Arcadia Biosciences, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
Arcadia is an agricultural biotechnology trait company developing crop yield and product-quality traits, largely through collaborators and joint ventures. Revenue remains primarily from licensing, contract research and government grants; commercial seed products incorporating its yield traits are still in development. The filing says meaningful revenue from those products may be several years away, if achieved.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.075m | $1.823m | $2.648m | $4.068m |
| Operating loss | $(3.927)m | $(4.235)m | $(13.149)m | $(11.493)m |
| Net loss | $(4.175)m | $(4.619)m | $(13.916)m | $(14.099)m |
| Net loss per share | $(0.09) | $(0.11) | $(0.31) | $(0.72) |
| Operating cash used | — | — | $(12.778)m | $(11.163)m |
- Q3 revenue fell 41% year over year, mainly because contract research and grant revenue declined 49% to $0.755m after certain prior-year projects ended. Nine-month revenue declined 35%; contract research and grants were down 41%, and license revenue was down 34%. Product revenue increased 10% for the nine months to $0.422m.
- Q3 operating expenses were $5.002m, down 17% year over year, including R&D of $2.255m (down 29%) and SG&A of $2.687m (down 5%). For the nine months, operating expenses rose 2% to $15.797m; lower R&D was offset by higher SG&A, including severance from an earlier reduction in force.
- Gross profit on product revenue was $0.042m in Q3 and $0.180m for the nine months, based on reported product revenue less product costs. Overall operating and net margins remained substantially negative.
- At September 30, cash and cash equivalents were $10.473m, short-term investments $43.413m and long-term investments $3.479m: approximately $57.4m in cash and investments combined. Total assets were $61.586m; total liabilities $34.075m; stockholders’ equity $27.511m.
- Notes payable were $25.077m, classified as long-term. The December 2015 Silicon Valley Bank facility bears interest at prime plus 0.90%, requires interest-only payments through December 2017, and matures December 1, 2020; it includes a $625,000 final payment and prepayment fees. Substantially all company assets other than intellectual property secure the loan. The company reported covenant compliance at quarter-end.
- Current liabilities were $3.825m versus current assets of $55.675m. Management stated that existing cash and cash equivalents were sufficient for anticipated cash requirements for at least 12 months. The filing also warns that additional financing may be needed and could dilute shareholders or impose restrictive debt terms.
Material changes, outlook and risks
- Nine-month net loss improved slightly from $14.099m to $13.916m, while operating loss worsened by $1.656m as revenue contracted and total operating expenses increased. The smaller 2016 loss attributable to common shareholders also reflects the absence of 2015 preferred-stock accretion and a nonrecurring warrant-related deemed dividend.
- Interest expense declined to $0.985m for the nine months from $2.008m, primarily following the December 2015 refinancing. Operating cash use increased to $12.778m; cash and cash equivalents fell $13.5m from year-end 2015. Investing cash use was $1.104m and financing provided $0.382m.
- No specific revenue, earnings or cash-flow guidance is provided. Management expects revenue to fluctuate with project timing, grant funding, license milestones and agricultural seasons; it expects continued losses and substantial development spending. R&D may increase as programs advance or the company takes on more regulatory or commercialization work.
- Key business risks include long and uncertain development and regulatory timelines, field-trial and weather risks, dependence on collaborators to develop and commercialize traits, concentration in grant and contract revenue, competition, and consumer or regulatory resistance to genetically modified crops. Management cited delays to certain development programs in India.
- The company carries a $3.0m noncurrent contingent liability from the Anawah acquisition, considered probable and tied to future commercial sales of specified products. Its 35% investment in Limagrain Cereal Seeds (LCS) is carried at zero after equity-method losses; LCS had $23.3m of debt owed to its majority owner, maturing January 15, 2017. Arcadia said it expected further financing, an extension or recapitalization; its exposure is limited to contributed capital, though it may contribute its pro rata share or accept dilution.
- Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No material litigation was reported. A Nasdaq independent-director compliance issue disclosed after two director resignations was addressed by an October 30, 2016 appointment; the company expected Nasdaq to confirm compliance.
Important facts for investors to verify
- Whether cash burn and operating commitments remain consistent with management’s stated 12-month liquidity expectation, and what financing actions may be required.
- Progress and timing of partner-led development, field trials and regulatory approvals, particularly the cited India delays, and whether milestones or commercial revenues are achievable.
- The sustainability and concentration of contract research, government grant and license revenue as prior projects end or grant scopes change.
- Compliance with Silicon Valley Bank covenants and the economics of the floating-rate loan, maturity, final payment and prepayment provisions.
- The status of LCS financing or recapitalization, potential dilution or pro rata funding, and the basis for the recorded $3.0m Anawah contingent liability.