Arcadia Biosciences, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial amounts below are in millions of dollars unless stated otherwise. Arcadia develops agricultural biotechnology traits and receives revenue from product sales, licenses, contract research and government grants. Its Sonova safflower oil products were its principal commercial products; seed products incorporating its yield traits were not expected to generate sales for at least three to five years.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.721 | $1.430 | $1.573 | $2.245 |
| Operating loss | $(4.289) | $(3.547) | $(9.222) | $(7.258) |
| Net loss | $(4.551) | $(3.677) | $(9.741) | $(9.480) |
| Net loss per share | $(0.10) | $(0.19) | $(0.22) | $(0.94) |
| Operating cash flow | Not presented separately | Not presented separately | $(8.847) | $(6.582) |
- For Q2, product revenue was $0.065 million, license revenue $0.140 million, and contract research and government grant revenue $0.516 million. For the first half, the respective amounts were $0.320 million, $0.292 million, and $0.961 million.
- Operating expenses were $5.010 million in Q2 and $10.795 million for the first half. The filing does not present a consolidated gross margin; product cost was $0.035 million in Q2 and $0.182 million in the first half.
- At June 30, cash and cash equivalents were $27.360 million, short-term investments $26.872 million, and long-term investments $6.910 million. Total current assets were $56.197 million; total assets were $65.709 million.
- Total liabilities were $34.421 million, including $25.027 million of notes payable. Stockholders’ equity was $31.288 million; accumulated deficit was $141.667 million.
- Management said existing cash and cash equivalents were expected to meet anticipated cash needs for at least 12 months. First-half operating cash use rose from $6.582 million to $8.847 million year over year. Investing activities provided $12.007 million, primarily from investment maturities; financing activities provided $0.227 million.
Material changes versus the prior comparable period
- Q2 revenue fell 50% year over year; first-half revenue fell 30%. The company attributed lower license revenue mainly to 2015 recognition of deferred fees after license agreements were discontinued, and lower research and grant revenue to completed 2015 projects and timing of work and grants. Q2 Sonova sales also declined on order timing; first-half product revenue increased 23% on higher volume and encapsulated sales.
- Operating loss widened 21% in Q2 and 27% in the first half. First-half R&D expense rose 13%, driven mainly by in-licensing fees, contract research fees, and field trials. First-half SG&A rose 14%, including severance, public-company services, and state franchise tax expense.
- Interest expense decreased 58% in Q2 and 47% in the first half, which management attributed to more favorable terms and a smaller debt discount after the December 2015 refinancing. Prior-year results also included nonrecurring preferred-stock accretion and a warrant-related deemed dividend; these explain much of the improvement in first-half loss attributable to common stockholders.
- Cash and cash equivalents increased from $23.973 million at year-end 2015 to $27.360 million, while short- and long-term investments together declined from $46.018 million to $33.782 million. The filing reports investment maturities and sales as a major investing cash inflow.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects continued losses and substantial development costs, and says future revenue will depend on licensing, contract research, grants, and eventually commercialization by partners. It may seek additional debt or equity, partner arrangements, or grants if needed.
- The $25.0 million Silicon Valley Bank term loan bears a floating rate of prime plus 0.90%, requires interest-only payments through December 2017, then 36 monthly principal installments, and matures December 1, 2020 with a $0.6 million final payment. Substantially all assets other than intellectual property secure the loan. The company reported compliance with its liquidity covenant at June 30, 2016.
- Key risks include long and uncertain development and regulatory timelines; dependence on collaborators for field trials and commercialization; variable grant and milestone revenue; competition, consumer resistance to GM products, weather and crop-trial risks, and potential need for additional capital. The company has never been profitable.
- CEO Rajendra Ketkar was appointed in May 2016, following leadership changes earlier in the year. The filing identifies a $3.0 million contingent liability relating to the Anawah acquisition; management considered it appropriate while three development programs continue. Inventory reserves for excess and slow-moving inventory were $2.3 million.
- After quarter-end, Arcadia disclosed that Nasdaq notified it on July 21, 2016 that it was not meeting the independent-director majority requirement following director resignations. It received a cure period, subject to the stated deadlines; failure to regain compliance could put its Nasdaq listing at risk.
- Management concluded disclosure controls were effective at a reasonable assurance level. The company reported no material litigation and no material changes in contractual obligations since year-end.
Important facts for investors to verify
- Whether cash burn remains consistent with management’s stated 12-month liquidity expectation, and whether additional financing will be needed.
- Progress, milestones, regulatory approvals, and partner commitments for trait programs, particularly given the long development cycle and reliance on collaborators.
- Revenue concentration and timing: contract research and grants represented 72% of Q2 revenue, while license and milestone revenue can fluctuate materially.
- Loan covenant headroom, floating-rate exposure, repayment schedule, and the implications of the lender’s security interest.
- Nasdaq board-independence compliance and the applicable cure deadline, along with any further leadership or internal-control developments.
- Potential funding needs or dilution associated with the Limagrain Cereal Seeds investment, which was carried at zero after equity-method losses; the filing says the venture had $21.0 million of debt due October 2016 and anticipated further financing from its majority owner.