Arcadia Biosciences, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Arcadia is an agricultural biotechnology company developing crop yield, stress-tolerance, quality and nutrition traits, and marketing SONOVA gamma linolenic acid (GLA) oil. Revenue comes primarily from SONOVA sales, licenses, contract research and government grants. Verdeca, its soybean-development joint venture with Bioceres, is consolidated.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $0.991 | $0.721 | $2.009 | $1.573 |
| Operating loss | $(3.737) | $(4.289) | $(7.700) | $(9.222) |
| Net loss | $(4.006) | $(4.551) | $(8.222) | $(9.741) |
| Basic and diluted loss per share | $(0.09) | $(0.10) | $(0.19) | $(0.22) |
| Cash used in operating activities | — | — | $(8.917) | $(8.847) |
Q2 revenue comprised product sales of $0.195 million, license revenue of $0.103 million, and contract research and grants of $0.693 million. For the first half, those categories were $0.400 million, $0.209 million, and $1.400 million, respectively. The filing does not present a consolidated gross margin; product revenue cost was $0.116 million in Q2 and $0.222 million in the first half.
At June 30, cash and cash equivalents were $13.438 million and short-term investments were $30.740 million. Total assets were $48.433 million, total liabilities $33.672 million, and stockholders’ equity $14.761 million. Debt was $25.225 million, including $4.167 million current and $21.058 million noncurrent. In July, the company repaid its $25.0 million Silicon Valley Bank term loan, paying $0.148 million interest, a $0.500 million prepayment fee and a $0.625 million end-of-term payment.
Changes versus comparable periods
- Q2 revenue rose 37%; first-half revenue rose 28%. Product revenue increased, while license revenue declined 26% in Q2 and 28% in the first half, primarily because anticipated launch dates for out-licensed yield traits were delayed.
- Contract research and government grant revenue increased 34% in Q2 and 46% in the first half, mainly due to a new 2017 research agreement.
- Research and development expense fell 25% in Q2 and 21% in the first half, chiefly reflecting workforce reductions made in 2016; increased field and Verdeca costs partly offset the reductions.
- Operating losses narrowed, but operating cash use was broadly similar to the prior-year first half. Interest expense increased 8% in the first half, primarily due to higher prime rates.
Outlook, risks and unusual items
- Funding and going concern: Management stated that available cash and investments were not expected to cover anticipated cash requirements for at least the next 12 months, and the filing says substantial doubt exists about the company’s ability to continue as a going concern. Management plans to seek funding through equity or debt, asset sales or out-licensing, and partnerships; success is not assured. The financial statements contain no adjustments for the uncertainty.
- Commercial outlook: The company does not anticipate meaningful seed-trait product sales for at least three to five years, apart from SONOVA sales. It identifies SONOVA expansion, non-GM wheat traits and work with partners on corn and soybean traits as near-term priorities. No quantified revenue or earnings guidance is provided.
- Regulatory and development risk: Arcadia reported delays in regulatory review of GM traits. It estimated that India’s halt in approvals for GM field trials could delay a license partner’s trait development and commercialization timelines by at least two to three years. Field-trial results, regulatory approvals, partner execution and growing-season conditions may affect milestone timing and commercialization.
- Nasdaq listing: The company transferred from the Nasdaq Global Market to the Nasdaq Capital Market on July 21, 2017, resolving a publicly held market-value deficiency. It still faced a minimum-bid-price deficiency, with an August 14, 2017 compliance deadline described in the filing; delisting could reduce trading liquidity and visibility.
- Other items: A $3.0 million contingent liability related to the Anawah acquisition remains recorded; the company said it was probable and continued to pursue three related development programs. In March 2017, Arcadia exchanged its entire LCS membership interest for 1,843,888 shares of its own stock held by Limagrain, which were retired. The company reported no material litigation and no material changes to contractual obligations since year-end.
Important facts for investors to verify
- Post-July-loan-repayment cash, investment balances and operating runway, and whether new financing or strategic transactions were secured.
- Nasdaq minimum-bid compliance status and any subsequent listing notices or actions.
- Progress and timing of regulatory reviews, partner diligence and commercialization milestones, particularly for India, Verdeca and the corn and soybean programs.
- SONOVA sales growth, product economics and the timing of customer orders; license revenue remains subject to milestone and launch delays.
- Potential effects of adopting the new revenue-recognition standard: management expected adoption in Q1 2018 and noted a possible material effect on license revenue, but had not concluded on the impact.