Arcadia Biosciences, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context
Arcadia develops agricultural traits and food ingredients using gene editing and breeding. Its portfolio includes SONOVA safflower oil, GoodWheat wheat traits, crop productivity traits, and a hemp-focused unit, Arcadia Specialty Genomics (ASG). The company reported limited product revenue and remains focused on research, development, and commercialization.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0.203 | $0.436 | $0.361 | $0.650 |
| Operating loss | $(4.981) | $(4.578) | $(9.200) | $(8.417) |
| Net income (loss) | $4.238 | $(6.669) | $(8.375) | $(17.284) |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $(8.429) | $(6.918) |
- Q2 revenue fell 53%, principally because there was no comparable license milestone and contract research and grant revenue declined. Six-month revenue fell 44%. Product revenue was $0.162 million in Q2 and $0.269 million for the half-year.
- Q2 net income resulted primarily from a $9.482 million noncash gain from remeasuring warrant liabilities, not from operating performance. The company remained loss-making for the first half.
- Research and development and selling, general and administrative expenses rose 9% and 7%, respectively, in Q2; for the half-year they rose 8% and 7%.
- At June 30, cash and equivalents were $14.646 million and short-term investments were $5.381 million, versus $11.998 million and $9.825 million at year-end 2018. Current assets were $22.0 million and current liabilities $4.157 million.
- Total liabilities were $17.060 million, including $8.294 million of warrant liabilities, $2.203 million of operating lease liabilities and a $3.0 million contingent liability related to the Anawah acquisition. No conventional borrowing balance is shown. Stockholders’ equity was $8.286 million, down from $12.815 million.
- Financing provided $6.865 million of cash in the first half, including the June 2019 offering. That offering generated $7.5 million gross and approximately $6.9 million net proceeds; Arcadia issued 1,489,575 shares and warrants for the same number of shares.
Changes, outlook and notable items
- Management said existing cash, cash equivalents and investments would be insufficient for anticipated cash needs through at least August 2020, raising substantial doubt about the company’s ability to continue as a going concern. It may seek further equity, debt or partnership funding; absent adequate funding, spending reductions or curtailment of programs may be necessary.
- Management expects contract research and government grant revenue to continue declining as projects end without replacement. It expects to market GoodWheat products in the latter part of 2019 and described commercialization-related spending as increasing.
- ASG reported an initial hemp harvest in Hawaii and continued breeding and seed-development work. Management said seed sales could begin as soon as spring 2020. A subsequent joint venture with Legacy Ventures Hawaii, Archipelago Ventures, committed a combined initial $5 million in capital; initial sales were expected in late 2019. The filing does not specify Arcadia’s individual contribution.
- Warrants issued with the 2018 and 2019 financings are recorded as liabilities and remeasured at fair value. Their valuation produced substantial, volatile noncash gains or losses and materially affected reported net income.
- Patent matters include an infringement complaint by Arista Cereal Technologies and Bay State Milling, with time to serve extended amid settlement discussions, and a separate USPTO interference concerning Resistant Starch Wheat, with a decision not expected until mid-2021. A prior, separate appeal was decided in Arcadia’s favor in August 2019, terminating that proceeding and leaving Arcadia’s patent in place.
- The filing reports no material change in internal control over financial reporting and says disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the company secures sufficient financing to address the disclosed going-concern uncertainty, and the resulting dilution or debt obligations.
- Operating cash burn, cash and investment balances, and actual timing of any required additional capital.
- Commercial progress and revenue conversion for GoodWheat, hemp and other products, compared with management’s stated timelines.
- The outcome and potential cost of the patent litigation and USPTO proceedings.
- The size and terms of potential dilution from outstanding warrants and options; the filing reports 4,469,040 warrants and 710,718 options outstanding at June 30, 2019.
- Future effects of warrant-liability fair-value changes, which can significantly distort quarterly net income.