Arcadia Biosciences, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in millions of dollars unless noted. Arcadia develops crop traits and commercial products, principally in hemp, wheat and soybean, and is beginning to monetize its technology through product sales, licensing and royalties.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0.281 | $0.203 | $0.590 | $0.361 |
| Operating loss | $(6.876) | $(4.982) | $(12.666) | $(9.200) |
| Net income (loss) | $(9.894) | $4.237 | $(7.471) | $(8.375) |
| Net income (loss) attributable to common stockholders | $(9.689) | $4.237 | $(7.164) | $(8.375) |
| Basic and diluted earnings (loss) per share | $(1.04) | $0.84 | $(0.80) | $(1.70) |
- Q2 revenue increased 38%, mainly from GoodWheat and SONOVA product sales; six-month revenue rose 63%. Six-month revenue included $0.100 million of license revenue from milestones and $0.042 million of royalties. No license revenue was recorded in Q2.
- Product cost was $1.490 million in Q2, exceeding product revenue of $0.231 million; the resulting negative gross margin reflects a $1.4 million write-down of wheat and hemp inventory and prepaid production costs, including hemp seed that failed minimum quality specifications.
- Operating expenses increased 38% in Q2 and 39% for the six-month period. Higher SG&A and R&D reflected employee, consulting and hemp-related costs, among other factors.
- Reported earnings were materially affected by noncash warrant remeasurement. Q2 recorded a $3.079 million warrant fair-value loss, compared with a $9.482 million gain in Q2 2019. For the first half, the $5.082 million warrant fair-value gain helped reduce the reported net loss; it is not operating cash generation.
- Operating cash use was $16.548 million for the first half, versus $8.429 million in 2019. Investing activities provided $14.609 million, largely from investment maturities and sales; financing provided $10.517 million.
- At June 30, cash and cash equivalents were $14.995 million, short-term investments $0.600 million, and restricted cash $2.000 million. The restricted cash secures the MidFirst Bank loan and is not freely available for general use. Current assets were $26.096 million and current liabilities $8.364 million.
- Total debt was $3.261 million, up from $0.131 million at year-end 2019. It includes a $1.1 million PPP loan at 1% interest and a $2.0 million MidFirst Bank note, secured by the restricted deposit account and due no later than May 2023. PPP forgiveness was not assured. Operating lease liabilities were $5.843 million, versus $2.108 million at year-end, largely following lease amendments and added Davis office space.
Material changes, outlook and risks
- Going concern: Management stated existing cash, cash equivalents and investments would be insufficient to meet anticipated cash needs through at least August 2021, raising substantial doubt about the company’s ability to continue as a going concern. Management may seek additional debt, equity or partnerships; none is assured. Financing may dilute shareholders or impose restrictive obligations. The filing says planned actions may not address the doubt within one year after issuance.
- Capital and dilution: In May, investors exercised 1,392,345 warrants at a reduced $4.90 price, generating $6.8 million gross and $6.2 million net proceeds; replacement warrants were issued. After quarter-end, a July warrant exercise generated approximately $2.55 million gross before fees and expenses. Common shares outstanding were 10,046,440 at June 30 and 10,699,577 at August 10.
- COVID-19: Hemp growers delayed seed-purchase decisions amid uncertainty, while food companies prioritized production over wheat R&D evaluation. Management warned further disruption could harm operations, financial condition and fundraising capacity.
- Commercialization: Arcadia said it had not yet generated material revenues from commercial products beyond limited GoodWheat and SONOVA sales, expected substantial costs before trait-bearing seed sales, and did not intend to pursue new contract research or grant projects. Revenue and development milestones can be seasonal and uneven.
- HB4 soybean: China import approval is required for commercial launch. The timing was uncertain and potentially subject to pandemic-related delay.
- Other developments: A June binding term sheet contemplated acquiring Industrial Seed Innovations’ hemp assets for $0.5 million cash and up to 397,878 shares, including milestone-contingent shares; definitive agreements remained to be completed. The filing reported no material litigation and effective disclosure controls.
- Guidance: The filing provides no quantified financial guidance or specific revenue forecast.
Most important facts for investors to verify
- Available unrestricted cash and the company’s actual cash-burn trajectory against the stated going-concern warning.
- Whether additional financing or partnerships were secured, and their dilution, fees, collateral and other terms.
- Whether the $1.1 million PPP loan was forgiven, and the repayment status of other debt.
- Sales, customer demand and inventory realization—especially the cause and potential recurrence of the $1.4 million write-down and the elevated inventory balance of $9.430 million.
- Progress and regulatory timing for China’s HB4 approval, and completion and terms of the proposed ISI acquisition.
- Effects of warrant exercises and outstanding options and warrants on fully diluted share count; the filing reported 4,418,618 warrants outstanding at June 30.