Arcadia Biosciences, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. Arcadia develops and commercializes crop traits and products focused primarily on hemp, wheat, and soybean.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $0.314 | $0.392 | $0.904 | $0.753 |
| Operating loss | $(7.581) | $(6.193) | $(20.247) | $(15.392) |
| Net loss | $(7.165) | $(14.187) | $(14.634) | $(22.562) |
| Net loss attributable to common stockholders | $(6.391) | $(14.187) | $(13.553) | $(22.562) |
| Basic and diluted loss per share | $(0.60) | $(2.04) | $(1.42) | $(4.03) |
- Revenue and margins: Q3 revenue declined 20% year over year; nine-month revenue rose 20%. Product revenue increased, while contract research and grant revenue declined. Cost of product revenue was $1.841 million in Q3 and $3.463 million year to date, exceeding revenue in both periods; reported gross loss was approximately $1.527 million for Q3 and $2.559 million year to date. Cost included inventory write-downs.
- Cash flow: Operating cash use was $23.467 million for the first nine months, versus $12.186 million a year earlier. Investing activities provided $14.428 million, principally from investment maturities; financing provided $12.824 million, including warrant exercises and borrowings. Cash, cash equivalents and restricted cash ended the period at $12.202 million.
- Balance sheet: September 30 cash and cash equivalents were $10.201 million; short-term investments were nil, versus $16.915 million at year-end 2019. Restricted cash was $2.001 million, pledged in connection with a bank note. Current assets were $21.194 million and current liabilities $8.408 million. Total debt was $3.253 million; total liabilities were $21.875 million and stockholders’ equity $12.002 million.
- Share dilution: Common shares outstanding increased to 10.832 million from 8.646 million at December 31, 2019. At quarter-end, 4.451 million warrants and approximately 0.981 million options were outstanding; these were excluded from diluted loss per share as anti-dilutive.
Material changes and notable events
- Q3 product revenue increased 13%, mainly from GoodWheat and higher SONOVA pet-food orders. Nine-month product revenue increased 30%; license and royalty revenue also increased from a low base, while contract research and grant revenue fell as agreements and grants ended.
- Operating expenses increased 20% in Q3 and 31% year to date. Higher product costs included a $1.3 million write-off of Archipelago hemp plants and biomass following regulatory changes; the company also wrote down developmental hemp seed inventory. Total inventory and prepaid production-cost write-downs were $3.063 million year to date.
- Arcadia acquired Industrial Seed Innovations (ISI) in August for estimated consideration of $1.212 million: $0.5 million cash, $0.432 million in shares issued, and up to $0.280 million in milestone-based future share payments. The acquisition added hemp seed varieties and breeding assets.
- Warrant fair-value changes materially affected reported losses: a $1.130 million gain in Q3 2020 compared with a $7.777 million loss in Q3 2019; a $6.212 million gain year to date compared with a $6.790 million loss. These are noncash valuation effects. The 2020 periods also included warrant-extinguishment losses.
- On November 12, 2020, after quarter-end, Arcadia agreed to sell its Verdeca interests and license specified traits to Bioceres Crop Solutions. Consideration included $5 million cash and 1.875 million BIOX shares, plus $1 million in five monthly payments, $2 million subject to commercial-planting or China-approval conditions, and royalties on specified sales. Some BIOX shares are restricted and 625,000 shares are subject to a potential clawback tied to third-party rights.
Outlook, risks, and contingencies
- Going concern: Management stated that cash and investments were insufficient for anticipated needs through at least November 2021 and that substantial doubt existed about the company’s ability to continue as a going concern. The filing says additional financing or partnerships may be needed; without adequate funding, Arcadia may have to reduce spending, delay or curtail programs, or take other adverse measures.
- Hemp regulatory exposure: A DEA interim final rule and expiration of Hawaii’s pilot program led Archipelago to temporarily cease operations in its current configuration. The company destroyed plants and disposed of biomass before the rules took effect and said it would monitor whether and how to re-enter the market.
- COVID-19 and commercialization: Management reported slower hemp-seed purchasing decisions and reduced wheat-customer R&D evaluation. The pandemic could also delay China’s approval of HB4 soybean, which the filing identifies as required for commercial launch. No quantified financial guidance was provided.
- Other commitments: Arcadia had $1.25 million of minimum funding commitments under a research and development agreement, including $0.5 million due in the remainder of 2020. A $1.1 million PPP loan remained outstanding; the company intended to seek forgiveness, but forgiveness was not assured. The filing also reports a $2.0 million Anawah-related contingent liability.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter. The company reported no material litigation.
Key facts for investors to verify
- Available liquidity and cash runway, including the effect and timing of the post-quarter Verdeca transaction proceeds, BIOX share restrictions, conditional payments, royalties, and potential clawback.
- Whether Arcadia can secure additional financing and address the disclosed going-concern uncertainty; distinguish unrestricted cash from the $2.001 million restricted balance.
- The duration and financial impact of Archipelago’s suspension, hemp regulatory requirements, and further inventory write-down or commercialization risk.
- Progress on China’s HB4 soybean approval and the timing and conditions for related commercialization and milestone or royalty receipts.
- Underlying operating trends excluding noncash warrant revaluations and unusual inventory write-offs, alongside the substantial potential dilution from outstanding warrants, options, and future share issuance.