|---|
| Revenue | $0.815 | $1.377 |
| Operating loss | $(3.711) | $(2.582) |
| Net loss | $(5.803) | $(3.476) |
| Net loss attributable to common stockholders | $(7.695); $(3.71) per share | $(3.476); $(1.69) per share |
| Cash used in operating activities | $(2.598) | $(2.126) |
| Cash and cash equivalents | $11.278 | $16.571 |
| Total assets | $19.420 | $24.889 |
| Total liabilities | $26.719 | $26.774 |
Revenue comprised $0.081 million product, $0.158 million license, and $0.576 million contract research and government grants. Product cost was $0.056 million, leaving $0.025 million product gross profit; the filing does not provide a consolidated gross-margin measure. Current assets were $12.373 million and current liabilities $12.056 million at quarter-end. Accumulated deficit was $119.773 million, and stockholders’ deficit was $91.875 million.
Quarter-end debt included an $8.0 million related-party note, $1.670 million of promissory notes, and $3.281 million of convertible notes; derivative liabilities related to convertible notes were $2.979 million. The company used $0.007 million in investing activities and $2.688 million in financing activities. Financing outflows included $1.452 million of debt payments and $1.238 million of deferred IPO costs.
Material changes versus Q1 2014
- Revenue fell 41%, primarily because a contract research project and government grant project had been completed during 2014. Product revenue declined 40%; license revenue declined 10%.
- Operating expenses rose 14% to $4.526 million. R&D declined 8%, while SG&A rose 40% to $2.638 million, reflecting public-company preparation costs, audit and consulting fees, and stock compensation.
- Net loss increased 67%. Other expense was $1.396 million, primarily from a noncash increase in the fair value of convertible-note derivative liabilities; Q1 2014 other expense was $0.021 million. Q1 2015 common-stockholder loss also included $1.695 million of preferred-stock accretion and a $0.197 million deemed warrant dividend.
- Cash decreased by $5.293 million during the quarter. Operating cash use increased from $2.126 million to $2.598 million.
Outlook, risks, and unusual or subsequent events
- Management expected existing quarter-end cash, the subsequent IPO proceeds, and the new term loan facility to fund anticipated needs for at least 12 months. It also said it may seek further financing, partner arrangements, or grants; additional equity could dilute holders.
- After quarter-end, Arcadia borrowed $20 million under a senior secured term loan facility and used proceeds in part to repay the $8 million related-party note and approximately $1.6 million of unrelated-party promissory notes, plus interest and prepayment fees. The loan bears interest at the greater of 9% or three-month LIBOR plus 8.74%, is secured by substantially all assets, and includes covenants tied to quarterly revenue targets or cash balances. Principal and interest are scheduled to be repaid by November 1, 2018.
- In May and June 2015, Arcadia completed its IPO and over-allotment sale of 8,528,306 shares at $8 per share, receiving approximately $58.3 million net proceeds. Preferred shares converted into 32,972,792 common shares; the filing’s Q1 financial statements do not reflect the IPO. A one-for-four reverse split took effect May 8, 2015.
- Key business risks include long and uncertain development and regulatory timelines, dependence on collaborators and grant funding, limited current product revenue, competition, weather and field-trial outcomes, consumer and regulatory resistance to GM crops, and potential future financing needs. Management expects R&D and public-company costs to rise; revenue and milestone timing may fluctuate.
- Arcadia reported no material litigation. Management concluded disclosure controls were effective at a reasonable assurance level; it also disclosed ongoing work to improve IT access controls following a prior significant deficiency.
Important facts for investors to verify
- Actual cash runway and compliance with the secured loan’s revenue-or-cash covenants, including the impact of interest and end-of-term payments.
- Use of IPO proceeds and any further financing or dilution.
- Progress, regulatory status, partner commitments, and commercialization prospects for the development pipeline and Sonova products.
- Revenue concentration and variability in grants, contract work, license milestones, and customer orders.
- Convertible-note and derivative-liability terms, inventory valuation and reserves, and remediation of IT access controls.
- Post-IPO share count, preferred-stock conversion, reverse-split-adjusted figures, and potential dilution from options and other securities.